China's Yanzhou Coal has agreed to buy coal miner Felix Resources Ltd, a source said, in a deal worth up to $3.3 billion that underscores China's growing interest in Australia's resources sector.

The potential takeover comes as asset valuations are rebounding after last year's rout, and despite Rio Tinto Ltd ditching a $19.5 billion deal with Chinalco earlier this year.

Still, the planned takeover by state-owned Yanzhou, China's No. 4 coal producer by market value, could face political opposition, especially coming at a time when China has accused Rio Tinto of spying.

The details and the terms of the agreement are not known yet, but the two parties have reached an agreement, a source who had been briefed on the matter told Reuters on Monday.

The source declined to be identified as the details of the deal were not public yet.

The source said the deal would likely be struck below A$20 a share, compared with Felix's last traded price of A$16.90, which gives it a market value of about A$3.3 billion ($2.8 billion).

Felix had been in talks with Yanzhou last year on a potential takeover but a deal could not be reached due to differences over valuations.

One banker, who has previously advised Chinese mining companies on potentially buying Felix, suggested Yanzhou might be prepared to pay up to a 20 percent premium to Felix's last traded price, valuing a deal at about A$4 billion.

If they get a A$20 per share valuation, it will be a great outcome for Felix, the banker said.

That would make it China's largest acquisition in Australia ever, and its third-largest cross-border deal this year, according to Thomson Reuters data.

Shares in both companies were placed on trading halts on Monday. Felix said in a statement it was in talks over a potential change of control transaction and declined further comment, while Wu Yuxiang, a director of Yanzhou Coal also declined to comment.

Australian coal stocks rallied on news of a potential Felix deal, with Whitehaven Coal Ltd rising 9.5 percent and both Macarthur Coal and Centennial Coal Ltd up more than 4 percent.

CHINA BUY

Media reports in June said Yanzhou had renewed its interest in Felix, though Felix said at the time it did not expect talks on a change of control to be concluded in the near future.

Analysts and bankers expect Chinese companies to further pursue Australian resource firms to secure their supply of natural resources. So far this year, Chinese firms have invested about $2.2 billion in Australian energy and resources companies.

Chinese imports of coal more than doubled to around 48 million tonnes of coal in the first half of this year, to meet growing demand for steel and power production. Felix produced 4.8 million tonnes of coal in the year to June.

New potential buyout or financing deals may include Australia's smaller iron ore players, the likes of Atlas Iron, and small base metals firms such as Kagara Ltd -- anything involved in steel making or infrastructure to assist in China's massive modernization drive.

Earlier this year, China's state-owned Minmetals agreed to takeover most assets from then debt-laden OZ Minerals Ltd. Analysts say the Rio/Chinalco situation has not dented optimism about flow of the Chinese deals into Australia.

That was a specific event between Rio and Chinalco. Since then we have seen other events transpire, Lawcock said. Felix shares have nearly doubled this year, far outpacing a 16 percent rise in the benchmark S&P/ASX 200 index .AXJO.

Felix never said what price they were looking for, but the market speculated it could be in the range of A$20-A$24 per share. It's all about how they negotiate really, said Brian Eley, a fund manager with Eley-Griffiths, which manages about A$600 million including Felix shares.

One thing is for sure, if they have got this far then obviously there is something real there, he added.

Citigroup and Wilson HTM are advising Felix, while Yanzhou, which was being advised by Royal Bank of Scotland on Felix last year, is now being advised by UBS, according to sources.

($1=A$1.20)

(Additional reporting by Joanne Chiu in Hong Kong; Editing by James Thornhill and Lincoln Feast)

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