Vale in Talks to Buy Xstrata; No Agreement Reached

Vale in Talks to Buy Xstrata; No Agreement Reached

Jan. 21 (Bloomberg) -- Cia. Vale do Rio Doce, the world's largest iron-ore producer, said it held talks to buy Xstrata Plc, a $60.5 billion takeover at current prices that would be the second-biggest in the mining industry.

Vale said today in a statement that no ``material result'' has come from the approach yet and tumbling stock markets worldwide make a deal more difficult. Vale is prepared to bid as much as $90 billion in cash and stock to buy Xstrata, based in Zug, Switzerland, Valor Economico newspaper reported today.

Vale's stock had its biggest drop in almost 11 months on concern that it may overpay as demand for commodities slows because of faltering growth in the U.S. The Rio de Janeiro-based company is considering a takeover as BHP Billiton Ltd. pursues a $109 billion unsolicited offer for Rio Tinto Group.

``A purchase this big in such bad global economic circumstances would be an enormous risk'' for Vale, said Rodrigo Ferraz, a steel and mining analyst at Banco Brascan in Rio de Janeiro. ``In the long run, though, the deal would be highly advantageous for Vale because it would end up with an enormous chunk of the world market for nickel and copper.''

Chief Executive Officer Roger Agnelli, who wants Vale to overtake BHP as the world's biggest mining company, is already spending $59 billion over five years to expand in Brazil, Canada, Mozambique, Australia and China.

Other Options

In addition to Xstrata, ``Vale continues to analyze several other options, involving different mining assets,'' Vale said in the statement. Current conditions in the ``global financial markets may constrain the realization of a major strategic move.''

The mining industry's largest deal to date was Rio Tinto's $42.9 billion acquisition of Alcan Inc., completed in November.

Vale's preferred shares, its most-traded class of stock, fell 3.77 reais, or 8 percent, to 43.10 reais at 2:25 p.m. in Sao Paulo trading. A close at that price would be the biggest one-day drop since Feb. 27, 2007.

Xstrata fell 184 pence, or 5.5 percent, to 3,179 pence as on the London Stock Exchange, valuing the company at 31.1 billion pounds ($60.5 billion). Earlier it rose as much as 6.4 percent.

$59 Billion

Xstrata, the biggest exporter of coal used by power stations, noted the Vale statement and had no further comment to make from its statement on Dec. 12 that it was holding discussions with ``a number of parties,'' spokeswoman Claire Divver said today by telephone from London.

BHP's three-for-one share offer for Rio added ``momentum'' to mining mergers, and Xstrata is ``perfectly positioned'' to benefit, Xstrata Chief Executive Officer Mick Davis said Dec. 6. Davis has developed the company's copper and nickel mining capacity through acquisitions, including the $16.2 billion purchase of Canada's Falconbridge Ltd. in 2006.

Vale is also expanding into nickel, coal, copper and fertilizers. The company bought Canadian nickel producer Inco Ltd. for $17.4 billion in 2006 to become the second-largest producer of the stainless-steel ingredient. Vale has operations adjacent to Xstrata in Canada's Sudbury basin and on the French- controlled Pacific island of New Caledonia.

Xstrata asked advisers JPMorgan Cazenove Ltd. and Deutsche Bank AG to take interested suitors ``seriously,'' the Financial Times said Dec. 11, citing unidentified people familiar with the situation. Vale had hired Lehman Brothers and Merrill Lynch to examine an Xstrata takeover, the newspaper reported.

Xstrata is 34.45 percent-owned by Glencore International AG, the world's largest commodity trader. Lotti Grenacher, a spokeswoman for Baar, Switzerland-based Glencore, declined to comment.

BLOOMBERG