UPDATE 1-Midwest board lines up to sell to Sinosteel

(Recasts, adds analyst, company comments, details)

By James Regan

SYDNEY, July 8 (Reuters) - China's Sinosteel took a big step closer to acquiring Australian iron ore prospector Midwest Corp MIS.AX on Tuesday, with Midwest's directors lining up to sell their shares after a merger with Murchison Metals Group Ltd (MMX.AX) collapsed.

The Chinese state-owned metals trader is offering A$1.36 billion ($1.3 billion), or A$6.38 a share, for all of Midwest under an offer closing July 18. Sinosteel's offer is unconditional, meaning anyone who sells gets paid immediately.

"With Murchison out of the way, Sinosteel's offer is looking very attractive, given Midwest's price history," said Eagle Mining Research analyst Keith Goode. "It's no surprise there's an exodus among the directors to sell."

An acquisition by Sinosteel would mark one of the first billion dollar-plus moves by a state-owned Chinese group to control minerals in the Australian outback.

"Midwest directors are now actively considering the disposal of the Midwest shares they own or control to Sinosteel under the terms of the Sinosteel takeover offer," Midwest said in a statement, suggesting other shareholders may want to do the same.

Murchison (MMX.AX) on Monday dropped its marriage plans with Midwest via a share swap, saying it didn't have Sinosteel's support. Acceptances for Sinosteel's offer have taken its stake in Midwest to over 45 percent.

"The Murchison plan was always a bit shaky given Sinosteel's own plans," said DJ Carmichael & Co analyst Paul Adams. "This could be start of China Inc. moving into Australian mining."

Shares in Midwest, which needed 50.1 percent of Midwest shareholders to vote in favour of the Murchison merger, were unchanged at A$6.38 on Tuesday.

MURCHISON STAKE

So far, three Midwest directors holding stock and options representing 2.52 percent of Midwest plan to sell, it said.

Separately, another director, holding 1.6 percent of Midwest, Stephen DeBelle, has also agreed to sell to Sinosteel.

The three remaining directors, together holding 13.08 percent, were also considering selling, according to Midwest.

Murchison and Midwest have long wanted to develop mines in the Yilgarn region of Western Australia, where much of the ore was deemed uneconomical to mine until ore prices started soaring to feed China's fast-growing steel industry.

Billions of dollars are still needed to dig mines, dredge a port and lay hundreds of kilometres of railroad track before mining can commence in the region.

Murchison still represents a potential hurdle to Sinosteel as it holds 10 percent of Midwest and has said it would not accept the Chinese group's offer.

Without Murchison's Midwest shares, Sinosteel cannot move to a compulsorily acquisition of all Midwest shares because under Australian securities rules an acquirer must control more than 90 percent of a target's stock to do so.

Australia has long feared becoming little more than a raw materials quarry to fuel Asian industrial expansion.

The government warned in February it would look closely at foreign investment in mining.

However, Australian Treasurer Wayne Swan has since said the government welcomes foreign investment as long as it was in the national interest. (Editing by James Thornhill) ($1=A$1.05)