ISHPEMING - A Canadian steel manufacturer that purchases iron ore pellets from Cliffs Natural Resources filed for bankruptcy July 16, but said efforts to restructure and refinance its debt won't affect the company's day-to-day operations or its relationship with Cliffs.
Sault Ste. Marie, Ontario-based Essar Steel Algoma Inc., Canada's second largest producer of integrated steel last year, will work to reduce $1.2 billion in outstanding debt by refinancing and restructuring through a "Plan of Arrangement" under the Canada Business Corporations Act, that country's bankruptcy law.
It has also filed for protection from U.S. creditors under Chapter 15 of the U.S. Bankruptcy Code. Chapter 15 provides legal recognition of a foreign company's bankruptcy proceedings in another country.
Essar Steel purchases all of its iron ore from Cliffs, with which it has a contract through 2024.
The CBCA-facilitated refinancing and recapitalization deal will not affect Essar Steel's business with Cliffs or its production, according to Brenda Stenta, manager of corporate communications for the company.
"There's no impact to employee, trade, pension or supplier obligations," she said. "It remains business as usual here at Essar Steel - normal production levels."
Dale Hemmila, Cliffs' manager of public affairs for North America, said he doesn't anticipate there being an impact to Cliffs' agreement to continue to provide Essar with iron ore as per its contract.
"From our standpoint, we're still providing Essar with pellets and we're still watching their bankruptcy," he said.
According to court documents filed with the U.S. Bankruptcy Court in Delaware, Essar attributed its economic difficulties to a "combination of the economic downturn, severe weather disruptions, unfavorable raw material pricing, and increased near-term cost of pension liabilities."
In particular, Essar cited last winter's deep freeze that choked Lake Superior shipping lanes with ice for much of the winter into late May. Ice on the lake interfered with the company's ability to get iron ore shipped from Cliffs.
"As a result, the company's steelmaking operations could not produce full capacity to take advantage of the rebounding steel demand and pricing over the past year," the court documents state.
Essar also cited financial hardship from what it said were years of paying above-market rates for iron ore from Cliffs.
In 2002, as what was then Algoma Steel Inc. emerged from Canadian legal protections from creditors and was restructuring its debt, Cliffs Natural Resources (then Cleveland-Cliffs Inc.) acquired a 45 percent stake in the Tilden Mine from Cannelton Iron Ore Co., a wholly owned subsidiary of Algoma.
The acquisition brought Cliffs' ownership of the mine from 40 to 85 percent. As part of the transaction, Cliffs assumed roughly $14 million of Cannelton's liabilities in the mine, according to documents from the U.S. Securities and Exchange Commission archives.
At the same time, Cliffs and Algoma entered into a 15-year deal that made Cliffs the sole supplier of iron ore pellets for Algoma's steelworks. Under the new contract, Cliffs expected to sell between 3 million and 3.5 million tons of iron ore annually through the contract term.
In bankruptcy court documents, Essar said that the "Cliffs Iron Ore Contract granted Cliffs an exclusive iron ore supply contract through 2016 and contained above-market pricing for iron ore. The Company paid $143/ton (and purchased 3.2 million tons) of iron ore on average in 2013 compared with Cliffs' published price of $113/ton over that same period. This above-market pricing significantly increased the Company's operating costs, resulting in a negative impact to the Company's financial results."
Hemmila declined to comment on Essar's statements in those documents.
"By policy we don't discuss our commercial agreements or arrangements with any of our customers," he said.
Essar said it recorded net losses of $396 million in 2010 and $305 million in 2011.
In June 2013, Cliffs and Essar renegotiated and extended their iron ore pellet contract, including pricing and minimum volume, through 2024. The two companies had gone to arbitration over the contract in past years, reaching an agreement in 2011. The deal also included that Essar accept a previous arbitration award under which the steelmaker would pay Cliffs $129 million for 2010 pellet sales.
In the court documents, Essar said last year's renegotiation and extension of its contract with Cliffs, as well as a new contract to purchase 2.5 million tons of iron ore per year from affiliate Essar Steel Minnesota Limited beginning in 2017, "will meaningfully improve financial results."
As part of its restructuring, Essar will refinance its roughly $802 million in secured debt - meaning debt that's backed by capital or physical assets - and has entered into a deal with roughly 70 percent of the holders of its more than $384 million in 9.875 percent unsecured bonds due in June 2015. Under that agreement, those note-holders will receive 32.5 percent of their claim in cash and 55 percent in newly issued secured notes at the time of the closing of Essar's restructuring agreement.
Essar said it's currently paying $113 million a year to service its approximately $1.2 billion debt and an additional $30 million for its pension obligations - expenses it said are unsustainable.
To help with Essar's cash-flow problems, Essar Global Fund Limited - the Mumbai-based multinational investment fund that purchased Algoma in 2007 - will give the steelmaker $300 million, with $100 million of that paid before the execution of the restructuring agreement, and potentially 100 percent of the equity of New Trinity Coal Inc. Trinity Coal mines coal in several locations in West Virginia and Kentucky.
Zach Jay can be reached at 906-486-4401.