Australia's BC Iron bids for rival, shows iron ore mines still in demand

* BCI launches friendly $237 mln offer for Iron Ore Holdings

* Cash, share offer is a hefty 79 pct premium to IOH stock price

* IOH board unanimously recommends shareholders to accept (Adds Atlas CEO comment, BHP profit forecast, detail)

By James Regan

SYDNEY, Aug 11 (Reuters) - BC Iron Ltd has launched a friendly cash and share offer worth around A$256 million ($237 million) for smaller rival Iron Ore Holdings Ltd, the second takeover in a month aimed at beefing up production in Australia's main iron ore region.

Australian miners continue to rack up strong profits from iron ore despite falling prices this year, although many have been under pressure to improve efficiency in the face of uncertain demand from key buyer China.

Mining major BHP Billiton (NYSE: BBL - news) is expected to show that more than half its projected $14 billion in fiscal 2014 profit will come from iron ore when it reports financial results on Aug. 19.

Rio Tinto (Xetra: 855018 - news) said last week that first-half profit from iron ore made up 92 percent of company-wide underlying earnings of $4.68 billion.

BC Iron is offering 0.44 of a share and A$0.10 in cash per IOH share, valuing Iron Ore Holdings stock at A$1.59 - a hefty 79 percent premium to prices over the last 60 days.

"We believe that combined with our existing business, IOH's portfolio of long-life iron ore assets in the world's best iron ore address, presents us with an excellent opportunity," said BC Iron Managing Director Morgan Ball.

Iron Ore Holdings stock climbed more than 50 percent on Monday to a high of A$1.43. BC Iron dropped as much as 10 percent to A$2.97.

BC Iron's proposal follows a successful move by China's Baosteel Resources and Australian rail operator Aurizon Holdings Ltd to take control of the West Pilbara Iron Ore project after sealing a $1 billion takeover of Aquila Resources (Toronto: AQA.TO - news) .

BC Iron exports about 4.3 million tonnes of iron ore a year and its deal could add a further 8 million tonnes.

IOH 's board is unanimously recommending shareholders accept BC Iron's offer in the absence of a superior proposal.

WATERED DOWN

Atlas Iron, another small producer, has watered down speculation that it could be a willing target for companies looking to expand in the Pilbara.

"There is a really clear proxy for value for Atlas and our undeveloped Pilbara projects. It arises from the recent Baosteel-Aurizon bid for Aquila (Paris: FR0010340711 - news) ," Managing Director Ken Brinsden told a media briefing on Aug. 4.

"We're definitely not on the market. I'm just saying that as a proxy for value, when you consider that the Aquila bid is now complete, the transfer across to Atlas is a strong one."

Along with Atlas, BC Iron and IOH are small-scale producers in the Australian Pilbara iron ore belt, which is dominated by Rio Tinto, BHP and Fortescue Metals, which in total will dig more than a half-billion tonnes of iron ore this year.

"This will give both BCI and IOH better economies of scale in the Pilbara and open up the potential for greater synergies for the two companies, particularly given where the assets are located in the Pilbara," said Morgans Stockbrokers mining analyst James Wilson.

Miners in Australia rode the iron ore boom to its peak in 2011, when ore sold for close to $200 a tonne on the back of strong demand from Chinese steel mills.

Since then demand growth has slowed in China, driving iron ore below $100 a tonne and leading miners to offer discounts to maintain sales and ponder ways to reduce operating costs - namely by mining more ore and optimising limited infrastructure such as rail lines and ports in the remote Pilbara.

A condition placed on BC Iron's offer is that iron ore does not close below A$90 a tonne, converted from U.S. dollars to Australian dollars, on any 20 consecutive days.

The price last stood at $95.70, or A$103 a tonne. (1 US dollar = 1.0782 Australian dollar) (Additional reporting by Lincoln Feast; Editing by Joseph Radford)