Mining and steelmaking company Cleveland-Cliffs said it is moving the production of a specialized type of iron ore pellet from Silver Bay to Virginia amid a fight over royalty fees to the owner of the land it mines.

In a call with investors last week announcing quarterly results, Cliffs CEO Lourenco Goncalves said the production of its direct-reduced, or DR, grade pellets would move to its Minorca Mine in Virginia and away from its Northshore Mining plant in Silver Bay to avoid "absurdly high" royalty fees.

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

"I will not use iron ore from the Peter Mitchell Mine in Babbitt, Minnesota because I don't want to pay that royalty," Goncalves told investors. "And it's my decision to use the iron ore from another location. So, I use iron ore from another location."

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

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Had he known he would be buying ArcelorMittal USA and its Minorca Mine in 2020, Goncalves said he never would have built the plant at Northshore, which also produces traditional pellets meant for blast furnaces.

"If I had a crystal ball, I would not have invested that $100 million," Goncalves said. "But the fact of the matter is that I did, at a time that Northshore was the only one that I could use to produce DR-grade pellets."

Now, Northshore's DR plant will become the company's "swing operation" and used "as needed," Goncalves said.

DR-grade pellets made in Silver Bay are shipped to Cliffs' hot briquetted iron, or HBI, plant in Toledo, Ohio. After that, the HBI produced by Cliffs can be mixed with scrap metal in an electric arc furnace to make steel.

It's unclear what effect moving the production will have on either facility's workforce. A spokesperson from Cliffs did not respond to the News Tribune's request for comment Tuesday.

Earlier this month the Mesabi Trust announced the resolution of an arbitration case that it initiated in December 2019 after it alleged Cliffs "failed to properly record and calculate royalty amounts during the second and third quarters of 2019."

The trust, which is administered by Deutsche Bank Trust Company Americas, said the American Arbitration Association determined Cliffs must pay the trust damages of $2.3 million for unpaid royalties on DR-grade pellets in 2019 and 2020 with interest totaling $430,000. Cliffs has until the end of the month to pay the damages, the trust said.

The Mesabi Trust's total royalty income in the first half of 2021 totaled $37 million, according to its second quarter financial results.

After the announcement, the publicly traded trust saw its stock fall on Friday from the day's high of $36.32 to a low that day of $26.50. On Tuesday, it closed at $27.20.

Since Northshore's DR-grade pellet plant was completed in 2019, Cliffs has grown from just a iron ore mining company with mines and pellet plants in Minnesota in Michigan to the largest flat-rolled steel producer in North America after it bought AK Steel for $1.1 billion and ArcelorMittal USA for $1.4 million. Earlier this month, it announced it was buying Detroit-based Ferrous Processing and Trading Company, a scrap metal company, for $775 million to help feed its electric arc furnaces.

At the time of its completion, the Northshore plant was set to supply Cliffs' Toledo HBI plant and also sell the pellets to steel-making companies.

But now that Cliffs is in the steel-making business, it plans to only ship the pellets to its own facilities after existing contracts with other companies are up.

On Friday, Cliffs reported a profit of $1.2 billion for the third quarter of 2021, up from $2 million in the third quarter of last year.