UPDATE 1-Chalco says $2.5 bln Australia mining deal terminated

HONG KONG, July 1 (Reuters) - Aluminum Corp of China Ltd (Chalco), the country's biggest manufacturer of the metal, said its $2.5 billion agreement with Australia's Queensland government to develop bauxite resources in the state had terminated due to adverse changes in the aluminium sector.

'The Aurukun Project has been hindered by various unfavourable factors to the extent that it cannot be implemented in accordance with the development agreement,' the company said in a filing to the Hong Kong stock exchange late on Wednesday.

Chalco, the world's third largest alumina maker, had agreed with the Queensland government that the development agreement would be automatically terminated after the expiration date of June 30, it said.

But both parties have agreed to continue discussions on the exploration of Aurukun bauxite resources and other means of investment.

News of the termination came in just three weeks after Chalco's state-owned parent said it was pushing the project ahead and denied a newspaper report it might call off the deal as a proposed mining tax would further erode its financial viability.

Chinalco Vice President Lu Youqing told Reuters on June 9 that Chalco did not have the consideration of withdrawing from the project but he said the proposed tax in Australia was a factor under consideration.

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Chalco had struggled to make the project feasible due to rising costs, an oversupplied market and a requirement to build an expensive refinery in Queensland state, and the mining tax would add a further blow, the Australian Financial Review said earlier this month.

Chalco shares have fallen about 30 percent in Hong Kong so far this year, underperforming an 8 percent drop on the broader market, on concerns about overcapacity and falling aluminium prices.

Its Shanghai shares eased 0.1 percent to 9.16 yuan in early Thursday trade, while the Hong Kong market was closed for a public holiday.

The company earlier proposed a 10 million tonnes a year bauxite mine and 2.3 million tonne alumina refinery in the eastern state of Queensland, running for 30 years with production to start in 2013.

Chalco's project joined a number of developments worth A$55 billion that have been put on hold following the government's announcement of the 40 percent mining super profits tax, the paper said.

(Reporting by Alison Leung; Editing by Jonathan Hopfner and Anshuman Daga)

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