Sumitomo pulls out of Aquila coal JV in Australia

Aquila Resources on Monday suffered a set back to its plans to raise capital via asset sales to help fund a A$7.4 billion ($7.6 billion) Australian iron ore project after Sumitomo Corp <8053.T> pulled out of a coal exploration partnership.

A memorandum of understanding reached between the two companies a year ago was designed to pave the way for an acquisition by Sumitomo of a 20-50 percent interest in coal mining tenements held by Aquila in Queensland state.

"Following two independent valuations, averaging A$108.8 million on a 100 percent basis, Sumitomo has elected not to acquire an interest in the tenements," Aquila said.

Aquila shares tumbled almost 10 percent to A$1.83 in early trading.

The proceeds from the sale and the joint venture agreement, on top of Aquila's existing cash reserves, were aimed provide funds needed to finance Aquila's share in the undeveloped West Pilbara Iron Ore Project.

Aquila in February put the iron ore project on ice at least through June due to funding difficulties, as soaring costs and volatile commodity prices take a toll on new mine developments.

The West Pilbara Iron Ore project in Western Australia is one of a number that have stalled since the mining boom cooled last year in the world's top iron ore exporter after Chinese demand slowed.

Aquila's project requires billions to be spent on rail and port access, stretching funding prospects.

Aquila and its partners American Metals and Coal International (AMCI), a mining investment firm, and South Korean steel giant POSCO <005490.KS> effectively froze the project last September after failing to agree on a budget for the year to June 2013. ($1 = 0.9721 Australian dollars)

(Reporting by James Regan; Editing by Ed Davies)