Less than three years ago when the global financial crisis hit, and during 2009 when the worldwide recession caused a slump in demand for diamonds, Russian diamond miner Alrosa was faced with a difficult choice, www.antwerpfacetsonline.be writes. It could either sell the diamonds that it was continuing to mine at prices that had fallen by 40 percent to the market, or sell its goods to Russia's state minerals repository, the Gokhran, until the situation changed.
Alrosa, which produces around 25 percent of global diamond output, and which markets around 70 percent of its production through Antwerp, chose the latter course. That was because the Russian Finance Ministry was willing to provide the funding. As a result, the Gokhran bought around $1 billion of goods, the global market was not flooded with goods at a time when producers chose to slash output to shore up prices, and Alrosa employees continued to work as normal thus preventing mass layoffs at the company.
In retrospect, the decision to sell to the Gokhran was a spectacular success, and the turnaround that Alrosa has seen has been met with much praise, including from the Russian Finance Ministry which reportedly saw Gokhran making a decent profit on its $1 billion investment. However, the decision was not without cost, particularly in terms of Alrosa's debt, which rose due to the slump in sales of goods.
Alrosa’s president, Fyodor Andreyev, was brought in 2009 to turn the company's fortunes around, and the former Russian Railways executive has succeeded not least due to the exceptional timing of his entry into the chief executive’s office. And with an Initial Public Offering (IPO) to be launched next year, the company aims to be able to raise money on the stock markets from investors that will enable it to finance further expansion, particularly of expensive underground operations. In addition, the IPO may be regarded by investors, who have long been waiting for a solid vehicle to enable them to invest in diamonds, as providing that opportunity.
The situation has improved so significantly that the miner recently forecast $4.7 billion in sales of rough and polished diamonds for this year. It aims to raise its budget for investments to $740 million, while spending on prospecting will rise to $135 million. Investment in the building of underground mines, alone, will rise to around $250 million. Alrosa also aims to reduce its overall debts to $2.73 billion, from $3.13 billion in 2010.
The rise in rough prices and Alrosa's ability to secure high prices for its diamonds along with higher output enabled it to post a rise in net profit on the year in the first half of 2011 that was more than five times higher. Net income was $585 million compared with $105 million in the first half 2010. Alrosa said it produced 19.0 million carats and sold 19.1 million carats of diamonds with an average price per carat of $113 during the six-month period compared with the sale of 24.1 million carats and an average price per carat of $80 in the first half of last year. The higher amount of carats sold last year, when it produced 17.6 million carats, was due to the sale of stock accumulated during 2009, the firm said. By comparison De Beers' production for the first half of this year was 15.5 million carats. Revenue was down 2 percent for the period at $1.87 billion from $1.91 billion the year before despite the considerably lower amount of diamonds that it sold.
Alrosa aims to raise as much as $3 billion in the IPO which it plans to hold in 2012, says Andreev. "My personal target is to prepare the company so we’ll be ready to do an IPO in the middle of next year,” Andreev told Bloomberg Television. The firm has still to decide on where to publicly launch the company's stock, with London, Canada, Hong Kong and Moscow being the leading locations.
The firm will sell a stake of 20-25 percent and use the proceeds to finance expansion as well as to help repay its more than $3 billion in debt, according to Andreev. Such a launch would make Alrosa the world’s biggest listed diamond company. De Beers was de-listed in 2001, while gems make up small percentages of the production of the Rio Tinto Group and BHP Billiton Ltd.
Publicly traded diamond companies, while often regarded as promising, tend to be off the radar for many investors due to their relatively small size and limited trading levels. "It's difficult to invest in diamonds and feel that you are investing in the product with a large company that has huge potential," said one industry member. "It could be that Alrosa will change all that. This is a company that produces 25 percent of the world's diamonds, has a good understanding of the market, and is ambitious."
Andreev believes the miner, a state-owned company with 51 percent owned by the Russian government and 32 percent owned by the Russian Republic of Yakutia in the far east of the country, where the company’s mines are based, should be valued along similar valuations to gold producers. He says that analysts have priced it at between $6 billion and $12 billion.
The miner's output last year was 34 million carats which was ahead of the 33 million carats produced by long-time mining giant De Beers. Alrosa targets annual production of 40 million carats by 2018, aided by investment of around $7.5 billion in new mines, and going underground at its current open pit operations, Andreev said.
Given that a shortage of diamonds is predicted in the coming years as demand from China and elsewhere in Asia continues to strengthen, Alrosa would appear to have an even stronger future if it achieves its annual target of 40 million carats due to rising prices that will be an inevitable outcome of the shortfall in supply.
Demand from China and India jumped by 25 percent and 31 percent, respectively, in 2010, and De Beers believes that consumption of diamonds by China, Hong Kong, Taiwan, India and the Persian Gulf combined will account for close to 40 percent of global demand by 2015. That would be higher than the 38 percent of the market accounted for by the huge U.S. market.
Alrosa's ambitions in expanding its operations further in Yakutia were seen earlier this year when it won government licences for two new diamond deposits in the region. Alrosa said that the Verkhne-Munskoe deposit has three kimberlite pipes and total reserves of 38 million carats valued at more than $210 per carat at current price levels. The other deposit, Maiskoe, has one kimberlite pipe and reserves of around 12 million carats with a value of $90 per carat, and both are situated within its existing production facilities in the western part of Yakutia. “Developing the deposits will not require significant capital expenditure and will encourage further stability of Alrosa's production,” the company said.
But it is not just in Russia that Alrosa has diamond interests, owning a 32.8-percent interest in the Catoca mining venture in Angola. Indeed, it has operated in the country for more than 20 years. Earlier this year, Alrosa said the Catoca venture was considering seven more diamond concessions in Angola after posting net income of $111 million last year. Catoca produced about 6.7 million carats of diamonds in 2010, and had sales of $527 million.
“All interesting concessions we have seen were considered through the Catoca venture,” said Alrosa vice president Sergey Pushkin. “This does not mean that we will refuse to analyze a concession especially for Alrosa.”
For Antwerp, the link with Alrosa is of vital importance, as it is for Alrosa in providing a stable relationship with the world's main trading centre, said Antwerp World Diamond Centre (AWDC) CEO Ari Epstein. "The AWDC considers the special relationship it has with Alrosa, which is underpinned by our Collaboration Agreement from 2007, as a key strategic asset.
"But the ongoing dialogue and partnership between the world's largest producer in carats of rough diamonds and the world’s leading diamond centre is not only critical to the wellbeing of the Russian and Belgian diamond industries, but also to the business worldwide which relies on the roles we play in enabling the efficient and uninterrupted flow of goods through the pipeline,” he added.
