GUBKIN, Russia (Reuters) - Soviet geologists were looking for oil when exploring this region 500 km (315 miles) south of Moscow.
Instead, they unearthed Europe’s largest iron belt. Legend has it the pit blasted into the fertile soil is big enough today to fit the world’s population twice over: it has certainly helped make billionaires of its three Russian owners.
Global prices for iron ore, a crucial ingredient in steel, have quadrupled in the last five years as China -- producer of a third of the world’s steel -- devours ever more raw materials.
Russia, second only to Saudi Arabia as an oil exporter and supplier of a quarter of Europe’s gas needs, also holds some of the world’s largest metals reserves. It produces a fifth of the world’s nickel, and only South Africa has more gold reserves.
Russia is the world’s fifth-largest iron ore miner, with a 6 percent share of global production. While its output lags China and top exporters Australia and Brazil, Russia’s reserves outrank them all, promising a long future for iron mining.
Rio Tinto this week secured the highest annual price rise in a decade when it agreed to sell its ore to China’s largest steel maker, Baosteel, at up to 96.5 percent more than a year ago.
“The margins in this industry are certainly enough to encourage existing producers to expand and new producers to come in,” said Jon Bergtheil, head of mining equities at JPMorgan in London.
Although most of Russia’s iron ore is for local use, its largest mines have some capacity for export and there’s plenty more ore in the ground to feed expansion plans.
“We have enough left for more than 100 years. In principle, our reserves are unlimited,” Nikolai Dronov, the chief engineer at the Lebedinsky mine, said at the edge of the pit.
Nearly half a km below, a fleet of 28 trucks built by U.S. firm Caterpillar Inc and Russia’s Kamaz fills up with rocks for the long, winding drive to the surface.
Lebedinsky is part of the metals empire of Alisher Usmanov, one of Russia’s 20 richest men and owner of a stake in English soccer club Arsenal. Metalloinvest, the firm he founded and half-owns, plans a public share offering in either New York or London this year.
The UK mining index, which includes most major mining groups, rose 50 percent last year compared with 4 percent for the FTSE 100 as a China-fuelled boom pushed commodity prices to records. It is up over 15 percent this year.
Usmanov and Vladimir Potanin, part-owner of Norilsk Nickel, are in talks to swap assets in a move to create a Russian mining champion on the scale of global leader BHP Billiton.
Metalloinvest would contribute the iron: its two mines supply 40 million tonnes of iron concentrate per year, or about 40 percent of Russian production, and the company plans to increase this by 50 percent within the next seven years.
Most Russian iron mines exist to serve the steel companies that own them: Russia is the world’s fourth largest steel producer with a 5.3 percent share of world production last year.
Metalloinvest’s steel mills consume some of the ore from Lebedinsky in-house, but the mine has large amounts of spare ore to process into higher-value products for export to the steel furnaces of Asia and Europe.
Lebedinsky today produces over 20 million tonnes from a pit stretching 5 km across. When Usmanov and Metalloinvest co-owners Vasily Anisimov and Andrei Skoch acquired it in 1999, the mine had already been operating for more than 30 years.
Gubkin, the town of 120,000 people that grew up around it, was founded in 1967. The flat land near the Ukrainian border was hitherto best-known as the site of one of World War Two’s biggest tank battles, in the nearby village of Prokhorovka.
Ivan Gubkin, the Soviet geologist after whom the town is named, is best remembered as an oil expert -- Russia’s state oil and gas university, which counts billionaire Roman Abramovich among its alumni, is named in his honor.
But Gubkin also helped uncover the reserves of the Kursk Magnetic Anomaly, the belt of iron slicing through Russia’s fertile Black Earth region that hosts its main iron mines.
A sign on the edge of town hails Gubkin as the “first town of the KMA” -- an area where the underlying rocks alter the Earth’s magnetic field.
Some of the wealth from this iron is now filtering through to its residents. Oleg Semyonov, managing director at Lebedinsky, said the average monthly salary for the 10,000 workers at the mine and associated plants was 21,000 roubles ($887.2), about 30 percent above the national average.
New amenities have accompanied growing prosperity in Gubkin. Children flock to a privately held amusement park known locally as Disneyland, and the mine helped fund construction of Russia’s biggest church outside Moscow -- built on two levels to accommodate services underground, where it’s cozier in winter.
“In the last five years they’ve built a skating rink, sports complex and shopping centers,” said Svetlana Tyrkalova, who sells newspapers from a street-corner kiosk in the town.
“My relatives visited from St Petersburg recently and were amazed. It was never like that when they lived here.”
With iron ore demand showing no signs of slowing, more investment is planned. Chief Executive Maxim Gubiyev says Metalloinvest will devote part of a $10 billion-plus capital expenditure program to boosting output at its Lebedinsky and Mikhailovsky mines to a combined 60 million tonnes by 2015.
The company will consume some internally but is also eyeing a bigger role as exporter of high-value iron products.
“There’s no global shortage geologically of iron ore. There is a shortage in the ability to move it from the supplier to the consumer, primarily China,” said JPMorgan’s Bergtheil.
Russia’s abundant iron ore and natural gas reserves, plus easy access to transport links, makes it ideal for processing iron into higher-value pellets or hot-briquetted iron, said Stephen Montague, vice-president of U.S. plant supplier Midrex Technologies Inc.
Charlotte, North Carolina-based Midrex supplied the second hot-briquetting plant at Lebedinsky and will find out this summer whether its bid to supply the third has been successful.
“Russia is the right place to make iron,” says Montague.
Editing by Sara Ledwith