Xstrata is aiming to create one of the world's largest natural resources firms by proposing a £41 billion merger with Anglo American, it emerged on Saturday (20th June).

The deal, which is being categorised as a 'merger of equals', would see the Swiss-based mining giant gain a degree of control over the world's biggest producer of platinum.

Having embarked on acquisitions to the tune of £17 billion in the past six years, Xstrata now has a market value comparable to Anglo's and sees the link-up as a unique opportunity.

"A merger of these two world-class companies with complementary assets is highly compelling [and would provide] enhanced scale and financial flexibility to fund future growth," it said in an emailed statement.

Although no financial terms have yet been revealed, Anglo - which responded by admitting that Xstrata has made an approach - was keen to play down further speculation.

"It should be noted that this situation is at a very preliminary stage and that there is no certainty that any transaction will be forthcoming," said the company.

According to the Times, Xstrata Chief Executive Mick Davis outlined the proposal in a letter to Anglo's board last week, motivated by pressure from Black Rock and Capital Group, its two largest shareholders.

The overwhelming response from those close to the situation has been that any deal would be logical for both parties.

Citigroup, for example, claimed in a report last week that the tie-up "makes strategic sense and could create synergies of up to $750 million (£456.3 million) per annum".

"[The resulting company] would be a global leader in base metals, platinum, ferrochrome and coal," added the report.

The Sunday Times suggests that a sticking point could be Anglo's belief that it is better run financially than Xstrata and can offer larger returns for investors by going it alone.

However, Anglo CEO Cynthia Carroll has been under fire from shareholders after cutting the company's dividend in February and some observers feel she could be coerced into agreement.

"Anglo may well now be 'in play' and the board is likely to have to examine all potential routes to maximise shareholder value," Michael Rawlinson, an analyst at Liberum Capital, said in a note quoted by Reuters.

Meanwhile, analysts at Investec Securities explained in a client note that "we think Anglo's beleaguered management board will respond positively and engage with Xstrata".

A similar view was expressed by Nomura, which offered a slightly more conservative estimate than Citigroup, predicting that annual savings of £423 million could be made through the deal.

"Anglo may be facing an identity crisis that could leave the company vulnerable to takeover,'' said analysts at the Japanese bank.

It is believed that Xstrata was also moved to propose the merger in order to remain competitive with Rio Tinto and BHP Billiton, who have announced a joint venture.

Indeed, the company - which failed in a bid to raise enough cash for an offer for Lonmin last year - was keen to focus on the potential benefits of joining forces with Anglo.

"The combination would create a premier portfolio of operations diversified across multiple commodities and geographies," added another section of its statement.

"Optimisation and reprioritisation of the combined company's organic growth pipelines would significantly increase shareholder returns."

Goldman Sachs and UBS are thought to be advising Anglo over the deal, with Deutsche Bank and JPMorgan Cazenove advising Xstrata.

Sources:

Xstrata seeks merger with Anglo American (21/06/09)

Mining group Xstrata plots talks on £41bn merger with Anglo American (20/06/09)

Xstrata eyes £41bn Anglo merger (21/06/09)

Xstrata Offers ‘Merger of Equals’ With Anglo American (Update3) (21/06/09)

Xstrata in talks with Anglo American (21/06/09)

Anglo American responds to press speculation (22/06/09)

Anglo shares soar after Xstrata seeks merger talks (22/06/09)

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