-- Alexander Smith is a Reuters columnist. The opinions expressed are his own --
By Alexander Smith
LONDON, June 23 (Reuters) - Anglo American was right to reject Xstrata's initial merger approach, but if it is going to eke out a better deal it must quickly come up with some credible alternatives. There aren't many, but Brazil's Vale and Chinalco are worth talking to.
Anglo has no time to waste. If it has a joker hidden up its sleeve, now is the time to play it. One option is to defend its independence by demonstrating that its assets are worth more than the market is currently giving it credit for. But if this is nothing more than selling non-core bits like building materials unit Tarmac, then why hasn't Anglo done so already, rather than resorting to scrapping its 2008 final dividend?
A sharp share price fall -- after the initial euphoria on Monday -- shows shareholders are nervous that Anglo will raise the drawbridge to Xstrata in the same way that Rio Tinto scuppered a takeover by BHP Billiton.
This will not be lost on Goldman Sachs, which will draw on the experience it gained as an adviser to BHP when working (along with UBS) on Anglo's defence.
Market rumours of a bid for Anglo from Aluminium Corp of China (Chinalco) will give the mining group's shares some support. But Anglo's chief executive Cynthia Carroll and chairman Mark Moody-Stuart must find out whether the ambitious Chinese company is serious.
China is desperate to get its hands on raw materials, particularly iron ore and coal, and has the cash to pay for them. But Carroll and Moody-Stuart will need to tread carefully. Chinalco will be in no mood to be used as a bargaining chip so soon after the debacle of its Rio deal.
On the other side of the world, Vale has often been billed as a more likely buyer of Xstrata than Anglo. This should not put Anglo's management off talking to the Brazilian miner. After all, a deal with Vale might well be a more palatable alternative for newly-installed South African President Jacob Zuma. Vale would not only face fewer competition hurdles than Xstrata, but the combination would also involve fewer potential job losses.
Zuma is likely to feel more comfortable with Anglo being owned by a company based in another large developing nation, rather than by a London-listed company with a major unlisted shareholder based in Switzerland, or by a Chinese state-owned customer in Chinalco. Zuma's thinking is also likely to be coloured by the success Brazil's populist president, Luiz Inacio Lula da Silva, has had in juggling social programmes with orthodox economic policies.
That said, it is unclear whether Vale could squeeze the same level of synergies out of a takeover of Anglo. Chinalco may also be willing to pay up to give itself the foothold it so desperately craves among the miners.
Given the relatively few options left for further consolidation in the global mining sector, Anglo needs to play the poker game of its life in negotiations with Xstrata and other possible buyers. Otherwise shareholders really will have cause to be angry with its management.
-- At the time of publication Alexander Smith did not own any direct investments in securities mentioned in this article. He may be an owner indirectly as an investor in a fund. For previous columns, Reuters' customers can click on --
(Editing by David Evans)