Court File and Parties

COURT FILE NO.: 15-CV-0011169-00CL DATE: 20170103

SUPERIOR COURT OF JUSTICE – ONTARIO COMMERCIAL LIST

IN THE MATTER OF THE COMPANIES’ CREDITORS ARRANGEMENT ACT, R.S.C. 1985, c. C-36, AS AMENDED

AND IN THE MATTER OF A PLAN OF COMPROMISE OR ARRANGEMENT OF ESSAR STEEL ALGOMA INC., ESSAR TECH ALGOMA INC., ALGOMA HOLDINGS B.V., ESSAR STEEL ALGOMA (ALBERTA) ULC, CANNELTON IRON ORE COMPANY, AND ESSAR STEEL ALGOMA INC. USA

BEFORE: Newbould J.

COUNSEL: Ashley Taylor and Lee Nicholson for the Applicants Andrew Kent and Jeffery Levine, for The Cleveland-Cliffs Iron Company, Cliffs Mining Company and Northshore Mining Company Lou Brzezinski and Alexandra Teodorescu, for the USW Local 2251 Kenneth Rosenberg and Debra McKenna, for USW and its Local 2724 Susan Ursel, for the Essar Algoma retirees Derrick Tay, for the Monitor L. Joseph Latham, for the Ad Hoc Committee of Essar Algoma Noteholders John McDonald, for Deutsche Bank Tony Reyes, for the Board of Directors of Essar Algoma

HEARD: December 27, 2016

Endorsement

[1] The applicants moved for an order approving a term sheet dated December 16, 2016 (the “Term Sheet”) between Essar Steel Algoma Inc. (“Algoma”) and Cliffs Mining Company (“Cliffs”) for the supply of iron ore pellets from January 1, 2017 through December 31, 2020. On December 29, 2016 I made the order requested for reasons to follow. These are my reasons.

[2] The order sought is opposed by USW and its Local 2724, and by USW Local 2251 (together “USW”) and by the Algoma retirees. They do so principally on the basis that they have not been provided with the commercial terms of the Term Sheet, that the USW was not consulted or kept informed with respect to the search for and/or negotiation of the iron ore supply, that the Term Sheet provides that the relevant agreements cannot be disclaimed by the applicants and must be assumed by a potential buyer and that the Term Sheet provides that Cliffs may terminate all agreements with Algoma if an Essar Global entity becomes the owner of the equity in Algoma. They ask that the motion be dismissed or in the alternative for an adjournment to permit disclosure of all relevant information.

Background to the Term Sheet

[3] Algoma requires a stable supply of raw materials, including iron ore pellets, to avoid a shutdown of its steel-making and other equipment.

[4] Since 2002, Cliffs has supplied Algoma with iron ore pellets pursuant to a Pellet Sale and Purchase Agreement, effective as of January 31, 2002 (as amended, the “Pellet Sale Agreement”). The Pellet Sale Agreement provides that Cliffs will be Algoma’s exclusive supplier of iron ore pellets until January 2017 and will supply on a non-exclusive basis thereafter until 2024.

[5] Disputes arose concerning the performance of the Pellet Sale Agreement and in January 2015, Cliffs commenced an action against Algoma and Algoma asserted counter-claims against Cliffs in the United States District Court, Northern District of Ohio Eastern Division. On October 5, 2015, Cliffs delivered a letter purporting to terminate or suspend the Pellet Sale Agreement. This action by Cliffs was instrumental in the applicants filing for CCAA protection.

[6] Following mediation, Cliffs and Algoma were able to resolve the dispute. On May 16, 2016, the parties entered into a Reinstatement Agreement (the “Reinstatement Agreement”), which, following the satisfaction of certain conditions precedent, revoked the purported termination or suspension and reinstated the Pellet Sale Agreement. In connection with the Reinstatement Agreement, Cliffs and Algoma also entered into the 2016 Supply Agreement which provided that Cliffs would supply Algoma with additional iron ore pellets until December 31, 2016.

[7] In November 2016, Algoma, with the assistance of the Monitor, its chief restructuring advisor, and legal counsel, entered into discussions with a number of iron ore suppliers, including Cliffs, to secure the supply of iron ore pellets starting January 1, 2017. On December 16, 2016, Algoma and Cliffs entered into the Term Sheet whereby Cliffs has agreed to supply Algoma with additional iron ore pellets. The term of the Term Sheet is four years commencing January 1, 2017 and ending December 31, 2020, with an optional fifth year. Together, supply under the Pellet Sale Agreement (as to approximately 35%) and the Term Sheet (as to approximately 35%) will constitute approximately 70% of Algoma’s annual iron ore requirements going forward.

[8] The Term Sheet provides that upon the Term Sheet becoming binding and effective the Pellet Sale Agreement and the Reinstatement Agreement shall be amended, without further act or document, to provide, amongst other things, that supply under the Pellet Sale Agreement shall recommence on January 1, 2017, and the Reinstatement Agreement shall be terminated. The Term Sheet by its terms is binding only if Cliffs has received written confirmation from the lawyers for the term lenders and proposed buyer that they consent to the Term Sheet and if court approval to the term sheet and its provisions is obtained by December 31, 2016. The lawyers for the term lenders and proposed buyer support the approval of the Term Sheet and have given their written consent to it.

Disclosure of the Term Sheet to the USW

[9] Cliffs has taken the position that the pricing terms in the Term Sheet are highly confidential. The Term Sheet contains a confidentiality clause.

[10] This motion was first heard on December 22 2016. Prior to then, Cliffs had permitted certain persons, including the proposed buyer, to see the Term Sheet upon signing a non-disclosure agreement. The applicants requested Cliffs to consent to the disclosure of the Term Sheet to the USW. Cliffs agreed to disclose the Term Sheet other than the pricing formula to USW's counsel and financial advisor if they executed an NDA in form satisfactory to Cliffs. At that first hearing counsel for the USW and the Locals appeared and submitted that the USW and the Locals had a right to be shown the entire Term Sheet, including its pricing formula, and that there should be an adjournment of the motion to permit this. The terms of an NDA had not been agreed.

[11] I declined to order that the Term Sheet be disclosed to the USW or its Locals. At my urging however, Cliffs agreed to provide the entire Term Sheet, including the pricing formula, to FTI Consulting, the financial advisor to the USW, upon the execution of the NDA as drafted by Cliffs. I adjourned the hearing to December 27, 2016. On the return of the hearing I was advised that the Term Sheet in its entirety had been provided to FTI Consulting and Mr. Bishop of that firm was in attendance in Court.

[12] On the re-attendance, the USW and its Locals again submitted that the USW should be entitled to see the entire Term Sheet. Their argument was essentially the same as made on December 22nd, namely that as the applicants were now in CCAA protection, there would be negotiations between the USW and the prospective buyer of the business in which the USW would be asked to make concessions and the information sought now would be of importance to the USW in the negotiations. It was said that not having the pricing formula would not be conducive to the negotiations.

[13] I decline for a number of reasons to order at this time that the Term Sheet with all of its pricing terms be produced to the USW or to adjourn the matter to enable this to be done.

[14] What is at issue on this motion is whether the Term Sheet should be approved. The negotiations between the USW and a buyer of the business is another matter. There is no evidence on the record where the negotiations stand, if at all, between the USW and any potential buyer, including the term lenders/buyer group.

[15] Counsel for Cliffs said that it may be with time and thought, some way can be made for the disclosure to be made to others at the USW apart from its financial consultant FTI Consulting. I note that the confidentiality clause in the Term Sheet requires the consent of Cliffs to its disclosure “except where such disclosure may be required by law…or in connection with a judicial or administrative proceeding”. It may be that the CCAA court has room under this provision to make a disclosure order at the appropriate time, but that is a matter for another day.

[16] To delay the approval of the Term Sheet beyond December 31, 2016, if it is to be approved, would be extremely prejudicial to the applicants and harmful to the restructuring process.

[17] The Term Sheet by its terms requires Court approval by December 31, 2016 in order for it to be legally binding. To delay its approval beyond that date would mean that Cliffs would not be bound to its terms and there is no guarantee that it could be revived.

[18] The Reinstatement Agreement of May 16, 2016 provides that the purported termination of the Pellet Sale Agreement by Cliffs shall be revoked but that performance of the Pellet Sale Agreement is suspended until January 1, 2017 or until such later date that may be extended under the Reinstatement Agreement (the “Recommencement Date”). It further provides that the suspension of the Pellet Sale agreement will be permanently lifted on the Recommencement Date provided that more than two months before the Recommencement Date a purchaser has entered into a binding agreement to purchase the business of Algoma or a plan of arrangement that provides for a plan sponsor to acquire the Algoma business has been sanctioned by the Court.

[19] The Recommencement Date is now April 1, 2017. It is quite unlikely that there will be a binding agreement to purchase the business of Algoma by that date or the sanctioning of a plan of arrangement. Therefore if the Reinstatement Agreement continues, the Recommencement Date will have to be extended which will require notice to be given two months before that date, i.e. by January 30, 2017. Failure to do so would result in the Pellet Sale Agreement being terminated. The notice to be given requires a certificate of the Monitor that for extended period, which may not be less than to July 1, 2017, the Monitor’s opinion is that Algoma’s cash flow forecast and financing arrangements will provide sufficient liquidity to Algoma to continue to perform its obligations under the Pellet Sale Agreement. However, the DIP financing expires on January 31, 2017 and there is no assurance it will be extended or on what terms. In the circumstances, there is a very serious risk that the Monitor will be unable to provide such an opinion. In that circumstance, the Reinstatement by its terms would mean that Pellet Sale Agreement would be terminated. That would leave Algoma without any supply under the Pellet Sale Agreement.

[20] The Term Sheet provides that once it becomes effective, which by its terms requires Court approval by December 31, 2016, the Pellet Sale Agreement will be fully reinstated as of January 1, 2017 and the Reinstatement Agreement will be terminated. In that event, the need for an extension of the Reinstatement Agreement and a Monitor’s certificate as to future liquidity will not be required. It would be foolish not to approve the Term Sheet by December 31, 2016 and run the risk of Algoma having no contracted iron ore supply if the Pellet Sale Agreement could not be extended. This is particularly the case when the adjournment requested by the USW was triggered by its desire to have the pricing terms of the Term Sheet disclosed to it to be used in a negotiating process that may not be seriously undertaken for some time.

[21] Moreover, according to Mr. Strek of CDG, the chief restructuring advisor of Algoma, it was important to arrange supply to start in April of 2017 and to do so required that the Term Sheet be negotiated before the end of the year. Supplies require a few months lead time in order to make all necessary arrangements for supply, including mining and shipping. It would be harmful to production at Algoma for the additional supply contracted for under the Term Sheet to be delayed.

Consideration of the Term Sheet

[22] The evidence indicates that the Term Sheet is clearly beneficial to Algoma. It permits the continuation of the supply under the Pellet Sale Agreement of 35% of the required iron ore supply of Algoma and a further 35% under the Term Sheet for the next four years. Algoma requires a stable supply of raw materials to avoid a shutdown of its steel-making and other equipment, which could have disastrous consequences for Algoma’s business and revenues, employees and customer relations.

[23] Algoma’s management is of the view that the Term Sheet is in the best interest of Algoma and its stakeholders. There are production issues at Algoma depending on the type of iron ore pellets used. After the purported suspension or termination of the Pellet Sale Agreement by Cliffs, Algoma was forced to source an alternative supply of iron ore pellets. After solicitation by Algoma's management, Algoma received proposals from a number of iron ore suppliers. Consideration of the proposals led Algoma to source its iron ore pellets from two suppliers other than Cliffs. During the time when Algoma used these alternative pellets Algoma's productivity began to suffer from a number of blast furnace shut downs which were attributed to the quality of the alternative iron ore pellets.

[24] After these production disruptions Algoma began studying the issue and based on a series of tests performed by Algoma's management and outside consultants, it was determined that for maximum productivity of the blast furnace Algoma must use a majority of "fluxed pellets" as opposed to "acid pellets." Currently in North America, there are two suppliers of fluxed pellets: a production facility in Mirmtac, Minnesota and the Tilden mine in Michigan owned by Cliffs. After consideration of its options, Algoma's management for technical reasons determined that there were a number of factors that made the Term Sheet more attractive than its other options. The stable supply of iron ore pellets from Cliffs provided by the Term Sheet is expected to limit production issues with the blast furnace and significantly improve Algoma's steelmaking capacity.

[25] The USW and its locals have filed affidavits in which it is asserted that after the commencement of these CCAA proceedings, a presentation to them by a member of Algoma’s management stated that the legacy contract with Cliffs, being the Pellet Sale Agreement, was since 2007 “off-market”, i.e. had prices higher than market prices, resulting in significant cash outflow. The purport of this evidence is that the Pellet Sale Agreement that will continue if the Term Sheet is approved is a bad deal for Algoma and reason in itself for the Term Sheet to be declined.

[26] I cannot accept this evidence or its implication. The Pellet Sale Agreement was made in 2001 and has been amended from time to time. The evidence is that the pricing under it was favourable to Algoma at times and unfavourable at other times. That is perhaps not too surprising given the volatility in market pricing of iron ore pellets. In his affidavit of November 9, 2015 filed in support of the application leading to the Initial Order in these CCAA proceedings, Mr. Marwah, the CFO of Algoma, provided evidence of the market pricing of iron ore pellets and concluded that the pricing of iron ore pellets to be supplied under the Cliffs contract had been decreasing in steps and by the time of his affidavit had become materially more favourable to Algoma than pricing from other suppliers of iron ore pellets. It is apparent that any reference to off-market pricing in the presentation to the USW shortly after the CCAA proceedings were commenced must have been to prior pricing and not to the then current pricing.

[27] There is no cogent evidence that the pricing under the Pellet Sale Agreement is not beneficial to Algoma. When that agreement was reinstated under the Reinstatement Agreement, it received Court approval on a motion that was not opposed by the USW or its Locals.

[28] There is no basis at all to counter the evidence that Algoma management’s view is that the Term Sheet is in the best interest of Algoma and its stakeholders. It should not be overlooked that as acknowledged by counsel for the USW during argument, it is the role of management as acknowledged by the management rights clause in the collective agreements to negotiate contracts such as the Cliffs contracts and it is not the role of the unions to be party to any such negotiations.

[29] The USW and its Locals object to two provisions in the Term Sheet.

[30] One is a provision that the Term Sheet and the Pellet Sale Agreement may not be disclaimed by Algoma in the CCAA proceedings and that they will be binding on and enure to the benefit of any party acquiring the ongoing business of Algoma. This provision was included in the Term Sheet because it was required by Cliffs. The evidence is that under the Pellet Sale Agreement and Term Sheet, Cliffs is committing a significant volume of iron ore pellets and foregoing other business opportunities. In order to commit to the supply, Cliffs required certainty that such supply would be in place for the full term of the Term Sheet. Cliffs would not agree to the Term Sheet if it could be disclaimed by a purchaser of Algoma's business during the CCAA proceedings.

[31] The USW contends that the provision that the Term Sheet and Pellet Sale Agreement may not be disclaimed by Algoma in these CCAA proceedings unlawfully limits the discretion of the Court in considering whether to permit a disclaimer of the contracts under section 32 of the CCAA. That section provides in part:

32 (1) Subject to subsections (2) and (3), a debtor company may — on notice given in the prescribed form and manner to the other parties to the agreement and the monitor — disclaim or resiliate any agreement to which the company is a party on the day on which proceedings commence under this Act. The company may not give notice unless the monitor approves the proposed disclaimer or resiliation.

(2) Within 15 days after the day on which the company gives notice under subsection (1), a party to the agreement may, on notice to the other parties to the agreement and the monitor, apply to a court for an order that the agreement is not to be disclaimed or resiliated.

(3) If the monitor does not approve the proposed disclaimer or resiliation, the company may, on notice to the other parties to the agreement and the monitor, apply to a court for an order that the agreement be disclaimed or resiliated.

(4) In deciding whether to make the order, the court is to consider, among other things, (a) whether the monitor approved the proposed disclaimer or resiliation; (b) whether the disclaimer or resiliation would enhance the prospects of a viable compromise or arrangement being made in respect of the company; and (c) whether the disclaimer or resiliation would likely cause significant financial hardship to a party to the agreement.

[32] Section 32 could not be applicable to the Term Sheet as the section applies only to pre-filing contracts. The Pellet Sale Agreement was in existence before the CCAA proceedings were commenced, although Cliffs took the position at the time that it had been validly terminated. Whether it would be subject to section 32 is a novel question that need not be answered as I do not see section 32 as being applicable in this case.

[33] The USW relies on a number of decisions to the effect that a statutory discretion cannot be fettered: by an administrative decision maker (Stemijon Investments Ltd. v. Canada (Attorney General), 2011 FCA 299); by parties directing how costs should be ordered by a court (Maple Lodge Farms Ltd. v. Government of Canada, [1982] 2 S.C.R. 2); by parties asking a court to insert into a divorce decree nisi a provision that all future payments shall cease if the wife remarries or becomes unchaste (Schmidt v. Schroeder (1981), 15 Sask. R. 230; 1152030 Ontario Inc. v. 2051187 Ontario Inc.; Seeman, Re (1976), 13 O.R. (2d) 414).

[34] I do not see these cases as being at all applicable. Section 32 of the CCAA applies when a court is asked to permit or reject a disclaimer of a contract by the debtor. That is not the situation here in which there has been no disclaimer and a debtor is agreeing not to disclaim a contract. Section 32 says nothing about such a situation. It does not provide that a court has a discretion to disallow a debtor from agreeing not to disclaim a contract. The provision in question in the Term Sheet does not limit any discretion to be exercised by a court under section 32.

[35] There is no cogent evidence that the provision in question making the Pellet Sale Agreement and Term Sheet binding on a purchaser of the business is disadvantageous to the Algoma stakeholders, including the USW and its Locals or to the retirees. To the contrary, Mr. Strek’s unchallenged evidence is that Algoma's management believed it was important to secure a stable supply of iron ore pellets under the Term Sheet. The stable supply of iron ore pellets provided by the Term Sheet is expected to limit production issues with the blast furnace and significantly improve Algoma's steelmaking capacity. Such a result will improve the value of Algoma's business and therefore increase the likelihood of it being able to complete a successful restructuring transaction for the benefit of all its stakeholders.

[36] The Monitor supports the approval of the Term Sheet. It states that the binding nature of the Pellet Sale Agreement and Term Sheet on an acquirer of Algoma’s ongoing business is beneficial to the restructuring efforts of Algoma by ensuring the benefits of both contracts follow the business of Algoma with no need of further assignments, agreements or negotiations with Cliffs.

[37] The Term Sheet also provides that Cliffs will have the right to terminate all of its agreements with Algoma if an agreement to sell all or a material part of the business or assets of Algoma to an Essar Global Entity (broadly defined to include entities related to, affiliated with or controlled by Algoma’s ultimate parent) shall have been approved by this Court or a CCAA plan shall have been sanctioned by this Court under which, upon implementation, an Essar Global Entity would retain or obtain a material equity interest in Algoma. This provision is opposed by the USW and its Locals.

[38] The evidence is that this provision was a firm condition of Cliffs agreeing to the Term Sheet. Cliffs has made it clear that it has no interest in dealing with Essar Global. Cliffs states that the step that it took in cutting off supply to Algoma in 2015 reflected a deep and abiding frustration with Essar Global's conduct that had built up over an extended period of time. It further states its view that there is considerable uncertainty about the fate of Algoma at this time and that there are clearly risks to Cliffs in fully committing capacity and agreeing to commit additional capacity to Algoma at this time. However Cliffs is prepared as a business matter to agree to take those risks and to provide that certainty of enhanced assured iron ore supply now. Cliffs understands that this will materially assist the advancement of the restructuring process and enhance the marketability of Algoma's business. But it is prepared on a business basis to so agree only so long as Essar Global is not involved.

[39] The USW, and particularly Local 2251, has indicated from time to time in this proceeding that it favours an Essar Global entity as a potential purchaser of the Algoma business. It is not surprising therefore that it is opposed to the provision that Cliffs can cancel its agreements with Algoma if an Essar Global entity retains or acquires a material equity interest in the Algoma business.

[40] Cliffs has made it clear that it will not agree to any Term Sheet that does not contain this provision. There is no doubt but that the Term Sheet was negotiated at arm’s length. The issue is whether the provision is so detrimental to the interests of the USW that the Term Sheet should not be approved. I have concluded that it is not. The benefits to Algoma and the restructuring process of the Term Sheet and the continued supply of iron ore pellets under it and under the Pellet Sale Agreement are obvious. As well, the Term Sheet does not prohibit an Essar Global entity from bidding on the Algoma business and acquiring it. If it turns out that an Essar Global entity becomes the owner of the Algoma business through the restructuring process, it will have to source iron ore pellets from somewhere other than Cliffs. It could not force Cliffs to supply it. The situation would be no different from what it is now. If Algoma were not able to obtain an agreement with Cliffs for supply of iron ore pellets now, it would have to source them from somewhere else, which in the view of Algoma’s management would be detrimental to the business of Algoma and a successful restructuring. It is clear that Cliffs is not prepared to continue supplying Algoma if an Essar Global entity is involved.

[41] A court has a broad discretion under section 11 of the CCAA to make any order that it considers appropriate subject to any restrictions set out in the statute. This general language in section 11 should not be read as being restricted by the availability of more specific orders. Appropriateness of an order is assessed whether the order sought advances the policy objectives underlying the CCAA. See Century Services Inc. v. Canada (Attorney General), [2010] 3 S.C.R. 379, 2010 SCC 60 at paras. 61 to 70. See also Air Canada, Re (2004), 47 C.B.R. (4th) 169 at para. 9.

[42] For all the foregoing reasons, I am of the view after balancing the interests of all stakeholders that it is appropriate that the Term Sheet be approved. The Term Sheet advances the policy objectives of the CCAA in advancing the overall prospects of a successful restructuring of the business of Algoma.

“F.J.C. Newbould J.” Newbould J. Date: January 3, 2017

Cited Cases and Legislation

Legislation

• Companies’ Creditors Arrangement Act, R.S.C. 1985, c. C-36

Case Law

• 1152030 Ontario Inc. v. 2051187 Ontario Inc.
• Air Canada, Re (2004), 47 C.B.R. (4th) 169
• Century Services Inc. v. Canada (Attorney General), [2010] 3 S.C.R. 379, 2010 SCC 60
• Maple Lodge Farms Ltd. v. Government of Canada, [1982] 2 S.C.R. 2
• Schmidt v. Schroeder (1981), 15 Sask. R. 230
• Seeman, Re (1976), 13 O.R. (2d) 414
• Stemijon Investments Ltd. v. Canada (Attorney General), 2011 FCA 299