On December 22, 2012, the stock of Nizhne-Lenskoye was put up for sale at auction. OAO Almazy Anabara, a subsidiary of ALROSA, turned to be the new owner of a 51-percent interest in Nizhne-Lenskoye (25,901,806 shares) having paid RUB 3.67 billion. The tender went without fuss – ending just after one bidding step.
Exactly two years ago, Rough&Polished predicted this development in the article “How to increase market capitalization of ALROSA.”
In accordance with that prediction, ALROSA would have increased its proved reserves by 3% to 4% in case it purchased Nizhne-Lenskoye, thus adding about 2 million carats of high quality rough to its annual output.
As such, Nizhne-Lenskoye is not the easiest asset. This company is saddled with significant liabilities, while its marketing policy has never been utterly transparent and errors in the corporate management led the miner to a technical default. It is a highly problematic legacy, and the new owner will have to take a number of difficult decisions, both organizational and financial, to radically change the situation.
Given the above circumstances, ALROSA seems to have deduced a pricing formula for Nizhne-Lenskoye as a "starting price plus one bidding step." In our opinion, this is the ultimate market value of the asset if compared with estimates of other public diamond companies, which are to some extent similar to Nizhne-Lenskoye.
Thus, if compared with Petra Diamonds by the capitalization/revenue ratio, Nizhne-Lenskoye may be estimated at $ 372 million [$ 143 million of revenue generated by Nizhne-Lenskoye * 2.6 multiplier for Petra Diamonds (in 2011, Petra’s revenue was $ 317 million, EBITDA - $ 90 million, while Nizhne-Lenskoye’s EBITDA was $ 48 million)]. Compared to Gem Diamonds by the capitalization/reserves metric, Nizhne-Lenskoye may be estimated at $ 325 million (26 million carats of reserves held by Nizhne-Lenskoye * 12.5 multiplier for Gem Diamonds, whose reserves amount to 29 million carats and market capitalization is $ 362 million).
Of course, such a preliminary examination of the diamond miner’s value will be transformed into a practical assessment, if ALROSA gets 100-percent control over Nizhne-Lenskoye exercising financial rehabilitation of the company.
In any case, diamond assets are turning today an ever scarcer vendible in the market, and 2 million carats of high quality alluvial rough added to annual production do not grow on trees. Some banking analysts estimate that the increase in ALROSA’s reserves after the acquisition of Nizhne-Lenskoye will give the diamond giant additional capitalization to the tune of $2 billion. Nizhne-Lenskoye is producing really expensive rough highly demanded in the market, although the reputation of the company itself is rather ambiguous. So, for ALROSA it is now crucial to bring the new company under the parent’s standards in management and diamond sales as quickly as possible.
Sergei Goryainov, Rough&Polished
