Glencore International Plc, the world’s largest publicly traded commodities supplier, is in talks with Xstrata Plc (XTA) to merge in a deal that would create an $82 billion rival to BHP Billiton Ltd.

Glencore, which already holds 34 percent of the Zug, Switzerland-based mining company, made an approach regarding an all-share “merger of equals,” Xstrata said today in a statement. Glencore said there’s no certainty of an offer.

The transaction, driven by Glencore Chief Executive Officer Ivan Glasenberg, would be the industry’s largest. The approach drove up mining shares from Sydney to London as investors anticipated a round of consolidation. Rising commodity demand from developing nations and the deteriorating quality of mineral reserves is spurring producers to combine and boost efficiency.

The merged company may be valued at about 52 billion pounds ($82 billion) after excluding Glencore’s 11 billion-pound stake in Xstrata.

“Glencore being such a dominant trader and marketer of commodities, and Xstrata being such a strong operator of difficult assets, I think it creates enormous value,” Prasad Patkar, a portfolio manager at Platypus Asset Management Ltd. in Sydney, said before the statement. “On one end you have great mining expertise, on the other you’ve got great marketing expertise. Two and two together should make five.”

Shares Rise

Xstrata climbed 9.9 percent in London trading to close at 1,230.5 pence, a six-month high, and Glencore gained 6.9 percent to 461.7 pence. The commodities trader also rose in Hong Kong before the shares were suspended after Bloomberg reported the potential deal. Bloomberg’s Europe 500 Metals and Mining Index increased 3.3 percent to the highest since July, led by Xstrata, Glencore, Vedanta Resources Plc and Anglo American Plc.

Anglo, the London-based mining company targeted by Xstrata in a failed approach in 2009, may again be vulnerable to a bid should Xstrata join forces with Glencore.

Together, Glencore and Xstrata would have the flexibility and financial firepower to make large acquisitions, according to people familiar with the matter. They may consider an offer for Anglo, though any such move would be unlikely to happen before they complete their merger, the people said. That process may take as long as six to eight months, one person said, adding that any offer for Anglo could be preempted by rival bids from competitors such as Rio Tinto Group.

Anglo rose 3.6 percent to 2,830.5 pence in London, a six- month high, valuing the company at 37.5 billion pounds.

Anglo as Target

“What is affecting sentiment the most is the speculation about Xstrata and Glencore,” Doug Blatch, head of equity trading at Investec Asset Management, said from Cape Town. “We know that Anglo has potentially been a target before. What would be the next move for a combined Xstrata-Glencore?”

A merger would give Glencore coal, copper and nickel mines fromAfrica to Asia. For Xstrata, the deal would be its biggest after dropping a 29.2 billion-pound offer for Anglo in October 2009. Glencore, located two miles away from Xstrata in Baar, is required to announce a firm intention to make an offer by 5 p.m. on March 1 under U.K. takeover rules, Xstrata said.

The combination would bring together two groups that separated a decade ago when Xstrata bought Glencore’s Australian and South African coal mines for $2.5 billion and went public in London. It would also reunite Xstrata CEO Mick Davis, 53, with Glasenberg, 55, a former coal trader who led Glencore to a $10 billion initial public offering in May.

Share Synergies

“This may be the rare case where a nil-premium merger of equals in which shareholders of both companies share the synergies is possible, and maybe even sensible and likely,” Christopher LaFemina, an analyst at Jefferies Group Inc., said today in a note. “A deal like this would never be easy, but now is as good a time as any for it to happen.”

A transaction may bring savings of as much as $704 million, Credit Suisse Group AG said in a report in October. BHP, the largest miner, withdrew from what would have been the world’s biggest mining deal, a $66 billion offer for Rio, in 2008. BHP has a market value of 126.9 billion pounds. Rio is valued at 77.6 billion pounds, and Xstrata at about 36.5 billion pounds.

Glencore is working with Citigroup Inc. and Morgan Stanley as financial advisers, while Xstrata has tapped Goldman Sachs Group Inc., JPMorgan Chase & Co., Deutsche Bank AG and Nomura Bank International Plc.

Glencore M&A

Glasenberg said in August that Glencore is “aggressively” seeking mergers and acquisitions as market valuations slide. He said in an April interview there was “good value” in a combination with Xstrata. He declined to comment today.

A South African native and Australian citizen, Glasenberg is the second-richest person in Australia with an estimated net worth of $7.2 billion, Forbes Magazine said today. Gina Rinehart, the Australian mining heiress and media investor, is the richest person, valued at $18 billion.

Mining takeovers are accelerating as companies struggle to replace depleting deposits and China’s industrial growth stokes metals demand for construction, cars and appliances. Global mining deals swelled to $98 billion last year, the highest level since 2007, from $76 billion in 2010, according to data compiled by Bloomberg. The average premium for takeovers last year was 23 percent, according to the data.

‘Massive Cash’

“There’s really nothing technically that should be preventing large-scale M&A activity,” Daniel Rohr, an analyst at Morningstar Investment Services Inc. in Chicago, said by telephone yesterday. “Balance sheets across the industry are in rather rude health and large miners have massive cash balances that seem to grow larger with each passing quarter.”

Mining companies may spend $134 billion developing assets this year, up 23 percent from 2010, according to a report last month by Citigroup. Glencore had $18.3 billion in long-term borrowings as of Dec. 31 and Xstrata had borrowings of $7.2 billion, according to data compiled by Bloomberg. Both have a Baa2 rating from Moody’s Investors Service, the second-lowest investment grade.

Combined, Xstrata and Glencore would report net income of about $11.2 billion in 2012 and Glencore would control about 65 percent of a merged company, assuming a takeover with no premium attached, Credit Suisse said in October.

Glencore, which owns mines, plants and warehouses, had a first-half profit of $2.5 billion, up 68 percent on a year earlier. It may post adjusted net income of $4.4 billion for 2011, according to the average estimate of 15 analysts surveyed by Bloomberg. It’s due to report earnings on March 5.

Increased Competition

Joji Okada, chief financial officer of Mitsui & Co., Japan’s second-largest trading house, said a merger would create a “major” competitor.

“I’m concerned that the competition for developing resources will really intensify,” he told reporters in Tokyo today. “We feel that there’s a threat of a major competitor emerging.”

Xstrata’s Davis, a South African, built the group through more than $30 billion of deals since its purchase of Glencore’s coal mines and its London IPO in 2002, adding copper, nickel and zinc. His largest deal was the $18.1 billion acquisition of Canadian nickel producer Falconbridge Ltd. in 2006.

He abandoned a hostile bid for platinum producer Lonmin Plc in October 2008 after metal prices plunged, and withdrew from bidding for Australia’s WMC Resources Ltd. in 2005 after being trumped by BHP. Xstrata produced 85.3 million metric tons of coal last year.

To contact the reporters on this story: Elisabeth Behrmann in Sydney atebehrmann1@bloomberg.net; Brett Foley in London at bfoley8@bloomberg.net

To contact the editors responsible for this story: John Viljoen at jviljoen@bloomberg.net; 

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