REFILE-Glencore expected to buy back Prodeco coal mines

(Corrects spelling of "Xstrata" in third paragraph)

* Decision expected by deadline later on Thursday

* Value of asset has risen due to strong coal prices

By Eric Onstad

LONDON, March 4 (Reuters) - Commodity trader Glencore [GLEN.UL] is expected to buy back its Prodeco coal mines from Xstrata (XTA.L) for about $2.5 billion, analysts said on Thursday as the deadline loomed for a decision.

Swiss-based Glencore was forced to give up the Prodeco operations last year for $2 billion when it was short of cash, but it got an option to buy them back that expires later today.

Its repurchase price is higher than what Glencore sold the mines for, reflecting the deal Glencore reached with Xstrata, but analysts noted the value of the mines could be higher still because of a rise in the price of thermal coal used in power stations.

Glencore and Xstrata declined to comment, but some analysts expected a repurchase to be announced on Friday.

"It appears likely in our view that Glencore will exercise the option and take the asset out of Xstrata's hands," said Credit Suisse analyst Michael Shillaker.

"The key reason is that the option is now `in the money' by (around) $0.7 billion based on our valuation."

He valued Prodeco at around $3 billion, while Liberum Capital put the value at between $2.7 billion and $2.8 billion, based on a thermal coal price of $90 per tonne.

Said analyst Paul Galloway at Bernstein Research: "A decision to buy back the asset could be seen as a very positive signal for thermal coal prices -- it would mean that Glencore believes coal prices will remain elevated for many years."

POSSIBLE PARTNER

Glencore may seek a partner to help buy back Prodeco and was holding talks with four possible parties, a source close to the situation told Reuters last month. [ID:nLDE61L1VK]

Negotiations were being held with Brazil's Vale (VALE5.SA) (VALE.N), U.S. coal miner Alpha Natural Resources (ANR.N), Singapore sovereign wealth fund GIC and U.S. private equity fund First Reserve Corp, the source said.

Two of the possible joint venture partners -- GIC and energy-focused First Reserve -- already have a relationship with Glencore after they invested in some of the $2.2 billion convertible bonds Glencore issued in December. [ID:nLDE5BM0K6]

The bond issue was one step towards a public listing that could value privately held Glencore at more than $35 billion.

The high-grade, low-cost Prodeco operations include two opencast mines, port facilities and part ownership of a railway in the South American country.

Glencore agreed to sell Prodeco last year to pay for its share of a $5.9 billion rights issue by Xstrata since it did not have enough cash at the time.

Glencore, Xstrata's biggest shareholder with a 35 percent stake, got an option to buy back Prodeco for an exercise price of $2.25 billion plus capital spent on the mine by Xstrata and earnings from the business during the option period.

Prodeco generated $259 million of EBITDA last year. (Editing by David Holmes)