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Nunavut Iron Ore sweetened its hostile bid for Baffinland Iron Mines Wednesday, in its tug of war with steel giant ArcelorMittal for the junior miner's vast iron ore deposit in the Canadian Arctic.

Nunavut Iron upped its offer to $1.40 a share for 60 per cent of Baffinland's shares, challenging ArcelorMittal's friendly bid of $1.25 a share for all of the shares.

Nunavut, backed by U.S. private equity firm Energy & Minerals Group, had earlier offered $1.35 a share for 50.1 per cent of Baffinland's shares. It already holds about 10 per cent.

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

At stake is Baffinland's huge iron-ore deposit in the northern Canadian territory of Nunavut, which is believed to be large enough to meet all of Europe's needs for years.

Shares of Baffinland were down 2 cents, or 1.5 per cent, at $1.32 on the Toronto Stock Exchange on Wednesday afternoon. Prior to Nunavut's original offer of 80 Canadian cents a share in September, Baffinland shares were at 56 cents.

At that time, Baffinland was looking for partners for its flagship Mary River project in Nunavut, and was discussing a possible joint venture with ArcelorMittal, the world's largest steel maker.

A Baffinland shareholder, who asked not to be named because he was not cleared by his company to speak, 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."

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Nunavut chairman Bruce Walter, a former head of Canadian miner Sherritt International Corp, 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 $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 per cent control of Baffinland, which he said was "superior" to Nunavut's offer for a maximum of 60 per cent 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 a week ago it said it would not hold its bid for Baffinland past Wednesday.

The company declined to comment on Wednesday on the new Nunavut bid, but a source with direct knowledge of the ArcelorMittal offer said the company would not raise its bid.

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After 11:59 p.m. EST Wednesday, ArcelorMittal will count the shares tendered to its offer. If they do not meet the 50 per cent plus one threshold needed to go forward, the company can either extend the offer for another 10 days, raise the offer and extend it for 10 days, or terminate it.

ArcelorMittal said recently it has lockup agreements with key shareholders and Baffinland directors holding about 25 per cent of the stock.

ArcelorMittal's offer values the company at around $490-million.

If Nunavut -- which was formed solely to buy Baffinland -- were to buy the entire company, the $1.40 per share bid would value the junior miner at about $550-million.

Nunavut said its new bid is for 195,312,171 common shares, worth about $273-million, plus the roughly 10 per cent of Baffinland stock it already owns.

While Nunavut's bid is for only 60 per cent 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 $4-billion. That component of the offer is subject to approvals from regulators.

Nunavut also said the deadline for its sweetened offer was extended to Jan. 10.

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