By Drew Hasselback -- Baffinland is tempting prey for a bottom-feeding predator. Twenty-cent share price puts market value at $50-million.
About a year ago, the biggest challenge in front of Gord McCreary was picking the right partner for his $4.1-billion dream, the massive Mary River iron-ore project on Baffin Island. Iron-ore prices seemed to be heading ever upwards, and the “Great Recession” that would tank commodities and stock markets at the end of 2008 was nowhere in sight. Both McCreary and his junior mining company, Baffinland Iron Mines Corp., were sitting pretty, while Nunavut was on the cusp of welcoming its first multi-billion-dollar industrial development.
As 2009 gets under way, the biggest challenge in front of Baffinland is outright survival. After a 90-per-cent plunge in its stock price, can Baffinland survive a hostile takeover from a bottom-feeding predator? Can the company hang on to enough cash to keep the lights on and the doors open until the market improves? And does Mary River even have a chance of becoming Nunavut’s first iron ore mine? We’ll probably learn the answers to those questions over the next 12 months or so.
This is the year that will test McCreary’s mettle and decide Baffinland’s fate. Experienced junior miners should be used to recessions. The commodities business is cyclical. The business people who survive are those who know how to manage their money and protect their projects during the worst of times.
Baffinland is in some ways perfectly positioned to do absolutely nothing and wait out the financial crisis. The company has taken some steps in that direction. It recently laid off a whack of staff and froze assignments of contract work. This is obviously painful for those who’ve lost their jobs, but from Baffinland’s perspective, those tough decisions make sense. Baffinland has already completed a feasibility study for Mary River. It confirms the existence of the deposit and sets out the economic case for building a mine. Such reports do not just fall out of the sky. They require months of drilling, metallurgical testing and engineering assessments, and cost millions to produce. For most junior miners, getting a feasibility study in hand means crossing the finish line. All the junior has to do is sit back and wait for a major producer to make an offer on the property.
But McCreary is taking a bolder approach to the situation. Despite the layoffs and slowdown on contracting work, Baffinland has rolled out a plan to spend $30-million on the project this year, with roughly half of that devoted to exploration work that will upgrade some of project’s resource statements. A $30-million development budget would be a significant sum for even a producing major. For a junior miner that has already generated a feasibility study, the move is arguably bizarre. So why is McCreary spending the money? “It’s important to keep up the momentum,” he explained to me. “What we are dealing with here is so different from your typical schlock deposit.”
McCreary says that if the world hadn’t tanked, Baffinland would probably have inked a joint-venture deal before the end of 2008, so he’s confident the potential partners are still out there. He’s just got to make sure he does the right sales and negotiating job to get a partner to sign the dotted line. Beefing up exploration results is a way to bolster the case that Mary River might have a mine life, and therefore a potential value, that extends beyond the 20-year span contemplated by the feasibility study.
Then there’s the issue that has the potential to keep McCreary up at night. Baffinland’s shares kicked off 2009 at around 20 cents each. That’s particularly alarming for a company whose shares were fetching about $4.50 at the beginning of 2008. A 20-cent share price puts Baffinland’s entire market value somewhere around $50-million. By the end of this year, Baffinland will have spent more than $400-million on Mary River. McCreary’s fear is that someone could swoop in and take out his asset for a song.
Baffinland is not without protection. McCreary figures about 29 per cent of the company’s shares are in the hands of insiders. That could be enough of a control block to thwart an unsolicited bid. But you never know. A huge problem for Baffinland is Mary River’s $4.1-billion price tag. Flip through the business pages of any newspaper these days and you’ll quickly realize that there isn’t too much of anything that will get built for that kind of money. Yet that price tag dates from a feasibility study that was completed when steel, oil and labour costs were near all-time highs. Miners around the world have been writing down the value of their assets due to the simple reality that things ain’t worth what they used to be.
A fresh look at Mary River would likely slash the capital cost. The question is, what would that new price tag be, and would it be low enough to interest anyone to foot the bill? Those questions will be answered by 2010 – if McCreary plays his cards right and Baffinland survives long enough to get them answered.
Drew Hasselback is an associate editor with the Financial Post in Toronto. He was mining reporter at the Financial Post from 2001 to 2007.
