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Cliffs to idle Northshore Mining as fight over royalty fees intensifies, scrap metal lessens need for pellets

The company does not want to pay "absurdly high" royalty fees to Mesabi Trust and is using more scrap metal in its electric arc furnaces.

FILE: Northshore Mining
Cleveland-Cliffs’ Northshore Mining in Silver Bay.
(Clint Austin / 2020 file / News Tribune)
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DULUTH — Cleveland-Cliffs will idle its Northshore Mining operations in Babbitt and Silver Bay amid a royalties dispute and as the use of scrap metal in its electric arc furnaces reduces the need for its pellets.

The Silver Bay pellet plant and the Babbitt mine will idle May 1 and last into at least the fall as the company moves production of direct-reduced grade pellets to its Minorca Mine in Virginia, Cliffs CEO Lourenco Goncalves said in a year-end earnings call with investors Friday morning.

Layoffs are expected for 410 of Northshore's 580 employees, Cliffs spokesperson Pat Persico said in an email to the News Tribune. Some will be hired at Cliffs' other Minnesota operations, she added.

The announcement intensifies Cliffs' efforts to get out of what it has called "absurdly high" royalty fees it pays to Mesabi Trust, a publicly traded trust that collects royalties from Cliffs based on the volume of shipments from Northshore, the price of taconite and the amount of taconite that was mined from land owned by the trust — namely the Peter Mitchell Mine in Babbitt, which supplies Northshore with ore.

"Because we are now able to produce (direct-reduced) grade pellets at Minorca, and mainly due to the ridiculous royalty structure we have in place with the Mesabi Trust, we will be idling all production at our Northshore Mine. ... No production, no shipments, no royalty payments,"Goncalves said in the call.

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It came in the same call where Cliffs announced a record profit of $3 billion in 2021 on a record revenue of $20.4 billion.

In October, the company announced it was moving production of its direct-reduced, or DR, grade pellets to its Minorca Mine in Virginia and away from its Northshore Mining plant in Silver Bay to avoid Mesabi Trust's royalty fees.

The October announcement came just weeks after an arbitrator ruled in favor of Mesabi Trust on unpaid royalty fees.

Mesabi Trust's Deutsche Bank manager declined to comment on the idling of Northshore.

In its quarterly report filed Jan. 28 , Mesabi Trust said it received nearly $21 million in royalty payments from Cliffs during the fourth quarter of 2021.

Asked if Northshore would keep running if Mesabi Trust were to lower its royalty fees, Persico said: "Cleveland-Cliffs has adjusted its full-year iron ore pellet production volume expectation to correspond to internal steelmaking needs for this year. This adjustment of iron ore pellets reflects our internal use of hot-briquetted iron (HBI) production and increased use of scrap in our steelmaking. We will be curtailing iron ore pellet production and temporarily idling Northshore Mining."

Cliffs spent spent $100 million on Northshore's direct-reduced or DR-grade pellet plant, which opened in 2019, and can produce 3.5 million tons of DR-grade pellets per year.

Goncalves has said he never would have built the plant at Northshore, which also produces traditional pellets meant for blast furnaces, if he had known that Cliffs would buy ArcelorMittal USA and its Minorca Mine in 2020.

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The DR-grade pellets supply Cliffs' new Toledo hot briquetted iron plant, which in turn feeds electric arc furnaces.

Because the company uses more scrap metal in its electric arc furnaces, the idling could be prolonged, Goncalves said.

Babbitt Mayor Andrea Zupancich told the News Tribune that she was "stunned" by Friday's announcement.

She said that the only positive she got out of it was that it would idle mostly during the summer — and hopefully not any longer.

"It's not only the miners that are affected, it's absolutely everyone else in town that's affected," Zupancich said. "It's the school that's affected, it's the government that's affected, it's the businesses in town that are affected, it's the bars and restaurants in town that are all affected. So it's a massive trickle-down effect."

This story was updated several times with additional quotes from company, trust and city officials and with additional information from the call. The final version was published at 2:27 p.m. Feb. 11. The initial version was posted at 10:38 a.m. Feb. 11.

Related Topics: ENERGY AND MININGSILVER BAYCLEVELAND-CLIFFS
Jimmy Lovrien covers energy, mining and the 8th Congressional District for the Duluth News Tribune. He can be reached at jlovrien@duluthnews.com or 218-723-5332.
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