Australia has signaled that it remains open to some investment from China in its key mining sector, giving the green light to Hunan Valin Iron & Steel Group's A$1.2 billion investment in iron ore miner Fortescue Metals Group Ltd. (FMG.AU).

Australian Treasurer Wayne Swan has granted Valin approval to take a stake in Fortescue of up to 17.55%, allowing the iron ore miner to raise much needed funds by issuing shares to the Chinese group.

A surge in Chinese government-backed entities in the mining sector has sparked some concern in Australia with politicians from minor parties expressing fears about China, a major customer, potentially winning the ability to drive down prices.

The government last week blocked on such deal, the A$2.5 billion takeover of OZ Minerals Ltd. (OZL.AU) by China Minmetals Nonferrous Metals Co., on the grounds that one of the mines being bought is in an Australian military zone.

Approval of the Fortescue deal will give heart to others trying to win approval, most significantly Aluminum Corp. of China with its landmark US$19.5 billion investment in Rio Tinto Ltd. (RTP).

However, this deal is on a much larger scale and raises more complex issues and Austock analyst Tim Gerrard said approval of Valin's stake in Fortescue shouldn't be seen as a sign that other Chinese investment would be approved.

"Each one is being assessed on a standalone basis and I wouldn't see any read through for Rio," he said.

Swan said the undertakings given by Valin and agreed to by Fortescue would deal with potential conflicts of interest on pricing.

"These undertakings ensure consistency with Australia's national interest principles for investments by foreign government entities," he said in a statement.

"They ensure the appropriate separation of Fortescue's commercial operations and customer interests, and support the market-based development of Australia's resources."

Those who structured the Fortescue deal worked hard to put together a proposal that would be easier to approve than the Chinalco investment in Rio, with a slightly smaller holding and only one China-appointed director instead of two.

Swan said Valin has given an undertaking that its nominee to Fortescue's board will comply with the iron ore miner's director's code of conduct and will submit a standing notice of potential conflicts of interest relating to marketing, sales, customer profiles, price setting and cost structures for pricing and shipping.

The Valin appointee to the board will also comply with the information segregation arrangements that have been agreed by the two parties, Swan said.

Valin is buying 275 million shares in Fortescue from New York's Harbinger Capital and will be issued with another 260 shares by Fortescue for A$665 million to take its stake 17.4%.

Fortescue Chief Executive Andrew Forrest said approval of the deal enhances the already strong relationship between Australia and China.

"Fortescue has always enjoyed close and mutually rewarding relationships with Chinese companies and Valin's investment in Fortescue exemplifies and rewards the cooperative approach we have taken," he said in a statement.

Fortescue may now look to proceed with an even bigger deal with China; a large hybrid funding package it has been discussing with China Investment Corp. to underpin its expansion plans.

Fortescue Executive Director Graeme Rowley confirmed Tuesday the miner is "still having discussions with a number of groups."

A spokesman for Valin wouldn't immediately comment but said the company may issue a statement later.

-By Alex Wilson, Dow Jones Newswires; 61-3-9292-2094; alex.wilson@dowjones.com