Oct. 23 (Bloomberg) -- Yanzhou Coal Mining Co. of China won Australian government approval for its A$3.5 billion ($3.2 billion) takeover of Felix Resources Ltd. after agreeing to sell shares and base senior executives in the country.

Yanzhou, China’s fourth-biggest coal producer, must reduce its ownership in the listed company, YanCoal Australia, to less than 70 percent by the end of 2012, Assistant Treasurer Nick Sherry said in a statement today. The majority of Yancoal’s board meetings must be held in Australia, he said.

Yanzhou gained approval for China’s largest acquisition in Australia amid increased scrutiny from lawmakers in Canberra of resource purchases by the world’s biggest consumer of metals and second-biggest energy user. In June, Rio Tinto Group rebuffed a $19.5 billion investment from Aluminum Corp. of China. Stern Hu, an Australian Rio employee, was arrested in Shanghai in July on espionage charges.

“It looks like a pretty balanced outcome,” said Peter Arden, a Melbourne-based analyst at Ord Minnett Ltd., an affiliate of JPMorgan Chase & Co. “The China-Australia relationship has to be managed carefully. There have been some incidents that have upset people on both sides. I don’t think we can tell China to go away and that they can’t have anything.”

Yancoal’s chief executive officer and chief financial officer must have their principal place of residence in Australia, Assistant Treasurer Sherry said.

Australian ‘Unease’

“These conditions partly reflect the unease in some parts of Australia about foreign ownership of companies,” said Martin Wang, a coal analyst at Guotai Junan Securities in Hong Kong. “It seems reasonable that the majority of board meetings are held in Australia. It will ensure that Chinese managers are in tune with local working practices and corporate culture.”

Australia halted a A$2.6 billion bid by China Minmetals Corp. for OZ Minerals Ltd. in March on national-security grounds. The review board also blocked China Non-Ferrous Metal Mining (Group) Co. from buying a majority stake in rare earths producer Lynas Corp. on Sept. 24.

Australia’s Department of Foreign Affairs and Trade said today that Hu the probe has been extended. China is Australia’s second-biggest trading partner, with two-way commerce valued at A$68 billion ($63 billion.)

‘Win-Win’ Outcome

Patrick Colmer, a director of Australia’s Foreign Investment Review Board, said in September overseas investors should limit proposed stakes in major mining companies to no more than 15 percent to improve their chance of winning approval.

Yanzhou and the Foreign Investment Review Board have realized a “win-win outcome” that would result in significant economic and employment benefits for Australia, the Zoucheng, Shandong-province based company said in an e-mailed statement today.

Chinese regulatory consents are required for the acquisition to proceed, Yanzhou said. Felix shareholders are due to vote on the proposal on Dec. 8, Yanzhou said.

Felix’s attributable coal sales during the 12 months ended June 30 were 4.77 million metric tons from three operations in New South Wales and Queensland-state, the company said July 30. Felix is developing the Moolarben mine, which is expected to have saleable production of 12.8 million tons a year, it said in an August presentation.

Felix also has a 15.4 percent stake in Newcastle Coal Infrastructure Group, which is building an export terminal at the port.

To contact the reporter on this story: Ben Sharples in Melbourne at bsharples@bloomberg.net; John Duce in Hong Kongt . Jduce1@bloomberg.net

Last Updated: October 23, 2009 03:57 EDT