* Rio Tinto tentatively offers A$15 a share
* Rio not yet in a position to submit firm bid
* Quality coking coal assets scarce
* Riversdale shares up 16 pct to record; Rio slips 0.5 pct
* Other bidders seen likely to enter the fray (Adds shareholder comment, coal background; updates shares)
By Sonali Paul
MELBOURNE, Dec 6 (Reuters) - Anglo-Australian miner Rio Tinto made a $3.5 billion bid approach for Africa-focused Riversdale Mining , sending the target firm's shares surging 16 percent and setting up a potential takeover battle.
Rio's move on Australia's Riversdale is likely to spark a bidding war, as the company has hard coking-coal projects in Mozambique that could eventually supply 5-10 percent of the global market for the key steel-making material.
Brazil's Vale is seen by analysts as the most likely rival bidder, as it already has coal mines nearby in Mozambique. India's Tata Steel , Riversdale's top shareholder, was also seen as a potential bidder.
Xstrata Plc , Anglo American and Peabody Energy could also be interested. Top coking-coal exporter BHP Billiton is seen as a less likely contender, as it has its own growth options in Australia.
The company's fourth-biggest shareholder, Australian investment firm LinQ Management, expects Riversdale to be hotly contested, given the scarcity of good quality coking-coal assets and booming demand from China and India for the commodity. "It's in a good part of the world for accessibility, and we think there's plenty of further upside for whoever's interested in buying it. Hopefully there will be other interested suitors coming to the table," LinQ Managing Director Clive Donner said.
Riversdale confirmed media reports that Rio was talking about an offer around A$15 a share for Riversdale, which would value the group at A$3.5 billion ($3.48 billion), only a 6 percent premium on Riversdale's close on Dec. 3 ahead of a leak to a UK newspaper . Riversdale also hinted that it was talking to others.
"While discussions with Rio Tinto are ongoing, there is no certainty that Rio Tinto or any other party will proceed with any proposal for the acquisition of Riversdale," Riversdale said.
Rio Tinto declined to comment on Riversdale's statement. The smaller miner's shares hit a high of A$16.41 on Monday, its biggest one-day gain in more than two years. They ended up 15.7 percent at A$16.31.
UBS is advising Riversdale, and Macquarie is advising Rio Tinto.
NO BID YET
A deal would mark Rio Tinto's first significant acquisition since its badly timed $38 billion takeover of Alcan at the height of the commodities boom in 2007, which forced it to sell more than $13 billion worth of assets to help slash debt.
It salvaged its balance sheet last year with a $15 billion rights offer after scrapping a $19.5 billion investment by its biggest shareholder, China's Chinalco. That deal was replaced by a planned iron ore joint venture with BHP, which fell apart in October after regulators objected.
Rio said last week it was hunting for small to medium-sized acquisitions worth around low-single-digit billions of dollars, in stark contrast to bigger rival BHP which remains on the prowl for major deals, like its recently failed $39 billion bid for Potash Corp .
While Rio and Riversdale were still in talks, Riversdale said Rio Tinto had advised the company that it was not in a position to submit a firm takeover offer.
Rio would need to pay well over A$3.5 billion to win support from Riversdale's three major owners: Tata Steel, Brazilian steelmaker CSN and U.S. hedge fund Passport Capital, who together own more than half the company, analysts said.
"Not only will they have to pay a big premium for it, but there are likely to be other bidders," said CLSA analyst Hayden Bairstow, who has a price target of A$17.50 a share on Riversdale.
Rio's decision to shrug off the complex ownership in Riversdale and make a tilt for the mid-sized miner not only underscores its hunger for scarce quality coking coal assets, but also marks a tacit recognition that Mozambique may be the new frontier for coking coal. Riversdale's Zambeze project holds 9 billion tonnes of certified resources, one of the largest undeveloped coking coal resources in the world. It also owns 65 percent of the neighbouring Benga project. The company is in the midst of completing an agreement to give China's Wuhan Iron & Steel Corp an 8 percent stake in the company and a 40 percent stake in the Zambeze project, another potential hurdle for Rio Tinto. Wuhan was not immediately available for comment.
Rio Tinto shares slipped 0 . 5 percent to A$86.0 , in a flat broader market. Its 5-year credit default swaps were trading steady at 89/94 basis points, as a takeover of Riversdale was seen as easily affordable. While Vale would be looking closely at any bid for Riversdale, one analyst, who declined to be named, said if Vale had been interested, it would have pounced earlier.
The analyst said that Mozambique may have discouraged Vale from bidding as the country wants more than one company developing its coal resources.
Riversdale also owns an operating underground coal mine in South Africa, Zululand Anthracite Colliery, which could attract strong interest for its good quality thermal coal, especially given its proximity to India, which faces a big coal shortage. ($1=1.007 Australian Dollar) (Additional reporting by Fayen Wong in Shanghai and Umesh Desai in Hong Kong; Editing by Ed Davies and Muralikumar Anantharaman)