Wellington, March 4 NZPA - The remnants of a Chinese dairy operation into which Fonterra's farmers sank over $200 million were today sold at auction to a big rival for 616.5 million yuan ($NZ184.12 million).

Sanlu Group Co -- declared bankrupt last month -- was bought by Beijing-based dairy company Sanyuan Foods Co in an auction at the Intermediate People's Court of Shijiazhuang, the northern Chinese city where Fonterra made its investment in 43 percent of a joint venture with Sanlu.

Fonterra had three directors on the Sanlu board -- Bob Major, Mark Wilson and a Chinese national, Patrick Kwok -- when they were told on August 2 that it had been selling milk for babies with high levels of the industrial chemical melamine, which can help cover up dilution of milk.

According to state newsagency, Xinhua, rather than stopping production of tainted products after the contamination was confirmed on August 1 last year, Sanlu decided to limit melamine levels to within 10mg for every kilogram of milk.

The company chairwoman, Tian Wenhua, said during her trial that she made the decision not to halt production of the tainted products because a Fonterra representative on her board gave her a European Food Safety Authority document which suggested up to 30mg/kg of food could be allowed for "migration" of melamine from plastic packaging.

Fonterra has said it emphasised the only acceptable level of contamination was zero.

Though Sanlu was one of 22 Chinese dairies whose products were found to contain melamine , Beibei infant formula produced by Sanlu contained the highest tested levels, at 2563mg/kg.

Tainted samples were found among another 21 suppliers (other than Sanlu), but the concentrations ranged from only 0.09 to 619mg/kg.

Fonterra declared Sanlu's brand beyond salvage quite soon after it first spoke publicly last September about the debacle, which killed at least six children and made hundreds of thousands sick.

Sanlu was declared bankrupt on February 12, by the Intermediate People's Court of Shijiazhuang. The auction started at 6 million yuan, based on the valuation of Sanlu Group's core assets, including land use rights, buildings, machinery and equipment as well as one of Sanlu's subsidiaries, the Linhe Dairy, the AP newsagency reported.

The Beijing Sanyuan Group Co, the parent company of the Shanghai-listed Beijing Sanyuan Foods Co, made the joint bid with the Hebei Sanyuan Foods Co, a subsidiary of the Beijing Sanyuan Foods Co.

Sanyuan bid against just one other prospective buyer during the auction, which lasted 15 minutes.

The auction company, the Hebei Jiahai Auction Co, declined to name the rival firm contesting the auction, which was open only to domestic dairy producers. Required bidders had to meet two criteria: no involvement in the melamine scandal; and total revenue of their liquid milk and milk powder products last year should reach 1 billion yuan.

Both of China's leading dairy producers, Yili and Mengniu, were unqualified to bid, since the chemical substance melamine was found in their milk products, though in smaller proportions than that detected in Sanlu's products.

Sanlu had been China's leading seller of milk powder for 15 years until the melamine scandal broke in September last year. The group's revenue hit 10 billion yuan in 2007, while Sanyuan's revenue was 1 billion yuan.

Taking over Sanlu will enable Sanyuan Foods to enlarge its foothold in the domestic market. Sanyuan has been renting six core plants from the bankrupt company.

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