a rio protege

PERTH (Dow Jones)-Grange Resources Ltd. (GRR.AU) said it is in talks with a potential Middle Eastern investor as the Western Australian iron ore hopeful firms up plans for its US$1.37 billion Southdown venture.

Grange is in "negotiations with a Middle-Eastern merchant company", Chairman Anthony Bohnenn told Dow Jones Newswires in an interview Thursday evening.

Bohnenn declined to identify the party, which is thought to be involved in the manufacture of high-grade iron pellets for use in steel mills.

Outside of China, the Middle East is one of the world's fastest growing steel producing regions, driven by abundant gas supplies and booming oil-backed industrial development.

And, like China, Gulf countries are trying to buy iron ore resources to ensure reliable supplies of the steel-making ingredient.

Last month, for instance, Perth-based Sphere Investments Ltd. (SPH.AU) said that Qatar Steel Co. would expand its investment in Sphere's Guelb el Aouj iron ore project in Mauritania to 49.9%, for a total price of US$375 million.

Both Sphere and Grange are targeting magnetite, a type of lower-grade iron ore that can be upgraded into pellets for steel mills.

Bohnenn said that Middle Eastern companies are keen to diversify away from distant South American pellets, where production is dominated by industry giant CVRD of Brazil.

Perth-based Grange hopes to receive government approvals for Southdown in the second half of next year, which would lead to a final investment decision and a two-year construction period.

Grange plans to ship concentrates out of Albany port in Australia's southwest to a proposed pellet plant in Kemaman, Malaysia, producing around 7 million metric tons of pellets per year.

If Grange secures a deal with the Middle Eastern investor, it would be the third overseas firm to back the company.

It unveiled a joint venture with Japan's Sojitz Corp., a pellet trading firm, in June.

And in August Rio Tinto Ltd. (RTP) acquired a 9% stake in Grange after agreeing to sell its eastern Southdown iron ore leases to the company.

Rio Tinto could build its stake to 19.9% if it converts share options at a cost of A$30 million.

Grange has appointed Azure Capital, a Perth-based investment bank, to assist in "determining the most appropriate partners" to participate in Southdown.

Bohnenn said that Grange is talking to five potential candidates to replace its outgoing chief executive Geoff Wedlock, who is due to leave the company next month.

The new CEO will focus on lifting Grange's commercial and promotional activities, including investment road shows, Bohnenn said.

In afternoon trade, Grange shares were unchanged at A$2.50, valuing the group at A$288 million.