Metalloinvest's Bottomless Money Pit

ReutersThe Lebedinsky mine in the Belgorod region. Legend has it that the pit can hold twice the world's population.
GUBKIN, Belgorod Region -- Soviet geologists were looking for oil when they explored the Belgorod region, 500 kilometers south of Moscow. Instead, they unearthed Europe's largest iron belt.

Legend has it that 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 owners.

"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 kilometer below, 28 trucks built by U.S. firm Caterpillar and Russia's KamAZ filled up with rocks for the long, winding drive to the surface.

Lebedinsky is part of the metals empire of Alisher Usmanov, Vasily Anisimov and Andrei Skoch. Metalloinvest, the firm they founded and co-own, plans a public share offering in either New York or London this year. Also, 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 tons 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. 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 more than 20 million tons per year from a pit stretching five kilometers across. When Metalloinvest 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 had been best-known as the site of a huge World War II tank battle, in the nearby village of Prokhorovka.

Ivan Gubkin, the Soviet geologist after whom the town is named, is best remembered as an oil expert -- named in his honor is the Gubkin Russian State University of Oil and Gas. 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 rubles ($890), about 30 percent above the national average.

New amenities have accompanied growing prosperity in Gubkin. Children flock to an amusement park known locally as Disneyland, and the mine helped fund the construction of the 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 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 said 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 tons by 2015.

The company will consume some internally but is also eyeing a bigger role as an exporter of high-value iron products.

Russia's abundant iron ore and natural gas reserves, plus easy access to transportation links, make 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. 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," Montague said.