China's Baotou funding Australia iron ore study

China's Baotou Iron and Steel (Group) Co Ltd on Tuesday signed an agreement to provide up to A$40 million ($38 million) to help fund pre-development studies on an Australian iron ore mine, Centrex Metals Ltd CXM.AX said.

The agreement drove project owner Centrex's shares up as much as 24 percent before easing. At 0435 GMT, the stock was 8.3 percent higher at A$0.52.

The agreement with Centrex will give Baotou a half share in the Bungalow iron ore deposit in South Australia if development proceeds, Centrex said.

Baotou already holds 10.13 percent of Centrex and has agreed to buy five million tonnes of ore over five years from Centrex's neighbouring Wilgerup mine when it opens next year.

Baotou's funds for the Bungalow project will help pay for an economic mine feasibility study carried out in two stages of A$8 million each, then a final A$24 million, the company said.

With its rich ores and direct shipping routes to Asia's fast growing economies, and in particular China, Australian iron ore mines are attracting attention among Chinese steel mills hungry for raw feed.

This month, China's Anshan Iron & Steel Group Corp 0347.HK (Ansteel) agreed to help underwrite two new iron ore mines in Australia, as it looks to expand its steel making in China, in exchange for a 12.78 percent interest in Gindalbie Metals Ltd (ASX: GBG.ax) .

Rio Tinto Ltd/Plc (ASX: RIO.ax) RIO.L and BHP Billiton Ltd/Plc (ASX: BHP.ax) BLT.L each are already spending billions of dollars to expand production in the iron ore-rich Pilbara region of Western Australia to keep pace with demand for ore in China.

Their biggest threat may come from Fortescue Metals Ltd (ASX: FMG.ax) , which is seeking funding from China's largest steel maker, Baosteel 600019.SS, and is fighting for access to BHP's railways to become a third force in the Pilbara. ($1=A$1.15)