The experts of the Institute for Regional Economy of the North (IREN, which was created within the Russian Academy of Sciences to study the economy of Yakutia and other northern regions of Russia is involved in designing programs and strategies for the development of this territory) deem it appropriate to sell the stock of diamond-mining monopoly ALROSA (RTS: ALRS) in two stages: first of all a block of shares is to be sold to a strategic investor and then the company’s equities are to be floated within an IPO.
As was reported earlier, after being transformed into an open joint-stock society from a closed-type corporation ALROSA intends to raise funds on the market: the company needs investments to build underground mines and develop the Timir Iron Ore Project. In November, the State Assembly of Yakutia removed the last legal obstacle to converting ALROSA into a public company by making appropriate amendments to the republic’s legislation (previously it read that preserving the company as a closed joint-stock entity was in Yakutia’s interests).
Now, the company’s shareholders are to take a decision to turn ALROSA public after which the Federal Financial Markets Service will register a new issue of shares. It is expected that this will happen next year. And in 2012, ALROSA plans to place about 20% of additional shares on the market which, according to the company’s estimates, will make it possible to attract about $2 billion.
IREN’s experts have prepared their own feasibility report on raising funds for the development of the company and submitted these recommendations to the authorities of Yakutia. The estimates made by IREN are to a certain extent diverging from those produced by the company and investment banks experts. The IREN scientists do not reject the idea of an IPO in the medium term, but they believe that to determine the real value of ALROSA’s stock the company’s shares should be first of all sold to a strategic investor - by reducing the share of the Russian state.
STEP ONE. ATTRACTING STRATEGIC INVESTOR.
The largest stake in ALROSA is now held by the Federal Property Management Agency, which owns 51% of shares. Yakutia owns 32% and another 8% are possessed by eight Yakut uluses (municipalities). The remaining 9% are owned by individuals and legal entities - in particular, by company employees who once could buy the papers, as well as by investment funds (for instance, Vostok Nafta) and banks (KIT Finance) (RTS: CITB). ALROSA’s stock is not traded on the market because the company is a closed corporation, so it is impossible to buy them on a free trading floor.
The experts of some investment banks and Rough&Polished, an industry news agency, earlier polled by Interfax believed that the most expedient way for the diamond monopoly to carry out an IPO will be to reduce the stake held by Yakutia to about 25%. Implicitly, the representatives of the Yakut authorities confirmed they were agree with this idea saying that it would not make a fundamental difference for their republic to have 25% or 40%, because this package would still be blocking, while Yakutia would see greater benefits from developing the company further than from drawing dividends on its shares.
The IREN experts believe that to raise funds to the company’s capital the state should also reduce its stake in it.
"Which is most important, the interests of the federal center and those of Yakutia should be observed while transforming ALROSA, and this is possible if both parties will pursue a differentiated approach to assessing the role and mission of the diamond complex,” the IREN report says on the problem of making the company public. “The diamond complex is insignificant by its input in the overall production and export of the Russian Federation economy. Rough and polished diamonds are luxury items, while natural diamonds earlier widely used in the engineering and military equipment have been replaced by synthetics. Consequently, the rough and polished diamond complex as a whole has no strategic value for the Russian Federation. At the same time, ALROSA’s business appears to be a core and budget-making industry for the Republic of Sakha (Yakutia).”
According to IREN, in 2010 ALROSA accounts for 42.8% of the total industrial production in Yakutia, while the amount of taxes paid by the company totals 33% in this republic’s budget revenues. ALROSA generates a 25-percent share in the total gross regional product.
“Thus, in our opinion, at the first stage after the company will be made public the Russian Federation government could reduce its stake from 51% to 32% and sell 19% of shares, which will help to determine the real value of the company’s stock and raise additional funds to the budget of Russia,” IREN believes.
According to Yury Danilov, an IREN expert and one of the authors of this study, in addition to probing the market value of ALROSA’s shares, their sale would raise funds to the budget of the Russian Federation in accordance with the plan to privatize state-owned blocks of shares held in large Russian corporations. "It would be appropriate to sell this equity stake immediately after turning ALROSA public, that is in 2011-2012. The deal could be worth $1-2 billion," Yuri Danilov says.
In his opinion, the role of a strategic investor could be played by some large-scale ore mining and smelting company (for instance, Norilsk Nickel) (RTS: GMKN), which in this case would have an opportunity to convert into a large mining holding modeled after Western companies, such as AngloAmerican or BHP Billiton.
STEP TWO. EVERYONE GETS 25.
At the following stage in 2012, IREN considers it expedient for ALROSA to venture an IPO by floating 28% of shares (added to the existing authorized capital). “In this case, the stakes owned by the Russian Federation government and the government of the Republic of Sakha (Yakutia) will be brought to 25% plus one share from 32%, while their total stake will be brought to 50% plus 2 shares from 64%, i.e. the controlling stake in the company will remain to be owned by the state,” the IREN experts suggest.
The Yakut uluses, in their opinion, should have an opportunity to dispose of their 8-percent stake at their own convenience. "In my view, fundamentally it would be wise to sell these 8% of the shares to attract significant investment resources, as their possession by the municipalities so far gives them little in terms of dividends", Yuri Danilov believes.
The authorized capital of ALROSA currently consists of 272 756 shares at par value of 13,502.5 (totaling RUB 3.682 billion).
According to the IREN, the average value of ALROSA’s share in the "gray market” currently stands at about RUB 300,000. "The value of securities in the gray market is determined by cornerers whose aim is to reduce prices", Yuri Danilov says.
Earlier, JP Morgan estimated ALROSA’s current capitalization at $7.3 to $9.0 billion, which makes one share worth RUB 800,000-900,000. According to Yuri Danilov, this estimate is based on the comparative method of analysis, but the comparison is made between diamond-mining companies of different "weight classes” (for example, between ALROSA and Harry Winston), so this kind of evaluation cannot be entirely correct as well.
IREN itself determines the current fair value of ALROSA’ stock at RUB 411,000 rubles per share.
According to the IREN experts, if the company will additionally issue 28% of shares their price may decline to RUB 344,000 a piece, but after placing them in 2012-2013 it will rise to RUB 440,000. As estimated by IREN, floating a 28-percent stake will net about $1.1 billion for ALROSA.
STILL NO CLARITY
ALROSA itself considers the two-stage pattern for selling its shares inappropriate. "Attracting a strategic investor followed by a subsequent IPO is tactics used by companies, let’s say, belonging to the second or third echelon to take advantage of the reputation enjoyed by the attracted “strategist” and boost the value of securities offered to the market,” ALROSA’s spokesperson said. “For ALROSA, which is currently a pace-setting company in the industry, such a decision would most likely turn out erroneous. The purpose of placing shares on the market is to maximize fundraising, rather than simply attract new participants."
Right now it is difficult to predict what kind of scheme will be agreed upon by ALROSA’s shareholders to redistribute its stock. Especially taking into account that there were no official statements about redistribution aspects made either by the Yakut shareholders or Russia’s Finance Ministry.
Russian President Dmitry Medvedev said in his letter to the Federal Assembly that state authorities should own only that property which they need to perform their duties, while the rest should be privatized. Appropriate solutions, he said, must be taken both at regional and local levels, and revenues from privatization are to be used to modernize the country’s economy.
"It only seems that property is never enough. In fact, managing excessive property requires a lot of effort, time, and often - and everybody knows it - considerable resources. But the worst of all is that it is often a source of corruption," the president remarked.
In his message, he also mentioned that this year he had signed a decree to reduce the list of strategic enterprises five times as much and that on his behalf "the government adopted an ambitious plan aimed at privatizing large companies."
"The main goal of privatization is to improve the efficiency of these companies and bring in more investments to the Russian economy," Dmitry Medvedev said.
ALROSA is currently not included in the privatization program for 2011-2013 (expected to generate RUB 1 trillion in profits).
Interfax
