The first step to transform ALROSA into an open joint stock company has already been made: last Wednesday Yakutia’s State Assembly expressed its willingness to change this republic’s legislation, which was the last legal obstacle to turning the company public. What’s more, the MPs began discussing the possibility of further reducing the stake held by Yakutia in the company.
This transformation of ALROSA will not only make the company more open and transparent to the market, but in the long term will enable it to venture an IPO. Last Wednesday, this intention was reiterated by the company’s president Fyodor Andreev, who was the first to announce possible placement options: 20% of shares worth $ 2 billion.
From closed to public
The discussion of ALROSA’s possible conversion into an open joint stock corporation started as far back as last year. The company executives explained at that time that as a closed joint stock entity ALROSA was precluded from establishing a civilized market of its shares, therefore making impossible to determine the fair market value of its equities. Moreover, they said, “the existence of an uncontrolled stock market was causing a major reputational problem." In addition, the company having a debt of more than $ 3 billion and annual revenues at the same level needs to raise funds for investment projects, while its private incorporation type complicates communication with the lenders. Earlier this year, a special group was established to discuss the transformation, and now, almost a year later, the procedure seems to be translated into practice.
The only legal obstacle to making the company public is 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 states that it is in Yakutia’s interests to preserve ALROSA’s legal incorporation type in the form of a closed joint stock entity.”
"The state interests of the Republic of Sakha (Yakutia) are protected by the company’s legal incorporation type in the form of a closed joint stock entity in accordance with the legislation on company establishment and constituent documents of the company," Article 3 of this law says.
This document was adopted before the conclusion of the amicable agreement approving the distribution of shares between the federal government and Yakutia. As experts explain, Yakutia, for which ALROSA was at the time the main donor to the republic’s budget, wanted to preserve management functions for the representatives of the republic in ALROSA and keep control over the company’s financial flows by way of freezing its incorporation status as a closed joint stock entity.
Last Wednesday, Il Tumen (the State Assembly) of Yakutia expressed its willingness to remove this restriction. According to the Interfax correspondent, who attended the Il Tumen session, the State Assembly passed the amendment to the law on managing ALROSA’s stock owned by the republic in the first reading.
By way of this amendment the text the law will be purged of the provision stating that the company’s legal incorporation type in the form of a closed joint stock entity is in the interests of the republic. According to the draft of the new law, which was prepared before the Il Tumen session (its text is available at Interfax), the phrase about the closed joint stock entity type of incorporation will be replaced with the wording saying that the interests of Yakutia will be "protected by the republic’s representatives in the company’s administration and control bodies."
Forty nine deputies of Il Tumen voted to adopt the amendments, with seven nay votes and one abstained.
Yakutia’s stakes
The voting results on making the company public came as no surprise: a survey of deputies belonging to different factions shortly before the Il Tumen session proved that most of them were positive to the idea of transforming the company. The cause of contradictions among the deputies was actually the fate of the company, or rather the fate of Yakutia’s stake in it for they wanted to know whether it will be reduced after the company turns public or left at the current level (the republic has a 32-percent interest in ALROSA propped by another 8 percent held by Yakut uluses, or municipalities).
Thus, Olga Fyodorova, the leader of the A Just Russia Party faction told Interfax that the problem was not about the transformation of the company, but about whether this change will be realized in the interests of the republic and its population. "Right now the law in action says that the state interests of this republic are tied exactly to the closed joint-stock incorporation type and the current stake in the company held by the republic and eight municipalities. Making the company public may bring about a change in these stakes," she said.
The Russian Federation Communist Party faction was expressly against the amendment: its leader Viktor Gubarev informed Interfax that all the seven members of the faction in the State Assembly would vote against it because "there had been many examples where companies after going public fell into private hands leaving people duped."
However, already during the first meeting of Il Tumen there was a motion to set a minimum size of 25% plus 1 share for the regional stake and sign a shareholder agreement meant to preserve the state interests of the republic. Presenting the bill Alexander Morozkin, the first vice-speaker of the State Assembly, said that the republic’s minimum stake may be changed in its final form.
"Fundamentally, there is no difference in the size of the republic’s stake - 25% plus 1 share or the current 32%,” - Pyotr Fyodorov, Chairman of the Committee for Industry in the Yakut parliament, told Interfax. “The republic will retain a blocking stake. The only difference is in the amount of dividends. However, it is of no essential importance for the republic. With the current package of 32% held by Yakutia as of 2010 it is expected to receive dividends worth 82 million rubles. It is a nominal income, given that ALROSA generates a total revenue of 10 billion rubles for the budget of the republic."
Road to market
The company plans to be converted into a public entity to facilitate access to fundraising on the market. President of Yakutia Yegor Borisov speaking at the State Assembly session said that the company now feels stable and is gaining momentum both in production and sales. "But all this has its limits, we can live in such conditions for the time being, but if we wish to see the republic developing, this is not possible to achieve without changing the company," he said.
ALROSA’s CEO Fyodor Andreev attending the parliament session said that taking into account insufficient financial instruments it would be expedient to transform ALROSA and give the company a new impetus for further development. According to him, it is quite possible to issue additionally about 20% of ALROSA shares which will give the company a chance to attract $2 billion.
"Proceeding from our very bold scenario, and I would call it even aggressive, we think that after going public it is possible to issue additional shares worth $ 2 billion - which is 20% of the company's market value - needed if we decide the company should enter the iron ore market. Even in this case Russia and Yakutia will retain 70% of the company’s capital. I mean that in a free market the current 10%, which are traded on the gray market, will be added another 20%."
Currently, Russia’s Federal Property Management Agency owns a controlling stake in ALROSA, while the company’s minority shareholders (its employees and foundations) own about 9-10%. Thus, in any case an IPO becomes impossible without diluting someone's stake. According to Sergey Goryainov, the Rough&Polished expert, the most likely option is if the Federal Property Management Agency will buy out shares to maintain its controlling stake, while the Yakut shareholders will not take part in stock redemption.
In his opinion, if the proportion of Yakutia in the company's authorized capital will decrease, Yakutia will have as well to reduce the number of its representatives sitting on the Supervisory Board of ALROSA, as the shareholders there should be represented proportionally. "But this is only if an IPO will be carried out. Until then the Board will maintain the status quo," he said.
Market in anticipation
Experts from banks and investment companies polled by Interfax, consider ALROSA’s plans to raise $ 2 billion quite real: even before Fyodor Andreev announced that figure, they expected the amount of a possible placement to be at a similar level. According to Yan Tavrovsky, who is in charge of the investment and banking business of JP Morgan in Russia and Ukraine, ALROSA “could place a minority stake on the market and in case of a favorable market situation it could easily attract about $ 2 billion."
"In our view, if ALROSA chooses to conduct an IPO, it will be successful. ALROSA which has unique production facilities and unique resources is of great interest to investors. Rough and polished diamonds will always be highly priced, especially in the current market context when demand for raw materials is growing," he said.
According to Konstantin Akimov, Executive Director of Morgan Stanley, ALROSA’s IPO should be successful. "The dynamics in the diamond market has improved significantly. Demand is on the rise while supply remains limited - for the past 10 years, virtually no major diamond fields were discovered. Furthermore, there are no liquid public companies in this sector in the world right now: the shares of De Beers, a company comparable in scale, are not traded, while the traded companies (such as Harry Winston and Gem Diamonds) have a far less diamond output and ore base, as well as low liquidity. Therefore, ALROSA in this sense is a unique company in the world market and undoubtedly should attract investors’ attention," Akimov believes.
The size of the company’s block of shares to be placed on the market will depend on several factors, including market environment, company evaluation and the structure of the block itself, Akimov says. He underlines that it would be appropriate to place up to 25% of ALROSA’s shares, however being aware of possible restrictions that are imposed on transactions involving strategic companies (ALROSA is currently rated as one) and foreign capital. "In my opinion, in the near future ALROSA should begin to gear up for possible restrictions," he said.
Akimov also believes that an IPO may alter the stakes in possession of the company’s shareholders. "In the course of an IPO the federal government may buy out some part of the block of shares to retain control over the company. It is quite another matter whether the authorities of Yakutia may wish to do that," he said, noting that it is strategically important for the company to attract funds for production development, which is in the long run meets Yakutia’s interests as well.
Nikolai Sosnowski, an analyst of Uralsib, also deems quite real a possibility to attract $ 2 billion placing a 20-25-percent block of shares on the market. In his view, it will be expedient for ALROSA, as the company is in need of money to fund production and refinance its liabilities while having no possibility to borrow much on the debt market.
In his opinion, the most logical floor to place shares for a diamond-miner is the LSE, but it is also possible to trade them at the Hong Kong Stock Exchange.
Alexander Pukhaev of VTB believes that an overall evaluation of the company today is close to $ 10 billion. "With the current “neutral-to-positive” performance metrics featured by the company I believe it is possible to place about 10%-15% of its shares on the market accordingly targeted to gain about $ 1 billion. But everything will depend on the market appetite at the moment when ALROSA will kick off its IPO," he said.
Conservative underground mines and optimistic diversification
In his speech delivered to Il Tumen Fyodor Andreev has outlined two options for further development of the company: one conservative, within which ALROSA would remain a diamond producer, and one optimistic, which may turn ALROSA into a diversified company if pursued.
"Within the conservative scenario, in 5 years I expect that ALROSA will recover 20% of diamonds in the underground mines, retaining its first place after we outstripped De Beers in the world market. Within the optimistic scenario, I see ALROSA as a diversified mining complex similar to Rio Tinto - as a company that is engaged in developing gold deposits on the territory of the republic,” Fyodor Andreev said.
The above cited words of Fyodor Andreev about the iron-ore market also point to a possibility of diversifying the company. ALROSA owns the Timir iron ore project in Yakutia and needs 88 billion rubles of capital investments for its development. Earlier, ALROSA planned to attract a strategic investor to this project, but so far it is not clear at what stage these activities proceed.
Timir, a mining and metallurgical company, was established by ALROSA to develop the project aimed at mining iron ore on four iron ore fields in Southern Yakutia - Tayezhny, Desovsky, Gorkitsky and Tarynnakhsky. The overall project includes development of the four fields and construction of two mining and concentration complexes and an integrated iron-and-steel works.
Simultaneously, the company is to continue its construction of underground mines. According to a three-year financial model of ALROSA, the company’s diamond output in 2010-2012 will reach 102.321 million carats. In this case, as it was reported, ALROSA expects to turn out 33.54 million carats in 2010, up 2.3% against 2009. These figures will be attained, in particular, due to underground mines Mir and Aikhal ramped up to their design capacity, as well by launching the Udanchny Mine, which will be one of the world's largest diamond underground mines capable of bringing to grass up to 4 million tons of ore per year.
Aikhal’s design capacity runs at 500,000 tons of ore in a year, while that of the Mir Mine is one million tons of ore, and they are scheduled to reach their design capacity in 2012.
It is also expected that in 2012 the Udachny Mine will recover its first 25,000 tons of ore. In 2014, ALROSA plans to put into operation the first stage of the Udanchy Mine with a capacity of 500,000 tons of ore per year, while the mine is scheduled to run at full capacity in 2016.
In just three years ALROSA plans to allocate 24.728 billion rubles for underground construction. In particular, 5.4 billion rubles will be invested into Mir and Aikhal, while 13.9 billion rubles will be earmarked for Udachny.
Sergey Goryainov considers ALROSA’s diversification to be inappropriate and believes that the company should better focus on diamond mining, and especially on underground construction. “ALROSA has been historically earning on diamonds. There have been many diversification projects - oil, gas, gold, but all of them, as you may recall, failed, and the company had to sell these assets," he said.
He notes that in general a holding diversified by the type of minerals mined is more financially stable: falling prices for one kind of raw materials are usually balanced by prices for other products. "But to achieve such a level of diversification, it is necessary to apply tremendous efforts and huge financial resources. And in this case one really cannot do without assistance of a strategic investor. But in any way the risks will still be very high," Goryainov believes.
Interfax
