BABBITT— Most of the workforce at the Northshore mine here will be on indefinite layoff starting on Monday. About 400 of Northshore’s 580 employees will be idled as a result of the shutdown, which comes even as Northshore’s parent company, Cleveland Cliffs, is experiencing some of its highest profits in years.
While the community of Babbitt has weathered many plant shutdowns in the past, the latest idling brings an additional level of uncertainty, due to longstanding concerns over royalties affecting the mine’s operations as well as restructuring within Cliffs that has reduced the need for iron ore from the company’s mines.
In announcing the plant’s planned shutdown back in February, Cliffs CEO Lourenco Goncalves had indicated that the company would be shifting production of DR-grade pellets over to the company’s Minorca Mine near Virginia. Cliffs had acquired the mine in 2020 as part of its acquisition of Arcelor-Mittal. Goncalves indicated that it could produce the same product for less at the Minorca facility, as compared to Northshore, in part because of a royalty structure in place at Northshore that has clearly irritated the company’s CEO.
“Because we are now able to produce (DR) grade pellets at Minorca, and mainly due to the ridiculous royalty structure we have in place with the Mesabi Trust, we will be idling all production at our Northshore Mine. No production, no shipments, no royalty payments,” Goncalves said during an investor call back in February.
The Mesabi Trust, a publicly-traded New York-based royalty trust was created in 1961 specifically to derive income from taconite production at the Peter Mitchell Mine, now operated as Northshore. In 2021, Cleveland Cliffs issued just over $57 million in royalty payments to the Mesabi Trust, a substantial increase reflecting the sharply higher prices for steel products. Those funds are distributed to shareholders primarily through dividends.
If the royalty structure at Northshore is a concern for Goncalves, there’s no sign that Cliffs is taking steps to address it. In a response to Cliffs’ announcement of the mine’s idling back in February, the Mesabi Trust issued a Securities and Exchange Commission response, indicating that Cliffs had made no recent attempt to address their stated displeasure over the royalty structure through a possible renegotiation. “Cliffs has not recently requested any changes to the royalty structure, which is governed by a 1989 royalty agreement, and Cliffs has historically failed to engage in meaningful negotiations requested by Mesabi Trust to address the interpretations of the royalty structure,” stated trust officials in their filing.
Cliffs’ apparent disinterest in talks could well reflect the company’s stated plan to operate the Northshore facility as a “swing plant,” which would operate only periodically when the company was experiencing high demand that it could not otherwise meet from its lower-cost operations.
At the same time, other recent Cliffs’ acquisitions point to a company that will need less taconite ore in the future. Among other changes, Cliffs has become a major steel producer and it has opted to cease selling its iron pellets to third parties. At the same time, the company acquired a scrap steel company last fall that will further reduce the company’s need for fresh ore to feed its steel production. Goncalves was explicit in his February investor call, noting that the company’s needs for ore “are not as high as before,” and that the company no longer needed to operate its mines at full capacity.