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Pellet Sale And Purchase Agreement

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Sectors: Manufacturing
Governing Law: Ohio, View Ohio State Laws
Effective Date: April 10, 2002
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Exhibit 10.7


CONFIDENTIAL TREATMENT INTERNATIONAL STEEL
GROUP INC HAS REQUESTED MARKED PORTIONS OF
THIS DOCUMENT BE ACCORDED CONFIDENTIAL
TREATMENT PURSUANT TO RULE 406 OF REGULATION
C PROMULGATED UNDER THE SECURITIES ACT OF
1933


PELLET SALE AND PURCHASE AGREEMENT


THIS AGREEMENT, entered into, dated and effective as of April 10, 2002 ("Agreement"), by and among THE CLEVELAND-CLIFFS IRON COMPANY, an Ohio corporation ("Iron"), CLIFFS MINING COMPANY, a Delaware corporation ("Mining"), NORTHSHORE MINING COMPANY, a Delaware corporation ("Northshore"), NORTHSHORE SALES COMPANY, an Ohio corporation ("Sales"; Iron, Mining, Northshore and Sales being collectively referred to herein as "Cliffs"), INTERNATIONAL STEEL GROUP INC., a Delaware corporation ("ISG"), ISG CLEVELAND INC., a Delaware corporation, ("ISG Cleveland"), and ISG INDIANA HARBOR INC., a Delaware corporation ("ISG Indiana Harbor"; ISG, ISG Cleveland and ISG Indiana Harbor being collectively referred to herein as "Steel").


RECITALS


WHEREAS, Cliffs desires to sell to Steel and Steel desires to purchase from Cliffs certain quantities of grades of iron ore standard pellets as follows: (i) such grades of iron ore standard pellets being those produced at the Empire Iron Mining Partnership iron ore pellet plant ("Empire Pellets"), located in Palmer, Michigan ("Empire Mine"); (ii) such grades of iron ore standard pellets being those produced at the Northshore Mining Company iron ore pellet plant ("Northshore Pellets"), located in Silver Bay, Minnesota ("Northshore Mine"); (iii) such grades of iron ore standard pellets being those produced at the Hibbing Taconite Company Joint Venture iron ore pellet plant ("Hibbing Pellets"), located in Hibbing, Minnesota ("Hibbing Mine"); or (iv) such other pellet grades as may be mutually agreed to by the parties hereto (such Empire Pellets, Northshore Pellets, Hibbing Pellets, and other mutually agreed upon pellets collectively being referred to herein as "Cliffs Pellets"), all on the conditions contained herein.


NOW, THEREFORE, in consideration of the mutual covenants hereinafter set forth, Cliffs and Steel agree as follows:


SECTION 1. DEFINITIONS.


The terms quoted in the above parentheses of the first introductory paragraph of this Agreement and the WHEREAS clause, other terms quoted throughout this Agreement, and the terms defined below in this Section 1 shall have the meanings assigned to them for purposes of


this Agreement. Attached as Appendix I to this Agreement is a locator list of all defined terms used throughout the Agreement.


(a) The words, "Steel's Annual Pellet Tonnage Requirements", as used herein, shall mean for any year a tonnage amount equal to Steel's total annual iron ore pellet tonnage requirements required for consumption in Steel's iron and steel making facilities in any year at ISG Cleveland, located in Cleveland, Ohio ("Cleveland Works") and at ISG Indiana Harbor, located in Indiana Harbor, Indiana ("Indiana Harbor Works").


(b) The word "pellets", as used herein, shall mean iron-bearing products obtained by the pelletizing of iron ore or iron ore concentrates, suitable for making iron in blast furnaces.


(c) The word "ton", as used herein, shall mean a gross ton of 2,240 pounds avoirdupois natural weight.


(d) The words "net ton", as used herein, shall mean a ton of 2,000 pounds avoirdupois natural weight.


(e) The word "year", as used herein, shall mean a calendar year commencing on January 1 and ending December 31.


(f) The words "shuttle tons", as used herein, shall mean pellets which are destined for Cleveland Works deliveries, which are first unloaded from vessel onto a dock which is not a Steel dock or a dock designated by Steel pursuant to Section 8(a).


SECTION 2. SALE AND PURCHASE/TONNAGE.


During each of the years 2002 through 2016, and each year thereafter as long as this Agreement remains in effect, Cliffs shall sell and deliver to Steel and Steel shall purchase and receive from Cliffs and pay for a tonnage of Cliffs Pellets which tonnage shall be equal to Steel's Annual Pellet Tonnage Requirements for each such year.


SECTION 3. QUALITY.


(a) Cliffs Pellets when loaded for shipment will be consistent with the typical specifications and analysis limits set forth in Exhibit 1.


(b) In the event the monthly average vessel analysis exceeds one standard deviation as set forth in Exhibit 1, Cliffs will take such actions as shall be necessary to achieve specification conformity. If specification conformity cannot be achieved, Steel and Cliffs shall negotiate in good faith to determine what actions or remedies, if any, are appropriate. If any two vessel shipments made during any calendar month have analysis that exceeds the analysis limits in the specifications set forth in Exhibit 1, Steel may refuse any subsequent vessel shipments during that calendar month, and Steel shall not be required to accept any subsequent shipments until Cliffs has taken action to remedy the non-conformity so that future shipments will be within the analysis limits. If more than two vessel shipments made during any calendar month have


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analysis that exceeds such limits, Cliffs and Steel shall negotiate an appropriate cost adjustment (if any) for the cargoes in excess of the first cargo that exceeded the analysis limits, based upon the additional costs (if any) to Steel associated with the quality specifications in the additional vessel shipments made during that calendar month that exceeded such analysis limits.


(c) Shuttle tons from the Cleveland Bulk Terminal shall be sampled and analyzed for the - 1/4" size fraction as they are being loaded into a vessel for delivery to Steel's dock. Shuttle tons shall not have a significant increase in the - 1/4" size fraction versus the non-shuttle tons delivered to the Cleveland Works pursuant to Section 8(a). In the event that two shuttle tons vessel shipments during any month display an increase in the - 1/4" size fraction of [* * * *] or more versus non-shuttle delivered tons, Steel and Cliffs shall meet to determine the cause of the significant increase and the corrective action to reduce the significant increase. If a corrective action cannot be implemented to reduce the - 1/4" size fraction below the [* * * *] increase, then Steel and Cliffs shall meet to work out a good faith adjustment.


SECTION 4. NOTIFICATION AND NOMINATION.


(a) With respect to the tonnage of Cliffs Pellets to be purchased by Steel for the year 2002, as provided in Section 2, on or before April 30 of the current year, Steel shall notify Cliffs in writing of Steel's preliminary tonnage of Steel's Annual Pellet Tonnage Requirements which Steel shall purchase from Cliffs. Such notification shall include: (i) Steel's Annual Operating Plan for the balance of the current year detailed by months, as such Annual Operating Plan relates to Steel's planned monthly consumption of all pellets for such year; (ii) the tonnage of Cliffs Pellets which Steel expects to purchase in the current year from Cliffs; and (iii) Steel's planned monthly pellet consumption for the first four months of the year 2003.


(b) With respect to the tonnage of Cliffs Pellets to be purchased by Steel for each of the years 2003 through 2016, as provided in Section 2, on or before November 1 of each of the years prior to the years above, Steel shall notify Cliffs in writing of Steel's preliminary tonnage of Steel's Annual Pellet Tonnage Requirements which Steel shall purchase from Cliffs. Such notification shall include: (i) Steel's Annual Operating Plan for the following year detailed by months, as such Annual Operating Plan relates to Steel's planned monthly consumption of all pellets for such year ("Steel's AOP"); (ii) the tonnage of Cliffs Pellets which Steel expects to purchase in the following year from Cliffs; (iii) Steel's expected total pellet inventory as of December 31 for the then current year; (iv) Steel's planned total pellet inventory on December 31 for the following year; and (v) Steel's planned monthly pellet consumption for the first four months of the year which succeeds the following year.


(c) With respect to the tonnage of Empire Pellets, Northshore Pellets and Hibbing Pellets which Cliffs will have available for sale to Steel in 2002, on or before May 31, 2002, and in each succeeding year on or before December 31 of each year prior to the years in Section 4(b) above, Cliffs shall notify Steel in writing as to the tonnage of Empire Pellets, Northshore Pellets and Hibbing Pellets Cliffs shall sell to Steel, which tonnage shall equal Steel's Annual Pellet Tonnage Requirements for such year.


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(d) With respect to Steel's Annual Pellet Tonnage Requirements as provided for in Sections 4(a) and 4(b) above, Steel shall notify Cliffs by the 15th day of each month for the year in determination: (i) Steel's actual consumption of all pellets for the previous month, and (ii) Steel's planned monthly consumption of all pellets for the balance of the year and the first four months of the following year. In the first month's notice of each such year, as provided for under this Section (d), Steel shall also advise Cliffs of Steel's actual total pellet inventory as of December 31 for the previous year.


(e) If during the course of the year, Steel's Annual Pellet Tonnage Requirements decrease from Steel's preliminary nomination provided pursuant to Section 4(b) above, then the tonnage of Cliffs Pellets which Steel shall purchase from Cliffs shall be reduced by an amount equal to the shortfall of the actual pellet consumption versus the nominated pellet consumption. In addition, Steel's Annual Pellet Tonnage Requirements shall not be modified so as to change Steel's planned total pellet inventory at the end of the then current year unless such modification is agreed to by Cliffs.


(f) If, during the course of the year, Steel's Annual Pellet Tonnage Requirements increase from Steel's preliminary nomination provided pursuant to Section 4(b) above, then Steel shall notify Cliffs in writing of any such increase in Steel's Annual Pellet Tonnage Requirements. Cliffs shall advise Steel in writing within fifteen (15) days of receipt of Steel's notice as to Cliffs' ability to supply all or any portion of such increased tonnage, which Cliffs shall sell and Steel shall purchase as provided for in Cliffs notice at the contract prices provided for in this Agreement. In the event Cliffs cannot supply any portion of such increased tonnage, Steel and Cliffs shall work together to attempt to procure such additional tonnage for Steel.


(g) In each year after 2004, upon reasonable notification and by mutual agreement, Steel may, for trial purposes, substitute up to 5% of Steel's Annual Pellet Tonnage Requirements for Northshore Pellets and/or Empire Pellets with another grade of Cliffs' produced pellets ("Substitute Pellets"). In the event an additional cost is incurred by Cliffs in producing or delivering the Substitute Pellets, then an appropriate price adjustment shall be made to the contract price for the tonnage of Substitute Pellets.


SECTION 5. PRICE, ADJUSTMENTS AND [****].


(a) The price for the Cliffs Pellets, either currently at or to be delivered to Steel's Cleveland Works or other dock area designated by Steel pursuant to Section 8(a), shall be as follows: (i) for the year 2002, the [* * * *] Northshore Pellets and Hibbing Pellets (which are currently located at Steel's Cleveland Works blast furnace ore yard) sold by Cliffs and purchased by Steel shall be [* * * *] per ton; (ii) the price for the [* * * *] Northshore Pellets and Hibbing Pellets (which are currently located at the Lorain Pellet Terminal, Lorain, Ohio) sold by Cliffs and purchased by Steel shall be [* * * *] per ton; and (iii) except for the price [* * * *] as provided for the specific Cliffs Pellets as described in Sections 5(a)(i) and 5(a)(ii) above, all other Cliffs Pellets sold by Cliffs and purchased by Steel in the year 2002 shall have a final year 2002 price of [* * * *] per iron unit (which at the expected natural iron content of [* * * *] for Northshore pellets equals [* * * *] per ton).


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(b) The price for the Cliffs Pellets, either currently at or to be delivered to Steel's Indiana Harbor Works shall be as follows: (i) for the year 2002, the [* * * *] Empire Pellets (which are currently located at Steel's Indiana Harbor Works blast furnace ore yard) sold by Cliffs and purchased by Steel shall be [* * * *] per ton; and (ii) except for the price [* * * *] for the specific Cliffs Pellets described in Section 5(b)(i) above, all other Cliffs Pellets sold by Cliffs and purchased by Steel in the year 2002, shall have a final year 2002 price of [* * * *] per iron unit (which at the expected natural iron content of [* * * *] for Empire pellets equals [* * * *] per ton).


(c) The prices for the specific grades of Cliffs Pellets sold and purchased in each of the years 2003 and thereafter for the Cleveland Works or other dock area designated by Steel pursuant to Section 8(a), and the Indiana Harbor Works shall be based on the 2002 base prices per iron unit as described in Section 5(a) (iii) and 5(b)(ii) above ("2002 base prices per iron unit for each of the Cleveland Works and the Indiana Harbor Works"), which 2002 base prices per iron unit for each of the Cleveland Works and the Indiana Harbor Works shall then be adjusted, up or down, in the year 2003 and each year thereafter by an amount as determined in accordance with Section 5(d) below.


(d) In order to determine the adjusted prices to be paid each year for the Cliffs Pellets, as provided for under Section 5(c), the 2002 base prices per iron unit for each of the Cleveland Works and the Indiana Harbor Works and each of the following respective year's then adjusted prices per iron unit for each of the Cleveland Works and the Indiana Harbor Works shall be further adjusted, up or down, each year for the year in determination as follows:


(1) Divide (x) the numerator, which is the amount by
which the [* * * *] for the calendar year in
determination changes (up or down) from the
immediately preceding calendar year's [* * * *]; by
(y) the denominator, which is the immediately
preceding calendar year's [* * * *], and multiply the
result obtained by [* * * *]; and


(2) Multiply the results determined in (1) above by the
preceding year's adjusted prices per iron unit for
each of the Cleveland Works and the Indiana Harbor
Works which will then equal the current year's price
adjustment per iron unit for each of the Cleveland
Works and the Indiana Harbor Works; and


(3) Add the result determined in (2) above to the
preceding year's adjusted price per iron unit for
each of the Cleveland Works and the Indiana Harbor
Works, which then will equal the current year's
adjusted prices per iron unit for each of the
Cleveland Works and the Indiana Harbor Works.


Those adjusted prices per iron unit for each of the Cleveland Works and the Indiana Harbor Works shall then become the contract's year final price for the Cliffs Pellets delivered to the Cleveland Works and the Indiana Harbor Works for the year in determination, and shall be the starting base for determining the following year's adjusted prices per iron unit for the Cleveland Works and the Indiana Harbor Works.


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(e) The price for all tons sold by Cliffs to Steel shall be based on actual natural iron content shipped. Notwithstanding the previous sentence, payments for the years 2002 through 2004, as described in Section 6(a), shall be based on actual natural iron content consumed by Steel.


(f) Attached as Exhibit 2 is an example of the adjustment formula applying the provisions of Sections 5(c) and 5(d).


(g) (i) Beginning in 2003, an [* * * *] shall be made in each year, wherein Cliffs shall pay Steel or Steel shall pay Cliffs, as the case may be, if [* * * *] average annual [* * * *] for actual [* * * *] in any contract year is [* * * *] or [* * * *]. The amount of the [* * * *] shall be determined as follows:


(1) In any contract year in which [* * * *] average
[* * * *] for actual [* * * *] is [* * * *], Cliffs
shall pay Steel an amount equal to: (w) the amount
[* * * *], (x) multiplied by [* * * *], (y)
multiplied by the contract year's average weighted
pellet price per ton for the Cliffs Pellets consumed
by Steel, (z) multiplied by the total tons of Cliffs
Pellets which Steel consumed in the contract year.


(2) In any contract year in which [* * * *] average
[* * * *] for actual [* * * *] is [* * * *], Steel
shall pay Cliffs an amount equal to: (w) the amount
[* * * *] (x) multiplied by [* * * *], (y) multiplied
by the contract year's average weighted pellet price
per ton for the Cliffs Pellets consumed by Steel, (z)
multiplied by the total tons of Cliffs Pellets which
Steel consumed in the contract year.


(3) For the purpose of estimating the [* * * *], a
[* * * *] payment calculation shall be made by
[* * * *] following the end of each quarter, using
the formula provided for in Sections 5(g)(i)(1) and
5(g)(i)(2) above for each quarter. This calculation
(and payment, if any) shall be based on [* * * *]
average [* * * *] for actual [* * * *] for the
quarter and the pellet tonnage consumed by Steel in
that quarter. Within 30 days following each quarter
[* * * *] shall notify [* * * *] in writing of the
amount (if any) payable by Cliffs to Steel or Steel
to Cliffs, and a quarterly payment, if any, shall be
made by Cliffs to Steel or Steel to Cliffs, as the
case may be, with
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