Essar Steel Minnesota Files For Bankruptcy After Dayton Pulls Mineral Leases

9 July 2016

Essar Steel Minnesota, which once promised the state’s first new taconite plant in decades and the state’s first direct-reduced iron plant, filed for Chapter 11 bankruptcy protection Friday after falling short of both of those promises.

The company filed in federal court in Delaware on the same day that Minnesota Gov. Mark Dayton refused to extend a deadline to terminate Essar’s state mineral leases that gave the company access to the iron ore at the proposed mine site outside Nashwauk.

Dayton said he took back the leases because it’s clear the company doesn't have the financial ability to finish the job or pay its contractors.

Dayton in May had set a July 1 deadline for Essar, which has been out of cash since 2015, to come up with a financing plan to pay its creditors and contractors and complete the $1.9 billion project that sits half built and idle.

The company could not meet the deadline and asked for another extension.

Dayton said no.

“This morning I instructed the Minnesota Department of Natural Resources to terminate Essar Steel Minnesota’s lease agreements with the state,” Dayton said in a statement. “The company has been told for the past nine months that the state would not extend those leases beyond July 1, 2016, unless it paid the full amounts it owed to Minnesota contractors and showed that it had the ability to carry its current construction project through to completion. The company has not done so, and has provided no reliable assurances that it will be able to do so in the foreseeable future.”

Essar has been looking for either more bank credit or new partners in the site, but its creditors — the company owes more than $1 billion on the project — also have been shopping the project around with Essar out of the picture.

It’s not clear how Essar’s assets at Nashwauk will be handled by the bankruptcy court. But on Friday, Dayton threw his support to Cliffs Natural Resources to take on the project, saying he recently met with Cliffs CEO Lourenco Goncalves. Goncalves has made several public comments about his interest in the Nashwauk site if Cliffs can get the state mineral leases.

“The state of Minnesota will continue those negotiations with Cliffs and obtain a firm commitment to execute those plans, before the leases are re-assigned. Mr. Goncalves and I will travel to the Range on Tuesday to discuss his plans in greater detail,” Dayton said. "I remain dedicated to assuring that these state leases are utilized by a responsible entity to mine and process their resources, and to create more jobs and further economic growth on the Iron Range.”

The Tuesday meeting, details of which have not been announced, will be open to the public, Dayton said, and to contractors owed millions of dollars by Essar. He told reported Friday that some of the businesses Essar owes "are in dire financial straits,” and that Essar showed “no willingness to make whole the vendors and produce the product."

Dayton said that if Cliffs buys the Essar assets, it “would be in the long-term best interest of the economy up there.”

Goncalves said he’s eager to get involved in the Essar project, especially working toward creating a direct-reduced iron plant at the site. That product is used in electric steel mills which can’t use traditional taconite iron ore from Minnesota.

“I am pleased that Minnesota Governor Mark Dayton has moved to terminate the state's existing agreement for the iron ore mineral leases at the Nashwauk mine site. This is the first step in a long-term development process that we believe holds tremendous potential for job creation on the Iron Range,” he said. “Cliffs looks forward to the opportunity to work in partnership with Governor Dayton's administration to develop the Nashwauk site as part of our future growth plans toward the production of value-added iron products in Minnesota.”

The state owns the mineral rights under about 50 percent of the land where Essar wants to dig for taconite iron ore in what's considered one of the richest deposits on the Iron Range, said Tom Landwehr, Department of Natural Resources commissioner.

The DNR awarded the leases to Essar, as it does to many mining companies, in exchange for a lease fee ($194,000 annually in this case) and a royalty on any ore mined from those parcels in the future.

Several private trusts also own mineral leases where the Essar mine would be located, and Essar had purchased rights for those, but it is unlikely Essar could proceed without the state leases.

Landwehr said Minnesota gave Essar an extra seven days after the July 1 deadline because company said it was close to finding new investors.

“They attempted to bring some investors in at the last minute. Obviously, that didn’t happen,’’ Landwehr said.

“They ran out of chances”

Nashwauk Mayor Ben DeNucci said Essar kept asking for more chances and more time but eventually forced the state to take action.

“It was their inability to produce on their promises that did them in. Everything was 13th-hour negotiations with them. They always needed one more chance. But they ran out of chances,” DeNucci said.

“Maybe this is better, to get someone else in there and a fresh start,” DeNucci added. “But there are a lot of contractors out there who really got burned on this… who may never get paid now. That’s really going to hurt a lot of people.”

The city of Nashwauk is owed about $100,000 from Essar for unpaid bills in 2016, DeNucci said.

State Rep. Tom Anzelc, DFL-Balsam Township, said the governor “went as far as he could go with Essar.

“I think he lost trust in them,’’ Anzelc said, noting that the most recent plan involved an Essar board member pumping $50 million to partially pay past-due bills for a nine-month extension of the lease. “It was never really nailed down... And it was never enough money.”

An Essar spokesman did not return a request for comment Friday.

Both Essar Steel Minnesota and a holding company ESM Holding Inc. filed for bankruptcy Friday, listing more than $1 billion in debt. According to the legal news website, the filing came just weeks after Essar’s insurer sued the company for allegedly violating an indemnity agreement related to bonds issued by the company.

The governor’s decision to pull the leases was just the last hit in what has been a very bad year leading up to Essar’s bankruptcy:

•    In January the company said it had laid off almost all of its employees and sent home all construction workers at its half-built plant in Nashwauk, out of cash and unable to finish the $1.9 billion job.

•    In February, a lawsuit filed in State District Court in Itasca County claimed Essar owed New York-based Axis Capital Funding more than $27.6 million for the giant haul trucks and shovels delivered to the mine last year but apparently not paid for. It’s one of several suits and claims against the company for unpaid bills, including $66 million Essar owes the state of Minnesota for unfulfilled economic development promises. Landwehr said Friday that Essar owes $49 million to Minnesota-based vendors alone.

•    In March, Reuters reported that Essar had hired investment bank Guggenheim Partners LLC and law firm White & Case LLP as debt restructuring advisers.

•    Then in May, in what may be the most devastating blow yet, Essar lost its only major customer for the taconite that was supposed to be produced at the Nashwauk plant when ArcelorMittal signed a 10-year agreement with Cliffs Natural Resources for taconite. That contact had been Essar’s, but with no Essar plant producing ore, ArcelorMittal needed a ready supplier, and Cliffs was ready to oblige.

The Nashwauk facility was to be one of the state’s largest private construction jobs and the first all-new major taconite operation on the Iron Range in 40 years. It was supposed to be employing 350 people by 2014 producing some 7 million tons of taconite iron ore pellets each year. Plans originally called for an iron and steel plant on the site, creating even more jobs, although Essar scrapped those years ago.

Ground was broken in 2008 on the taconite project, but work occurred in fits and starts. Essar said it obtained $850 million in financing in 2014 and indeed restarted work in earnest last year. The company as recently as October appeared poised to finish the project and begin making taconite pellets late this year. But that promise was dashed last winter when 700 construction workers and even most of Essar's own newly hired employees were pulled off the project and sent home before the first pellet was produced.

And Essar is in financial trouble in other nations, too.

•    In Canada, the company has had to declare bankruptcy and reorganize its Sault Ste. Marie, Ont., steel mill. The wesbite reports that Essar Steel Algoma has saddled 125 local creditors with more than $38 million in debt. The largest local creditor is the city of Sault Ste. Marie, which is owed $14 million by the troubled steelmaker.

•    Last month Reuters reported that Essar Global — the Mumbai, India-based parent company of the Essar empire — was looking to sell its giant 405,000 barrel-per-day oil refinery in Gujarat, India, to help pay off ballooning debt. Essar, which is controlled by the billionaire Ruia brothers and has assets in the oil and gas, steel, ports and power sectors, has faced pressure from creditors to reduce borrowing that some analysts estimate at more than $14 billion.

•    Essar also has been under pressure from banks in India to find a new owner for its India-based Essar Steel India LLC. If the company doesn’t find a new equity buyer, published reports noted, the banks will find a buyer themselves and force the sale.


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