Xstrata, Vale seen poised for lighter takeovers

By Andrei Khalip and Eric Onstad - Analysis

RIO DE JANEIRO/LONDON (Reuters) - Miners Vale and Xstrata are likely to focus on smaller takeovers and internal expansion until the dust settles on volatile markets that may have helped torpedo a plan to merge the two firms.

Analysts said the companies, both headed by shrewd dealmakers, will no doubt keep an eye on other possibilities for mega-mergers, but could be wary in the short term after recent lurches in equity, metals and credit markets.

Vale (RIO.N: Quote, Profile, Research, Stock Buzz) (VALE5.SA: Quote, Profile, Research, Stock Buzz), the world's top iron ore producer, said late on Tuesday it had halted plans to buy Xstrata (XTA.L: Quote, Profile, Research, Stock Buzz) after months of talks about a deal that would have been one of the biggest ever takeovers, worth up to $90 billion.

"Vale has clearly stated when bidding for Xstrata that they want copper and coal, so I guess we can expect isolated acquisitions at a smaller scale for now," said analyst Rogerio Zarpao of Brazilian bank Unibanco.

"They secured $50 billion in financing for Xstrata, and it won't be difficult for them to raise a smaller sum very quickly," Zarpao said. "Also, from the second quarter, they'll have a lot more firepower with their cash flow reinforced by the recent iron ore and pellets price hike."

Last week, Vale raised prices of iron ore pellets by bigger-than-expected 86.6 percent for Italian steelmaker Ilva, and other customers are likely to accept similar increases.

The new pricing follows last month's jumps of 65 percent to 71 percent in iron ore prices for all its major clients.

Among the possible takeover targets mentioned by analysts were Grupo Mexico's (GMEXICOB.MX: Quote, Profile, Research, Stock Buzz) Southern Copper (PCU.N: Quote, Profile, Research, Stock Buzz) unit, London-listed Chilean miner Antofagasta (ANTO.L: Quote, Profile, Research, Stock Buzz) and U.S.-based Freeport-McMoRan Copper & Gold (FCX.N: Quote, Profile, Research, Stock Buzz), as well as coal companies in China and elsewhere in Asia.