Nunavut Iron sweetens its offer for Baffinland

TORONTO Thu Dec 30, 2010 9:45am EST

A woman pushes a baby pram while walking along a dirt road at dusk in Iqaluit, Nunavut on Baffin Island in the Canadian Arctic August 16, 2009. REUTERS/Andy Clark

A woman pushes a baby pram while walking along a dirt road at dusk in Iqaluit, Nunavut on Baffin Island in the Canadian Arctic August 16, 2009.

Credit: Reuters/Andy Clark

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TORONTO (Reuters) - Nunavut Iron Ore sweetened its hostile bid for control of Baffinland Iron Mines BIM.TO on Wednesday, extending a battle with steel giant ArcelorMittal (ISPA.AS) for a vast iron ore deposit in the Canadian Arctic.

Nunavut Iron upped its offer to C$1.40 a share for 60 percent of Baffinland's shares, valuing the entire junior miner at about C$550 million ($550 million) and challenging ArcelorMittal's friendly bid of C$1.25 a share for all of the shares.

An hour before its bid was due to expire at 11:59 on Wednesday, ArcelorMittal announced it was extending the offer until January 10, but held the value of the bid at C$1.25 a share.

"ArcelorMittal is considering Nunavut Iron Ore Acquisition Inc's announcement earlier today that it has amended its partial offer for common shares," Arcelor said in a statement late in the evening.

The new bid from Nunavut, backed by U.S. private equity firm Energy & Minerals Group, improved on an earlier offer of C$1.35 a share for 50.1 percent of Baffinland's shares. It already holds about 10 percent.

Toronto-based Baffinland said its board of directors was reviewing the amended offer.

At stake is Baffinland's huge iron ore deposit on Baffin Island in the northern Canadian territory of Nunavut. While developing the Mary River mine will be a major logistical and environmental challenge, the deposit is believed to be large enough to meet all of Europe's needs for years.

For ArcelorMittal, which aims to be about 80 percent self-sufficient in iron ore supply and is already the world's largest steel maker, a successful bid would mean more direct access to the iron ore it needs for production -- a key issue given tight global supplies and healthy demand from Chinese steel mills.

That demand has strengthened the hand of major producers such as BHP Billiton (BHP.AX), Rio Tinto (RIO.AX) and Vale (VALE5.SA) in negotiations with steelmakers.

Shares of Baffinland closed unchanged at C$1.34 after see-sawing through the day, and were the second most actively traded issue on the Toronto Stock Exchange with more than 8.5 million shares changing hands.

Prior to Nunavut's original offer of 80 Canadian cents a share in September, Baffinland shares were at 56 Canadian cents.

At that time, Baffinland was looking for partners for its flagship Mary River project, and was discussing a possible joint venture with ArcelorMittal.

BID SEEN MOVING AHEAD

A Baffinland shareholder, who asked not to be named because he was not cleared by his company to comment on the matter, said the Nunavut bid seemed to be moving toward success.

"The Nunavut plan entails building a very limited mine and getting cash flow going relatively quickly, and building this in phases, and I think the market has embraced this," the shareholder said.

"I must admit I'm a little bit skeptical, but there are people out there who have drunk this Kool-Aid and they're going to find out if its good or bad Kool-Aid soon enough."

Nunavut Chairman Bruce Walter, a former head of Canadian miner Sherritt International Corp (S.TO), told Reuters he believes his company's offer is "demonstrably better" than ArcelorMittal's.

"We're giving shareholders an opportunity to cash in a significant portion of their stake if they choose to at C$1.40 and they will have an ongoing interest in a project that clearly not only we but Arcelor have stated pretty emphatically, by putting our money on the table, believe is a very valuable asset going forward," he said.

Tom Meyer, an analyst at Raymond James in Toronto, said his firm was still recommending that shareholders tender to ArcelorMittal's all-cash offer for 100 percent control of Baffinland, which he said was "superior" to Nunavut's offer for a maximum of 60 percent control.

"Continued ownership of BIM shares under (Nunavut), in our opinion, will be subject to further share dilution, technical risk, project delays, capital cost inflation, etc," he said.

ArcelorMittal said recently it has lockup agreements with key shareholders and Baffinland directors holding about 25 percent of the stock. ArcelorMittal's offer values the company at around C$490 million.

Nunavut Iron -- which was formed solely to buy Baffinland -- said its new bid is for 195,312,171 common shares, worth about C$273 million, plus the roughly 10 percent of Baffinland stock it already owns.

While Nunavut's bid is for only 60 percent of Baffinland, the company plans to offer a warrant component that would allow shareholders who cannot immediately tender their shares to take advantage of future value of the company once the giant deposit is developed at an estimated cost of about C$4 billion. That component of the offer is subject to approvals from regulators.

The deadline on Nunavut's sweetened offer is also January 10.

($1=$1.00 Canadian)

(Additional reporting by Robert-Jan Bartunek in Brussels; Additional writing by Jeffrey Hodgson; editing by Dave Zimmerman and Rob Wilson)

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