Oz rival target as Xstrata joins the bid fray

Resource Pacific, a thermal coal producer, has rebuffed the approach and questioned the legality of Xstrata's stakebuilding. Xstrata agreed to buy the stake of Japan's Marubeni Corp, Resource Pacific's biggest shareholder. That would take Xstrata's holding in Resource Pacific to 15.6%.

Paul Jury, managing director of the bid target, dismissed Xstrata's allcash offer, which is at a 2.1% discount to Resource's last traded price, as too low. He also questioned the arrangement that allows Xstrata to buy Marubeni's stake. Xstrata's offer trumped a bid from fellow coal miner New Hope that values Resource Pacific at about A$808 million.

Xstrata has been on the acquisitions trail for the past 12 months, paying more than £11 billion for Canadian mining company Falconbridge and £1.9 billion for nickel and gold producer LionOre. Bankers have suggested it may link up with Anglo American in the latest round of consolidation.

Xstrata's bid for Resource Pacific comes at a time of unprecedented takeover activity in the mining sector. Deal volumes have exceeded £127 billion globally following BHP Billiton's £69 billion takeover approach to rival Rio Tinto. Mining companies have strong balance sheets and a desire to do deals on the back of the boom in commodities and strong demand for raw materials from China.

Rio, the world's second-largest miner, bought Canadian aluminium rival Alcan in a friendly $44 billion (£21.3 billion) deal in the summer while India's Tata Steel swooped for Corus at the start of the year.

A group of Chinese steelmakers said yesterday that itwas considering a bid for Rio Tinto to thwart BHP's approach and stop it gaining control of 40% of global iron-ore supply and more than half of the Asian supply.

The move would push BHP into an auction, and could force it to abandon its bid. Charlie Aitken, head of institutional dealing at Southern Cross Equities, said BHP wouldwalk away if it could not secure a recommendation from Rio's board.

Australian broker Southern Cross is rated as the most accurate forecaster of BHP's share-price performance of 16 analysts tracked by Bloomberg. The threat of China getting a blocking stake in Rio is a "clear and present danger'' to holders of Rio shares, Aitken said.

Rio's London shares are trading at a 14% premium to BHP's three-forone share offer, indicating investors expect a higher bid. Aitken said shareholders should take advantage of the 27% increase in the London shares since the approach and "lock some of the Rio outperformance in and switch to BHP shares".

Rio chief executive Tom Albanese has told investors BHP's offer undervalues his company, a viewechoed by some of Rio's institutional shareholders. BHP chief executive Marius Kloppers said no other group had the capacity to replicate the deal.