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Serving Northern St. Louis County, Minnesota

Essar earns reprieve but frustration remains

Tom Klein
Posted 12/9/15

REGIONAL – Essar Steel Minnesota has paid $20 million in overdue bills to contractors working on its $1.9 billion Nashwauk taconite plant, earning a reprieve from Gov. Mark Dayton who had …

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Essar earns reprieve but frustration remains

Posted

REGIONAL – Essar Steel Minnesota has paid $20 million in overdue bills to contractors working on its $1.9 billion Nashwauk taconite plant, earning a reprieve from Gov. Mark Dayton who had threatened to call for immediate payment of a $66 million loan that the company owes the state.

While Essar’s action has bought it more time, Iron Range legislators plan to keep pressure on the company to keep its payments to contractors current.

“I knew years ago that Essar was a bad actor. Maybe that’s the way they do business in India. That’s not the way we treat our contractors in this country,” said Senate Majority Leader Tom Bakk, DFL-Cook.

State Rep. Jason Metsa, DFL-Cook, said Essar had a “handshake agreement” to pay all its vendors by the end of October during a session hosted by the Iron Range Resources and Rehabilitation Board but never met its commitment.

“There were promises made us during that session with Essar outlining its goals and timelines for achieving them. But it seems to me it’s been just smoke and mirrors.”

Dayton had issued an ultimatum to Essar last week that it pay contractors on time and for past due bills. If the company failed to respond by Wednesday, Dayton said he would call in the state’s loan.

On Friday, Dayton said officials from the Iron Range Resources and Rehabilitation Board and state Department of Employment and Economic Development confirmed that Essar had paid up to $20 million in past due bills.

In addtion, Essar officials said representatives from an “international bank” are at the Nashwauk site to investigate whether to loan Essar money to pay additional past-due bills by the end of the year.

That additional capital “would also help assure the completion of the project, with timely payment of its contractors and vendors moving forward,” said Matt Swenson, Dayton’s spokesman at the Capitol.

Swenson added that Dayton is also “sympathetic to the concerns of some vendors, who have expressed that more strident demands (by the state) at this time could jeopardize the future of the project, and limit the company’s ability to make timely payments on any outstanding and future obligations,” Swenson said.

Essar is working to obtain funding to pay back the state as well as make good with its vendors, a spokesman for the company said.

“We appreciate the work and support of the governor and the state agencies as we here at Essar continue to focus our efforts on this massive project,” said Mitch Brunfelt, Essar Steel Minnesota spokesman. “We also hope to finalize a payment agreement with the governor’s administration soon to reimburse the state for the $65.9 million grant utilized to construct the publicly-owned infrastructure servicing the Essar Steel Minnesota site.”

Frustration with Essar

Iron Range legislators shared the governor’s frustration with Essar and supported him when he issued the ultimatum last week.

“The governor has lost his patience with them and so have I,” said state Rep. Tom Anzelc, DFL-Balsam Township. “Construction has basically stopped at the site. We don’t do business with companies that don’t pay their bills. It’s not acceptable.”

State Rep. Jason Metsa, DFL-Virginia, agrees.

“They’re not paying our local businesses on time,” Metsa said, who said contractors have quit working on the project after Essar has failed to pay its bills. “We have people applying for unemployment benefits that should be working out there. It’s extremely disappointing.”

Essar Steel also drew criticism from legislators earlier this year after it downscaled its plans for a steel mill that would employ 1,000 workers, to build a taconite processing plant, which would employ 350 workers.

The announcement by Essar resulted in pushback from other Iron Range pellet producers, who said it would put the state-funded project in direct competition with existing taconite plants.

“Essar didn’t live up to the contracts they signed,” Bakk said. “They’re not building what they said they were going to build. We need another seven million tons of taconite pellets like we need a hole in the head.”

“It’s very clear to me Essar will not be building a steel mill,” said Metsa. “They have a path toward building a taconite plant and if they can do that, more power to them. We’re not trying to shut down the company, but as sure as heck, I won’t be supporting any future efforts to adjust the language for them.”

Pursuing payment of loan

Essar has been in default on the state money since October because it failed to live up to the 2007 agreement to build the iron and steel mill that would have added more jobs and brought added value to Minnesota iron ore that officials have sought for decades.

Recovering the state’s loan, however, may be difficult.

The $66 million in infrastructure funding originated with the state’s Department of Employment and Economic Development, which granted the funds to Itasca County for necessary infrastructure to accommodate the steel plant. Those improvements included construction of about 10 miles of rail, installation of industrial transformers, and water and sewer connections.

Technically, Essar would still be responsible for reimbursing the state for the cost of those improvements, according to Jeff Nelson, who oversees the 21st Century Minerals Fund for DEED.

However, the agreement puts the onus on Itasca County to recover the funds. The agreement includes a sliding scale of reimbursement, so if Essar were able to get a taconite plant up and running soon, it may not have to repay the full amount.

Anzelc said that complicates matters if the dispute heads to the courts.

Itasca County Auditor Jeff Walker, however, said the county’s main responsibility is to initiate an enforcement action. “We’d have to start the legal action against Essar Global and ESM if the state is forced to see repayment of the loan,” Walker explained. “But the rest falls on the state. We could take steps to protect the county in the agreement. We would only be in trouble if we collected the money from Essar and didn’t turn it over to the state.”

Although the county attorney would be charged with pursuing the legal action, Walker said the attorney could request assistance from the state’s attorney general.

Bakk said the state would assist the county and would have to find some way to alleviate the financial burden for the county for any legal costs it might incur.

Metsa suggested the state take steps in the future to avoid counties in Itasca’s situation. “Any business arrangement that puts the state’s taxpayers on the hook should be under the jurisdiction of the attorney general,” he said. “If any legal proceedings are required to pay back a state loan, it should be the attorney general’s job.”

Meanwhile, Bakk is adamant that the state should pursue repayment of the loan.

“If we have to spend the money to go to India to file a claim and go to court, we need to do it,” Bakk said.

Walker said the county dispersed the dollars provided for infrastructure and kept account of the expenditures.

“Those are tangible assets,” said Walker. “The rail line will be utilized and the other infrastructure improvements could attract other development if the Essar deal falls through.”

Metsa added that timelines are built into the mineral lease agreements that Essar has with the state. If those timelines are not met, the lease rights revert to the state.

Meanwhile, the IRRRB took precautions with the $6 million loan it provided by requiring an irrevocable letter of credit with the Bank of India in New York.

Should the IRRRB decide to collect on its loan, Metsa said all it requires is a plane ticket to New York and IRRRB Commissioner Mark Phillips could have the $6 million repaid that day.

Bakk said he wanted to exercise that letter of credit earlier, but then IRRRB Commissioner Tony Sertich granted Essar an extension on the loan.

Essar had promised to pay on the loan to the IRRRB, which now totals $6.8 milion with interest, by Dec. 11.

Essar paid $750,000 in interest in November as part of the agreement, according to Phillips. He expected to talk to Essar representatives about the remaining principal.