Xstrata, Vale seen poised for lighter takeovers

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 (VALE5.SA), the world's top iron ore producer, said late on Tuesday it had halted plans to buy Xstrata (XTA.L) 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) Southern Copper (PCU.N) unit, London-listed Chilean miner Antofagasta (ANTO.L) and U.S.-based Freeport-McMoRan Copper & Gold (FCX.N), as well as coal companies in China and elsewhere in Asia.

While sliding equity markets hit the value of shares Vale wanted to use as part payment for Xstrata, that might not be a factor for a smaller target.

For example, Freeport was valued at around $35 billion and would be easier to buy, possibly in cash, analysts said.

BOLT-ON TAKEOVERS

Xstrata also is due to see growing cash flow amid strong prices for its products such as coal and copper.

"What happens now? For Xstrata ... we think it is too early to speculate about a potential tie-up with another company or bid from the Chinese," said analyst Jason Fairclough at Merrill Lynch in London.

"We expect business as usual -- execution of their organic project pipeline and more bolt-on transactions," he said in a research note.

Xstrata, which completed seven acquisitions over the past year, has several more in the pipeline and will likely go forward with those in coming months, analysts said.

They would likely be along the lines of Xstrata's recent Australian purchases of nickel miner Jubilee Mines JBM.AX for around $2.7 billion and coal producer Resource Pacific RSP.AX for $991 million, they added.

Chief Executive Mick Davis said earlier this month that the firm's divisions were constantly looking at acquisition opportunities even during the Vale talks.

Analysts said now that Vale was out of the picture, speculation would certainly resurface about a tie-up between Xstrata and Anglo American (AAL.L).

Davis has repeatedly said that a combination of the two firms would release synergies, but sources close to the situation have said Anglo is not interested.

EXPANSION

Both firms have ambitious expansion plans, with Vale due to spend $59 billion in five years, which it bills as the industry's largest investment plan.

Two big nickel projects, Goro in New Caledonia and Onca Puma in Brazil, are expected to launch output in late 2008 and 2009. The mines would eventually make Vale the world's biggest nickel miner, said another analyst, who was unauthorized to speak to the media.

Xstrata has a $30 billion pipeline of growth projects, which it says will deliver compound annual volume growth of over 12 percent through 2013.

Amid the rush to build new mines in similar areas, could Xstrata and Vale come back together?

"Xstrata fits Vale like a glove," Unibanco's Zarpao said. "While the chances of a new Vale offer are now more remote, it is possible that over the next six months, other suitors will show up, and Vale will just continue being the strongest candidate."

Analysts also said that a big drop in Xstrata shares could prompt minority investors to put pressure on Xstrata's main stockholder, trading house Glencore, to moderate its demands.

Vale says a dispute over marketing rights with Glencore, which wanted to maintain and expand the marketing rights within the merged company, was what had scuppered the deal.

A breather of several months might also lead to a change in the current unstable market environment, which some analysts blamed for the breakdown in talks.

(Editing by Richard Chang)