UPDATE: Xstrata Abandons Full Takeover Of Sphere, Reduces Ambitions To Control

Xstrata Plc (XTA.LN) will abandon its all-or-nothing drive for a full takeover of Australian iron ore developer Sphere Minerals Ltd. (SPH.AU) and settle for control of the company, amidst lackluster takeup of the company's A$2.50-a-share proposal.

The Anglo-Swiss diversified miner's first major foray into iron ore has turned into a tussle over Sphere's shareholder register, with Chinese investors led by Singapore-based commodities trader Sin-Tang Development vying to block the bid.

The problems illustrate the fierce competition between non-Chinese resource companies and Chinese commodities consumers as they vie for undeveloped mineral resources in emerging economies.

Xstrata said Wednesday it would declare its offer unconditional if its interest in Sphere, which is focused on magnetite prospects in the West African nation of Mauritania, exceeds 50% by Nov. 12 when the offer period ends.

That would mean the company would settle for control of the company and its board, a climbdown from the original offer announced Aug. 24 which aimed at a full takeover.

"We believe our cash offer ... is very attractive to Sphere shareholders," Xstrata Coal Chief Executive Peter Freyberg said.

"We wish to announce our willingness to declare our offer unconditional under certain circumstances, in order to expedite the process," he said.

Sin-Tang has circulated alternative proposals for financing Sphere's development prospects amongst the company's major shareholders, according to an adviser to Sin-Tang, arguing that Xstrata's offer does not represent the best option.

The trader, headed by iron ore trader Yuzheng Xie, has Chinese steelmakers including Tangshan Ganglu Iron & Steel Co. Ltd. and Tianjin Metallurgy Group Co. Ltd. as major investors.

Sin-Tang's plan would aim to raise funding for Sphere's Askaf magnetite project from Chinese investors to the tune of around US$540 million, the adviser said.

Sphere aims to produce six million metric tons a year of magnetite pellets from the project from the first three months of 2012.

Xstrata's original offer represented a 61% premium to the company's closing price on the eve of the bid and came with the recommendation of Sphere's board.

But the Sphere holding by Xstrata's Sidero vehicle had risen to just 8.38% on Monday from the 5.46% held by Sphere's board when the offer was first announced in August.

In a notice to the Australian Securities Exchange Wednesday, Sidero said its holding had since fallen to 8.21%.

Sin-Tang said that drop indicated Sphere shareholders were turning their backs on Xstrata's bid. "It appears that some of the people that had accepted the offer have changed their minds, which they are entitled to do as of yesterday due to variations in the original bid," said a spokesman.

Sin-Tang has overtaken Xstrata in Sphere's shareholder register, with a 10.77% stake sufficient to block a full takeover, which requires 90% acceptance from Sphere shareholders if it is to go ahead.

The adviser to Sin-Tang said that Sphere's major shareholders had indicated they would need a bid raised to as high as A$3.50 a share to consider selling out to Xstrata, and added that the miner would have trouble running the business as a controlling shareholder alone.

"They're now defining success as anything above a 50.1% stake. That would give them control of the board but they'd still have to deal with Sin-Tang because Sin-Tang isn't going away."

-By David Fickling, Dow Jones Newswires; [phone]; [e-mail]