2nd UPDATE: Flinders, Fortescue Caught In Magnitogorsk-ENRC Dispute

An $880 million stake in iron ore miner Fortescue Metals Group Ltd. (FMG.AU) held by Russian steelmaker Magnitogorsk Iron & Steel Works (MAGN.RS) has been frozen in a dispute with miner Eurasian Natural Resources Corp. PLC (ENRC.LN), according to court documents released Thursday.

Australia's Federal Court in Sydney on Nov. 25 froze 857.6 million Australian dollars ($877.1 million) of Magnitogorsk's assets in Australia, the documents stated.

The assets comprise a holding of around 5% of Fortescue, the world's fourth-largest iron ore miner, Magnitogorsk said.

The marketing division of ENRC--a diversified miner focused on Kazakhstan and listed in London--wants the stake frozen as collateral for the case it has brought against Magnitogorsk over the steelmaker's failure to buy all the iron ore it is contracted to purchase. A person with the knowledge of situation said the two parties are close to settling the dispute.

ENRC spokespeople weren't available for comment.

"We were made aware that this (holding) was being frozen," a Fortescue spokesperson said, adding she didn't have further details of the order.

The court order was published by Magnitogorsk's takeover target, Flinders Mines Ltd. (FMS.AU). The two companies said it wouldn't affect Magnitogorsk's A$554 million offer for the company, also announced Nov. 25, and Flinders' board continued to recommend the takeover.

"Magnitogorsk has informed Flinders it is of the view that the freezing order currently in place does not and will not impact on Magnitogorsk's ability to complete the scheme," Flinders said.

ENRC and Magnitogorsk are currently in dispute over a shortfall in the steelmaker's buying of ENRC's iron concentrates and pellets. Magnitogorsk is contracted to buy around 12 million metric tons of ENRC's 17 million tons annual iron ore output, but the miner said in a quarterly report Nov. 10 that the steelmaker would only take 70% of this amount during the last four months of 2011.

"We expect to be compensated by MMK via an arbitration process for any negative economic effect as a result of the breach of contract. We reserve our legal rights in this regard," ENRC said in the report.

Magnitogorsk has $915 million in unused credit facilities on June 30. Paying for the Flinders acquisition from these facilities would still leave the steelmaker well within its existing financing covenants, based on the most recent published financial information.

A lawyer for ENRC said he could not comment on the matter and a lawyer for Magnitogorsk was not immediately available for comment.

-By David Fickling, Dow Jones Newswires; [phone]; [e-mail]

--Cynthia Koons in Sydney contributed to this article