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UPDATE 1-Labrador Iron says needs new funding to continue mining

(Adds background on markets, CEO comment, share price move)

TORONTO, Feb 14 (Reuters) - Canada's Labrador Iron Mines Holdings (LIM) warned on Friday it needs new investment to continue mining operations in 2014, underscoring the challenges facing some of the small and established iron ore miners in Canada and overseas.

The warning, which sent LIM shares sharply lower, came days after a Reuters poll indicated that iron ore prices were set to test five-year lows this year after hitting a six-month trough in January, on rising global supply and slower growth in Chinese steel output.

LIM, which is mining its James open pit mine in the Labrador trough in Eastern Canada, said the grade and consistency of its ore began to fall as it went deeper into the mine, resulting in a shortfall in iron ore quality and negative cash generation in its 2013 operating season and a fiscal third-quarter net loss.

"These ore quality problems, together with significant capital invested during the year, put considerable strain on LIM's cash resources and LIM now needs new external investment to enable the company to continue mining operations in the 2014 season," Chairman John Kearney said in a statement.

LIM's struggles highlight the challenges that face early-stage iron ore miners working in the Labrador trough, even though many of these companies have strategic partnerships with established steelmakers.

Shares of juniors like New Millennium Iron, Alderon Iron Ore, Adriana Resources and Century Iron Mines Corp have all fallen sharply in the last 24 months.

Even established players like Iron Ore Co (IOC), jointly owned by Rio Tinto , Mitsubishi Corp and Labrador Iron Ore Royalty ; and Cliffs Natural Resources Inc with major iron ore operations in Canada are all re-thinking their commitment to these operations.

Earlier this week, iron ore and coal producer Cliffs said it would forego plans to expand its Bloom Lake mine and idle its Wabush Mine, both located in the Labrador trough. Early on Friday, Cliffs said it is now also considering idling, selling or finding a partner for Bloom Lake.

Rio, which considered selling its interest in IOC in 2013, hinted on Thursday that it was likely to hang onto the asset, as it was not getting offers that reflect the value it hoped for.

These moves emphasize the challenges facing iron ore miners with operations in Canada, which sell into the seaborne iron ore market dominated by output from Brazil and Australia.

TOUGH MARKET

The price of iron ore, used to make steel, dropped more than 7 percent in January, rivaling losses for all of last year. A further price fall poses a threat to the profit margins of top miners like Vale, Rio Tinto and BHP Billiton and could edge out high-cost producers, including some in China - the world's biggest steel producer and consumer.

China is also the world's biggest iron ore producer, but the low iron content of its domestic ore makes it heavily reliant on imports, and a key driver of spot prices. The country buys about 60 percent of the world's seaborne iron ore exports.

With risks to China's economic growth rising this year as the government seeks a more sustainable consumption-driven expansion, the outlook for iron ore prices has softened.

Benchmark 62 percent grade iron ore for delivery to China <.IO62-CNI=SI> is forecast to average $121.50 a tonne in 2014, lower than last year's $135, according to the median estimate in a Reuters poll of 14 analysts in January. That would be its cheapest price since 2009 when it averaged around $86 a tonne.

The price is generally seen falling further to $115 next year. Two analysts polled, CLSA and Goldman Sachs, predicted a decline to below $90 in 2015, as growth in demand from top consumer China fails to keep pace with increased supply.

FUNDING CRUCIAL

LIM, which currently relies on IOC and RB Metalloyd for much of its shipping and marketing activities, said it is assessing a variety of scenarios for the coming 2014 operating season. LIM's operations run from April through November with a planned winter closure from December to March.

Toronto-based LIM said it is seeking to negotiate revised and improved terms with its major contractors and rail and port infrastructure providers prior to the start of its 2014 season.

"We do realize that in planning for the 2014 season, we need to raise additional financing and we are currently evaluating a number of different financing alternatives, including off-take arrangements and other potential options," said Kearney, noting that a failure to obtain adequate financing could force LIM to the delay, or even suspend all operations.

In the third quarter ended Dec. 31, LIM reported a net loss of C$31.3 million, or 25 Canadian cents per share. Net revenues in the quarter were C$28.4 million. LIM did not provide year-ago results.

Shares in the company fell 18 percent to 19 Canadian cents a share in afternoon trading on the Toronto Stock Exchange.

(Reporting by Euan Rocha; Editing by Jeffrey Benkoe and Meredith Mazzilli)