The financial highlights of 2014 posted by ALROSA in line with the IFRS on March 23, 2015 were positively predictable. The miner’s EBITDA reached 93.9 billion rubles, which is 36% up over 2013. Last year, ALROSA boosted its consolidated revenue by 23% to 207.2 billion rubles. These numbers almost matched the forecasts from investment banks and, as many of them believed, were incorporated into the company’s stock prices (its shares rose 19% on the Moscow Stock Exchange year to date).
Maybe the only thing that resisted prediction was the company’s net financial result. Investment banks in their estimates based on its last reporting period and the rate of ruble devaluation in the fourth quarter, diverged even in their opinions if ALROSA would be able to show profit or loss. If in the first 9 months ALROSA, despite a 44-percent decline, still managed to make a profit (12.8 billion rubles), its annual result was negative. The miner incurred a net loss of 16.8 billion rubles. This was due to a foreign exchange loss of 64 billion rubles taken into account in the process of revaluation of its loan portfolio, 90% of which was denominated in U.S. dollars.
Though ALROSA is not formally required to pay dividends having a net loss, the situation is ambiguous, because this loss - occurred on the backdrop of higher financial results in all other fields – comes from accounting. According to Renaissance Capital, the company’s net profit cleared from the exchange rate difference is 42 billion rubles, which is 9% higher than a year ago. In response to investor concerns, the management of ALROSA promised to change the method of calculation and take the interests of shareholders into account. As it was stated in a conference call by Ilya Ryaschin, Acting President of ALROSA, the company offers to pay dividends for 2014 at the level of 2013. "Despite the loss registered for the past year, the management of the company is currently discussing various options for dividend payments with its major stakeholders. We believe the best solution will be to pay at the level of the previous year," Ilya Ryaschin said. That year, ALROSA paid 1.47 rubles per share to its shareholders, or a total of 10.826 billion rubles. This level implies a dividend yield of 2%, as Deutsche Bank pointed out in its review.
Devaluation of the ruble hit the company’s "paper" net income, but became one of the main factors of revenue growth, as the bulk of ALROSA diamonds is sold for U.S. dollars. The miner had a sales revenue of 169.93 billion rubles from gem quality diamonds, up 21% towards the previous year, due to the devalued ruble (the gain in this case is estimated at 27.9 billion rubles) and higher sales (adding 5.6 billion rubles).
The average price of gem quality diamonds produced by ALROSA in 2014 decreased by 3% to $ 171 per carat, due to changes introduced into its product range. Last year, the situation in the diamond market was positive, which added 4% to the value of ALROSA diamonds (without taking into account the changes in the product range). The average price of diamonds sold by ALROSA underwent the most significant correction in the fourth quarter going down to $161 per carat (-12%). The fall was due to a change in the assortment sold, though market prices remained flat compared with the third quarter.
Besides seasonal factors, the deterioration in the company’s product range was caused by favorable market conditions in 2014 - ALROSA was able to sell such goods from its stock, which could be difficult to sell in another situation. The market stopped growing and it would be logical for ALROSA to sell the best quality rough, Nikolai Sosnovski, a UBS analyst, suggested during the conference call. This possibility exists in theory, replied Ilya Ryaschin, but the company will not use it. "We need to sell all the amount of rough that we produce," he explained.
As planned, ALROSA will sell 2 million carats from its stock in 2015, Ilya Ryaschin specified. "The company plans to reduce its stock further as much as possible using all kinds of methods and first of all by accelerating diamond sorting," he said. ALROSA’s target for its stock is to bring it to the level of 10-11 million carats, which is equivalent to a 2.5-3-month output. The company still has no plans to sell diamonds to Gokhran.
In contrast to 2014, the first quarter of 2015 was difficult for producers of diamonds. De Beers slashed prices by 3-4% at its January sight and in February by 2%. In January, ALROSA did not change prices, but it lowered them by 3% in February. "Now the market is relatively stable, and we look at it with cautious optimism," Ilya Ryaschin said.
So far, ALROSA does not change its outlook for this year, saying prices will go up by 3%. "If prices will recover and increase by 3% to the end of the year, we shall consider 2015 a successful year," he said. ALROSA also expects that those amounts of rough, which its customers were permitted to leave unpaid for in January and February (30% of the monthly limit in January and 10% in February), will be bought by them in the course of further trading sessions.
In his reply to a question, how ALROSA managed to avoid such a significant cut in prices as was made by De Beers, Ilya Ryaschin noted that "the point at issue is not always about price cuts as such and very often the numbers are due to a change in the product range that one or another company offers in the market." "We are closely monitoring the situation in the market, and I want to say that our prices are in congruence with the current level," he said.
ALROSA’s capital investments in 2014 came as a surprise in its reporting - 33.3 billion rubles, which is 12% lower than the company’s previously voiced projection, BCS notes in its review. The company’s capex target for 2015 is 36 billion rubles, said Ilya Ryaschin. The foreign exchange part in ALROSA’s total capex does not exceed 10%, and the company is working to replace imported equipment by domestic. In the future, capital investments will be reduced, as their most expensive part - the construction of underground mines – was completed in 2015 with the launch of the Udachny Mine. In 2016, ALROSA plans to maintain capex at 30 billion rubles, in 2017 – at 28 billion rubles, in 2018 – at 22 billion rubles.
Reduced capital investments were one of the factors, which contributed to increase net cash flow of ALROSA 2.6 times to 45 billion rubles. Devaluation was another factor. Having incurred a loss due to the revaluation of its debt because of the ruble depreciation, ALROSA aims to reduce its debt burden, minimize maintenance costs and risks of currency borrowings. In 2015, ALROSA may reduce its debt ($ 3.1 billion) by one third, repaying about $ 1 billion. "At the current rate of the ruble against the dollar the company’s cash flow will be sufficient for early repayment of debt in the amount of $ 1 billion in 2015," Ilya Ryaschin said. This amount does not include the scheduled payment of about $ 334 million on ruble bonds maturing in June and October of this year.
Sergey Bondarenko for Rough&Polished
