After the April correction in the local market followed by a forced hiatus, ALROSA was one of the first Russian corporations which took a risk to make a move for IPO having an impressive bulk of debts. Having issued 26 billion ruble worth of bonds the diamond holding is gearing up for selling $1 billion of eurobonds. Igor Kulichik, ALROSA’s Chief Financial Officer, told the Cbonds Review Magazine about the company’s plans to change the structure of its debt portfolio and described the prospects of a pursued “diamond” IPO.
The last year has turned out to be anything but simple for the diamond industry. How is it recovering?
The crisis has wreaked complete havoc on the diamond market. The latter produced the so called diamond bubble when at some instant rough prices outstripped polished prices.
Diamonds have turned into a commodity which started to live its own life. As a result, the bubble got busted. Right now the diamond market is recovering. It was freed of many petty intermediaries, who tried to earn some half-percent margin on re-sales, giving room for mainly large-scale players. It is coming back to a condition in which it was in 2007. It is an adequate market for players interested in stability and long-term cooperation with big diamond miners, such as our company and De Beers. They can form their own stocks creating something like a store of rough diamonds.
As a matter of fact, we are miners who recover and sell great volumes of raw materials to the largest buyers. In their turn, they process some part of their rough distributing in the market the rest, which they do not find useful for their purposes but which is demanded by diamond manufacturers working in other product ranges.
Already now market volumes and prices are actually close to the pre-crisis levels. It is noteworthy that prices for polished diamonds are quietly rising at an approximate pace of 5%–7%. A uniform demand for jewelry goods virtually in all segments allows us to predict a stable demand for stones till the end of the year. If suddenly there will be a second crisis wave and there will be some new shocks in the economy, the diamond market will feel it after an interval of six to eight months, not earlier.
Therefore, feeling confident to quite a good extent, we can predict that all those plans which the company set for 2010 will be implemented. In the first half of the year we sold diamonds for some $2 billion. In the third and fourth quarters the volumes of our offerings will be a bit less. Accordingly, by the end of the year it is expected that the company’s sales proceeds will reach about $3.2 billion which agrees with our forecasts submitted to the Board of Directors in the beginning of year.
Moreover, with its results in the crisis period ALROSA for the first time in its history outstripped De Beers in terms of output and in 2009 occupied the first place in the world in terms of recovered carats producing over 32 million carats. The preliminary six months results prove that we shall be able to preserve our leadership.
Are you happy with the company’s financial results in 1H 2010?
We have published our 1H report based on the Russian Accounting Standards (RAS). Fundamentally, it cannot be considered representative.
IFRS reporting is more indicative in this respect and the company will disclose these results in the coming autumn. Then we shall be able to see real figures. The RAS-based results are positive. Our net profit reached almost 3 billion rubles. We have good sale proceeds. As for some decrease in profit compared with 1Q it is an objective factor connected with revaluation of foreign-exchange liabilities.
What kind of results do you predict in IFRS reporting?
We expect very good results. This year, if there will be no emergencies, first-half and end-of-year reports will become the best in the company’s history: high EBITDA, excellent profit, decreases in costs and procurement prices.
What will be instrumental to such results?
In the first place, the company has never sold such an amount of rough at such favorable prices earning $3.2 billion at their peak. The average USD exchange rate this year will exceed 30 rubles. The company sold about $3 billion worth of rough in 2007-2008 but then the dollar rate, if you remember, was 24 rubles. This year our ruble sales proceeds grow both due to higher sales and a more favorable exchange rate.
Certainly, the major part of expenses, such as money spent for steel and concrete, are tied to the ruble. Therefore, we observe a rise in prices, but in comparison with the company’s growing sales proceeds inflation is not so much apparent. This results in an essentially decreased prime cost and higher EBITDA. So the 2010 report will be really good.
How much comfortable is the company with its current level of debt?
In the beginning of the year the company’s total debt portfolio weighed as much as $3.8 billion. The primary goal of the company for 2010-2012 is to reduce its debt portfolio and radically improve its quality. ALROSA’s Board of Directors has approved the program of loans for 2010 which includes the following steps: reducing the debt portfolio by $600 million to $3.2 billion for the year’s end and changing its structure. If early this year the share of short-term liabilities exceeded 60%, by the end of the year more than 90% of loans in the portfolio should be long-term.
We have already implemented a considerable part of the accepted program having issued ruble bonds for 26 billion for the periods of three and five years and almost completely removed all short-term credits from our balance sheet replacing them with long-term credits.
According to the 1H results, ALROSA Group’s debt portfolio is worth $3.5 billion. The amount of our long-term credits already exceeds short-term credits. Now the parity makes 65% to 35% accordingly.
With all that, price parameters are very comfortable in comparison with the last year. If in 2009 we attracted credits under 12%–13% in foreign exchange taking money without bargaining now the average cost of foreign exchange credits is about 6%–7%. We paid 8.25%–8.95% of interest for rubles borrowed to release our bonds. The interest paid on our debts has been essentially lowered. The company saved over 2 billion rubles only in the first half of the year.
What is the volume of debt the company is to re-finance till the end of the year?
It is $1 billion. This includes the short-term credit which should be repaid in the end of the year, eurocommercial papers for the amount of about $300 million due in December 2010, as well as some credits which should be refunded in November-December.
Besides, we have arrangements with banks to repay several credits ahead of schedule. We will watch the portfolio condition. As a matter of fact, by the end of the year we shall have a portfolio with just two issues of eurobonds left: the old one for $500 million and a new one for $1 billion which is scheduled to be released in autumn, as well as ruble bonds worth 26 billion and some $600 million of long-term credits.
ALROSA was the only company in the Russian market which last year used such an instrument as ECP. How much successful was this experience for you?
Indeed, we were real pioneers in using this instrument in Russia. ALROSA had a success with the first ECP issue as far back as 2003 and then placed eurocommercial papers every year.
The first investment bank in Russia which started to specialize in organizing ECP releases was UBS. We have been working with the bank since 2003. Last year VTB Capital joined the deal. That fact that we used this instrument for many years and our risk was well known to investors, allowed the company to attract rather big money by way of ECP in the end of 2008 and the beginning of 2009 despite a collapse in markets when banks completely closed borrowing limits. The company was not greedy in terms of interest on these papers paying 12%–14% per annum. During that time it was almost the only way for us to receive financing.
All those investors who bought ECP issued by the company before the crisis bought our papers last year as well. They are not sorry about it now.
What kind of investor category do they belong to?
Mainly these are UBS clients from private banking. They are private investors having very serious levels of income. Besides, many of them have Russian roots and very well know what ALROSA is.
Do you plan new ECP issues?
This year we have no such plans. We do not need short money now. The company’s sales plans go quite well and we have sufficient cash flow. We have a good surplus of liquidity and we have money on our accounts.
Are you satisfied with how your ruble bonds program goes on? How much comfortable is the 8.25%-8.95% rate of attracting funds on the local bond market for your company? Did you expect a cheaper way to borrow?
We started to plan our release of ruble bonds from the end of the last year and systematically geared up for the event, registering our program. The company was going to enter the market in April-May, but there happened unpleasant events in Greece, so it was decided to wait. By the end of May it became clear that other borrowers are in the same situation as we are. Registered ruble bond programs had many high-quality borrowers, such as Gazprom, Transneft, Gazpromneft, but no one dared to enter the market. ALROSA took the risk.
In the run-up for placement we told our would-be investors that we shall enter the market once, we shall borrow much and we shall not return in the ruble segment in the near future: “Therefore, if you want to get a high-quality debt of ALROSA into your portfolio, buy now.” The market proved we were not mistaken. The company had a goal — to release bonds at less than 9% per annum (which approximately corresponds to 3%–4% in foreign exchange), and we made it.
How do you estimate the quality of your investor base from the point of view of future liquidity of your bonds issues? In what way were they distributed among investors?
Our releases were widely re-subscribed. Large bond packages were bought by Sberbank, VTB, Alpha-Bank and Svyaz-Bank. Those were the participants whose orders ran as high as 1–3 billion rubles. All in all there were allocated about 70 investors including many small investment companies which took small packages worth 100-300 million rubles. We are glad to see this. It means that our papers will be liquid and have a good circulation.
One year ago there was a heated debate on whether a state-owned company had an opportunity to be assisted by the government, including by way of extending state guaranties for bond issues. However, this mechanism has never been put to practice. Why?
This idea was really widely discussed and at some stage supported by the Ministry for Economic Development, but turned out hard to be realized. Borrowers understood that moving this way the bond release procedure will take at least six months or even a year. Besides, while the issue was debated the situation in the markets started to recover and as a result the idea definitively withered as the emitters understood that they could issue their bonds without state guarantees.
Was it possible for you to have a cheaper loan if you had a guarantee?
It was scarcely probable. The market understands the quality of this or that risk very well. The state guarantee is a factor of state support. It means covenants imposed on any emitter which may turn out even tougher than actually higher interest rates. State guarantees do not happen free of charge.
You said that ALROSA does not plan to enter the local ruble market in the near future. Why?
At this stage international markets are of much greater interest to the company. Right now we need a great volume of long-term and cheap financing. Currently it is unreal to place ten-year ruble bonds in Russia. There is no such a market here. This is why we have decided to release eurobonds. As I said, the company’s long-term target is to get a leaner debt portfolio and longer borrowing terms. All the money we are currently attracting goes for re-structuring old short-term debts. In 2011, we plan to have a debt of $3 billion continuing to decrease the debt burden further on.
At what stage are your plans to issue eurobonds? Have you already reached any agreements with concrete banks on cooperation in this project?
We plan to attract $1 billion for ten years. Eurobonds will be released under Rule 144A. The company has already held a tender for organizing the release. We have chosen three book-runners having equal rights: JP Morgan, UBS and VTB Capital. We scheduled a eurobond road show to be run in October and November in Asia (Hong Kong, Singapore), Western and Eastern America and Europe.
What is in your opinion a comfortable interest rate to attract funds in the outside market?
I will not give now any specific figures. I can only say that our plans are very aggressive and we want to borrow as cheap as possible. If you look at how they trade our ten-year bonds due in 2014 (around 7,0%–7,5%) and plot a profit margin graph you will have a chance to figure out where our new paper will be.
Have you any plans to enter the market of syndicated crediting?
We have considered syndication as a possible instrument to attract funds. Having such a good market we do not need a syndicated credit right now. ALROSA was successful in placing ruble bonds. Our plans to get ready with eurobonds are still in force. If there will be any force-majeure situation and the market of eurobonds will suddenly be closed, then we will remember about syndication. It is a relatively small market. It would be very difficult to attract $1 billion for a long time. Its maximum yield will be $300-500 million for three-five years.
Does your company plan an IPO? If yes, when this program will be fulfilled?
We have really made such statements and discussed this issue with all the participants of the process meaning the company’s management and shareholders. Today it was possible to achieve the main thing: there emerged understanding that IPO is a blessing for the company and a good instrument to attract capital which will give a chance to develop further, to increase the company’s raw-material base, at the same time allowing the state to keep control over the company since there may only be sold no more than 20%-30% of its shares.
The problem is obviously not a simple one. First of all, the company should be very well geared from the point of view of production economics and finance which requires a number of economic and political decisions. Having started active preparation for this process, we can kick off the program roughly by 2012.
Last year ALROSA started to sell its non-core assets. In particular, in August 2009 the company reached an agreement for selling its gas assets worth $620 million to VTB. Do you plan to effect any other deals before the end of the year?
According to our strategy which we approved last year, the group should concentrate all the efforts on its primary business which is diamond mining. All the other assets which do not correspond to the company’s major profile are to be sold. First of all, these are oil and gas assets. Irelyakhneft is the last of our oil companies which will be sold. Now we are getting ready with our iron ore assets. We consider various scenarios of attracting a strategic investor to OAO Timir. We have many offers. Till the end of the year we hope to approve a strategic investor who will be included into the project.
Whom are you negotiating with?
We are negotiating with Mechel, Rostekhnologii and Chinese investors. It is a very open process. We want to receive good money for the project. All our actions are coordinated with the government because, as a matter of fact, it is a strategic asset. The problem facing any new owner is more political than economic. Iron reserves there are huge. The project cannot be further developed without decisions taken by the government.
What is price of this problem?
We have an independent evaluation of this project according to which OAO Timir costs around 10 billion rubles. It is the minimum sum to be discussed.
What variant is more preferable for you — to leave the project completely or to attract a strategic investor?
For us, certainly, it would be more preferable to exit the project entirely giving away 100% of it. But I think that such a variant is unlikely. Any ‘strategist’ who will enter the business will most likely ask us to remain there with some stake in it. Possibly, we shall remain in the project with a 25% package.
When the Irelyakhneft deal will be closed?
We have a buyer and all the documents are approved. Now we have a simple bargaining process underway trying to set the price: $100 million or $110 million. I hope that in the near future we shall settle this question.
What are the investment requirements of your group till the end of the year and where are you going to allocate funds?
All investments will be channeled to develop the primary business according to the strategy accepted by the company: we continue to develop our underground mines, Udachny and Aikhal, and bring Mir to its full capacity. So far our investments are modest since we had very heavy capital expenditures in 2006-2007 when we designed and bought unique equipment for the underground mines.
Now major investments are actually used for construction purposes. The company will spend about 10 billion rubles every year till 2012.
