Essar Steel Nashwauk project faces another deadline it is unlikely to meet

As another big deadline for a $2.6 billion taconite plant in Nashwauk looms at the end of the month, the project once considered a godsend for the Iron Range's economy is once again controlled by the very outfit that drove it into bankruptcy.

The history of the project is fraught with broken promises and missed deadlines, and to nobody's surprise, the latest deadline will almost certainly be missed, too, which means the state of Minnesota could pull a critical mineral lease on Jan. 1.

After Essar Steel Minnesota filed bankruptcy in 2016, a company called Mesabi Metallics ended up trying to revive the project. But it failed, too, and these days an arm of Essar is essentially running Mesabi, publicly inserting itself back into the iron venture after buying out its debt earlier this year.

The state sees Essar as a pariah and is seeking to bar it from even doing business in Minnesota. Yet the state must somehow reckon with Essar if it wants to keep the project from collapsing completely.

"It's certainly always been our priority to see the project go forward," said Jess Richards, an assistant commissioner with the Minnesota Department of Natural Resources (DNR).

The state could yank the project's lease soon after its expiration, but it can wait, too. "We have the whole year [2020] to decide."

Richards said the DNR purposely hasn't spoken with Essar executives so far, and "I don't see us meeting with Essar." The DNR would consider a "passive" role for Essar in the iron ore project, but one with "no operational or decisionmaking control," he said.

Mercuria, a giant Swiss commodities trading group, has been publicly interested in helping to finance the project since September 2018. Stelco, a Canadian steelmaker, has shown interest in buying a good chunk of the plant's iron ore pellet production — provided that the plant is completed.

"Stelco and Mercuria are really hot about doing this," said Ron Dicklich, a former Iron Range legislator who was a lobbyist earlier this year for Essar Capital Americas.

Richards said the DNR has talked with Mercuria and Stelco "on various occasions over the last several months." But he added that the DNR "does not have a specific goal related" to either company.

"The DNR is prepared to consider proposals by any credible entity that may be interested in moving the Mesabi project forward. All discussions with Mercuria and Stelco have been in this context."

Mercuria and Essar declined to comment; Stelco didn't return calls.

Essar was heralded back in 2007 when it bought out a moribund effort in Nashwauk to build a new taconite facility coupled with the Iron Range's first steel mill. (The latter later fell by the wayside.) Essar Steel Minnesota started construction in earnest in 2011 with a planned 2013 completion date.

But Essar ended up scrambling for cash, struggling at times to pay its suppliers and failing to reimburse the state for about $65 million in local infrastructure improvements for the project. In July 2016, after myriad missed deadlines, then Gov. Mark Dayton moved to terminate Essar's lease.

Without the state lease, the Nashwauk project isn't viable. Essar Minnesota responded by filing for reorganization under Chapter 11 of the U.S. Bankruptcy Code, owing its creditors well over $1 billion.

By the end of 2017, the former Essar Minnesota — rechristened Mesabi Metallics — was exiting bankruptcy with new owners, a new plan and a new lease agreement with the state of Minnesota. The lease called for the taconite pellet plant to be completed by the end of 2019.

Essar returned in January 2019. As part of a $1.75 billion repayment of its various lenders worldwide, Essar Global bought $260 million in face-value secured notes issued by Mesabi Metallics — substantially all of the taconite venture's post-bankruptcy debts.

DSA owned Mesabi Metallics through a British Virgin Islands company called Nubai Investments. Nubai was committed to putting $250 million in equity into post-bankruptcy Mesabi Metallics. Some of that money — at the state's insistence — partly paid Minnesota contractors who'd gotten stiffed by Essar.

In addition to the $250 million, Nubai/DSA tried but failed to tap the capital markets for another $650 million needed to complete the project. DSA didn't respond to requests for comment.

Now an arm of Essar is trying to raise that $650 million, but the state isn't willing to give it another chance.

Soon after Essar bought Mesabi's debt in January, the DNR and the Minnesota Department of Administration launched proceedings to prohibit Essar Global and its affiliates from doing business in the state, as well as to bar Madhu Vuppuluri, Essar's point man for the crippled taconite project.

The debarment process "is still under review by the department and a date has not been set for a final determination," said a Department of Administration spokeswoman. Essar Global says the state has no authority to banish it or its affiliates — or Vuppuluri personally.

A trustee appointed to recover funds for unpaid creditors sued Essar affiliates for allegedly siphoning millions of dollars from the Minnesota project to Essar ventures overseas. The litigation also named Vuppuluri and two members of the Ruia family.

"The Ruia family … used [Essar Steel Minnesota] as a piggy bank to disguise the financial distress of their web of affiliates through a corporate shell game," the bankruptcy trustee said in an amended complaint filed in July. The trustee said Vuppuluri and another Essar Steel Minnesota executive "engaged in self-dealing" and acted in "bad faith."

However, a federal judge rejected key aspects of an earlier similar complaint by the bankruptcy trustee against Essar affiliates and Vuppuluri. The bankruptcy trustee failed to sufficiently allege that Vuppuluri engaged in a self-interested transaction; therefore he didn't breach his loyalty to Essar Steel Minnesota, the judge wrote.

Vuppuluri appears to be in charge of the Mesabi project again.

His title these days is CEO of Essar Capital Americas; that's how he's addressed earlier this year in letters from Mercuria and Stelco, which appear in court records. The letters offer support for Essar's effort to revive the iron ore project.

Banks from India to the United States lost hundreds of millions of dollars in Essar Steel Minnesota's bankruptcy. Essar Steel Algoma, a Canadian steelmaker, slipped into bankruptcy less than a year before the company's Minnesota project did.

And Essar Steel India, the Essar empire's historic crown jewel, toppled into insolvency in 2017 and was purchased this year by ArcelorMittal, its longtime Indian rival. (ArcelorMittal, the world's largest steelmaker, owns part of one taconite operation on the Iron Range and all of another.)

At this point, Geneva-based Mercuria seems critical for the Mesabi project. The company is one of the world's largest oil traders, with interests in iron ore and metals.

Mercuria announced in September 2018 it would lead an effort to raise the $650 million in debt for the Mesabi project. The deal never got done while DSA/Nubai owned Mesabi Metallics.

But in an April letter to Vuppuluri, Mercuria's investment director said the firm still "sees significant potential" in Mesabi, adding that "the fundamentals of the project (ore grade, cost structure, infrastructure setup, community support, etc.) would make it a world-class integrated iron ore asset."