Shares in Anglo American Plc jumped as much as 12 percent on Monday after rival Xstrata Plc sought talks about a merger of equals to better compete in a consolidating mining sector.

Several top Anglo shareholders brushed off Xstrata's proposed balanced link-up and said they wanted a sizeable premium if the two companies join forces, while South Africa said it feared job losses at Anglo's mines if they merge.

Anglo shares pared gains and were up 7.8 percent in London at 1,749.5 pence at 7:50 a.m. EDT following Xstrata's approach to Anglo announced on Sunday. Before Monday, Anglo shares in London had underperformed the UK mining index <.FTNMX1770> by around 20 percent.

Shares in Xstrata fell 2.6 percent to 663 pence, compared with a 0.6 percent fall in the UK mining index.

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.

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.

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.

SHAREHOLDERS WANT PREMIUM

Top Anglo shareholders rejected a shared merger, betting that Xstrata's 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.

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 added.

Xstrata, the world's largest exporter of coal for power stations, said on Sunday it wanted to start talks with Anglo to create a group with enhanced scale and financial flexibility.

Steelmakers would likely oppose the merger, which would create the second biggest producer of coal used in steelmaking, 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.

Even if Anglo resists the merger attempt by Xstrata, it would have to examine all M&A possibilities, Liberum's Rawlinson said. A whole range of potential suitors may yet come out of the woodwork such as Vale or even a Chinese-backed BEE (Black Economic Empowerment) consortium.

Xstrata has grown from a small Swiss producer of steel alloys in the late 1990s to the fifth-biggest mining group by market value through a string of acquisitions.

(Additional reporting by Raji Menon and Victoria Howley in London; James Macharia in Johannesburg; Sonali Paul and James Regan in Australia; Editing by Jon Loades-Carter and David Holmes)

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