CORPORATES

CREDIT OPINION
30 June 2020
Baffinland Iron Mines Corporation
Update to credit analysis
Update Summary
Baffinland Iron Mines Corporation (Baffinland, Caa1, stable) is constrained by 1) a
concentration of cash flows from one metal (iron ore), which has volatile pricing, 2) a small
single mine in a remote location above the Arctic circle (northern Baffin Island, ~6 million
wet metric tonnes (wmt)) 3) shipping constraints (can only ship between in late May/early
RATINGS June to late September/early October due to ice), 4) execution risk on the planned mine
Baffinland Iron Mines Corporation expansion (including delays in receiving approval for its rail expansion from the Nunavut
Domicile Toronto, Ontario, Planning Commission), high leverage which was 7x for the twelve trailing months ending
Canada
Long Term Rating Caa1
March 31, 2020 and 6) negative free cash flows expected over the rating horizon. The
Type LT Corporate Family company benefits from 1) the high grade ore body of the mine, 2) low complexity of the
Ratings mine operations and 3) the mine's location in Canada's Nunavut Territory, a politically stable
Outlook Stable
mining region.
Please see the ratings section at the end of this report
for more information. The ratings and outlook shown Exhibit 1
reflect information as of the publication date. The absence of approval for Baffinland's planned expansion has kept production levels flat
8,000
Finished Ore Production (thousand wmt)

5,700-6,300

Contacts
6,000 5700
5,443

4,621

Jamie Koutsoukis +1.416.214.3845 4,000

VP-Senior Analyst
3,256

jamie.koutsoukis@moodys.com 2,000
1,331

Donald S. Carter, CFA +1.416.214.3851

MD-Corporate Finance 0
2015 2016 2017 2018 2019 2020 Guidance

donald.carter@moodys.com Source: Company MD&A

CLIENT SERVICES Credit strengths

Americas 1-212-553-1653
» High grade ore body with low strip ratio
Asia Pacific 852-3551-3077
Japan 81-3-5408-4100
» Planned expansion will result in competitive cost profile

EMEA 44-20-7772-5454 » Low complexity mine operations

Credit challenges
» High commodity, operating and geographic concentration

» Planned expansion has execution risk.

» The need to secured full funding for its Phase 3 expansion

 MOODY'S INVESTORS SERVICE CORPORATES

Rating outlook
The stable outlook reflects our expectation that Baffinland will not commit to expansion capital expenditures before funding is
committed and it will adjust or slow capital spending should market conditions deteriorate.

Factors that could lead to an upgrade

» Upward rating pressure is limited at this time due to the significant capital expenditures required over the next several years, lack of
regulatory approval for the expansion and the single site concentration risk. That said, ratings could be upgraded once the company
successfully expands its productive capacity and is able to demonstrate an improved operating cost profile, reduced leverage and
continued adequate liquidity.

Factors that could lead to a downgrade

» The ratings could be downgraded if Baffinland experiences any significant operational difficulties, adverse iron ore market
conditions, or its existing operations were unable to fund its operating and interest expenses. The rating could also be downgraded
is Baffinland's liquidity position weakens.

Profile
Baffinland owns the Mary River iron ore mine at the northern end of Baffin Island in the Nunavut Territory, Canada. It is 72% owned by
Nunavut Iron Ore (which in turn owned by The Energy & Minerals Group) and 28% owned by ArcelorMittal. Current operations consist
of an open-pit mine, crushing and screening facilities and road and port infrastructure to transport and load iron ore for shipment to
customers. Finished ore production in 2019 was 5.7 million wmt and revenues were $507 million.
Exhibit 2 Exhibit 3
FY2019 Production by Product FY2019 Revenues by destination of iron ore

Asia
3%

Super Sinter
Fines
32%

Direct Ship Pellet

68%

Europe
97%

Source: Company Reports Source: Company Reports

Detailed credit considerations

COVID-19 outbreak at this time has had minimal impact to operations
Baffinland has been able to maintain continuous operations through the current COVID-19 outbreak. The company Baffinland has put
in place a number of protocols and procedures to manage the effects of the coronavirus outbreak, including changing shift schedules
from 2-week-on/2-week-off to 4-week-on/4-week-off and demobilized approximately 200 employees and contractors, comprised of
all of its Inuit workforce and high risk employees. During Q1, 2020, these measures have resulted in directly identifiable costs of $1.6
million (but do not include the effects of lower production attributable to COVID-19).

This publication does not announce a credit rating action. For any credit ratings referenced in this publication, please see the ratings tab on the issuer/entity page on
www.moodys.com for the most updated credit rating action information and rating history.

2 30 June 2020 Baffinland Iron Mines Corporation: Update to credit analysis

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Single mine concentration, and small scale

Baffinland owns a single asset - The Mary River mine, located on northern Baffin Island, in the Nunavut Territory, north of the
Arctic Circle, in Canada. It produces iron ore (with an average 67% iron content) which is mined, crushed and screened into directly
marketable products and then shipped through a dedicated port facility. Baffinland ships its product only during open water season
from late May/early June to late September/early October. Baffinland is amongst the smallest of our rated mining companies with
production guidance in 2020 of approximately 5.7-6.3 million wmt (5.7 million wmt in 2019), and even still, when planned production
reaches 18 Mtpa once its Phase 3 expansion is completed.

With the company relying on the single mine for all cash flows, disruptions in production from geological difficulties or external factors
such as weather could have a significant negative impact on the company's financial performance. Concentration risks are somewhat
mitigated by the mine's location in a politically stable mining region, and its financial importance to the Nunavut Territory.

Exhibit 4
Baffinland's single site location

Source: Company Presentation

Expansion plans has execution and regulatory risk and creates negative free cash flow
Baffinland plans to expand the Mary River mine to a capacity of 18 Mtpa. The expansion would see a 110 km rail line built from the
Mary River mine to the Milne Inlet Port, and another dock built at the port to increase ship traffic carrying ore out of the inlet. As
observed with many industry participants, there are execution risks associated with mine expansions being on-time, on-budget and
achieving design specifications. Though execution risk at the Mary River mine is mitigated by it being a phased expansion of existing
operations and the low technological complexity, our rating horizon places an emphasis over the next 2 years, where increased
production is not yet realized.

The company’s Phase 3 expansion (production of 18 Mtpa) is also subject to regulatory risk. Under its current approvals, Baffinland
is allowed to move only 6 Mtpa of iron ore a year from the mine site to its Milne Inlet port. The formal hearings with the Nunavut
Impact Review Board (NIRB, the regulatory body that has to approve the expansion) we adjourned in November 2019 due to local
community opposition and requests for further information and a formal hearing scheduled during March, 2020 was delayed, pending
resolution of COVID-19 constraints on public gatherings. At this time a revised date for the hearing to conclude the environmental
impact assessment process and release its recommendation to the Federal Government is not scheduled. However, Baffinland has
worked with the Qikiqtani Inuit Association (“QIA”) and representatives of the relevant communities to resolve remaining community

3 30 June 2020 Baffinland Iron Mines Corporation: Update to credit analysis

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concerns related to its rail expansion proposal. In May 2020, Baffinland and the QIA executed a memorandum of understanding
detailing the process to reach agreement on commitments required of Baffinland to conclude the hearing process and the parties
signed a continuation letter acknowledging that the parties have reached substantial agreement setting out a series of commitments
agreed to by Baffinland, primarily in respect of certain environmental, cultural and economic matters.

Phase 3's capital budget is between $1.2 - $1.3 billion. With this large spend program, Baffinland will have significant negative free cash
flow over the next few years. The company also will face a funding gap over the medium term for this spend, which is expected to be
financed with additional debt and equity from its sponsors.

Offtake agreement removes some seasonality in cash flows but price risk remains
Baffinland sells its production through an offtake agreement, at prevailing market prices, so it is taking both production risk and market
price risk. It has an offtake agreement with CitiGroup Global Markets Ltd for the purchase of its production (which Citi then sells to iron
ore customers) which is annual and renewable. This contract is positive in that it provides for a definitive sale of produced volumes and
removes some cyclicality in Baffinland's cash flows ( 78% of sales price is received when the ore is delivered to the port, not shipped),
but the short tenure and absence of price guarantees do not mitigate pricing risk which we view as high given the historic volatility in
iron ore prices.

Future lower cost production

The characteristics of the Mary River mine provide for competitive low cost operations at the completion of its planned expansion.
It is a simple open pit operation with a very low stripping ratio today (<0.5x) and very high grade (67% Fe) and quality, which is
crushed into premium Direct Ship Ore (75% of production) and super sinter fines (25%). Costs also benefit from operations that are
in Canadian dollars which has historically weakened in low commodity price environments. In 2019, Baffinland recorded C1 costs of
$41.99/wmt. Once the company's phased expansion is complete complete, Baffinland's cash cost/tonne is expected to fall below $20,
which would become competitive with the global iron ore miners. This could vary however depending on changes in prices for inputs
such as fuel and movements in the Canadian dollar.

Exhibit 5
Baffinland's costs are expected to remain flat in 2020 as it has been unable to expand production
2018 2019 2020 Outlook
Direct operating cost or C1 cost ($/wmt) 40 42 38-40
Overheads and others ($/wmt) 7 7 7-9
Freight and related charges ($/wmt) 16 19 15-17
Source: Company Reports

ESG considerations
Baffinland is exposed to environmental risks typical for a company in the mining industry. This includes, but is not limited to site
remediation and mine closure, waste rock management, and air emissions. The company is subject to environmental laws and
regulations in the areas in which it operates.

Under the terms of Baffinland's permits and its agreements with the QIA, the company is required to monitor and report the effects
on the environment from its operations, provide training assistance, increase local employment and contribute to several sustainable
development initiatives. As well under the Inuit Impacts and Benefits Agreement Baffinland has with the QIA, royalty payments are
made to the QIA. Royalty payments in 2019 were $4.9 million.

Direct Baffinland Inuit employment rose with a 208 headcount at the end of Q1, 2020 compared to 169 at the end of Q1, 2019.
reflecting ongoing training initiatives and advancements of Inuit, seasonal exploration hiring and new Inuit internship programs. Overall
Inuit employment, including direct contractors as of the end of Q1, 2020 was 355 compared with 314 at the end of Q1, 2019.

Baffinland is a privately owned company and has a history of high leverage.

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Liquidity analysis
Baffinland has adequate liquidity. The company had $34 million of cash as of Q1/2020 and $31 million available on its revolving credit
facility ($182 million committed, matures May 2022). Moody’s expects that the company will be cash flow negative by about $50
million in 2020 as spending on the phased expansion is limited to committed amounts until regulatory approval is received.

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Rating methodology and scorecard factors

Exhibit 6
Scorecard Factors
Baffinland Iron Mines Corporation

Current Moody's 12-18 Month Forward View

Mining Industry Scorecard [1][2] LTM 3/31/2020 As of 6/16/2020 [3]
Factor 1 : Scale (20%) Score Score
a) Revenues (USD Billion) Ca Ca
Factor 2 : Business Profile (25%)
a) Business Profile B B
Factor 3 : Profitability and Efficiency (10%)
a) EBIT Margin (EBIT / Revenue) Caa Caa
Factor 4 : Leverage and Coverage (30%)
a) EBIT / Interest Expense C C
b) Debt / EBITDA Caa Caa
c) Debt / Total Capital A A
d) (CFO - Dividends) / Debt Ca Caa
Factor 5 : Financial Policy (15%)
a) Financial Policy B B
Rating:
a) Scorecard-Indicated Outcome Caa1 Caa1
b) Actual Rating Assigned Caa1

[1] All ratios are based on 'Adjusted' financial data and incorporate Moody's Global Standard Adjustments for Non-Financial Corporations.
[2] As of 3/31/2020(L).
[3] This represents Moody's forward view; not the view of the issuer; and unless noted in the text, does not incorporate significant acquisitions and divestitures.
Source: Moody's Financial Metrics™

Ratings
Exhibit 7
Category Moody's Rating
BAFFINLAND IRON MINES CORPORATION
Outlook Stable
Corporate Family Rating Caa1
Sr Sec Bank Credit Facility B2/LGD2
Senior Secured Caa1/LGD4
Source: Moody's Investors Service

6 30 June 2020 Baffinland Iron Mines Corporation: Update to credit analysis

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CLIENT SERVICES

Americas 1-212-553-1653
Asia Pacific 852-3551-3077
Japan 81-3-5408-4100
EMEA 44-20-7772-5454

8 30 June 2020 Baffinland Iron Mines Corporation: Update to credit analysis