Xstrata could wait for shareholder pressure to build on rival Anglo American before considering a premium bid for the group, while Anglo, enjoying share outperformance, is in no hurry to break the impasse.
Two weeks after Anglo sharply rebuffed Xstrata's proposal for a merger of equals, a resolution looks a distant prospect.
Since Xstrata announced it had sent Anglo's board a letter about a possible tie-up, Anglo's shares have performed 13 percent better than its rival's and 9 percent better than the UK mining index.
Anglo has shown no signs of utilizing takeover rules to force Xstrata to make a bid or walk away, and on Tuesday it declined comment on whether it would seek a put up or shut up ruling.
Xstrata needs to decide whether to make a formal offer, but in the meantime it may be banking on pressure from the Anglo shareholders or waiting for the appointment of a new chairman at Anglo to bring management to the negotiating table.
Xstrata declined to comment on whether it would make a formal offer, only saying: We continue to see it as a compelling transaction and would like to engage with Anglo's board.
Analyst Tom Gidley-Kitchin at Charles Stanley said he believed Xstrata would eventually lay down a formal offer.
They're not going to walk away. This deal has been talked about for a long, long time and it is Xstrata's one chance to reach the top-tier level of global miners, he said.
Xstrata has a market value of $31 billion, but teaming up with Anglo would create a group worth $68 billion, closer to rival Rio Tinto's $74 billion and sector No. 1 BHP Billiton at $137 billion.
It's really a question of price and relative shares and how Xstrata can structure a deal that gives Anglo shareholders a suitable premium that isn't too massively dilutive to Xstrata, said Gidley-Kitchin.
One source familiar with the situation said that the impasse could last for a long time.
The ball's in Anglo's court at the moment for them to demonstrate to their shareholders they can create more value than a merger with Xstrata, he said.
Anglo has drawn up a short list of candidates for chairman and is in the process of choosing a final candidate, said another source close to the situation who declined to be named.
NIL PREMIUM, NO PROGRESS
Xstrata Chief Executive Mick Davis strongly defended the concept of nil-premium mergers in a speech last week, but said those were rare.
It might not happen very often and you might not be able to do it if the other party doesn't want to play with you, he told a dinner of the Melbourne Mining Club in London.
He's leaving the doors open, he's scrabbling around a bit, said a major Anglo shareholder who declined to be named.
Analysts said progress would be glacial as long as Xstrata maintained the nil-premium stance.
It's a bit of a grind for Xstrata to see if it can make headway, because Davis appears to be saying a premium isn't something we're prepared to do because we believe this is a merger of equals. Which leaves us with a bit of an impasse, said analyst Des Kilalea at RBC Capital Markets.
He may well have to table a firm proposal, so shareholders can have a look, but once you do that it's already becoming kind of hostile.
HOW MUCH TO PAY?
Several major Anglo shareholders have supported Anglo's rejection of Xstrata's proposal, including South African insurer Old Mutual, which told Reuters Xstrata would have to come back with a improved offer for it to succeed.
Analyst Tony Robson at BMO Capital Markets said a bid would be accretive in terms of net present value (NPV) up to a ratio of 3.3 Xstrata shares for each Anglo share, assuming Xstrata's forecast of $1 billion in synergies.
The 3.3 ratio implies a premium of 24 percent at Monday's share prices. The ratio was at 2.38 before Xstrata announced its approach and had climbed to 2.67 by Monday.
A hostile bid by Xstrata is a possibility... although it could also walk away from Anglo and look elsewhere, Robson said in a note.
Xstrata may put down a formal bid at a modest premium to get the ball rolling with regulatory approvals, which could run on for many months, said Gidley-Kitchin.
When BHP Billiton dropped its bid for Rio Tinto last November, the anti-trust process had already been running for 10 months.
(Editing by Sitaraman Shankar)