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April 11, 2017

Another Bidder Emerges for Nashwauk Mining Project

Business North

Mesabi Metallics said Monday another potential buyer hopes to become owner and developer of the mine and partially completed pelletizing plant located in Nashwauk.

Essar Steel Minnesota LLC, the former developer, declared Chapter 11 bankruptcy approximately half way through the project, which now is being managed by Mesabi Metallics.

The latest proposal emerged from a group that calls itself “Chippewa.” The new suitor is affiliated with ERP Iron Ore, which purchased the assets of Grand Rapids-based Magnetation to resolve a bankruptcy in 2016. ERP also has purchased metallurgical coal assets through bankruptcies, Mesabi Metallics said in a prepared statement. Both coal and iron ore are needed to manufacture steel.

Mesabi Metallics filed its reorganization plan in January. It contemplates emerging from bankruptcy under the ownership of SPL Investments, a financial sponsor that has funded operations during the bankruptcy. The plan is scheduled to be heard by the United States Bankruptcy Court in Delaware on April 26.

That plan, however, could be rejected if "higher and better" offers are received from other interested investors. David Pauker, chief restructuring officer of Mesabi Metallics, said that bankruptcy laws require a competitive process to ensure that recoveries to creditors are maximized.

"We are pleased to have several potential sponsors competing for the opportunity," Pauker said.

Both the SPL and Chippewa proposals offer existing pre-petition and post-petition creditors and lenders a total of more than $250 million through a combination of cash payments, assumption of obligations and issuances of new debt, he noted.  That amount, Pauker said, is just a fraction of what Essar invested in the project. Both of the potential sponsors have expressed interest in developing a direct reduced iron (DRI) facility on the site after building crushing, concentrating and pellet production facilities. Essar once made the same commitment but later dropped the DRI plan. Mesabi Metallics is currently comparing the two proposals.

A third proposal, received from competitor Cliffs Natural Resources, Inc., offered to purchase substantially all of the assets of Mesabi Metallics for $75 million as part of a liquidation. Cliffs CEO Lourenco Goncalves has said the firm would use the Nashwauk ore as feedstock for a direct reduced iron pellet.

"The proposal from Cliffs appears to be a continuation of Cliff's long-running effort to take control of the project without paying fair compensation to creditors or lenders," Pauker said "Our preliminary view of the Cliff's proposal is that it is the financial equivalent of a liquidation and is therefore far less favorable to our creditors. We will consult with our stakeholders to hear their views, but we think it is in the interests of creditors to focus on proposals that reflect some reorganization value."

Cliffs responded Monday evening.

“Cliffs presented an all-cash offer of $75 million, which we believe represents a realistic value for the assets. Such concrete indication of interest stands in contrast with the plans put forth by both Mesabi Metallics and Chippewa, which are loaded with assumptions, conditions, contingencies, smoke and mirrors. The Iron Range people have heard this story before,” Goncalves said.

He contends there currently is no domestic buyer for additional taconite pellets that might reach the market. He doesn't believe SPL has the financial resources to develop the project, and without a pellet customer, would not be able to find buyers for its bonds or securities.

Pauker said a primary concern is to ensure stakeholders receive some repayment for work and other investments already made in the plant.

"Creditors, lenders and government stakeholders have all expressed the view that an open and competitive process is necessary to ensure that ownership passes to the investor that is willing to provide creditors with the highest recoveries. That is exactly what is occurring," Pauker said.

The reorganization is being overseen by the Bankruptcy Court, which will also determine whether the reorganization is feasible. Final bids are due on April 21 pursuant to bidding procedures that are scheduled for approval at an April 13 hearing.

All of the offers are non-binding and subject to further documentation if accepted.

Construction of the Nashwauk project stalled in 2015 when its previous owner and contractor, Essar Global and Essar Projects, ran out of money to complete the half-built facility. Mesabi Metallics' independent directors retained outside counsel to investigate the circumstances of Essar's failure, which resulted in a $1 billion lawsuit against Essar that is currently pending. It has been estimated that at least $800 million is needed to complete the project.

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