Essar Bankruptcy: One Year Later – Mesabi Daily News

One year has passed since a once-promising $1.9 billion taconite plant in Nashwauk folded into one of the most expensive and potentially-devastating bankruptcies on the Iron Range.

On July 8, 2016, the state of Minnesota notified Essar Steel Minnesota that it planned to terminate the companys state-owned mineral leases at 12:01 p.m. that day. But Essar effectively took a poison pill, filing for bankruptcy about a half hour before the termination would go into effect, further delaying the project and shrouding Range businesses and contractors in financial uncertainty.

In the time that has passed, the Nashwauk project underwent a mild rebranding effort under the name Mesabi Metallics, Essars ownership successor, and developed a reorganization plan to emerge from bankruptcy as Chippewa Capital Partners, led by billionaire Tom Clarke.

But optimism toward the project remains circumspect from Minnesota leaders. Clarke has no history in iron or taconite mining, and the states preferred choice to manage the project Cliffs Natural Resources announced plans to open a similar plant in Toledo, Ohio three days after Chippewa earned court approval to lead the Nashwauk effort.

Still, the project has a path forward if Chippewa can secure needed financing for the half-built plant, which stands to be the first new taconite operation in Minnesota in 40 years.

We have no reason to believe they wont be successful, said Minnesota Gov. Mark Dayton in a phone interview Friday. Well monitor closely, but we have every reason to be optimistic. They said in court that they were going to do this, and that goes beyond any kind of assurance that Essar provided before.

Officials from Essar and Mesabi Metallics did not return requests for comments and interviews for this story. Clarke, who a spokesperson said is traveling outside the country, could be not be reached for comment.

When Essar Steel Minnesota broke ground on the former Butler Taconite site in 2008, it was the darling of the Iron Range. The state, Itasca County and the Iron Range Resources and Rehabilitation Board invested dutifully into the endeavor, which was to host a steelmaking facility and taconite plant.

On the often-cyclical Range, Essar was slated to generate more than 700 construction jobs and 350 permanent jobs, when the national economy was itself headed into a downward spiral.

Stops and stalls eventually peppered the project, which in 2010 scrapped the steelmaking facility. At the time, the company was paying the state about $194,000 per year on the mineral leases, a payment plan that began in 2004.

But seven years in and the project had virtually gone nowhere.

By the end of 2015, Dayton was demanding the company pay back $65.9 million in infrastructure grants to Itasca County. Essar was missing payments to contractors and vendors on the Range, and company officials were seeking more financing from the parent company, Essar Global, to keep it afloat.

After a missed $10 million payment in 2016, despite assurances from the India-based company, Dayton moved to pull the plug.

We kept getting assurances from Essar that they were turning things around, Dayton said. Those discussions went on for virtually a year leading up to July of last year they led us on the way they led on a lot of people.

He added that the state stuck with Essar so many times because it was the only real option at the time, noting the company had the leases and ownership of the property in Nashwauk.

Dayton stopped short of saying the state should have terminated the leases sooner, calling the July notice the responsible and honorable thing to do, and slamming Essars decision to file for bankruptcy rather than relinquish the mineral leases.

Hindsight is perfect, Dayton said. Thats typical of the way they operated we just had a string of broken promises.

Gov. Mark Dayton talks about the state's role in trying to demand payment for venders from the now-bankrupt Essar Steel Minnesota project in Nashwauk during a public meeting Tuesday at Cloverdale Township Hall. (Mark Sauer/Mesabi Daily News)

Days after Essars filing, Dayton was joined at a table in Nashwauk by Congressman Rick Nolan, members of the Iron Range Delegation and most importantly Lourenco Goncalves, chairman, president and CEO of Cliffs Natural Resources. The intent of the public meeting was the state announcing its intent to hand Essars mineral leases over to Cliffs, the now-preferred company to take over operations of the project.

Cliffs had a tenuous history with Essar to that point.

Goncalves and Essar CEO Madhu Vuppuluri traded numerous barbs over time about taconite projects and contracts. Cliffs was skeptical of a potential competitor coming online, but by the time Essar was forced into bankruptcy, it had lost its lengthy pellet agreement with ArcelorMittal to Cliffs.

With the state behind him, Goncalves focused in on the project for Minnesotas first direct-reduced/hot-briquetted iron facility. It was meant to be the next step for the taconite industry on the Range and a pathway to the auto industry in Detroit, the industry current pellets do not reach.

They have two choices: Help me build an iron plant, or sell it for scrap, Goncalves said at the August press conference. Either way, Im going to get it.

The rivalry between Essar and Cliffs managed to spill into the bankruptcy proceedings.

Five days after the press conference, lawyers for Essar asked the court to allow an investigation into Cliffs. Essar claimed Goncalves interfered with its ArcelorMittal contract and colluded with the state for the mineral leases. U.S. Bankruptcy Judge Brendan Shannon eventually allowed an inquiry into communications between the state and Cliffs.

For much of the next year, Goncalves remained vocal about his desire to open a new Cliffs operation on the Iron Range, where his former competitor failed.

But as support for Cliffs wavered, the rhetoric ramped up.

Range lawmakers excluding Sen. Tom Bakk, DFL-Cook wrote a letter to DNR Commissioner Tom Landwehr backing the debtor in possession, Mesabi Metallics. They were happy with the plan Mesabi was putting forward, but the act signaled a change in tide from July, when the delegation helped promote the Cleveland-based company.

Goncalves, calling out legislators, warned Minnesota that a Cliffs-run HBI plant was the states to lose.

Dayton said he called Goncalves immediately after the Chippewa bid was accepted and said the CEO expressed disappointment in the outcome, but noted the relationship was on good terms.

He expressed a desire to undertake the project, but the only bid before the judge was the Clarke group, Dayton said. It really wasnt an option.

When Essar reported its liabilities in August, the number was astounding: $1.1 billion owed to creditors, compared to about $200 million in claimed assets. The filing also confirmed the grim outlook for its vendors: $74 million owed to contractors locally and out of state.

More than 300 creditors ranging from overseas banks to local businesses to employees owed bonuses and vacation pay made claims against the company. A list of local vendors read like a whos who of Range businesses, some teetering on the brink of insolvency without payment from Essar.

The state also joined in, launching an effort to pry the mineral leases from the company. By moving into bankruptcy, Essar was able to protect the leases under its Chapter 11 filing, despite attempts by Minnesota to convince a judge otherwise.

The judge denied the lease extraction in November, giving Essar an extension until February, and further delaying what the state felt was an open-shut case.

It was a much more lengthy process than I would have wished, Dayton reflected. It is what it is. Its frustrating, the amount the delays.

A $35 million bridge loan in the early part of the bankruptcy removed Essar Steel Minnesota from ownership of the Nashwauk project. The new owners, SPL Advisors LLC, replaced Vuppuluri as CEO with Matthew Stock, and removed Essar members from the board of directors.

This is a very, very important development for us, said Mitch Brunfelt, assistant general counsel and director of government and public relations for the company, in August when the action took place.

The company became known as Mesabi Metallics in December, and it had a mountain to climb to please the court: Work out a payment plan for contractors, and find about $800 million to finish the project, then estimated at nearly $2.6 billion to complete.

It started by suing Essar Global for $1.1 billion, claiming the parent company siphoned off money meant to help build the Nashwauk plant, instead putting it toward operations elsewhere around the world. The suit named Vuppuluri, which according to the filing, had direct knowledge of the parent companys use of funds for non-project-related purposes.

A month later, Mesabi Metallics released its reorganization plan that the state DNR referred to as a moon shot.

In March, the court allowed Mesabi Metallics to renew labor agreements through the Iron Range Building and Construction Trades for future construction work on the project, and the United Steelworkers for potential plant employees.

Still, efforts by Mesabi Metallics to secure the critical state mineral leases were blocked by Dayton and the DNR.

In this October 2015, photo, steel supports stretch into the distance on a half-completed building at the bankrupt Essar site in Nashwauk. Bankruptcy filings show the company is in debt more than $1.1 billion to creditors. It claimed $208 million in assets, and reportedly owes local contractors and vendors $74 million $49 million to local businesses.

When bidding opened on the project in April, the usual suspects were there. SPL made its bid, and Cliffs came in with a surprising $75 million cash offer, one the Mesabi Metallics team dismissed immediately.

But the real surprise was that a new bidder entered the fray: Chippewa Capital Partners.

Led by Clarke, the billionaire coal mine owner, Chippewa became the favorite and, eventually, the court approved owner of the former Essar/Mesabi Metallics operation.

It just seems to me that the United States needs to have a reliable, consistent source of iron, Clarke said in April after acquiring the site. And it just seems like Nashwauk is the perfect place to build one.

Chippewa plans to open the Ranges first hot-briquetted iron (HBI) at the ore-rich Nashwauk location, a key piece in the groups plan to jumpstart the project back into existence. The company says it will begin construction by September, finish work by the end of 2019 and ship at least 3 million tons of taconite in 2020.

Dayton and the state Executive Council voted 3-1 in June to transfer the coveted mineral leases to Chippewa, with conditions:

By Aug. 31, the group needs to show the state it has the money needed to reopen a mine and construct the iron-producing facility.

Thats about $625 million. If it fails, the state closes on the leases and collects $4 million through the DNR.

Dayton said Friday he was cautiously optimistic about Chippewa, adding that he spoke with Virginia Gov. Terry McAuliffe about Clarke, and received positive feedback about the businessman.

He is a new investor in this industry, and that always raises a question mark, Dayton said. They dont have a proven track record in the steel and taconite industry, but they have a very successful business track record in other sectors.

The states plan with Chippewa now is to wait until Aug. 31 and hope Clarkes Chippewa team is successful. Thats the best course of action, Dayton said, because the company hasnt given the state a reason to doubt them.

Clarke, the lead investor in ERP Iron Ore, closed on purchasing the former Magnetation operations in 2016. He announced plans to reopen Plant 4 in Grand Rapids and a pellet plant in Reynolds, Ind.

Earlier this week, as part of the Chippewa reorganization, Mesabi Metallics laid off about 25 of its 50 workers in preparation for the ownership change. Chippewa plans to use a contractor to complete construction and share some functions with ERP.

Dayton added if the first deadline isnt met, the state will quickly huddle up to formulate a response plan.

Whether that includes Cliffs is unknown, but for now the governor said the quickest path to opening operations and getting people back to work is through Chippewa.

I dont see any reason at this point to predict or prepare for something that theres no basis for right now, he continued. Were focused on success.

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Essar Bankruptcy: One Year Later - Mesabi Daily News