Xstrata, the Anglo-Swiss mining group, walked away yesterday from its proposed merger with Anglo American after the South African miner secured a 12-month stay of execution to turn the company around.

Sir John Parker, Anglo’s chairman, is understood to have told shareholders that the management team, led by Cynthia Carroll, the chief executive, needed more time to address significant problems in the business.

His call has been backed by leading shareholders and Xstrata has been forced to accept that it does not have the support to launch a hostile bid.

The announcement yesterday that it was walking away came five days before a “put up or shut up” deadline imposed by the UK Takeover Panel.

Xstrata made its “merger of equals” approach to Anglo in June, but it was rejected on the grounds that it undervalued the company.

A number of Anglo investors felt a nil-premium merger was unacceptable, but Xstrata was unwilling to offer more.

Anglo ended the stalemate two weeks ago when it asked the UK Takeover Panel to issue Xstrata with an ultimatum. Xstrata’s decision to walk away means that it is barred from approaching Anglo for at least six months, but in reality it will have to stay away for much longer because of the deal that Sir John has struck with Anglo’s shareholders.

Among the issues that need to be addressed by Mrs Carroll is Anglo’s investment in the Minas-Rio iron ore project in Brazil.

Anglo has already spent about $7 billion (£4.4 billion) on the asset but still needs an estimated $5 billion to make it ready for production.

It is looking to sell a stake in the project to another investor but has not yet agreed suitable terms.

Anglo must also deal with financial problems in its platinum and diamond subsidiaries.

Anglo Platinum, the largest producer of the precious metal, is struggling with high fixed costs and low metals prices, which have resulted in heavy losses.

The company, which is 80 per cent-owned by Anglo American, may require a capital injection if platinum prices do not recover soon.

De Beers, which is 45 per cent-owned by Anglo, is attempting to refinance about $1.5 billion of debt and bankers may insist on a further capital injection from shareholders.

If Mrs Carroll can address these problems then shareholders may decide that Xstrata would need to offer a significant premium to justify a deal.

If she fails, however, there may be increased pressure to do a deal at any price.

Liberum Capital analysts said: “The pressure is now on Sir John Parker to deliver the promised changes at the company. Immediate hurdles are the refinancings of Amplats and De Beers; resolution of permitting issues at Minas-Rio and the delivery of the promised cost savings.”

Xstrata believes that its merger rationale will remain sound and it reiterated its case yesterday.

Mick Davis, the Xstrata chief executive, said: “The compelling strategic rationale for a merger of the two companies remains undiminished and has been recognised by shareholders of both companies.”

ING analysts believe that Xstrata will return with an offer next year. “Given its greater leverage to commodity prices, we expect Xstrata to outperform Anglo American over the next six months, after which Xstrata may reconsider its options upon the expiration of the standstill agreement,” they said.

Anglo’s share price fell 95p to £22.16, down 4.1 per cent, and Xstrata was off 21p, or 2 per cent, at £10.10.

Rio and BHP cancel plans

Rio Tinto and BHP Billiton are to cancel plans to sell iron ore through a joint venture amid competition concerns and pressure from China, the world’s biggest importer of the raw material. The two companies announced plans in June to create a joint venture of their iron ore assets in Western Australia and made provisions to sell up to 15 per cent of iron ore produced through the joint venture, independent of the parent companies. The move was opposed by the World Steel Association and the China Iron and Steel Association.

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