UPDATE 3-Aussie billionaire threatens to sink SQM's $1 bln lithium deal

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Hancock builds up 18.3% stake in Azure Minerals

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Billionaire torpedoed $4.2 bln Albemarle deal earlier this month

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SQM deal for Azure valued it at $1 bln

(Adds SQM decline to comment in paragraph seven)

By Melanie Burton and Rishav Chatterjee

MELBOURNE, Oct 27 (Reuters) - Hancock Prospecting, owned by Australia's richest person Gina Rinehart, threatened on Friday to torpedo a deal by the world's second biggest lithium chemicals maker, Chile's SQM, for an Australian lithium miner.

Hancock Prospecting, an iron ore miner, has built up a stake of 18.3% in Azure Minerals, which is developing the Andover project in Western Australia, a filing to the Australian securities exchange showed on Friday.

Shares in Azure have rocketed more than tenfold this year to value the company at A$1.56 billion ($991.22 million).

It is the second time in as many weeks that Hancock has blindsided a potential acquirer of Australian assets by amassing an apparent blocking stake in the target company.

The stake in Azure puts at risk a deal by Sociedad Quimica y Minera de Chile S.A. (SQM), which - backed by Azure's board - offered on Thursday to buy the shares in the developer that it did not already own.

"While Andover shows good prospects, it has a long path and significant risks to navigate before its ultimate potential is known. Hancock is an established West Australian company with the capacity to support and expedite development," Hancock said in a statement to Reuters.

SQM declined to comment on Hancock's move.

Less than two weeks ago, Albemarle, the world's top lithium chemicals maker, ditched its $4.2 billion bid for Liontown Resources amid "growing complexities", after Hancock popped up on Liontown's register with a 19.9% stake.

SQM's scheme of arrangement deal for Azure requires 75% of voting shareholders to back the deal, and already has implicit support of around 43%, broker Canaccord noted in a report.

SQM also offered an off-market takeover option - where it would go directly to shareholders - if the scheme of arrangement should fail. Analysts said that was a back up if an "interloper" should emerge. The scheme of arrangement is contingent on no other shareholder acquiring a stake of 19% or more.

"(Whether) this suggests Hancock just wants to partner (i.e. hasn’t gone to 19%) or is gearing up for more, remains to be seen," Canaccord's Paul Howard said.

"SQM may have expected this, hence it included the Takeover in the deal as a fallback."

SQM's scheme of arrangement offer is A$3.52 per share and its off-market cash offer is for A$3.50 per share - just where shares closed on Friday.

Chemicals makers are seeking earlier stage projects to more cheaply secure supply, helped by a slide in lithium prices that has undercut valuations for lithium companies. Azure's Andover project is not expected to come into production until 2030.

SQM did not immediately respond to a request for comment. Hancock declined to give further details and Azure declined to comment.

Azure rejected a previous buyout offer, worth A$901 million, from SQM in July.

($1 = 1.5765 Australian dollars) (Reporting by Rishav Chatterjee in Bengaluru; additional reporting by Ernest Scheyder; Editing by Savio D'Souza and Mark Potter)