REGIONAL- More than 400 employees of Northshore Mining operations in Babbitt and Silver Bay are facing layoffs in May after Cleveland-Cliffs confirmed last week that the facilities will be idled at least into the fall.
The action comes in the midst of an ongoing royalty fee dispute between the company and the Mesabi Trust, which receives payments based primarily on the selling price of pellets shipped from Northshore Mining’s Silver Bay processing facility, and a lesser amount based on the amount of ore extracted from the Peter Mitchell Mine near Babbitt.
Cliffs CEO Lourenco Goncalves said in an earnings call Friday with investors that production of direct reduced, or DR, grade pellets will shift to the company’s Minorca Mine in Virginia in May, idling both the Silver Bay production facility and the Babbitt mine that feeds it.
“Because we are now able to produce (DR) grade pellets at Minorca, and mainly due to the ridiculous royalty structure we have in place with the Mesabi Trust, we will be idling all production at our Northshore Mine. No production, no shipments, no royalty payments,” Goncalves said in the call.
The change is a 180-degree shift in direction from 2019, when Cleveland-Cliffs invested $100 million to upgrade the Silver Bay pellet plant to produce DR-grade pellets from ore mined at the Peter Mitchell Mine, with the intent of producing pellets both for their own use and to be sold to other manufacturers. Northshore produced 3.8 million long tons of iron ore pellets in 2020.
Layoffs are expected for 410 of Northshore’s 580 employees, Cleveland-Cliffs director of corporate communications Pat Persico said. Some will be hired at other Minnesota operations, she added.
No date has been given for when Northshore Mining might resume production, and a general reference to “the fall” was left open-ended by Goncalves.
“We also acknowledge that our strategy to stretch hot metal by adding increased amounts of scrap to the (basic oxygen furnaces) is working extremely well. With more scrap in the BOF’s, we need fewer tons of hot metal to produce the same tonnage of liquid steel. As a consequence, the Northshore idle could go longer than currently planned,” he said.
Cleveland-Cliffs’ confirmation of the idling had been anticipated by Northshore Mining employees since Goncalves openly discussed the option in an October earnings call.
“We will soon be shifting our DR-grade pellet production away from Northshore and into Minorca, where we will not have to deal with the unreasonable royalty structure at Northshore,” Goncalves said. “Even though it’s not prohibitive, (it) could be a lot less. That’s why we are moving from the Northshore, with a bad, very bad royalty structure, to Minorca. That will be a big savings in terms of cash cost from the royalty standpoint. As we plan to no longer sell pellets to third parties in the coming years, Northshore will become a swing operation, which we will keep idle every time we decide to do so.”
Minorca became a viable alternative when Cleveland-Cliffs acquired it and other Iron Range mining properties from ArcelorMittal USA in a $1.4 billion deal in 2020 that made Cleveland-Cliffs the largest producer of taconite on the Range.
“Little (did) I know at the time that I made that investment (in Northshore Mining) that I would be able to acquire Minorca inside the transaction of ArcelorMittal,” Goncalves said. “If I had a crystal ball, I would not have invested that $100 million.”
Babbitt Mayor Andrea Zupancich told the Duluth News Tribune on Friday that she was “stunned” by Friday’s announcement, and said the effects of idling mine operations would be widespread.
“It’s not only the miners that are affected, it’s absolutely everyone else in town that’s affected,” Zupancich said. “It’s the school that’s affected, it’s the government that’s affected, it’s the businesses in town that are affected, it’s the bars and restaurants in town that are all affected. So, it’s a massive trickle-down effect.”
Arbitration ruling
The current situation is related to an ongoing dispute over royalty payments that the Mesabi Trust formalized in late 2019 by filing for arbitration of the disagreement with the American Arbitration Association. Mesabi Trust alleged various breaches of the 1989 royalty agreement under which Northshore extracts iron ore from Mesabi Trust lands, resulting in underpayment of royalties to the trust.
An arbitration hearing was held in July 2021, and in October the Mesabi Trust was awarded “$2,312,106 for underpaid royalties on DR-grade ore in 2019 and 2020 and interest in the amount of $430,710, calculated through June 30, 2021, and continuing to accrue until paid,” according to a trust press release. The arbitration panel declined Mesabi Trust’s demand for greater information sharing by Cleveland-Cliffs, as well as denying compensation for attorney fees.
In response to Friday’s announcement by Goncalves, Mesabi Trust officials filed a document on Monday with the Securities and Exchange Commission suggesting that Cleveland-Cliffs has not attempted to reach a resolution of the dispute.
“Cliffs has not recently requested any changes to the royalty structure, which is governed by a 1989 royalty agreement, and Cliffs has historically failed to engage in meaningful negotiations requested by Mesabi Trust to address the interpretations of the royalty structure,” the statement said.
The trust received nearly $53 million in royalty income from Cleveland-Cliffs through the first nine months of 2021, according to the trust’s third-quarter SEC filing.
Mesabi Trust stock is traded on the New York Stock Exchange, and it took a beating after Friday’s announcement. At opening on Friday, a share of Mesabi Trust (MSB) was valued at $30.13. Within 15 minutes of the report of Goncalves’s earnings call statements about idling Northshore, the stock plummeted to $22.63. It declined to a low of $20.02 on Monday, and as of close on Tuesday stood at $21.99.
Minnesota Public Radio contributed to this report.