Terminated Nashwauk Lease Is A Positive For Cliffs

| About: Cliffs Natural (CLF)


Governor Mark Dayton terminates Essar Steel Minnesota's leases after the company missed a July 1 deadline to repay incentives and contractors.

The leases are for the mineral rights at the Nashwauk iron ore facility - a $1.8 billion project that is half completed.

Governor Dayton recommends that Cliffs Natural Resources take over the leases and development of the site.

This is another positive catalyst for Cliffs' shares and strengthens their competitive position in the U.S iron ore market.

On July 8th, Minnesota Governor Mark Dayton announced that he would terminate Essar Steel's right to state leases at the taconite site in Nashwauk, Minnesota. This ends an 8-year saga in which Essar overpromised and underdelivered. Back in 2008, the company promised to finish a first of its kind fully integrated iron ore mine and steel processing facility by 2014.

As it currently stands, the project is estimated to be 50-60% complete, and needs an additional $500-$800 million to finish. Due to cost overruns and delays, Essar has continuously failed to meet development goals and has failed to pay back money owed to contractors and the state of Minnesota. In April, Governor Dayton issued an ultimatum to Essar, demanding that they repay $66 million by July 1st, or else their rights to the project will be terminated.

As July 1st came and went, Essar failed to pay back the incentives and offered no assurances that they would be able to obtain financing in the near future. As such, Governor Dayton upheld his end of the bargain by announcing that he is terminating their leases.

What Does This Mean For Cliffs?

Cliffs Natural Resources' (NYSE:CLF) CEO Lourenco Goncalves has been lucid on the Essar situation ever since he took the helm of the company two years ago. In fact, he called Essar's claim that the project would be complete in 2015 "fantasy" and has long criticized the lack of progress of the site.

However, Goncalves gave a telling interview in March in which he voiced his desire to construct a direct reduced iron (DRI) facility in the state of Minnesota and mentioned that the low-silica composition of the iron ore at Nashwauk makes it a perfect ore body to make direct reduced iron. In the interview, he mentioned that, with the cooperation of Minnesota legislators, the cost to construct the facility would be greatly reduced. As a further sign that Cliffs is serious about expanding, they announced a $300 million share offering a couple of weeks ago.

In fact, the presence of an additional taconite producer on the Iron Range would have been a blow to Cliffs' business. The plant is forecasted to produce 7 million tons of iron ore pellets annually and would have been a direct competitor to Cliffs.

What makes this development such a game-changer for Cliffs' business is not only the fact that a would-be competitor is now out of the picture, but that Governor Dayton is recommending that Cliffs take over the project. He wants the project to be taken over by a responsible company which will see it to completion, and thus provide the 350 full-time jobs that Essar promised all those years ago.

Dayton and Goncalves are meeting on the Iron Range on Tuesday to discuss development plans and continue negotiations. If Dayton does indeed transfer the leases to Cliffs, it will add to Cliffs' already dominant market share in the U.S iron ore market, and will provide an avenue for growth that should allow them to increase revenues and cash flows once the project is complete.

Disclosure: I am/we are long CLF.

I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it (other than from Seeking Alpha). I have no business relationship with any company whose stock is mentioned in this article.

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