LONDON/ZUG, Switzerland (Reuters) - Miner Xstrata XTA.L sought to win over waverers to the merits of its $39 billion takeover by commodities trader Glencore (GLEN.L), telling shareholders to back the "fair and reasonable" offer even as investors flexed their muscles by expressing opposition to its pay plan.
The structure of the deal, which requires at least 75 percent of shareholders excluding Glencore to approve it, means opposition from investors representing just over 16.5 percent of Xstrata's total shareholding would be enough to derail it.
Industry analysts believe the deal will ultimately succeed but Xstrata nevertheless faced a taste of opposition from a subdued crowd of investors, as 36.5 percent of those voting rejected its pay plan, up from a hefty 31.7 percent no vote last year.
Including shares withheld, 39 percent failed to back the plan.
Mick Davis, Xstrata's chief executive, is one of the best paid top executives in the FTSE 100, taking home $5.4 million pounds last year in salary, cash bonus and benefits - excluding long-term incentives, deferred bonuses and retirement benefits that could more than triple that if he hits set targets.
Davis has agreed to forgo a "change of control package" that would normally have been triggered by the takeover, but he is still expected to get a hefty shares package to ensure he stays on after the deal, a potential flashpoint for opponents to the merger.
The package is expected to be detailed in a circular to shareholders due later this month.
Xstrata, one of the world's largest thermal coal exporters and the fourth-largest copper miner, earlier reported a "strong" financial performance from the start of the year, despite a drop in first-quarter copper output as it replaces ageing operations.
Investors have kept a close eye on miners' major projects as costs soar and timetables stretch, but Xstrata said all major projects were making good progress and remained on schedule, with its flagship greenfield Koniambo ferronickel production in New Caledonia on track for the second half of 2012.
Some Xstrata investors have said the miner's growth profile, which includes Koniambo, but also Peruvian copper projects and a zinc-lead-silver mine in Australia, should mean a higher offer from Glencore, which agreed in February to pay 2.8 new Glencore shares for every Xstrata share owned.
Chairman John Bond, addressing some 200 shareholders gathered in an auditorium in the Swiss town of Zug where Xstrata is based, said investors would continue to benefit from the growth profile and should vote in favor of the deal in July.
"In the judgment of the independent directors, the terms of the proposal are fair and reasonable and the proposal represents a significant opportunity to create a distinctive business with very strong prospects to generate superior returns for our shareholders," he said.
Small shareholders, who tend to far outnumber institutions at annual meetings, could be key for Xstrata, as many of them own only shares in the miner -- meaning they are more motivated to agitate for a better deal than funds owning both companies. They make up a quarter of the register, analysts estimate.
"I would have expected better. I would have liked a minimum ratio of 3.5," one shareholder, Thomas Stitzinger, 76, said.
The miner said earlier that quarterly copper output dropped more than 18 percent year-on-year, after it reached the end of life of mines including the Ernest Henry open pit in Australia, while newer projects are still ramping up.
It was also hit by heavy rainfall in Peru that battered output from its Tintaya mine, along with bad weather and an outage at Collahuasi, owned jointly with rival Anglo American (AAL.L). Collahuasi is expected to see improved production in the second half as it moves to higher grade ores.
Xstrata produced 171,121 tons of copper in the quarter.
Mined coal, a key earner for Xstrata along with copper, saw consolidated production increase by 9 percent year-on-year to 21.1 million tons from the first quarter of last year, when the sector was battered by bad weather. Production was slightly down, however, on the fourth quarter of last year.
Rivals have seen their output hit by wet weather in the first three months but also by safety stoppages and strikes, with operators like Anglo coming in below analyst estimates.
"We saw biggest scope for disappointments in coal, which did not materialize," analysts at Liberum said in a note.
Shares were up 2.3 percent at 1,171 pence around 1612 GMT, broadly in line with the UK sector .FTNMX1770.
"It is a reasonable set of numbers, maybe slightly disappointing.. but it looks like they will meet their full year targets," Analyst Andy Davidson at Numis said.
Nickel rose 8 percent year-on-year to 26,381 tons over the quarter. Zinc, in which Xstrata will become the world's top player after the merger and which is expected to be a focus for antitrust authorities, was flat, with output at 239,983 tons.
Xstrata Zinc said separately that it was accelerating production from its Lady Loretta zinc-lead-silver underground mine and extending the life of its Handlebar Hill operation in Queensland, boosting annual zinc production by 5 percent.
Lady Loretta will begin production in late 2012.
(Editing by David Cowell)