China-Oz deals to surge despite Rio tensions

By Joseph Chaney and Sonali Paul

SYDNEY/MELBOURNE (Reuters) - China is undeterred by recent Sino-Australian tensions and is gearing up for a slew of deals down under in everything from iron ore to property, bankers and lawyers say.

Investment bankers and industry sources in China say Beijing is trying to send Canbera a message: the arrest of four Rio Tinto (RIO.AX)(RIO.L) employees in Shanghai is not a serious enough issue to curb our investment strategy in Australia.

"All relationships have hiccups. You've to to put this in context: China and Australia are inextricably bound in relation to their trading and market forces," said John Curtis, a partner at Australian law firm Freehills.

"That relationship will continue."

Curtis said despite the spat over the detention of Rio's employees, the Chinese would continue investing in Australia because it is stable and hospitable to Chinese investment.

Only this week China's Yanzhou Coal (1171.HK) agreed to buy coal miner Felix Resources (FLX.AX) for $2.9 billion, in what would be the biggest takeover by a Chinese company in Australia.

That would add to the $2.2 billion already invested this year by Chinese firms into Australian energy and resource companies.

Elsewhere China Investment Corp (CIC), China's $200 billion sovereign wealth fund, is in advanced talks with Fortescue Metals (FMG.AX) to strike a $1 billion-plus convertible bond deal to help Australia's third largest iron ore miner expand.

Uranium miner Paladin Energy Ltd (PDN.AX)(PDN.TO), which has assets in Namibia, is rumored to be attracting Chinese interest, two investment bankers told Reuters.

LESS COMPLEX

Chinese firms are aiming for less complex deals after Rio Tinto shareholders forced it to scrap a planned $19.5 billion tie-up with aluminum group Chinalco and after Minmetals ran into trouble trying to buy Oz Minerals' (OZL.AX) Prominent Hill mine near a weapons testing range.

"There's two changes: there's a potential that they'll focus on exploration, conversion into mines and thereby production. And I think that China's investment will broaden from just the energy/resources sector," said Curtis.

Among smaller miners, several deals have already been done, notably last year's takeover of Midwest Corp by Sinosteel Corp and Anshan Iron and Steel Company's recent tripling of its stake in Gindalbie Metals Ltd (GBG.AX).

Outside mining, CIC has invested $585 million in industrial property trust Goodman Group (GMG.AX) over the past two months, which will give it at least an 8 percent stake, while last month Sinochem approached Australian farm chemicals group Nufarm Ltd (NUF.AX) about a possible takeover.

Yanzhou's deal with Felix should ease past Australian regulators because the deal is relatively small, involves a second-tier mining company and has been in the works for roughly a year, bankers say.