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Baffinland takeover battle grows as former CEO pursues Chinese bidder

Baffinland Iron Mines is developing an iron ore mining operation in the northern part of Baffin Island

Baffinland Iron Mines

The standoff between the world's largest steelmaker and a private equity fund over Baffinland appears headed for a stalemate.

A takeover offer by ArcelorMittal was set to expire at midnight Monday night, but whether the company was going to receive enough shares to cement its bid was unclear.

And that's just fine for former Baffinland chief executive officer Gordon McCreary, who welcomes any delay as he works to put together a third option with an unidentified Chinese firm.

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"Time is my biggest enemy in terms of trying to attract the Chinese to move on this," said Mr. McCreary, who is expected to head to China this week to talk to his potential investor.

"I have not found one shareholder who has said they're tendering to ArcelorMittal yet. So, I think I'm in good shape to see this thing perpetuate and have more time to address the situation with the Chinese to get them moving on it."

Mr. McCreary, who stepped down from the Baffinland board in November after ArcelorMittal's friendly deal was announced, believes both of the current offers greatly undervalue the company's potential. Though he is no longer an officer of the company, and as an investor holds less than one per cent of Baffinland's stock, Mr. McCreary would like to see a better offer put on the table.

The two current potential buyers are fighting to control Baffinland's Mary River project on northern Baffin Island, about 1,000 kilometres northwest of Iqaluit. It contains 865 million tonnes of iron ore reserves in three deposits. In exploration this year, Baffinland identified six other potential deposits.

The offers so far are "cheap beyond belief. They are truly trying to steal this asset," Mr. McCreary said.

Jennings Capital analyst Peter Campbell said the Chinese don't like bidding wars.

"The Chinese don't like to pay expensive prices and this is starting to get a little expensive and also the Chinese tend to react a little more slowly," he said.

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Mr. Campbell said he would bet one or both of the suitors may come close to getting enough shares and extend their offer.

However, he noted that it would be difficult for Nunavut Iron Ore Acquisition Inc. to get the shares it wants because of a lockup agreement ArcelorMittal has with Baffinland's directors and senior executives and the company's largest shareholder, Resource Capital Funds, which holds a 23 per cent stake in the company.

ArcelorMittal has offered $1.40 per share in a deal that values the company and the massive Mary River iron ore project deep at about $550 million.

Nunavut Iron has offered $1.45 per share plus a fraction of a warrant, but it only wants to take control of the company by increasing its stake in Baffinland to 60 per cent. The company, a subsidiary of Energy & Minerals Group, already owns about 10 per cent of Baffinland's equity.

Its offer was also to expire Monday, but under a deal with the Ontario Securities Commission, Nunavut Iron was expected to extend its bid.

Baffinland shares closed Friday at $1.42 on the Toronto Stock Exchange, down a penny.

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Demand for iron ore, used in the production of steel, has returned since the recession and the emerging economies of India and China have swung back into high gear.

Luxembourg-based ArcelorMittal has been building up its iron ore reserves as it seeks to protect itself against price increases in the metal.

The world's three biggest iron ore suppliers decided last year to price their contracts on a quarterly basis rather than an annual one, making steel producers more vulnerable to sudden price changes.

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