By Diana Asonova
UST-NERA, Yakutia, Russia (Reuters) - In winter it gets so cold that metal snaps.
When the weather is warmer people make a living sifting the earth for fragments of gold in the Oymyakon district of Russia's far eastern Yakutia region.
But the unusually rich deposits of the alluvial gold near the surface are running out and producers have had to switch to the more expensive process of digging mines to extract gold ore.
Production at the first two mines to be opened in the area since the fall of the Soviet Union will start soon. One is being launched by GV Gold, with U.S. fund BlackRock and the European Bank for Reconstruction and Development among its shareholders, and another by the locally-owned Yantar group.
As alluvial deposits disappear in other areas, producers are opening mines to help Russia keep its place as the world's third biggest gold producer after China and Australia and ahead of the United States in fourth place.
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"It is always hard to move away from old traditions but all regions nearby... have already gone through it," said Elena Andreyeva, chief ore mining geologist at Yantar.
Global gold prices in London are now at around $1,285 per ounce, down by around a third from their peak in 2011. But Russia's rouble currency has also fallen, making foreign investments more attractive in an area dependent on gold for the bulk of local revenues and that is a challenging place to work.
There are no direct flights from Moscow to Ust-Nera, the main village of the Oymyakon district, located some 9,300 km east of Moscow and temperatures often fall below 50 Celsius.
In winter, motorists keep their engines running at all times so they don't seize up. Some people have heated garages. Locals call it "the Pole of Cold," and the district claims the title of the coldest continually-inhabited settlement in the northern hemisphere, although other places also claim it.
The area was home to Gulag labour camps in the former Soviet Union and prisoners were made to pan for gold from local rivers with their bare hands.
GOOD RETURNS
Alluvial gold as a proportion of national gold production has fallen to around 30 percent from 83 percent twenty years ago, according to the Russian Gold Industrialists' Union.
In Oymyakon it is also declining but still accounts for the bulk of 9 tonnes of gold the district produced in 2016 when Russia produced a total 297 tonnes.
GV Gold's new plant will start production in May. It is expected to produce up to 3 tonnes of gold a year, including gold-bearing concentrate. GV Gold has put in $113 million for the first stage of investment in the mine which will become the third of its type in the area.
"This would be the biggest gold mining and processing plant in the Oymyakon district," Alexander Tuluptsov, chief executive of the Tarynsky plant, told Reuters.
The EBRD has a 5.26 percent stake in GV Gold. An EBRD spokesman directed questions about the investment to GV Gold. A spokesman for Blackrock declined to comment.
GV Gold shelved a plan for an Initial Public Offering in 2007 and then 2009. In a statement this week it said: "The current international and political situation is not favourable for a successful 'investment window', however the company is constantly monitoring public market opportunities."
Tuluptsov expects GV Gold to see a return on its investment within five to six years.
Yantar's Khangalas plant, located some 160 km from Ust-Nera village, will start operating in 2018. It should produce up to 1 tonne of gold a year, including concentrate, a Yantar official said.
The investment is being funded by proceeds from alluvial gold production but the official did not give a figure. Yantar's alluvial gold production was 2.3 tonnes in 2016, and this year it plans to produce around 1.8 tonnes.
Producers first offer the gold to the Russian central bank and some of the surplus is exported. Russia exported around 30 tonnes of gold last year, mainly to Europe, China and India, according to Russia's Gold Industrialists' Union.
RISING OUTPUT
Despite the larger outlay, ore mining has advantages over the seasonal alluvial mining.
"Hardrock mining is more stable and profitable and less dependent on weather and logistic issues than alluvial mining," said Mikhail Leskov, director for mining practice at American Appraisal Russia, a global valuation and corporate finance advisor.
Although still some way behind China's 453.9 tonnes and Australia's 298 tonnes of gold production last year, the new mines should help Russia meet forecasts by the Gold Industrialists' Union for an increase in output by 8 tonnes this year.
Other gold-ore mining projects are also coming on tap.
Amongst them, Russia's largest gold producer Polyus is expected to commission its large Natalka gold deposit in the east by the end of 2017. In the next three to four year it will also study Sukhoi Log, one of the world's largest untapped gold deposits.
(Additional reporting by Alexander Ershov and Elena Fabrichnaya; Writing by Katya Golubkova; Editing by Polina Devitt and Anna Willard)
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