After the Parliament of Yakutia adopted the amendments to the law of this republic “On management and disposal of shares issued by ALROSA” in their first reading on October 6, 2010, there was observed a marked revival in the ranks of traders involved in buying and selling shares of the Russian diamond company under "gray" schemes. Now the average price of one share fluctuates around 300,000 rubles, but forecasts say it will go up at least three times after ALROSA will be converted into an open joint stock corporation. Perhaps this optimism is inspired by the estimate ventured by JPMorgan, which defined the company's value in the range of $7.3-$9.0 billion: a threefold increase in the current market capitalization of ALROSA fits precisely in this interval. This development should certainly please the minority shareholders jointly owning a nearly 9-percent stake in ALROSA.
As for the sentiment of the company’s main shareholders, the Russian Federation and Yakutia, it can hardly be optimistic. In Yakutia, there are voiced concerns that as a result of such conversion and subsequent additional equity issue Yakutia’s stake in ALROSA may be reduced to 25% +1 share from 40%, which according to a number of Yakut MPs, will entail substantial decrease of control over the company on the part of Yakutia. What’s more, the opponents of such a scenario have a serious legal argument - the amicable agreement between the Russian Federal Property Management Agency and the government of Yakutia inked in 2006 and in fact fixing the stakes held by the major shareholders. At the same time, Finance Minister Alexei Kudrin, who heads the Supervisory Board of ALROSA, made a statement that the company has no plans to go for an IPO. But it is precisely ALROSA’s need to go to the stock exchange to raise funds necessary to complete the construction of underground mines and finance diversification that has so far been the most serious argument in favor of turning the company public. And the company's management openly stated its intention to carry out an IPO in 2011 - 2012.
Obviously, the way to achieve a balance between the interests of the federal and Yakut shareholders is still full of thorns and to walk the full length of it they may require considerable time. Meanwhile, ALROSA’s transformation into a public entity hypothetically creates an intriguing perspective that can fundamentally change the evolution of the Russian company.
In the decade since De Beers declared its refusal from monopolistic regulation of the diamond market, the development trends pursued by its key players dissociated clearly enough. Some companies - especially De Beers itself and Leviev Group, as well as Harry Winston Diamond Corporation - have chosen the path of vertical integration, a way to create their own "diamond pipeline" in which the movement of diamonds from mine to jewelry displayed in a company boutique goes under the aegis of a producer-owned brand. It should be noted that this line of development is taken by companies for which the diamond business has historically been their major occupation. They came to this idea "from different sides,” someone moving from mining to a jewelry brand and someone from a jewelry brand to mining, but their conceptually similar strategies were based on realization that in a competitive market they should not produce, polish and sell an impersonal crystal, but a branded diamond.
On the contrary, the diamond divisions of Rio Tinto and BHP Billiton are just mining companies not involved in diamond marketing, jewelry branding, etc., in the slightest degree. The diamond business share in the integrated revenue of broadly diversified Rio and BHP is just a few percent; historically, the diamond business has never been central to these corporations.
ALROSA (as well as its historical predecessor, Yakutalmaz) has always been a diamond mono-company. All attempts at diversification - from developing oil and gas assets to furniture factories - have so far been frankly unsuccessful. The company’s timid attempts to move towards vertical integration of the diamond business proper (Brillianty ALROSA, Almazny Dvor, etc.) do not cause any euphoria either. The Russian diamond miner’s strong point is its good mineral resources base, personnel and mining technology. But the potential of ALROSA in the field of jewelry marketing and producing its own brands is obviously equal to zero.
If ALROSA goes public, this may virtually offer a chance to attract a strategic investor which would be a company owning a world-class jewelry brand, one from the top five. Such an alliance would bring to the market a very powerful player, able to truly compete with De Beers not only in mining but in the most significant (in terms of profit margin) sector – the retail trade in branded diamond jewelry. It is more than likely that companies which are setting pace in the world jewelry market and carrying historic brands are interested in immediate access to high-quality diamond raw materials (an equally in the lack of such access for competitors). The alliance of De Beers with LVMH and that of Leviev with Bvlgary and H. Stern are a good proof to what was said.
ALROSA’s transformation into a public corporation and its movement to the stock exchange is, of course, not an end in itself, but a means of attracting necessary investments for the company’s development. It wouldn’t be bad if development were understood as following a promising trend set by far the least players on the diamond market.
Sergey Goryainov, Rough & Polished
