Vale's putative $85bn takeover of Xstrata was on Wednesday night on the brink of collapse after a major shareholder in the Anglo-Swiss miner refused to agree to the terms of the offer.
Glencore, the commodities trader which owns 35 per cent of Xstrata, was demanding a significant extension of the lucrative marketing rights to commodities, including coal and nickel, that it already has in place with Xstrata, according to people close to the situation. Those people said the terms were not acceptable to Vale.
Vale and Xstrata started discussions last year and an offer of around £45 a share had been proposed 10 days ago. However, negotiations between Vale's management and Glencore continued and only ended on Wednesday night after the pair were unable to agree the restructuring of the commercial agreements.
Vale's offer was structured as a straightforward takeover of Xstrata, leaving one listed company in Brazil. Vale, which has two classes of shares, would have needed Glencore to accept preference shares, which have fewer rights than its ordinary shares to complete a deal, a person close to the negotiations said.
Vale initially opened talks with Xstrata at $40 a share, but that was rebuffed. The Brazilian group - which had secured $50bn financing for its offer - was able to significantly increase that to $45 after it secured bigger-than-expected increases in the prices paid by Japanese and South Korean steelmakers for its iron ore, which helped its shares rise more than 5 per cent.
Because the offer was about 40 per cent cash and 60 per cent equity, the difference in the value of the two miners' share groups was key to the bid's structure.
A combination of Vale and Xstrata would create the world's largest mining company, although it would be overtaken by Australia's BHP Billiton if the group succeeds in its hostile bid to take over Anglo-Australian rival Rio Tinto.
Xstrata this week published a mixed production report ahead of annual results next week. with weaker copper output offset by a strong rise in coal volumes.
The group said it had mined record amounts of coking coal, thermal coal, nickel, zinc, ferrochrome and platinum last year. The coal divisions were particularly strong, with Xstrata's South African thermal coal mines producing 20 per cent more than in 2006.