Federal Bankruptcy Judge Brendan Shannon will hold hearings Monday and Tuesday in Delaware that may decide the future of state mineral leases at the now-bankrupt Essar Steel Minnesota project in Nashwauk.
At stake are 350 Iron Range jobs, more than $1 billion of investment capital, tens of millions of dollars owed Minnesota contractors and millions of tons of top-grade iron ore under the Essar site.
The judge is weighing arguments by the state of Minnesota that the leases should be handed back to the state because Essar, which filed for bankruptcy in July, reneged on contractual commitments.
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But virtually every other party in the Essar bankruptcy case is asking the judge to keep the leases inside the bankruptcy case. They want the leases treated like every other asset in the shuttered $1.9 billion taconite mine and processing plant project that has been sitting half-built but idle for nearly one year.
Those parties include dozens of contractors, vendors and other northern Minnesota businesses who have unsecured debt as yet unpaid by Essar. Those little guys - The Official Committee of Unsecured Creditors - are siding against the state and Gov. Mark Dayton and with Essar's successor, SPL Advisors, who are trying to broker a deal to take over the project, pay off some of the Essar debt and restart construction.
"The Committee believes that the completion of the (Essar) pellet production facility offers the greatest potential for producing a meaningful distribution to creditors, especially unsecured creditors," attorneys for the contractors argued in a court filing last week.
Meanwhile several private companies that own the minerals below the Essar site (the state owns about half the ore there) also are supporting SPL and arguing against the state.
This week's hearings are a continuation of testimony that started during an October court session. An attorney close to the case said the judge is expected to issue a written decision on the mineral rights leases soon, possibly by week's end.
State, Cliffs vs. everyone else
Attorneys for the state of Minnesota are arguing that the mineral rights were withdrawn from Essar in July after the company failed to finish the project and reneged on paying $66 million owed the state for unfulfilled economic development guarantees.
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But Essar filed for Chapter 11 bankruptcy protection minutes before the state officially pulled the mineral leases. Now, in addition to the unsecured creditors, SPL Advisors, as well as the banks that Essar owes hundreds of millions of dollars, argue that the mineral leases should be listed as assets that will be decided as part of the ultimate bankruptcy settlement.
Dayton wants the leases back so the Minnesota Department of Natural Resources can hand them over to Cliffs Natural Resources. Cliffs CEO Lourenco Goncalves has said he wants access to the rich load of taconite iron ore at the Nashwauk site. If he gains control of the project, Goncalves said he'll build Minnesota's first plant that can make direct-reduced iron for use in electric arc mini mills, the fastest-growing segment of the U.S. steel industry.
But attorneys for the unsecured creditors claim state officials and Cliffs may be illegally colluding to steal the leases away from Essar/SPL. They have requested documents of all discussions between Cliffs and the state (namely the DNR and Gov. Dayton) that may reveal any collusion.
Attorneys for the unsecured creditors said the leases should stay with the court until "there can be an opportunity to learn whether there was any collusion or misconduct between the State of Minnesota and Cliffs that might suggest the DNR filed (its request for the leases) with unclean hands."
"Disturbingly, the creditor's suspicions of anti-competitive behavior and potential backroom deals were recently buttressed" when Goncalves vowed to investment analysts that he would someday control the ore at the Essar site. (Goncalves also called bankrupt Essar operations in Canada and the U.S. a "criminal enterprise," comparing them to Mafia families.)
Instead of siding with Dayton and Goncalves, the smaller creditors at the Essar site are putting their hopes behind SPL and the new CEO of the ghost operation in Nashwauk, Matthew Stock, to rework a plan to pay off some creditors, find new investment capital and breathe new life into the dead project. Stock has been trying to form a deal since summer to repay local vendors a portion of what Essar owed them to get them to come back and finish the work.
But court documents reveal it will be an uphill battle for SPL to raise enough money not just to pay off some of Essar's past debts but also to finish the project. Essar Steel Minnesota and its holding company reported $1.1 billion in liabilities and only $208 million in assets.
The company owes contractors and vendors almost $75 million, 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.
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Need another $800 million
Financial experts have submitted testimony in the case that it will take another $800 to $870 million to finish the project. Others have projected that, if SPL gains control of the property and finds financing, the company could have it finished and begin producing pellets, no sooner than April, 2019.
It's not clear who would buy those pellets. Essar (the Nashwauk project is now being called NewCo in bankruptcy documents for lack of any other name) has no major contacts from any steelmaker to buy pellets and the domestic market appears already well served by existing producers. Stock has argued in court documents that he expects steelmakers to sign on with NewCo to spur competition with existing producers like Cliffs and thus lower taconite prices.
Meanwhile more than 300 different creditors have submitted claims to the bankruptcy court, including a Singapore investment firm, ICICI Singapore, owed $552.3 million; U.S. Bank National Association, which says it's out $383.5 million; and the Bank of India, which wants $150.4 million out of whatever is left of the project. Of those 300 creditors, only about 60 are secured; others are unsecured claims and less likely to see their money back.
Some of the local companies which are owed money include A.W. Kuettel & Sons contractors, Hammerlund Construction, the Jamar Co. and Barr Engineering, most of which have not submitted an exact tally of what Essar owes them.
The $1.9 billion Nashwauk facility was to be the state's largest private construction project and the first all-new major taconite operation on the Iron Range in 40 years. It 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 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 even Essar's own newly hired employees were sent home with Essar out of cash.
