Essar Steel Minnesota is behind on payments to contractors

Cash-hobbled Essar Steel Minnesota is in hot water again. Contractors and workers have called the state saying the company is late on payments for the massive $1.9 billion taconite production facility being built on the Iron Range.

Some contractors said they are considering pulling workers from the job site, and a union representing workers there said others already have pulled some of their employees.

"Based on constituent calls and calls from businesses and workers I received, the buzz is that there appears to be another cash-flow issue at Essar with contractor and vendor payments being late [or] reduced," said state Rep. Tom Anzelc, who is also chairman of the Legislature's Iron Range delegation. "There have been layoffs at the site."

Reasons for the layoffs are more complicated than the late payments, said Mitch Brunfelt, assistant general counsel for Essar.

"My understanding of the reductions in staff we have had thus far is not related to that," Brunfelt said. Instead, one contractor laid off 30 workers two weeks ago because its part of the project was completed. Another temporarily furloughed 50 workers until third-party engineering and supply-chain delays clear up. Yet another group of workers will soon get time off for deer hunting season, Brunfelt said.

"We are working to get current on our payments to contractors, and they are working with us," Brunfelt said. "We understand that we need to get current with our contractors or they will eventually have to pull workers off the site. We understand that."

Essar originally was going to build a steel production plant in Nashwauk. It pulled back, however, to a taconite operation that instead of opening Oct. 1 will start production next year.

Barry Davies, business manager for the Ironworkers Local 512, said 40 of his 200 members at the site were laid off in the past two weeks.

"There have been some late payments from Essar to our contractors. This happened once before," Davies said. "Even a few weeks of delay is quite a bit for our contractors to come up with on their own."

Craig Fellman, president of the Jamar Co. that installed piping, ventilation and mechanical systems at the Nashwauk site, said Essar has paid for every job in which the company deals directly with the company.

"[The company] is being very proactive in getting [some] payments out there," Fellman said. "There is only one contract that we are having some trouble on," and it's one in which Jamar is a subcontractor waiting for the main contractor to be paid.

Essar's Nashwauk construction has sputtered on and off since 2008 as the company struggled to secure funding. It ground to a halt last year, but crept back to life last fall after Essar successfully secured overseas financing that brought an end to months of inactivity.

Mike Hanson, president of Hunt Electric, finished his portion of the Essar project in Nashwauk six months ago and was paid in full.

"But I know some of their financing issues are fairly public, and there are time periods when they have financing and funds and they pay in a timely manner," he said. "But then at other times, they pay in an extended manner that is longer than anyone anticipated."

The state of Minnesota has been pulled into Essar's financing woes. Essar owes the state $65.9 million in state grants and $6 million in state-issued loans after failing to comply with the terms of an agreement in which Essar promised to deliver a working iron ore-to-steel mill by Oct. 1.

Essar and the state are in negotiations over how that money will be paid back. Officials at the Minnesota Department of Employment and Economic Development said negotiations continue. Brunfelt said Essar officials are waiting to hear back from the state on its latest proposal.

"Essar is still stuck on trying to extend the terms and conditions of its repayment of the state subsidies," Anzelc said. "In other words, they have not agreed to write a check. They are bargaining with the state and are proposing incremental payments over time, which to me lends credence to the notion that this is a company that has cash-flow issues."