* Most foreign investors came in at A$2.50 to A$2.60
* To raise at least $3.7 bln at bottom of range
* Solid foreign demand seen helping offset domestic sceptics
* Investors hope a buoyant float will reopen IPO pipeline
* Pricing announcement due on Saturday (Adds background, quotes, graphics)
By Narayanan Somasundaram and Victoria Thieberger
SYDNEY, Nov 19 (Reuters) - Australia's biggest float in more than a decade, the $3.7 billion initial public offering of the QR National rail freight business, is likely to price on Saturday near the lower end of the indicative range, three sources said.
Concerns about QR National's reliance on the cyclical coal haulage business and its main customer in China, upcoming contract renewals and a government overhang of shares had fuelled talk the offer price may have to be cut.
But solid demand from foreign institutions should lift the price just above the $2.50 bottom of the range, sources with direct knowledge of the float said.
QR National will break a drought in large share offers in Australia since the global economic downturn, and investors hope a successful float may open the door to a series of stalled IPOs in the new year.
Foreign institutional bids were mostly in the A$2.50 to A$2.60 per share range, at the bottom of the A$2.50 to A$3.00 price guidance, said the sources, who declined to be named as they are not authorised to speak to the media.
"Demand was quite strong at the A$2.55 to A$2.60 range from overseas institutions. In fact, at that level the book will be covered. Having said that, it is multiple times covered at A$2.50," one source said.
QR National, which operates a coal haulage rail network and trains, is likely to be one of the largest floats in Asia ex-Japan this year. At A$2.50, the state government would raise A$3.7 billion through the sale.
But demand from local investors has been weak, in contrast with some of the mega-IPOs in Asia this year including the world's largest IPO, Agricultural Bank of China.
Elsewhere, General Motors this week pulled off the biggest IPO in U.S. history, raising $20.1 billion after pricing at the top of the proposed range in response to huge investor demand.
"A BIT RICH"
QR National says it is the world's largest transporter of coal from mines to port and carries 260 million tonnes of freight a year, using its 16,000 rail wagons and 2,300 km of track -- the first of which opened in 1865.
Its chief executive, Lance Hockridge, a former head of North American operations for Australia's BlueScope Steel, has spent the best part of a year travelling the globe and pitching the IPO to about 300 potential investors.
At A$2.50 a share, QR National would be priced at 21.1 times forecast earnings for 2011, just above its closest Australian rival, ports and rail group Asciano, trading at 20.4 times forecast earnings.
"The valuation is super-rich and dwarfs its local and international competitor," said one fund manager who declined to be named because the fund's parent has links with QR.
"It is a market leader but what it fails to address is the fact it is a cyclical industry and such sectors need to leave some dough in the table for investors. This one does not."
Another fund manager, who did not take part in the IPO, said QR carried risks because a majority of coal contracts will be repriced in coming years, whereas Asciano has volumes locked in for 10 years and a proven track record through economic downturn.
He also worried about the large amount of debt that may be needed to fund expansion of coal trains and tracks.
Comparable major North American rail groups are much cheaper, trading at around 15-16 times forecast earnings, according to Thomson Reuters data.
GOVERNMENT SET TO RETAIN STAKE
A pricing meeting is scheduled for Friday night with the pricing announcement by the Queensland government on Saturday.
"Ideally the pricing recommendation will be at the middle of the A$2.50 to A$2.60 (range) in the best case, but ultimately it is up to the Queensland government to price at that level or leave more room for investors," another source said.
The sources said the Queensland government is likely to retain a 40 percent stake in QR National, at the top end of its 25 to 40 percent guidance.
A Queensland government spokesman declined to comment.
Australia's IPO pipeline has been virtually shut this year, with choppy equity markets and two of last year's biggest floats, retailers Myer and Kathmandu, faring poorly.
"It will give the local market a real bit of confidence if this deal can get away and trade in a steady manner," said one banking source.
Just on Friday, oil and gas explorer Karoon Gas scrapped its IPO worth up to $1 billion at its Brazilian unit, citing unfavourable market conditions and sending its shares down by as much as a tenth.
The shares are due to start trading on the Australian stock exchange on Monday, Nov. 22 under the symbol QRN. (Editing by Balazs Koranyi and Lincoln Feast)