Top shareholders in Anglo American brushed off rival Xstrata's plan for a merger of equals on Monday and pressed for a big premium to create a giant to compete in a consolidating mining sector.

Xstrata came up against another obstacle to its proposal, unveiled on Sunday, to link up the two groups when South Africa said it feared job losses at Anglo mines if they merged.

Anglo-Swiss Xstrata, whose market value has expanded tenfold since floating in 2002 through a string of takeovers, said on Sunday it asked Anglo for talks about a merger.

Anglo has not responded, but top Anglo shareholders rejected Xstrata's call for a merger of equals, betting that initial proposal was just an opening play.

If they won't pay a premium, they are not going to get anywhere, said one top-20 investor in Anglo who declined to be named. The shareholder was also a top 10 Xstrata investor.

Takeovers are typically at a premium of 30 percent plus. You would be looking for reasons why it should not be 30 percent -- in this case, I don't see any, he said.

Uncertainty about a possible marriage of the two groups dimmed a run-up in Anglo shares, which soared as much as 12 percent in early trade but pared gains to be up 4.5 percent at 1,696 pence by 1510 GMT. Before Monday, Anglo shares in London had underperformed the British mining index <.FTNMX1770> by 20 percent this year.

Shares in Xstrata fell 6.5 percent to 637 pence, compared with a 3.5 percent fall in the British mining index.

SHAREHOLDERS WANT PREMIUM

South Africa, where Anglo has the bulk of its mines, said it was concerned about the impact on workers and anti-trust issues from the possible combination.

At face value it raises concerns about competition issues in the industry and a whole host of other issues, as well as the impact on jobs, said Jeremy Michaels, chief communications director at the mines ministry, adding: Jobs would be the significant concern.

The ministry would seek information from Anglo chief executive Cynthia Carroll at a previously scheduled meeting on Thursday, he said.

Anglo may resist merger talks since it regards its assets as being higher quality, but could come under pressure from shareholders still fuming about the suspension of the company's final 2008 dividend.

Anglo may well now be in play and the board is likely to have to examine all potential routes to maximize shareholder value, analyst Michael Rawlinson at Liberum Capital said in a note.

Bringing the two groups together would create a group worth $68 billion based on Friday's closing share prices, versus BHP Billiton which is valued at $144 billion and Rio Tinto at $74 billion.

A combination of the two firms would create the world's biggest producer of zinc, platinum, coal for power stations and ferrochrome and No. 2 in coal for steelmaking and copper.

Steelmakers would likely oppose the merger, due to its expanded role in coal, analysts said.

Anglo, which owns the world's largest platinum producer, South Africa's Anglo Platinum , said in a statement on Sunday the situation was at a very preliminary stage.

The approach may unleash a new round of attempted mergers after Brazil's Vale failed last year in an attempt to buy Xstrata, said analyst Nick Hatch at ING.

We place a 30 percent probability that an Xstrata/Anglo American merger takes place. Either way, both companies are now in play and we expect Vale to look hard at both companies, and in particular Xstrata, he said.

(Additional reporting by Victoria Howley in London; James Macharia in Johannesburg; Sonali Paul and James Regan in Australia; Editing by Dan Lalor)

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