China may invest about US$3 billion in Fortescue Metals Group Ltd, Australia's third-biggest iron ore exporter, three people familiar with the transaction said.

China Investment Corp, the US$200-billion sovereign wealth fund, is in talks with Fortescue, which plans to use some of the proceeds to retire debt, the people said, asking not to be identified before an agreement.

Separately, Chinese steel maker Hunan Valin Iron and Steel Group yesterday agreed to buy a A$1.2-billion (US$776 million) stake in Fortescue.

Fortescue is facing a funding shortfall of A$731 million for an expansion, Macquarie Group Ltd said yesterday. Perth-based Fortescue has "non-current" borrowings of A$4.9 billion as of December 31 last year, according to company report.

CIC is turning to mining companies after losing more than US$5 billion on financial firms, including Blackstone Group LP and Morgan Stanley.

"China needs to boost its pricing power for iron ore and other raw materials because it's a big consumer," Cherry Chen, a Beijing-based analyst with Core-Pacific Yamaichi International Ltd, told Bloomberg News.

"Investing in resource firms is a correct step for CIC to shun the financial crisis," Chen said.

Fortescue is down 78 percent since touching a record A$13.15 a share last June, when record iron ore prices had helped turn Chief Executive Officer Andrew Forrest into Australia's richest man.

The stock fell 2.4 percent to A$2.83 last Friday, giving it a market value of A$8 billion the last time it traded.

The Reuters/Jefferies CRB Index of 19 commodities fell to the lowest level since June 2002 on February 17, as the global recession crimped demand from car makers and builders.

The price and demand collapse has forced indebted mining companies Rio Tinto Group and OZ Minerals Ltd to seek investments worth US$21.2 billion from Chinese companies earlier this month.

The proposed CIC deal may be in preferred shares paying a dividend, and the payment rate hasn't been agreed upon, one person said. CIC said on December 3 it would avoid investing in foreign financial firms after losing billions on stakes in Morgan Stanley and Blackstone.

Hunan Valin yesterday also said it agreed to buy 225 million new shares from Fortescue, and 275 million shares from Fortescue's second-largest shareholder Harbinger Capital Partners, giving the steel maker a total stake of 16.5 percent.

(Shanghai Daily February 25, 2009)