SYDNEY - China could take a stake in a $3.3 billion port and rail infrastructure project in Western Australia's Mid-West iron ore belt, one of the firms involved in the project said on Friday.

Murchison Metals Ltd, which plans to develop the infrastructure with its partner, Japan's Mitsubishi Corp , said on Friday that Chinese groups expressed interest in becoming involved at meetings this week in China.

Despite strained ties between the two countries over drawn out negotiations on benchmark iron ore prices and the detention of four Rio Tinto employees in China on charges of stealing state secrets, China was still keen to do deals with Australian iron ore companies, Murchison said.

The discussions with the Chinese groups have been very positive, with high levels of interest in co-operation in the development of the mid-west region, Murchison said.

The remarks drove Murchison shares up 17 percent, while those of neighbour Gindalbie Metals Ltd rose 9 percent.

China's steel industry is keen to back the development of alternative iron ore sources to curb what it regards as too much pricing power in the hands of the world's big three producers of iron ore, Vale , Rio Tinto and BHP Billiton.

The Mid-West region of Western Australia has long been touted as a potential new iron ore province, although ore grades are not as rich as in the state's Pilbara region where BHP and Rio Tinto have their Australian iron ore mines.

Murchison said the project, the Oakajee Port & Rail project, intended to pursue a proposal for China Communication Construction Company to provide design assistance.

Oakajee would also hold talks with China Railway Construction Corporation (CRCC) about potential strategic co-operation for the project's rail component.

Chinese interests might take equity in the project, said Murchison's neighbour in the Mid-West, Gindalbie, which plans to mine iron ore there.

Their involvement could be a combination of things but I'm sure in the long term they would like to have some equity in it, Gindalbie Chairman George Jones said in a telephone interview from Hong Kong.

Jones was one of a delegation of Australian iron ore miners led by the Western Australian state premier Colin Barnett that visited China this week to meet with Chinese steel officials.

The visit came as the China Iron and Steel Association, the country's leading iron ore price negotiator, continued to demand steeper cuts than the 33 percent reduction agreed by Rio Tinto, BHP Billiton and Brazil's Vale in talks with Japanese, South Korean and Taiwanese steel mills.

Jones said he did not have any special insight into the progress of the talks but believed the Chinese steel makers might eventually agree to the same terms.

I personally think that these settlements that have been achieved are close to where they should be and I think that ultimately China will accept around the levels that have been settled, he said. (Reporting by Bruce Hextall; Editing by Clarence Fernandez)

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