Brazil's Vale seen hunting amid mining merger talk

By Brian Ellsworth and Denise Luna

RIO DE JANEIRO (Reuters) - Potential mining mergers have sparked talk that Brazil's Vale may try to acquire a major industry player, though local analysts say Vale would probably target small companies as the economy slows.

Some believe Vale (VALE5.SA: Quote, Profile, Research) may try to acquire Anglo American (AAL.L: Quote, Profile, Research) or Xstrata (XTA.L: Quote, Profile, Research) after Anglo American rejected Xstrata's nil-premium merger bid.

Aluminum Corp of China also was seen as a possible bidder for Anglo.

The flurry of industry consolidation, including a possible joint venture between Vale rivals Rio Tinto (RIO.L: Quote, Profile, Research) and BHP Billiton (BLT.L: Quote, Profile, Research), could put takeover pressure on Vale a year and a half after its failed effort to buy out Xstrata.

"We would not rule out the possibility of Vale and/or a Chinese buyer becoming involved in any (merger) discussions around Xstrata/Anglo," said investment bank Nomura in a research report, adding it sees more logic in an Xstrata deal.

Vale, the world's largest iron ore miner, has for years been seeking to diversify operations by including a greater content of non-ferrous metals, a strategy that led to its 2006 purchase of Canada's nickel miner Inco.

The 2008 bid for Xstrata would have advanced this goal, though its failure rescued Vale from buying overpriced assets. Meanwhile, Rio Tinto looked to a Chinalco equity deal to shore up its balance sheet but later backed out in favor of BHP.

Liberium Capital wrote in a research note that Vale, armed with a strong balance sheet and a solid cash position, would mostly likely be drawn to bid for Anglo to help give it the diversification it originally sought in the 2008 Xstrata deal.