Senators quiz officials on steel mill ‘superproject’

Arkansas economic and finance leaders fielded more than two-and-a-half hours of questions from the Arkansas State Senate on the state’s recruiting of a $1.1 billion Big River Steel Mill superproject to Osceola.

Gov. Mike Beebe (D) announced the major industrial project – the largest of his administration – last week. It is expected to create 525 high-paying jobs and could require the state to obligate itself to $125 million in bonds to support getting the project off the ground.

Legislators must agree to the bond issue, or an alternative financing of the deal, to move the project forward. The state’s Amendment 82 allows for the Arkansas legislature to use general obligation bonds for major economic development projects.

On Monday (Feb. 4), Senators met in a “committee-of-the-whole,” a rarely used conference where all 35 State Senators come together as a “committee” to ask questions regarding state policy. The Arkansas House of Representatives will replicate the forum on Wednesday.

Arkansas Economic Development Commission Director Grant Tennille, Arkansas Development Finance Authority Director Mac Dodson, and Department of Finance and Administration Director Richard Weiss, as well as staff members of those agencies, Delta Trust and Bank CEO French Hill, and Arkansas Teacher Retirement System Director George Hopkins also took part in the Q&A panel.

Senators asked a variety of questions about the mega-deal, including how safeguarded the state may be if the factory does not come to fruition or reach its potential.

“We may have the strongest clawback provisions we’ve ever employed,” said AEDC Director Grant Tennille. He outlined how in many instances the investors in the Big River Steel Mill must put their own money up first or in tandem, as well as meet certain payroll, hiring and infrastructure investment thresholds.

“We have done everything we know how to do to try to ensure the safety of taxpayers’ dollars,” Tennille said.

In response to a question regarding job hires being from Arkansas, Tennille said there was no guarantee that all employees would be Arkansans, but he said the likely recruiting base would be from a 75-mile radius around Osceola. He added that there was an effort made to site the factory in central Arkansas to ensure a more likely Arkansan workforce, but logistics were superior in northeast Arkansas.

MONEY LINING UP
Of the $125 million state bond issue proposed for the project, $50 million will be loaned to the company for start-up costs and will provide the company with a lower-cost access to capital. Another $50 million will be used for site preparation. About $20 million will help stabilize the subsurface of the site near the Mississippi River. A final $5 million will be earmarked to pay for bond issuance costs.

One analysis from state economist John Shelnutt showed that the state would get its $50 million loan back from the company within 4-6 years under certain conditions.

Today’s dialogue in the Senate revealed that the Arkansas Teacher Retirement System (ATRS) had approved earlier in the morning becoming a 20% stakeholder in the project by committing $60 million to the deal.

Big River Steel, which is being led by steel magnate John Correnti, is pulling together a developer group that will commit to $90 million, a 30% stake, and a large industrial investor (identified as Koch Industries) will become a 40% owner in the development with its $120 million equity position. A final investment fund is committing $30 million to the project for a 10% piece of the pie.

All of the equity investors account for nearly $300 million in total equity. A combination of loans and grants for additional financing of land, buildings, machinery and equipment were also detailed.

The capital budget for Phase I of the steel mill consists of $721 million in equipment, $303 million in building and construction costs, and $10 million in land costs.

ANALYSIS
Documents obtained by Talk Business Arkansas from the ATRS detail the analysis used to guide the decision-making for that organization. The analysis was performed by Little Rock-based Delta Trust and Bank.

Noting that it performed a “conservative” risk assessment, Delta Trust outlined market conditions and future expectations and used that study to answer questions coming from State Senators.

Scrap steel will represent 70% of the overall cost structure of Big River Steel, making it “the most important input” to be analyzed, according to the report.

“When Big River Steel’s projections are stress-tested using the lowest average annual hot-rolled coil-auto bundle spread since 2004 ($235 per short ton) in conjunction with an assumed 62% mill utilization rate, the projections still demonstrate adequate cash flow to meet the project’s forecast debt service obligations,” noted the analysis.

When asked about the availability of scrap metal to meet the mill’s input needs, the Delta Trust report said, “The U.S. is a net exporter of scrap, indicating a scrap shortage is unlikely in the near future.”

Big River Steel Mill will be one of the most technologically advanced manufacturing facilities in the steel industry.

“The major differentiator for the mill is having the ability to make higher end steel products with the flexibility of a mini mill,” the report said. “The Big River Steel Mill is expected to be the only mini mill in the U.S. capable of producing certain grades of steel.”

Some Senators raised concerns that Big River would directly compete with two local Nucor steel mills in nearby Blytheville. They worried that the competition could impact local jobs and lead to economic hardships for the long-standing existing Arkansas factories.

“There is absolutely no overlap between the Big River Steel Mill and Nucor Yamato. Nucor Yamato makes I beams,” the Delta Trust report noted. “In the project’s best estimates, there will be no more than 200 thousand tons of overlap between the Big River Steel Mill and Nucor Hickman. The strongest competitor the company will have is the Severstal mill in Columbus, Mississippi and the Nucor Berkley mill in South Carolina.”

AEDC director Grant Tennille also warned that whether it was in Arkansas, Mississippi, Louisiana or elsewhere, Nucor would feel some competitive pressure because the plant was going to be built regardless of location.

“That plant [Big River Steel] is going to be built somewhere… I’d rather it be in Arkansas,” Tennille said. “My guess is that it will create upward wage pressure on wages in northeast Arkansas. To that, I say ‘good.’”