Glencore and Xstrata in talks

This would be the industry's biggest deal to date, trumping Rio Tinto's U$38B acquisition of Alcan in 2007. Glencore, the world's largest diversified commodities trader, already owns 34% of Xstrata and a tie-up between the two has long been expected, as Glencore aims to add more mines to its trading clout.

"We've always had the belief these two companies should be together," Glencore Chief Executive Ivan Glasenberg told a financial conference in Moscow.

News that Xstrata, the world's fourth-largest diversified miner, had received an approach boosted shares in both companies, sending Xstrata up more than 14% and Glencore up over 8%, signalling that this massive vertical integration move is welcomed by investors.

The two sides have little overlap in mining, meaning a combined operation would get synergies from some areas of marketing, but would otherwise combine industrial and operational assets to create the world's largest zinc and thermal coal producer, with a substantial presence in copper and nickel.

Analysts at Credit Suisse estimate the synergies at around US$468M, roughly 5% of combined 2012 net income, thanks to a better use of Glencore's marketing capabilities.

Under UK rules, Glencore has 28 days to make an offer, although that could be extended at Xstrata's request.

Xstrata is understood to be taking advice from Nomura and Goldman Sachs alongside JP Morgan and Deutsche. Glencore has opted for advisers Citigroup and Morgan Stanley, which were also lead banks for Glencore's US$10B listing last May.

A merger of Glencore and Xstrata could lead to a new round of defensive takeovers and mergers in iron ore, analysts believe. Neither Glecore nor Xstrata has a position in iron ore mining, but Xstrata tried to buy AngloAmerican in 2009. It was thwarted by a scarcity of major new discoveries and the strong position of iron ore miners Vale, Rio Tinto and BHP Billiton, which have no intention of loosening their grip.

According to Bloomberg, Chinese thermal coal producers are unlikely to oppose the Glencore/Xstrata tie-up. However, China's ,massive steel industry will be nervous about further agglomeration of iron ore miners. (Sources: Reuters, additional staff reporting).