(Corrects Freeport to U.S. major from Canadian)
By Aleksandar Vasovic and Stephen Eisenhammer
BOR, Serbia/LONDON, June 13 Serbia's mining sector, stagnant since the wars that tore Yugoslavia apart in the early 1990s, looks set for a revival as volatile commodity prices increase the allure of countries in Europe with established infrastructure and skilled labour.
Once home to a core copper and gold mining facility for the former Yugoslavia, the town of Bor in the north-eastern corner of Serbia has a history of mining dating back to Roman times.
U.S. major Freeport-McMoRan Copper & Gold and its smaller Canadian partner Reservoir Minerals are exploring the area's underground reserves. Early results have impressed investors and analysts.
"The grades they're drilling are exceptional... These come around once a decade," said Brent Cook, a geologist and private investor who writes an investment newsletter.
International mining firms are under pressure from increasingly cautious investors to move away from projects in non-traditional mining countries where a lack of good roads, railways, water and power, as well as skilled workers, can hike costs.
Eastern Europe, along with Spain and Greece, has emerged at the forefront of this shift, with governments that are eager to help boost jobs and growth.
Canada's Gabriel Resources is planning Europe's biggest open cast gold mine in Romania, while Dundee Precious Metals aims to double current gold production in Bulgaria to 300,000 ounces a year by 2016.
The Freeport and Reservoir project is at an earlier stage but is drilling good grades along the Timok belt where state-owned RTB Bor - short for Mining and Smelting Basin Bor in Serbian - is also located.
"These are Congo-type grades in Europe," Reservoir Mineral's chief executive, Simon Ingram, said in an interview in London.
The drill hole in April showed copper ore of 7.2 percent equivalent, far above the average global deposits usually under 1 percent, meaning more copper for less rock mined, adding to results that Freeport called "encouraging".
For Ani Markova, who co-manages the Global Gold and Resources Fund at asset manager Smith and Williamson, Serbia is part of a wider trend.
"You have to put Serbia in the whole context of Eastern Europe which is opening up for mining... This is an area which I think will grow in the next few decades in terms of the supply of materials to Europe and the world," Markova, who has invested in Reservoir and Dundee, told Reuters.
Serbia was made an official candidate to join the European Union only last year after slow progress in recovering from the wars that tore apart Yugoslavia in the 1990s and the disastrous 13-year rule of Slobodan Milosevic.
The country hopes to begin accession talks later this year or early next after striking a landmark accord in April to settle ties with its former Kosovo province.
For prospector Nebojsa Trailovic, 60, the treasures in the ground of eastern Serbia have been a lifeline during the years of turmoil, during which Serbia lagged behind its neighbours, Romania and Bulgaria.
"I cannot make a fortune out of this, in such a primitive way," Trailovic told Reuters as he emerged from an icy creek where he was panning for gold.
He, too, has expansion plans - a bigger pump and bigger sluice box with which to process material from the river bed.
"I know foreign investors found gold in this region in huge quantities... They say these mountains are packed with gold, that South African mines are nothing compared to this," Trailovic said through a grizzled beard.
Serbia's minister for mines, Milan Bacevic, says 300 companies are now registered for mining and exploration. Many are small firms attracted by the security and infrastructure as well as the relatively new political stability.
"There are small and medium companies that are recognising Serbia as one of the most interesting places in Europe," he told Reuters. "These investments may be small and medium, but they are big for us."
The current Socialist-Nationalist coalition must contend with unemployment of 25 percent as well as a mounting budget deficit and debt, and failed to secure a precautionary loan from the International Monetary Fund last month.
The government hopes the mining sector will be a bright spot.
After attempts to sell RTB Bor to Romania's Cuprom or Austria's A-Tec failed, the state opted to fund the regeneration of the company itself, injecting nearly 70 million euros. Much of this will go towards a new smelter that will cut production costs.
Canada's export credit agency - Export Development Canada - has loaned a further 135 million euros, in part because of the number of Canadian firms exploring in the area, including another junior miner, Avala Resources.
There is plenty of room for growth. According to Bacevic, Serbia uses less than 10 percent of its total mining resources.
The Freeport and Reservoir Minerals project is interesting not just for the quality of its find but also its infrastructure and location, a few km away from RTB Bor's pit, with a functional railway as well as water and power supply.
But Freeport and Reservoir's deposit is deep underground, meaning it will take more time and expense to drill out and exploit. Developing an underground mine on this scale would have been difficult without Freeport, the world's largest listed producer of copper.
"We're in a partnership with one of maybe five companies that could actually develop this mine," said Reservoir's Ingram.
It is still unclear how big the deposit is. Ingram said it looks similar to the 200 million tonnes of high grade copper ore and 600 million tonnes of lower-grade porphyry copper ore in Bor, but said this estimate was little more than "geological arm-waving."
"I believe the potentials are big... What is more important is that this is the first major appearance of gold and copper mineralization south of Bor," project coordinator Miodrag Banjesevic said on the site, over the sound of revving trucks.
Banjesevic is wary of being too optimistic, however: "The time span between this phase and the actual opening of the mine depends on many things... Sometimes the mine never opens."
Freeport and Reservoir have six years to complete a feasibility study. Then there's a window of two years to get started on building the mine. There is still a long way to go.
Back in Bor, where antique mining equipment lines the industrial high street, there are signs of recovery.
New apartment buildings are popping up and locals said more jobs were around, although unemployment still hovers around 20 percent. Bor's rental market has boomed, with prices quadrupling in two years, according to one resident.
"So things are improving. Most people cannot see the progress as wages are still very low... but there it is, right under the surface," said Zoran Stanojkovic, an office clerk.
RTB Bor returned to profit in 2011 after more than two decades of losses. The company said profits last year were up 34.4 percent on the back of upgraded equipment.
For companies exploring in the region the most exciting development is the government's decision to help fund the new smelter, which should be finished by 2014 and will nearly halve the cost of copper production.
The state is now keen to hold on to RTB Bor, Bacevic said.
"As long as this government is in power RTB Bor will not be sold... Why should we sell something which has a future?" (Additional reporting by Matthew Robinson in Belgrade; Editing by Sonya Hepinstall)