June 22 (Bloomberg) -- Anglo American Plc’s board unanimously rejected a proposal from Xstrata Plc for a “merger of equals” to create a mining company that would compete with BHP Billiton Ltd., the world’s largest.

“The terms proposed by Xstrata were totally unacceptable,” London-based Anglo said today in a statement. “The strategic case for the combination is unattractive for Anglo American shareholders.”

Xstrata said yesterday there would be “substantial” cost savings from a merger that would give it additional copper and coal production and platinum in South Africa. While Xstrata is the “best fit” for Anglo, rival bids from companies such as Brazil’s Vale SA, may emerge, said Michael Rawlinson, head of mining, resources and energy at Liberum Capital Ltd. in London.

Vale, the world’s biggest iron-ore producer, may now emerge as a “preferred buyer” for Anglo’s assets, which could prove “an enticing prospect,” Citigroup Inc. analyst Alexander Hacking said today in a report.

Zug, Switzerland-based Xstrata said in an e-mailed response it was “disappointed” by Anglo’s rejection and surprised that the U.K. company hadn’t agreed to talks.

‘Further Approach’

“Xstrata will be looking to make a further approach,” John Meyer, head of natural resources at investment bank Fairfax I.S. Plc, said by phone from London.

A merger would have the effect of “significantly diluting Anglo American’s unique exposure to the structurally attractive platinum, iron ore and diamond markets,” Anglo said, adding it has “regularly reviewed its strategic alternatives, including the rationale for a combination with Xstrata.”

Anglo’s American Depository Receipts pared gains after the rejection, falling from $14.09 just before the release to close at $13.45 in New York trading.

“I didn’t expect an outright rejection so quickly,” Wayne McCurrie, a fund manager at RMB Asset Management, said by mobile phone from Johannesburg. “What this means is that the price Xstrata offered was not even in the realm of what Anglo thought was reasonable.”

Cynthia Carroll, who took over as Anglo’s chief executive officer in 2007, suspended the company’s dividend in February for the first time since World War II after metal prices fell. Carroll has continued with the reorganization started in 2005 by her predecessor Tony Trahar, selling stakes in units including AngloGold Ashanti Ltd. and paper maker Mondi to focus on metals used by growing economies such as China.

Xstrata’s Impetus

The impetus for Xstrata’s approach “appears to stem from disappointment with Anglo passing its final dividend for 2008,” Charles Kernot, a mining analyst in London at Evolution Securities Ltd., said in a note today.

Citigroup’s Hacking said that the “challenges” to a Vale- Anglo deal “remain substantial, including Vale’s lack of experience in Africa, lack of synergies, and difficult financing.” Barclays Plc credit analyst Christopher Buck wrote in a note to clients today that Rio de Janeiro-based Vale’s “very large cash position and significant access to capital” give it “some flexibility to make an offer.”

A Rio de Janeiro-based press official for Vale who can’t be named because of company policy said Vale doesn’t comment on market rumor. Anglo’s spokesman in London James Wyatt-Tilby said he had no comment on the Citigroup report when contacted by telephone today by Bloomberg News.

Headquarters Move

Goldman Sachs Group Inc. and UBS AG advised Anglo, while Deutsche Bank AG and JPMorgan Cazenove advised Xstrata.

Anglo was founded by Ernest Oppenheimer in 1917 in Johannesburg and grew to become South Africa’s biggest company during apartheid as sanctions limited its ability to expand abroad. Anglo moved its headquarters to London in 1999.

It controls Anglo Platinum Ltd., the world’s biggest producer of the metal, and owns a 45 percent stake in De Beers, the largest diamond company. It also has copper, coal, zinc and other mines in 45 countries.

The combination of Anglo and Xstrata would have sales of more than $54 billion, based on 2008 figures, almost matching those of London-based Rio Tinto Group. Melbourne-based BHP had sales of $63.7 billion in the year to Dec. 31.

A merger would combine Xstrata’s “highly rated management with Anglo’s superior assets,” Kieran Daly, an analyst at Investec Ltd. in Johannesburg, wrote in a note today.

$27 Billion Acquisitions

Xstrata CEO Mick Davis has led $27 billion of acquisitions in six years to add copper production in Chile, nickel mines in Canada, coal in Australia and platinum in South Africa.

It bought Canadian nickel producer Falconbridge Ltd. for $18.1 billion in 2006. Xstrata broke off talks to be bought by Vale, the world’s biggest iron-ore exporter, in April last year after the companies couldn’t agree on terms.

Xstrata also abandoned a hostile bid for platinum producer Lonmin Plc in October after metal prices plunged. The company raised 4.1 billion pounds ($6.7 billion) in a 2-for-1 rights offer in March to help it reduce net debt to $12.6 billion.

With assistance by Diana Kinch in Rio de Janeiro--Editors: Simon Casey, Tony Barrett

To contact the reporter on this story: Carli Lourens in Johannesburg at clourens@bloomberg.netBrett Foley in London at bfoley8@bloomberg.net;

Last Updated: June 22, 2009 18:30 EDT