On August 12, ALROSA published its IFRS financial statements for H1 2024. Despite its abridged state which raised questions, it still sheds light on the state of the largest diamond miner and adds to understanding of the state of the diamond market.
ALROSA’s consolidated revenue for H1 2024 amounted to 179.47 bn rubles ($1.96 bn), down 5% from a year ago and in line with the consensus forecast. The decrease in revenue is explained by the decline in rough diamond prices, which outweighed the positive effect of the ruble devaluation.
The company’s operating profit almost halved and amounted to 37.83 bn rubles. Such dynamics of the ruble indicator - taking into account the depreciation of the national currency - indicates a decline in real prices for diamonds amid rising costs (by 14% YoY, to 114.1 bn rubles).
The sharp decline in the Q2 indicators is significant as revenue for this period was 49% lower than in January-March and the operating profit was 93% lower.
ALROSA’s key financial indicators in Q1 2024 H1 2024, bn rubles
|
|
Q1 2024 |
Q2 2024 |
H1 2024 |
H1 2023 |
YoY |
QoQ |
|
Revenue |
118.7 |
60.8 |
179.5 |
188.2 |
-5% |
-49% |
|
Production cost |
75.9 |
38.2 |
114.1 |
99.9 |
14% |
-50% |
|
Operating profit |
35.4 |
2.4 |
37.8 |
73.5 |
-49% |
-93% |
|
Net profit |
29.3 |
7.3 |
36.6 |
55.7 |
-34% |
-75% |
The poor results in Q2 are clearly seen in comparison with the figures in Q1 when ALROSA sold surplus inventories accumulated during a two-month pause in sales when manufacturers suspended rough diamond purchases in late 2023. The value of these inventories was estimated at 25-30 bn rubles. According to the financial statement, rough diamond inventories as of June, 30 were estimated at 57.4 bn rubles, which is down 32% year-on-year.
Thanks to the sale of the surplus inventories, the free cash flow (FCF) in H1 2024 more than doubled compared to 2023 figures, up to 38 bn rubles. In the previous half of the year, the FCF was negative (minus 19 bn rubles). Both figures are the analysts’ estimates, since the short-form report does not include this indicator, as well as EBITDA and net debt.
Updated EBITDA for the half-year amounted to 64 bn rubles, according to analysts’ estimates, which is 23% lower than a year ago but higher than the consensus forecast (59 bn rubles). The decline in year-on-year comparison is primarily due to increased costs.
The EBITDA margin dropped to 36% (according to the calculations made by the investment banks Sinara and BCS) compared to 45% a year earlier and 37% in the previous period. Some analysts, for example, Alfa-Bank (30%) and Veles Capital (33%), estimate the EBITDA margin to be significantly lower, which suggests that ALROSA’s marginality has returned to the COVID-19 pandemic level.
Net profit for the half-year declined by 34%, to 36.63 bn rubles. In addition to the decrease in revenue and the increase in costs, other operating expenses of 10.3 bn rubles - not disclosed by the company - also had an impact. The profit could have been even lower, but ALROSA, probably, took into account the profit from its stake in Angola’s Catoca that is estimated at 11.7 bn rubles and is listed in the reporting line ‘Share in net profit of joint ventures’.
The company’s insignificant net debt is an important difference from the 2008-2009 crisis for ALROSA. ALROSA’s net debt amounted to 6.3 bn rubles (net debt/EBITDA is less than 0.1x) compared to a negative value a year ago and 36 bn rubles according to the figures early in the year.
Conservative estimates
Although the company demonstrated strong growth in cash flow with a slight decrease in revenue and maintained almost zero net debt, the analysts are cautious about the results.
The figures turned out to be slightly better than expected, Sinara writes in its survey, and will allow the company to pay dividends for the first half of the year. The MyInvestments online investment service also considers the results of the first half of the year to be strong and expects the distribution of dividends based on the half-year results. The free cash flow was 19% higher than Alfa Bank expected.
At the same time, the BCS considers the results to be rather mixed and notes a drop in EBITDA and net profit, on the one hand, and free cash flow that exceeded expectations, on the other hand. Nevertheless, BCS has a negative forecast for the ALROSA shares in the sluggish diamond market and a persistently high price/earnings ratio (P/E).
Veles Capital interprets the results as poor. “The significant decline in revenue [in Q2] and EBITDA is due to sluggish demand for rough diamonds from the Indian cutting and polishing sector that has accumulated surplus inventories of polished diamonds and faced high rates when raising debt finance,” Veles Capital says in its survey. ALROSA, in turn, adheres to a price-over-volume strategy, which means reducing rough diamond sales to maintain price levels, Veles Capital reminds.
Pressure from surplus inventories
While some of ALROSA’s problems may be caused by the sanctions affecting the payments and profitability due to the need to provide discounts to buyers (this can be seen from the public statements made by the representatives of several large Russian exporters), the key reason is still the state of the diamond market. And the state of the market is of great concern.
Since the beginning of the year, diamond prices have declined by 10.9%, according to Zimnisky Global Rough Diamond Price Index. The RapNet Diamond Index (RAPI™) for 1-carat diamonds was 26.4% below year-on-year as of August 1. In early August, one of the India’s largest diamond cutting and polishing companies, Kiran Gems, that employs 50,000 workers at its Surat factory, announced a 10-day production shutdown to bring supply and demand into balance and improve the market amid the recession. India’s diamond production in July and the first week of August was 50% lower than a year ago.
The market is under pressure from the polished diamond inventories - already cut and polished but not yet absorbed by retailers - that were accumulated by manufacturers during the price increase in 2021-2022. To speed up the destocking process, diamond producers reduce their supply. De Beers that decreased its production forecast for this year two times (from a total of 29-32 mn to 23-26 mn carats) cancelled its regular trading session in August and put off the sight until a later date this year. Petra Diamonds cancelled its August tender scheduled for August-September, saying it wanted to support the steps taken by major diamond producers to cut supplies during this period of sluggish demand.
Not the best time for luxury
These steps are taken to stabilize the situation with the diamond inventories, but the very fact that the inventories remained in the pipeline abnormally long indicates a crisis in final demand. According to Maxim Khudalov, chief strategist at the investment company Vector X, the main problem now is the replacement of natural polished diamonds with cheap lab-grown diamonds (LGDs) in the relatively inexpensive jewelry segment. “Conspicuous consumption will not suffer as much from the cheap alternative that appeared, but the middle class, well-off section of the society, can easily opt out of buying natural polished diamonds,” he believes. This is facilitated by the positioning of lab-grown diamonds as environmentally-friendly and socially-oriented products, in contrast to natural gems, the production of which is accompanied by risks inherent in mining.
The expansion of LGDs has been the most widely discussed topic for a decade, but opinions on its effect still differ. According to the Tenoris analytical company, lab-grown diamonds accounted for 57.8% of rough diamond sales in June 2024 compared to less than 20% in 2020. Since the beginning of 2023, the share of LGDs has surpassed that of natural rough diamonds, which in June were at the level of the remaining 42.2% of sales. Meanwhile, according to Edahn Golan, Tenoris’ managing partner, LGDs with their price falling by far more than that of the natural gems, are far from outperforming the natural polished diamonds. The expert is convinced that the price disparity makes LGDs a separate segment.
Igor Kulichik who was CFO of ALROSA from 2002 to 2017 and later served as the deputy chairman of the AGD Diamonds’ board of directors, believes that the poor results of diamond miners are explained by the luxury market stagnation. The main buyers in the diamond jewelry market with annual estimated value of $85 bn are wealthy people aged over 30, mainly the Americans. This small social group has fairly traditional preferences, thanks to which disruptions in jewelry consumption have usually been avoided even during economic crises.
Now, an unprecedented transformation in the luxury goods consumption by affluent consumers is seen. “Modesty and spending restraint have come into ‘fashion’. Such a shift in mentality has not been observed during any of the crises in the past 30 years,” Kulichik notes. In his opinion, one of the reasons for this phenomenon is the effect of the ceased De Beers’ long-term marketing campaign that formed the ‘Diamonds are forever’ media image.
The oversaturation of the luxury sector is confirmed by the latest results of the main brands. The giants of this business sector - LVMH and Richemont - showed a decline in jewelry sales due to sluggish jewelry consumption in China and the rest of Asia (except Japan) amid the low demand in America and Europe. The middle class in China (according to Bain, China accounts for 16% of the global luxury goods consumption) is minimizing the spending on high-end goods. In its review published in June, Bain suggested that the global luxury market is expected to show poor performance this year since the peak of the COVID pandemic. Affluent people in China avoid flaunting their wealth, preferring spending restraint, a consultancy says.
Sergey Bondarenko for Rough&Polished
