Battle for Baffinland heats up

Revised offers in the dwindling hours of 2010 from both Nunavut Iron Ore Acquisition and global steel giant ArcelorMittal (mt-n) for junior Baffinland Iron Mines (bim-t) have grabbed the headlines in the first week of 2011.
Nunavut Iron Ore, backed by U.S. private equity firm Energy & Minerals Group, raised its bid after market hours on Dec. 31 to $1.45 in cash per share for 60% of Baffinland’s outstanding shares. Its previous offer was $1.40 per share. (Nunavut Iron’s parent company is Iron Ore Holdings [ioh-a]).
Nunavut’s increased bid followed a revised offer from ArcelorMittal for 100% of Baffinland’s shares at $1.40 per share, up from its previous offer of $1.25 per share.
“Previously there was a much bigger spread between the offers which made sense in terms of one being for 100% of the company and the other being for 60% of the company but now the spreads have narrowed quite considerably,” says Peter Campbell, a senior mining analyst at Jennings Capital in Toronto who covers the iron ore sector. “Nunavut Iron says they’ll be looking at their options and possibly improving their offer but it’s getting quite expensive and I’m not sure they’ll be able to come back with any significant improvements.”
In a Jan. 3rd press release, Baffinland said its board supported ArcelorMittal’s bid, which it described as remaining “in the best interests” of the company.
Tom Meyer of Raymond James recommends shareholders tender to ArcelorMittal’s offer. “Continued ownership of Baffinland shares under Nunavut Iron Ore, in our opinion, will be subject to further share dilution, technical risk, project delays, capital cost inflation, and an overall high level of uncertainty,” he wrote in a research note to clients on Jan. 4.
Of course that’s not how Bruce Walter, Nunavut Iron’s chairman, sees it. He believes Nunavut Iron’s offer is superior.
“That’s what major shareholders of the company are telling us, so at the moment we’re quite comfortable with the offer we have on the table,” he said in a telephone interview on Jan. 4. “We’re offering $1.45 per share for a significant portion of their shares and they will have the opportunity to participate in the Mary River project and that’s a compelling offer that many shareholders are telling us they want to participate in.
“Essentially the ArcelorMittal offer is a complete cash out for all shareholders and that may be something of an attraction to some, but we find it baffling that the Baffinland board of directors, having made a compelling case in an earlier director’s circular that there was value in participating in the project, are now telling shareholders that participating in the project is a very bad thing to do.”
Baffinland had been looking for partners to help cover development costs for its Mary River iron ore project on Baffin Island, 1,000 km northwest of Iqaluit and about 160 km south of Pond Inlet. Plans to develop the deposit involve building a 140-km railway to transport the iron ore to the coast. With substantial investments needed in rail and port facilities, capital costs have been estimated at about $4.1 billion.
A 2008 feasibility study put reserves for deposit No. 1 at Mary River (there are five deposits on the island) at 365 million tonnes grading 64.7% iron. The study outlined a 20-year mine life from reserves, producing 18 million tonnes a year.
Campbell of Jennings Capital describes the iron ore at Mary River as “the best iron ore bar none.”
“It’s super high-grade and a super valuable product,” he notes. “It would be the most valuable iron ore you could possibly imagine. Even if it cost US$50 per tonne to mine, it would probably get pretty close to US$200 a tonne, so the margins are very good.”
That’s one reason why Nunavut Iron is considering an initial bootstrap operation in the early stages and using an existing road to truck the ore to Milne Inlet, a port on the northern coast of Baffin Island, rather than immediately attempting to build a rail line and new port on the southern coast. Milne Inlet is only ice-free for three months of the year, but it would still enable Nunavut Iron to ship about 3 million tonnes per year in the early stages of the project, Campbell estimates.
“ArcelorMittal looks like they’re more interested in the rail option – building 140 km of rail, a new port on the southern coast of Baffin Island, and that would be a minimum 18-million-tonne-a-year operation and a very large capital expenditure,” Campbell explains.
One aspect that hasn’t been talked about much, he points out, is how the government and people of Nunavut regard the two proposals, particularly in terms of their revenue implications.
“On the one hand the ArcelorMittal deal offers the promise of a much bigger project, a much bigger capital investment, a much bigger infrastructure program, whereas the Nunavut Iron offer seems to be a much smaller project to begin with and the promise of a much larger project would seem to be much further down the road than what Arcelor might be able to do,” he explains. “And there are revenue implications too. I’m sure they’d prefer to collect taxes on an 18-million-tonne-per-year operation compared to a 3-million-tonne-per-year operation. Of course this might be partially offset by collecting taxes sooner on the smaller operation.”
Both offers are set to expire on Jan. 10.