African Minerals has agreed to sell China Railway Materials (CRM) around 40 per cent of the iron ore it plans to produce from its flagship Tonkolili deposit in Sierra Leone.
The percentage is equivalent to between five and eight million tonnes per annum.
In return, CRM is to buy 30.5 million new shares in the company for £153 million. The money will fund the first phase of Tonkolili's development and give CRM a 12.5 per cent stake in the group.
The purchase agreement will last at least 20 years and is designed to feed Chinese steelmakers' demand for iron ore. China's demand for the commodity is widely predicted to grow as the country continues to upgrade its infrastructure in interior provinces. It also uses it to manufacture many of the world's industrial products.
Commenting on the agreement, Alan Watling, CEO of African Minerals said:┬á"African Minerals welcomes the signing of this Conditional Agreement with CRM, one of China's large-scale state owned enterprises and one of China's largest steel trading companies.ÔÇØ┬á
State-owned CRM, which provides steel and other materials needed by the Chinese railway industry, has also expressed an interest in funding the second phase of development at Tonkolili.
The second phase is expected to cost around £1.6 billion and include construction of infrastructure including a port and railway.
African Minerals, which is listed in London, UK, shortly hopes to announce a doubling of Tonkolili's iron ore reserves to 10 billion tonnes.
In an interview with UK newspaper the Financial Times, African MineralsÔÇÖ chairman Frank Timis suggested CRM or other Chinese companies may be considering a takeover of the company, reflecting the Asian countryÔÇÖs desire to own iron ore supplies.
"We are in discussions with industrial groups in China and several large corporationsÔÇöfrom Europe to Brazil to AustraliaÔÇöabout a corporate deal," Timis was quoted as saying.
"[CRM] can come in and watch for 12 months, until we start our first stage of production, and then anything can happen."
He went on to say that Chinese corporations were interested in buying iron ore from sources other than Rio, BHP Billiton and Vale, the three producers that dominate world supply.
African Minerals has been promising alliances with bigger partners since September last year, when it released a statement to the stock market saying it was in talks with a number of interested parties.
The deal is expected to close during the first quarter, subject to due diligence.
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