BHP move on Rio to spark new M&A wave in mining

By Eric Onstad - Analysis

JOHANNESBURG (Reuters) - A spurned bid approach by BHP Billiton (BHP.AX) for Rio Tinto (RIO.L)(RIO.AX) is likely to accelerate consolidation in the mining sector as rivals are spurred into action.

Management and shareholders, however, should be careful not to overpay, analysts and fund managers said.

"It will definitely intensify pressure by shareholders to go out and do something, but it's not always easy," said portfolio manager Matt Brenzel at Cadiz African Harvest Asset Management in Cape Town.

"Sometimes you just cannot find the reserves and you might be forced into overpaying for something."

Rival diversified mining companies such as Anglo American Plc (AAL.L), Xstrata Plc (XTA.L) and CVRD RIO.N might be tempted forge new partnerships to keep from being swallowed up.

"I think what this does, is it throws everything wide open again," said a London analyst who declined to be named.

"Anglo, Xstrata, Lonmin (LMI.L), Alcoa (AA.N), Freeport (FCX.N) -- anything that has a decent size and decent set of assets is potentially on the blocks."

Shares of mining companies surged on Thursday after BHP Billiton, the world's biggest mining group, proposed paying three of its shares for each Rio share. The proposal was promptly rejected as too low.

Anglo American and Xstrata shot up by 15 percent and 11 percent respectively, but they came down to earth on Friday as investors took profits.

Anglo now has forward price earnings ratio of 14.3, Xstrata at 11, Rio at 15.4 and BHP at 13.7 versus 15.5 for the UK mining sector .FTNMX1770.

"When mining companies are trading at 14-15 times forwards earnings, it's a time to take some money off the table," said an analyst in Johannesburg.

Anglo shed 6.3 percent to 3,417 pence by 1445 GMT, Xstrata fell 5.6 percent to 3,373 pence and No. 3 ranking platinum producer Lonmin lost 4.3 percent 3,255 pence.

ANGLO KEY PLAYER

While Anglo American has been touted previously as an attractive takeover target as it winds up a restructuring by shedding non-core units, it might seek to turn the tables and become a predator under the leadership of new Chief Executive Cynthia Carroll, some analysts said.

Carroll is much more aggressive than previous management and has moved quickly since assuming the top job early this year to seize takeover opportunities by snapping up new iron ore and copper operations in Latin America.

The company has a strong balance sheet and will end up with $15-20 billion in cash over the next 12 months as it concludes the sale of road materials unit Tarmac, finishes selling a stake in AngloGold Ashanti (ANGJ.J) and generates cash from operations, analysts said.

Other analysts, though, believe Anglo is too tempting a target for rivals to pass up.

One candidate might be Brazil's CVRD (VALE5.SA), which is unlikely to compete for Rio due to its already dominant role in the iron ore sector.

"CVRD might not be able to bid for Rio Tinto for anti-trust issues, but could possibly enter the fray via Anglo American," said MF Global Securities in a research note.

"The question is whether this takeover battle is all about iron ore and the proximity to China. If that is the case, then CVRD would need to counter the Australians' combined power."

Anglo has buoyant growth prospects in iron ore from its Kumba (KIOJ.J) unit and its recent purchase of a of a 49 percent stake of MMX in Brazil, it added.

Xstrata, which already has two key joint ventures with Anglo in coal and copper, could team up with CVRD to take on Anglo, added MF Global, which reiterated a "buy" rating on Anglo and boosted its target price to 4,500 pence from 3,500.

MF maintained its "neutral" stance on Xstrata, but increased its target price to 3,700 pence from 3,100.

(Reporting by Eric Onstad; Editing by Andrew Callus)