Midwest, Murchison drop on China takeover concerns

SYDNEY, June 26 (Reuters) - Shares in west Australian iron ore prospectors Murchison Metals Ltd (MMX.AX) and Midwest Corp MIS.AX dropped on Thursday on concerns Australia will cap foreign investment in the mining sector.

Murchison recoiled as much as 6 percent to A$3.35 a share before recovering to A$4.46, down 2.8 percent against a modest rise in the wider market .AXJO.

Midwest fell nearly 3 percent to A$6.39 but later rebounded to $6.50, down 1 percent.

Chinese steel trader Sinosteel has approached Australia's Foreign Investment Review Board with a proposal to take over Murchison, according to a government notice signed on June 16.

Sinosteel already has launched an A$1.36 billion ($1.3 billion) offer for Midwest, and now holds more than 40 percent of the group thanks to bid acceptances. Sinosteel also owns 2.4 percent of Murchison.

Separately, Murchison and Midwest have agreed to a merger in hopes of combining their respective iron ore deposits in west Australia's midwestern region.

"This could be a way for Sinosteel to tie up all of the region," DJ Carmichael & Co mining analyst James Wilson said.

The Australian newspaper on Thursday said in an unsourced report Australia was looking to impose a 49.9 percent ownership cap on foreign sovereign corporations to stop Chinese firms taking control of Australian mining houses. ($1=A$1.04) (Reporting by James Regan; Editing by James Thornhill)