Baffinland Iron Mines is developing an iron ore mining operation in the northern part of Baffin Island
Iron ore has become such a hot commodity that companies are fighting to get to the ends of the Earth to mine it.
Arcelor Mittal the world's biggest steel maker, has struck a deal to acquire Baffinland Iron for $433-million, trumping a hostile bid from a Texas private equity fund.
Baffinland's jewel is a proposed $4-billion project on Baffin Island, about 1,000 kilometres northwest of Iqaluit, described by investment bank Jennings Capital Inc. as "quite possibly the best undeveloped iron ore deposit in the world."
The price of iron ore, used to make pig iron, which in turn is used to make steel, has soared in recent years as steel demand has surged along with rapid growth in emerging economies. While many analysts expect the price to fall in the next five years as supply increases, UBS Investment Research believes the market "could remain very tight for four years."
The Mary River project, as currently planned, would see 18 million tonnes of iron ore mined each year for two decades. The project includes the construction of a $1.2-billion, 140-kilometre railway to move the commodity to a port for shipping.
ArcelorMittal had been in advanced talks with Baffinland about a joint venture to develop the mine before Energy & Minerals Group, a $2-billion, Houston-based private equity firm, launched its $274-million bid in September. ArcelorMittal's strategy is to greatly expand its holdings of iron ore, to ensure supply of a key steel-making ingredient and to insulate it from swings in the commodity's price.
"It's clearly superior to the offer on the table," Baffinland vice-chairwoman Daniella Dimitrov said in an interview.
A month ago, Baffinland's board recommended shareholders reject the hostile 80-cents-a-share bid by Nunavut Iron Ore Acquisition Inc., a takeover vehicle backed by Energy & Minerals Group. In a presentation at the time, the company suggested a fairer price for the shares would be around $3, based on comparisons with similar deals, using the metric of share price to net asset value.
ArcelorMittal offered $1.10 a common share and 10 cents a share for warrants issued three years ago.
Last Friday, Gord McCreary, a director, resigned from the board; the news was made public Monday morning, two hours after the deal was announced. Mr. McCreary had been the company's chief executive officer from May, 2004 until last March. He didn't return a call requesting comment.
The premier of Nunavut, Eva Aariak, welcomed the deal and said she wants ArcelorMittal to support locals in the territory with jobs. Nunavut's population is about 33,000 and its unemployment rate is around 14 per cent.
"It's good news for Nunavut," Ms. Aariak said. "I hope that they'll invest in our people as much as they've invested in the mine."
Asked whether she'll make demands of the company, the Premier said: "There's a lot of room to discuss things."
She said wasn't concerned about a foreign company - ArcelorMittal is based in London and Luxembourg - controlling the resource.
Baffinland said its deal with ArcelorMittal, which it called a support agreement, gives it the option to accept a better offer if another unsolicited bid emerges.
ArcelorMittal has a goal of increasing its annual iron ore production to 100 million tonnes, double current output.
The company said in a statement that its technical expertise and ability to manage large projects will help it to build the Mary River mine.
ArcelorMittal already has a significant presence in Canada. It owns Dofasco, the Hamilton steel maker. As part of that acquisition, it acquired assets that generate 40 per cent of Canada's iron ore production.
ArcelorMittal did not respond to a request for comment. The $4-billion plan for Mary River had been based on a 2008 feasibility study, with mining predicted to begin in 2016.
David Ebner