Anglo is likely to resist the attempt by Xstrata to forge a larger mining group better able to compete with bigger competitors BHP Billiton
Xstrata, which has a market value of $33 billion, said in a statement it recently sent a proposal to Anglo, worth $35 billion.
The approach by Xstrata, which has regarded Anglo an attractive partner for several years, comes after sector No. 1 BHP agreed on June 5 to combine its Australian iron ore operations with those of Rio in a joint venture.
BHP has a market value of $144 billion, Vale is worth $93 billion and Rio $74 billion.
Xstrata is seeking to engage with the board of Anglo American regarding a merger of equals that would realize significant value for both companies' shareholders, Xstrata said in a statement.
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.
Anglo said in a statement the situation was at a very preliminary stage, but declined to give further details.
A source familiar with the situation said Anglo only received the approach a few days ago.
The source, who declined to be named, said Anglo's board would examine the value for shareholders in a combination with Xstrata compared to the value by remaining independent.
One main issue was the fact that Anglo's assets are higher quality and have longer lives than those of Xstratra, he said.
Why would you want to dilute that portfolio with lower value assets? the source said.
Anglo shareholders also might not be keen to share cost savings with Xstrata from a program underway to slash $1 billion through procurement savings and another $1 billion through asset optimization, he added.
Xstrata would probably be reluctant to make a hostile bid since it would run the risk of opposition from the South African government, a major Anglo shareholder, industry sources and analysts told Reuters last week.
Xstrata said it had already identified substantial operational synergies from a link-up, but did not give any figures.
Nomura analyst Paul Cliff estimated in a recent note that a merger could result in cost synergies of $700 million per year, or 2 percent of combined operating costs.
Bank of America-Merrill Lynch analyst Jason Fairclough pegged cost savings at $875 million a year, including benefits from putting Anglo assets into Xstrata's Swiss tax domicile.
News of Xstrata's approach first appeared in an article in the Sunday Telegraph, which said commodities group Glencore, Xstrata's 35 percent shareholder, was made aware of the approach to Anglo and was thought to be supportive of a deal.
The report said Anglo was being advised by Goldman Sachs and UBS while Deutsche Bank and JP Morgan Cazenove were advising Xstrata.
The Sunday Times newspaper, which also reported the story, said Xstrata's Davis had made the move after pressure from Black Rock and Capital Group, two big shareholders.
(Reporting by Kate Holton and Eric Onstad; Editing by Rupert Winchester)