Call Xstrata’s proposed combination with Anglo American a friendly merger of equals, by all means. But the advance in Anglo’s shares on Monday, and the retreat in Xstrata’s, suggests investors expect otherwise. Much of the Swiss miner’s matey approach is designed for consumption in Pretoria. Yet Anglo’s response has been typically grumpy, as befits a lumbering Goliath surprised by a more agile David. Anglo knows that Xstrata covets its iron ore, platinum, coal and copper assets, but sees no merit in sharing them on the terms proposed. That is Anglo-speak to encourage its suitor to offer a premium. Yet it is not clear that Xstrata can pay enough to win over Anglo.

Anglo’s listed platinum, iron ore, coal, sugar and aluminium interests in South Africa are worth about $17.7bn. Its unlisted metals and mining activities are worth $32bn, at a diversified mining multiple of eight times forecast earnings before interest, tax, depreciation and amortisation, according to Nomura. Add to that the present value of the first phase of Anglo’s Minas-Rio copper development, subtract net debt, and Anglo’s pre-approach market capitalisation of £21.3bn was only £2bn or so short of fair value.

If overlapping businesses were combined, logistics shared and Anglo’s bloated head office subsumed into Xstrata’s mergers and acquisitions boutique, that could generate savings of, say, $700m a year. Taxed and capitalised, these would be worth £3bn in total. Yet even if all of that value accrued to Anglo, it would still only represent a 14 per cent premium, half the amount a takeover target could normally expect in the past.

Xstrata would love to diversify its portfolio through the merger. But unless it musters a 25-30 per cent premium, its friendly approach will remain just that. A more likely outcome of Xstrata’s Anglophilia is that it reawakens Brazilian miner Vale’s interest in itself and, by underlining Anglo’s vulnerability, attracts Chinese attention. Chinalco, having tip-toed around Rio Tinto, might be more forceful this time.

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