UPDATE: Battle For Sphere Minerals Intensifies As Xstrata Upgrades Offer

The battle between Anglo-Swiss diversified miner Xstrata PLC (XTA.LN) and Chinese steel makers for control of Mauritania-focused iron ore miner Sphere Minerals Ltd. (SPH.AU) intensified Wednesday, with Xstrata raising its bid for the company by 20% and a Chinese consortium pushing a rival plan to develop the miner's Askaf magnetite resource.

The moves sent Sphere's share price up 19%, climbing 47 cents to A$2.95, just short of Xstrata's revised A$3-a-share cash offer. But Sin-Tang Development, a Singapore-based iron ore trader backed by Chinese steel makers, said it was preparing an alternative proposal to trump Xstrata.

The fight exemplifies the tussle between Chinese consumers and western miners for the world's few remaining attractive iron ore assets.

Vale S.A. (VALE), BHP Billiton Ltd. (BHP), and Rio Tinto PLC (RIO) control roughly two-thirds of the sea-borne supply of iron ore, while China's construction-driven economy accounts for the same proportion of demand.

African iron ore assets, such as Guinea's Simandou project being developed by a joint venture of Rio Tinto and Aluminum Corp. of China Ltd. (ACH), or Chinalco, have been a particular focus of competitive attention. Sphere represents Xstrata's first major foray into the market.

A person familiar with Sin-Tang said the company and its backers would underwrite a capital raising worth around $120 million-$130 million, or 20% of the $540 million estimated development costs of Sphere's Askaf magnetite project, priced around A$3.20-A$3.25 a share.

The balance of the financing would be provided as debt by Sin-Tang's consortium, which includes steel makers Hebei Xinquan Coking Co. Ltd., Tanghsan Ganglu Iron & Steel Co. Ltd. and Tianjin Metallurgy Group Co. Ltd..

The plan would see Askaf producing six million tons a year of magnetite pellets from Askaf within 12 months, in contrast to Sphere's current development plan which sees first production in 2012, rising to six million tons in 2015.

"It would have to be a complete turnkey solution" another person familiar with Sin-Tang said.

Xstrata said that its final A$3-a-share offer, raised from an original A$2.50 proposal which saw lackluster take-up since it was announced Aug. 24, remained the only firm option available to Sphere's shareholders. The deal would value Sphere at A$513.6 million.

"We believe our cash offer ... is very attractive to Sphere shareholders and demonstrates our willingness to expedite the completion of our offer. Xstrata's offer is the only opportunity for shareholders to realise certain cash value for their investment in Spehre in the short term at a substantial premium of 94% to the pre-offer price of A$1.55," said Peter Freyberg, Chief Executive of Xstrata Coal.

Xstrata held 8.11% of Sphere's shares Tuesday, compared to 12% held by Sin-Tang last Friday, according to regulatory filings.

Any deal would need to be accepted by more than 50% of shareholders to give Xstrata control of the company, and more than 90% to allow it to buy out all remaining minority shareholders - a circumstance that Sin-Tang's 12% holding would block.

Both sides have been pushing for the support of the company's other major shareholders, including Australian investment fund Acorn Capital Ltd., U.K. fund Genesis Asset Management LLP, and the Qatar Steel Company.

Acorn Capital, which is Sphere's second-largest holder with 11.6% of stock, said in a filing by Sphere that it intended to accept Xstrata's revised offer, but the company told Dow Jones that it was leaving a window open to any credible and superior proposal.

In a statement after Sin-Tang announced its plans to raise it's offer, an Xstrata spokesperson said: "Sin-Tang has had more than two and a half months to put a proposal to the Sphere Board and today's statement merely increases the uncertainty about whether it intends to make a proposal that is in the best interest of all Sphere shareholders."

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