Aricom eyes $1 bln for Russia iron mines, shares drop

By Robin Paxton

MOSCOW, Oct 8 (Reuters) - Anglo-Russian miner Aricom Plc OREA.L needs $1 billion in external funds for an iron ore project to supply resource-hungry China, it said on Wednesday, sending its shares lower in a tough global environment for borrowers.

Shares of Aricom, a member of the UK's FTSE 250 mid-range stocks index, pared losses to 8.8 percent by 1505 GMT after earlier plunging 38 percent to a record low on the release of a feasibility study into the project in Russia's far east, where construction will start next year.

"We're not ignoring the credit crunch but, to put it into perspective, we still have 12 months' cashflow on our balance sheet," Chief Executive Jay Hambro told Reuters. "We have 12 months to ride out the storm."

Aricom is betting on favourable freight rates and strong demand for its iron ore in China, where a third of the world's steel is produced. Iron ore prices have quadrupled in the last five years as steel makers consume more raw materials.

The feasibility study of the K&S and Garinskoye deposits reiterated the company's plans to raise up to $1 billion. Hambro said Aricom would seek either a loan or would consider inviting a strategic partner to help develop this particular project.

"Debt is more attractive, unless that strategic partner were to bring something else: technology, equipment, people or offtake (a deal where a third party agrees to buy the iron ore)," Hambro said in a telephone interview.

Morgan Stanley is advising Aricom on raising the finance, which will contribute to the $2.3 billion cost of building two mines, a processing mill and a plant to produce direct reduced iron, a form of iron that can be fed into steel furnaces.

Hambro said in a statement the company was also considering "further solutions for reducing development plans in line with available capital". He declined to specify these measures.