Cash woes linger for Essar Steel project
It seems like every other month or so Essar Steel Minnesota is in the news, and the news usually isn't good for the fledgling taconite company that broke ground in 2008 and has all its permits in place but still isn't producing any iron ore.
Now, state officials are again frustrated that Essar isn't paying its bills to contractors, and that the future of the project appears in limbo.
In December, the News Tribune first reported that work had slowed to a crawl on the massive, $1.7 billion project as money to pay for construction had run dry. The company made news at that time by conceding it was pushing back the start date for full-scale taconite production from 2014 to the end of 2015.
That was the second major slowdown in the past 18 months; work also ground to a stop in 2012 for the same cash-flow reasons.
By January, only 74 construction workers remained on the site, down from 200 last fall, as contractors build what should be Minnesota's first all-new, full-scale taconite mine and production plant since 1977.
The slowdown has been downplayed by Essar officials who said it was just a matter of working with its contractors to reduce construction activity to only critical tasks until Essar finds cash -- about $700 million, the company said Monday. The company also reminded skeptics Monday that its investors already have funneled $1.1 billion into the project, most all of it from banks in India -- hardly something anyone plans to walk away from when nearly two-thirds completed.
Waiting on weather, financing
Essar has said the slowdown will continue until warmer weather and additional financing arrives to "springboard a major increase in on-site activity," the company said in a January statement to the News Tribune.
Six weeks later, however, no financing deal has been announced. The site is apparently deserted of construction workers. And the company continues to owe contractors "millions of dollars for work as far back as 2011," state Rep. Tom Anzelc, DFL-Balsam Township, told the News Tribune on Monday.
The Essar plant sits partially built at the same site as the old Butler Taconite facility in Nashwauk in Itasca County, in Anzelc's district.
Major contractors on the job over the past year include Hammerlund Construction, the Rice Lake Construction Group, Northern Industrial Erectors and Industrial Maintenance Services. At least one, Grand Rapids-based Hammerlund, has filed a "mechanics' lien" on the project, Anzelc noted, a legal effort to secure what assets there are at the project as security for what's owed them.
"It's baffling to the entire Range delegation. We met with Essar people -- local people, some of them from New York, some from India -- in December, and they assured us they would pay their past bills and that they would have financing in line to get going again" by the end of March, he said. "So far, those things haven't happened. Why such a large, global company would act this way is just baffling to us."
Essar Steel Minnesota is a subsidiary of Mumbai, India-based steel giant Essar Group, a $20 billion corporation with about 70,000 employees worldwide. Despite the parent company's massive size, money problems have dogged the Minnesota project.
Kevin Kangas, an Essar Steel Minnesota spokesman, said company officials were continuing to hammer out a financing arrangement that would see cash flowing again and work resume. He said the project's upgrade from a 4 million ton per year plant to a 7 million ton plant just as construction started added costs and complexity to the project.
"The change in project scope and securing additional debt require, among other things, approvals from our current project lenders, which is at an advanced stage. (Essar) expects the financial closure to occur relatively soon," the company said in a statement to the News Tribune on Monday. "Essar Steel Minnesota LLC appreciates the support of all its stakeholders including the local community as well as local contractors to finish this historic and massively important project within the State of Minnesota."
Anzelc said Iron Range lawmakers are trying to determine how best to press Essar to pay its bills and move the project ahead without "pushing them away."
"We're in the same predicament as the contractors. The upside has the potential to be very good ... so no one wants make them angry," Anzelc said. "But something has to give here."
Tony Sertich, commissioner of the Iron Range Resources and Rehabilitation Board and the state's lead on mining issues, said his staff is "in communication with the company multiple times during any given week and continue to monitor their status."
$73 million in public money
At stake is not just hundreds of construction jobs and about 300 permanent jobs at the new taconite plant, but also about $73 million in public funding -- $6 million from the IRRRB and $67 million from the state.
Much of that money went to build infrastructure to and at the project site and would still be there if Essar pulled out. Moreover, Sertich noted, the IRRRB's money is "fully secured by letters of credit. Literally, there is money secured in a bank as far as our agency's investment goes."
But, like many people on the western Iron Range, and many construction workers now off the job, officials remain concerned about Essar's commitment.
"As an agency, there is nothing more we can do to help at this time. We are frustrated with the company's inability to stay current with local contractors and have asked them to fix this situation," Sertich told the News Tribune. "We have been told that Essar continues to look to finalize the last piece of their major financing, and we can look to expect results of this by the start of the second quarter of the year."
Perhaps most disappointing to Anzelc, however, is that the public investment was made in Essar Steel Minnesota because of its promise to expand beyond a traditional taconite plant and into on-site steelmaking. The taconite operations always have been considered just the first stage of a two-stage project, with an additional $1 billion direct-reduced iron mill.
It would be the first such facility ever in the U.S., with mine, ore processing and steel mill at the same location, and would fulfill a long-held dream of Range leaders to add value to taconite in Minnesota rather than far-flung mills in other states or nations. The steel mill portion of the project would add another 100 employees in addition to the taconite operations.
"Note that the name is Essar Steel, not Essar taconite. ... The public investment in this was always about the (added value) of steelmaking on the Iron Range. But now it seems like Essar isn't talking about that at all. We can't even get to the first stage," Anzelc said.
Progress has been slow since the beginning when it was Minnesota Steel. Essar appeared as a savior of sorts of the idea when it purchased the project at what is one of the largest deposits of taconite iron ore in North America.
When completed, taconite pellets will run out of the plant by rail toward steel mills in the U.S. as well as Essar's own Algoma steel mill in Sault Ste. Marie, Ontario -- even as far as Essar steel mills in India, company officials have said.
While not yet finished, the new plant already has a customer for half of its taconite. Early in 2013, Essar Steel Minnesota announced that it will sell 3.5 million metric tons of standard and fluxed iron ore pellets annually to ArcelorMittal's North American steelmaking operations. ArcelorMittal owns the Minorca taconite mine and plant in Virginia but has a big appetite for raw iron ore, with steelmaking facilities in Indiana, Ohio, West Virginia, Pennsylvania, South Carolina and Illinois.
But, just last week, ArcelorMittal bought more time while waiting for Essar pellets by signing a two-year extension of a contract with Cliffs Natural Resources, which will provide AreclorMittal with pellets through January 2016.