Essar Steel Minnesota may be out of cash and foundering in Chapter 11 bankruptcy protection, but the company is trying to hang on to its investment in the half-built Nashwauk, Minn., taconite project.
Essar on Monday said it has signed a “nonbinding letter of intent” with investment firm SPL Advisors LLC to pump $250 million of new equity into the Nashwauk project, which has been idle since 2015. It also is challenging the state’s revocation Friday of mineral licenses necessary for the plant to operate.
“The company and SPL are currently working to finalize terms in the next few days. If they can do so, the company would likely seek court approval for the financing by the end of this week,” Essar Steel Minnesota said in a statement Monday.
The company said the Chapter 11 filing was necessary to protect the more than $1 billion already invested in the project. The filing also precludes the state’s ability to revoke the licenses, the company said.
“While we would have preferred to complete the company’s restructuring without utilizing Chapter 11, we believe that SPL is the right party to carry this project through to completion and remain committed to doing everything possible to complete the process…,” said Prashant Ruia of Essar Global Funds, the division of the Mumbai, India-based company that funded the Minnesota project.
The announcement appears to set up a battle between Essar’s parent company and the state of Minnesota, which after pulling the mineral leases out from under Essar, is vowing to give them to Cliffs Natural Resources. The leases are critical for access to the rich taconite iron ore at the proposed Nashwauk mine site.
State officials Friday said they felt they had the legal right and in fact obligation to take the leases back because Essar had failed to advance the project as promised. But Essar disagrees, saying they filed for bankruptcy before the leases were terminated. That appears to put the issue in the hands of federal bankruptcy court.
“The state’s putative termination notice was sent in violation of the standstill agreement it had reached with the company on June 30 and is therefore invalid,” Mitch Brunfelt, Essar spokesman and attorney, said in an interview. He said the state’s retraction of the leases would have taken effect at 12:01 p.m. Friday, 31 minutes after Essar filed for bankruptcy.
Minnesota Gov. Mark Dayton had set July 1 as a deadline, and then extended that to July 8, for Essar to find guaranteed funding not just to repay past-due bills to Minnesota vendors but also finish the project. Essar also owes the state $66 million for unfulfilled economic development promises.
Dayton and Lt. Gov. Tina Smith are set to meet with Cliffs CEO Lourenco Goncalves Tuesday in Nashwauk to discuss how Cliffs could be awarded the mineral leases and somehow take over the Essar project. But that prospect now seems muddled by Essar’s effort to stay in the project through bankruptcy.
Dayton, Smith and Goncalves are scheduled to meet with the Iron Range legislative delegation and U.S. Rep. Rick Nolan, followed by a public meeting at 11:15 a.m. at the Nashwauk Township Community Center.
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, out of cash and unable to finish the $1.9 billion job, 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.
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 the $66 million Essar owes the state. Minnesota Department of Natural Resources Commissioner Tom Landwehr said Friday that Essar owes $49 million to Minnesota-based vendors alone.
In March, Essar hired investment bank Guggenheim Partners LLC and law firm White & Case LLP as debt restructuring advisers. Then in May, in what may have been 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 close to 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. By 2014 it was supposed to be employing 350 people producing some 7 million tons of low-cost 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. As recently as October, the company 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 well before the first pellet was produced.