Court backs DNR in axing leases for beleaguered Nashwauk iron ore project

A Ramsey County court judge has upheld the termination of mineral leases for a troubled and long-delayed iron ore project near Nashwauk, Minn., pushing it further into limbo.

The Minnesota Department of Natural Resources (DNR) in May axed the leases for Mesabi Metallics after the company missed the deadline for a $200 million down payment to complete the half-finished taconite plant.

A few weeks later, Mesabi Metallics sued the DNR in Ramsey County District Court for breach of contract and good faith, asking the court to disallow the cancellation. Without the state leases, Mesabi Metallics' project as planned is not viable.

Ramsey County District Court Judge Robert Awsumb ruled Thursday that the DNR had properly terminated the leases, and that Mesabi owes the state $17.5 million in past due royalties.

The DNR and Mesabi Metallics cut a last-chance deal in December 2020. Mesabi Metallics was supposed to have lined up $850 million in financing for the project by May 1 — with $200 million of that deposited into a U.S. bank account.

But Mesabi Metallics ponied up only $100 million, blaming the coronavirus pandemic in India for financing delays. Essar Global, a multinational metals company owned by the wealthy Ruia family of India, effectively controls Mesabi Metallics.

In his ruling, Awsumb wrote that the $200 million payment was "material as a matter of law. In fact, it was foundational."

As for Mesabi saying it was hamstringed by COVID-19, Awsumb noted that the pandemic hadn't stopped Mesabi Metallics from negotiating a new lease accord over many months in 2020.

"The entire agreement at issue in this case was negotiated at the height of the pandemic," he wrote.

Essar Steel Minnesota started building the Nashwauk plant in earnest in 2011 with a planned 2013 completion date. But it ended up 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 tor Chapter 11 bankruptcy protection.

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.

When Mesabi missed more deadlines by Jan. 1, 2020, the state could have pulled the leases then. But it chose to craft yet another deal with Mesabi.

Mesabi's state mineral leases are much coveted by other companies.

Cleveland-Cliffs, the largest player on Minnesota's Iron Range, has long sought them. U.S. Steel, long the Range's dominant company and now second to Cliffs, has also shown interest.

The DNR would eventually put the leases back on the market. However, any releasing process could get delayed if Mesabi appeals Awsumb's decision — or if the company files Chapter 11 bankruptcy.

Chapter 11 protection freezes legal actions while temporarily shielding a company from its creditors claims. "I don't think there is any reason to think that bankruptcy is a possibility," said Dale Kurschner, a spokesman for Mesabi Metallics.

He said Mesabi Metallics hopes to "collaborate on concrete plans with all key stakeholders including the state of Minnesota. ... We remain committed to completing an iron ore pellet plant and building a value-added facility at our Nashwauk site."