DEALTALK-BHP/Rio venture boosts Fortescue fortunes

* China seen funding Fortescue's expansion

* Asset JVs, convertible bonds likely way to raise funds

* Unlikely to issue equity

* CIC most likely investor to offer funding - sources (For more Reuters DEALTALKS, click [DEALTALK/])

By Denny Thomas

SYDNEY, July 7 (Reuters) - As BHP Billiton (BHP.AX) and Rio Tinto (RIO.AX) focus on delivering $10 billion in savings from their iron ore venture, Fortescue Metals Group Ltd (FMG.AX) hopes to get a favourable funding deal for its aggressive growth plans.

BHP-Rio's (BLT.L) (RIO.L) $116 billion iron ore venture effectively means Chinese and other Asian steel mills have one less major iron ore supplier to deal with, giving steel mills less clout in annual price negotiations. [ID:nSYD73514]

Fortescue, a distant No.4 iron ore miner, behind Brazil's Vale (VALE5.SA), Rio and BHP, is seen as an indirect beneficiary of the BHP-Rio deal. Investors have snapped up the stock betting that Fortescue could extract a better bargain from Chinese firms who are keen to lower their reliance on BHP and Rio.

The BHP-Rio deal raises the probability of China financing Fortescue's expansion, with China Investment Corp, a sovereign wealth fund being advised by Deutsche Bank, the most likely investor to offer funding, sources said.

Fortescue would need $5.2 billion to more than double its annual output to 120 million tonnes in a next expansion phase, CLSA estimates. Fortescue is forecast to ship 26 million tonnes in fiscal 2009.

But Fortescue founder and CEO Andrew Forrest is in no mood to issue further equity and dilute his holding, sources close to Forrest told Reuters.

"To fund major expansion, they would sell down assets in a joint venture structure because that is a preferred option for a buyer as well," said one source familiar with Fortescue's thinking.

Fortescue's spokesman was not available for comment.

Fortescue raised about $826 million by selling a 17.4 percent stake to China's Hunan Valin Iron and Steel earlier this year, but the source said a new equity deal with another Chinese entity was unlikely.

"Andrew (Forrest) hates selling equity... The deal with Valin was done because they had an ongoing expansion to fund," the source added.

"They get far better value by selling down assets, rather than selling down equity. It's almost certain the next lot of capital they raise would be at the asset level," the source said.