Corporate activity in the upper levels of the global mining market continues to rise with London reports over the weekend suggesting that Brazil's CVRD (Companhia Vale do Rio) had started looking at the aggressively expanding Anglo-Swiss Group, Xstrata.
Reports in the London Times and Financial Times suggested that CVRD had hired bankers to consider a possible bid for Xstrata, with Wall Street group, Lehman Brothers, named as the lead banker.
At present levels, a bid for Xstrata would be worth more than $A85 billion, and would probably result in BHP Billiton and Rio Tinto moving to either finalise their stand off, or start serious discussions on a merger.
A takeover or merger with Anglo American would be richer: over $A100 billion, but Anglo has a lot of low performing South African gold mining assets to deal with.
Anglo has low exposure to China and India, compared to CVRD, Xstrata, BHP and Rio.
The day before the Xstrata speculation broke, Rio CEO, Tom Albanese had declared the BHP three for one suggested offer 'dead in the water' in an interview with Bloomberg. BHP of course politely declined to say anything than it was still pushing ahead.
Friday here saw speculation from London that Xstrata and Anglo American might be looking at a mega-merger but bankers in London saw that could have been a case of one company name right (Xstrata), the other wrong (Anglo instead of CVRD).
The problem for these big miners is that there is probably no second deal left for them, assuming they get what they want in the current round, so they will have to move quickly.
Xstrata is looking to grow aggressively and has a very bullish take on future commodity prices.
It last week offered almost $1 billion for the medium NSW coal miner, Resource Pacific and a day or so later was said to be waiting to offer $20 a share, or over $A9 billion for Zinifex.
But then there is said to be a queue of possible suitors for Zinifex. The one thing stopping it happen is the weak outlook for zinc prices next year. The feeling is if you wait until 2008, you won't have to pay as much, but then ZFX could have been snapped up by someone else.
But at the top end it's a one deal market: miss one and you could end up as the target.
If Rio and BHP don't merge, either could become a stalker for another group.
Seeing the strong opposition from steel groups in China, Asia and Europe to a BHP-Rio union that would rule out either company and CVRD merging if their present romances failed.
Rio could be a target for an aggressive Xstrata if it wants to escape CVRD. But that might require Xstrata and Anglo to merge first, or joint venture a bid that would probably find it hard to get competition approval in some jurisdictions.
Xstrata shares closed up 8% at £36.56 on Friday.
The Anglo American rumours were rejected by 'sources' close to Anglo (probably investment bank advisers).
Mick Davis, the chief executive of Xstrata, said last week that BHP's move would spark a wave of further consolidation. He said "We are the most perfectly positioned company in the industry, the company which is going to benefit from consolidation in any way that it actually transpires".
That comment, and others in a similar vein, sparked the round of speculation and the run up in the share prices of Xstrata, BHP and Rio and the likes of Zinifex and other smaller miners.
Xstrata is the world's fifth-largest mining group and the fourth-largest producer of copper (thanks to its cheap buy of Mount Isa back in 2003).
Last year the group, which is part-owned by the Swiss metals trader Glencore, won a $US19 billion hostile bid battle for control of Falconbridge of Canada, breaking up an agreed deal with Inco. CVRD then snaffled Inco.
Xstrata did lose out this year in its attempt to buy LionOre, the Canadian-Australian nickel and gold producer. It then lobbed a rich, $A3.1 billion offer to buy Jubilee Nickel of Australia.
The moves at the top end of the market come as Chinese companies step up efforts to acquire foreign natural resources assets lower down the ranking pole.
There were two separate takeover bids on Friday, one for an iron ore company in Australia and the other for a copper miner with operations in Peru.
Sinosteel, one of China's largest steelmakers, made a $A1.19 billion cash offer for Midwest Corporation, an Australian iron ore explorer which is in the throes of fighting off an unwanted approach from another WA iron ore exploration group, Murchison Metals.
Sinosteel Corp has been a 'partner' of sorts with Midwest in a developing relationship that has suddenly extended to a full blown offer.
It is seen as a small counter strike by the Chinese steel industry to snap up Australian iron ore assets ahead of any successful completion of the BHP-Rio dance.
Sinosteel bid $A5.60 a share, 16% more than the stock's last traded price and 54% above the spurned offer from Murchison Metals.
Midwest shares last traded at $A4.85 on the ASX before the stock was suspended. That was a rise of 10c. The Murchison offer was one new share for every 1.08 Midwest shares, which is now well underwater.
Sinosteel has an initial joint venture with Midwest to develop two iron ore projects in Western Australia.
Murchison is backed by Japan's Mitsubishi Corp., and bid for Midwest to remove competition to build a port and railways on in the Geraldton area of Western Australia.
The move by Sinosteel is a rare example of Australia's former major resources partner, Japan, running into a similar move from our new, emerging top market in China.
Japanese trading houses and steel and other resource buyers (and those in South Korea) are feeling threatened by the rising investment activism by Chinese companies in offshore markets.
