Ore prices may not raise Vale bid for Xstrata

SAO PAULO (Reuters) - Brazilian iron ore miner Vale (VALE5.SA: Quote, Profile, Research)(RIO.N: Quote, Profile, Research) should make an announcement on takeover talks with mining rival Xstrata (XTA.L: Quote, Profile, Research)XTA.AU soon, but improved iron ore price may not help raise its bid, analysts said on Monday.

Vale announced on Monday that it has secured agreements from at least five major Japanese and one South Korean steelmaker, including Nippon Steel (5401.T: Quote, Profile, Research) and POSCO (005490.KS: Quote, Profile, Research), to raise term iron ore prices for 2008 by 65 percent from its southern mining system.

But the expected increase in cash flow from the improved iron ore revenues, which make up about two-thirds of Vale's mining earnings, would not likely raise Vale's bid for takeover target Xstrata, said UBS Pactual's mining specialist Edmo Chagas.

"(The term price increase) is positive but does not necessarily raise Vale's leverage to bid higher," said Chagas on a conference call Monday. "Vale is in a comfortable position in respect to cash flow given the very decent price of nickel and iron ore in 2008 and 2009."

Chagas added that he expected "Vale to come out in the short-term and make an official statement about the transaction given that Vale management is to meet to decide on a formal offer for the company" Xstrata.

The UBS Pactual analysts were slightly more up beat than sources recently quoted by the Financial Times that said that negotiations were not going well due to lack of agreement over price.

UBS Pactual mining and metals analyst Paulo Galloway said on a conference call: "The politics of the deal seem to be sorted out, the financing seems to be sorted out and remaining is the price that needs to be sorted out."

Chagas estimated that Vale could reasonably bid around 48 pounds a share for Xstrata, which would require about $50 billion in financing that Vale is reported to have secured from banks.

If the deal goes through, it would make the world's largest iron ore and nickel mining company.

(Reporting by Reese Ewing; Editing by Marguerita Choy)