Xinfa will pay $A500,000 by Monday as an exclusivity payment for a five-month due diligence period to August 31.

At the end of the exclusivity period the companies will sign a memorandum of understanding at which time Xinfa will pay an additional $2 million for a 5.8% interest in Australian Bauxite through the issue of 6.6 million shares at 38c per share. The exclusivity payment will fully convert to shares as part of this placement.

Xinfa is an integrated aluminium company which has refining and smelting operations in Shandong, Guangxi, Shanxi and Zinjian provinces with current installed capacity of more than 5 million tonnes per annum alumina and 1Mtpa of primary aluminium.

The company imports more than 10Mtpa of bauxite, and operates several bauxite mines in China. It had operated two mines in Indonesia until late 2012.

Xinfa will acquire a 50% stake in the projects through funding all pre-production costs for the first mine of each project, including due diligence costs, feasibility study fees and working capital.

The Chinese company will also take at least 50% of bauxite production from the projects, and could end up taking all bauxite production if requested by Australian Bauxite.

Australian Bauxite chief executive and managing director Ian Levy said bauxite shipments were planned to start in the second half of 2014.

“As supportive offtake partner, Xinfa will greatly reduce market risk for our first two projects, especially in the early years whilst each project establishes consistent production,” he said.

Australian Bauxite will be responsible for managing statutory and governmental relations and land and tenement administration as well as operating exploration activities.

The company will repay its portion of development costs over time.

Xinfa will get first shot at negotiations for future Australian Bauxite projects.

Australian Bauxite shares were trading 20% higher at 24c.