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High stakes for Baffinland in the Far North Add to ...

It will cost billions of dollars to build, and require construction of one of the world's most northern railway line stretching 140 kilometres across Canada's high Arctic.

But what lies beneath a stretch of barren northern landscape demonstrates just how far miners will go to tap what's left of the world's shrinking raw materials.

The latest takeover fight for a Canadian resource pits the world's largest steel maker, ArcelorMittal, against a U.S. private equity firm as the companies jockey to acquire Toronto-based Baffinland Iron Mines Corp., owner of the Mary River project, an iron ore deposit on isolated Baffin Island.

The battle has become a company-maker for Baffinland, which just six months ago was trading at 35 cents while its management team sought out a deep-pocketed partner to turn its discovery into an operating mine.

Baffinland shares have soared more than 300 per cent to $1.44 on Wednesday, pushing the company's market value to nearly $500-million amid the bidding war.

The war intensified on Wednesday when the Ontario Securities Commission said it was considering blocking the hostile bid by the private equity group, Nunavut Iron Ore Acquisition Inc., citing concerns about the offer. Nunavut said in a released late Wednesday that it had settled the matter with the regulator, which was related to proposed warrant allowing stockholders to earn partial shares if its bid was a success. Nunavut also said it may extend its bid beyond the Jan. 10 deadline, which is also when ArcelorMittal's offer is set to expire.

Meanwhile, a former Baffinland CEO and director is also pursuing a possible Chinese bid, believing both bids now on the table don't reflect Mary River's full potential.

Why the sudden interest in a little-known mining outfit?

Mary River is considered one of the world's best-quality undeveloped iron ore deposits on the planet due to its high grade and plentiful resources, which experts say could supply Europe's steel market for several years.

And for ArcelorMittal, the Mary River iron ore project provides an alluring prospect. The steel giant is on a quest to secure more of its own supply of the steel-making ingredient to feed its mills. It has a goal to double its iron ore production to 100 million tonnes annually by 2015 and rely less on product and pricing that is controlled by the world's big three industry players: Vale SA, Rio Tinto PLC and BHP Billiton Ltd. As a result, ArcelorMittal has become more willing to pay the price for greater independence, which includes building Mary River from scratch.

But gaining control of Baffinland and its Mary River project will only be the first hurdle for the winner of the takeover battle between ArcelorMittal and Nunavut, which is backed by the $2-billion private equity fund Energy & Minerals Group.

The next big challenge will be building the mine in one of the most remote regions of the world, about 1,000 km northwest of the Nunavut capital of Iqaluit. The project is estimated to cost $4-billion, about $1.2-billion of which includes construction of a 140-km railway to transport iron ore from the mine to a port for shipping.

Once the mine is in production, estimated to begin around 2016, there will be operational and logistical costs of producing year-round the projected 18 million tonnes of iron ore annually over 20 years.

Baffinland has also been working on a cheaper alternative that would include stockpiling the iron ore and trucking it during the warmer months of the year. The company hasn't released an official figure on what that proposal will cost, but analysts estimate it could cost up to $400-million. It's not clear if any of the bidders are interested in the cheaper alternative.

Some analysts are favouring ArcelorMittal to win control of Baffinland, in part because it has the support of the company's board of directors and its largest shareholder, for a total of 25 per cent stake in the company. ArcelorMittal is offering to buy 100 per cent of the company at $1.40 a share, while Nunavut's offer is for 60 per cent, include its own 10 per cent interest, at $1.45 a share.

"We really think that in order to create a sustainable future we will have to spend some money on developing infrastructure up front," said Peter Kukielski, ArcelorMittal's head of mining.

"A project that might otherwise be quite formidable for somebody else, for us is actually a very good fit in terms of our capacity and capability," added Mr. Kukielski, whose experience includes mining in harsh northern climates from his time as chief operating officer at Teck Resources Ltd., which operates the Red Dog zinc-lead mine in northwest Alaska.

Still, ArcelorMittal insists it won't buy Baffinland at any cost and said this week that its latest offer, which values the company at $550-million, is its final one.

ArcelorMittal's latest offer is nearly twice the 80-cent-a-share hostile bid put forward last fall by Nunavut. The bid surfaced while ArcelorMittal was negotiating a joint venture with Baffinland to build the Mary River project.

Nunavut chairman Bruce Walter said his bid has the backing of pension fund and other investors, which he wouldn't name.

He also dismissed speculation Nunavut plans to flip the project, and added the group made the unsolicited offer for Baffinland believing the project was not meeting its potential.

Meantime, former Baffinland director and CEO Gordon McCreary continues to pursue a Chinese investor he says has been interested in the Mary River project for years. While the bid has yet to surface, Mr. McCreary believes he will have more time, predicting a shareholder stalemate on the current two bids on the table.

He won't name the potential Chinese investor, citing confidentiality agreements. Mr. McCreary stepped down from the CEO chair last March. He resigned from the board in September after Baffinland's board decided to back the ArcelorMittal bid.

Editor's note: The online version of this contains additional information

 

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