Baffinland Iron Mines BIM W
May 30, 2007 - 4:27pm EST by
issambres839
2007 2008
Price: 2.70 EPS
Shares Out. (in M): 0 P/E
Market Cap (in $M): 240 P/FCF
Net Debt (in $M): 0 EBIT 0 0
TEV ($): 0 TEV/EBIT

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Description

Baffinland Iron Mines is sitting on mines that should pump out over US$16 BILLION in pre-tax cash flow over 25 years. Never mind the mining should last close to 100 years due to its incredible size. Insiders have bought over C$5 million in stock in the last 18 months (over C$11.2 million in the last 3 years). Mitsubishi has also made a strategic investment in the project. Despite the potential and the heavy insider ownership, Baffinland still only has a C$240 million market cap. This should change over the next six to nine months due to a likely new strategic investor and the definitive feasibility study. The stock could easily double or triple from its current level.

Iron Ore is used in steel
 
Iron ore is the raw material used to make “pig iron,” which is the main ingredient in steel. There are three types of iron ore: lump, fines and pellets. Paradoxically, fines are actually the lower quality iron ore and must be “sintered” or fused together. Fines can also be processed into pellets which are then used to make steel. Both fines and pellets require extensive processing. Lump can be the better quality iron ore because little processing is needed and it is suitable as a direct feed to making steel. Lump iron ore typically receives a premium to fine iron ore. Currently that premium is about 27%-30%.
 
Most of today’s mines generally produce a small percentage if any of their output as lump. In fact, the largest iron ore mine in the world, the CVRD mine Carajas, only produces 5% lump and its lump percentage is declining.  (Baffinland’s iron ore deposits are anomalous at 75% lump and 25% fine.)
 
Cartel Pricing for Iron Ore and Steel Companies Are Getting Squeezed
 
It is important to note that sea-borne iron ore (iron ore that is not domestically produced and consumed in any one country) is essentially controlled by a cartel of three companies: BHP Billiton, Rio Tinto and CVRD. They control about 75% of the sea-borne iron ore. Every year steel companies negotiate iron ore prices for the following year with these three companies.
 
And lately due to the demand for steel and thus iron ore, prices have been jumping. In 2005, iron ore prices went up 71.5%. In 2006, prices increased 19% and in 2007 prices increased 9.5%. Iron prices have tripled since 2002 and early predictions are that prices could increase another 10% in 2008.
 
It’s not hard to understand that steel companies are not enjoying those price increases exacted by the “Big 3” iron ore producers. Chinese steel companies have been trying to get more involved in the price negotiations as the Chinese steel industry explodes in volumes.
 
China may have some longer term issues beyond the pricing of iron ore. China reported in May their “official” iron ore reserves of 59.4 billion tons. However, most of those reserves are low-grade of 30-35% iron. These reserves are even less impressive when you realize that only 50% of these reserves have been commercially prospected.
 
Despite these impressive sounding reserve figures, there are rumors in the marketplace that China is mining iron ore grades as low as 8-9% iron. By mining ore at such a low grade, China literally may be running out of domestically produced iron ore. The amount of labor and work involved in trying to get iron ore out for that type of grade is quite high. If China has problems with its domestic iron ore production look out for iron ore prices, they will explode higher.
 
Luo Bingsheng, deputy chief of the China Iron and Steel Association, has been quoted as saying that Chinese steel companies should buy or jointly develop overseas iron ore mines.  He also said “that in order to guarantee stable supply in the medium and long term China needed to control at least a third of world iron ore resources.” I wonder how many investors have considered this comment.
 
Further, India recently boosted its export tax on iron ore with a 62% grade or better, as they are trying to keep as much high quality iron ore in the country as possible.
 
These countries are not the only ones struggling with iron ore prices. The largest steel company in the world, Arcelor Mittal, is starting to struggle with those prices. Arcelor Mittal has been largely protected by its ownership of several iron ore mines and also due in part to supply agreements such as its 25 year preferential supply agreement with Kumba Iron Ore in South Africa that gives Arcelor Mittal 6 million tons of iron ore at cost plus 3 percent. Currently, Arcelor Mittal has 64 million tons of iron ore its 145 million tons needs covered. Its goal is to get to 75% coverage. This is why Arcelor Mittal is actively looking to invest in iron ore mines.
 
Suffice it to say that supply is tight, and power is increasingly in the hands of just three companies and prices are poised to stay strong and continue to rise as long as demand for steel stays strong.
 
Baffinland’s 100% owned world class Mary River Deposits
 
Baffinland sits on world class deposits of iron ore. Compasses don’t work at the deposit as the iron ore grades at 66% iron. Consider that the highest percentage that nature theoretically allows is 69%. The company has five deposits that cover 1,600 hectares.
 
Baffinland has really only drilled a portion of Deposit #1 and that is what the scoping study and its definitive feasibility study will be based upon. Current estimates of 12.6 million tons per year producing for 25 years are based upon only one of five deposits. Now you can start to visualize how big this operation is going to be.
 
Baffinland’s initial drilling of Deposit 2 and 3 have showed some spectacular results. For example, just in December drilling of Deposit 3 showed 65.8% iron over 170 meters. In 2004, drilling of Deposit 2 showed 63.5% iron over 107 meters. If these initial drilling results prove accurate, Baffinland could be sitting on a multi-generational iron ore mine, or production of 100 years. More on the deposits can be found here:
 
http://www.baffinland.com/investors/pdf/070228-bmo.pdf

Investors wanting further confirmation of the quality of Bafinland’s iron ore deposits should note that BHP Billiton actually staked claims around Deposit #4 at Mary River in 2006.
 
Scoping Study tripled estimate and Definitive Feasibility Study due in December
 
Last May, Baffinland through its Scoping Study work was able to triple the resource estimate to 309 million tons iron ore at a grade of 66.1% iron and inferred resources of 28 million tons at a grade of 65.9% iron. The Scoping Study assumed that the mine would produce 10 million tons of iron ore for 34 years.
 
The initial scoping study produced a cash flow figure of over C$6 billion. However, Baffinland now estimates a higher yearly production number of 12.6 to 15 million tons a year and shortened the time to 25 years from 34 years. And the initial scoping study used figures that are over 43% below current iron ore prices.
 
The scoping study is kind of like an official “preliminary” resource estimate, and the strict official estimate is called the Definitive Feasibility Study, and that is due on December 15th of 2007. The Study will also be using the improved production estimates and this should provide much higher cash flow and a substantial increase to IRR. The release of this study should provide a concrete catalyst for Baffinland.
 
Mitsubishi Investment gives credibility
 
In December of 2005, Mitsubishi Corporation invested C$5.5 million to buy 2.75 million shares at C$2 per share. That price was over a 30% premium to Baffinland’s share price at the time. Further, Mitsubishi added more as part of a follow-on offering earlier this year.
 
Of interest to note is that Mitsubishi owns 26.2% of Canada’s largest iron ore producer Iron Ore Company of Canada. They also own a 49% stake of Iron Ore Company of Canada’s sales division. Further they own 50% of Compania Minera Huasco S.A. in Chile and Mitsubishi also has a significant global trading presence.
 
I believe that Mitsubishi’s presence as an investor in Baffinland is a significant positive and validates the potential for Baffinland. Further, their continued participation in financing Baffinland is also very positive.
 
The potential cash flow numbers are HUGE and the IRR is large as well
 
The calculations can get a bit complicated, so I will try to keep it as simple as possible. (All figures are in US dollars for the below calculations) Taking out the shipping costs and using the 2007 price of $62.50 a ton for iron ore FOB Baffin Island (not in Rotterdam where the iron ore will be shipped).
 
If you assume about US$12 to $14 of operating costs, you get an average of around $50 a ton in operating cash margin. At 12.6 million tons a year, that produces $630 million in cash flow and at 15 million tons, that produces $750 million in cash flow. Total cash flow over the course of the first deposit would be $15.75 billion at 12.6 million tons and $18.75 billion at 15 million tons with the second deposit.
 
I calculate the pre-tax IRR of the mine to be 42% to 46% depending on how much iron ore is produced a year. This is a significant boost to the 15% calculated in last year’s scoping study. This also assumes 100% equity funding the project. If debt is used, the IRRs go even higher. Further this gives absolutely zero value to the fact that there is probably another 75 years of iron ore to be mined.
 
High valuation numbers based upon recent transactions
 
Two iron ore companies were recently acquired. Vedanta acquired Sesa Gosa and Anglo American’s purchase of 49% of MMX Minas Rio provides some timely comparisons to the valuations currently being paid for iron ore producers. The EV/tonnage produced a year is $180 a ton of iron ore.
 
Now if I multiply 15 million tons per year times $180 a ton and I subtract the capital cost of building out the mine (US$1.6 billion, more on this later), you get a valuation of $1.1 billion, which gets you a price of C$13.60 stock price. Again this gives no value to the other deposits or the long life nature of this mine.
 
Compared to other junior producers trying to build new iron ore mine, Baffinland by far has the highest grades and the highest quality iron ore. The only one close is Mt Gibson Iron which has a much smaller mine that should produce 3 million tons of iron ore at 50% lump 50% fines. Finally, Baffinland also has the second lowest cost of producing iron ore. The only mine that has a lower operating cost than Baffinland is MMX’s Minas Rio, which Anglo American just bought 49% of for $1.2 billion as mentioned above.
 
Insider Buying
 
Insiders are rarely stupid with their own money. And the insider trail at Baffinland is telling. Since 2005, insiders have bought over C$11 million worth of stock and in the last eighteen months they have bought over C$5 million worth of stock. To put the insider buying in perspective, name another small cap whose insiders have over 5% of the company recently?
 
Both the CEO and the chairman have been consistent buyers since around C$1 a share up through C$3 a share. The most indicative pattern of insider buying I have found is when executives are buying as their stock goes up. There is only one reason an executive would do this. This is a significant positive and how I found the company in the first place.
 
An interesting anecdote is that Gord McCreary (a mining engineer and the CEO of Baffinland) wrote his MBA thesis in the 1977-1978 that someone could develop the Mary River deposits in the right iron ore price environment and produce an excellent return doing so. After working for other mining companies, now he’s making his thesis come true.
 
 
The Biggest Risk
 
The largest risk to Baffinland is the issue of raising the money needed for their large mine, which will require a very large upfront investment of around US$1.8 billion (C$2 billion). The $1.8 billion will be for the mine, rail line and port as the Mary River deposits are in a remote region of Northeastern Canada. So this begs the question: How exactly is a $240 million market cap company going to raise this amount?
 
First, the company has already proven it can raise equity money, as it has raised almost C$150 million in money to date, including a large flow-through raise of over C$49 million announced on May 16th. (Flow-through common shares are tax credit securities that provide tax benefits to Canadian investors and are only available for junior mining and energy companies.)
 
Second, the company plans to add strategic investors to help with the financing and facilitate debt financing. Baffinland already has Mitsubishi as a strategic investor and may be able to rely on them for further financing, when the company proceeds with the US$1.8 billion capital raise. Further, Baffinland plans to add additional strategic investors such as steel companies, shipping companies or even a larger mining conglomerate. The more strategic investors Baffinland can get on board the easier it will be to get financing and more importantly debt financing which will significantly raise the IRR of the project.
 
Third, if raising the money for this project was such a problem, would insiders blow over $11 million buying stock?
 
Finally, the continuing rise in the price of iron ore, demand for steel, and the tightening of the supply for iron ore in China and India will continue to make Baffinland more and more attractive to partners and financiers.
 
Shipping Risk
 
Shipping is the second big risk the company faces. The Mary River deposits are in Northeastern Canada and quite close to Greenland. There is worry about what kind of ice breaking ships will be needed to transport this and the cost involved in building rail lines, a southern port and paying for the ships themselves.
 
Investors should be assured by the company’s partnering with FedNav, which is the company’s new partner in planning out the shipping solution for the Mary River deposit.
 
http://biz.yahoo.com/cnw/070516/baffinland_fednav.html?.v=1
 
“Fednav has participated in every major bulk shipping project in the Canadian Arctic and has provided innovative and practical solutions that have helped to develop shipping in the Canadian Arctic for over 50 years. Fednav currently provides bulk shipping solutions for CVRD-Inco's Voisey's Bay Nickel operations, Xstrata's Raglan Mine to the south of the Mary River Project and Teck Cominco's Red Dog mine in Alaska. While in operation, Fednav provided bulk shipping services to Breakwater's Nanisivik Mine and Teck Cominco's Polaris Mine to the north of the Mary River Project and was a major provider of ice-class tug and barge shipping services to the petrochemical companies drilling in the Beaufort Sea in the 1970s and 1980s.”
 
Potential Strategic Partners
 
The most logical strategic investor at this point would be a steel company and more specifically a European steel company, since Rotterdam is the easiest shipping destination for Baffinland.
 
The world’s largest steel company, Accelor Mittal, is one company that could very much use Baffinland’s low cost iron ore. As mentioned above, they have a history of locking in pricing and supply and actively investing in iron ore producers. Another potential steel partner is ThyssenKrupp AG, the German steel giant. It’s interesting to note that because of declining availability of lump iron ore from Brazil to Europe, there is a developing shortage of lump into the European steel sector. This bodes well for Baffinland.
 
Another example of a potential strategic investor is a shipping company, which will then contract on to ship the iron ore. Other potential investors are mining companies such as Anglo American, the world’s second largest mining group, which wants to triple its share of iron ore production.
 
Why the timing is so good to buy the stock now
 
By year’s end, BIM should have a new strategic partner and results from their definitive feasibility study. Each of those catalysts should cause the stock to move markedly higher. When Mitsubishi signed on as the first strategic investor, the stock almost doubled in a two month period. The definitive feasibility study will prove to investors that this project can be done and what the official numbers will look like. Both of those major catalysts should serve to drive the stock considerably higher.
 
In 2008 the company will ship a bulk sample of 250,000 tons to prove the quality and show the world what Baffinland has to offer. By that time, the stock price should be much higher.
 
Summary
 
Executives of Baffinland have bought over C$11 million of stock. Why? They see a multi-generational iron ore mine that has world class grades of iron. They see substantial IRRs and substantial cash flow. They see a company that could be worth more than $1 billion selling for around $200 million. With new coverage, a definitive feasibility study and a new strategic investor, Baffinland should see its stock price at least double by year end.

Catalyst

-New Strategic Investor
-Definitive Feasibility Study
-Price for iron ore increases again for 2008
-new analyst coverage
-Bulk sample shipment in 2008
    sort by    

    Description

    Baffinland Iron Mines is sitting on mines that should pump out over US$16 BILLION in pre-tax cash flow over 25 years. Never mind the mining should last close to 100 years due to its incredible size. Insiders have bought over C$5 million in stock in the last 18 months (over C$11.2 million in the last 3 years). Mitsubishi has also made a strategic investment in the project. Despite the potential and the heavy insider ownership, Baffinland still only has a C$240 million market cap. This should change over the next six to nine months due to a likely new strategic investor and the definitive feasibility study. The stock could easily double or triple from its current level.

    Iron Ore is used in steel
     
    Iron ore is the raw material used to make “pig iron,” which is the main ingredient in steel. There are three types of iron ore: lump, fines and pellets. Paradoxically, fines are actually the lower quality iron ore and must be “sintered” or fused together. Fines can also be processed into pellets which are then used to make steel. Both fines and pellets require extensive processing. Lump can be the better quality iron ore because little processing is needed and it is suitable as a direct feed to making steel. Lump iron ore typically receives a premium to fine iron ore. Currently that premium is about 27%-30%.
     
    Most of today’s mines generally produce a small percentage if any of their output as lump. In fact, the largest iron ore mine in the world, the CVRD mine Carajas, only produces 5% lump and its lump percentage is declining.  (Baffinland’s iron ore deposits are anomalous at 75% lump and 25% fine.)
     
    Cartel Pricing for Iron Ore and Steel Companies Are Getting Squeezed
     
    It is important to note that sea-borne iron ore (iron ore that is not domestically produced and consumed in any one country) is essentially controlled by a cartel of three companies: BHP Billiton, Rio Tinto and CVRD. They control about 75% of the sea-borne iron ore. Every year steel companies negotiate iron ore prices for the following year with these three companies.
     
    And lately due to the demand for steel and thus iron ore, prices have been jumping. In 2005, iron ore prices went up 71.5%. In 2006, prices increased 19% and in 2007 prices increased 9.5%. Iron prices have tripled since 2002 and early predictions are that prices could increase another 10% in 2008.
     
    It’s not hard to understand that steel companies are not enjoying those price increases exacted by the “Big 3” iron ore producers. Chinese steel companies have been trying to get more involved in the price negotiations as the Chinese steel industry explodes in volumes.
     
    China may have some longer term issues beyond the pricing of iron ore. China reported in May their “official” iron ore reserves of 59.4 billion tons. However, most of those reserves are low-grade of 30-35% iron. These reserves are even less impressive when you realize that only 50% of these reserves have been commercially prospected.
     
    Despite these impressive sounding reserve figures, there are rumors in the marketplace that China is mining iron ore grades as low as 8-9% iron. By mining ore at such a low grade, China literally may be running out of domestically produced iron ore. The amount of labor and work involved in trying to get iron ore out for that type of grade is quite high. If China has problems with its domestic iron ore production look out for iron ore prices, they will explode higher.
     
    Luo Bingsheng, deputy chief of the China Iron and Steel Association, has been quoted as saying that Chinese steel companies should buy or jointly develop overseas iron ore mines.  He also said “that in order to guarantee stable supply in the medium and long term China needed to control at least a third of world iron ore resources.” I wonder how many investors have considered this comment.
     
    Further, India recently boosted its export tax on iron ore with a 62% grade or better, as they are trying to keep as much high quality iron ore in the country as possible.
     
    These countries are not the only ones struggling with iron ore prices. The largest steel company in the world, Arcelor Mittal, is starting to struggle with those prices. Arcelor Mittal has been largely protected by its ownership of several iron ore mines and also due in part to supply agreements such as its 25 year preferential supply agreement with Kumba Iron Ore in South Africa that gives Arcelor Mittal 6 million tons of iron ore at cost plus 3 percent. Currently, Arcelor Mittal has 64 million tons of iron ore its 145 million tons needs covered. Its goal is to get to 75% coverage. This is why Arcelor Mittal is actively looking to invest in iron ore mines.
     
    Suffice it to say that supply is tight, and power is increasingly in the hands of just three companies and prices are poised to stay strong and continue to rise as long as demand for steel stays strong.
     
    Baffinland’s 100% owned world class Mary River Deposits
     
    Baffinland sits on world class deposits of iron ore. Compasses don’t work at the deposit as the iron ore grades at 66% iron. Consider that the highest percentage that nature theoretically allows is 69%. The company has five deposits that cover 1,600 hectares.
     
    Baffinland has really only drilled a portion of Deposit #1 and that is what the scoping study and its definitive feasibility study will be based upon. Current estimates of 12.6 million tons per year producing for 25 years are based upon only one of five deposits. Now you can start to visualize how big this operation is going to be.
     
    Baffinland’s initial drilling of Deposit 2 and 3 have showed some spectacular results. For example, just in December drilling of Deposit 3 showed 65.8% iron over 170 meters. In 2004, drilling of Deposit 2 showed 63.5% iron over 107 meters. If these initial drilling results prove accurate, Baffinland could be sitting on a multi-generational iron ore mine, or production of 100 years. More on the deposits can be found here:
     
    http://www.baffinland.com/investors/pdf/070228-bmo.pdf

    Investors wanting further confirmation of the quality of Bafinland’s iron ore deposits should note that BHP Billiton actually staked claims around Deposit #4 at Mary River in 2006.
     
    Scoping Study tripled estimate and Definitive Feasibility Study due in December
     
    Last May, Baffinland through its Scoping Study work was able to triple the resource estimate to 309 million tons iron ore at a grade of 66.1% iron and inferred resources of 28 million tons at a grade of 65.9% iron. The Scoping Study assumed that the mine would produce 10 million tons of iron ore for 34 years.
     
    The initial scoping study produced a cash flow figure of over C$6 billion. However, Baffinland now estimates a higher yearly production number of 12.6 to 15 million tons a year and shortened the time to 25 years from 34 years. And the initial scoping study used figures that are over 43% below current iron ore prices.
     
    The scoping study is kind of like an official “preliminary” resource estimate, and the strict official estimate is called the Definitive Feasibility Study, and that is due on December 15th of 2007. The Study will also be using the improved production estimates and this should provide much higher cash flow and a substantial increase to IRR. The release of this study should provide a concrete catalyst for Baffinland.
     
    Mitsubishi Investment gives credibility
     
    In December of 2005, Mitsubishi Corporation invested C$5.5 million to buy 2.75 million shares at C$2 per share. That price was over a 30% premium to Baffinland’s share price at the time. Further, Mitsubishi added more as part of a follow-on offering earlier this year.
     
    Of interest to note is that Mitsubishi owns 26.2% of Canada’s largest iron ore producer Iron Ore Company of Canada. They also own a 49% stake of Iron Ore Company of Canada’s sales division. Further they own 50% of Compania Minera Huasco S.A. in Chile and Mitsubishi also has a significant global trading presence.
     
    I believe that Mitsubishi’s presence as an investor in Baffinland is a significant positive and validates the potential for Baffinland. Further, their continued participation in financing Baffinland is also very positive.
     
    The potential cash flow numbers are HUGE and the IRR is large as well
     
    The calculations can get a bit complicated, so I will try to keep it as simple as possible. (All figures are in US dollars for the below calculations) Taking out the shipping costs and using the 2007 price of $62.50 a ton for iron ore FOB Baffin Island (not in Rotterdam where the iron ore will be shipped).
     
    If you assume about US$12 to $14 of operating costs, you get an average of around $50 a ton in operating cash margin. At 12.6 million tons a year, that produces $630 million in cash flow and at 15 million tons, that produces $750 million in cash flow. Total cash flow over the course of the first deposit would be $15.75 billion at 12.6 million tons and $18.75 billion at 15 million tons with the second deposit.
     
    I calculate the pre-tax IRR of the mine to be 42% to 46% depending on how much iron ore is produced a year. This is a significant boost to the 15% calculated in last year’s scoping study. This also assumes 100% equity funding the project. If debt is used, the IRRs go even higher. Further this gives absolutely zero value to the fact that there is probably another 75 years of iron ore to be mined.
     
    High valuation numbers based upon recent transactions
     
    Two iron ore companies were recently acquired. Vedanta acquired Sesa Gosa and Anglo American’s purchase of 49% of MMX Minas Rio provides some timely comparisons to the valuations currently being paid for iron ore producers. The EV/tonnage produced a year is $180 a ton of iron ore.
     
    Now if I multiply 15 million tons per year times $180 a ton and I subtract the capital cost of building out the mine (US$1.6 billion, more on this later), you get a valuation of $1.1 billion, which gets you a price of C$13.60 stock price. Again this gives no value to the other deposits or the long life nature of this mine.
     
    Compared to other junior producers trying to build new iron ore mine, Baffinland by far has the highest grades and the highest quality iron ore. The only one close is Mt Gibson Iron which has a much smaller mine that should produce 3 million tons of iron ore at 50% lump 50% fines. Finally, Baffinland also has the second lowest cost of producing iron ore. The only mine that has a lower operating cost than Baffinland is MMX’s Minas Rio, which Anglo American just bought 49% of for $1.2 billion as mentioned above.
     
    Insider Buying
     
    Insiders are rarely stupid with their own money. And the insider trail at Baffinland is telling. Since 2005, insiders have bought over C$11 million worth of stock and in the last eighteen months they have bought over C$5 million worth of stock. To put the insider buying in perspective, name another small cap whose insiders have over 5% of the company recently?
     
    Both the CEO and the chairman have been consistent buyers since around C$1 a share up through C$3 a share. The most indicative pattern of insider buying I have found is when executives are buying as their stock goes up. There is only one reason an executive would do this. This is a significant positive and how I found the company in the first place.
     
    An interesting anecdote is that Gord McCreary (a mining engineer and the CEO of Baffinland) wrote his MBA thesis in the 1977-1978 that someone could develop the Mary River deposits in the right iron ore price environment and produce an excellent return doing so. After working for other mining companies, now he’s making his thesis come true.
     
     
    The Biggest Risk
     
    The largest risk to Baffinland is the issue of raising the money needed for their large mine, which will require a very large upfront investment of around US$1.8 billion (C$2 billion). The $1.8 billion will be for the mine, rail line and port as the Mary River deposits are in a remote region of Northeastern Canada. So this begs the question: How exactly is a $240 million market cap company going to raise this amount?
     
    First, the company has already proven it can raise equity money, as it has raised almost C$150 million in money to date, including a large flow-through raise of over C$49 million announced on May 16th. (Flow-through common shares are tax credit securities that provide tax benefits to Canadian investors and are only available for junior mining and energy companies.)
     
    Second, the company plans to add strategic investors to help with the financing and facilitate debt financing. Baffinland already has Mitsubishi as a strategic investor and may be able to rely on them for further financing, when the company proceeds with the US$1.8 billion capital raise. Further, Baffinland plans to add additional strategic investors such as steel companies, shipping companies or even a larger mining conglomerate. The more strategic investors Baffinland can get on board the easier it will be to get financing and more importantly debt financing which will significantly raise the IRR of the project.
     
    Third, if raising the money for this project was such a problem, would insiders blow over $11 million buying stock?
     
    Finally, the continuing rise in the price of iron ore, demand for steel, and the tightening of the supply for iron ore in China and India will continue to make Baffinland more and more attractive to partners and financiers.
     
    Shipping Risk
     
    Shipping is the second big risk the company faces. The Mary River deposits are in Northeastern Canada and quite close to Greenland. There is worry about what kind of ice breaking ships will be needed to transport this and the cost involved in building rail lines, a southern port and paying for the ships themselves.
     
    Investors should be assured by the company’s partnering with FedNav, which is the company’s new partner in planning out the shipping solution for the Mary River deposit.
     
    http://biz.yahoo.com/cnw/070516/baffinland_fednav.html?.v=1
     
    “Fednav has participated in every major bulk shipping project in the Canadian Arctic and has provided innovative and practical solutions that have helped to develop shipping in the Canadian Arctic for over 50 years. Fednav currently provides bulk shipping solutions for CVRD-Inco's Voisey's Bay Nickel operations, Xstrata's Raglan Mine to the south of the Mary River Project and Teck Cominco's Red Dog mine in Alaska. While in operation, Fednav provided bulk shipping services to Breakwater's Nanisivik Mine and Teck Cominco's Polaris Mine to the north of the Mary River Project and was a major provider of ice-class tug and barge shipping services to the petrochemical companies drilling in the Beaufort Sea in the 1970s and 1980s.”
     
    Potential Strategic Partners
     
    The most logical strategic investor at this point would be a steel company and more specifically a European steel company, since Rotterdam is the easiest shipping destination for Baffinland.
     
    The world’s largest steel company, Accelor Mittal, is one company that could very much use Baffinland’s low cost iron ore. As mentioned above, they have a history of locking in pricing and supply and actively investing in iron ore producers. Another potential steel partner is ThyssenKrupp AG, the German steel giant. It’s interesting to note that because of declining availability of lump iron ore from Brazil to Europe, there is a developing shortage of lump into the European steel sector. This bodes well for Baffinland.
     
    Another example of a potential strategic investor is a shipping company, which will then contract on to ship the iron ore. Other potential investors are mining companies such as Anglo American, the world’s second largest mining group, which wants to triple its share of iron ore production.
     
    Why the timing is so good to buy the stock now
     
    By year’s end, BIM should have a new strategic partner and results from their definitive feasibility study. Each of those catalysts should cause the stock to move markedly higher. When Mitsubishi signed on as the first strategic investor, the stock almost doubled in a two month period. The definitive feasibility study will prove to investors that this project can be done and what the official numbers will look like. Both of those major catalysts should serve to drive the stock considerably higher.
     
    In 2008 the company will ship a bulk sample of 250,000 tons to prove the quality and show the world what Baffinland has to offer. By that time, the stock price should be much higher.
     
    Summary
     
    Executives of Baffinland have bought over C$11 million of stock. Why? They see a multi-generational iron ore mine that has world class grades of iron. They see substantial IRRs and substantial cash flow. They see a company that could be worth more than $1 billion selling for around $200 million. With new coverage, a definitive feasibility study and a new strategic investor, Baffinland should see its stock price at least double by year end.

    Catalyst

    -New Strategic Investor
    -Definitive Feasibility Study
    -Price for iron ore increases again for 2008
    -new analyst coverage
    -Bulk sample shipment in 2008

    Messages


    SubjectQuestion
    Entry05/30/2007 08:16 PM
    Memberdavid101
    Issambres,

    Interesting idea.

    1. What is the projected timeline for a mine actually coming online?

    2. Why buy now when an equity raise mught be priced lower?

    3. How will their mines impact supply? That seems to be the key dynamic, as well as understanding any other trends, like the increased use of scrap.

    David

    SubjectRe: question
    Entry05/30/2007 08:32 PM
    Memberissambres839
    1) The bulk sample will go out in 2008. Production should start 2010-2011.

    2)You buy now because each step towards production adds value. And because 40% plus IRRs and valuations such as this don't just stay around. I will tell you that Baffinland isn't going to raise $1.8 billion at this level. That would be absurd.

    When they sign another strategic investor, it lowers the amount they have to raise from the outside investing community. Look at what happened when they signed Mitsubishi. The stock doubled. Further, the Definitive Feasibility Study is another hurdle.

    Ask yourself why insiders are spending all of their money buying stock at these levels?

    I think it is pretty clear that if Baffinland wanted to sell out to a mining giant they could for double to triple the price. Management thinks there is more value developing the mines out.

    3)1.6 billion iron ore was produced, of that 700 million tons were sea-borne iron ore. 12.6 to 15 million tons a year isn't going to disturb that.

    An interesting note is that Rio Tinto is currently short 6 million tons to customers and is scrambling to find iron ore for customers.

    Subjectquestions
    Entry05/31/2007 07:00 AM
    Memberheffer504
    given the high iron content and long mine life, one would think that this would be a low cost operation, but the fact that it hasn't been developed before now argues against that premise. can you discuss where this sits on the cost curve, and if your operating costs include depreciation or not? also, mitsubishi spending $6m seems like a very small amount for a very big company, have its other investments in the area been so small? thanks a lot.

    Subjectre:questions
    Entry05/31/2007 10:31 AM
    Memberissambres839
    This actually is a low cost operation compared to other mines. The problem as to why it hasn't been developed is because of its location, ice in the water and that its never been properly explored. Just look at a map and you will realize how remote Mary River is.

    Depreciation is not in the cost numbers I quote.

    Mitsubishi has spent a small amount of money now, but by being a strategic investor and continuing to add on financings, they are signaling they will also participate in the big financings.

    SubjectHistorical perspective / Txn's
    Entry05/31/2007 11:00 AM
    Membergrant387
    This may sound like a strange request, but I was wondering if you could point me in some direction for industry reading on iron ore and its supply / demand characteristics over the last ten to twenty years or so.

    Price increases over the past two years are strong (mirroring other commodity prices), but what's with the massive 71% jump in 2005? That looks to be either a very deep structural industry issue or a speculative pop. In either case it would be helpful to understand.

    Also, you mentioned a couple smaller players doing acquisitions. What have BHP and Rio Tinto done on the acquisition front? Are they active? Are there prices comparable to the recent transaction you cite?

    Thanks for a great idea.

    SubjectI like Baffinland.
    Entry05/31/2007 01:05 PM
    Memberran112
    Thanks for posting the idea.

    A while back, I picked the "chicken" play on Baffinland, which is McChip Resources (MCS in Canada). I won't earn nearly the same return on McChip as with Baffinland, provided the thesis pans out. However, some types who like to do arbitrage work might find McChip to be of related interest. I opted to take McChip as my proxy on Baffinland.

    At the current price of $3.37 Canadian, McChip has a market cap of less than $18.6 million Canadian.

    McChip owns 4,723,921 shares of Baffinland, which equals about 75% of McChips current stock price. This has been a long term holding for McChip, and McChip has a director on the board of Baffinland. In addition, McChip owns a portfolio about $3.6 million of other publicly traded stocks. The firm also holds direct and indirect interests in long lived natural gas and oil wells which should produce about $2.1 million of revenues per year. The stock pays a dividend of about 3%. Last, McChip holds a fair working capital nest egg, which leaves it debt free after deducting short term assets - long term liabilities.

    I don't post this to disparage BIM in any way. Baffinland is certainly a good idea and deserves to be highly rated on VIC. As I initially mentioned, if one thinks that the deposit will become a mine, BIM is the logical investment to own.

    Here is the link to the McChip annual report.

    http://www.sedar.com/DisplayCompanyDocuments.do?lang=EN&issuerNo=00001371


    SubjectShipping costs
    Entry05/31/2007 02:17 PM
    Memberrii136
    Thanks for another great idea.

    Question on the shipping costs: how are these accounted for in your analysis, and how to these affect the projected cashflows? I was not sure if you did or did not include them in your cashflow assumption, though it seems as if this would be imporant given that shipping is a big barrier with the mine.

    Do you have any idea of where shipping costs will net out compared to comps, and how this will affect that operating costs or prices received on the ore?

    Also, does the location of the mine pose increased weather risks, both to the operation of the mine itself, and shipping of the ore?

    Thanks again,

    rii

    Subjecthistorical perspective
    Entry05/31/2007 02:17 PM
    Memberissambres839
    I have found information broadly available on the Internet. Here are a few resources:

    http://www.miningnews.net/sectionstory.asp?sourceid=c21

    http://steelonthenet.blogspot.com/

    http://www.infomine.com/commodities/iron.asp

    Another place to get info is from any brokerage with research on CVRD, Rio Tinto or BHP.

    I have been collecting info for 9 months now.

    FYI, while prices have jumped since 2005, know that they have tripled since 2002. Its not a speculative pop, its just that we have a cartel and few mines coming on stream to handle demand.

    Consider a massive deposit like Baffinland at 12-15 million tons a year pales in comparison to 1.6 billion tons a year produced.

    Further check out the recent news on CVRD, they are short 6 million tons of iron ore and are scrambling to get it to fill supply agreements as they are falling short.

    Also, do you think that the big 3 would be going ahead with $6 billion new mines in dubious countries like Guinea in Africa if this was just a speculative pop?

    As to acquisitions, Anglo american is not a small company. The Big 3 have been content to sit on the mines they do have, but that's just because no real new mine has come online. You can bet that the closer to production we get the more they will be interested.

    Subjectre:shipping costs
    Entry05/31/2007 02:21 PM
    Memberissambres839
    Shipping costs will be about $15-$10 a ton. I actually did not include them, because the price I use in my analysis is the FOB on Baffin Island. Not in Rotterdam. Iron ore in Rotterdam is going for around $89 a ton right now.

    I think weather is a factor, but because of the southern route and southern port it should not be a problem.

    Subjectre: shipping costs
    Entry05/31/2007 02:35 PM
    Memberrii136
    thanks for the response. One quick follow up:

    What is the reason for the price discrepancy between prices in Baffin island and Rotterdam (I assume it is due to shipping costs from the ports to the factories, but want to make sure)? Has the gap in prices between the two locations been pretty constant, and would you expect it to continue? I did not realize that there was such a large pricing discrepancy between different locations, so it would be helpful to understand the drivers here more clearly.

    Thanks again for the clarification--I thought you were being aggressive when it looks like you are actually being conservative.

    rii

    Subjectre:re:shipping costs
    Entry05/31/2007 05:10 PM
    Memberissambres839
    The only discrepancy is shipping costs.

    Subjectre:I like Baffinland
    Entry05/31/2007 05:11 PM
    Memberissambres839
    Thanks for the "chicken" play on Baffinland. I will check out the arbitrage on McChip.

    SubjectSome historical cost figures
    Entry05/31/2007 05:52 PM
    Memberissambres839
    There is a good report from Canaccord Adams on another potential iron ore mine and company, Consolidated Thompson (Toronto Venture: CLM). It gives a lot of good industry and up and coming iron ore comparisons.

    Baffinland has the second lowest operating cost of the 13 new potential mines, and the average cost to produce iron ore is $25.32 a ton. (FYI, their estimate of Baffinland's operating cost is high by $3-5 a ton, but that is a mistake by the analyst. (Doesn't really matter as Baffinland is still below the average even with the mistake.)

    Check out the report if you can get it.

    SubjectConsolidated Thompson
    Entry06/02/2007 06:43 PM
    Memberrylflush803
    This company was just able to raise over $200mm in less than an hour last week in a private placement. Pretty impressive and shows the demand for iron ore, any particular reason you prefer Baffinland to CLM? CLM seems to be an easier investment in that its now fully funded from an equity perspective and will be producing about a year and a half ahead of them with much less infrastructure development risk...do you have any thoughts?

    Subjectre:Consolidated Thompson
    Entry06/03/2007 03:24 PM
    Memberissambres839
    I think the upside on Baffinland is so much greater, due to the quality and longevity of its reserves. Also, Baffinland is well funded after its last offering itself, though not through to production.

    CLM may be a good investment as well,but I prefer the upside of BIM.

    SubjectFinancing
    Entry06/04/2007 10:51 AM
    Membermet99
    From your analysis, I can understand why you anticipate raising the needed capital for development is most likely doable. Do you have specifics (or ranges) on the equity and debt mix on funding the capital needs?

    Specifically, in addition to today's 63.9MM shares outstanding, there are 528K warrants (strike price $5.50 - that's positive), and 4.6MM outstanding options.

    I would agree that further equity raising activities would probably be allied to higher equity pricing (the warrants certinly suggest that), but $1.8B (US) is a lot of capital. How do you see this playing out through 2010 in terms of share dilution for purchasers on the existing share base?

    What is the likelihood the company would sell itself? Or what would it take to get management's and the Board's attention? How big might a 'strategic' investor's position grow without mangement viewing it as a threat if indepence is desired?

    Thanks!

    Met99

    Subjectre:Financing
    Entry06/05/2007 08:32 PM
    Memberissambres839
    I don't have specifics on equity/debt mix. I only know that with good strategic partners and offtake agreements the debt portion should be higher. The higher then debt portion the better.

    I see the stock reaching a much higher level with a strategic partner and doing financing then.

    The likelihood of the company selling itself depends on the strategic investor initiative this year. No strategic investor, then the company would probably partner with a mining company or sell out.

    Over a 10% stake in the company would probably allow the company to have a seat on the board.

    SubjectConstruction Expertise & Permi
    Entry06/12/2007 10:06 AM
    Membertumnus960
    It is my understanding that developing a project of this magnitude requires considerable development and construction expertise. Does BIM already have this internally? How much will they need to staff up / partner to lower their execution risk or minimize cost over-runs?

    Where is the company in terms of permitting? Is this a source of risk?

    Subjectre:construction Expertise & Pe
    Entry06/12/2007 03:58 PM
    Memberissambres839
    The main expense of the construction involves a rail line, port over arctic terrain. It doesn't involve an expensive technical plant. One of the benefits of the having such high iron ore product and so much of it being lump, is that not much has to be done to it.

    As to staffing, if you check out the press releases from the company since the beginning of the year, you can see that they are starting to really staff and beef up with operators and people with really good resumes.

    I don't think permitting is a risk and I think the company is well on its way with all of its final permitting. They have excellent relations with the Inuit tribe and the government.

    SubjectFinally
    Entry06/12/2007 06:18 PM
    Memberlouisc738
    Hi Issambres,

    I am glad that you finally posted BIM. I have some questions about it:

    1) The European market for iron ore is declining because furnaces are being closed due environmental concerns and high costs, so they are replacing by slabs imported from low costs producers (e.g. Arcelor-Mittal Brazil, and this was the rationale for CSN Brazil – ticker NYSE: SID for making a bid for Corus ( SID lost to Tata), because SID owns one of the best iron ore mines in the world (Casa de Pedra), that in two to three years will be producing 40 million tons). How much will be the shipping costs to the Far East?

    2) I have some doubts if you can use the figures of Vedanta acquisition and Anglo acquisition of MMX, without some adjustment , considering that they are more close to the Far East markets (where growth is happening), and therefore shipping costs are lower. Besides that, it is not certain that BIM could ship ore around the year. MMX- Rio is a big project that will reach almost 50 million tons, and it is around 10% of CVRD’s (RIO) production of iron ore.

    3) One of the underwriters Raymond James issued a report in 2005, saying that will be required “Class 3” vessels, which are similar to icebreakers ships to transport the ore from Mary River, as he said: “Up to four ice class shipping vessels (capex of $ 550 million) on the order of 250,000 deadweight tonnes are being considered. A loading rate of 7,000 tonnes per hour would be required in order to deliver 10 million tonnes of iron ore per year”. Do you have any update figure on that? On other shipping options that the company could implement?

    Thanks for the reply.

    Regards,

    Louisc



    Subjectre:finally part 1
    Entry06/13/2007 02:09 PM
    Memberissambres839
    Here are some answers from BIM:

    1) Consolidation in the European Market has been a work in progress over the past twenty years. Many mills have shut but this has focused production on larger and more existing blast furnaces. The survivors are expected to remain. Current iron ore demand is ~145 million tonnes for EU-15 and growth is generally flat that sees annual changes in iron ore consumption driven more by the availability of scrap steel. Slight growth is predicted as re-builds of blast furnaces are completed. EU-15 are more efficient and significantly lower cost that the North American market, but EU focuses on higher quality products that other parts of the world.

    Environmental pressures remain a constant, everywhere. CSN is a integrated producer that was privatized by the Brazil government in 1993. CSN produces a pig-iron slab cheaper and more efficiently than NA producers. In the USA stand up for steel campaign that saw virtually all steel companies exporting into the USA hit with duties, except for the CSN slabs. Many of these were being imported as it was cheaper to buy and import rather than produce the slabs themselves. CSN had a JV with Dofasco to export > 1 million tonnes of these slabs into the US for use in producing automotive flat steel. This was a key asset that Arcelor sought in its takeover of Dofasco. There has been constant discussion about any future production of hot metal, the blast furnace part of the steel making process, being located in Brazil or the source of the iron ore and fabricating being concentrated in end-user markets. Very probable it will be the way of the future, but it has been discussed on/off again for the past 30 years.

    The Casa de Petra is planned to expand to 30-40 million tonnes by 2012 but it produces concentrate (pellet feed) and fines (sinter feed). CSN plans a new 6Mt pellet plant as well. CVRD had the right of first refusal on "excess production" from Casa de Petra until 2031. Excess production is defined as anything that CSN does not consume. Remember that in 2002 Corus bid £2.7 billion for CSN, but dropped the bid due to the CVRD option and a worsening financial position. There appears to be a buy or be bought attitude developing amongst steel producers. CVRD was supposed to sell Ferteco or give up this right to satisfy regulators but I am not sure where this is at. In any case, Baffinland's focus is on lump (75%) and fines (25%) production, initially at 12.6 Mt per year. As you may know lump is a premium priced product that requires specific physical/chemical/metallurgical characteristics.

    Many mine expansion plans are limited due to infrastructure bottlenecks, both rail and port capacity

    Sinter plants are environmental concerns in Europe and I am probably safe to say that no new sinter plat will be built in Europe, but sinter remains the most efficient and best way to produce hot metal. Remember, when iron ore is finer grained that 0.15 mm in size, you can only use this material to make a pellet. Brazilian ores, including that from Casa de Petra, are very fine grained, (think flour). Despite comments that there are better fine products elsewhere, we have received interest in our product as our fines are 3-6 mm in size (small pebbles) and we do not generate very much ultrafine material (<0.15 mm). Finer grained iron ore reduces the productivity of the sinter plant. As sinter plants are designed to meet a specific feed, use of finer grained ore reduced productivity of the sinter plant. Then one must buy additional iron ore credits (pellets, lump) to maintain output. Steel mills are either on or off and there is a balance to maintain steel output.

    2) BIMC can ship 12 months a year from either Milne Inlet or Steensby Inlet. We choose, in the scoping study, to only ship 8.5 months a year to mitigate cultural concerns. It would be possible to expand this to 12 months once a history is established. As you are aware, fear and uncertainty is the greater concern, particularly when discussing anything new, even if it is only a perceived concern. However, this is moot as we plan to go to Steensby Inlet as the cultural concerns are mitigated and the technical requirements of the ships considerably less.

    Subjectre:finally part 2
    Entry06/13/2007 02:10 PM
    Memberissambres839
    3) In our scoping study, a copy of which is on our website, shipping costs, using a ice reinforced cape class bulk carrier (>150,000 dwt), were ~US$ 18.5 per tonne from Milne Inlet, which included the cost of two ice-management vessels, for an 8.5 month per year shipping season. We had access to some long-term basic rates from Brazil to Europe that were ~US$16.5-17.5 per tonne in 2005. This was the rational for assuming that we would have to absorb $2.5 per tonne shipping cost. It is not clear what will be the long-term shipping rate for Brazil to Europe, it is just as difficult to forecast long-term iron ore prices. So this is a best guess and given the changes in the shipping markets, I see higher long-term costs, due to changing lesgislation in Europe/NA and Asia that will already has newer better quality ships being built. Shiploading capacity in the scoping study was dual streams at 6,000 tph (2 x 6,000 tph)

    As stated, we plan to ship from Steensby Inlet and we are in the middle of this process for our definitive feasibility study. Steensby allows us to ship 12 months per year, use a lower class of ice reinforced bulk carrier (cheaper due to less steel in its construction), however the feasibility study will use actual estimates from shipyards rather than consultant estimates so our estimate would be more accurate. This is a far as we can discuss our shipping, however we have formed a strategic alliance with FedNav, whom have extensive experience in shipping in Canada's Arctic (see news release on Baffinland website).

    Baffinland will produce a high quality lump iron ore and some sinter fines that we believe that marketing up to 15 million tonnes into Europe will be easily doable. Our bulk sample is oversubscribed and our marketing efforts have been extremely well received.

    *****

    Note the last comment from the company: "the bulk sample is oversubscribed"

    SubjectLouisc
    Entry06/13/2007 05:53 PM
    Memberissambres839
    I think if you do some poking around the European market that there is a growing chance of a shortfall in lump shipments of iron ore into Europe. And that situation could play right into Baffinland's hands.

    SubjectLouis
    Entry06/20/2007 05:53 PM
    Memberissambres839
    Your post also confirms what I'm starting to hear and that is that iron ore pricing could surge for next year's pricing. I'm hearing that 30-40% is not out of the question. This would be an enormous boost for the valuation and financing for Baffinland.

    Further, the pricing should happen right around the definitive feasibility study and a potential strategic partner.

    Also, check out the news on Mittal today:


    Arcelor Mittal, the world's biggest steelmaker, plans to produce about 80 percent of the iron ore it uses within the next decade to protect itself against price increases from the three companies that dominate the market.

    Mittal wants to boost supplies from the current 45 percent of the ore it uses by buying mines near its manufacturing facilities across the world, Chief Executive Officer Lakshmi Mittal said today at a steel conference in New York.

    Mittal is buying iron-ore facilities in Senegal and Liberia to counter the market power of BHP Billiton Ltd., Rio Tinto Plc and Brazil's Cia. Vale do Rio Doce, which together control about 80 percent of the world's iron ore and are boosting prices for the raw material used to make steel.

    ``We want to have a completely integrated business model,'' Mittal said at the conference. High-cost new projects the iron- ore companies are developing will make it ``difficult'' for prices to decline substantially, he said.

    http://www.bloomberg.com/apps/news?pid=20601081&sid=aTjAq4T1cyYg&refer=australia

    SubjectIron Ore Prices
    Entry06/21/2007 10:11 PM
    Memberlouisc738
    Issambres,

    I don´t believe that it will reach 30%-40%, it just gut feelings. It is more between 10-20%, in order to compensate US$ devaluation against the Brazilian Real and the Australian Dollar.

    What Mittal said is not new, however he increased the percentage target of iron ore produced internally, it was 50%.

    Regards,

    Louisc

    SubjectLondon Mining Plc
    Entry06/26/2007 12:07 PM
    Memberlouisc738
    Issambres,

    Do you know any about this company? So far is private owned, but its biggest shareholder with 28% is RAB Capital, which is one of most shrewd investors, that manages RAB Special Situation Fund (a hedge fund managed fron London). The mining company will make an IPO in July at Oslo Stock Exchange. Could the Greenland project compete with BIM?

    They have iron ore exploration licenses in Sierra Leone (Africa), Greenland and Brazil (Minas Gerais state, where are CVRD, MMX and CSN (Casa de Pedra).

    Regards,

    Louisc

    Subjectre:london mining
    Entry06/26/2007 12:34 PM
    Memberissambres839
    I don't know about them, but I will look around and see if I can find anything. If I can I will post something. Thanks for the head's up.

    SubjectUpdate
    Entry07/05/2007 03:18 PM
    Memberissambres839
    There is no company specific news to Baffinland that is driving the stock up to all time highs. I think the momentum is just building from talk of a 25% increase or more in the price of iron ore for 2008, and bullish commentary from Rio Tinto and BHP from Australia.

    There appears to be substantial institutional interest from Raymond James today.

    SubjectRaymond James
    Entry07/11/2007 04:33 PM
    Memberlouisc738
    Issambres,

    They have a strong buy on the stock.

    Louisc

    SubjectIron Ore Acquisitions
    Entry07/12/2007 01:20 PM
    Memberissambres839
    July 12 (Bloomberg) -- Mt. Gibson Iron Ltd., backed by Russian billionaire Alisher Usmanov, is looking for iron ore and coking coal acquisitions in Australia and overseas to benefit from soaring demand for steelmaking ingredients driven by China.

    ``We have identified some very clear winners within the M&A space,'' Luke Tonkin, managing director of Perth-based Mt. Gibson, said yesterday by phone. Potential acquisitions could be made within the next 12 to 18 months, he said.

    Rising demand from China has pushed iron ore prices to records for five years, spurring acquisitions including Mt. Gibson's purchase last year of rival Aztec Resources Ltd. Shares of Cleveland-Cliffs Inc. surged in May on speculation the company may be acquired by Cia. Vale do Rio Doce, the world's biggest iron-ore producer.

    ``Mt. Gibson has a track record of acquisition,'' Merrill Lynch & Co. analysts Mike Harrowell and Stuart Howe said in a July 10 report. ``We expect this pattern to continue with a positive valuation outcome for shareholders.''

    Shares of Mt. Gibson rose 1.5 cents, or 1 percent, to a record A$1.475 at the 4:10 p.m. Sydney time close on the Australian Stock Exchange. The company, whose stock has gained 66 percent this year, has a market value of A$1.2 billion ($1 billion).

    Usmanov, through Gallagher Holdings Ltd., holds about 17 percent of Mt. Gibson and ``will participate'' should the Australian company find assets worth buying, Tonkin said. The Uzbek-born billionaire controls Metalloinvest, the world's fourth-largest iron-ore producer, among other businesses.

    Seven Years

    Iron ore will rise through 2009 for a record seven consecutive years of price gains as global production of the key steelmaking raw material fails to meet Chinese demand, UBS AG said in a July 8 report. The price of coking coal, also used in steelmaking, may jump 22 percent next year, Goldman Sachs JBWere Pty. said in a May report.

    Mt. Gibson will ``closely look at'' acquisitions overseas as well as coking coal assets as its business cycle is complementary to iron ore, Tonkin said. It completed the A$207 million takeover of rival Aztec in January to gain control of the Koolan Island mine where first ore was shipped last month.

    ``They have got to be the right size, so around Aztec's size is good but we could certainly do a little bit larger at the moment and the reason for that is we are in exactly that sweet spot in the cycle,'' Tonkin said. No opportunities had matured, he said.

    Mt. Gibson also owns the Tallering Peak mine in Western Australia state, and is awaiting environmental approvals at a third mine, Extension Hill, to bring total production to about 10 million metric tons annually, Tonkin said.

    Macquarie, Citigroup

    Development of the Extension Hill mine will cost about A$80 million and take four months to construct once approval is received, Tonkin said. The mine will produce about 3 million tons annually, he said.

    Iron ore will climb 25 percent in 2008 and 10 percent in 2009, UBS analysts led by Daniel Brebner wrote in the report. That's higher than UBS's previous forecasts for a 10 percent gain in 2008 and no increase in 2009. Macquarie Bank Ltd. expects 2008 prices to rise 17.5 percent, Citigroup Inc. forecasts 20 percent and Credit Suisse Group 25 percent.

    Demand for iron ore is ``as strong as we have seen it,'' Tonkin said, adding that ``you just can't stop the juggernaut overnight.'' Additional supply in the next three to five years may reduce the price of the ore, he said.

    Increased production at steel mills is driving demand for iron ore, the costliest ingredient in steel that's used in items from toasters to cars, UBS said. That leaves BHP Billiton Ltd., Rio Tinto Group and Cia. Vale do Rio Doce, the mining companies responsible for three-quarters of global trade in iron ore, in a better bargaining position for higher prices.

    Subject10% holder filing
    Entry07/16/2007 11:46 PM
    Memberissambres839
    Baffinland surged another 11% today. Besides good old fashioned momentum, there appears to be a lot of excitement based upon the filing of Dundee (Goodman & Company) that they increased their position to over 10% of the company.

    They announced a similar position in CLM before the stock basically doubled.

    There also appears to be an intensified search for iron ore investments.

    Subjectannouncement
    Entry08/17/2007 09:24 AM
    Membervanbr707
    what do you make of this morning's announcement?


    Baffinland comments on short-term investments status
    Friday August 17, 8:55 am ET


    TSX SYMBOL: BIM
    TORONTO, Aug. 17 /CNW/ - Baffinland Iron Mines Corporation ("Baffinland" or the "Company") advises on the impact of recent disruptions in global credit markets on $43.8 million of its $45.9 million in cash and investments. The remaining $2.1 million is held in cash and guaranteed investments not affected by this situation.
    Baffinland's cash management criteria is to invest in products that are ranked by the Dominion Bond Rating Service ("DBRS") as R1-High. In July and August of 2007, Baffinland invested, on the basis of professional advice, a total of $43.8 million in the following A Notes with three separate trusts managed under the Coventree Capital Group Inc. ("Coventree"):


    Maturity Nominal
    Date Issuer Value Date Value

    August 13, Structured Investment Trust III July 3, 2007 $9,949,500
    2007
    August 13, Structured Investment Trust III July 10, 2007 9,957,500
    2007
    August 15, Skeena Capital Trust Series A August 3, 2007 6,989,220
    2007
    August 16, Lafayette Structured Credit Trust August 2, 2007 6,987,400
    2007
    August 30, Skeena Capital Trust Series A July 30, 2007 9,960,700
    2007
    -----------
    $43,844,320
    -----------
    -----------

    Coventree announced on August 13, 14 and 15, 2007 that it was experiencing market disruption and as a result was unable to meet its repayment obligations until its liquidity providers fund such repayments. While the DBRS announced yesterday that the investments are under review, the DBRS has rated the above trusts and their underlying assets as R1-High.
    Of the A Notes held by Baffinland, $33.9 million came due and payable on the maturity dates shown above but were not paid and remain outstanding. Another A Note in the amount of approximately $9.9 million comes due on August 30, 2007.

    Baffinland is currently investigating the implications of these events, which appears to be a result of the current lack of liquidity for asset backed securities of the type held by Coventree rather than the creditworthiness of its underlying assets.

    The Company currently believes it has sufficient cash available to maintain financial obligations provided this market disruption is resolved in a timely manner. In the interim, the Company is working diligently on a short-term solution.


    Subjectre:announcement
    Entry08/17/2007 11:15 AM
    Memberissambres839
    I'm trying to assess what this means, but it makes me shake my head. Why a company such as Baffinland would stick so much money in illiquid securities is beyond me.

    When I hear more from the CEO I will report more.

    SubjectMaterial?
    Entry08/17/2007 11:18 AM
    Memberjohn771
    It seems the short-term disruption and any potential loss are quite small compared to the value of the project.

    Subjectre:Material?
    Entry08/17/2007 11:21 AM
    Memberissambres839
    My general sense is that you are correct. Still its just annoying to come out with this news in this market environment.

    SubjectUpdate
    Entry08/17/2007 11:56 AM
    Memberissambres839
    I talked with the CFO and he told me that the investments they have were in the highest rated commercial paper. The problem is the commercial paper market seized up in Canada for the first time in recent history.

    Yesterday, ten major banks of Canada announced a $40 billion package to bailout the troubled funds and provide liquidity.

    Baffinland expects to get 100% of their money back, the only question is one of timing.

    In the most dire scenario, economists in the Canadian papers today say that at worst investors would only get 90% of their money back.

    Please see the below story:

    http://www.cbc.ca/money/story/2007/08/16/coventree.html

    Subjectdictated statements?
    Entry08/17/2007 12:11 PM
    Membercarbone959
    Here's another company suffering similar problems:
    Redcorp said it is "investigating the implications of these events, which appear to be a result of the current lack of liquidity for asset-backed securities of the type held by Coventree rather than the creditworthiness of its underlying assets."
    Here is Baffinland:
    Baffinland is currently investigating the implications of these events, which appears to be a result of the current lack of liquidity for asset backed securities of the type held by Coventree rather than the creditworthiness of its underlying assets.
    I'm no fan of conspiracy theories but is someone dictating these statements or is Baffinland just copying Redcorp out of laziness?
    I'm also concerned about why they didn't come out with a statement earlier given that their stock was going through above-average declines, and of course about the investment itself. Are these guys sharp enough to execute the equity raises or merger that this company needs?
    What do you think is the worse case scenario for BIM right now?
    thanks

    Subjectworst case?
    Entry08/17/2007 12:39 PM
    Memberissambres839
    The worst case is that BIM loses $5 million of their money and their development is delayed 3-6 months due to waiting for their cash.

    As to the similarity of the statements, I'm guessing that lawyers drew up the press releases and the two companies probably share the same legal counsel.

    The similar statement doesn't bother me.

    The bailout is what is important, and that seems to moving forward.

    SubjectUpdate and change of opinion
    Entry08/17/2007 02:48 PM
    Memberissambres839
    Ok, so I've had a few calls around and I think the worst case could be a 30% haircut to their money or $13 million.

    The problem is that unlike the company's characterization, from talking to the banks involved this is a very fluid situation. The money may be tied up for a significantly longer time than I first thought.

    Further, Baffinland is a company that needs to spend its money now and it needs to raise a significantly greater amount of money soon to keep up its bulk sample ore shipment.

    I believe the current environment of liquidity and capital availability will compel Baffinland to significantly delay its progress of its mine. This is actually a horrible time for this to happen to this company, as they are in the middle of negotiations for strategic partners.

    I think the risk on the stock in the current environment and their horrible cash management has caused me to change my mind and recommend for VIC investors to sell.

    The risk of further bad news and delays is too great and that the stock could fall significantly more.

    That said, they could have an investor step in and offer liquidity for their investments, but that doesn't change the fact that the environment for raising money has completely changed in the last couple of weeks.

    I apologize for this as I had no idea the company was this irresponsible with its money and I'm just glad its right around my recommendation price. I will revisit this once the capital environment and the liquidity situation changes.

    Subjectsteel giants
    Entry08/19/2007 11:40 PM
    Membercarbone959
    As your comments suggest, it appears their problem is only liquidity. What makes it so difficult to call up a steel giant and negotiate a buyout right away, assuming some type of financing is set up for the duration of due diligence.
    Related thought: Isn't it attractive for steel giants who already appreciate BIM's mines for what they are to provide a high-coupon rescue financing package, even if they're not intending to acquire?

    Subjectre:steel giants
    Entry08/20/2007 01:35 PM
    Memberissambres839
    I wouldn't describe a company that needs to raise close to C$2 billion has having "only" a liquidity problem.

    I'm not sure what the steel giants are thinking. But why would they rush in now and buy BIM out or provide a big cash payment, when the stock could be in half in the next 6 months?

    The timing of this Coventree announcement really is terrible for the timeline of a 2008 bulk sample for BIM. They not only need that cash now they needed to raise more money by year end.

    And while this may push the company into M&A discussions instead of strategic investment discussions, they will be in a position of weakness, not strength.

    Further if the economy weakens from here because of credit problems, the price of steel and iron ore will fall.

    I still like BIM's assets and their plan. However, I cannot ignore the new risks and its near term liquidity problem. Once they solve these issues I will revisit, but in my mind the risk/reward has dramatically changed.

    Subjectnew financing in place
    Entry08/23/2007 03:09 PM
    Membervanbr707
    sounds good...

    TORONTO, Aug. 23 /CNW/ - Baffinland Iron Mines Corporation ("Baffinland" or the "Company") announced today that it has arranged a $21 million senior secured credit facility from its corporate banker, the Bank of Nova Scotia, to provide liquidity to the Company which was constrained due to the recent illiquidity of asset-backed commercial paper.

    As previously reported, $43.8 million of the Company's $45.9 million in cash and investments was invested in certain non-bank asset-backed commercial paper R1 High A Notes (the "Investments") with three separate trusts with maturity dates ranging from August 13 to August 30, 2007. On August 13, 2007, Coventree Capital Group Inc. announced that due to market disruption it was unable to meet its repayment obligations until its liquidity providers funded such repayments.

    The non-revolving, six-month credit facility, primarily collateralized with the outstanding Investments, will provide the Company with the ability to drawdown up to $21 million immediately.

    "This credit facility provides us with sufficient cash to continue to operate and meet our financial obligations while the longer-term liquidity matter is being resolved in the marketplace", said Gordon A. McCreary, President and Chief Executive Officer. "As a result of this expedited support from the Bank of Nova Scotia, we are continuing to move forward with our plans."

    Subjectre:new financing
    Entry08/23/2007 05:03 PM
    Memberissambres839
    This is good news. I'm still wondering how this changes their financing they need to do by year end. Any thoughts?

    Subjectre: new financing
    Entry08/24/2007 02:02 AM
    Membervanbr707
    my two cents...you would think that the banks see so much future business with Baffinland (potential deals, partnerships, m&a, money raising) they would find a way to finance them one way or another

    big risk to me: the terms of the financing could be extreme

    SubjectRJ upgrades price target
    Entry08/27/2007 05:59 AM
    Membervanbr707
    Raymond James upgrades price target to $5 today and writes a 10 page report about company

    Major points below:

    We are increasing our target price on Baffinland shares to C$5.00 (previously
    C$4.00) and are reiterating our STRONG BUY rating to reflect our
    increasingly positive view of the production expansion potential of the 100%-
    owned Mary River iron ore project. In our opinion, Baffinland shares remain
    undervalued trading at a P/NAV of 0.27 times. In addition to assumed higher
    capital and operating costs, incorporating a slow ramp-up from 12.5 million
    tonnes per year of iron ore product (75% lump/25% fines) starting in 2012 to
    30 million tonnes per year by 2021, we have increased our “unadjusted” net
    asset value estimate to C$12.76 from C$11.62 per share. On an “adjusted
    NAV basis” the NAV increases to C$6.38 from C$5.81 previously. Going
    forward, we will refer only to the unadjusted NAV and remove the “50%
    adjustment factor” which previously accounted for unknown equity dilution
    and other risks. On the pricing front, we now forecast a long-term fines price
    of USc50.0/dmtu (previously USc45.0/dmtu) and a long-term lumps price of
    USc62.0/dmtu (previously USc60.0/dmtu). The combined changes in pricing,
    cost and expansion assumptions results in a 10% increase in our NAV
    estimate. For perspective, without the increase in our long-term price
    assumptions our NAV would have otherwise declined by 14%.
    We observe that Baffinland Iron Mines continues to make its way on the radar
    screen of the iron ore and steel industry as well as garnering growing levels of
    investor attention as the need for increasing amounts of high quality iron ore
    becomes more apparent. Although we had expected the announcement of a
    strategic investor by now, we believe that validation of the project by a wellfunded
    third-party would result in a material positive improvement in the
    share price and prove our C$5.00 target price conservative.
    A robust iron ore market, a constrained yet strong demand for lump products,
    and a steel industry that more and more demands high quality inputs, result in
    fundamentals that support the investment case for Baffinland shares. Though
    early stage, we believe the rewards outweigh the risks. A potentially high
    quality, lump iron ore product located in the Arctic and delivered to the
    European market will likely compete directly with CVRD’s (RIO-NYSE, not
    rated) product line. We have applied a 0.40 times multiple (previously 0.60
    times) to our net asset value of C$12.76 to calculate a C$5.00 target price.

    SubjectProfile has changed
    Entry08/27/2007 04:15 PM
    Memberissambres839
    I think the macro backdrop has changed significantly in terms of funding and financing. I also cannot seem to get over the stupidity of the cash management.

    I recognize clearly that if a third party announced a strategic investment the stock would easily double. I also recognize that the demand/supply for iron ore is still very strong.

    However, in this credit and stock market, I no longer think the risk/reward is the same. I think the market agrees with me when it cannot rally on its biggest analyst trying to bull the stock.

    If September rolls around and we start having debt and credit problems again, this stock will fall hard.

    The stock is higher then when I recommended it and if you own it because of me, I would sell.

    I still like and would buy Hemisphere, CAM Commerce and Photochannel.

    Subjectre:Bioteq
    Entry08/27/2007 09:44 PM
    Memberissambres839
    I still follow it. I think BQE shares a lot of characteristics of BIM. The minute the market becomes weak and this stock absolutely plummets. BQE traded down to $2.70 from $4.40 in a week. Now it has substantially recovered but that is really volatility I would like to avoid.

    In the case of BQE, I underestimated how European funds would just buy and sit on their shares, and I exited early.

    I think BQE is fairly valued at $3.50 to $4, but any delay in projects or downturn in copper prices will hurt the stock.

    Subject$30 million raised
    Entry09/27/2007 01:41 PM
    Memberissambres839
    BIM just raised $30 million in a common and flow through offering. This comes on the heels of several analysts scrambling to raise their forecasts of iron ore pricing. Add in a Federal Reserve Bank flooding the market with money and commodity prices are soaring.

    This bodes well for BIM's valuation and the crisis appears to have passed.

    As long as the economy doesn't crater because of housing this stock is an interesting buy for those looking for iron ore exposure.

    SubjectIron Ore set to remain strong-
    Entry10/18/2007 05:43 AM
    Membervanbr707
    from today's WSJ

    China's Continued Steel Demand
    Bolsters Iron-Ore Prices, Miners
    By PATRICK BARTA
    October 18, 2007

    BANGKOK, Thailand -- The longrunning boom in iron-ore prices appears to have at least one more year to run, and maybe more. That could be good news for some of the world's biggest mining stocks.

    Iron ore -- an ingredient in steel -- already registered eye-popping price gains during the past several years, largely thanks to robust demand from China. But many analysts expected prices to level off as mine expansions in Australia and elsewhere started to catch up with demand.

    That hasn't happened. Now, analysts are predicting a price increase of 30% or more for 2008, as steelmakers and mining companies prepare to hammer out new contracts with customers for next year. (Unlike most commodities, prices for much of the world's iron ore are set through annual contracts in private negotiations rather than on international exchanges.) Some have suggested prices could even double -- a surge that would have been unthinkable a year ago.

    What happened? For one, steel output in China -- the world's biggest producer -- has continued to boom despite some predictions it might taper off this year. Chinese steel production is on track to grow 18% to 19% this year and next, about the same expansion rate as 2006, according to Citigroup.

    Meanwhile, mining companies still aren't producing enough ore supplies. Although Rio Tinto, BHP Billiton and other mining companies have been expanding their iron-ore mines in Australia and elsewhere in recent years, capacity has been held in check by port bottlenecks and other infrastructure constraints.

    The result is a tighter-than-expected market. China's needs for iron-ore imports are expected to increase by about 61 million metric tons this year, UBS said in a recent report, even though exported supply world-wide is only projected to increase by 45 million metric tons.

    China has been ramping up domestic production of iron ore to help offset the need for more imports. But some of its ore is expensive by international standards, and some analysts say the country is approaching the limits of increasing domestic production.

    Meanwhile, another ore-producer and steelmaker, India, levied a tax on iron-ore exports earlier this year to ensure more supply for domestic steel mills.

    Indeed, some analysts say India offers the best indication yet that iron ore-prices are due for another big jump in the coming round of annual supply contracts. In India, unlike elsewhere, producers often negotiate their prices on a spot basis rather than once a year, providing a real-time barometer of overall market conditions. During the past twelve months, Indian iron-ore prices have shot up roughly 120% on the spot market, making Indian ore in some cases more than twice as expensive as product sold through annual contracts elsewhere.

    Citigroup analysts predict annual contract iron-ore prices will rise 30% in 2008, but say they could go even higher given the recent movement in Indian spot prices.

    All of this strengthens the hand of the big iron-ore producers, especially Anglo-Australian mining giants Rio Tinto and BHP Billiton, and Companhia Vale do Rio Doce, or CVRD, of Brazil. Together, these companies control about 75% of the world's iron-ore trade, with the balance made up by smaller producers in India, South Africa and elsewhere.

    The outlook may be particularly good for Rio and BHP, whose mines are closer to China and can deliver ore to Chinese steelmakers at a discount. That may give the two companies leverage to demand higher prices from buyers in 2008 compared to competitors in Brazil and elsewhere.

    Iron-ore producers are notoriously tight-lipped about their negotiating tactics and the prices they ask for. During a visit to New York earlier this week CVRD Chief Executive Officer Roger Agnelli said it is too soon to talk about what to expect from price negotiations, though he added that demand remains very strong. Rio Tinto Chief Executive Tom Albanese recently said "certainly it hasn't escaped our notice" that Chinese steelmakers are getting Australian iron ore at a discount to other providers, implying his company may press for a premium.

    To be sure, China's steelmakers will fight hard to prevent more iron-ore price increases, which they aren't always able to pass on to customers. They are already struggling to incorporate iron-ore price increases from past years, including rises of 9.5% in 2007, 19% in 2006 and 71.5% in 2005 -- and some may already be losing money. If the annual iron-ore price increases turn out to be smaller than expected -- say, only 20% -- it could actually hurt mining company shares in the short run, since some of the stocks already appear to have priced in an iron-ore increase.

    Any price increases will likely underpin strong earnings for the iron-ore producers over the longer term. In Asia, Rio Tinto has the greatest exposure to the commodity, with Australian capacity of as much as 195 million metric tons this year compared to 129 million metric tons for BHP Billiton, according to HSBC.



    .


    SubjectThis is a negative
    Entry10/19/2007 01:33 PM
    Memberissambres839
    http://biz.yahoo.com/cnw/071019/baffinland_mitsubishi.html?.v=1

    Mitsubishi's participation in every financing was a big positive. Their failure to participate in the last round of financing is a negative.

    SubjectRE: am I missing something?
    Entry02/21/2008 12:29 AM
    Memberissambres839
    I think the potential is there, but I don't understand why the company can't find a partner and had to hire an investment bank to find one. What are potential partners balking at, that we can't see?

    SubjectRE: RE: am I missing something
    Entry02/21/2008 09:32 AM
    Membergrant387
    A snippet from the last press release,

    "Mr. McCreary said confidentiality agreements have already been signed with 16 potential partners but that none of the major iron ore producers including Vale, Rio Tinto and BHP Billiton are on the list, because the agreements prohibit them from bidding for the company."


    That seems a bit odd in that their process is excluding a true strategic partner. So they are just looking for a "financing" partner? I don't understand the thought process given how big the opportunity is. Management must think they can take this all the way to the goal line - with just money and no other expertise. Tough to guage whether that is true.

    Ironically - maybe a true strategic partner brings too much value to the table? BIM mgmt doesn't want to concede that so they are playing hardball. Is this somewhat of a backhanded way for them to keep their jobs/stay in control?

    Wish I could get comfortable with this piece because the risk/reward seems to have changed quite a bit more than the stock price has moved.

    Thanks for your thoughts.

    SubjectDeal with Arcelor
    Entry11/10/2010 01:34 PM
    Memberbruno677
    Are you still following this name?  Would love to have thoughts on deal with Arcelor.  Thank you.

    SubjectRE: Deal with Arcelor
    Entry11/10/2010 09:08 PM
    Memberissambres839
    I'm not following the name anymore, sorry. 
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