A move by Fortescue Metals Group Ltd. (FMG.AU) to offer discount iron ore prices to China in return for up to US$6 billion in funding will underpin the miner's expansion plans, but raises questions about the prices the firm will receive in the future, analysts said.

Fortescue has struck a deal with the China Iron & Steel Association to sell all of its iron ore fines to Chinese mills until the end of 2009 at prices 3% lower than those Rio Tinto Ltd. (RTP) and BHP Billiton Ltd. (BHP.AU) have agreed with steelmakers in Japan, Taiwan and Korea.

The pricing deal appears designed to save face for CISA, which has been refusing to accept the Japanese benchmark despite its position being undermined by rising spot prices, and to attempt to pressure Rio and BHP to fall into line.

The deal is conditional on Fortescue securing US$5.5 billion to US$6 billion in funding from Chinese financiers to bankroll its plans to up annual iron ore output from its mines in the Pilbara region of Western Australia to 95 million metric tons.

While a 3% discount on six months of production might not be too heavy a price to pay to win access to cheap funding for a company-making expansion, analysts say there are still unanswered questions and risks for Fortescue.

Namely; what will the terms of the finance agreement be and will China now always be expecting a discount from Fortescue in the future?

"The question has to be asked, what happens to your negotiating position when you tie your balance sheet to your largest trading partner," Macquarie analyst Brendan Harris said.

Asked if the Chinese would expect a discount from Fortescue in the future, the miner's executive director of marketing, Russell Scrimshaw, said it is too early to say.

"That is for time to tell, we are on day one of a Fortescue price for the next six months," he told reporters.

Fortescue Chief Executive Andrew Forrest said the deal would help China in its drive to establish more stable iron ore pricing and that if this was achieved Fortescue would not be selling its ore at a discount.

"You will see I think, Fortescue at least reaching parity with the other producers," he said.

Fortescue's deal also features a guarantee from CISA that the miner will have priority for negotiating iron ore prices in 2010.

UBS analyst Glyn Lawcock said the discount over the next six months is not a big deal but there is uncertainty over what prices Fortescue will receive for its ore in the future.

"The question is what commitments are behind (the deal) for subsequent periods," he said.

Fortescue's agreed price of 94 cents per dry metric ton unit is about 3% below the 97 cents Rio Tinto has agreed with other Asian steelmakers, and equates to US$55.50 a dry metric ton of Fortescue's iron ore.

With spot prices, on a free-on-board basis, surging to about US$90 a ton, Lawcock said Fortescue's deal also denies it any exposure to the upside of the spot market.

Macquarie's Harris also said the deal highlighted Fortescue's lack of leverage to the spot market despite a recent tendency of Fortescue's share price to track movements in the underlying Chinese iron ore price.

Fortescue's stock rose on the news of the funding deal, closing up 2.9% at A$4.58 in a broader Australian market that ended down 1.6%. Still, Fortescue's closing price was below an intraday high of A$4.75. Several analysts said the stock price has run ahead of the miner's production, and is already pricing in its yet-to-be-delivered expansion.

Analysts also made the broader point that the deal is part of a push by China to encourage the development of new sources of iron ore and that this, along with the current high prices, was helping new producers get started with the new supply likely to drive prices lower in the long run.

"China's strategic aim to encourage as much iron ore production as possible has the ability to undermine the historical high returns that iron ore has generated," Citi analysts said in a client note.

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

(Elisabeth Behrmann in Sydney contributed to this story)