Prepared for: SHAWKAT KAMAL COURSE INSTRUCTOR PORTFOLIO MANAGEMENT AND INVESTMENT ANALYSIS (F605)
Concerns
The Mary River Property Baffinland Iron Mines Corporation Nunavut Iron Ore Acquisition Inc Arcelormittal
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
Resources
Project Overview
7 deposits of iron with high grade direct shipping ore. Deposits 1 to 3 amounts to 865m tonnes 365m tonnes are proven and probable( grading 64.7% iron) 52m tonnes are measured and indicated(grading 64.6% iron) 448m tonnes are inferred (grading 65.5% iron) 18m tonnes of iron ore shipment per year with 20 years of mine life.
Capital Expenditure
Capital required(m) Production Capital intensity (mt)
Railway (including 1.2b Rail line and 760m Steensby port) Rent
Road
Own
Capital Expenditure
Company Rio Tinto BHP Billiton Vale Project Simandou Waiq 220 mt Carjas Serra Capital(m) 12000 7400 8039 Production 95 65 90 Capital Intesity 126 114 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.
Shipping cost
Port Australia South Africa Western Africa China 3400 9700 12600 Europe 9900 7300 4400
Brazil
Canada
13500
14300
6200
3000
Geographically Canada posses less shipping distances with Europe, which confirms lower transportation cost. Moreover the shipping rate in Canada is of 2.5 to 3 times lower than that of Australian iron ore producers. That gives exclusive competitive advantage to ship iron ore to china which is the 60% importer of worlds iron ore.
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
Project Evaluation
2008 study (Deposit 1):
Discounted @7% Pre-Tax After Tax
Production-365m tons Project life-21 years Lump price $67 per ton and Fines price $55 per ton
Project Evaluation2010
Calculation of Tax Pre Tax Cash Flow $ Billion After Tax Cash Flow $ Billion Tax Rate 18.1 11.2 38.12%
Production (deposit 1): 365 million tons Forecasted sales price for fines (no lumps) Shipment- 18m tons by railway and 5m tons by road Project life- 21 years (railway) and 73 years (road)
Project Evaluation2010
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)
Project Evaluation2010
Operating Cost:
$14.62 / ton (railway) $63 / ton (truck by contract) $29 / ton (truck by Baffinland)
Project Evaluation2010
Comparison of alternatives:
Road Road Rail Way (managed by (contract) Baffinland)
NPV at 7%
Per Share NPV Per Share NPV (Diluted) IRR
7% 342
393 0.1
458.2663 1.33996
1.166072 8.02%
-2.21083
-1.92392 5.19%
Project Evaluation2010
Comparison of alternatives: Railway option overrides with $4.43 billion NPV Exploration of deposit 2 &3 will have more NPV (no data available) Data about deposit 4-7 yet to be published
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
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
ArcelorMittals strategy
Acquisition of London Mining:
acquisition price/ton=$1.2462
ArcelorMittals strategy
72 acquisitions (2003-2010)
Avg. $1130 million ( 98.9% of Baffinlands NAV)
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
Available Cash
$5.919 Billion in Dec, 2009
Strategic position
Advantage of Nunavut
Credit Rating (Aa1 Over BBB-) Existing shareholdings (8.82% of fully diluted)
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%)
Strategic Direction
Reduced acquisition cost = $203.616 Million Cost saving in Acquisition = $26.04 Million Saving from 2% participation = $248.73 Million
Discrepancies
NAV
$1.141 Billion Analysts estimation $4.431 Billion (7% NPV)