Fortescue Metals Group, Australia's third-largest iron ore producer, and Baosteel will merge their interests in two magnetite projects into a Hong Kong-based vehicle.

FMG will then own 88 percent of the new venture, FMG Iron Bridge, and Baosteel 12 percent under a deal the two partners signed yesterday in Shanghai.

The joint venture will include the Glacier Valley and Northstar mining areas, which have a total of 3.2 billion tons of resources, in Western Australia, FMG said.

"This agreement consolidates one of the world's most prospective magnetite projects taking into account its massive scale and close proximity to both customers and rail and port infrastructure," FMG Chief Executive Nev Power said yesterday.

The deal needs approval from Australia's Foreign Investment Review Board and China's State-owned Assets Supervision and Administration Commission.

FMG and Baosteel are already partners in the Glacier Valley project under a 65-35 venture. The Northstar project is wholly owned by FMG at present.

Power said in March that FMG may list its magnetite iron ore assets in Hong Kong or Shanghai within two to three years to fund expansion.