Now that the Minnesota Department of Natural Resources has officially terminated a mineral lease agreement with Mesabi Metallics in Nashwauk, what happens next for the project is at the forefront of interest for the Iron Range.
The saga of the former Butler Taconite project has played out in highs and lows since 2008, culminating in the state’s decision Wednesday to move on from Mesabi Metallics, more than two years after Essar Global regained majority ownership in the company and project.
Just in the last two weeks, since the lease termination process began May 5, the headlines have flipped through the Range at a whiplash pace.
Below, we’ll try to explain what’s going on in Nashwauk and with the state’s leases.
How did we get here?
Hang on tight for this one.
Essar Global and subsidiary Essar Steel Minnesota broke ground on the Nashwauk project in 2008, promising a new mining operation, pellet plant and steel mill that would employ hundreds. Things didn’t always go as planned and numerous stops and starts along the way led to Essar eventually drawing the ire of former Gov. Mark Dayton for lack of progress and missed payments to benefit state coffers. In 2016, as the state moved to terminate the leases, Essar Steel Minnesota filed for bankruptcy and the mineral leases were held up in the courts, rendering the Dayton administration and its plan to transfer them to Cleveland-Cliffs ineffective.
A group named Chippewa Capital Partners eventually emerged from bankruptcy with the project under CEO Tom Clarke and made quick payments to local contractors teetering on their own bankruptcy from the project’s failure. Clarke ran into his own problems and was eventually ousted, replaced by Gary Heasley, who led the project through another stagnant period before leaving.
In January 2019, the morning of Gov. Tim Walz’s inauguration, Essar Global rejoined as the majority owner and the state moved to debar them from doing business in Minnesota. To date, we don’t know the result of that debarment effort, though it may be moot now.
Essar failed to complete a deadline of finishing pellet plant construction by Dec. 31, 2019, giving the DNR a year to decide the leases’ fate. In December 2020, the state’s Executive Council — consisting of the governor, lieutenant governor, attorney general, secretary of state and auditor — approved an amended agreement for Essar contingent on a $25 million payment to the state. Cliffs CEO Lourenco Goncalves made the same offer, but was rebuffed, and Essar had until May 1 to submit an offtake pellet agreement, show a binding financial deal to finish the project and place $200 million cash in a U.S. bank account for immediate funds toward construction.
The DNR said on May 5 that Essar only met half of the $200 million cash requirement, which the company blamed on COVD-19 raging through India, but the state later poked holes in the company’s financing package and said $100 million was being held hostage by the company until the amendment was ratified.
The termination process started May 5 and completed on May 26, according to the DNR, when Essar didn’t complete a series of milestones that included completion of the pellet plant.
Got all that? Good, let’s move on.
What happens now?
Well, after Mesabi Metallics announced late Friday that they filed a lawsuit against the DNR’s termination effort, we’re playing the waiting game. If the DNR maintains control of the leases again and can go a few different directions. It could auction them off or negotiate directly with companies. Specifically interested are Cliffs and U.S. Steel. The agency hasn’t provided a timeline for a decision or tipped its hand on a preferred company.
What will the courts look at?
Mesabi Metallics is challenging that its financing packages for the project weren’t sufficient in the DNR’s eyes. It seems likely the credibility and the $100 million cash the company was short on will be the key points. The DNR has said it believes it has a solid case. What we’re watching out for is what more is publicly revealed about the Mesabi Metallics financing: Who is the “Mark AB” financier and who is the offtake agreement with? We could find out through filings.
What is Mesabi Metallics saying?
President Larry Sutherland said last week that he expects the DNR decision to be reversed. The company has said it met all the requirements of an amended lease agreement. He also said the company will move forward with construction despite not having state minerals and Cliffs-controlled minerals in Nashwauk, leaving them only a small amount of other private leases.
Is it viable for Mesabi Metallics to do that?
Without the leases, not logically. The DNR said a big issue with their funding package to finish construction was that it was contingent, and that was with the state leases assumed to be secured. Without those, the practicality of mining anything in a long-term scenario essentially doesn’t exist. Even with the state minerals, Mesabi was facing a mine life under 20 years, which isn’t ideal for investors. Now, they do still have private land and infrastructure in what they’ve already built, so if Mesabi finds a way to fund it and build the plant out, they could look to sell it and recoup something. Industry experts, however, believe the company is destined for bankruptcy if the leases stay with the DNR.
What are Cliffs and U.S. Steel saying?
It wouldn’t be shocking to find out Cliffs applied for the leases before the ink on the termination was dry, and we know Cliffs has already officially put its hat in the ring. They want this project and have for more than a handful of years. Goncalves has the leverage with the company’s land holdings and knows it. As for U.S. Steel, its recent interest, expressed earlier this month, was a surprise. We don’t know the extent of that interest yet, but sources have indicated it is real interest. Both have said they would use the ore for existing sites and expand their direct-reduced or hot-briquetted iron sectors.
How big of a factor are Cliffs’ current leases in Nashwauk?
This could end up being the biggest factor. Cliffs controls 3,700 acres of minerals, and with the state leases, would have the longest mine life of any other company if granted the state minerals.
What’s at stake for Hibbing Taconite?
There’s more at stake for the entire Range than most realize here. Hibbing Taconite is set to run out of ore around 2024. Cliffs has committed to feed HibTac ore from Nashwauk. U.S. Steel, the minority partner of HibTac, notably didn’t mention the mine in its statement about the state leases. It’s likely that any solution for HibTac requires some amount of permitting and that could mean a temporary idling of the plant no matter what. If Nashwauk isn’t the solution, Goncalves has said he will look elsewhere within the company’s mine sites to keep it running. The problem is this: Let’s say, hypothetically, Cliffs mines ore from another mine and ships it to HibTac for processing. That’s one mine lost and one mine that is being mined twice as fast as is now planned. Long term, that becomes a problem for more than just 700-plus jobs in Hibbing. Short term and long term, the Iron Range can’t afford to lose HibTac from a jobs perspective in the mines, but also the impact on contractors and spin-off jobs and taconite production tax shortfalls that would ripple throughout the entire region.
What are the roadblocks for U.S. Steel?
Cliffs and its land ownership are the biggest. It cuts the mine life down significantly and could make investors wary of pouring money into a project if the mine life doesn’t project them to either break even or profit. That said, does U.S. Steel have a path to use the ore without Cliffs’ land? It could and we just haven’t heard the plan and how the company would navigate the land map yet.
What are the roadblocks for Cliffs?
Political will. Even before Cliffs bought ArcelorMittal USA, it was in position to have a big upper hand on the Iron Range mining scene from its competitors by landing these leases. It would be reasonable for competitors to lobby lawmakers and state officials in hopes of blocking Cliffs from gaining what some would conceive as too much power in the region’s largest economic driver. That said, Cliffs has spent years positioning itself in Nashwauk through seemingly every avenue within its power. They’re the most logical to obtain the leases, but at this point, if the political will to give Cliffs the opportunity isn’t there, it might not matter.
Why don’t they work together?
The concept is simple if you only consider the Hibbing Taconite partnership. But the dynamics in the North American steel game have changed dramatically in the last two years. After Cliffs bought AK Steel and ArcelorMittal USA it became the largest integrated steel company in North America, surpassing … you guessed it, U.S. Steel. What was almost a token business rivalry before is now full-fledged and they don’t exactly get along that well either. So while a partnership would be ideal to the state, the idea appears to be dead on arrival.
What is the state and Iron Range Delegation saying?
Right now the standard line is to get a credible, viable company in control of the state’s leases. U.S. Steel and Cliffs check those boxes more easily than anyone else right now. Before U.S. Steel expressed interest, this was a slam dunk to go to Cliffs. Now? They’re at least the favorite. It’s a tightrope to walk without all options laid on the table. DNR officials said they will take their time to decide the next steps.
What’s a reasonable timeline?
Depends on the resolution of the lease lawsuit. DNR isn’t setting a timeline yet on its next move if it keeps the leases. It’s worth noting a bill sponsored by the Iron Range Delegation is in conference committee that would keep permits alive at the project site should the leases change hands. The Legislature is due back June 17 for a special session. If that bill passes, and whenever it becomes law, it would be a good starting point to expect real movement, if not before.