LONDON - Swiss-based commodity trader Glencore bought back its prized Prodeco coal operations in Colombia from mining group Xstrata and a source said it was still talking to possible partners.

The purchase price still has to be finalised as it is partly based on capital Xstrata spent on the mines and Prodeco's earnings, but analysts estimate it will be around $2.5 billion to $2.7 billion.

It was an easy decision for Glencore to exercise its option to buy since the privately held firm values the mines at around $4 billion to $5 billion, a source close to the deal told Reuters on Friday.

Coal prices have gained 20 to 30 percent, Prodeco's reserves have grown by 40 percent and the production outlook is stronger since Glencore gave up the mines a year ago, the source added.

Glencore was still in discussions, begun earlier in the year, with four possible partners in the operations -- Brazil's Vale, U.S. coal miner Alpha Natural Resources, Singapore's sovereign wealth fund GIC and U.S. private equity fund First Reserve Corp, said the source, who declined to be named.

Glencore is buying the asset 100 percent now and then it will still have discussions, the source said. But who knows, maybe in the end it will just keep it 100 percent. That is a scenario as well, the person said.


GIC and energy-focused First Reserve already have a relationship with Glencore, having invested in some of the $2.2 billion convertible bonds Glencore issued in December.

The bond issue is a step towards a possible public listing that could value Glencore at more than $35 billion.

With an IPO (inital public offering) in mind, Prodeco attracts a higher valuation sitting within Glencore and therefore it has acted sensibly to exercise this option now and has not sold Prodeco immediately to an unrelated third party, said analyst Michael Rawlinson at Liberum Capital.

Standard & Poors Ratings Services said Glencore's investment grade credit ratings would not be affected by the Prodeco deal.

We understand the purchase will be funded from cash and undrawn bank lines, and that Glencore plans to partly replenish its liquidity in coming months, including cash from potential disposals, S&P said in a statement.

Xstrata said it would use the cash for its growth programme, due to result in a 50 percent jump in volumes by 2014.

The statement reassured some investors who were worried the firm would splash out on a takeover, such as buying up the remaining 75 percent of No. 3 platinum firm Lonmin that it does not already own, Rawlinson said.

We do not believe management wants to test the balance sheet or the patience of its shareholders having only recently returned to a state of financial repair, he said.

The high-grade, low-cost Prodeco operations include two opencast mines, port facilities and part ownership of a railway in the South American country. Glencore aims to boost output at the mines to 22 million tonnes a year by 2014 from around 15 million this year, the source said.

Strong demand for imported coal from China is expected to provide a solid floor for prices after Asia's benchmark thermal coal prices at Australia's Newcastle port have risen nearly 30 percent since late August.

Glencore agreed to sell Prodeco for $2 billion last year to pay for its share of a $5.9 billion rights issue by Xstrata since it did not have enough cash.

Glencore, Xstrata's biggest shareholder with a 35 percent stake, got an option to buy Prodeco back within a year for $2.25 billion plus earnings from the business and capital Xstrata spent on the mine. (Reporting by Eric Onstad; editing by Dan Lalor and Jon Loades-Carter)