Presentation Baffinland Final

7/28/2019 Presentation Baffinland Final

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Baffinland Iron Mines

Corporation


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HASNAT AHSAN 43 E-10

MOHAMMAD ZILLUR RAHMAN 46 D-132AFM RIASAT HOSSAIN 46 D-134

MD. RAIHAN SHOUROV 46 D-139

CHALAN KANTI ROY 46 D-141

DAMIL ALAM PRAKASH 47 D-37

Prepared by: Group 8

Prepared for:SHAWKAT KAMAL

COURSE INSTRUCTOR

PORTFOLIO MANAGEMENT AND INVESTMENT ANALYSIS (F605)


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Concerns

The Mary River Property

Baffinland Iron Mines Corporation

Nunavut Iron Ore Acquisition Inc Arcelormittal


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The Mary River Property

Located 3000 kilometers directly north of

Toronto.

High grade iron ore deposit first discovered in

the 1960s by Murray Watts and Ron

Sheardown.

First exploratory work indicated a resource of

about 120 million tonnes grading approx. 68

percent iron.


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Problems of The Mary River Property

Is in Arctic Circle

There was permafrost on the ground, which

may cause surface to become unstable

Was no infrastructure to speak of

Average temperature in winter was 28 C

Due to latitude and location, used to remaindark for many continuous months


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Baffinland Iron Mines Corporation

Incorporated in 1963 as Baffinland Iron Mines Limited.

McCloskey and McCreary acquired a significant share ofMary River Property in 2003 and then created BaffinlandIron Mines Corporation in 2004.

Both became chairman and ceo of Baffinland respectively. Raised $14 million via a reverse takeover and conducted a

preliminary study on Mary River

After exploration it was found that Mary River hadsignificant and high quality iron ore deposits

Initially planned on building a 230 kilometers rail line fromMary River to Steensby Port.

Due to global financial crisis, they failed to move theproject and thus their share price reduced


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ArcelorMittal

Formed in 2006, after takeover of Arcelor by

Indias Mittal steel

Accounted for 10 percent of global steel

production

A joint venture proposal to Baffinland was

placed in 2009

Proposal was in final stage when Nunavut

launched its unsolicited bid


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Nunavut Iron Ore Acquisition Inc

Was incorporated on August 27, 2010

Was a wholly owned subsidiary of Iron OreHoldings

Iron Ore Holdings is owned by Jowdat Waheed, aconsultant formerly employed by Baffinland

On September 2009, nunavut purchased 20million shares of Baffinland for $12.1 milllion

On September 2010, they offered $0.80 pershare for all the shares


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Project Overview

Resources 7 deposits of iron with high grade direct shipping

ore.

Deposits 1 to 3 amounts to 865m tonnes

365m tonnes are proven and probable( grading64.7% iron)

52m tonnes are measured and indicated(grading64.6% iron)

448m tonnes are inferred (grading 65.5% iron)

18m tonnes of iron ore shipment per year with 20years of mine life.


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Capital Expenditure

Capital

required(m)

Production

(mt)

Capital intensity

Railway

(including 1.2b Rail

line and 760m

Steensby port)

4100 365 11.23

4100 865 4.74

Road

Rent 2799 365 7.67

2799 865 3.24Own 2898 365 7.94

2898 865 3.35


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Capital Expenditure

Company Project Capital(m) Production CapitalIntesity

Rio Tinto Simandou 12000 95 126

BHP Billiton Waiq 220 mt 7400 65 114

Vale Carjas Serra 8039 90 89

Anglo

Americal

Minas-Rio 5004 26.5 190

The Capital intensity of the project is very low compared to the

other project in this industry. It means the project is very

attractive.


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Shipping cost

Geographically Canada posses less shipping distances withEurope, which confirms lower transportation cost.

Moreover the shipping rate in Canada is of 2.5 to 3 timeslower than that of Australian iron ore producers. Thatgives exclusive competitive advantage to ship iron ore tochina which is the 60% importer of worlds iron ore.

Port China EuropeAustralia 3400 9900

South Africa 9700 7300

Western Africa 12600 4400

Brazil 13500 6200Canada 14300 3000


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Special Considerations

To negotiate any hostile takeover Baffinland creates

some barriers become vital while determining the

value of Baffinland.

Poison Pills

Shareholders rights plan

Superior proposal support agreement Price of Ore


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Special Considerations (Contd.)

Poison Pills

Issued options on 11.392 million shares at different

prices and expiry dates.

7 Million are issued to their executives at exercise

rates from $0.25 to $0.58. Deep in the money in case

of a buyout


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Poison Pills

42.334 million warrants issued that work like

call options

valued at $0.70 per share, likely to be in the

money in case of a takeover.


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Shareholders rights plan

Any unsolicited bid needs to be a take-over bid(buying all the diluted common shares)

Superior proposal support agreement

Full payment at once

No diligence condition No undue delay taking into account all legal,

financial, regulatory and such other issues.


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Superior proposal support agreement

ArcelorMittal will be paid by Baffinlands of $19.5

Million as Break fee.

$ 15.5 million plus reimbursement of expenses of $ 4

million

Then, the cost is the responsibility of the purchasingcompany.


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Price of Ore

For decades since 1970s pricing was

benchmarked by first agreement between a

global miner and steel maker each year.

Year Fine Ore Price per Ton

Until 2004 (>62% Ore) $ 10 to 15

2004 (>62% Ore) $ 28.112008 (>62% Ore) $ 61.57

2010 (>62% Ore) $ 146

2015 Onwards (>62% Ore) $115


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Project Evaluation

2008 study (Deposit 1):

Production-365m tons

Project life-21 years Lump price $67 per ton and Fines price $55 per ton

Discounted @7% Pre-Tax After Tax

NPV - $2.7 billion

IRR 20.5% 15.9%

Payback Period 3.7 years 4.3 years


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Project Evaluation2010

Production (deposit 1): 365 million tons

Forecasted sales price for fines (no lumps)

Shipment- 18m tons by railway and 5m tons byroad

Project life- 21 years (railway) and 73 years (road)

Calculation of Tax

Pre Tax Cash Flow $ Billion 18.1

After Tax Cash Flow $ Billion 11.2

Tax Rate 38.12%


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Capital Budget:

$4.1 billion for 7 years (railway)

$2.8 billion in 2012 (truck by contract) $2.9 billion in 2012 (truck by Baffinland)

Working Capital $400m Straight Line Depreciation


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Operating Cost:

$14.62 / ton (railway)

$63 / ton (truck by contract)

$29 / ton (truck by Baffinland)

Discount rate-7% (same as 2008 study)

Equity financing but possible necessity of debt

exists (riskiness will increase)

Deposit 2-7 will reduce riskiness


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Project Evaluation2010Comparison of alternatives:

Rail Way Road(contract)

Road

(managed by

Baffinland)NPV at 7% 7% $4,430.79 -756.102 458.2663Per Share

NPV 342 $12.96 -2.21083 1.33996Per ShareNPV

(Diluted)393 $11.27 -1.92392 1.166072

IRR 0.1 16.13% 5.19% 8.02%


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Comparison of alternatives:

Railway option overrides with $4.43 billionNPV

Exploration of deposit 2 &3 will have more

NPV (no data available)

Data about deposit 4-7 yet to be published


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Acquisition Offers

Nunavut offered $274 million @ .80 per share

(.24 of NAV)

NAVBaffinland =$1141.67 million

Per share $3.34 or $2.91 (diluted)

ArcelorMittal offered $433 million @ $1.1 per

share (.33 of NAV)

Baffinland selected the latter


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2nd round of offers

Nunavut offered $463 million for 50.1% @$1.35 per share (.41 of NAV)

ArcelorMittal offered $429 million for 50% +1

share @ $1.25 (.38 of NAV) Baffinland again selected the latter

because Nunavuts plan was to replace the BOD,

president and CEO of Baffinland

Permitted bid (60 days) or take-over bid (full value ofcommon share)


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2nd offer by Nunavut

2nd offer includes: Purchasing 162 million shares

Providing 50% finance of $4.1 billion capital budget

Payment of 2% gross revenue (49.9%)

50% break fee ($9.75 million) Total > $2.5 billion

Capital Provider: Barclays denied

Energy & Mineral group provided $200 million

E& Ms usual investment ranges from $150m to$400m


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ArcelorMittals strategy

Acquisition of London Mining:

acquisition price/ton=$1.2462

Deposit 1: 365 million tons @$1.2462

Acquisition price- 40% of NAV and$1.33 per share

Deposit 1,2,3: 865 million tons @$1.2462

Acquisition Price 94% of NAV (Acquisition avg.)

Acquisition Price per share- $3.14 (NAV per share-

$3.34)


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ArcelorMittals strategy

72 acquisitions (2003-2010)

Avg. $1130 million ( 98.9% ofBaffinlands NAV)

Cash Reserve-$5.919 billion (2009)

Strategic intent:

Backward integration

Iron ore production 150 million tons by 2020.

Credibility report: BBB- (stable)


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Strategic Position

Advantage of ArcelorMittal

Operational Capability in Iron Ore Mining

London Mining South America - August, 2008

Iron Ore facility of Adriana Resources - August, 2008 Quebec Cartier Mines - June, 2005

Forward Integration (Mary Rivers perspective)

Purchaser (in case supply outstrip demand)

Price (Quarterly arrear pricing model) Available Cash

$5.919 Billion in Dec, 2009


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Strategic position

Advantage of Nunavut

Credit Rating (Aa1 Over BBB-)

Existing shareholdings (8.82% of fully diluted)

Nunavut has financial leverage

ArcelorMittal has operating leverage


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Strategic Directions

Nunavut should forgo majority shareholdings

ArcelorMittals operating leverage

ArcelorMittals cash position

Resource Capital Fund (Tender 23% of shares)

Right to waive minimum tender condition (45%)

Propose Arcelor for joint-venture purchase

ArcelorMittal = 50% + 1 Share = $1.25 per share

ArcelorMittal = All 2007 warrants = $0.10 per share

Nunavet = 41.12% share @ $1.25 per share


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Strategic Direction

Reduced acquisition cost = $203.616 Million

Cost saving in Acquisition = $26.04 Million

Saving from 2% participation = $248.73

Million


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Discrepancies

NAV

$1.141 Billion Analysts estimation

$4.431 Billion (7% NPV)

Total number of Diluted Share

Case suggested = 393,389,284

Summed = 402,642,322

(342,934,199+11,392,000+5,981,988+42,334,135)

Presentation Baffinland Final

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