According to mass media reports, recently ALROSA held a presentation for investors and analysts where the company voiced its financial results in 2009 and 1Q 2010, forecasts for 2010, the company’s future strategy and plans to issue new series of bonds.
ALROSA’s successful moves to refinance its debts and sell its non-core assets in 2009 as well as its growing sales in 2010 make it possible to say that the company’s credit profile looks stronger, bonds.finam.ru writes. As the company is state-owned and enjoys a considerable amount of government support holding leading positions in the world diamond market, the recently announced prices for ALROSA’s new bonds seem quite adequate. The company declares its interest in placing its bonds on the market and maintaining a positive public credit history with regard to its drive to an IPO in 2012. In view of the high level of liquidity currently enjoyed by banks and a rather low volume of top quality securities offered on the market it is possible to expect that ALROSA’s new issues of bonds will attract high attention on the part of market players.
Following the results of the meeting it is possible to point out the following key moments:
In 2010 ALROSA expects essential growth of its financial results.
The company’s sales and profits are growing. Demand for rough diamonds in 2010 is recovering. Diamond prices (after slumping 15% in 2009) are displaying growth coming up nearer their pre-crisis level. In 1Q 2010 ALROSA’s rough sales reached $975 million which is 1.5 times higher than in the similar periods of 2007 and 2008. It should be noted that the company did not sell rough to Gokhran, Russia’s state repository, and all its output was sold to the market. According to ALROSA’s report based on the Russian Accounting Standards (RAS) for 1Q 2010, the company netted 27.4 billion rubles in sale proceeds (or 43% of the total 2009 sales proceeds) posting a net profit of 5 billion rubles (which is already twice as much as the total net profit earned in 2009). According to the company plans, its sales proceeds by IFRS in 2010 will reach 129.7 billion rubles (+423 % to the 2007-2008 level). Its profit margin is expected at a level of 20% which is above the pre-crisis figures.
ALROSA’s short-term debt is being re-financed and its credit portfolio term is being extended with interest payments going down. If the situation on financial markets will improve, this will make it possible for ALROSA to have much better terms for attracting financing in 2010. In 1Q 2010 ALROSA has already managed to cut the average interest rate paid for its borrowings by 4.5% (to 7.85% from 12.39% per annum). The placement of ruble and euro bonds scheduled by the company in 2010 for the terms of 3 to 5 years will give a chance to extend duration in an essential degree removing the risks related to a high content of short-term debts in its portfolio.
The investment program of ALROSA does not envisage increasing its borrowings. Due to depletion of its open-pit diamond fields ALROSA is running a program aimed at continuing its diamond mining operations underground to maintain the current rough output. The company has already allocated funds to buy the greater part of special machines and equipment needed. Investments to be made in 2010 – 2012 to start underground operations at three mines (Aikhal, Mirninsky and Udachny) amount to some 10 billion rubles a year and can be financed from the company's own resources. Besides, a considerable amount of profit and EBITDA for 2010 will allow ALROSA to accumulate means to repay its debt and bring the Net Financial Debt / EBITDA indicator to 1.7х.
During the crisis period the major factor which determined ALROSA’s business solvency was the support rendered by the Russian state.
While demand for rough diamonds plummeted during 1Q 2009, Russia’s government purchased 100% of the diamonds mined and totally in 2009 Gokhran bought 40% of ALROSA’s rough output (compared with 4% in 2008).
Besides, ALROSA’s solvency was maintained by way of refinancing its short-term debt with state-owned banks. In the period when financial markets got closed VTB extended about $2 billion to ALROSA as credits and also bought the company’s non-core assets paying 18.6 billion rubles.
We believe there is a whole variety of factors prompting the state to preserve control over the company and lending it financial support in case of need in the future:
Firstly, the state holds the controlling stake in the company (the Government of the Russian Federation owns 50.9% of ALROSA’s shares with another 40% belonging to the Government of Yakutia and its uluses, or settlements, while the company’s Supervisory Board is chaired by Alexey Kudrin, Minister of Finance of the Russian Federation).
Secondly, the company is the largest taxpayer and employer in Yakutia (the company’s average personnel number on January 1, 2010 was 33,000 persons).
Thirdly, ALROSA is the largest diamond producer in the world (in physical terms), controlling 29% of the global diamond market following the results of 2009. ALROSA’s expected reserves account for about 1/3 of the world’s total diamond reserves, while the company’s proved reserves are sufficient for maintaining the current level of output for 25 years.
Positioning of new bond releases
Taking into account ALROSA’s business model (mining and processing of diamond-bearing ore) and its credit rating (B +/Ba3/B +) it is possible to take the following large-scale Russian metallurgical companies as a basis for comparison: Severstal (BB-/Ba3/B +), Evraz (В/В1/В +) and Mechel (-/B1/-) which have facilities to recover and process metallic ores and coal.
The three-year bonds, BO-2 and БО-3, released in 2010 by Severstal are currently traded having an approximate earning power of 8.0% per annum.
The new releases of Evraz and Mechel are traded having an earning power within the range of 9.7%-10.2% per annum.
In our opinion due to its leading positions in the diamond market and state support ALROSA has a stronger credit profile and a spread of approximately 100 basis points versus the traded bonds released by Evraz and Mechel looks quite justified. Purchasing 3-year bonds issued by ALROSA will be attractive if their earning power will be at least 8.7% per annum or higher.
Comparing ALROSA with such state-owned companies as Aeroflot (-/-/BB +), AIZHK (BBB/Baa1/-), Russian Railways (ВВВ/Ваа1/ВВВ) it should be said that a smaller level of government participation in their capital, their higher debt burden and a lower level of credit ratings makes it necessity to award a 140-basis-points premium to the earning power of bonds issued by Russian Railways, 60 to 100 points to those issued by AIZHK and Aeroflot having a similar duration. Thus, purchasing 5-year bonds released by ALROSA turns attractive if it will yield at least 9.3% per annum or higher.
