Anglo American, the mining and natural resources giant, was rehearsing its defence last night against a £41 billion merger approach from Xstrata, its Anglo-Swiss rival.

Anglo American confirmed a merger proposal from Xstrata but was markedly unenthusiastic, emphasising that the situation “is at a very preliminary stage and that there is no certainty that any transaction will be forthcoming”.

The Anglo American board is deliberating whether to enter talks with Xstrata, although it is understood to be opposed to a deal. However, the board is likely to be influenced significantly by shareholders, whom it began sounding out a few days ago.

Analysts said that they expected the Anglo American board to attempt to convince its investors that remaining independent would be better for shareholder value. The group has announced plans to shave $2 billion (£1.2 billion) off its annual costs by 2011 through measures such as cutting 19,000 jobs globally and centralising its procurement operations. It is expected to ask shareholders why they would want to share the benefits of these cost savings with another company.

Furthermore, Anglo American is expected to argue that the overlap between the companies is minimal, reducing the scope for cost savings by eliminating duplication. There is limited scope for cost savings in platinum, one of Anglo American’s biggest areas that is far less significant for Xstrata, and in diamonds, in which Anglo American has a modest interest but Xstrata has none.

Xstrata, meanwhile, was noticeably more upbeat. The company said: “Xstrata believes a merger of these two world-class companies with complementary assets is highly compelling. The combination would create a premier portfolio of operations diversified across commodities and geographies, with enhanced scale and financial flexibility to fund future growth.”

There are synergy opportunities to reduce costs through merging the companies’ coal assets in Australia and South Africa as well as their copper mining and head-office operations. Furthermore, analysts said that there would be potential tax savings from incorporating Anglo American’s assets into Xstrata’s Swiss tax domicile.

Michael Rawlinson, a Liberum Capital analyst, said that a deal would make “a huge amount of sense”. However, he added: “The problem is that Anglo American is being very resistant to the idea.”

Mick Davis, the chief executive of Xstrata, is thought to have written to the Anglo American board towards the end of last week, with the support of Glencore, the metals trader, which is a 35 per cent shareholder. In a recent research note, Citigroup said that a tie-up between the companies could lead to annual cost savings of up to $1 billion. The approach comes as Cynthia Carroll, the chief executive of Anglo American, faces accusations that she overpaid on deals, such as the 49 per cent stake she acquired in the Minas-Rio iron ore project in Brazil in 2007. Some shareholders are also angered by her decision this year to suspend the company’s dividend.

Anglo American is also struggling to find a chairman to replace the outgoing Sir Mark Moody-Stuart who is acceptable to the South African Government. The company had lined up Sir John Parker, the chairman of National Grid, to head its board, but his appointment was blocked by South Africa, which is the company’s largest shareholder through public pension funds.

As of Friday night, Anglo American was valued at £21.3 billion and Xstrata at £19.9 billion. Xstrata’s 2008 revenues were $28.0 billion, compared with Anglo American’s $32.9 billion.

Adding up

Where annual savings from a merger would arise:

Copper operations $171 million Coal operations $535 million Head Office $220 million Tax saving from lower Swiss rate $120 million Total savings $1.04 billion Source: Citigroup

Investors need more details

Analysis: David Robertson, Dan Sabbagh

Mick Davis, the chief executive of Xstrata, has an acute sense of timing. Anglo American’s problems have mounted in recent weeks and his proposal would give Anglo shareholders an elegant way of dumping the unpopular Cynthia Carroll in favour of the Xstrata boss. By striking now, Xstrata can gain some of the benefit from Anglo’s planned cost-saving programmes and smaller Xstrata shareholders get to see Glencore diluted to the point where its influence is no larger than any typical City institution.

Yet Anglo’s problems might make the case for accepting a merger not quite so compelling. It can argue that its own investors should benefit from the $2 billion cost-saving programme alone — and it is right to point out that synergies from a merger, whilst real, are not as large, amounting to $1 billion a year at the top end according to Citigroup. In simple terms, it could say that it is $2 billion for itself or $3 billion shared between the two companies. Given that Anglo is the largest platinum miner in the world, it is hard to see that Xstrata would be allowed to keep its stake in Lonmin, the No 3. But selling out of Lonmin at present levels would trigger a loss. Anglo insiders also point out that there is no prospect of savings in the diamond business, where Xstrata has no presence.

The South African Government has always taken a close interest in Anglo’s affairs. It wants to see a black chairman appointed, which has already triggered a row with the City — but, given that Mr Davis is a native of the country, he might be able to provide some comfort to Pretoria. On the other hand, if he concedes guarantees about jobs, then those $1 billion synergy benefits may not be as great as hoped.

At this stage, Anglo’s reluctance to embrace a deal is no great surprise, given that it is weak. But Anglo’s concerns cannot be brushed aside, either. Mr Davis needs to explain in more detail how he would run the business, before Anglo investors should allow themselves to be seduced.

Times Recommends

• Lies and cover-up at MG Rover exposed by report
• High oil prices push manufacturing costs up
• Primark founder steps down as chief executive