Gov. Dayton OKs Chippewa Capital Partners plan

Construction at Essar Steel Minnesota near Nashwauk on Oct. 8, 2015. The company since reorganized in bankruptcy as Mesabi Metallics, though lost in its bankruptcy bid to current owner Chippewa Capital Partners. (Aaron J. Brown)

One way or another, a long awaited new taconite mine and iron briquette mill near Nashwauk, Minnesota, puts new meaning in the old phrase “take a slow boat to China.”

On Saturday, Gov. Mark Dayton said he was satisfied with the financial package put together by Chippewa Capital Partners, the new owner of the former Essar Steel Minnesota project near Nashwauk. He also detailed the plan as Chippewa explained it to the state.

The decision maintains forward momentum for the project, which has been ensnared in financial and bankruptcy issues for more than a decade. This week, Chippewa will pay $39.5 million to local contractors still owed money from work done prior to Essar Minnesota’s bankruptcy. It also claims to have half a billion dollars in secured financing, with a feasible plan to get the rest from U.S. lenders later in the process.

Probably most interesting is company’s revelation that it has an offtake agreement with a Chinese steelmaker for the company’s first loads of iron ore. That means that not only will Chippewa not compete with other ore producers on the Iron Range, but that Mesabi ore will be used to make “foreign steel.” As I wrote the other day, this business is increasingly complicated.

Additionally, Chippewa says it plans an iron briquette plant on the heals of opening its taconite plant in 2019 or 2020.

“After very careful review of Chippewa’s progress to date, I believe that they have substantially satisfied its obligations to the Bankruptcy Court and the State of Minnesota,” writes Dayton.  “Their progress has been very significant; their securing the necessary financial commitments has been most impressive; their negotiations for an offtake agreement with a Chinese company could open an entire new market for Range production; and their firm commitment to repay contractors $39.5 million next week, altogether are sufficient for me to direct DNR to file with the Bankruptcy Court today the State’s support for the project’s continuation.”

Dayton addressed the fact that Cleveland-Cliffs wanted to stop this project under Chippewa management, preferring to gain access itself. However, Cliffs put in a paltry bid during the bankruptcy process, on the belief that Chippewa couldn’t raise the funds it appears to have raised.

Chippewa Capital Partners is a holding company formed by Virginia businessman Tom Clarke and British steelmaker Liberty House. Clarke owns ERP Iron Ore, the company that acquired Magnetation in another bankruptcy case. Clarke’s involvement means that ERP’s interests will be paired with what happens at this Nashwauk facility.

Clarke has told media that the mine will also be renamed at some point.

Here is the full text of Gov. Mark Dayton’s letter:

An Open Letter to People on the Iron Range:

Today is the State of Minnesota’s Decision Day, regarding the future of Chippewa
Capital Partners project at the former Essar site. Chippewa plans to construct a taconite pellet
plant to produce 7 million tons annually, and a Direct Reduced Iron/Hot Briquetted Iron
facility to produce 2.0 million tons annually.

Minnesota Department of Natural Resources’ and my staff have been very closely
monitoring Chippewa’s progress during the past three months. To satisfy its obligations under
the bankruptcy proceedings, Chippewa has done the following:

Transferred $39.5 million to an account to be paid to primarily Range contractors next
week, if the project is approved to continue. They have committed to paying vendors
the balance due them, when the company exits the bankruptcy proceedings, a
significant acceleration over what is required under the court approved bankruptcy
plan.

  1. Chippewa has secured a firm, binding commitment for $250 million, and a letter of
    intent for an additional $250 million equity investment in the project.
    Chippewa has already invested $25 million of its own capital in the project.
  2. Chippewa has provided a $4 million Letter of Credit to the DNR and a $1 million
    Letter of Credit to the private leaseholders, if they should default of the terms of the
    agreement.
  3. Chippewa has secured the strong intentions of two major US lenders to provide the
    remaining financing needed to complete the building of the former Essar site and
    begin production. I have heard from both lenders, and I am satisfied that their
    intended involvement is secure.
  4. Chippewa has obtained a Letter of Intent with a Chinese company for a ten-year
    offtake agreement to purchase a minimum of 4.2 million tons of pellets annually.
    With this offtake agreement, Chippewa’s products would not compete with other
    Range taconite operations for the existing US markets.
  5. Chippewa is working with Kiewit Energy Group Inc. towards concluding a General
    Contracting Agreement for project completion. Kiewit spent 90 days and thousands
    of hours to develop the $549 “cost to complete” projections. Kiewit is committed to
    utilizing local Minnesota tradespeople in completing the project on a projected 31-
    month timeline after mobilization. Kiewit is rated A+ by Standard & Poor’s Financial
    Services LLC and consistently ranked amongst the top contractors in the world.
    Kiewit is operating under a “Limited Notice to Proceed Agreement, ” positioning the
    project for continuous construction activitiy.
  6. Chippewa has engaged Tenova S.p.A. to design a Direct Reduced Iron/Hot Briquetted
    Iron facility at the Nashwauk location. Tenova is a world leader in the construction of
    DRl/HBI plants. Tenova has made meaningful progress on the design and integration
    between the DRl/HBI plant and the 7.0 mmpta Metso pellet plant. The design allows
    the Metso pellet plant to deliver hot DR Grade pellets directly into the DRl/HBI plant.
  7. On the other hand, failure to continue with Chippewa has very negative consequences
    for the Range. Cleveland Cliffs has expressed its interest in acquiring the site’s minerals
    leases; and Cliffs has proven itself to be a very strong, and greatly valued, leader of the
    revitalized Range mining operations. I do not want anything to damage that extremely
    important working relationship.

However, the State of Minnesota is not free to do whatever it wants with this project.
No thanks to Essar, it is controlled by the Bankruptcy Court. Chippewa made the winning bid
to acquire the project in the Court’s proceedings, and they were awarded the rights to it by the
Court.

If the Chippewa project did not continue, everything would revert back to the
Bankruptcy Court. As the attached comparison chart shows, re-establishing the project anew
under someone else’s ownership would be a lengthy process, during which time contractors
would not be paid, the site would not be rebuilt, and there would be few new jobs on the
Range.

After very careful review of Chippewa’s progress to date, I believe that they have
substantially satisfied its obligations to the Bankruptcy Court and the State of Minnesota.
Their progress has been very significant; their securing the necessary financial commitments
has been most impressive; their negotiations for an offtake agreement with a Chinese company
could open an entire new market for Range production; and their firm commitment to repay
contractors $39.5 million next week, altogether are sufficient for me to direct DNR to file with
the Bankruptcy Court today the State’s support for the project’s continuation.

Comments

  1. Aaron, this deal reminds me of an old phrase: “If it’s too good to be true…it probably isn’t”. Something about this deal and the revolving set of financing partners smells fishy…time as always will tell.

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