Russian diamond miner ALROSA managed to finish 2009 gaining 3.463 billion rubles of net profit by IFRS. In 2010, the company intends to earn even more than in the pre-crisis years – 25.883 billion rubles.
In the near future the company will issue 26 billion rubles worth of bonds to refinance its short-term debts, and in the end of this year it plans to release Eurobonds for the amount of $1 billion meanwhile keeping open the possibility of a subsequent IPO to finance its investment program and improve the structure of borrowed capital.
2009: Scrambled out
According to ALROSA’s report, the company finished 2009 with a net profit of 3.463 billion rubles by IFRS compared with 32.767 billion rubles of dead loss in 2008. It is noteworthy that even in the autumn of 2009 the company’s President Fyodor Andreyev stressed that the primary goal of ALROSA for this year was to “reach a breakeven.”
As a whole, 2009 was a sufficiently difficult year for the diamond industry. Due to slumped demand and prices for rough diamonds the world’s largest diamond-mining companies started to reduce their sales and output. ALROSA did not cut its output, but abandoned the market in an attempt to generate deficiency of Russian rough. In the first six months of 2009 the company sold diamonds to Gokhran only.
The Russian government helped to find a partial solution for the company’s sales problem, but there was another one. Before the crisis ALROSA was active in attracting loans to finance construction of underground mines (3 mines totally worth around $3 billion). Therefore, in 2008 ALROSA Group had a net debt of 134.4 billion rubles by IFRS. During the first half of 2009 having no sales ALROSA had to finance its day-to-day operations from credits which brought its debt to 155.2 billion rubles.
In the summer of 2009 the situation in ALROSA was abruptly changed. The former president of the company, Sergey Vybornov, retired and was replaced by Fyodor Andreyev, the former senior vice-president for finance with Russian Railways. According to market participants, the first document signed by Fyodor Andreyev in his new position was the decision to renew diamond sales from July 2009.
ALROSA essentially revised its marketing policy. If earlier the company mainly operated under one-time contracts now it switched over to long-term contracts. In the summer of 2009 the company announced conclusion of "long" contracts with 15 Belgian companies for rough supplies to the amount of about $500 million.
Meanwhile Gokhran continued to support ALROSA – in 2009 this agency bought a total of 32.5 billion rubles worth of rough from the company. As a result, according to the company report, ALROSA’s sales in 2009 reached 77.949 billion rubles (down 14.4% vs 2008) by IFRS.
Due to this ALROSA did not stop mining diamonds during the crisis period and in 2009 it was able to expand its market share in a significant way. In 2009 the company became the world leader in diamond output producing 32 million carats, while its market share zoomed from 22% to 29%. De Beers, which suspended production, recovered 24.6 million carats bringing its market share down from 30% to 23%.
Simultaneously, the company had to take a number of measures to reduce expenses. ALROSA refused to increase wages and their indexation, cancelled bonus payments, put 12,000 persons on unpaid leaves, retrenched about 700 workers, reduced material and transport expenses and also expenses for fuel and electric power by 25%, as well as royalty payments by 12%. As a result, total spending for mining, royalties, administration and marketing expenses decreased by 12.4%, or by 8 billion rubles.
Besides market recovery, the company was positively influenced by the revaluation of foreign exchange forward contracts made with banks under the program of hedging foreign exchange risks in 2006. Under these contracts ALROSA agreed to sell US dollars for rubles within 5 years at prices ranging from 26.56 to 26.84 rubles per one dollar. As a result in 2008 ALROSA faced a loss of 25.077 billion rubles due to a changed fair price of these contracts. In 2009, the company’s net profit grew by 10.686 billion rubles due to the changes introduced to these contracts.
To further reduce its debt the company sold some part of its non-core assets in October 2009 including its 90-percent stake in ZAO Geotransgaz and 90-percent stake in OOO Urengoyskaya Gazovaya Kompania affiliated with VTB at the price of 18.615 billion rubles ($620 million).
Besides, ALROSA abandoned LUO-Camatchia-Camagico, its money-losing project in Angola. As the report says, in the end of last December ALROSA sold its share in the project to its other participant - Portuguese Eskom - for 129 million rubles ($4.3 million) which are subject to payment in December, 2020. ALROSA did not recognize its share in the dead loss of LUO for 2009 to the amount of 161 million rubles.
Having renewed it sales to the market and also selling off its non-core oil and gas assets for 18.6 billion rubles ALROSA started to reduce its debt. According to the report, in the end of 2009 the company had already a net debt of 117.952 billion rubles of which 94.377 billion rubles were a short-term debt (increased almost by 40 billion rubles during one year).
“The work of the company and its new management in 2009 was focused on the financial field and the primary goal which faced ALROSA was to reduce and re-structure its debt. As far as one can judge, this problem was successfully solved,” Rough&Polished expert Sergey Goryainov believes.
2010: We shall grow
In 2010 ALROSA expects an essential gain in its IFRS-based financial figures: according to the company’s documents presented to analysts in the past week, this year ALROSA may already surpass its pre-crisis levels of sales proceeds and profit.
The company’s forecast says that in 2010 ALROSA will earn 129.698 billion rubles in sale proceeds (in 2009 the figure was 77.949 billion rubles and in 2007 it was 90.734 billion rubles).
ALROSA continues to work under long-term contracts which are concluded with 18 companies (15 from Belgium and 3 from India). The company intends to bring the total share of long-term contracts to 56% in 2010 as compared with 21% in 2009.
ALROSA is tying up new long-term contracts for 3 years and diamonds are supplied on a monthly basis, while the amount of goods and their range are agreed in advance. Totally, the currently operating contracts provide for sales at the level of $3.9 billion.
The changes introduced into the company’s marketing policy and also market recovery may allow ALROSA to do without Gokhran’s assistance this year. The president of the company, Fyodor Andreyev, earlier told Interfax that ALROSA under the current market conditions is able to sell the whole of its output unaided and the issue relating to the necessity of government support will be considered by the Board of Directors. According to a source in ALROSA, so far this was not solved definitely. However, the amendments offered to the national budget in 2010 and already being reviewed by the State Duma (Russian parliament) suggest decreasing allocations for gems purchasing by Gokhran by 21.36 billion rubles against the earlier approved 42.76 billion rubles.
“During the past year the situation in the diamond market has considerably changed,” Rough&Polished expert Sergey Goryainov says. “Both the output and price level already exceed the pre-crisis figures. As a matter of fact, it is already possible to speak about a complete recovery of this market.”
Market recovery is proved by Russia’s diamond export data posted on the web-site of the Russian Ministry of Finance and based on Kimberley Process certificates and this is much more obvious, than experts’ pronouncements. According to this data, Russian diamond exports in 1Q 2010 considerably surpassed not only the 2009 level (when the country’s rough exports was virtually stopped), but also pre-crisis levels. In January-March, 2010 Russia exported 12.452 million carats worth $765.779 million, whereas in January-March, 2008 – 6.649 million carats worth $414.836 million.
ALROSA’s EBITDA in 2010 is predicted at 51.55 billion rubles in comparison with 23.858 billion rubles in 2008 and 25.883 billion rubles in 2007. The company’s EBITDA-based profit margin will increase to 39.7 % from 28.5% in 2007.
The company is expected to finish 2010 having an IFRS-based net profit of 25.883 billion rubles. As was reported, in 2008 ALROSA posted a loss, and in the pre-crisis 2007 gained 16.184 billion rubles of net profit.
The company intends to continue bringing its debt down: according to its forecast for the end of 2010, its debt will make 100.653 billion rubles in the end of 2010. Besides, ALROSA hopes to replace short-term obligations for long-term: it is expected that “long” debts in the end of this year will run at 94.972 billion rubles, whereas “short” debts will reach 5.682 billion rubles.
Re-structuring debts
According to the company data, its current major creditor is VTB accounting for about 59% of ALROSA’s debts. Other Russian banks account for another 15%, while Eurobonds for 14%, European commercial Papers for 9% and foreign banks for 3%.
The repayment schedule envisages that in June 2010 ALROSA will pay back $390 million (the bigger part of which is due to the Russian banks except VTB), in the second half of this year the company will pay $2.157 billion (the biggest part will go to VTB), in 2011 $147 million will be paid to the foreign banks, in 2012 ALROSA will pay back $478 million (its debt to VTB and other Russian banks). Eurobonds redemption will take $500 million and is scheduled for 2014.
The main objective of ALROSA now is to re-structure its debt which would allow the company to increase its terms of redemption thus cutting interest payments. By the end of December 2010 the company intends to bring its share of long-term debts to 94%.
In the first half of the year ALROSA attracted credits from several banks for the amount of $2.556 billion (76.554 billion rubles), including $770 million for more than one year. During the same period ALROSA Group paid back credits and refunded European Commercial Papers for 73.309 billion rubles.
In June ALROSA is going to place 26 billion rubles worth of bonds to refinance debts. As was reported, the company closed its bid book for two series of bonds totally valued at 15 billion rubles on June 22 pinning their placement on MICEX for June 24.
The first coupon rate of the 21st series five-year bonds (for 8 billion rubles) is 8.25% per annum, while the 23d series bonds (for 7 billion rubles) will yield 8.95 interest.
The organizers of this bond issue are VTB Capital, TKB Capital and Renaissance Capital.
According to Nikolay Sosnovsky, an Uralsib analyst, ALROSA will be able to place rouble bonds successfully. As a matter of fact, ALROSA is a state-owned company and public debt is appreciated as sovereign. “All state-owned companies usually manage to place well in the capital market,” he said.
The fourth quarter of 2010 is earmarked for issuing the company’s ten-year Eurobonds up to $1 billion. According to the source in the company, the contest which is to define the organizers of the coming issue will be wrapped up one of these days.
“The decision to try it out with Eurobonds probably stems from the fact that ALROSA earns most of its sales proceeds in dollars since diamonds are sold at dollar-based prices and go mostly for export,” Nikolay Sosnovsky believes. “Eurobonds will allow the company to attract funds without essential foreign exchange risks, which arise if money is borrowed in a currency different from which you get your sales proceeds.”
In the opinion of Yan Tavrovsky, CEO of the JP Morgan investment and banking business in Russia and Ukraine, ALROSA’s performance in 2009 and the first six months of 2010 may be regarded as positive “and investors’ fears if there were any should fall away to a great extent.”
“It is obvious that the situation in ALROSA has now changed to the best and the foreign market itself is recovering demonstrating good prospects including a rise in prices. Besides, in the intermediate and long term fundamental indicators of this market remain attractive: there are no new large deposits discovered and in the long term demand will most likely exceed supply which should be positive for rough prices,” he says.
Going underground
Simultaneously, ALROSA needs to complete the program of transition to underground mining for which it attracted so large-scale loans. “Open-pit diamond fields are depleted as soon as the depth of their development reaches the target point,” the company says. “Therefore ALROSA has to change its bearings for underground mining to continue the development of these deposits. For example, the Mir Mine has already been switched over to underground operation since its open-pit mining turned impossible in 2001. The Udachny Mine will exhaust the limits of open-pit recovery in 2013.”
In 2009, ALROSA produced 80% of diamonds by way of open-cut mining, extracting another 13% underground, and still another 7% on alluvial fields. The company expects that by 2012 the share of underground mining will grow to 65%, with open pits decreasing to 34% and alluvial mining to 1%.
It is also expected that in 2012 the first 25,000 tons of ore will be mined at the Undachny Underground Mine. In 2014, ALROSA plans to commission the first stage of Udachny to turn out 500,000 tons of ore in a year, and schedules its full-throttle operation yielding 4 million tons annually for 2016.
“Going underground” will give the company a chance to increase output. According to the three-year financial model of ALROSA already reviewed by the Supervisory Board, in 2010-2012 the company will bring its output to 102.321 million carats. As was reported, in 2010 ALROSA expects to mine 33.54 million carats, up 2.3% against 2009.
Totally, within the coming three years ALROSA plans to allocate 24.728 billion rubles for underground construction. In particular, Mir and Aikhal will require 5.4 billion rubles, while Udachny will need 13.9 billion rubles.
However, taking into account the existing debt burden independent financing of this investment program may turn out difficult for ALROSA: besides underground construction the company still has its Timir iron ore project weighing on its hands in Yakutia whose implementation will require around 88 billion rubles. Therefore, the company continues to consider a possibility of attracting new investors and an IPO after it will be transformed into a public company from its currently closed form. Fyodor Andreyev said earlier that ALROSA’s management considers it expedient to place 20-25% of the company’s stock on the market.
“To some extent it is for this reason that ALROSA is now actively working with rating agencies and going out to bond markets, including Eurobonds,” the company explains. “We wish to be as much open as possible for the market and investors by the day when the company will probably indeed decide to launch its initial public offering.”
/Finmarket/
