January 12, 2011 / 8:10 PM / 7 years ago

Baffinland shares jump, investors see higher bid

TORONTO (Reuters) - Shares of Baffinland Iron Mines spiked on Wednesday, a sign that investors are expecting a higher takeover bid to materialize for the owner of a giant, undeveloped iron ore deposit in Canada’s Arctic.

Baffinland stock rose as much as 7.5 percent to C$1.58 a share before paring gains to close at C$1.51. The share price had previously oscillated between the values of the two bids on the table.

The first is a friendly bid from global steel giant ArcelorMittal at C$1.40 a share for the entire company, or some $550 million. The second is a hostile, C$1.45-a-share bid from Nunavut Iron Ore for 60 percent of the shares. Nunavut’s offer values Baffinland at C$570 million.

“This deal looks to me like it’s not going to get done at this price,” said Peter Campbell, senior mining analyst at Jennings Capital in Toronto.

Baffinland shares jumped a day after Cliffs Natural Resources announced plans to acquire Canada’s Consolidated Thompson Iron Mines for C$4.07 billion. Consolidated owns a mine already in production.

“This puts the spotlight squarely on the value of these big, rich, high-quality iron ore assets, and I think now the market is realizing that this (Baffinland) deal is not going to get done at $1.40 or $1.45 a share,” said Campbell, who raised his target price on the company to C$1.65 a share.

A banker who is not working on the deal said the stock price might also reflected greater clarity about the Nunavut bid. The company formalized a sweetener to its offer on Monday, promising a piece of the action in the company for existing shareholders that tendered to its bid.

Baffinland’s Mary River project in the Canadian territory of Nunavut carries a hefty development price tag at about $4 billion. But once built the mine, which is relatively close to European steel mills, could meet all of the continent’s supply needs for years.

The battle for remote Mary River has raged for four months already, unusually long for such a relatively small deal. That partly reflects how intense the race for global resources is becoming as demand from China and other emerging nations picks up pace.

Since Nunavut made its first bid for Baffinland in September - 80 Canadian cents for all of the company - the share price has soared and has become one of the most active on the Toronto Stock Exchange.

“The profile of the shareholders has obviously changed from the time that the corporate events have started,” said Baffinland Vice-Chair Daniella Dimitrov.

At least 13 percent of the company stock is held by arbitrage traders, or short-term holders looking for the highest possible gain in the shortest period of time possible.

Other arbs sold shares into the open market as much as a week ago, easily off-loading the shares at prices superior to the bids.

“Clearly something has got to give here,” said a source with direct knowledge of the offers on table. “Shareholders are saying they don’t know who to pick and they won’t make a choice until there’s a clear winner. The market clearly is saying right now, ‘we are expecting a higher offer to come from someone’.”

Adam Low, an analyst with Raymond James Ltd in Toronto, said deep-pocketed Arcelor would likely make the key move.

“In our view, the Arcelor bid is the one that’s likely to prevail,” said Low. “At what price or what timing, I can’t promise.”

Luxembourg-based Arcelor, which wants to own Mary River to help it ease its dependence on outside sources of iron ore for steelmaking, could not be reached for immediate comment.

Campbell said that most likely very few shareholders had tendered to either bid so far. If either side held an edge, it would most likely communicate that it was gaining momentum.

“I would suggest that the market is speculating that this process isn’t over yet,” said Baffinland’s Dimitrov.

The Nunavut bid expires on January 25, and Arcelor’s offer expires on January 21.

Reporting by Pav Jordan; Editing by Frank McGurty

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