Australia miners jump on China talk

By James Regan and Denny Thomas

SYDNEY (Reuters) - Shares in Fortescue Metals (FMG.AX) jumped by more than a fifth on Thursday as investors bet the world's fourth-largest iron miner would attract investment capital from China.

In China, state-owned metals trader Minmetals said it had completed its takeover of debt-laden Australian miner OZ Minerals (OZL.AX) -- whose shareholders were due to vote later on Thursday on a revised $1.4 billion (85 million pound) offer from the Chinese.

Fortescue has led a week-long rally in iron ore miners and prospectors after larger rival Rio Tinto (RIO.AX) (RIO.L) scrapped a $19.5 billion tie-up with China's Chinalco in favour of an iron-ore joint venture with peer BHP Billiton (BHP.AX) (BLT.L) and a $15.2 billion rights issue.

"It's all to do with the BHP/Rio deal," said Chris Kimbers, a client adviser with Bell Potter Securities. "Everybody's waiting now the Chinese have missed out. They still need to have their iron ore supply. It's likely they will come back and do another deal with Fortescue."

Fortescue shares soared as much as 21 percent to an 8-month high of A$4.33 (2.13 pounds), and has gained more than half since the Rio/Chinalco deal collapsed last Friday.

China's Hunan Valin Iron and Steel already owns about 18 percent of Fortescue, and traders said Valin may look to raise its stake.

Other analysts said Rio's rights issue had shown that capital was available for big investments in mining companies with operations ripe for expansion, such as Fortescue.

"Valin or another Chinese group could go the way of a bond issue, convertible notes, there are lots of facilities for potential shareholders," said James Wilson, mining analyst for DJ Carmichael in Perth.

Fortescue, founded by mining entrepreneur Andrew "Twiggy" Forrest, is a distant No.4 in iron ore mining behind Brazil's Vale (VALE5.SA), Rio and BHP.

Fortescue's first year of output is likely to only be 30 million tonnes, against the 300 million-plus dug by Vale.

However, with one of the largest property holdings in Australia's Pilbara iron belt, potential exists to more than quadruple that in coming years.

Also, unlike its larger rivals, Fortescue sells all its ore to Chinese mills -- more than two dozen in all -- giving it a foot in the door with potential investors with access to sizeable state coffers, according to analysts.

At the height of last year's commodities boom, Forrest was crowned Australia's richest man with a paper fortune worth over $7 billion, though he is worth only about half that now.

Iron ore prices have since contracted, with some Japanese and South Korean steel mills negotiating 33 percent discounts to last year's price and Chinese mills holding out for deeper cuts.

Shares in other iron ore firms also gained.