RTGAM



Baffinland Iron Mines suitor Nunavut Iron Ore is seeking backing for its bid from deep-pocketed Chinese investors, sources say.

Getting involved in a fast-moving hostile takeover battle is not viewed as something that generally interests Chinese investors, but sources said that hasn't stopped Nunavut from approaching potential backers that could help the company compete with ArcelorMittal's cash offer for all of Baffinland.

The response has been some interest, said a person familiar with the situation. Still, after the Potash Corp. of Saskatchewan drama, when there was much talk about Chinese bids, but no action, investors are likely to be wary of putting too much faith in a Chinese investment in Baffinland.

Nunavut doesn't have the cash to bid for the whole company at the current share price, which is in the $1.45 range. It has instead constructed a complicated bid that offers cash for part of the company.

Nunavut has tried to spin that as a virtue because, with a float still outstanding, shareholders can participate in any upside, but the reality in most takeover battles is that cash is king. And in this case, it will take more cash, given the share price of Baffinland and the fact that neither offer on the table has yet attracted a lot of shares.

Nunavut chairman Bruce Walter declined to comment on the China talk, saying only that he believes his bid is the best on the table.

Analyst Peter Campbell of Jennings Capital said in a report Tuesday that it will take a higher bid by somebody to get this deal done.

"We have no fundamental foundation on which to base a target price for Baffinland, but we can say that the $1.40 for 100% of the company being offered by ArcelorMittal and the $1.45 for up to 60% of the company being offered by [Nunavut] are both inadequate in the eyes of the market. We therefore have revised our recommendation on Baffinland to Speculative Buy with an increased target price of $1.65, which we believe is a price likely needed to win the day before a Chinese bidder appears."

That bid could come from Nunavut, or it could come from former Baffinland CEO Gordon McCreary, who is also looking for Chinese backers for a deal.

The issue for anyone in China is time. But so far, given that shareholders have not tendered in big numbers to either the Nunavut or Arcelor bids, it appears there's a few weeks to work with.

"The bid extensions by ArcelorMittal and [Nunavut] allow Mr. McCreary more time to bring a Chinese bidder to the table," Mr. Campbell of Jennings Capital said in his report. "We understand that Mr. McCreary is heading back to China this week."