Xstrata scrapped its £5 billion offer for Lonmin yesterday, while BHP Billiton’s proposed acquisition of Rio Tinto faced setbacks as the world’s two biggest takeover bids were sent reeling by the turmoil in the credit markets.

The Anglo-Swiss mining group said that it had dropped a £33-a-share offer for Lonmin because the debt terms it had arranged were no longer attractive. BHP has a $55 billion (£32 billion) debt facility available to complete its $120 billion offer for Rio Tinto, but bankers have given warning that the cost of borrowing this money could double.

The reduced availability and higher cost of debt is making merger and acquisition deals extremely difficult to put together, even for cash-rich mining companies.

Xstrata had planned to raise $10 billion to finance its purchase of Lonmin, the FTSE 100-listed platinum producer, plus an additional $5 billion to refinance other debt. It successfully negotiated a three-year term for the $5 billion package but the $10 billion funding would have required refinancing in 12 months. Xstrata was unwilling to risk the possibility that credit might then be even more expensive.

Mick Davies, Xstrata chief executive, said: “The lack of clarity and certainty regarding the future availability of credit introduces significant risks into the financing package.”

Xstrata made its £33-a-share offer three months ago and acquired nearly 11 per cent of Lonmin’s stock at that price. The Takeover Panel had given Xstrata until today to make a formal offer but the company has decided to walk away.

It will be able to rebid only if another buyer emerges or if a friendly deal is arranged. Otherwise, Xstrata must wait six months before it can make a higher offer and 12 months if it wants to make a lower one.

The withdrawal of Xstrata, combined with a halving of the platinum price in the past three months, led to a sharp fall in the value of Lonmin’s shares. The stock fell £4.61 to £18.13 yesterday and Xstrata took the opportunity to increase its stake. It bought 14.2 per cent at an average of £19.79, taking its total holding to 24.9 per cent. Xstrata is understood to want regulatory clearance to raise that to 29.9 per cent, the maximum allowed by UK authorities.

Analysts said that the fall in Lonmin’s share price would send a “strong message” to the board. Lonmin has been criticised for a series of production downgrades this year and Brad Mills, the chief executive, was ousted on Monday.

Sir John Craven, chairman of Lonmin, said: “Although recent unprecedented developments in world financial and economic markets are having a substantial impact on platinum and other commodity prices, the long-term demand fundamentals for platinum remains positive.”

Despite any financing setbacks, BHP’s bid for Rio received a boost yesterday when Australian competition regulators cleared the deal. BHP has already received approval from the United States and is only waiting for European Union backing before making a formal offer.

The company has raised $55 billion from a syndicate of banks including Goldman Sachs, Barclays, HSBC and Citibank. It will not draw on the facility before the EU gives its verdict on January 15. Bankers said the price of the debt facility was about 60 basis points when arranged but could double or triple if credit markets remained chaotic.

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