The financial results for the first 9 months of 2010 posted by ALROSA and based on the Russian Accounting Standards prove that Russia's major diamond miner has successfully weathered the global economic crisis. The company’s revenue and profit from sales have significantly surpassed those of the corresponding period in the pre-crisis 2007. This positive outcome was achieved both as a result of favorable market conjuncture prevailing in the rough diamond market and due to successful efforts by ALROSA’s management to reduce costs, restructure and reduce the overall debt.
The transformation of ALROSA into a public company forthcoming in the nearest future will create conditions for a civilized circulation of this company’s stock and its good reporting will undoubtedly be a factor working to increase market capitalization of ALROSA, which in turn will boost its investment appeal. This is something which interests all its shareholders regardless of whether or not making ALROSA public will be followed by an additional issue of shares and IPO. Whatever scenarios may take place after this corporation will be turned public, it is important that by that time the company could have the biggest possible potential for market capitalization.
Achieving good operating performance is not the only and perhaps not the most important way to solve this task. Given the state of and prospects for the global mineral resources base of the diamond market, it is possible to say that it is the quality and quantity of proved diamond reserves which will be the most essential argument to influence the company’s competitiveness and ultimately its capitalization. The issues related to ALROSA’s welfare burden, government support, debts, etc. are very important, but they are secondary with regard to the main factor: diamond resources are depleting, costs due to underground mining are growing and there are no new diamond deposits found or to be discovered in the near future. Under such circumstances, even a small – equal to a few percent - increase in proved reserves may have a most favorable effect on ALROSA’s capitalization.
Along with ALROSA, financial results for the first 9 months of 2010 were published by OAO Nizhne-Lenskoye, a diamond-mining business wholly owned by Yakutia via its Ministry of Property Relations. Nizhne-Lenskoye’s balance-sheet gives a dismal impression: the company’s working capital ratio and own funds are well below the threshold limit values, i.e. there are all the grounds to speak about signs of bankruptcy. In January 2010, OOO Nizhne-Lenskoye Invest (where Nizhne-Lenskoye has a 99-percent stake) committed a technical default on its bonds due to lack of funds. Sad as it may be, but it seems that the favorable market conditions in 2010 did not and probably will never become a driver able to get Nizhne-Lenskoye out of the financial abyss. Its revenue went up only 9% for the first 9 months of 2010 compared to the similar pre-crisis period of 2007 (whereas ALROSA increased its revenue 1.5 times as much). Nizhne-Lenskoye’s net profit was three times less than in 2007.
Meanwhile, Nizhne-Lenskoye has a very good mineral resources base. The company is mining diamonds at four mining allotments (Billyakh, Tiglikit, Molodo and Hara-Mas) and two exploration sites (Prilensky and Kuonamka) in four regions of Yakutia: Anabar, Bulunsky, Zhigansky and Oleneksky. The company management claims that their proved reserves can sustain production at current levels for a decade. Moreover, there is a chance that reserves in the Bolshaya Kuonamka area, where Nizhne-Lenskoye is currently engaged in exploration, may increase the company’s mineral resources by 30%.
Should ALROSA buy Nizhne-Lenskoye, this would relieve Yakutia’s authorities of the unenviable fate of a resuscitator trying to revive an obvious financial corpse. In turn, ALROSA could accumulate in its hands nearly all the cost-efficient alluvial deposits of Yakutia which will definitely increase the company’s market capitalization potential in a significant way. In 2006, Vyacheslav Shtyrov, the then President of Yakutia, proposed to merge Nizhne-Lenskoye and Almazy Anabara (currently for 100% owned by ALROSA), rightly believing that consolidation of diamond assets would raise investment appeal of the new company. Of course, at that time this proposal was largely induced by political reasons which are now non-existent. But in the run-up to turning ALROSA a public entity it would be worthwhile to go back to this fruitful idea. In case of a favorable forecast ALROSA’s proved reserves may increase by 3-4% pushing up its revenue by $120-130 million. It is not a trifle in a scarce market. Ultimately, the only thing which may appeal to shareholders of any company, to say nothing of a mining business where the financial planning horizon spans over a period of 20 to 30 years, is the growth of its market value. Any other tasks are secondary.
Sergey Goryainov, Rough&Polished
