March 26 (Bloomberg) -- Xstrata Plc, the world's fifth- largest mining company, agreed to buy Canada's LionOre Mining International Ltd. for $4 billion, increasing nickel production by 36 percent at a time of record-high metal prices.

Xstrata, based in Zug, Switzerland, will pay C$18.50 a share for LionOre, it said today in a statement, 5.8 percent more than the company's closing price in Toronto on March 23. The shares rose as high as C$19.40, indicating investors expect an improved bid.

The purchase of LionOre will give Xstrata Chief Executive Officer Mick Davis control of nickel mines in Australia, Botswana and South Africa in his drive to put the company among the world's three largest nickel producers. The metal, used in stainless steel, surged to a record $48,500 a metric ton on March 16, driven by demand from China.

``Xstrata tends to surprise the market with their acquisitions, which have been perceived as ill-timed, and which then turn out to be smart,'' said Mark Pervan, head of research at Daiwa Securities SMBC in Melbourne. ``They seem to call the trend better than others.''

Shares of LionOre rose C$1.80, or 10 percent, to C$19.29 on the Toronto Stock Exchange. Xstrata fell 5 pence to 2,573 pence in London. The stock has doubled in the past year.

`Not Sensational'

The company's offer for LionOre is 5.38 times the Canadian company's earnings before interest, taxes, depreciation and amortization, or Ebitda, according to data compiled by Bloomberg. That compares with a ratio of 8.65 times Ebitda it paid when it bought Canada's Falconbridge Ltd. for $18 billion last September.

The offer for LionOre is ``not a sensational bid in that is doesn't offer much of a premium,'' Ian Henderson, who manages $3.6 billion in natural-resource assets for JPMorgan Asset Management in London, including Xstrata shares and as much as 2 percent of LionOre, said today by telephone. ``It may spur a counter bid.''

Shareholders, including some of LionOre's directors, have signed a ``lock-up'' deal to deliver Xstrata 19 percent of the company's shares, Xstrata said.

The deal will increase Xstrata's exposure to rising nickel prices by 50 percent while the company completes new projects in Tanzania and the French-controlled Pacific island of New Caledonia, Davis said on an analyst conference call today.

`Competitive Situation'

``It will be strongly accretive,'' Davis said. ``We had been looking at LionOre for some time but it only became possible after we took Falconbridge.''

He declined to comment on likely savings from the purchase because the company is ``still in a competitive situation, potentially.''

A five-year rally in metals spurred more than $123 billion of acquisitions last year in the mining industry, up from about $60 billion in 2005, according to Bloomberg data.

The purchase of LionOre will take Davis's spending on takeovers to almost $23 billion in the past 12 months, as he seeks to build Xstrata, backed by Swiss commodity trader Glencore International AG, into a mining company rivaling BHP Billiton Ltd., Anglo American Plc and Rio Tinto Group.

Shares of Xstrata climbed 109 percent last year and have gained 1 percent in 2007. BHP's shares rose 11 percent last year. Anglo's stock climbed 29 percent and Rio's advanced 7.7 percent.

Vale, Norilsk

In addition to Xstrata's purchase of Falconbridge, Brazil's Cia. Vale do Rio Doce bought Canada's Inco Ltd. for $17.4 billion last year to become the world's largest nickel producer. Russia's OAO GMK Norilsk Nickel is second, followed by BHP Billiton, the world's largest mining company.

Shares of other nickel producers such as Eramet SA and Toledo Mining Corp. Plc gained today. Eramet, operator of the world's largest ferronickel smelter, may be a takeover target as bigger rivals seek to meet rising demand, President Jacques Bacardats said in an interview today.

Shares of Eramet rose to a record after Vienna-based Boehler-Uddeholm AG, which makes similar steel products to Eramet, said March 19 it may be acquired by CVC Capital Partners Ltd. Eramet shares jumped 7.12 euros, or 4.9 percent, to 152.2 euros in Paris. Earlier, they traded at 154.8 euros, the highest since the company sold shares to the public in September 1994.

Shares of London-based Toledo, an owner of nickel mines in the Philippines, also rose to a record 195.50 pence on March 19.

Production, Profit

Xstrata Nickel has mines and processing facilities with annual production of 110,000 metric tons, in locations including Canada, where it has five mines, the Dominican Republic and Norway.

LionOre expects to produce 44,300 tons of nickel this year, according to its Web site. The company posted profit last year of $428.5 million, recovering from a $76.4 million loss, after nickel prices jumped.

The offer represents ``full and fair value'' for LionOre, the Canadian company's Chief Executive Officer Colin Steyn said in separate conference call today. ``Nickel prices are at unsustainable levels and if they were to remain there we would start to see value destruction in the stainless-steel market, which would affect demand.''

Another bid is ``not expected,'' Steyn told reporters after the conference.

Debt to Equity

Xstrata's ratio of debt to equity will be about 40 percent at the completion of the deal, Davis said on the London conference call. The company ``had spoken to ratings agencies'' and expected to retain its credit rating, he added.

Xstrata's debt is rated Baa2, two steps above high-risk, or junk, status, by Moody's Investors Service. Standard & Poor's rates it a level higher at BBB+.

``If the proposed acquisition is successful, we estimate that Xstrata's credit metrics would remain in line with the ratings,'' S&P analysts Alex Herbert in London and Elena Anankina in Moscow wrote in a press release today. ``It would reduce Xstrata's financial flexibility within the rating category, however, and increase the company's exposure to a weaker financial profile, should metals prices decline from current highs.''

The purchase of LionOre, Xstrata's second-biggest deal after Falconbridge, will be financed through Xstrata's existing credit facilities and cash, Xstrata said.

Xstrata is being advised by Macquarie Bank and TD Securities Inc. LionOre is being advised by JPMorgan Chase & Co.

To contact the reporter on this story: Brett Foley in London at bfoley8@bloomberg.net

Last Updated: March 26, 2007 16:21 EDT