Recently ALROSA released a voluminous report for the first six months of 2010. The majority of its statistics demonstrate positive dynamics in the company’s performance.
Thus, ALROSA’s 1H 2010 sales including diamonds, as well as works and services performed reached RUB 53,579.7 m against the plan of RUB 53,208.5 m (100.7 %). The plan was exceeded due to higher diamond sales. The favorable conditions in the diamond market brought the miner’s sales of rough and polished diamonds and grinding powders to USD 1,556.2 m against the planned USD 1,542.4 m (100.9 %); the company gained a surplus income of USD 13.8 m or RUB 491.1 m. ALROSA’s net assets are worth RUB 158.5 bn which is a great deal more than one year ago, when the company’s assets weighed RUB 138.7 bn. Its net assets growth was stipulated by a higher net profit.
It is really positive that being a capital-intensive mining enterprise ALROSA has a “heavy” balance structure with overly prevailing fixed assets where capital goods make the bulk. In the period from 1H 2009 to 1H 2010 the company’s deficiency in own working capital was ranging from RUB 67,266,707,000 to 69,428,447,000 covered by borrowed funds.
ALROSA is active in attracting long-term financing to fund some part of its permanent assets. The dynamics of the miner’s working capital ratio is the following. In the period from 1H 2009 to 1H 2010 the ratio dropped from 1.61 points to 1.25 points because the company’s working capital was contracting faster than its short-term liabilities. The working capital ratio in the mentioned period stayed in the range of 0.63-1.10 points which was within the established norm. The own-assets-autonomy ratio reflects the share of the company’s own capital in its total assets which in the first six months of 2010 was 0.55% and complied with the established standard level proving a relative financial independence of the company from external borrowings. ALROSA’s largest creditor is the VTB bank; the company’s accounts payable reach RUB 43 bn. It is important to underline that it is a friendly creditor belonging to the main shareholder of the company – the Federal Government of the Russian Federation.
In 1H 2009 ALROSA’s receivables turnover was 0.31 times for six months. In 1H 2010 it grew to 2.06 times. This indicator points to the company’s high overall performance in its transactions with buyers and customers.
In the first half of 2010 the company demonstrated impressing growth in labor productivity due to efficient labor management, investments into production facilities and a positive conjuncture in the market. Thus, labor productivity went up from 386,600 rubles per person in 1H 2009 to 1,635,600 rubles per person in 1H 2010. This may be taken as an indirect proof of efficient work of the company’s new president Fyodor Andreev.
ALROSA industrial optimism is reflected in objective and balanced description of risks facing the industry. According to the company management, they include the following:
- The financial crisis which is transforming into reduced prices for raw minerals. The influence of the financial crisis on the diamond market took the form of deficient liquidity among its participants which facilitates lower demand for industry products. Now this risk is estimated as high.
- Decreased output and diamond supply to the market. Due to depleted open-pit diamond mines ALROSA is accelerating the construction of its 4 underground mines, which are to make up for lower diamond output. Taking this into account the company does not intend to decrease its current diamond output by value which is proved by the “Major lines of business development for ALROSA Group till 2015.” Despite the preserved output of rough diamonds their supply to the internal and external markets under the world crisis which erupted in 2009 was limited and this permitted to stabilize the world market as a whole in a crisis environment. Therefore, the measures taken by the company to maintain its output and limit rough sales to markets will permit to lower mid-term risks to a great extent.
- Decreased consumption of diamond jewelry. This risk is a key one for the diamond industry and it is currently developing and may become real in the short term. Active actions taken by the authorities in the industrially developed countries to solve the crisis-related problems give hope for a less negative scenario in the global economic development and for recovery of steady demand for diamond jewelry in advanced nations in the mid-term. At the same time there is a trend in the world market of diamond jewelry proving that the United States is losing its leading positions in favor of China, India and the United Arab Emirates which are posting highly increased consumption of diamond jewelry. Taking into account that China and India have a population numbering one third of the global population it appears that these markets may become the future for the jewelry industry and its further development.
- Higher competition within the industry and, as a consequence, a possible slump in sales and profits. This risk is considered insignificant due to the low probability of newly discovered large diamond fields, which could bring new players to the market, and taking into account the company’s wide product range.
- Fluctuation of foreign exchange rates. The company’s own assets and profits may be exposed to foreign exchange risks. This kind of risk appears to be high taking into consideration the company’s major agreements for selling its production as well as for purchasing imported equipment and component parts and due to its liabilities with regard to credits in euros and U.S. dollars. Exchange rates are currently fluctuating chaotically, mainly because current exchange rates are affected by prevailing crisis, political and information reasons. To reduce the negative foreign exchange exposure the company plans its activities taking into account actual (or expected) fluctuations of exchange rates. It is necessary to keep in mind that a weaker ruble (today its rate is 1.5 times lower as compared with the middle of 2008) may essentially raise the company’s competitive opportunities which will level off a major part of risks caused by negative influence of the financial crisis on diamond business.
- Growth of the market offering substitutes for natural diamonds (synthetic diamonds). Diamonds of most popular color characteristics cannot be mass-produced. Production of synthetic diamonds of such a quality is very costly and their output is so far low. This is why the risks connected with a possibility of replacing natural diamonds with lab-made analogues are minimal in the mid-term and long-term.
Understanding the macroeconomic risks associated with the recession in the world economy, ALROSA is nevertheless optimistic about its future.
Vladimir Teslenko for Rough&Polished
