UPDATE 2-Aricom's H1 loss narrows as mining begins in Russia

(Adds more details, quotes, background)

By Robin Paxton

MOSCOW, Aug 6 (Reuters) - Anglo-Russian miner Aricom Plc OREA.L reported a reduced first-half loss on Wednesday, as it started mining iron ore in the Russian Far East.

Losses narrowed to $2.5 million in the first six months of 2008 from $5.3 million in the same period last year. Aricom also said its net assets rose 9 percent to $1.2 billion while cash and cash equivalents and short-term investments fell to $392 million from $498 million at the end of 2007.

"We're now cementing our transition from developer to producer and will be making regular shipments from the end of August or beginning of September," Aricom Chief Executive Jay Hambro told Reuters by telephone from London.

Aricom, listed on the London Stock Exchange, is banking on strong iron ore demand from Chinese and Russian steel mills, plus relatively low freight costs, to make its mines in the Russian Far East profitable.

Benchmark prices for iron ore rose as much as 96.5 percent this year, the highest jump in a decade, driven by huge demand from China, which produces a third of the world's steel.

Aricom starting mining at its Kuranakh deposit in the Amur region in June. Hambro said the company would release studies into its two larger deposits, K&S and Garinskoye, in September.

Hambro said the company's net cash would be enough for another 12 months. Aricom also expects to raise about $1 billion in debt to fund the larger projects and has appointed Morgan Stanley to advise it.

"We're looking at the availability of funds at the beginning of next year," Hambro said.

REGULAR SHIPMENTS

Hambro said it was too early to say whether Aricom would post a profit for the full year. Higher overheads, not yet matched by sales, turned a small profit in the second half of 2007 to a loss in the first half of this year.

"We're gearing up to be a fully operational company. Our production has not yet caught up," Hambro said. "We've a lot more people on permanent contracts and our overheads have risen considerably, but we're not yet in full-scale production."

Aricom's regular shipments of saleable product from Kuranakh would comprise 3,000-tonne loads, Hambro said. The company has an offtake agreement with China National Gold Group Corp for up to its entire output, but can also sell its ore elsewhere.

At full capacity the Kuranakh mine will supply 2.4 million tonnes a year of ore to a mill that will produce 900,000 tonnes of titano-magnetite concentrate and 290,000 tonnes of ilmenite, the ore from which titanium sponge or dioxide is made.

The company has previously said it would be able to deliver concentrate from Kuranakh to the Chinese border at a freight rate of $13.44 per tonne, a quarter of the cost from Australia.

"We're confident we will get a significant proportion of the freight premium," Hambro said.

The two larger projects, K&S -- or Kimkan and Sutara -- and Garinskoye, are due to start production from 2010. Hambro said Aricom had decided to process ore from both mines at a large plant to be built at K&S in the Jewish Autonomous Region. (Editing by Greg Mahlich)