The monitor overseeing Essar Algoma's restructuring wants everything wrapped up by Jan. 31. That could be complicated by a clause slipped into a recently signed supply agreement, allowing Cliffs Mining Co. to refuse to supply iron ore pellets if the Sault steelworks is acquired by Essar Global or a related company.
Greater-than-usual employee turnover is occurring at Essar Steel Algoma as a Jan. 31 deadline approaches for concluding the Sault steelmaker's restructuring.
Court documents provide no numbers or details, but a report filed this week by the court-appointed monitor overseeing the restructuring describes higher employee turnover as one of several challenges currently faced by the company.
"The monitor further understands from management that the applicants’ operations continue to face headwinds resulting from uncertainties in the restructuring process, such as higher employee turnover as compared to the period prior to the Companies' Creditors Arrangement Act proceedings, the ability to make capital expenditures on a timely basis and challenges in dealing with concerned customers and vendors," said the monitor, Brian Denega of Ernst and Young Inc.
Denega serves notice that he wants to see the company's protection from creditors ended on January 31 without further extensions.
Using unusually strong language, he calls on everyone involved to get the job done.
"The monitor is of the view that a viable and consensual going-concern solution will broadly benefit all stakeholders," Denega said.
"Continued delay exposes Algoma’s business to greater uncertainties and risk of failure. In light of the foregoing constraints and concerns, the monitor strongly encourages all stakeholders to engage in expedited and meaningful discussions to effect a successful restructuring as soon as possible."
That may be a tall order, given other recent developments.
Cliffs may terminate supply deal if Essar Global is approved as purchaser
Essar Steel Algoma is an integrated steel producer.
Unlike other steelmakers that use electricity to turn steel scrap into liquid steel, Essar Algoma uses a blast furnace to melt iron ore pellets (with a small amount of scrap steel) into hot metal.
This necessitates a stable supply of iron ore pellets because shutting down a blast furnace, even for a short time, can have serious negative effects on production, sales, employees and customer relations.
Cliffs Mining Co. recently signed an agreement to supply Essar Algoma with its most important raw material — iron ore pellets — until the end of 2020.
But that agreement includes a clause allowing Cliffs to terminate the deal if Essar Algoma is acquired by Ontario Steel Investments or any other entity related to, affiliated with or controlled by Essar Global.
The termination option was a firm condition imposed by Cliffs in signing the supply agreement, the monitor reported.
Iron ore pellets account for about one half of Essar Algoma's total raw material costs.
Under the recently signed agreement, Cliff's would supply about 70 per cent of Essar Algoma's annual iron ore needs.
Steel prices stabilizing
North American prices for hot-rolled coil steel recovered significantly in the first half of 2016, then softened in the second half, slipping below $500 a net ton in October.
"However, the market has shown signs of stabilizing in the recent weeks," the monitor said, citing the most recent price of US$586.
"It should be further noted that Algoma's cash flow for the period of April to November 2016 has benefited materially from the suspension of of certain costs pursuant to the stay of proceedings and/or court orders, including approximately $29 million of special pension deficit payments and approximately $102 million of interest on [pre-insolvency] secured debt for the same period," Denega reported.
As for closing a deal to sell the Sault steelmaker, the monitor reported: "Closing of the sale transaction requires the settlement of a variety of issues between the term loan bidders and certain key stakeholders. With a view to furthering the sale transaction in an expeditious manner, the term loan bidders and their advisors have had various meetings with the applicants and key stakeholders, including: the USW [United Steelworkers] and its Locals 2724 and 2251, as well as relevant provincial and federal governmental authorities."
"At present, the monitor is not in a position to disclose further details with respect to these meetings due to their confidential nature."
