What's Next for ArcelorMittal After Nunavut Sweetens Offer for Baffinland?

Includes: BIMGF, MT
by: Proactive Investor

Backed by U.S. private equity firm Energy and Minerals Group, Nunavut Iron Ore Acquisiton has increased its unsolicited takeover bid for Baffinland Iron Mines Corp (OTC:BIMGF) [TSE:BIM] by nearly 69% on Thursday, easily beating out steel giant ArcelorMittal's (NYSE:MT) previous offer.

Nunavut Iron Ore Acquisition, a subsidiary of Iron Ore Holdings, is a vehicle created back in September solely for the purpose of making the Baffinland purchase, supported by Energy and Minerals.

Nunavut's revised $1.35 per share offer represents a premium of approximately 23% to ArcelorMittal's previous proposal of $1.10 per share, which was recommended to Baffinland shareholders in early November. Nunavut Iron's first bid was $0.80 per share back in September.

Baffinland was trading as high as around $1.3 on Thursday, but dipped back to $1.2 a half an hour before market close.

Junior explorer Baffinland is a hot commodity as the company is sitting on the Mary River project in Nunavut, an iron ore deposit estimated to be large enough to supply all of Europe. The property has reserves of about 365 million tonnes of ore, grading an average of 65% iron, and about 500 million tonnes of ore resources. The project is expected to produce 18 million tonnes per year.

Toronto-based Baffinland has been looking for partners for the C$4 billion project for some months now, as the company is not large enough to sustain the required costs.

Nunavut Iron's new bid, however, is only offering to acquire 50.1% of Baffinland's shares, whereas ArcelorMittal is bidding for around 66.6% of the company, according to reports, meaning the deal is not actually worth more to shareholders on a total basis. Previously, Nunavut Iron was also bidding for around 66.6% of Baffinland, or around two-thirds.

Gaining approval for 50.1% of Baffinland's shares may still be a feat though, as 25% of shares are in lock-up agreements with ArcelorMittal. On Monday, ArcelorMittal also received approval from Canada's Competition Commissioner for its bid to go through.

Nunavut Iron's new offer values the entire company at around $531 million, higher than ArcelorMittal's $433 million bid, and its own previous $274 million proposal.

The private equity-backed special purpose vehicle already owns 8.8% of Baffinland, and according to its statement today, requires roughly 162.4 million shares for its offer to complete.

Industry analysts are expecting ArcelorMittal to come back with an even higher offer, as the company is on the hunt for raw material for its steel mills.

Nunavut Iron also said that if its offer goes through, Baffinland will be made to distribute to each shareholder, excluding itself, a 2% gross revenue royalty on the sale of iron ore from Mary River.

"We believe that the continuing ownership interest in Baffinland and the proposed royalty interests should generate significant additional returns to shareholders as Mary River is brought into production," said chairman of Nunavut Iron, Bruce Walter.

Nunavut Iron Ore has extended the deadline for its offer to December 30.

Disclosure: None