Rough sales posted by ALROSA in the fourth quarter drew major attention on the part of analysts and experts covering the company. If all the other aspects of the diamond miner’s operating statement were relatively predictable, its sales performance surpassed expectations. This raises the question if this growth should be considered to be a proof of recovery in demand from diamond cutters and dealers, or it is only ALROSA’s desire to maximize revenues on the homestretch of the year after a weak third quarter. The January sights of the largest diamond miners give grounds for some optimism. De Beers’ monthly sales went up more than twice compared with December reaching $540 million, while ALROSA, according to media reports, sold over $400 million worth of diamonds. De Beers, however, had to sacrifice prices (according to various estimates, they were decreased by 5% to 7%). ALROSA did not correct its diamond prices.
Operating results of ALROSA in the fourth quarter of 2015
Sales higher, product mix worse
ALROSA ramped up its rough sales in the fourth quarter of 2015 by 45% to the previous quarter driving them to 7.1 million carats. The company’s sales of gem-quality diamond increased by 37%, to 4.1 million carats. Alfa-Bank, for example, expected a slight recovery of this indicator versus the third quarter forecasting a rebound to 3.5 million carats from 3 million carats. The bank views the final numbers produced by ALROSA in the fourth quarter as indicating recovery in market demand.
In terms of sales, ALROSA’s performance in the fourth quarter was slightly better than expected, Deutsche Bank said, adding that this was partly due to the effect of growth against low performance in the third quarter. A similar conclusion came from the BCS Investment Company. Sberbank CIB views ALROSA’s high sales in the fourth quarter as "particularly astonishing" after weak results of the previous period.
According to Sberbank CIB, such positive trading results were due to higher sales of non-gem-quality diamonds going up by 58% compared with the third quarter and reaching up to 3 million carats. This was accompanied by deterioration in the miner’s product mix where the share of industrial diamonds reached a record 42% in the fourth quarter (against 38% in the July-to-September period). VTB Capital attributes the excess of "bort" to seasonal fluctuation.
The proportion of gem-quality rough in total sales declined in 2015 as a whole - to 66% (down by 4 percentage points). However, ALROSA’s sales value was nearly flat (down 1%), as the company sold high-value stones, trying to compensate for the drop in market prices, as it follows from a review issued by Deutsche Bank.
The average price of gem-quality diamonds decreased by 9% in the fourth quarter due to price adjustments practiced by diamond producers at that time and reached $166 per carat. The situation stabilized after prices settled at a higher level of $182 per carat in the third quarter, VTB Capital said. "With regard to sales of gem-quality diamonds, their mix apparently did not improve either, contrary to our expectations, so price movements were consistent with general market trends," Sberbank CIB noted. As a result, ALROSA saw a drop of 13% in the average price of its total diamond sales in the third quarter to the level of $ 100 per carat.
Having gained $800 million in revenue in the fourth quarter (an increase of 36% to the third quarter), ALROSA managed to get ahead of De Beers by 45%, whose sales for the period totaled $500 million, the BCS said. According to VTB Capital’s estimate, ALROSA earned $711 million in revenue in the fourth quarter.
Taking into account that ALROSA increased sales in the fourth quarter, its consolidated revenue in 2015 should amount to $3.6 billion, which is higher than Sberbank CIB’s forecast by 3-5%. ALROSA itself estimates its expected revenue in a more conservative way, saying it may reach $3.4 billion.
ALROSA as a catching-up company?
The results of the January trading sessions held by De Beers and ALROSA appear to be more eloquent as they drew prompt attention.
“On the one hand, if the problem with excess inventory in the middle segment of the diamond pipeline had not been resolved, then we would not have seen this growth,” Boris Sinitsyn, an analyst at VTB Capital said. “On the other hand, it is too early to say that the situation is completely normal. Historically, January sights are characterized by strong demand. During the last few months of 2015, sales were at a low level, and it was logical to expect some cycle of restocking.”
“It is too early to say there is a market rebound going on. In January, demand is recovering after New Year holidays and this is a seasonal factor. Still, the results of trading sessions held in January this year provide a positive signal. Many indicators suggest that the market situation has somewhat improved,” Andrey Lobazov of the Aton Investment Group said.
This cautiously optimistic picture is somewhat marred by reports about price cuts applied by De Beers in January. Officially, this fact is not recognized by the company, but sightholders said the downward price correction reached 5% to 7%. ALROSA does not see reasons for reducing prices in February, Andrey Zharkov, the company’s CEO said in late January. He noted that price adjustments made by other major market makers would have an impact on the entire market.
Proceeding from the experience learned in 2015, Andrey Lobazov considers it quite possible that ALROSA will have to cut prices with a lag of one or two months.
Boris Sinitsyn notes that any price reduction “is a function of two components - the market and the product range.” He does not believe that it is inevitable for ALROSA to correct prices for diamonds, at least in the current market situation. “I would not say that ALROSA will have to ‘catch up’ with the price reduction introduced by De Beers in January. This correction may be attributed first and foremost to a change in the product range. The same with ALROSA, as its prices for gem-quality diamonds do not correlate with the average market price for diamonds. For example, in 2015 the average price of gem-quality diamonds produced by ALROSA fell by only 1%, while a total drop was 15%,” the VTB Capital analyst said.
VTB Capital believes that the difficulties in the midstream are temporary and expects a recovery in demand in the second quarter of 2016, according to a review released by this investment bank.
Sberbank CIB predicts that the average selling price for diamonds will decrease by 10% in 2016, while sales will stay mostly flat.
Alfa-Bank believes that restocking in the diamond industry, which was previously expected in the second half of 2016, may happen before that date. Alfa-Bank has not yet increased its annual sales forecasts, as it believes that growth will be more gradual. According to Alfa-Bank, diamond stocks held by manufacturers will decline throughout the year and reach 7 million carats by the end of the year (compared to 34 million carats at the end of 2014 and 19 million carats at the end of 2015).
So far, the results obtained in January, in conjunction with the operating statement of ALROSA for the fourth quarter of 2016, seem to be a too shaky basis for long-term forecasts about the prospects facing the market in 2016. “The question is whether restocking will continue in February and March, and so on, or whether there is still some excess of goods in the midstream,” Boris Sinitsyn said. However, the situation has definitely changed, if you will remember at least that a representative of a major diamond manufacturing company said at the end of last year, that March of 2016 could be viewed as a baseline for the beginning of market recovery with great reserve and certain exaggeration.
Sergey Bondarenko for Rough&Polished
