By Eric Onstad LONDON (Reuters) - Miner Xstrata rebuffed calls by shareholders of proposed merger partner Anglo American to pay a premium and warned hopes of a quick recovery may be premature after first-half profit dropped sharply. Xstrata, saddled with $13 billion in net debt and hit by weak metals prices, was not in any position to offer a sweetener to Anglo shareholders, analysts said. Chief Executive Mick Davis, who made public his "merger of equals" proposal on June 21, told Reuters that a premium was not on the cards even after Anglo rejected the approach and many of its shareholders said a premium was needed to move forward. "We don't see this as a takeover and therefore we don't see this as a situation where typically a premium should be paid," Davis said in an interview. "I think it's sensible for them to engage with us... We're quite patient and we'll wait." Analyst Nick Hatch at ING said the stand-off between the two was likely to persist as Anglo's new chairman John Parker got to grips with the company. "We expect both Xstrata and Anglo American to lobby investors in their respective post-results road shows, but ... apart from the odd rumour, the next three months may be rather quiet." Xstrata had been pressing for talks with Anglo management, saying a merger of the two groups, which both operate in South Africa and have two joint ventures, would lead to $1 billion in synergies on top of an Anglo cost-cutting plan. Xstrata shares, which have more than doubled this year, fell 2.5 percent to 844 pence, largely in line with a weaker UK mining index as copper prices fell. Anglo shares slipped 3.9 percent. CAUTIOUS OUTLOOK Xstrata cautioned that strong recent market gains might be deceptive and second-half prices were likely to be volatile. "As stock markets rebound and achieve significant gains, it would be tempting to believe that the world is returning to pre-financial crisis conditions," Davis said in a statement. "I fear that this belief is somewhat premature." Despite recent rebounds in commodity markets, they are still well below the heights of last year and resulted in steep falls in profits for most mining firms. Xstrata, the world's fifth-biggest diversified mining group by market value, said EPS for the six months to the end of June fell 77 percent to 38 cents from $1.66, before exceptional items and including its recent takeover of the Prodeco coal operation. This was higher than a consensus forecast of 33.6 cents, based on the average estimate of nine analysts polled by Reuters. Including exceptional items, including a $248 million write-off for a drop in value of its 25 percent stake in platinum firm Lonmin, EPS fell 83 percent to 27 cents. "Interim results from Xstrata were every bit as bad as the figures already reported by its competitors," said analyst Charles Kernot at Evolution Securities, pointing out EPS was down more when accounting for dilution from its rights issue. Other analysts were more positive, pointing to Xstrata's real cost cuts of $119 million in the first half and falling costs every year since the group was founded seven years ago. "As such, the case by Anglo management for superior cost cutting credentials seems thin to say the least," Michael Rawlinson at Liberum Capital said. Anglo posted its own interim results on Friday with a 69 percent drop in underlying EPS and said it would reach half of its eventual $2 billion target for cost cuts this year, with $450 million already achieved. Anglo launched its cost cutting programme after several years of cost increases. | 
