In Nashwauk, Minn., construction activity is bustling as workers race to pour concrete and erect steel at the first U.S. iron-ore processing facility to be owned by India’s largest steel producer, Essar Group.
The project broke ground in 2008. However, recently, the jobsite had been dead for months, with the owner facing mechanics' liens from contractors and a troubled future.
The situation took a positive turn in early October, when Essar reported closing a mix of private-equity and debt deals needed to complete the project and secure payment for contractors.
Closing a deal between different investment parties in the U.S. and India caused a funding debacle, says Derek Bostyancic, president of Northern Industrial Erectors, Grand Rapids, Minn. Contractors were idle as a $450-million bond issuance was abruptly scrapped this summer, a setback that caused the financial community to question whether the project would ever get funded.
“The people in the United States weren’t getting the answers they needed from India, but, with this last round of funding, we’ve been told [that] it’s all domestic and it’s in the physical account here,” he says. “Before, [the situation] was: send an invoice to India, wait for them to process the payment, then wait for somebody in New York to distribute it.”
When an $1.8-billion project sits half finished after being touted by Minnesota officials as crucial to the rehabilitation of the once famed but now languishing Iron Range, there is an atmosphere of unrest, panic and disappointment. Those sentiments characterized the Essar Steel site during most of 2014 and were expressed in dozens of angry comments from area citizens in the local press and social media. “We were legally robbed by Essar. Look what they did to our land. Shame on our government officials for not protecting us from these pirates,” one Nashwauk citizen said.
Convinced the iron-ore-crushing plant would provide an economic boost for the depressed Iron Range community, Minnesota officials issued bonds and a loan to cover nearly $60 million in infrastructure and logistics upgrades. The state's advocacy of Essar drew criticism. In June, Essar said it already had invested nearly $367 million in the project and committed an additional $350 million for its completion. However, the company and the state determined that, together, they didn’t have sufficient funds to finish the job.
A dozen signatory contractors and 15 trade unions were caught in the middle. "[Grand Rapids, Minn., prime contractor] Hammerlund Construction filed liens that totaled in the neighborhood of $9 million, and, with the other [contractors' filings], my estimates are that it was closer to $12 million total," said Dan Kingsley, business manager for Operating Engineers Local 49.
Essar's financial history over the past few years has been bumpy. The firm's attempts to penetrate the North American steel market have coincided with bankruptcy flirtations, distressed debt swaps and missed credit payments. Standard & Poor’s said Essar would continue to face financing and market risks as it looks to complete the Nashwauk project. Last year, Credit Suisse placed Essar Group on its watch list because it was so overleveraged.
With steel prices falling or flat for most of 2014, Essar could not generate the cash flow it needed. Bostyancic says NIE was among the contractors owed millions for work at the Essar site. In December, NIE started erecting the secondary crusher in Nashwauk but was off the site for most of 2014.
Relations with this high-risk client must be approached “very carefully,” Bostyancic says. “It’s been a lot of work, and I had to follow them very closely. But they’ve been very good to me: They’ve told me when they were running out of money and when it was time to slow down or stop.”
An owner trying to sync a new plant opening with fluctuations in steel prices will accelerate the construction schedule, and, as a result, the pressure will shift to contractors. “Some of these customers believe that, every day they're off line, they're losing money, so these jobs can be very fast-paced," says Kelly McGill, president of L-Con Constructors, which served as general contractor for NuCor Steel at a new steel-tube-rolling mill in Louisiana.