Federal Bankruptcy Judge Brendan Shannon on Tuesday rejected the state of Minnesota's effort to rescind state mineral leases under the former Essar Steel Minnesota project in Nashwauk.
The ruling, made from the bench after two days of hearings in Delaware, will keep the valuable mineral leases inside the massive bankruptcy case through at least Feb. 3, 2017.
Minnesota had argued that the state has rescinded the leases last summer after Essar failed to live up to multiple contractual obligations to create jobs and operate the plant as well as promises to repay debts to private contractors.
But the judge, backing virtually every other party in the bankruptcy case, agreed that the leases are critical for whatever entity ends up inheriting the Nashwauk project. Without the state leases, which account for half the ore under the site, it's unlikely the project could move forward in any form.
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.
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The judge backed SPL Holdings' motion that they be given more time to put a recovery plan together for the Nashwauk project. SPL has invested in the bankrupt project and is trying to put together a plan to repay some of Essar's debt and raise enough money to restart construction on the $1.9 billion taconite iron ore mine and processing center that has sat half-built but idle for a year.
"We are gratified by the ruling," said Mitch Brunfelt, spokesman for Essar Steel Minnesota which is, in essence, hoping to sell the bankrupt project to SPL.
A spokesman for Minnesota Gov. Mark Dayton did not immediately return a request for comment on the ruling.
Dayton, tired of the project's many delays and failed promises from Essar management, wanted the state leases back now to hand them over to Cliffs Natural Resources, which has promised to use the ore at the site to make direct-reduced iron products.
But other than the state and Cliffs, virtually all other parties are backing SPL, including dozens of Minnesota contractors and vendors that haven't been paid by Essar and are hoping recoup some of their money.
Attorneys for those unsecured creditors in the bankruptcy, in documents filed in court last week, argued that the leases should stay with the court to give SPL enough time to form a viable plan for the Nashwauk project. Those attorneys also said the leases shouldn't go back to Minnesota 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 Cliff's CEO Lourenco Goncalves vowed to investment analysts that he would someday control the state leases and ore at the Essar site.
If no viable plan develops to restart the project it's likely the leases will revert back to the state later in the bankruptcy process.
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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.
Financial submitted testimony in recent days 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.
Meanwhile more than 300 different creditors have submitted claims to the bankruptcy court. Only about 60 are secured; others are unsecured claims and less likely to see their money back.
The Nashwauk facility was to be the state's largest-ever 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, and 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.
