Baosteel, China's largest iron and steel conglomerate, wants to forge an alliance with Anglo American, the mining company that rejected a merger approach from rival Xstrata in June.
Baosteel has tabled a proposal to pay £1bn for a 30% stake in Anglo's huge Minas Rio iron ore mine in Brazil, which it acquired last year for £3.7bn.
If Anglo agrees a deal with Baosteel, the Chinese company could help it fend off bids from predators such as Xstrata, which was told last week by the City's Takeover Panel to make a formal bid for Anglo by 20 October or walk away.
Baosteel, which is based in Shanghai, employs 112,000 staff and generates annual revenue of $21.5bn (£13.5bn). It is keen to expand internationally and has been exploring opportunities in Africa and Asia as well as South America.
Anglo has made it clear that it is seeking a partner to help develop Minas Rio, which is expected to produce more than 35m tonnes of iron ore by 2011. Production could rise by another 50% within a decade. Two other companies are understood to have contacted Anglo about buying a stake in Minas – the Bahrain-based Gulf Industrial Investment Company and Sojitz, a Japanese conglomerate. But Baosteel is understood to be the frontrunner.
Latin America is Anglo's fastest growing region and this week the group will take shareholders and analysts to Brazil and Chile to review its operations there. The trip is being seen by the company as an "opportunity to showcase Anglo's most attractive assets and to outline future growth prospects". Observers believe Anglo's management want to emphasise the "hidden value" within the company to underline their opposition to Xstrata's proposal for a nil-premium merger, which would create a company worth £40bn.
Anglo's shareholders have made it clear to new chairman Sir John Parker, who took over from Mark Moody-Stuart in August, that Xstrata's offer is unacceptable because of the absence of any takeover premium. Insiders say Parker is implacably opposed to a deal with Xstrata on the basis of the terms outlined four months ago.
Xstrata, led by Mick Davis, is under pressure to add a cash component to any future offer for Anglo, but will need to raise funds via a rights issue to make additional cash available. If Xstrata can find the money for a premium, shareholders are likely to force Anglo's management into talks. However, that would require Xstrata to find up to £10bn and analysts are sceptical that the Anglo-Swiss firm can raise that amount. "It is hard to see how they can get funds to provide a premium, so the deal must be as good as dead," one analyst says.
Xstrata's net debt stands at about £7.5bn, against a market capitalisation of £25.5bn. It has already raised £4.1bn in a rights issue this year, which could restrict its future capital-raising potential.
Source: The Guardian
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