Analysis The mining industry has some gritty and colourful characters in its ranks - big Mick Davis, the chief executive of nickel producer Xstrata, is said to have devoured an entire turkey at a Christmas lunch in Johannesburg a few years ago - but even these larger-than-life folk are astonished at the wave of mega-mergers and rumours of takeovers that are sweeping through the sector.

Davis himself has kept the City buzzing in recent weeks with gossip that Xstrata was examining links with South African-based Anglo American or Brazil's Vale, the world's leading iron ore producer.

Nothing much has come of that tale, but Credit Suisse has advised investors to hold on to both Xstrata and Anglo American shares because of the chance that one might bid for the other.

The broker said that a takeover of Xstrata by Anglo American, a leading platinum producer, would make the most sense. A research note said: "If Anglo were to offer £40 per share for Xstrata in a 50-50 cash-and-share offer, we estimate it could be 13% accretive to their 2008 earnings per share and would increase their gearing from 18% to 57%.

"But if Xstrata offered £40 per share for Anglo on the same terms, it would be 7% dilutive for Xstrata shareholders, unless platinum prices outperformed."

Although it has not yet moved to buy either Anglo American or Vale, Xstrata has been a notable predator among Australia's second-tier miners. It bid $2.9bn (£1.5bn) for Jubilee Mines to help consolidate its role as one of the world's biggest nickel producers.

Earlier this year, Xstrata's coal unit trumped Australia-listed New Hope when it offered $776m for Resource Pacific, a Hunter Valley coal miner.

Xstrata, itself, could be gobbled up by Vale, which has offered to pay $90bn for the UK-Swiss nickel and copper miner.

The Brazilian company has already built up an impressive nickel business, and analysts at RBC Capital Markets, a Canadian bank, said the purchase of Xstrata would propel Vale into the big league in copper and coal, too.

However, it is BHP Billiton's £75bn bid for Rio Tinto that has set the stock market buzzing with rumours that there will be other mergers in the mining sector.

On February 5, just before a deadline imposed by British regulators, it increased its offer for Rio Tinto, the industry's number three. Having offered three of its shares for each of Rio's last November, BHP raised its offer last week to 3.4 shares, valuing its rival at $147bn. Rio quickly rejected the revised offer.

City mining industry analysts believe a deal will be done eventually but it may take months to conclude.

The main motivations behind such deals are scale and diversification. Bigger companies benefit from economies of scale: BHP reckons that buying Rio Tinto and merging the two firms' operations, in particular those at Pilbara, an immense iron-ore deposit in Australia, could result in annual savings of around $3.7bn within seven years. The combined firm would also be strong in aluminium, uranium and coking coal.

Rivals and consumer nations such as China and Japan are growing concerned that a BHP-Rio tie-up would be able to demand higher prices and stifle competition.

This has led Aluminium Corporation of China and Alcoa, the big US-based aluminium maker, to buy a 12% stake in Rio in a move to block a BHP takeover.

Elsewhere, there are rumours that Vedanta, the Indian mining company listed in London, could be bought by Chinese investors. The possible price cited was £25 a share and the company's shares rose by some 4% on Friday.

The company has denied that an offer had been made and analysts pointed out that it was unlikely India would allow the sale of such a strategically-important national champion to China.

Mining companies can afford to make acquisitions because they are flush with cash from a boom in commodity prices.

Buying companies with existing production can make more sense than developing a new mine, which can take a decade or more and cost billions of dollars - with no certainty that the resources are as rich as geologists predict.

The ongoing speculation has breathed life into the mining sector and most observers believe that consolidation is inevitable - but the big deals may have to wait until the BHP-Rio situation is resolved.

Rio Tinto bought Alcan, the Canadian aluminium producer, last year and raised $40bn from banks to finance the deal. BHP raised $70bn in promissory notes from banks to cover a share buy-back that it has proposed if its takeover of Rio is successful.