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 (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.