RPT-DEALTALK-Sinosteel seen upping stakes in Aussie mining race

(Repeating story from May 27 with no change to text) (For more Reuters DEALTALKS, click on [DEALTALK/])

By Tom Miles and Miranda Maxwell

HONG KONG/SYNDEY, May 27 (Reuters) - A proposed $3.2 billion tie-up of two Australian iron ore miners raises the stakes for Chinese commodities trader Sinosteel, which covets both.

China's roaring demand for steel has set the iron ore market alight, driving up prices and stirring interest in resource-rich areas.

Two of the biggest beneficiaries are Midwest Corp MIS.AX and Murchison Metals Ltd (MMX.AX), which are battling to lead the development of Western Australia's Yilgarn iron ore province and weaken the dominance of BHP Billiton (BHP.AX) and Rio Tinto (RIO.AX), which produce from the Pilbara region further north.

Sinosteel, looking to seize the opportunity, is bidding for Midwest. But Murchison threw a spanner in the works on Monday by negotiating a friendly tie-up with Midwest that would leave the Chinese firm, a 20 percent Midwest shareholder, with a measly 10 percent stake in a combined company.

But few market watchers think that will be the end of the story.

"We believe Sinosteel will not simply abort its bid for Midwest," Stephen Gorenstein, an analyst at Goldman Sachs JBWere, said in a note to clients. "Its options include coming back with a superior cash bid or waiting on the sidelines and potentially making a bid for the merged entity."

A marriage of the two leaders in the region was bound to happen, experts say, since they will share railway and port infrastructure and could cut costs by merging adjacent projects.

Midwest's shareholders will vote on the deal 28 days after a scheme of arrangement document for the merger is issued, giving Sinosteel four weeks to intervene.

IN CHINA'S SIGHTS

Murchison's move has upped the ante after it failed to snare Midwest with a A$748 million all-stock offer late last year.

Midwest then rejected a takeover proposal from Sinosteel, which turned hostile with a bid of A$5.60 a share before finally winning the recommendation of Midwest's board with an offer of A$6.38, conditional on getting 50.1 percent acceptance.

Midwest shares closed at $7.03 on Tuesday, a price that puts Sinosteel's offer in the shade and implies investors do not expect it to trump the merger terms, equivalent to A$7.36 a share at the market close on Tuesday.

A sticking point in Sinosteel's approaches to Midwest has been David Law, a Malaysian board member who holds 13.3 percent of Midwest and who, according to media reports, was keen to avoid incurring a large tax liability by selling.

The reverse takeover format of the merger proposal would overcome that objection by having Midwest absorb Murchison.