China is set to accelerate investment in iron ore projects in Australia, the world's biggest exporter, despite the collapse of its deal to buy stakes in mines owned by Rio Tinto Group.
Rio last week scrapped a planned $19.5 billion deal with Aluminum Corp of China, known as Chinalco, in favor of a share sale and iron ore venture with BHP Billiton Ltd.
"The opportunities for Chinese groups to come in and facilitate development of some of the smaller players are definitely going to start picking up pace," said Eric Lilford, head of Australia mining at Deloitte Corporate Finance.
Australia has A$26 billion ($21 billion) of proposed new iron ore mines, according to government estimates.
Aurox Resources, Grange Resources and Atlas Iron may attract increased investment from China, according to Ord Minnett, an affiliate of JPMorgan Chase & Co.
"We won't see this trend stopping or being deterred by Chinalco's rejection because these companies are trying to get sustained supplies with stable prices," said Zhou Xizeng, a Beijing-based analyst at CITIC Securities Co. "Chinese companies have been successful in forming alliances with Australian junior miners."
A total of 33 "less advanced" iron ore projects, with an estimated cost of A$26 billion, are planned, the Australian Bureau of Resources and Agricultural Economics said in a report last month. Many are lower-grade, magnetite ore projects including Atlas Iron's A$3 billion Ridley project and Grange's $1.6 billion Southdown project.
Magnetite needs greater processing than higher-grade hematite ore, which accounts for about 96 percent of Australia's output, according to Gindalbie Metals Ltd.
"The Chinese love magnetite so I'm sure they are going to push into the magnetite space big time," Peter Arden, a resource analyst at Ord Minnett, said.
Fortescue Metals Group may be a target of Chinese investment with Baoshan Iron & Steel Co and China Minmetals Group among companies seeking acquisitions of overseas mining projects as the nation opens its purse strings, Citigroup Inc said last month. China may spend more than $500 billion on foreign resource investments over the next eight years, according to Deloitte Touche Tohmatsu.
"It will refocus interest on the junior iron ore sector in the Pilbara" region of Western Australia, said Mike Young, managing director of Perth-based iron-ore explorer BC Iron Ltd. "The Chinese want to have a more personal level of involvement with their suppliers. The private mills in China will start looking at other players."
Aquila Resources is seeking to develop a A$4.1 billion direct shipping iron ore mine, port and rail project in Western Australia. The company may seek partners to develop infrastructure for the project, Russell Tipper, general manager of iron ore for Aquila, said yesterday by phone from Perth.
To be sure, China may also invest in projects outside of Australia, said Alan Heap, managing director of global commodities for Citigroup in Sydney. "There is high grade ore in West Africa, there is high grade ore in India," he said.
Rio, BHP and Brazil's Vale SA, the world's biggest exporter, control about 75 percent of the global iron ore exports. Steel makers in China, Europe and Japan have said the planned venture between Rio and BHP, the world's second- and third-largest producers, would limit competition.
The China Iron & Steel Association has rejected an agreement reached by Rio Tinto and Japanese and Korean mills for a 33 percent cut in annual contract prices, still at the second-highest level on record. The BHP-Rio venture "hints heavily of monopoly", the Chinese group said in a statement.