NEW DELHI/BANGALORE (Reuters) - India's third-largest steelmaker, JSW Steel Ltd (>> JSW Steel Limited), is in talks to buy embattled West African iron ore miner London Mining (>> London Mining Plc), showing Indian firms' growing appetite to secure raw materials abroad, sources familiar with the matter said.

London Mining was one of several junior miners set up in West Africa during the boom years on the back of rising demand for iron ore, hoping to turn the region into a new producing frontier to compete with Australia and Brazil. Instead, they have battled infrastructure woes, high costs and low prices.

The debt-burdened miner, whose shares have dropped 96 percent so far this year, warned last week it did not have enough cash to operate its only mine and was in talks about a potential strategic investment - though that would involve significant equity dilution.

It declined to comment on Monday. A JSW spokesman did not immediately reply to a request for comment.

"Talks (with London Mining) have been going on for many months. JSW people have visited them also," said one of the sources, who declined to be named as the talks are not public.

The source said London Mining would come "cheap" for JSW, thanks to its shrunken market valuation of roughly $10 million - though debt swells its enterprise value to over $290 million, according to Thomson Reuters data.

The source added a deal would be aimed at helping JSW meet its own demand for iron ore.

Action against illegal mining in India has led to a sharp fall in domestic iron ore output, forcing JSW to import heavily. It plans to ship in 10 million tonnes of iron ore in this fiscal year ending March 31.

News of the talks, confirming a weekend report in Britain's Sunday Times newspaper, sent shares in AIM-listed London Mining up almost 18 percent in early trading on Monday. At 0850 GMT (09:50 a.m. BST), the stock was up 8.9 percent at 4.92 pence.

African Minerals (>> African Minerals Limited), a rival producer in the region, saw its shares rise 8.2 percent.

BUYING ABROAD

JSW, controlled by billionaire Sajjan Jindal, has been eyeing up supply of raw materials and even steelmaking capacity outside India, securing mining assets in Chile, Mozambique and the United States. It is also close to buying some steel mills owned by Italy's Lucchini and considering buying the privately owned Ilva steel plant, also in Italy.

In a similar push abroad, Jindal Steel and Power, controlled by Sajjan’s brother Naveen Jindal, has already bought coal mines in South Africa, Mozambique and Australia. It has also been looking for iron ore mines in Africa, its executives have said.

Analysts and sources familiar with the matter cautioned, however, that even if it was successful in its bid, Jindal would need to tackle many of the issues that have troubled London Mining and its peers, not least costs.

"Their operating cost is still too high against the current iron ore price. It's not a bad asset, but having so much debt when the iron ore price is so low, and when you're not generating free cash flow, just doesn't work," said analyst Carole Ferguson at SP Angel in London.

West African miners are higher-cost producers at roughly $75-85 per tonne delivered to China, compared with big three Brazil's Vale (>> Vale SA), Rio Tinto (>> Rio Tinto plc) and BHP Billiton (>> BHP Billiton plc), with costs of about $45-55.

BHP said on Monday that it aims to cut its iron ore production costs by more than 25 percent and squeeze more tonnes from its mines.

(Additional reporting by Clara Ferreira-Marques in LONDON; editing by Susan Thomas/Keith Weir)

By Krishna N Das and Karen Rebelo