* High gold price encourages villagers to mine * Some artisanal miners use mercury to extract gold
By Jeremy Clarke
ASMARA, Feb 4 (Reuters) - More than a dozen foreign mining firms are now working in Eritrea, but poor villagers in the Red Sea state's remote lowlands are also increasingly using their bare hands to claim some of the riches.
The nation is on the brink of a mining surge that could boost its agriculture-based economy, which has suffered from irregular rains and the global downturn, while aid agencies say Eritrea's poor suffer widespread hunger and malnutrition.
Experts say the country's impending mining boom will challenge oil-rich neighbours to make it easier for foreign firms to prospect across a large geological structure in the region rich in base metals and gold.
Gold, copper and zinc are the main attraction for foreign explorers, and licenses are held by companies from Australia, Britain, Canada, China and Libya.
Asmara holds a significant stake in the projects, but the most advanced mine, run by Canada's Nevsun Resources Ltd, will not begin production until late this year, and Asmara is unlikely to see a profit until 2012 at the earliest.
However, some of Eritrea's poorest people are already cashing in on the nation's vast mineral potential, working in family groups to collect rocks and crush them by hand.
"The price of gold is so high at the moment that if these people, who are so poor, can find just one gram per month it is equivalent to the wage paid for national service," Tucker Barrie, an economic geologist and regional expert, told Reuters.
"But you can find one gram in a day if you are lucky."
Gold has been on a roll as investors buy the precious metal as a hedge against inflation although it slipped towards $1,100 an ounce on Thursday from $1,124.45 on Wednesday.
USING MERCURY
National service is mandatory for young Eritreans, and when someone will be granted "demobilization" is often unknown. Some Eritreans spend most of their adult lives in national service, whether in the military, building roads or working in cafes.
Mining company officials say the groups of impoverished Eritreans who search for gold on their licences use primitive and often unconventional methods.
"Every day on site I see local Eritreans working in groups, men and women," Timothy Strong, Eritrea manager for British company London Africa, told Reuters. "They use one rock to crush, and the base of their sandals to pan for the gold."
The dangers of rudimentary, artisanal mining are well known, where no safety standards are enforced and children carry piles of rocks between deep vertical pits.
"In the more advanced areas they also use mercury to extract the gold from the rock, which kills local wildlife, and in an agricultural area it gets into the food source. It also burns your skin and the fumes send you crazy," Strong said.
Industry officials insist the artisanal mining is not in conflict with the big foreign companies, which use modern industrial methods alongside the basic, local extraction.
"Although artisan mining on sites licensed to companies is not technically legitimate, it is much wiser to build a good relationship with communities," Strong said.
"If you totally disenfranchise local villagers -- apart from being immoral -- you leave your project open to sabotage. We help on our site. We give water and other provisions."
Other than the small-scale artisanal mining and some minor extraction by Italians during the colonial era, Eritrea's mining potential is largely unexploited. (Editing by Daniel Wallis and James Jukwey)
