Xstrata revealed at the weekend it had approached major mining house Anglo American with a merger proposal the Swiss miner said was “compelling”

However, today Anglo said the offer would “profoundly impact the nature of the group’s portfolio by significantly diluting Anglo American’s unique exposure to the structurally attractive platinum, iron ore and diamond markets while increasing exposure to nickel and zinc”

The London-listed company, which began life in South Africa, said irrespective of the lack of strategic merit to the deal, Xstrata’s terms – which have not been made public – were “totally unacceptable”.

Anglo said it had reviewed the offer and compared the quality and lifespan of both its and Xstrata’s assets – and came to the view its operations were superior.

Additionally, the company’s board said its new approach to asset optimisation and procurement would “deliver substantial further cost savings for the benefit of Anglo American shareholders”

While Anglo’s board has rejected the deal, there is already talk of shareholders forcing the issue.

Analysts from Fairfax in London said the deal was expected to be largely a stock transaction but with a cash component.

“Substantial cost savings and balance sheet synergies could add significant value and persuade investors to vote the deal through,” Fairfax said.

The brokerage added that Anglo shareholder dissatisfaction with the recent dividend cut and some “top-of-the-market” deals may cause shareholders to vote the deal through.

“Anglo should be prepared for significant pressure to demonstrate significant additional value or to accept the proposed merger,” Fairfax said.

However, Fairfax warned there could be potential anti-competition issues over the coking coal elements of both companies, as the merger would create the world’s second-largest coking coal producer.

Fairfax also said the platinum influence may require Xstrata to dump its Lonmin stake “as control of Anglo Platinum and influence over Lonmin would be unacceptable to the European Anti-Competition Commission”.

Xstrata has been seeking more exposure to Platinum, and made a takeover offer for Lonmin last year.

However, the brokerage said merger and bid proposals “normally flush out unseen value in major mining companies as boards compete to show which company has greater value”.

“Previously unseen projects and overlooked assets may come to the fore and hidden businesses may be sold to realise cash.

“Anglo American shares should continue to go better as investors relish the prospect of greater value being discovered within the group.”

Fairfax also said Xstrata shareholders would back the deal to create a mining company that could compete with BHP Billiton and Rio Tinto, with Xstrata’s trading house backer Glencore believed to be supportive of the bid.