VALE S.A. 
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The discussions are still at an early stage but have revived hopes of a long-debated Sudbury tie-up, with the companies considering a number of options for their mining and processing operations in the area, the sources said.
Depending on the details of a potential deal, several of the sources said a tie-up could mean substantial savings for both mining heavyweights, if all or part of their mining, milling and even smelting operations are brought together.
In 2006, a proposed merger of Falconbridge and Inco - the then-players in Sudbury, but later taken over by Xstrata and Brazil's Vale, respectively - expected annual synergies and cost savings of about $550 million (344 million pounds).
The sources said talks restarted after Glencore completed its acquisition of Xstrata earlier this year. Discussions have progressed against the backdrop of a nickel price that has fallen by around a fifth since January to around four-year lows, weighed down by over-supply.
But there was not yet what one of those sources called a "meeting of minds".
"There is material value to be created, but some difficult decisions have to be taken," said another of the sources.
Both Glencore Xstrata and Vale - whose current chief executive Murilo Ferreira led Vale Inco, later Vale Canada, after the 2006 takeover - declined to comment.
The two main operators in Sudbury have held talks on joining forces on more than one occasion before, both as Inco and Falconbridge and later as Vale and Xstrata. Analysts have long said a tie-up would make sense for two operators mining the 60 km-long, oval-shaped formation known as the Sudbury basin.
But the sources said a tough nickel market, pressure on Vale over nickel difficulties at its Goro nickel-cobalt mine in New Caledonia and elsewhere, make a deal more likely than in the past. Equally, the problems across Vale's nickel division could prove distracting, they said.
Yet smaller, successful, cooperation efforts in recent years, as at Xstrata's Fraser mine, could also help.
Under that 2011 deal, Xstrata used infrastructure at its Fraser mine to dig mostly copper ore from a deposit of Vale ore bodies accessible from Xstrata's mine - a project with a 10-year life that also increased fresh air ventilation, benefiting working conditions for Vale's employees.
BACK TO THE FUTURE
Inco and Falconbridge came close to a deal in 2006 - before Xstrata, then independent of Glencore, and Vale stepped in to buy the two companies.
When Inco first unveiled its bid for Falconbridge in late 2005, it said a merger would result in major savings that would come from efficiencies in overlapping operations, along with savings from better use of mining and processing facilities in Canada, improving procurement practices, building a common information technology base, and spending cuts.
The two companies initially envisaged savings of about $350 million a year, but in 2006, after a deeper look into each other's operations, the two sides said they expected a deal would result in annual savings of around $550 million.
That synergy number is likely to have come down over time, the sources said, as Vale and Xstrata have already gone some way to extract costs and bring in improvements over the years. Nickel prices have also dropped from more than $20,000 per tonne around the time Inco raised its offer for Falconbridge in 2006 and from over $50,000 at the peak in 2007.
Nickel was trading at less than $13,800 in Friday trade, against the background of higher costs.
Norilsk Nickel, the world's largest producer of the metal, estimates roughly a third of producer are losing money, with costs in some cases over $18,000 per tonne. Others estimate more than half the industry is burning cash to produce.
Industry sources and sources familiar with the talks say that they still expect that any substantial tie-up could still result in savings of several hundred million dollars annually, depending on the details of a deal.
Although the Vale and Glencore individually own a number of assets across Canada, one source said the talks between the two sides right now, are focused exclusively on collaboration around their operations in the Sudbury nickel region, where the majority of their Canadian operations and personnel are located.
Glencore Xstrata owns the Nickel Rim South Mine and the Fraser Mine, along with a mill and smelter in the area, while Vale owns six mines, along with a mill, a smelter and a refinery in and around Sudbury, making it one of the largest integrated mining operations on the globe.
One source said the two sides hope to reach an agreement over the coming months, though another said a deal was unlikely to be struck before January, when Indonesia has said it plans to bring in a ban on unprocessed ore exports. Indonesia's nickel ore is currently shipped to China to produce nickel pig iron, a cheap substitute for nickel in stainless steel.
Glencore, which has been slashing costs since it took control of Xstrata in May, is in similar talks with Rio Tinto to cut costs and potentially combine operations in Australian thermal coal.
(Reporting by Clara Ferreira-Marques; Editing by Giles Elgood)
By Clara Ferreira-Marques and Euan Rocha
