Vale and Xstrata seek other opportunities as merger plans fail

While merger negotiations between Vale and Xstrata have broke down, analysts are predicting that both companies will be looking for other acquisition opportunities.

According to mining company experts at Citigroup, “The demise of the Vale/Xstrata deal may not be the end, but just the beginning of a new wave of mining/metals M&A.”

In a recent report the analysts acknowledge that the failure of the merger “suggests that even friendly deals are becoming harder to complete, given lofty valuation and end-cycle jitters”.

However, the report asserts that Chinese and Russian interests “are also exerting a new, potential pull on asset markets” and despite the current difficulties in the global credit markets, the analysts expect funding to support the consolidation in the mining sector to remain available.

They also suggest that the Chinese government could be an alternative source of funding, having accrued $120 billion in foreign reserves in the first two months of this year, taking the country’s total foreign reserves to $1.64 trillion.

In the case of Vale, Citigroup believes that the Brazilian group will seek further acquisitions because “management is driven by the desire for size and commodity diversification as well as a firm belief in the power of the super-cycle. Vale is emboldened by the success of recent acquisitions.”

The report expects Xstrata to continue its trend of bolt-on acquisitions over the coming months but it does not rule out possibility of Vale returning with another bid.

Citigroup suggested that Freeport, Alcoa, Teck Cominco, Antofagasta, Kazakhmys and ENRC, Vedanta, Peter Hambro, Aricom and Ferrexpo, Norsk Hydro and Anglo American are all potential targets for Xstrata or Vale.