UPDATE 2-Chinese private equity offers $850 mln for Discovery Metals

* Rare private equity approach for resource project

* CFC seeking Discovery's Botswana copper project

* A$1.70/share offer at 16.4 pct premium to last traded price

* Discovery shares on trading halt

(Recasts, adds details on China bids)

By Miranda Maxwell and Denny Thomas

MELBOURNE/HONG KONG, Oct 4 (Reuters) - A private equity firm founded by Chinese billionaire Yu Yong and a fund backed by state-owned China Development Bank have offered to buy Australian-listed copper explorer Discovery Metals Ltd , valung the company at about $850 million.

The takeover offer for Discovery is the latest in a series of small-to-mid-sized metals and mining deals to hit Asia in the wake of sliding commodity prices. The fall in metal prices is making it hard for smaller producers and explorers to secure funding for their projects, which is expected to spark a series of asset sales, bankers have told Reuters.

It's rare for private equity firms to buy into mining companies as the cyclical nature of the business makes it hard to predict the outcome of such investments.

But Yu's Cathay Fortune Corp. (CFC) already owns a 13.7 percent stake in Discovery Metals, which is focused on the emerging Kalahari Copper belt in northwest Bostwana.

Yu, the largest shareholder in CFC, has a net worth of $1.4 billion according to Forbes. CFC also owns 35.5 percent of Hong Kong listed China Molybdenum , the largest molybdenum producer in China and the fourth largest in the world.

Chinese investment into Australia's mining sector has come under intense scrutiny, but Australia has never outright rejected any Chinese acquisition.

CFC's deal has already been approved by Australia's Foreign Investment Review Board, CFC said in a statement on Thursday. The deal is still conditional on securing regulatory approvals in China.

The all-cash deal was backed by a $600 million loan from China Development Bank, China's policy bank, the statement said. The proposal is for a joint venture that would be 75 percent owned by CFC and 25 percent owned by China-Africa Development Fund (CAD).

The cash offer of A$1.70 a share is at a 16.4 percent premium to Discovery's last traded price of A$1.46. Discovery Metals was placed on a trading halt on Thursday morning.

"CFC and CAD Fund value the high quality of Discovery Metals' senior management team, and are enthusiastic about the opportunity to work with them to develop and provide funding certainty to the Boseto Copper Project," Yu said in a statement emailed to Reuters.

Citigroup is advising CFC, the statement added. CHINESE ON THE PROWL

China, which accounts for nearly 40 percent of global copper consumption, has been on the prowl for mining investments in Africa, South America and central Asia as it looks to feed ever expanding domestic demand for key commodities.

Earlier this year, China-Africa Development Fund and China Guangdong Nuclear Power Corp (CGNPC) agreed to buy Kalahari Minerals and Extract Resources for about $2.3 billion, giving them control of the Husab uranium project in Namibia.

State-owned China National Gold is also considering a bid for the African unit of Barrick Gold , the world's No. 1 producer.

Of late, China has seen switching away from Australia and Canada as asset prices became more expensive. For a related story:

Long project approval processes have also put off some Chinese investors, spurring the search for assets in emerging markets instead.

($1 = 0.9795 Australian dollars)

(Additional reporting by Stephen Aldred; Reporting by Miranda Maxwell and Denny Thomas; Editing by John Mair and Richard Pullin)

((Miranda.Maxwell@thomsonreuters.com)(+613 9286 1464))