The Minnesota Department of Natural Resources (DNR) has objected to the plan for Essar Steel Minnesota (now called Mesabi Metallics) to emerge from Chapter 11 bankruptcy protection. Arguing the plan isn’t feasible, the agency asks the U.S. Bankruptcy Court in Delaware to deny Essar the right to assume mineral leases owned by the state. Those leases comprise about 40 percent of the mineral formation to be mined.
In a Monday filing, the DNR calls the reorganization plan “speculative at best and visionary at worst.”
“Essar has no plant, no operations, no income, no customer for its ore, no prospect of income for at least two years, no meaningful funds on hand, no existing shareholder willing to contribute new funds, no binding commitment from its plan sponsor, and no exit financing. These conditions have existed, unresolved, for the last eighteen months.
"Simply put, Essar’s plan fails any test of feasibility that could be applied, and confirmation should be denied,” the agency says in its objection.
The DNR has legal standing in the bankruptcy because it controls the mineral rights. In 2004 and 2005, the DNR entered into 27 separate long term leases with Essar’s predecessor, Minnesota Steel Industries, LLC, that allow mineral mining at the former Butler pit near Nashwauk. In 2012, the DNR entered into five more mineral leases with Essar. Those leases required Essar to complete construction of its pelletizing plant by year-end 2010 and to mine at least 5 million tons of ore in 2012, according to the DNR. When the plant was not completed, the DNR and Essar negotiated two time extensions.
Through 2014 and 2015, construction on the taconite plant was intermittent, with contractors frequently abandoning the site due to Essar’s failure to pay them, the agency contends. In November 2015, construction stopped altogether, with contractors owed in excess of $60 million, according to the DNR. Minnesota officials and Essar executives had been in the process of renegotiating the mineral leases during the first half of 2016. On July 8, 2016, Gov. Mark Dayton indicated those negotiations had failed. He instructed the Minnesota Department of Natural Resources to terminate Essar Steel Minnesota’s lease agreements. Essar, however, filed for bankruptcy protection before Dayton issued the order, transferring jurisdiction over the leases to the court.
Now, the DNR argues, Essar Steel Minnesota has failed to meet new milestones set by the bankruptcy court.
“Essar has either pushed off or completely abandoned each of these milestones,” the DNR said in its filing. “Indeed, it appears that Essar has gotten only as far as obtaining preliminary support from various stakeholders concerning the distributions under a hypothetical plan of reorganization, and in desperation, filed the proposed distribution as its ‘plan’ of reorganization.”
The agency listed several components it says are still missing:
• Essar has not secured a new offtake agreement, and does not propose to do so until after plan confirmation.
• Essar has not finalized the terms of an equity commitment.
• Essar has not entered into negotiations with potential lenders to provide the $600 million in exit financing Essar needs, and does not propose to do so until after plan confirmation.
• Essar’s new equity investor is not required to make an equity commitment until after the exit financing is completed.
• Essar is not proposing a date for commencement of plant construction, and its plan does not require that construction ever occur.
• Essar is not proposing a date for commencement of mining operations, commissioning of plant facilities, or full operations.
• Essar is not proposing to pay anything to the DNR after the leases are assumed other than base rents.
• Essar proposes to cure its defaults on all mineral leases (DNR and private) by posting a $5 million letter of credit, with no explanation of how such a letter of credit would be applied as between the lessors or why $5 million will be sufficient to cure its defaults.
• Essar includes no disclosure on adequate assurances of future performance under the leases (DNR or private).
“Essar’s current proposal to assume the leases with no commitments going forward other than to pay the base annual rents of approximately $242,000 a year does not meet the substance of the economic benefit the DNR negotiated,” the DNR said.
Mineral lease revenue is important to the state because it benefits primary schools and the University of Minnesota.
“If Essar had met it obligations to commence mining operations, it would be paying millions of dollars a year in royalties to the DNR, along with tens of millions of dollars a year in production taxes to the state,” the DNR said. “The DNR would be receiving more than $8.5 million a year in royalties if Essar had not defaulted on its obligation to build the plant and commence operations” plus $16.64 million in taconite production taxes.
“The DNR has already lost 18 months as Essar has floundered in locating the financing and offtake agreements needed to the complete the project. The Court should not force the DNR to wait any longer. The Court should instead find that Essar’s plan is not feasible, and deem the DNR’s leases rejected,” the filing says.
A hearing on the reorganization plan is scheduled April 26.