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Mesabi Metallics hopes to rise from wreckage of Essar Steel Minnesota

Matthew Stock, CEO of SPL Advisors, which is trying to take over the Essar Steel Minnesota project in Nashwauk. John Myers / jmyers@duluthnews.com

HIBBING — There's a new CEO, a new name and a new attitude at the company formerly known as Essar Steel Minnesota.

But the same problems loom: How to escape more than $1 billion in debt and finish the half-built project in Nashwauk already years overdue and hundreds of millions of dollars over budget.

Throw in the fact the governor of the state won't play ball with you. And, by the way, the whole thing is mired in federal bankruptcy court with tentacles that reach from Iron Range construction companies to multinational banks in India, New York and Hong Kong.

The new name is Mesabi Metallics, if a bankruptcy judge in Delaware agrees at a hearing scheduled for Thursday.

Gone are the last vestiges of Essar Group, the Mumbai, India, company that took the project over in 2008 only to run out of money, twice, and then walk away owing $1.1 billion.

The new CEO is Matthew Stock, 45, a British-born veteran of the iron ore and steel business who worked developing and running ore processing plants in India and steel sales in Thailand. Stock was brought in by SPL Partners LLC, a Santa Barbara, Calif.-based, three-family owned investment company that sees promise in buying the Nashwauk project for pennies on the dollar, finishing the job and then making money selling taconite iron ore pellets.

Construction underway at the Essar Steel Minnesota site in October 2015. (Bob King / News Tribune)"Bad blood"

At first, SPL wasn't sure what they were getting into. Essar parent company officials apparently sold the project as 80 percent finished.

"When in reality it's more like 50 percent," Stock said in a recent interview with the News Tribune at the company's headquarters in Hibbing.

He said Essar officials also failed to tell SPL how bad their reputation had become in Minnesota after multiple rounds of nonpayment to contractors and vendors who are owed tens of millions of dollars, according to court documents.

"We didn't realize how much bad blood they (Essar) left behind," Stock said. "We needed to figure out, and quickly, what went wrong. We needed to find out if it was built poorly or if it was a bad idea or a bad plan. ... What we determined is that none of that was true. It was being built very well. It's an incredibly rich body of iron ore. And the plan is good."

The problem, Stock said bluntly, was Essar's corporate culture. Essar Steel Minnesota was owned by Essar Group, which also owned Essar Projects, an in-house general contractor of sorts that oversaw construction. Analysts have noted that the family that controls the Essar empire was overextended, out of cash and in deep credit trouble at home in India as well as in Canada and Minnesota.

"There was no arm's-length, critical partner who could say, 'No, don't do it that way,' " Stock said, adding that Essar had no experience working in the U.S. before taking on the Nashwauk project. "The decisions were being made in Mumbai or New York. They need to be made here. That's why I'm here."

Despite Essar's missteps and misstatements, SPL and Stock decided to dive in and see what they could make of the mess. They invested $35 million over the summer to pay off bankruptcy costs (including paying all of the attorneys involved) and keep the lights on at the Nashwauk project. Some 58 Essar Steel Minnesota employees are still on the payroll.

Construction underway at the Essar Steel Minnesota site in October 2015. (Bob King / News Tribune)Stock and SPL have until February to make it work, a deadline set by the bankruptcy judge in Delaware, although that could be pushed out.

The judge essentially will have three choices — approve the SPL plan, wait for some other plan that has yet to surface, or force the project into liquidation.

"We have a plan. We have a great design. The hardest work has already been done. The infrastructure is all in place — water, roads, rail, gas, electricity. We have a team still in place to finish the project," Stock said "Our job now is to convince all of the players that finishing the job and producing iron ore pellets is the best way for everyone get what they want. It's the best result for everyone involved."

North of $2 billion

If it all seems confusing, it is. Stock is running Mesabi Metallics, formerly Essar Steel Minnesota, which is now under control of SPL. But only as much control as the bankruptcy judge will allow.

SPL has appointed an all-new board of directors to the company and kicked Essar's people off.

SPL has a plan, if it can raise money, to pay back a portion of the major lenders, pay off vendors and contractors and resume construction.

It will cost at least another $800 million, by the contractor's own estimates — that on top of $1.8 billion already spent. That pushes the total cost of the project to about $2.6 billion.

Of that $1.8 billion already spent, Essar still owes some $1.1 billion, including about $75 million to contractors and vendors, nearly two-thirds of that to Minnesota companies, many of them in Duluth and on the Iron Range. Several former Essar employees also are owed money and retirement benefits. Of the more than 300 creditors who say Essar owes them money, only about 60 are secured.

A feasibility study conducted for SPL estimates that, if SPL gets bankruptcy approval and financing by next April, the Nashwauk project could be completed and producing pellets by April 2019.

Even with Minnesota's first all-new, full-scale taconite operation in 40 years, however, it's still not clear who would buy Mesabi Metallics' taconite pellets. The company has no major contracts from any steelmaker to buy pellets and, short of a major upswing in U.S. steelmaking, the domestic market appears already fully served by existing producers.

Construction underway at the Essar Steel Minnesota site in October 2015. (Bob King / News Tribune)Mesabi Metallics will have to obtain at least preliminary agreements with steelmakers, so-called offtake agreements, to buy its product or the deal is not likely to clear the bankruptcy court.

Stock said discussions with major U.S. steelmakers that buy iron ore on the spot market revealed those companies want another choice for domestic supply — both as a hedge against higher costs (competition between suppliers often drives prices down) and as a hedge against any natural or financial disaster that might befall a single company, namely Cliffs Natural Resources, the only major spot market supplier in the U.S.

"We are going to be the most cost-competitive producer" in the U.S., Stock said, noting the Nashwauk project will have far lower transportation, electricity and employment costs than any other Iron Range producer.

Moreover, with the global spot price of iron ore now back above $80 per ton, U.S. producers are more competitive. That price, which had flirted with $200 in 2011, had dropped below $40 during the depths of the 2015 industry downturn.

Dayton's dilemma

Stock and SPL remain very concerned, at least publicly, over Minnesota Gov. Mark Dayton's decision to pull state mineral leases out from under the Nashwauk project and instead hand them over to Cliffs Natural Resources.

Court documents show that in fact the Minnesota Department of Natural Resources in October 2015 sent Cliffs a letter promising to offer them the mineral leases in Nashwauk if Essar Steel Minnesota defaulted on the lease agreement with the state. (State officials had never made that letter public before it became part of the bankruptcy court record.)

The state tried to do just that in July, but hours before Dayton acted, Essar Steel Minnesota filed for bankruptcy. The bankruptcy judge in Delaware last month agreed that the state leases should remain in the bankruptcy court case and denied, temporarily at least, Minnesota's effort to pull them back permanently. Ultimately, whoever wins the leases still will have to reach an agreement with the state.

Stock said Dayton was rightly angry after Essar Steel Minnesota's repeated failures to deliver on payments, not just money owed the state but also to dozens of Minnesota contractors.

Construction underway at the Essar Steel Minnesota site in October 2015. (Bob King / News Tribune)"He has every right to be upset that his people weren't paid what they were owed," Stock said. "But we aren't Essar anymore."

While SPL has private mineral lease holders on board with its plan (about 60 percent of the minerals are privately owned, and about 40 percent are owned by the state), Stock said the project can't proceed without the state leases.

"We want to have a conversation with the governor. We want to show him we mean business," Stock said. "In a way, we owe him a debt for pushing the issue. If he hadn't decided to take the leases back, the whole project would still be lingering out there. He was a catalyst for change."

It appears that the state can easily get out of its promise to give the mineral leases to Cliffs — the letter says the state can cancel the agreement at any time. Still, attorneys in the case have accused Minnesota officials of collusion with Cliffs, and backroom deals that are undermining the effort to revive the Nashwauk project.

SPL officials note that Cliffs has presented no plan to build anything at the Nashwauk site but instead wanted the rich iron ore under the site that it would transport to nearby Hibbing Taconite, where Cliffs is part owner and operator.

"That's not the highest and best use of that iron ore," Stock said, noting Nashwauk, Itasca County and dozens of contractors would lose out if Cliffs wins the leases. "We think the governor, in the end, will decide to support 350 new jobs and the promise of new work" at Mesabi Metallics.

State officials so far have declined to comment on the SPL developments, saying they are waiting for the bankruptcy court to reach a decision.

"The court has given Essar until February to address a number of outstanding issues in the case, including whether it has the financing to complete the project and offtake agreements for sale of the ore," DNR officials said in a statement to the News Tribune. "Once the court rules on these matters, we will consider all options available to the state at that time."

More than just taconite?

Essar's Nashwauk facility 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 but work occurred in fits and starts. As recently as one year ago the company appeared poised to finish the project and begin making taconite pellets this year. But that promise was dashed last winter when 700 construction workers and most of Essar's own newly hired employees were sent home, with Essar out of cash.

Stock says Mesabi Metallics can deliver on many of the failed promises of Essar. He also envisions a day when the Nashwauk project expands to include a directly reduced iron plant — not just a DR-ready pellet — the kind of added-value products Iron Range promoters have been waiting decades for.

"We need to get the (taconite mine and processing plant) project completed first. We have to walk before we can run. But, look, that's why I wanted to call it Mesabi Metallics and not Mesabi Taconite," Stock said. "Everything is in place... and it's all designed around an added-value product that doesn't stop at (taconite) pellets. That's what makes this such a great opportunity. That's why I took the job."

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