UPDATE:Xstrata Makes A$428 Million Offer For Iron Ore Explorer Sphere

Xstrata PLC (XTA.LN) has offered shareholders in West Africa iron ore explorer Sphere Minerals Ltd. (SPH.AU) A$2.50 cash a share in a takeover that values the target at A$428 million ($383 million), the companies said Tuesday.

The deal signals Xstrata's drive to expand its footprint in iron ore. Xstrata bought in December an early stage iron ore exploration project in Congo and announced plans to develop an iron ore processing plant in Australia. Xstrata, however, doesn't currently produce iron ore.

The acquisition would give Xstrata access to three iron ore projects in the West African nation of Mauritania that are able to produce 65 million metric tons of iron ore annually: the Lebtheinia, Askaf and Guelb el Aouj projects.

Xsrata's offer values Sphere 61% above its A$1.55 closing price Monday and 73% over its 30-day volume-weighted average price, Xstrata said in a statement.

The offer has been unanimously recommended by the Sphere's board, who own 5.4% of its diluted equity and have agreed to sell their shares to Xtrata, the Anglo-Swiss miner said.

The acquisition "gives Xstrata exposure to (the) attractive iron ore market through organic growth projects," Xstrata said.

Analysts hailed the announcement as a good deal for Xstrata. "We think the deal represents outstanding value for Xstrata shareholders," said Ambrian Partners in a note. Equity analyst Matt Fernley at GMP Securities agreed, but noted that Sphere shareholders may not have received full value.

"While we believe that the deal is a good one for Xstrata shareholders, as it provides a cheap entry into the iron ore business with potentially world class assets, for the same reason we believe that it is a poor deal for Sphere shareholders."

Fernley expects other bidders may step into the fray. "Certainly Sphere has been linked to a number of global and Chinese steelmakers as well as Chinese trading/investment companies in the past."

The deal, however, has been structured to prevent potential suitors from launching a counter-bid. It includes traditional "no talk" and "no shop" clauses to protect the transaction from falling apart and a break-up fee of $4.4 million if the deal isn't completed under certain circumstances.

Xstrata plans to keep its A$2.50 a share offer open to Sphere's shareholders for at least a month from the date the offer documents are mailed to shareholders.

The deal is contingent on at least 90% of Sphere's shareholders accepting the offer.

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