Revised offers for Baffinland from both bidders

A takeover battle between Nunavut Iron Ore Acquisition and global steel giant ArcelorMittal (MT-N) for junior Baffinland Iron Mines (BIM-T) and its attractive Mary River project is heating up with revised offers from both companies in the dwindling hours of 2010.

Nunavut Iron Ore, backed by a U.S. private equity group, raised its bid 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’s parent company is Iron Ore Holdings (IOH-A).

Nunavut’s increased offer followed a revised offer the same day from ArcelorMittal for 100% of Baffinland’s shares at $1.40 per share, up from its previous offer of $1.25 per share.

The three-month-long battle for Baffinland shows no signs of abating. Bruce Walter, Nunavut Iron’s chairman, said the company was “continuing to assess its options beyond the increase of the offer price to $1.45.”

Baffinland had been looking for partners to help cover development costs for its Mary River project 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.

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.

In a press release announcing ArcelorMittal’s latest offer, Baffinland’s board of directors recommended shareholders accept the steelmaker’s bid, which is a 27% premium to its original offer.

Tom Meyer of Raymond James recommended shareholders tender to AcelorMittal’s “superior” all-cash proposal in a research note to clients on Dec. 29 following Nunavut Iron Ore’s earlier $1.40 per share 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, etc.,” Meyer wrote.

In an earlier note on Dec. 20, Meyer argued that ArcelorMittal is “the more suitable partner” and “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.”