Battle for Baffinland Iron Mines continues

The takeover battle between private equity investor Nunavut Iron Ore Acquisition and global steel giant ArcelorMittal (MT-N) for junior Baffinland Iron Mines (BIM-T) and its Mary River project took a new turn with a revised offer from the U.S. backed private equity group.

Nunavut Iron Ore has raised its bid to $1.40 in cash per share for 60% of the company’s outstanding shares (calculated on an in-the-money fully diluted basis).  Its previous offer was $1.35 per share for 50.1%.

ArcelorMittal’s offer is for 100% of Baffinland’s shares at $1.25 per share.

In a research note to clients Tom Meyer of Raymond James recommended shareholders tender to AcelorMittal’s “superior” proposal. “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, etc.,” Meyer wrote on Dec. 29.

In an earlier note on Dec. 20, Meyer argued that ArcelorMittal is  “the more suitable partner” and is “better positioned to develop the project than Nunavut Iron.”

Meyer also pointed out that he does not expect other groups to bid for the company. “In our view the other European steel players may simply choose to let ArcelorMittal run with the project as its development would alleviate future raw material supply constraints,” he said. “We do not anticipate an existing iron producer to bid as the “Big Three” have development plans for other projects in the Atlantic basin.”

Baffinland’s Mary River project is on Baffin Island, 1,000 km northwest of Iqaluit. Plans to develop the deposit involve building a 140-km railway to transport the iron ore to a port for shipping. With substantial investments needed in rail and port facilities, capital costs have been estimated at about $4.1 billion. (The company has been looking for partners to help cover development costs.)

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.

If Baffinland breaks a definitive agreement it has signed with ArcelorMittal it will have to pay the steelmaker a $15.5 million break fee. 

Baffinland said on Dec. 29 that a special committee of its board of directors is reviewing Nunavut Iron Ore’s amended offer. Nunavut’s parent company is Iron Ore Holdings (IOH-A).