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Legislators lukewarm on Essar Steel extension

Marshall Helmberger
Posted 1/22/15

REGIONAL— Once-high-hopes for a steel mill employing 1,000 workers on the west end of the Mesabi Iron Range have faded, and now the prospect for a much-smaller project faces a new …

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Legislators lukewarm on Essar Steel extension

Posted

REGIONAL— Once-high-hopes for a steel mill employing 1,000 workers on the west end of the Mesabi Iron Range have faded, and now the prospect for a much-smaller project faces a new challenge.

India-based Essar Steel appears to face an uphill battle as it seeks to convince Iron Range lawmakers to extend an October deadline for completion of even its downscaled plans to build a taconite processing plant, or be required to reimburse the Department of Employment and Economic Development for up to $65 million worth of public infrastructure necessary for the plant.

Essar has already received a number of extensions, according to Itasca County Auditor Jeff Walker, who worked on the original agreement. “The original agreement required that they produce taconite by 2012, and steel by Oct. 1, 2015,” said Walker. “Through a series of extensions, they are down to taconite by about Oct. 1, 2015.”

The company still hopes to open the taconite processing plant, employing about 350 workers at the former location of Butler Taconite, near Nashwauk, but the request for a time extension suggests the company doesn’t expect to meet its already extended deadline.

The $65 million in infrastructure funding originated with DEED, which granted the funds to Itasca County for necessary infrastructure to accommodate the steel plant. Those improvements included construction of about ten miles of rail, installation of industrial transformers, and water and sewer connections. According to Walker, all but $1.2 million of the original grant has already been spent.

According to Jeff Nelson, who oversees the 21st Century Minerals Fund for DEED, the funding agreement, to which Essar was a signatory, requires the company to repay the cost of those improvements if it doesn’t have an operational plant by Oct. 1, 2015.

Construction on the taconite plant had ground to a halt last year as the company exhausted its available funding and struggled to obtain a new line of credit. Work on the site resumed this past fall when the company secured new financing, but the looming deadline poses yet another hurdle.

While Iron Range legislators supported Essar’s original plan for a steel mill in the hopes of creating added value and generating additional jobs from the region’s taconite resource, they’re getting pushback from other Iron Range pellet producers now that the project may be limited to taconite production. The Essar plant could produce up to seven million tons of taconite annually, putting it in direct competition with existing taconite plants.

Iron Range legislators met last week with Cliffs Natural Resources CEO Lourenco Goncalves, who voiced concerns about using public dollars to subsidize new taconite production when there is little need for additional capacity given projections for slower economic growth globally this year. Cliffs owns and operates mining operations in Babbitt, Silver Bay, and Eveleth and is a minority owner and manager of Hibbing Taconite.

Lawmakers were sympathetic to Goncalves’ viewpoint.

State Rep. David Dill, DFL-Crane Lake, said Essar’s original plan included a taconite plant, but the pellets were supposed to be used at the accompanying steel mill.

“It’s a delicate balance between supply and demand domestically,” said Dill. “Adding more taconite production into the mix could further upset that balance. I don’t want to be in position to play referee for the taconite plants.”

Senate Majority Leader Tom Bakk, DFL-Cook, also expressed reservations. “There’s not a lot of appetite among the Range delegation to support an extension for Essar,” he said. “We’ve never provided public money for a pellet plant.”

Bakk said he’s not comfortable with helping Essar build a plant that will displace some the taconite pellets already in production at existing plants. “Essar’s got a tough path ahead of them on this.”

Sen. David Tomassoni, DFL-Chisholm, said Cliffs’ concerns about public money subsidizing a competing taconite plant are legitimate.

“One other issue is we have these long-time companies that have been on the Iron Range for a long time,” added Tomassoni. “I don’t think we want to lose plants we already have here.”

Tomassoni noted that companies are worried about what is happening with the iron ore market in Australia and Brazil, and with the slowing of demand from China.

According to Tomassoni, Cliffs’ Goncalves told legislators that the company’s plan now is to put all its eggs in northern Minnesota and Michigan and make long-term investments in taconite production on the Iron Range. Part of the strategy includes investing in (DRI), which produces pellets that are 98 percent or more iron as opposed to the 62-63 percent in taconite pellets.

“They’re the bird in the hand here right now,” said Tomassoni, referring to Cliffs and other existing Iron Range taconite producers. State Rep. Jason Metsa, DFL-Virginia, did not rule out a loan extension with Essar, but said he is taking a wait-and-see approach.

Sen. Tom Saxhaug, DFL-Grand Rapids, also did not commit, noting that that some taconite mines may be nearing a point where they can no longer extract enough minerals to operate and the potential for new capacity should be considered.

Dill acknowledged that the new plant proposed by Essar would be one of the most modern plants. But he still has strong reservations about funding the project with public dollars. “If Essar thinks the Range delegation is just going to roll over, we’re not,” he said.

Meanwhile, Tomas-soni and other legislators also alluded to Essar’s questionable track record on this project.

“You lose the trust factor at some point with broken contracts and people not getting paid,” he said. “When they produce a pellet, I’ll believe it.”

“Frankly, Essar hasn’t performed,” agreed Dill.

Dill said the Iron Range Resources and Rehabilitation Board took precautions with the $6 million loan it provided by requiring an irrevocable letter of credit with the Bank of India in New York. The IRRRB could recoup its investment by calling the loan when it matures in October 2015 if a loan extension is not granted.

“I’m very comfortable that the money borrowed from the IRRRB is perfectly secure,” Dill said.

As for the $65 million in infrastructure grants, the specifics are less certain, and it’s unclear if the company would be able to repay the funds and keep its downscaled project moving forward. Essar spokesperson Mitch Brunfelt did not return multiple phone messages seeking comment for this story.

Dill said legislators will need to scrutinize the agreement before deciding whether to amend its provisions. “What are the terms and conditions of the agreement with the state and what recourse does the state have if Essar fails to pay off the grants?” Dill asked.

Walker said the agreement puts the onus on Itasca County to recover the funds, if Essar fails to meet the terms of the agreement. Walker said the agreement includes a sliding scale of reimbursement, so Essar likely would not have to repay the full amount if it gets its taconite plant up and running relatively soon. But unlike the IRRRB loan, which is fully collateralized, Essar made no such commitments for the grant funding, said Walker. But Walker noted that the county still owns the new rail line that serves the plant, so as long as the facility is operational, he expects that Essar will have little option but to pay the money back. “They’d be hard pressed to get anything in or out of there without the rail line,” said Walker.

Cook-Orr Editor Tom Klein contributed to this report.