* Northland creditors approve debt restructuring plan
* Two smaller Nordic miners also undergo restructuring
* Talvivaara and Northern Iron suffer production glitches
LONDON/STOCKHOLM, July 16 (Reuters) - A financial crunch at iron ore miner Northland Resources demonstrates the impact of metal price falls on small-scale mine exploration in the Nordic region and is scaring away already rattled investors.
The sector had been flourishing since the mid-2000s, drawing in foreign and domestic companies and investment, until the price falls of the last two years in iron, base metals such as nickel, and more recently in gold.
The reversal in fortunes was driven home when the Swedish unit of Norway-listed Northland Resources, one of the region's best-known new iron ore miners, filed for bankruptcy protection in February.
In January it revealed a $425 million funding shortfall, about four times its then market capitalisation, to cover higher than expected capital and operating costs for its Swedish mine.
Small Nordic miners and explorers found their efforts to raise funds suddenly got much harder, threatening to cause serious delays or even halt some projects completely.
"It doesn't help at all. It certainly affects local confidence, adding to the lack of confidence worldwide across the industry in terms of return of capital," Michael Hudson, the CEO and President of Mawson Resources, a Canadian firm operating in Sweden and Finland, said of Northland's difficulties.
"People who invested will be gun-shy, of course," he added, underlining that a lot of the funds for Northland came from Norway and London and those flows were being affected.
Northland's situation became critical in late May, when a group of bondholders, unhappy with debt restructuring proposals, froze its bank accounts, forcing it to halt operations for days.
The company's share has fallen 92 percent to 0.48 Norwegian krona so far this year.
The Northland crisis has hit various Nordic and international financial institutions such as banks and fund managers as well as suppliers.
"A lot of shareholders at Northland got their fingers burnt and this brought a lot of uncertainty to the market," said Paul Marsden, sales director at Nordic Iron Ore, a company aiming to reopen and develop two iron ore mines in Sweden that were shut in the late 1970s by steelmaker SSAB due to low iron prices.
"We certainly felt that Northland was grabbing all the attention and we found it really difficult to get much. Hopefully this situation will change quickly."
Northland's creditors on Friday approved a proposed reorganisation.
Northland is not alone. Other miners in the region such as Nordic Mines and Lappland Goldminers, are also going through a painful reorganisation phase.
"The Northland saga has affected the financial situation of the junior miners. It's a psychological reaction. But there is also a deeper cause that is the decline of stock markets in Nordic countries," Nordic mining expert Magnus Ericsson, cofounder of consultancy the Raw Materials group, said.
"It has become more difficult to find capital in Sweden, Finland and Norway."
Mining exploration investment in Nordic countries jumped from about 60 million euros ($78 million)in 2004 to almost 250 million in 2012, despite a fall in 2009 following the global financial crisis, according to the Raw Materials Group.
From 2012 however, exploration investment has been declining a little and the consultancy expects it to remain flat to slightly lower in 2013 and 2014.
Finland and Sweden ranked first and second in the Fraser Institute annual survey of mining companies, which assesses the best destinations for investment in exploration, based on public policy factors. Norway was also high, in tenth place.
During the last decade, investors rushed in to the politically stable Nordic region, when China's insatiable hunger for raw materials pushed metals prices to all-time highs.
But things turned sour in the last couple of years as the Asian giant lost some of its appetite and metal prices fell.
"Scandinavia is a good jurisdiction but it is a long way away from China and that is a problem. Also, the cost of projects in Scandinavia is quite high compared with the world's average," Macquarie metals analyst Colin Hamilton said.
Operational problems are also taking a toll.
A glitch at Northern Iron's mill in Norway, for example, hit production at the end of May.
Weak nickel prices and production glitches have raised doubts over the future of Finnish nickel miner Talvivaara's Sotkamo mine, which was initially hailed for pioneering a cost-efficient extraction process.
Shares in the two companies have lost about 80 percent and 60 percent of their value, respectively, so far this year.
"The recent problems affecting small Nordic miners are also the reflection of how difficult the transition is from being an explorer to building an operating mine," Ericsson said.
"The optimism needed when you are an explorer has to leave the way to realism when you become a miner." ($1 = 0.7664 euros) (Editing by Anthony Barker)