London Mining said it started production of iron ore from its Marampa operation in Sierra Leone and that the first shipment was on track to be completed by the end of this year.

This is very significant for Sierra Leone as well as for London Mining, Chief Executive Graeme Hossie told reporters on Friday. Sierra Leone is now back producing high specification iron ore...they are expecting a big increase in their GDP next year.

Marampa, which supplied iron ore to Europe, was closed in the mid 1970s.

London Mining's first shipment will follow rival African Minerals which shipped the first iron ore from its Tonkolili mine in Sierra Leone last month.

Sierra Leone has a huge mineral potential...the country needs foreign investment to help develop those, Hossie said, noting the support given by the government.

London Mining employs 2,400 workers at Marampa, including contractors, of which about 92 percent are from Sierra Leone.

Production will increase during the first half of 2012 to over 160,000 tonnes a month, with 1.8 million tonnes of production still targeted for 2012.

The production of high specification iron ore product from our plant at Marampa after decades of mine inactivity marks the beginning of our Phase 1 ramp up and forms the basis for our phased expansions to 16 Mtpa (million tonnes per annum), said Hossie.

The company expects Phase 1 capacity to increase 11 percent to 4Mtpa in 2013 due to plant optimisation, although its capital costs for Phase 1 have also grown 11 percent to $234 million (149 million pound).

The miner said it is in talks with steelmakers and traders, including Glencore, on further offtake deals that would provide financing to accelerate output to 4Mtpa by the end of 2012.

At the moment we are in discussions with a number of companies, said Hossie, adding that the company hopes to conclude those talks over the next two months.

Our plan is to have a mix of offtakers including both traders and steelmakers, he said. The company also hopes to have a combination of European and Asian buyers.

The miner produces high quality iron ore which is suitable for Europe and can also be blended to lift lower grade iron ore from Chinese producers.

It expects to ship between 20-30,000 tonnes this month, using smaller ships for the first three months until a larger vessel capable of carrying about 150,000 tonnes is expected to arrive around the end of February.

The miner said it received its first prepayment from Glencore for its scheduled December shipment and expects to receive a further prepayment for its January shipment later this month.

Glencore has paid $60 a tonne in advance for the iron ore, with the total capped at $27 million, and will pay the remainder depending on spot iron ore prices at the time of ship loading.

Spot iron ore prices <.IO62-CNI=SI> fell as much as 32 percent from the end of September, although they have picked up recently to $133.46 a tonne as demand from Chinese steel mills has returned.

What we have seen is that there is a strong pricing floor resistance level at around $120 a tonne...and that is chiefly driven by the cost of iron ore production in China, Hossie said. If the price goes to $120 or below, much of that production stops and then more requirement is made of imports.

He expects stronger prices in 2013 and 2014 as China continues to increase its steel consumption and as new iron ore supply comes to the market slower than expected. He sees iron ore prices at about $120-180 a tonne over the next couple of years, possibly within a tighter range of $140-150 a tonne between now and 2014.

Shares in London Mining were up 1.3 percent at 1008 GMT, valuing the company at about 340 million pounds.

With the challenging logistics of trucking and barging, a successful few shipments may put the sceptics to bed and allow a re-rating on this cheap looking stock, said Numis Corp analyst Andy Davidson.

(Reporting by Julie Crust; editing by James Davey)