Essar owes $1.1 billion in bankrupcy

Construction continues at Essar Steel's new taconite plant near Nashwauk on Oct. 8, 2015. (Aaron J. Brown)

Construction continues at Essar Steel’s new taconite plant near Nashwauk on Oct. 8, 2015. (Aaron J. Brown)

Bankruptcy proceedings began recently for Essar Steel Minnesota, the struggling subsidiary of the Indian company Essar Steel, which seeks to build a new iron mine in Northern Minnesota. The story draws rapt attention from residents and leaders on the Mesabi Iron Range. For good reason. The outcome of this case will determine if hundreds of new jobs are created, but also if the company actually pays back $49 million owed to local contractors.

The initial “tale of the tape” is staggering. Essar Steel Minnesota says it owes more than $1.1 billion for the project, more than double the assets on the ground.

As we know from earlier coverage, the State of Minnesota and rival company Cliffs Natural Resources want a different outcome from this bankruptcy case. They’ve jointly announced a deal for Cliffs to take over the mineral rights and purchase the project assets amid the bankruptcy proceedings. The sooner the better, they say.

However, everyone close to the matter knows that the bankruptcy could take months, or even years. Essar, for its part, argues that it’s not dead; in fact, Essar says it will build the plant as described.

That’s a bold claim for a company that struggled so mightily just to build half a plant. But they cite a recent small bridge loan and the recent hire of new CEO Matthew Stock, an experienced hand in international steelmaking, as a sign that they’re serious about raising funds and paying back their debts.

Residents of the Iron Range have heard that before, however, and rightly remain skeptical. Meanwhile, Cliffs has two goals here. The long range goal is to produce direct-reduced iron as described in their proposal. But in the short run, they want to tie up Essar and build market share.

Even though Cliffs seems to have the upper hand, these companies will continue sparring.

One of the complicating factors is the short term rebound of steel and iron ore prices. In general, that’s good for the industry, but it could also attract new investors to projects like Essar. Remember, they claim lack of investment as their biggest problem. So what’s the bankruptcy court going to do if Essar shows up months from now with half the money? Or if some other company shows up? And, of course, Cliffs will be there to offer its bid. Lawyers. Dueling MBAs. Confusion.

Cliffs hopes to swoop in amid a tough market to provide a stable, steady option in taking over Essar. But their ideal outcome involves threading a shrinking needle.

One thing seems certain. Big projects aren’t big projects until the money is in place. Everyone on the Iron Range should be aware of that by now.

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