State axes leases for troubled Nashwauk iron ore project

A troubled and long-delayed iron ore project in Nashwauk has reached a new level of limbo — one that could tie up the mineral leases there even longer, or finally free them up.

The Minnesota Department of Natural Resources (DNR) terminated Mesabi Metallics' mineral leases Wednesday, seemingly washing its hands of the $2.6 billion project. But Mesabi Metallics, which is controlled by Essar Global, says it is moving ahead with plans to finish a half-built taconite plant.

The state gave Mesabi Metallics a last-chance lease extension in December, providing that the company meet a host of new provisions by May 1. On May 5, the DNR announced Mesabi had failed to meet those provisions, including having a requisite $200 million in hand.

Mesabi had 20 days to cure its defaults of the December agreement, but it did not do so.

"We have terminated the leases, so therefore they cannot mine state ore," said Jess Richards, assistant DNR commissioner. The agency will give notice to the company to remove any equipment it has on state mineral lands, he said.

While Mesabi also plans to mine ore on private lands, Iron Range players have said the project did not appear viable without the state leases. "Certainly, a large chunk of their mine plan involved state ore," Richards said.

But Mesabi's President Larry Sutherland said Wednesday "we are very optimistic" and "committed to moving this project forward."

About 25 workers are on site doing road work, and "all contracts are being finalized for construction work to complete the facility," he said. Sutherland, a 45-year steel industry veteran who retired from U.S. Steel in 2020, became Mesabi's president just two weeks ago.

Asked how the project could work without state mineral leases, Sutherland said Mesabi planned to continue working with the DNR.

The DNR has a differing opinion on the relationship.

"Mesabi Metallics and its parent company Essar Global have not demonstrated credibility in their dealings with the DNR," Richards said.

Sutherland also noted that Essar Global's co-founder Ravi Ruia publicly said last week during a visit to Nashwauk that the company will "take all necessary actions to protect its interest." In other words, a lease-related lawsuit against the state could be in the offing.

Mesabi Metallics on Wednesday took out a full-page advertisement in the Star Tribune, signed by Ruia, touting the project and its economic benefits for Minnesota.

Mesabi's state mineral leases are much coveted by other companies. Cleveland-Cliffs, the largest player on Minnesota's Iron Range, has long sought the leases. And within the last couple of weeks, U.S. Steel, long the Range's dominant company and now second to Cliffs, notified the DNR of its interest.

Both companies, like Mesabi Metallics, are looking to build a plant near Nashwauk that would further process taconite pellets into a purer form of iron, Richards said.

The state could put the erstwhile Mesabi leases up for bid or arrange a negotiated sale. "We have not made any decisions on how we will manage these state minerals in the future," Richards said.

By May 1, Mesabi Metallics had $100 million of the $200 million the state had earlier demanded. The company blamed the COVID-19 calamity in India for financing delays, saying it would have the money soon.

But in a May 19 letter to Mesabi Metallics, Richards wrote that "the COVID crisis in India was not the reason Mesabi failed to obtain $200 in immediately available funds by May 1. Rather, it was never Mesabi's or Essar Global's intent to meet this condition."

In an interview, Richards said Mesabi would put up the full $200 million only if the DNR would agree that the company had met all conditions from the December 2020 lease extension. The DNR wouldn't do so because the conditions hadn't been met, he said.

In its letter to Mesabi, the DNR said it was particularly troubled by financing for the project. A lender named Mark AB, which is apparently based in Dubai, "lacks the resources" for the $450 million term loan it's supposed to provide and "is not a credible lender for the project," the DNR letter said.

Sutherland declined to comment on the details of Mesabi Metallics' financing, which totals $850 million. But he said, "we have binding and enforceable agreements for our whole financial package."

Essar Global, a multinational metals and energy company owned by the wealthy Ruia family of India, was heralded back in 2007 when it bought out a moribund effort in Nashwauk to build a new taconite facility coupled with the Iron Range's first steel mill. (The latter later fell by the wayside.)

Essar Steel Minnesota started construction in earnest in 2011 with a planned 2013 completion date. But it ended up scrambling for cash, stiffing contractors and failing to reimburse the state for about $65 million in infrastructure improvements for the project.

In July 2016, after myriad missed deadlines, then Gov. Mark Dayton moved to terminate Essar's lease. Essar Minnesota responded by filing Chapter 11 bankruptcy.

By the end of 2017, the former Essar Minnesota — rechristened Mesabi Metallics — had financially reorganized with new owners, a new plan and a new lease agreement with the state of Minnesota. But Mesabi Metallics quickly became a shambles.

Essar re-entered the picture in January 2019 by buying up $260 million of Mesabi's outstanding debt and eventually what was left of its equity.

In December 2020, the state extended Mesabi's lease agreement over strong objections from Cleveland-Cliffs.

To get the extension, Mesabi Metallics and Essar paid $24.5 million in debt owed to the state and ponied up another $11.5 million to cover previously owed rents and royalties to local governments.