Essar files for bankruptcy after Dayton ends its bid to build Iron Range mine, plant

Updated: 4:15 p.m. | Posted: 1:04 p.m.

Gov. Mark Dayton has instructed the Minnesota Department of Natural Resources to terminate the state's mineral lease agreements with Essar Steel, and will instead negotiate with Cliffs Natural Resources to finish building the $2 billion taconite mine and pellet plant on the Iron Range.

Shortly after receiving the news, Essar Steel Minnesota filed for Chapter 11 bankruptcy protection in U.S. Bankruptcy Court in Delaware.

It's a shocking fall for a company that fewer than 10 years ago promised to build not only the state's first new taconite mine and pellet plant in decades, but also Minnesota's first ever steel mill built at the mouth of a mine.

Construction has been stalled on the project since last fall, as Essar has struggled to secure financing amid a global downturn in the steel industry. It still owes contractors tens of millions of dollars, and also owes the state $66 million for infrastructure built at the site.

The bankruptcy filing now throws into question whether the state and contractors will ever be repaid in full.

Essar had agreed with the state last year to complete construction of the plant by July 1, 2016. The company also missed another deadline with the state to make its first loan repayment.

"The company has been told for the past nine months that the State would not extend those leases ... unless it paid the full amounts it owed to Minnesota contractors and showed that it had the ability to carry its current construction project through to completion," Dayton said in a statement.

Meanwhile, Dayton said he is in negotiations with Cliffs Natural Resources about taking over the project, finishing construction of the pellet plant, and also building a "direct reduced iron" facility to create a higher-value iron product that can be fed into electric arc furnaces, which make up a growing part of the steel industry.

"The State of Minnesota will continue those negotiations with Cliffs and obtain a firm commitment to execute those plans, before the leases are reassigned," Dayton added.

He said he will travel to the Iron Range Tuesday to meet with Cliffs CEO Lourenco Goncalves to discuss his plans in greater detail. The governor said it will be a public meeting.

Cliffs owns two existing taconite mines and pellet plants on the Iron Range, Northshore Mining and United Taconite, and is also co-owner and operator of Hibbing Taconite.

In a statement, Goncalves called Dayton's decision to terminate Essar's leases "the first step in a long-term development process that we believe holds tremendous potential for job creation on the Iron Range."

Essar Steel had asked the state for a nine-month extension of the state's right to terminate its mineral leases. The company was working with a new equity investor to finish the project and repay contractors, but that additional financing was contingent on Minnesota providing a forbearance on the leases.

Minnesota DNR Commissioner Tom Landwehr said he doesn't anticipate Essar's bankruptcy filing to slow the state's plans to move forward with Cliffs.

"We feel confident that the state's mineral leases will not go into this long drawn-out bankruptcy proceeding, and we would be able to renegotiate those leases in a relatively reasonable amount of time."

But Landwehr said the $66 million Essar still owes the state will have to be resolved in bankruptcy court.

Essar also owes about $25 million to out-of-state vendors, and still owes $49 million "to good Minnesota contractors, most of them up in northeast Minnesota," Dayton said. "Some have been put in dire financial straits because of Essar's failure to make proper payments."

"There's just been no evidence of any willingness to make whole the vendors or ability to carry forward the project," Dayton added.

Ben DeNucci, mayor of the small Iron Range town of Nashwauk where the project is under construction, confirmed there are "a lot of local contractors here that are owed a lot of money, and others that have purchased supplies and materials for the project that are locked up in storage."

DeNucci said it will be a struggle now for them to get repaid at all.

Essar also still owes the city of Nashwauk about $100,000, he said, for utilities provided by the city during the first half of 2016.

But in the longer term, DeNucci believes a new company taking over the project and building a direct reduced iron facility would be a positive step for the region and could maybe even provide what the project once promised.

"The project is still a great opportunity for the area," he said. "We need the industry to move towards value-added products, not just make more pellets."