ALROSA mulls to expand its business through the acquisition of foreign assets, the Kommersant Daily reports. According to this edition, the diamond miner’s consultants from VTB Capital advised to start the process by buying Ekati, the Canadian diamond mine, which accounts for about 3% of the world diamond output in carat terms and about 5% by value. Ekati is the major diamond asset of BHP Billiton, an Australian-British conglomerate, which owns an 80-percent stake in Ekati Diamond holding the license to develop the minefield. Yet, it is doubtful that BHP will agree to sell the asset to ALROSA: VTB Capital tentatively estimated it at mere $1.0-1.5 billion.
The fact that ALROSA is considering the purchase of new diamond deposits was publicly stated last week [October 3-9] by Igor Kulichik, the company’s financial director. According to him, the company may buy certain assets and deposits from major players in the diamond industry, "assuming they decide to sell them." Moreover, ALROSA has already engaged a consultant, VTB Capital, to "get investment ideas for business expansion," a source from this investment bank told the Kommersant Daily. According to him, VTB Capital submitted its recommendations at the beginning of October. "We recommend that ALROSA start foreign expansion with the acquisition of Canadian diamond mine Ekati, which may become the basic platform for consolidation of other assets in this country, including diamond fields in the early stages of development," the source said, adding that VTB Capital estimated the asset at about $1.0-$1.5 billion. The presentation provides materials for further discussion with the client, the source said. Officially, ALROSA, VTB Capital and the London office of BHP do not comment this topic.
Ekati is the first and largest diamond deposit in Canada, whose development began in 1998. It accounts for about 3% of the world diamond output in carat terms and about 5% in value terms. The current resource estimate runs at an average of 0.5 carats per tonne of ore, while the underground reserves are estimated at 2.2 carats per tonne. Proved reserves suitable for open-pit development account for 4.8 million carats and those suitable for underground mining - 2.56 million carats. Revenues in 2010 reached $1.27 billion, diamond output was 3.81 million carats, capital expenditure ran at $127 million, while operating profit (EBIT) was $485 million.
Until now, ALROSA’s international projects in diamond mining were limited to Angola. The Russian company owns 32.8% in Sociedade Mineira De Catoca Lda established in Angola in 1992 to develop a kimberlite pipe of the same name (the other shareholders are Daumonty Financing, controlled by Lev Leviev, Angola’s Endiama, and Brazil’s Odebrecht). However, it is no secret that this country presents great political risks: this spring it was reported that Mr. Leviev’s business units had completed the sale of 18% in Catoca to China Sonangol, which resulted in passing the control over one of the largest diamond fields in Africa to the Angolan-Chinese alliance (see the Kommersant issue dated May 18).
The Canadian market is favorably distinct by low-risk business, said the VTB Capital source familiar with the details of the presentation to the Kommersant Daily. However, according to this source, the document does not imply that Ekati is currently for sale. Meanwhile, it is a major diamond assets of BHP Billiton, which owns an 80-percent stake in Ekati Diamond holding the license to develop the diamond field (another 20% is owned on a parity basis by Chuck Fipke and Stewart Blusson, the geologists who discovered it in 1991). “Given the high quality of the asset, BHP’s price expectations may be quite high,” said the source, adding that the “indicative estimate of Ekati at $1.0-$1.5 billion (15-20% of the value attributed to the business of De Beers) is approximate because the data to create a financial model is not available, while market analysts in their reports do not disclose detailed findings on the evaluation of the BHP diamond business.”
However, ALROSA’s move to reach the Canadian market may run into a number of fundamental obstacles. Thus, according to the law of Canada on foreign investments, any foreign acquisition of a Canadian company involving a transaction of more than CAD 299 million (about $280 million) is to be reviewed by the state agency on investments for compliance with state interests. Last November, the agency gave a negative opinion to a proposal by BHP Billiton to acquire Potash Corp, the largest Canadian producer of potash. In addition, the possible deal will have to be coordinated with the EU for compliance with the antimonopoly legislation, as 90% of rough produced at Ekati is sold via Antwerp.
Sergei Goryainov, a diamond industry expert of Rough&Polished, adds that Canada is a country with one of the toughest legislations in the sphere of subsoil use, particularly in the fields of ecology and rights of national communities living in the territory of projects under development. "This is not Africa, not South America, and certainly not Russia. At one time, De Beers faced tough pressure from the indigenous population of Canada. To be honest, I am surprised by the selection of this consultant for ALROSA," the expert said. On the other hand, he believes that ALROSA has some chances to get the Canadian mine: "For the world-scale mining giants like BHP or Rio Tinto diamond mining is a non-core business existing at the level of a division. For example, at BHP it is less than 3% of their total revenue. And from time to time there comes up information that these companies are ready to consider selling it off."
