^[1]By Kishori Krishnan Exclusive to Iron Investing News

China is set to accelerate investment in iron ore projects in Australia, the world's biggest exporter, after the collapse of its deal to buy stakes in mines owned by the Rio Tinto Group (RIO:AU). Australia has A$26 billion (US$ 21 billion) of proposed new iron ore mines, according to government estimates.

"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.

Last week, Rio scrapped a planned $19.5 billion deal with Aluminum Corp. of China ^[2], (NYSE: ACH) known as Chinalco, in favor of a share sale and iron ore venture with BHP Billiton Ltd. ^[3], dashing Chinese expectations of locking in more supplies. Aurox Resources Ltd. ^[4], (ASX:ASO) Grange Resources Ltd. ^[5] (ASX: GRR) and Atlas Iron Ltd. ^[6](ASX:AGO) may attract increased investment from China, according to Ord Minnett Ltd., 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."

Fortescue Metals Group Ltd. ^[7],  Australia's third-largest iron ore exporter, surged 15 per cent to A$3.59 on the Australian stock exchange, the highest in eight months. Aurox jumped 20 per cent to 27.5 cents and Murchison Metals Ltd. rose 11 per cent to a nine-month high.

China is also looking at Fortescue ^[8], controlled by billionaire Andrew Forrest, who may be a target of Chinese investment with Baoshan Iron & Steel Co. ^[9] 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."

Rio, BHP and Brazil's Vale SA, the world's biggest exporter, control about 75 per cent of the global iron ore exports. Steelmakers 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.

China, the biggest buyer of iron ore, needs supplies to boost economic growth. The nation's 4 trillion yuan ($585 billion) stimulus package has already helped manufacturing expand, sparked record vehicle sales and boosted monthly imports of iron ore, copper ^[10]and aluminum ^[11]to records in April.

China is also looking at Brazil. Chinese company Wuhan Iron & Steel is set to acquire stakes in MMX Mineração e Metálicos ^[12], a holding for the mining sector of Brazilian businessman Eike Baptista, or in one of its subsidiaries, MMX Sudeste, Brazilian financial newspaper Valor Económico reported.

The paper said that negotiations for the acquisition of the stake in MMX were underway and that the deal, if it happened, would be carried out by a capital increase, which would provide the resources needed to develop MMX's business plan.

"Negotiations continue and we are discussing relevant aspects of the deal related to Wuhan's stake in MMX," said Ricardo Antunes, chairman of LLX Logística. LLX, a logistics company that is part of Eike Baptista's group, along with MMX, signed a memorandum of understanding with Wuhan that outlines a "potential" commercial and strategic partnership.

The agreement includes discussion on construction, by the Chinese company, in the super port of Açu, an LLX project in Rio de Janeiro, of a steel making plant with capacity to produce 5 million tonnes of steel per year, representing an investment of US$4 billion.

Valor Económico said that the mining company planned to raise production of iron to from 8.7 million tonnes to 33.7 million tonnes by 2013. MMX Sudeste's production will be distributed via the Sudeste port, another of LLX's port projects, in Itaguaí, in the Rio de Janeiro metropolitan region, with capacity to process up to 50 million tonnes per year, and is due to start operating at the end of 2011.

Cash price soars

Cash prices for iron ore into China, the world's biggest buyer, have been trading at the highest in almost four months on concern steel mills won't be able to win a steeper cut in contract prices than Japanese and South Korean rivals.

Spot prices for ore delivered to China jumped 11 per cent to $76.50 a metric ton in the week ended June 5, according to Metal Bulletin prices, the highest since February 20. That's the biggest weekly gain in 20 months.

Rio Tinto, the world's second-largest iron ore exporter, last month agreed to sell ore under annual contracts to Japanese and South Korean mills for about $61 a metric ton. Freight costs for vessels carrying ore to China from Australia are about $17 a ton, according to SSY Futures Ltd.

China's iron ore imports jumped 33 per cent to 57 million metric ton in April from a year ago, according to customs data. A surge in lending and investment and rising retail sales have spurred confidence that Premier Wen Jiabao's 4 trillion yuan ($585 billion) stimulus package is reviving growth in the world's third-biggest economy.

"There seems to be increasing signs that the economic conditions in the market are starting to improve, we are now starting to see a number of green shoots coming through," ANZ's Pervan said.