By Yuka Obayashi and Kaori Kaneko

TOKYO (Reuters) - Japanese trading house Mitsui & Co said on Wednesday it would acquire a 40% stake in the Rio Tinto-operated Rhodes Ridge iron ore project in Western Australia for $5.34 billion, to strengthen its long-term earnings base.

The deal, marking Mitsui's largest investment ever is a result of long-term efforts to expand its production volume of iron ore, a key growth driver, CEO Kenichi Hori said.

Rhodes Ridge is one of the world's largest undeveloped deposits of the key steelmaking ingredient, with 6.8 billion metric tons of mineral resources, Mitsui said.

"The project is in Western Australia, where we have been involved in mining development since the 1960s and have the most expertise," Hori told a news conference. "It will further strengthen our business foundation."

The deposit's proximity to existing iron ore projects reduces capital costs and risk, he added.

The Japanese company is buying out two separate stakes controlled by the family of late Australian magnate Michael Wright, whose father jointly discovered the region's iron ore lode in the 1960s.

Mitsui, with a diverse portfolio spanning metal resources, energy, machinery, and food, expects production to start by 2030.

Its 40% stake in Rhodes Ridge is projected to yield 16 million tons of iron ore a year initially, rising to more than 40 million tons after further expansion, boosting operating cash flow by 100 billion yen ($659 million) and 250 billion, respectively.

In the financial year that ended in March 2024, Mitsui's annual equity share of iron ore production was 61 million tons through investment in Vale and partnerships with Rio Tinto and BHP.

Mitsui expects to find cost savings by tapping existing infrastructure between Rhodes Ridge and Rio Tinto's nearby Robe River project, in which it also has a stake.

Iron ore from Rhodes Ridge will be blended into ore sold by Rio Tinto and exported to Asian countries, including Japan.

Wright Prospecting's former 50% interest in the Rhodes Ridge joint venture has been restructured and separated into two newly formed entities separately controlled by its shareholders, VOCG and AMB.

Mitsui will buy VOC Group's entire 25% interest for $3.34 billion, including stamp duty, with the deal expected to close by the end of March 2026.

Mitsui also plans to buy a stake of 15% from AMB Holdings for $2 billion, including stamp duty.

After these transactions, Rio Tinto will hold 50% of the project, while Mitsui will own 40% and AMB 10%.

Global crude steel output is expected to grow as higher demand in India and Southeast Asia will offset an expected moderate decline in top producer China, while supply may fall short due to production decay at existing mines, Hori said.

($1=151.6800 yen)

(Reporting by Yuka Obayashi, Kaori Kaneko, Kantaro Komiya in Tokyo; Additional reporting by Melanie Burton in Melbourne; Editing by Jamie Freed and Clarence Fernandez)