In early October, the members of the Yakut parliament passed in its first reading a bill allowing ALROSA to be turned into a public company from a closed joint-stock entity, the Kommersant Daily writes. At the next stage, the Russian diamond company plans an IPO which will transform it into a multi-business mining corporation of a global level. In his first interview as President of ALROSA Fyodor Andreev told Elena Kiseleva, special correspondent of Kommersant, when the new "blue chip" may hit the market and why ALROSA’s management considers dangerous the emergence of a strategic investor among their shareholders.
This is a precedent for the market when a company generating such an output becomes public. Why the decision to turn ALROSA into an “open” company is taken right now?
It should have been done a long time ago. The more so, because the relevant agreement was reached by the company’s shareholders when they wrapped up the amicable agreement to increase the share of the Russian Federation to a control level. One of its points suggested making the company public (or rather, it was an annex to the agreement). Re-incorporating ALROSA into an open joint-stock company was discussed much earlier due to the fact that in accordance with the Companies Act all the companies having more than 50 shareholders should be automatically made public. But, as it is customary in this country, a peasant needs thunder to cross himself and wonder. Since there was no pressing need to initiate a process of turning the company public, no one forced this process and everyone was saying: "Well, when the need will come then we shall do it.”
Next was the crisis, and we stopped selling rough diamonds for almost nine months, and we were forced to seek ways in which the Russian Federation could support the company. Then, by analogy with AvtoVAZ, we had an idea: why not make it possible for the state to increase its stake in the company? And very quickly we got an answer: no, because the company is closed.
Do you plan to return to the subject of additional capitalization of the company by shareholders after making it public?
I think it would be wrong. The current shareholders include the state, and the function of the state is to carry out social expenditures. We should remember what Engels taught us: roads, army, prison... In times of crisis, the government can support the company, but to include additional capitalization at its expense into our own strategy - this is wrong. It borders with lethargy of the company’s management. Besides, ALROSA does not immediately face the problem of increasing its capital: we have enough resources for current operations. By the results of 2010 the company’s EBITDA will be approximately $ 1.3 billion - enough to complete all investments for underground construction by 2017. So, all the pronouncements that ALROSA is on the verge of bankruptcy are in fact contrary to reality. We estimated that our proved reserves will keep up production at 30-32 million carats per year, and that's enough for 40 years.
Nevertheless, it is assumed that the next step after ALROSA turns public will be an IPO. How soon may this happen? In one of your presentations, you mentioned a period of two to three years.
So far this is a theoretical issue. You've heard the statement of Alexei Kudrin (Vice Prime Minister in charge of ALROSA’s Supervisory Board. - Kommersant) that an IPO has not been considered by the Supervisory Board. And it's absolutely true. Moreover, today ALROSA is on the list of strategic enterprises. Therefore, the question of an IPO is so far purely theoretical. On the next stage of development the answer will possibly be ‘yes.’ As a representative of the company’s management I believe that we should nest a possibility of IPO - for further development of the company and for new projects. But this does not mean that tomorrow we shall be ready for an IPO and it does not mean that we shall do it at all.
But if you still decide to launch an IPO, what block of shares will be put on the stock exchange?
We believe that more than 20% may not be sold because it creates a great risk of changes in the configuration between the shareholders. For Yakutia it is fundamentally important to retain a blocking stake (now it controls 40%. - Kommersant). There comes up the issue pertaining to the stake owned by the Russian Federation, which now holds 51% and finds it necessary to preserve control over a sufficiently long period of time. And we think it's logical.
But why counting the stake held by the federal state we do not include the block of shares possessed by Yakutia? Why this division into federal and republic-owned blocks?
You are absolutely right. Legally and economically, they can and should go together. And we have come to this close. De facto, the situation that existed before the federalization may safely be described as opposition: the Republic of Sakha (Yakutia) fought for control, while the Federation believed that the company should belong to the center. Now the positions are closer and we do not see differences. Moreover, in anticipation of the possibility of an additional equity issue there emerged such a concept as agreement between shareholders. We are discussing a new version of the articles of incorporation where in particular there is a proposal to tighten control of the Supervisory Board over the volume of transactions that may be concluded by the company’s president. There is a proposal that key issues should be supported by 2/3 of votes. I think that very soon we'll stop dividing the stake held by the Russian state into federal and republic-owned.
Currently it is fashionable among Russian companies to be located in Hong Kong. Will you go there as well?
We should look for various trading floors. Actually, I do see good prospects for the Russian market. For example, the ruble-denominated bonds, which we recently placed for 26 billion rubles, proved that they are even more convenient for us than hard currency due to absent covenants. If Russia will step by step but confidently move towards creating a financial center, I would not exclude Russia as an option. Who would have believed ten years ago, that it would be possible to place $1 billion of eurobonds in Russia? So it is quite possible to speak of a Russia-London combination. In fact, the trading floor is absolutely unimportant. Where there will be money, where there will be investors – there you will have a trading floor.
Any desire to launch a "people’s IPO" repeating the experience of Rosneft and VTB?
Maybe. Personally, I do not brush aside the idea, let's call it a "people’s IPO" or attracting a maximum number of investors, including individuals. Why not? On the contrary, I have no ill feelings towards the idea of a "people’s IPO.” It seems to me far more dangerous to attract a strategic investor. You should be afraid to have a situation where some company will be able to get a stake comparable with the stake held by Yakutia or Russia. This will immediately raise the problem of balance between shareholders. In my opinion, it makes sense to speak of as wide a base of investors as possible, including population. We have already discussed the issue whether the employees of our company will be able to buy its shares.
Sounds like you have good wages in your company...
If we shall split the company’s capital in compliance with its new articles of incorporation, one share will be worth 50 kopeks.
Banking analysts assessed ALROSA approximately at $7.9 billion. How much true do you think such an assessment is?
All of them proceed from a $1-billion EBITDA and $3-billion revenue; to all intents and purposes, analysts do not really analyze anything, they just take the number, multiply it by the current multiplier and say: today the company is worth $10 billion, tomorrow - $8 billion. Now we see huge demand for companies that produce something real. Just look around – quotes of all gold mining companies are flying up. Personally, I believe that today, when many countries have proclaimed a policy of printing money and supporting their economies once again by way of inflating their money supply, the value of ALROSA will grow and it will grow very quickly. We produce a product that is associated with values. Yes, it's not gold, not a classic commodity, yet many people are more and more inclined to consider diamonds as an investment.
This is understandable: diamonds are a non-renewable product...
Quite right. Over the past 15 years there has not been discovered even a single major diamond field and all the companies go underground - we and De Beers including. Depletion and decline in production are taking place. Global output fell to 120 million carats from 165 million carats which were considered a normal level for the market before the crisis. According to our forecasts, by 2017-2018 the market may return to its pre-crisis level though making great efforts.
During the crisis ALROSA accumulated a record debt burden. Won’t it discourage potential investors?
At one time, when I was first vice president of ALROSA and was getting ready to release the first issue of eurobonds, we made a provision for a $2-billion debt. And then it seemed to all of us that it will never be that way. When last summer I returned to the company, its accounts payable amounted to $4.5 billion, and now they are about $3.5 billion. This year we shall make our debt long. I hope that the already released five- and seven-year ruble-denominated bonds as well as the scheduled issue of ten-year eurobonds will allow us to forget about the debt issue until we complete our mines.
In your opinion, what is a comfortable debt level for ALROSA?
In classical economics, a debt level equal to a threefold EBITDA is considered comfortable, in other words a debt of $3.2 billion at a revenue of $3 billion is generally speaking acceptable to us. There is absolutely no reason to talk about some fundamental threats to the company. But there are no opportunities to develop further either. That's why we're talking about an IPO. But in our view, any plans for an IPO should be tightly linked to a specific project and business plan. While issuing additional shares we should give a very clear answer if questioned by shareholders: why? Whether it is to have some fun, guzzle away, invest in real estate on the Cote d'Azur or build another line of production facilities?
So why does ALROSA intend to hold an IPO in this case?
This is the path that was covered by Rio Tinto and BHP; this is a way to diversify the mining business. I’d like to stress it – mining business. After all, ALROSA is a mining company. This is an opportunity to go to other segments of the market - iron ore, gold - where the production principle is very close to ours. A mine is a mine - even as far away as Africa. You may also shift to coal. You know, one time ALROSA planned to buy Yakutugol. This kind of diversification seems of interest strategically. And we have already a hands-on project – it is iron ore. Moreover, we got a license.
You mean GMK Timir (the iron ore division of IG ALROSA for 100% owned by ALROSA)?
Yes, the Timir Project. We understand its financial model. At present we are engaged in additional exploration and compiling design and estimate documentation; starting from 2012 we shall begin to invest money in this project. If we start construction on two deposits, this will require approximately $2-2.5 billion of investments (total investments up to 2039 will be RUB 88 billion. - Kommersant). This is exactly the amount we expect to attract during an IPO. But this is not the only way. We are persistently seeking investors for this project. But there are many risks, including country and territory risks.
Can you disclose those who were negotiating this project with your company?
No, I can’t, because we are negotiating it up to now. Let me say just one thing – if you randomly point your finger at any mining company inside this country or abroad, you won’t be wrong. And probably we shall not need any IPO, if we can find a strategic investor to share costs. But still we have to implement shared funding of this project and we need $1 billion for this purpose.
Does it mean that you are ready to give one half of your company to partners?
Yes, we're talking about 50% plus one share for ourselves.
Are you looking for some coal or gold assets?
What’s the use of looking if you have 5 billion tons of iron ore under your feet? Other assets will be worth billions of dollars. Where shall we find them? We have no possibility to be engaged in acquisitions. Theoretically, we are looking around but in a frothy conversation you may well swallow Norilsk Nickel or Polyus (laughing).
Any desire to start developing the Grib diamond pipe near Severalmaz?
We have friendly relations with LUKOIL on the management level (LUKOIL controls OAO Arkhangelskgeoldobycha which holds the license for the diamond area. – Kommersant.) because it is geographically close, within 100 miles. They looked at our techniques and sorting, but there were no specific talks on joint development of the Grib Pipe. At one time we also mulled the issue. The project is hard to develop, the ore body lies deep enough, so you will have to shut off rivers and lakes. And it requires significant investments while we are in need of them ourselves. If we talk seriously about investments, I would say that IPO is a fashionable thing, but if we knew how to avoid it, then I would have left it aside. It means to turn over the entire company starting from accounting where you will have to submit reporting almost from March and replace all the software... I talked to people who held IPOs and all of them expressed the same attitude. There are a lot of books on this subject and five years ago there was even a Nobel Prize awarded to someone proving that IPO is not a benefit. When you attract additional shareholders you invite a threat of differences between them, which we have recently seen in the case of Norilsk Nickel. The alternative is to attract investors directly to our points of growth: Timir and Severalmaz. We need to work out this option before the end of the year. Another way is to sell assets, but not our core assets. We are reluctant to do that.
What kind of non-core assets are you ready to let go?
All of them (laughing). We believe that now it is a good time to focus on our major business and stop being engaged in the energy sector, passenger transportation and oil production. We must put an end to it. In December, we plan to take decisions on a number of non-core assets at the session of our Supervisory Board. It looks rather strange that we cannot find money to invest in diamond mining, while continuing to maintain non-core assets, which are generating nothing but losses. I am ready to deal with diamond mining and diamond sales day and night. But as soon as it comes to deal with hotel occupancy or efficiency of hydropower generation, it makes me sick. For instance, in Angola we have a power-generating asset, Hydroshikapa S.A.R.L. (ALROSA owns 55% of the company’s shares. - Kommersant). We were building hydropower plants there because of the circumstances: it was one of the conditions for us to enter the Catoca diamond mine, but now it's time to transfer these assets to a specialized company.
A Russian company?
Well, first of all it may be a Russian company as soon as Dmitry Medvedev announced a strategic partnership with Angola. We have already submitted our proposals to a number of specialized companies. Hopefully, in the near future we shall start negotiations and we'll get either "yes" or "no." I cannot say anything more concrete so far.
Who will replace Zarubezhneft which refused to participate in your oil project in Angola?
We are looking for someone. In Angola we have an exploration license and it shows that there are some prospects. But the project requires further investments, and frankly speaking we are not ready to make such investments so far. This is why we offer various scenarios to oil companies. But there is no clearly expressed interest in response – due to country risks among other things.
When several years ago ALROSA was part of OAO Severalmaz, it was assumed that it was able to solve the problem of depletion in the Yakut diamond pipes. Did these expectations come true?
Now we have an additional spout of optimism. We hope that in five years we shall make the project a money earner. But so far we only invest, invest and invest... Sales figures are not dramatic, but somewhat better than we planned. Unfortunately, there is no possibility to save there because the cycles of constructing new factories and expanding the quarry require investments. At the present time, we are working with potential investors just like in the case of Timir. There is some interest expressed and it is sufficiently concrete since the people we are dealing with are not just looking at the metrics but ask to see the stones and make spectral analysis at the quarries.
Are they mining companies?
They include mining companies and our diamond-cutting clients. Now customers are not at all less wise in this business, but in many ways smarter than us because they are sitting on sales and understand the market very well. Many large customers with a turnover starting from $1 billion are mulling about having their own resource base, and many are trying to accumulate the so-called diamond stocks.
Is it really true that the world market recovered to this extent?
There are obvious improvements. The next decade will be a decade of shortages in rough. In this context, we expect a 31-percent price growth by 2018 versus 2008. Unless, of course, there will be a second wave of the crisis. I joined the company on July 1, 2009, and we soon resumed our sales under long-term contracts, and when we sold our first batch of diamonds we considered it a miracle. However, in August, we had more ready buyers, and in September the company felt it could close the year in absolute confidence.
It turns out that during the crisis your long-term contracts worked and Gokhran was not a 100-percent buyer of your rough?
Yes, people were afraid of losing them. During the crisis we sold $1 billion worth of diamonds to Gokhran and virtually the same amount – worth $1.2 billion - in the free market, while the lion's share was sold just under such contracts (about 24). And they are still an essential part of our sales. And even when we raised the issue about switching to a softer pricing formula where the price can vary on a quarterly basis, the customers met us half-way once again simply in order to maintain their product range and access to raw materials. We believe that these contracts are really a very good base, which allows us to become the number one company not only in terms of production, which was achieved by ALROSA in the past year due to reduced output by De Beers, but in terms of sales as well.
There is another aspect about this situation meaning that on the background of shortages in rough diamonds it is necessary to create a mechanism giving a broader access to customers, since closed auctions are not enough anymore. We have such experience since we organized online sales platforms and increased the share of tenders. Presently, in this way we are selling about 12% and plan to increase that amount to 20% next year (although personally I think that the most appropriate fugure will be 30%). We have to engage the base of small and medium size clients. They are important for us as a safety airbag. Of course, it is tempting to sell the entire product range under firm contracts. Immediately after the crisis, as soon as our customers realized that the market went up, there emerged consortia of four or five companies, which said: let us buy what you have for one billion. It is important to prevent making the market more narrow and return to the experience we had with De Beers, which was a monopolistic buyer of Russian rough several years ago. Therefore, we are diversifying geographically: we entered into contracts with India and we plan to intensify our efforts in Asia.
How much rough is currently purchased by resident companies?
They spend $500-600 million for their purchases, which makes around 15-18%. Of these, Smolensk-based Kristall buys $180 million worth of rough, the Yakutsk diamond cutters totally spend about $200 million, while the rest are the companies which are just operating on the market. During the crisis this segment completely died.
What is the volume of purchases scheduled by Gokhran for the next year?
I have not seen the budget yet, but as far as I know, Gokhran is no longer in need of rough diamonds. So, I think there will be some standard level of $150-200 million, or perhaps they will decide not to buy at all. But for us it's not fearful any more. The most important for us was the support rendered by Gokhran in the crisis period. Without it we could have a very hard time indeed.
Your company is forced to move to underground mining and is now building three mines. To what extent will ALROSA’s costs rise and its margin drop?
Switching over to underground mining we shall have our costs increased by about 30%. But much depends on technology. For instance, at Inter diamond content is around $1,000 per ton of ore, at Mir we have the same high quality rough and high diamond content, $350 per ton, but we have already doubts about Aikhal where diamond content is about $160 per ton of ore. These mines are now virtually at the stage of completion, and we move on to the largest mine, Udachny, which will require $1 billion of investments up to 2016. This mine is big - 4 million tons of ore and the ore body is almost one thousand meters deep. It makes about 15% of the company’s output. This is a very complicated project. Our forecast shows that the actual profit margin at Udachny will be around 2-3%. That's the whole margin. And we are accustomed to 30%! In oil companies there is a saying that their barrel can endure everything, while we say that our carat can endure everything. Therefore, cost management becomes a key issue.
Do you plan to reduce staff due to transition to underground mining and what will happen to the mono-towns of Yakutia, for example to Udachny?
There will be no social upheavals and mass migration. In the next ten years we shall have to retrench about 3,000-4,000 people. For comparison: in 2005 the company employed just over 36,000 people. Now we have 32,000. In the next ten years, output will remain at 32-34 million carats, that is at the present-day level. The factories will process the same amount of ore; again it should be said that we have a lot of social facilities, repair shops and workshops. Now Aikhal features 200 vacancies and we cannot fill them in: not everyone wants to work underground. Temporary difficulties were created by a one-year interval in construction works at Udachny, which are now resumed. We had to engage our workers at other jobs during the transition period. We have a lot of waste ore, and we have decided to process it once again. There are diamond pipes that have been frozen, for example Zarnitsa which is located near Udachny. And in addition to all this there is Aikhal which is close by where we shall employ people on a rotational basis. We have problems, but all of them can be solved.
