Bankruptcy battle over Essar Steel Minnesota site leaves $74 million unpaid to contractors

Essar Steel India’s manufacturing plant in Algoma, Ontario. The company has suffered while trying to expand it’s North American production capacity.

It’s devastating. That’s what Associated General Contractors of Minnesota President Dave Semerad says of the $1.9 billion steel production project from India’s Essar Steel–meant to rehabilitate the state’s historic “Iron Range” region—and its descent into bankruptcy. Now a fight over the site’s mineral leases between the Minnesota Department of Natural Resources and Essar has stranded $74 million in unpaid bills to local and national contractors.

The state, along with one of Essar’s major competitors, Cliffs Natural Resources, is trying to seize control of the Nashwauk, Minn., site. But Essar attorneys argue that the state’s repossession of mineral leases undermines the bankruptcy process—without the mineral deposits the project sits on top of, it’s worth nothing to Essar or its creditors. For now, the state’s seizure of the mineral leases has been stayed by the bankruptcy court, but the Minnesota Department of Natural Resources filed for the stay to be vacated in whole or in part on Sept. 2. So far a decision has not been issued.

Minnesota Gov. Mark Dayton (D)is not budging, though contractors and other creditors support Essar’s restructuring plan, said Barry Davies,business manager for the International Brotherhood of Ironworkers Local 62, Minnesota. The governor and the Minnesota Department of Natural Resources says they’re finished supporting a company that balked on a $60 million-plus loan and multiple construction deadlines.

MNDR’s stance is that these failures forfeited the valuable mineral leases at the site. Dayton, who Essar says is the only stakeholder opposing its restructuring proposal, wants Cliffs to take over the site and finish construction. “We are going to get that iron ore in the ground…it will take time,” said Cliffs CEO Laurenco Goncalves on a recent earnings call.

Essar, however, has accused the state a and Cliff’s of collusion and the bankruptcy court last month granted Essar’s request to examine communications between them. Many unsecured creditors favor a plan where Essar stays in control. “This has been very hard on many of our contractors,” Davies says. “I’m skeptical but there has been a new group of investors [SPL Advisors LLC] who hired a new construction manager and we’ve been told it could get started back around April. And to get this project finished, we feel, is the only way that contractors are going to recoup some losses.”

Getting contractors paid is a major concern for state officials who said local firms were over-leveraged on the project when payments stopped coming and are now struggling to survive. Essar, and its successor, SPL, have also stated that getting contractors paid so that work at the site may resume is a major priority. Essar filed for bankruptcy protection the same day Dayton chose to terminate the mineral leases.

Semerad said contractors are often willing to take risks on projects like the Essar steel plant because it is advertised to be for the greater good of the community. The Essar plant is billed as the first on the Iron Range that would make directly reduced iron ore for use in electric arc mini mills. These require more refined material inputs than blast furnaces, but represent the fastest growing sector of domestic steel production. “With the banks and the state seeming to be on board, that makes contractors feel comfortable, especially when its for a project that is supposed to improve the local economy, ” Semerad says.

Much of Essar’s decline in liquidity stems from a struggling U.S. iron and steel industry clobbered by a global price collapse and by a heavy wave of illegally dumped steel imports from abroad, Plus, the value of taconite, a low grade form of iron ore has fallen hard.

Essar’s deal with SPL is supposed to pump $250 million of new equity into the Nashwauk project, which has been idle since 2015, seems to be a positive development. But it has not been approved by the bankruptcy court, because of the state’s motion to retract the mineral lease. A ruling was expected on Oct. 20, but none was issued and a hearing was set for late November.

Semerad is skeptical and with good cause, because Essar is a company in turmoil. Aside from the Minnesota bankruptcy case, its plant in Algoma, Manitoba is struggling with an over-leveraged debt load, and the company is frantically trying to sell off assets from its other businesses to plug holes in its hemorrhaging steel segment .

While Essar is still the official owner, SPL will issue new stock said Essar CEO Matthew Stock in a presentation to the Nashwauk City Council Oct. 19. Stock said the company was working with contractors to estimate the funding needed to finish construction, and a restructuring plan is taking shape.

Stock wants the company to exit bankruptcy and have crews back on site by April—but that plan could be disrupted by the state if it wins its fight to seize the mineral leases. Private leaseholders that own 60 percent of the mineral leases support Essar’s plan to exit bankruptcy, Stock says.. The state owns 40 percent of the mineral deposits at the site.

“If Essar stays in charge it’s more likely that contractors will get the entirety of what they are owed,” Davies, tells ENR. “If another investor takes control of the project through bankruptcy, it’s often for pennies on the dollar and that would be a pretty hard pill to swallow.”

Cliffs Natural Resources CEO Laurenco Goncalves,offered a different perspective on prospects of contractors recovering losses in a recent investors earnings call. “They are not paying anyone. They don’t pay the bus drivers that takes the politicians to visit their site. They don’t pay any bills. So, they are really a strange type of people over there” Goncalves says. “ That’s their [M.O.], they filed for bankruptcy. They have bankruptcies all over the world. They’ve filed for more bankruptcies than companies. It’s amazing.

“Essar Minnesota, also known as ‘neverland,’ never finished, never producing pellets, never paying anyone. After years of lies and broken promise, the local community came to realize that the future of the Iron Range is not with Essar, but with Cliffs Natural Resources.”

 

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