The ALROSA Group produced $1.706 billion worth of rough diamonds in 9 months of 2010 and intends to drive its rough and polished sales to $680 million in the fourth quarter, Andrey Evplanov writes in the Rossiiskaya Business Gazeta. The company managed to reduce and restructure its liabilities. However, ALROSA’s debt is still heavy, and to reduce it the company is not averse to using external tools. In all likelihood, it will set its sights on this target. Anyway, the Financial Times has already reported citing the company's management that in the second quarter of 2011 the Russian diamond monopoly will be transformed from a closed joint stock company into an open joint stock company, and then venture an IPO. In early October 2010, the members of the Yakut parliament adopted a bill permitting to change ALROSA’s incorporation type and turn it into a public company. And in mid-December 2010, the State Assembly of Yakutia amended the regional law on management and disposal of shares in the company, according to which the share of the republic cannot be below 25% +1 share (currently its stake is 32%).
According to the representatives of Yakutia’s government, the current law contains no mechanism to guarantee the existing level of corporate control for the republic in case of a possible increase of the company’s registered capital. They motivated the need for an amendment to preserve Yakutia’s stake in ALROSA by the necessity to provide such guarantees.
Maxim Lobada, an analyst of Investkafe, believes that after ALROSA will be converted into an open joint stock corporation it may carry out an IPO in 2012-2013, depending the company’s need in capital and the situation on world markets. According to him, ALROSA may launch an IPO both in Hong Kong and London trying to attract international capital. “So far it is early to speak of the placing price, but according to a preliminary estimate, an additional emission of 25% of shares will make the price run at $30,330 per share,” the expert says.
In the long run, everything points to the fact that the stock market will soon have yet another "blue chip". According to Valeria Pyatnitseva, Strategic Investments Director of RN-Trust, investors are very positive about an IPO and they would be interested in buying diamond shares, because diamonds are a non-renewable and very expensive product. The company’s high indebtedness remains to be a negative factor but an IPO can significantly reduce it.
ALROSA, however, believes it is impossible to sell more than 20% of its shares because this will create a great risk of configuration changes between the shareholders. For Yakutia it is fundamentally important to retain a blocking stake (now it controls 40% of shares). The stake held by the Russian Federation is debated, for currently it is 51% and the federation finds it necessary to retain control for a sufficiently long period.
Diamond producers expect further price increases for rough diamonds in the short term, primarily due to the current imbalance between supply and demand in the world diamond market.
Now diamond prices are almost back to pre-crisis levels. China, India and the Middle East are gradually regaining their demand for diamonds. There are many other markets where demand for diamonds is also growing, albeit on a smaller scale. There are three markets which are of greatest current interest and these are Russia, Brazil and South Korea.
In Russia, jewelry sales in 2008 were estimated at $6 to $6.5 billion, and in 2009 they dropped to 50-60 percent of this amount. According to Pavel Sokolov, the ambassador of the International Colored Gemstone Association in Russia, 2010 sales will be about 85% of the total sales in 2008.
Meanwhile, the Russian Ministry of Finance plans to hold an auction to sell diamonds of special sizes exceeding 10.8 carats. The auction will be open and intended for domestic market consumers. It is planned to put up 250 lots consisting of 970 stones. Their total weight will reach 12,921 carats.
However, not only the Russians are counting on a good year. Their competitors are also hoping for big profits. De Beers is expected to reach a stable level of production and start paying back loans to its shareholders. At the same time the company is considering offers made by financial institutions to create investment instruments based on diamonds.
The company’s 2010 output forecast runs at 30-33 million carats, while in 2011 it is expected to reach a sustainable level of 40 million carats or more. De Beers has received many proposals from financial organizations to take part in a fund that gives investors an opportunity to invest directly in diamonds, since after the global financial crisis investors may prefer material values rather than shares. According to De Beers, only less than 1% of sold diamonds may be attributed to the category of investment diamonds. The company has so far not decided what could be its role in such funds.
Diversified miner Rio Tinto Group is also building up its activity on the market. ALROSA is considering a possibility of getting this giant involved in the project for developing the Lomonosov Diamond Field in the Arkhangelsk Region. The transaction may reach nearly $400 million in price. So far foreign companies have not mined diamonds in Russia. The only attempt was made by De Beers. This corporation wanted to buy a 49.9-percent stake in Arkhangelskgeoldobycha from LUKOIL (LKOH) for $225 million, but did not receive consent of Russia’s Federal Antimonopoly Service for the deal.
