(Updates share performance in paragraphs 5,6)
By Guillermo Parra-Bernal
SAO PAULO, Sept 26 (Reuters) - Cia Siderúrgica Nacional SA is considering selling part of its stake in Congonhas Minérios SA, Brazil's No. 2 iron ore producer, to China Brazil Xinnenghuan International Investment Co, two people familiar with the deal said on Monday.
According to the people, the Chinese mill known as CBSteel is interested in buying about 25 percent of Congonhas directly from CSN. They said CSN, as Brazil's No. 2 listed flat steelmaker is known, would remain in control of the unit, adding that talks are advancing slowly and may not necessarily result in a deal.
The first person, who asked for anonymity since the talks are private, said any deal valuing Congonhas north of $20 billion is more likely to succeed. The transaction also hinges on CSN being able to secure long-term supplying contracts from CBSteel, the same person noted.
CSN, which owns about 88 percent of Congonhas, declined to comment. Efforts to contact CBSteel's media representatives in Brazil were unsuccessful.
Shares of CSN reversed early losses and gained 0.3 percent to 8.76 reais in mid-afternoon trading, underscoring optimism among investors that a Congonhas Minérios deal would help CSN accelerate cutting the largest debt burden among Brazilian steelmakers, currently at about 26 billion reais ($8 billion).
The stock has more than doubled this year, partly on hopes Chief Executive Officer Benjamin Steinbruch will push forward with asset sales to cut debt. The six Asian companies that own a combined 12 percent of Congonhas would keep their stakes unaltered if a deal between CSN and CBSteel takes place, the people said.
On Aug. 19, O Globo newspaper reported intentions by CBSteel to buy 30 percent of the unit.
Congonhas Minérios was created at the end of 2014, through the merger of CSN's fully owned Casa de Pedra mine and Namisa - an ore production joint venture with the Asian companies. Casa de Pedra has one of Brazil's best-quality iron ore reserves.
According to bankers and analysts, CSN agreed to combine both assets to avoid paying $3 billion in penalties to the partners for missing Namisa's expansion goals. The Asian consortium includes Japan's Itochu Corp, Nisshin Steel Co Ltd, JFE Steel Corp and Kobe Steel Ltd as well as Korea's Posco Ltd and Taiwan's China Steel Corp.
$1 = 3.2441 Brazilian reais Additional reporting by Tatiana Bautzer in São Paulo; Editing by David Gregorio and Alan Crosby