ALROSA’s (RTS: ALRS) plans to be transformed from a closed into an open joint-stock company have been announced publicly and become more and more clear. In the end of May, Fyodor Andreyev, President of ALROSA, held a meeting attended by the deputies of the State Assembly (Il Tumen) of Yakutia which discussed not only making the company public, but also its subsequent additional issue of shares and attracting new investors.
The only legal obstacle precluding the company’s transformation is the necessity to amend Yakutia’s legislation.
REMOVE THE BARRIERS
Speculations about promptly turning ALROSA into a public company started as early as the last winter. The first to speak about this process was the representative of Rosimuschestvo, the Russian Federal Agency for Managing State Property, which is the major shareholder in the diamond-mining monopoly. Alexander Golubenko, Yakutia’s Minister of Industry, later told Interfax that the relevant working commission had been instructed to prepare draft documents for the company’s transformation before the end of 2010.
There is a legal obstacle to turning ALROSA public: the existing law of the Yakut Parliament as of April 24, 2003 "On management and disposal of shares issued by Joint-Stock Company ALROSA which are a state property of the Republic of Sakha (Yakutia)." The law says preserving ALROSA as a closed joint-stock company is in the interests of Yakutia.
"The state interests of the Republic of Sakha (Yakutia) are assured by the organizational and legal form of the Company as a closed joint-stock society in accordance with legal acts on the company’s establishment and its constituent documents,” Article 3 of this Law says.
As Rough&Polished expert Sergey Goryainov explains, this document was passed before the conclusion of the amicable agreement which approved the distribution of stakes between the federal government and Yakutia and is “very wide of the present realities in the diamond market."
"The point is that at the time of ALROSA’s inception Yakutia (together with its uluses, or settlements) had a larger block of shares than the federal state - 40% against 32%. Virtually, ALROSA was the main source of Yakutia’s budget. It was the time when this law was enacted which said that preserving ALROSA in the form of a closed joint-stock business met the interests of Yakutia as this permitted the representatives of the Republic of Sakha (Yakutia) to preserve control over the company and cash flow,” he said.
As Fyodor Andreyev stressed during his presentation in Il Tumen, the organizational form of a closed joint-stock company in the period when it was established “permitted to avoid negative consequences and errors of the first stage of privatization, but now its intended purpose is played out.” In particular, he underlined that the Russian legislation on joint-stock companies was considerably improved since 2003, and now the level of protection of the rights of non-supervising shareholders was considerably higher in comparison with the period of ALROSA’s establishment.
At the same time, this law formally remains in force up till now, and so to turn the company public it should be amended. As a matter of fact, it is necessary to remove the provisions referring to the organizational and legal form of the company from Article 3 of the Yakut law.
This issue is to be considered by Il Tumen. The nearest session of the State Assembly of Yakutia is scheduled for June, but according to Alexander Uvarov, the chairman of the relevant committee in Il Tumen, the issue of making ALROSA a public company is not being prepared for this session. "All the items on the draft agenda for the June session are financial, including budget updating," he said.
The next session of Il Tumen will take place only in September.
OTHER CONDITIONS
Simultaneously, the parties continue to discuss the conditions under which the company already made public may function. According to Fyodor Andreyev, ALROSA suggests to preserve the status quo. The first condition for transformation offered by the company is to "preserve the existing level of corporate control in the company on the part of the Republic of Sakha (Yakutia) and Russian Federation".
Accordingly, in line with ALROSA’s move it is planned to keep the existing composition of the shareholders’ representatives in the company’s Supervisory Board. Right now the Supervisory Board includes 6 representatives of Yakutia, 4 state officials, 4 independent directors and President of ALROSA, Fyodor Andreyev.
One more condition is “not to change the seat of the company" which is based in the City of Mirny in Yakutia. According to Sergey Goryainov, this is necessary to preserve the amount of tax revenues in the budget of Yakutia for which ALROSA is the basic tax payer.
Besides, one of the conditions is the "invariance of the social responsibility principle in the company’s business.”
ALROSA’s social responsibility appears to be one of the main subjects in the negotiations between the Republic of Sakha (Yakutia) and the company. According to ALROSA’s recent press-release, the company’s management was instructed to prepare additional information on implementing the social policy pursued by ALROSA in the Republic of Sakha (Yakutia), as well as on increasing the taxable base by way of ALROSA’s industrial projects on the territory of Yakutia for the nearest session of the State Assembly which is scheduled for June 17-18.
During their meeting in May the Il Tumen deputies, in particular, pointed out that in recent years ALROSA “decreased its financing of social programs to a certain degree." In his reply to this question Fyodor Andreyev recognized that the major bulk of these programs was financed from the company’s profits, and ALROSA’s situation during the crisis was rather squeezed (in 2008, for instance, ALROSA posted a dead loss).
In this connection the president of the company emphasized the main objective of turning ALROSA public – a possibility to attract additional capital.
"We did not stop production and did not dismiss people in the crisis. It cost the company almost $2 billion in additional credits. If not for the financial assistance of the Russian government the company would not have sustained the consequences of the slump in prices for rough diamonds. But it is impossible to fulfill all the obligations, including social, relying only on state support. Therefore, reducing the company’s debt and increasing the market value of the company is the only way we can finance social projects in sufficient amounts," ALROSA’s representative said.
DIAMOND IPO
Fyodor Andreyev mentioned the possibility of ALROSA’s IPO earlier, but he spoke about it rather as an additional option to which it will be possible to resort after making the company open. In February, he pointed out that the company management considers putting 25% of ALROSA’s stock to the market as an efficient decision which would help to reduce the company’s debt, preserve jobs and fulfill the investment program. According to him, at that time IPO was offered to the shareholders, but their position on this issue was never voiced.
Now ALROSA calls additional issuing of shares and their placing on the stock exchange as one of its most important tasks.
Addressing the State Assembly Fyodor Andreyev stressed that the world diamond industry felt the negative impact of the financial crisis to a full extent and ALROSA was no exception. In the first half of 2009, ALROSA virtually suspended its sales in the market. The anti-recessionary measures taken in this environment were directed at maintaining the level of production and preserving jobs that led to a sharp increase in debts. So in 2009 ALROSA posted a net debt of 106 billion rubles, which means that the company spends about 15 billion rubles to pay interest rates to the banks. “All the company’s stability indicators were in disarray resulting in withheld ratings assigned to ALROSA, including those of Standard and Poor's. The company’s quality as a borrower was decreased to a significant extent,” he noted.
ALROSA managed to turn the crisis corner due to the support rendered by the state which was active in buying diamonds for Gokhran. In 2009, Gokhran bought 32.5 billion worth of rough from ALROSA. "Today the company depends on state support which is not acceptable for its major shareholders interested in higher efficiency and earning power of the company," the president of ALROSA stated.
According to him, “the second crisis wave is possible” and in these conditions it is just necessary for ALROSA to have such a tool as contributing money to its capital which is only possible in case of a public company. Besides, its shares may be freely placed on a stock exchange at a market price and an inflow of investments means a decreased debt burden and new opportunities for further development.
Besides, in his opinion, making ALROSA public will guarantee the rights of minority shareholders who want to sell their shares, but so far cannot do this. “Ideally, we would like to make ALROSA a company belonging to people. An additional issue of shares will allow the company’s employees, as well as the people living in the republic to buy our stock,” Fyodor Andreyev said.
Now ALROSA’s equities cannot be bought in free sale on the market. The Russian Federation represented by Rosimuschestvo owns a 50.9-percent stake in ALROSA, while the Ministry for Property Relations of Yakutia has 32% with another 8% belonging to the eight uluses (settlements) of Yakutia. The remaining 9% are owned by legal entities and individuals. ALROSA’s capitalization is evaluated by the investment companies holding shares of the diamond monopolist which is done for their own reporting purposes. Only one of them – Sweden-based Vostok Nafta - reports publicly. In its latest report Vostok Nafta evaluated its investments in ALROSA proceeding from the latter’s total value of $2.18 billion ($8,000 per share). In its last report before the crisis - for 1H 2008 - Vostok Nafta priced one share of ALROSA at $28,000, that is $7.6 billion for the company’s aggregate stock.
According to ALROSA, the closed joint-stock type of business does not allow a civilized stock market for the company, which precludes it from bringing to light the real market value of its stock. Moreover, the "existence of an uncontrolled stock market is a sensible problem for the company’s reputation."
As a matter of fact, currently there are virtually no instances of a large-scale diamond mining company being traded at a stock exchange. The stock of ALROSA’s subsidiary, ALROSA-Nyurba, is quoted at RTS (RTS: ALNU). There are several junior players listed at LSE (for example, Petra Diamonds or Gem Diamonds), but their share in the total diamond output is insignificant.
De Beers was once listed at the Johannesburg Stock Exchange. "They cancelled their listing after a very sophisticated transaction in May 2001, which defined the Oppenheimer family’s stake as 40%, Anglo American’s as 45%, and Botswana’s as 15%. There was just nothing left for the stock exchange,” Sergey Goryainov explains. “Actually, leaving the stock exchanges and transforming De Beers into a ‘family-type’ company in many respects was due to an avalanche of claims accusing De Beers proper and the diamond business as a whole of being non-transparent.”
At the same time, according to Nikolay Sosnovsky, an analyst of Uralsib (RTS: USBN), the company could be attractive to investors exactly from the point of view of its uniqueness. "It is a tempting sector and in many respects protective. There are no similar companies in the market now which exactly means uniqueness. At the same time, for such an IPO there should be a generally good market environment: when the market is panicky even a good history is hard to sell,” he believes.
According to Nikolay Sosnovsky, the company could place such an IPO on a Russian floor or in London, and "it would be good to take a closer view of Asian floors as well.” “Everything depends on how high the company assesses its own value and what kind of money it hopes to attract. It is very difficult to navigate a large-scale IPO on a single floor and it is more expedient to break it in several runs," the analyst said.
Konstantin Akimov, Executive Director at Morgan Stanley, believes that the current situation in the diamond market may contribute to increasing the appeal of diamond-mining companies for investors. "Right now there are no large and liquid companies of this industry segment in the market,” he remarks. “As this being the background, demand for diamonds is currently growing. Supply in this sector is limited as the majority of operating deposits are already rather “mature”, and there have been just a few major diamond fields newly discovered during the last decade. Analysts expect that demand for diamonds will exceed supply for some years to come, and if such a diamond industry leader as ALROSA will come out to the market the latter in such a situation will interpret it in a positive way."
BILLIONS IN INVESTMENTS
So, ALROSA is in need of additional funds to reduce its debt burden and finance its investment program.
ALROSA plans to increase its diamond output by way of expanding the company’s existing mines and building new ones underground. According to the three-year financial model of ALROSA which was already reviewed by the Supervisory Board the company will extract 102.321 million carats in 2010-2012. It was also reported that in 2010 ALROSA expects to recover 33.54 million carats, up 2.3% vs 2009.
"Such a level of planned output is based on the operating capacities of the company and its subsidiaries. Besides, the Mir and Aikhal Mines will be brought to their design capacity. The Udachny Mine will also be launched and it will become one of the largest underground diamond mines in the world capable to produce up to 4 million tons of ore per year," the company said.
The design capacity of Aikhal is 500,000 tons of ore per year, that of the Mir Mine is 1 million tons of ore per year, and they are scheduled to reach their design capacity in 2012.
It is also expected that the Udachny Mine will turn out its first 25,000 tons of ore in 2012. In 2014 ALROSA plans to launch the first stage of Udachny with an operating capacity of 500,000 tons of ore in a year, while its design capacity is scheduled to be reached in 2016.
Totally, during the next three years ALROSA plans to allocate 24.728 billion rubles for underground construction. In particular, Mir and Aikhal will need 5.4 billion rubles each, while Udachny will consume 13.9 billion rubles.
Simultaneously, the company still intends to diversify production engaging in the Timir iron-ore project in Yakutia which needs 88 billion rubles in capital investments.
The Timir Mining and Metallurgical Company was established by ALROSA to develop the iron-ore project based on four deposits in Southern Yakutia - Tayezhny, Desovsky, Gorkitsky and Tarynnahsky. As it was reported earlier, ALROSA intends to start the project by constructing the Tayezhny GOK (mining and concentration complex) since the Tayezhny and Desovsky deposits which will be suppliers to this GOK are well studied and located close to the existing railway and electric power infrastructure. The other two deposits (Tarynnahsky and Gorkitsky) are far from the infrastructure facilities and therefore will require more time to build a mining and concentration complex there.
The project as a whole envisages development of the four deposits, construction of two mining and concentration complexes and an integrated iron-and-steel works.
Earlier, to implement this project ALROSA planned to attract a strategic investor which could get up to 49% in this business. Fyodor Andreyev informed that there were negotiations on the subject with large-scale foreign investors, including Asian investors.
"However, without increasing the value of ALROSA itself and attracting additional funds from the market while having a current debt of $3.5 billion and a forecast sale proceeds of $3 billion the diamond monopolist’s plans to diversify its business by getting involved into projects like Timir may be given up for lost,” Sergey Goryainov says.
Interfax
