(Adds details on the subscription and investment deal in...

(Adds details on the subscription and investment deal in paragraphs 2-5)

July 17 (Reuters) - Australia's Sovereign Metals (SVM) said on Monday global miner Rio Tinto (RIO) RIO.L would invest A$40.4 million ($27.61 million) for an initial 15% stake in the company, which is looking to develop a rutile and graphite project in Malawi.

Sovereign will use the funds from the investment to advance a definitive feasibility study for its Kasiya project, with the aim of producing graphite for lithium-ion batteries and rutile for the titanium pigment and titanium metal industries.

Rio Tinto will subscribe for 83.1 million shares in Sovereign at a price of A$0.486 per share, a 1.8% discount to Sovereign's last closing price.

Sovereign has also issued Rio with options to increase its stake to 19.99% within 12 months.

In addition to the subscription, the parties also entered into an investment agreement, under which they will work together on technical and marketing aspects of graphite product from Kasiya project, with a focus on supplying purified graphite for the lithium-ion battery anode market.

Rio Tinto did not immediately respond to a Reuters' request for comment.

($1 = 1.4635 Australian dollars)