(RTTNews) - Anglo-Swiss mining company Xstrata plc (XTA.L: News , XSRAY.PK, XSRAF.PK) said Sunday that it recently sent a written proposal to the board of directors of rival Anglo American plc (AAUK: News ,AAL.L: News ), seeking their consideration regarding a merger of equals of the two companies. A combination of the companies could create a company with a market capitalization of about $68 billion and help compete better against mining giants Rio Tinto (RTP: News , RIO.L) and BHP Billiton (BHP: News , BLT.L).

U.K-based Anglo American has a current market capitalization of $35 billion, while Xstrata has a market capitalization of $33 billion. The merged company would thus overtake Rio Tinto, but still fall short of the market capitalization of the world's largest mining company BHP Billiton as well as that of Brazil's Companhia Vale do Rio Doce.

In a statement, Xstrata 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 multiple commodities and geographies, with enhanced scale and financial flexibility to fund future growth."

However, Xstrata said there was no assurance that any transaction will be forthcoming from its proposal, and added that any further announcement will be made if and when appropriate.

Xstrata is seeking to cut costs through a combination with Anglo American as it grapples with the drop in commodity prices amid the economic downturn. The merger offer also highlights the pressure faced by smaller miners as they struggle to keep pace with the larger mining companies. Earlier this month, mining giants BHP Billiton and Rio Tinto announced the formation of an iron-ore joint venture after Rio Tinto's board withdrew its support for a proposed $19.5 billion investment by the Aluminum Corp. of China or Chinalco (ACH) in the company.
Through the merger, Xstrata intends to gain control of the world's biggest platinum producer, Anglo American, and access to its iron ore mines. Also, Anglo American owns a 45% stake in De Beers SA, the world's largest diamond company. Synergies opportunities are seen through the merger of the two companies' coal assets in Australia and South Africa as well as their copper mining operations.

However, the deal could face several hurdles. Xstrata's merger proposal does not offer a premium to Anglo American's shareholders as it is seeking a merger of equals. Further, Anglo American's assets are believed to be of higher quality and having longer life than those of Xstrata. In addition, the deal could face resistance from South Africa, which is a major Anglo American shareholder and where the company has significant operations.

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