Arctic iron mine reaches milestone, but hurdles remain

* Largest mine ever in Arctic being built by Arcelor subsidiary

* Project could have key permits by early 2013

* Company must still sign social agreement with local Inuit

* Iron ore prices well below 2011 highs, demand seen sluggish

By Julie Gordon

TORONTO, Sept 20 (Reuters) - Even though regulators should clear a massive iron ore project in Canada's far north by early next year, a decision on whether to move ahead may hinge on clear signals that global steel demand is pulling out of its current funk.

The Mary River project, owned by a subsidiary of steelmaker ArcelorMittal, was given the green light late last week by regulators in the territory of Nunavut after a four-year environmental review.

The approval is the first major milestone for the challenging development, located in a remote and environmentally sensitive region of the Canadian Arctic.

"It's fair to say that this is the most important step towards development that has occurred," said Tom Paddon, chief executive of Baffinland Iron Mines, which is 70-percent held by ArcelorMittal. "But it is just that - an important step."

At present, economic trends appear to be working against the ambitious Arctic project. Iron ore prices have tumbled since 2011, hitting a near three-year low earlier this month as steelmakers struggled with the debt crisis in Europe and a slower pace of expansion in China.

With demand for steelmaking materials set to grow at a slower pace than previously, miners around the world are scaling back expansions and shelving higher-cost projects.

Still, the bleak near-term outlook for iron has not slowed activity at Baffinland. The Toronto company is pushing ahead with a feasibility study and pre-construction work in Nunavut.

ArcelorMittal, which is in the midst of a major expansion at its other Canadian project, is still pushing ahead with efforts to boost its own iron ore output and reduce its dependence on miners like Vale SA, Rio Tinto and BHP Billiton.

Considered one of the richest undeveloped iron ore deposits in the world, the Mary River mine is expected to produce up to 30 million tonnes a year, or the equivalent of more than 80 percent of Canada's current total output.

But to get the project up and running, Baffinland will have to build the Arctic's largest open pit mine, along with support infrastructure - including a port and railway - all of which is expected to cost at least $4 billion.

The Canadian government still has to sign off on the mine plan approval, as well as on the water license, which is now being reviewed by Nunavut regulators. Baffinland expects both permits to be in place in the first quarter of 2013.

And the company must also reach an impact and benefit agreement with the local Inuit communities, a key step for any resource development project in Canada's north.

Paddon said those negotiations are well underway, though he warned it would be difficult to predict when an agreement would be in place.

Mining projects from Argentina to Alaska have been derailed by opposition from local communities who worry development will bring them little economic benefit, while destroying their traditional way of life and harming the environment.

Once all the pieces are in place, Baffinland will turn to its majority shareholder, ArcelorMittal, to make the call on whether construction will go forward.

"The final decision rests with our shareholders," said Paddon. "But at Baffinland we're busy putting in place all the elements required to allow that decision to be made."

A NEW FRONTIER

Found well above the Arctic Circle on Baffin Island, Mary River is one of the most isolated mining projects in the world. Temperatures at the site regularly dip below minus 30 and there is 24-hour darkness from November to January.

Critics of the project say the mine is simply too ambitious to work in such an inhospitable environment, a charge Paddon is quick to rebuke.

"Over the past several decades we've gotten empirical proof that mines can be undertaken in remote locations," he said. "So I don't have any doubt at all that this project is doable. Logistically it is well within our capacity."

Agnico-Eagle Mines Ltd owns two gold projects in Nunavut, while both Rio Tinto and BHP Billiton operate diamond mines just south of Arctic Circle in the Northwest Territories.

But while gold and diamonds are small enough to be flown out on a plane, iron ore is produced by the tonne - making transportation a far more arduous task.

Once mined and crushed, millions of tonnes of ore will be transported by rail across 100 miles of barren landscape to a port in Steensby Inlet. It will then travel by ship from the northernmost tip of Baffin Island to steel mills in Europe.

For Paddon, who helped build the Voisey's Bay nickel mine in Northern Labrador, the project is not only feasible, but will also be milestone for future Arctic development.

"This, on its own, will be the largest mine development ever to occur in the Arctic," he said. "It's happened across the North and this is the next one."