2nd UPDATE: Yanzhou Makes Bid For Felix Resources - Source

Yanzhou Coal Mining Co. Ltd. (1171.HK) has made a takeover bid for Felix Resources Ltd. (FLX.AU) in a deal agreed by both parties, a person familiar with the situation said Monday.

There have been media reports that Yanzhou could be offering as much as A$25 a share for Felix but the person said the offer is pitched below A$20 a share. They last traded at A$16.90, giving the company a market capitalization of about A$3.32 billion.

The bid is the latest in a steady stream of Chinese investments in Australia's key mining sector which have sparked concern among some politicians and commentators. It also comes amid diplomatic tensions between Australia and China over the detention of four Rio Tinto Ltd. (RTP) employees and will be closely watched by the market for signs of the Australian government's attitude to Chinese investment.

Shares in both Felix and Yanzhou were placed on trading halts Monday with Felix flagging an upcoming announcement on a potential change of control.

The bid has been a long time in the making, with Felix first signaling it was in talks over a possible deal a year ago.

A previous round of talks with Yanzhou stalled in March this year and in June Felix said that, given the global financial environment, it was unlikely that talks with interested parties would be concluded in the near term.

Since then a resurgent Asian steel sector has revived demand for metallurgical coals, and in July the miner said several parties had expressed interest in a "potential change of control transaction."

 
   Deal To Highlight Australia's Stance On China Investment 
 

The deal will be reviewed by Australia's Foreign Investment Review Board, which gives its recommendations to the Australian Treasurer who makes the final decision on whether foreign investments are in line with Australia's national interests.

The biggest Chinese investment mooted so far, Aluminum Corp. of China's US$19.5 billion investment in Rio Tinto, was abandoned in June on commercial grounds but many in China believe the Australian government opposed the deal.

Foreign Investment Review Board officials have signaled Australia's preference is for bidders to take stakes of less than 49.9% in local companies, so the Yanzhou deal will be a test of the government's willingness to allow state-owned Chinese companies to make full takeovers.

The market will also be looking for any signs that the diplomatic row over the detention of the Rio Tinto employees is coloring the government's attitude to Chinese investment, although Australian Treasurer Wayne Swan has said the screening process remains unchanged.

Felix operates mines in New South Wales and Queensland state and its production is currently weighted toward higher margin metallurgical coal used in steel making.

However, this weighting is set to change with the development of the miner's A$400 million Moolarben thermal coal project in New South Wales state.

Moolarben is under construction and is expected to boost Felix's thermal coal sales to about 75% of total output as it ramps up from mid 2010.

Felix has an 80% stake in Moolarben, Japan's Sojitz Corp. (2768.TO) holds 10% and a Korean consortium including consortium including Korea Resource Corp. and Korea Electric Power Co. (KEP) holds the remaining 10%.

Felix Managing Director Brian Flannery wasn't immediately available for comment.

Yanzhou said in a statement that it had halted trading in its Hong Kong-listed shares in relation to a proposed acquisition, but gave no further detail.

-By Alex Wilson, Dow Jones Newswires; 61-3-9292-2094; [e-mail]

(Yvonne Lee and Aries Poon in Hong Kong contributed to this story)