China's participation in a $2.7 billion Pilbara iron ore project is in serious doubt after talks with Clive Palmer's listed Australasian Resources broke down during a critical week for Sino-Australian relations.
State-owned Shougang, which has a 6.33 per cent stake in Australasian and a strategic alliance to develop its flagship iron ore venture at Cape Preston in Western Australia, forced the termination of project funding talks after its attempts to gain control of the company failed.
It is understood that, on top of the funding talks, the Chinese steelmaker was in separate negotiations with Mr Palmer over a deal to buy the majority of his 66percent stake in Australasian.
A source close to the funding talks said China wanted a deal "on their terms" and was not satisfied with the 50 per cent interest that project funding would have delivered. It wanted control of the parent company.
Australasian will now have to turn to other parties to secure the much-needed financing.
An Australasian spokesman said the increasing tension between Australia and China over the surprise arrest on July 5 of four of Rio Tinto's staff, including Australian national Stern Hu, on allegations of bribery and espionage, had not affected the discussions with Shougang.
But any deals between state-owned entities and miners will now come under greater scrutiny. Shougang has been caught up in the crisis, with reports that its head of iron ore purchases, Tan Yixin, allegedly provided production data to Rio.
Australasian Resources shares have been suspended for two weeks amid desperate negotiations with Shougang over the Cape Preston project agreement, which was originally signed in March 2007.
Shougang -- China's fourth-largest steelmaker -- had exclusive rights to deliver a finance offer to Australasian subsidiary International Minerals, which would provide the funding to develop the project, about 80km southwest of Karratha.
The deadline for the finalisation of the funding agreement has been extended repeatedly since its original deadline of September last year. Australasian had given its Chinese partner until June 30 to finally reach an agreement, but it is understood China was pushing hard to take control of the company through the purchase of a significant chunk of Mr Palmer's stake.
Australasian said yesterday that it was aware Mr Palmer had recently held discussions with Shougang over the potential sale of part of his shareholding, but that no agreement was reached.
Mr Palmer is fast emerging as a significant independent player in the Pilbara region and is likely to be high on China's radar as an alternative source of supply following news of the $US116 billion ($145bn) iron ore joint venture between Rio Tinto and BHP Billiton.
The other key player in the Pilbara, Andrew Forrest's Fortescue Metals Group, is closely aligned with China through its $645 million share deal with state-owned Chinese steelmaker Hunan Valin, which now has a 17.5 per cent stake in Fortescue.
Mr Palmer already has an alliance with China, through his deal with Citic Pacific, which bought the rights to 2 billion tonnes of iron ore from his Pilbara deposits. But his strategy is to maintain ownership of the lucrative tenements and the rights to the port and infrastructure at Cape Preston.
Australasian said it would remain in talks with Shougang and would step up discussions over funding with other parties, including interests from the Middle East, Africa and Asia.
Source: The Australian
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