ALROSA offers banks to create an investment fund with a guaranteed income, writes Olga Alekseeva at www.gazeta.ru. Gokhran, which purchased diamonds from ALROSA during the last crisis, won 40% of investment returns over two years. But such a situation looks more like an exception: it is difficult to make diamonds a full-fledged investment vehicle, as skeptical experts believe.
ALROSA wants diamonds to play the role of an investment instrument. The company offers banks possible options to create an investment fund, the company’s head Fyodor Andreev said on Tuesday. For those who invest money in the diamond stock ALROSA is prepared to guarantee that in a year or two they will be able to sell their diamonds on the market at a price not below a certain level. According to Andreev, this idea is being "closely examined" by a number of Russian and foreign banks.
This proposal was discussed with VTB as far back as 2009, but it never materialized. Meanwhile, practice has confirmed the viability of this idea, according to ALROSA.
Andreev gave the example of Gokhran, which bought $1 billion worth of diamonds in the first half of 2009 from ALROSA, which lost its clientele because of the crisis. "The state, having bought diamonds from ALROSA to the State Fund, earned about 40% per annum for two years," the company’s CEO boasted.
In recent years, the diamond market experienced significant price fluctuations: after the crisis slump diamonds rebounded 40% and some categories of diamonds by 50% exceeding pre-crisis levels for some items at the beginning of this year. This allowed the diamond mining company to increase its net profit 4.2 times under IFRS in the first half of this year to 26.267 billion rubles. In 2011, ALROSA expects a revenue of about $5 billion.
The proposal to create a diamond investment fund in part is dictated by corporate interests of ALROSA since this may facilitate increased demand for the company's goods, as experts are convinced. In part, this is beneficial for Russia because if diamonds will be considered as an instrument for foreign exchange reserves of Russia, Vnesheconombank (VEB) may be chosen as an operator of such transactions, suggests Alexei Kozlov, a leading analyst at the Department of Analysis and Risk Management of the UFS Investment Company. But in general, analysts are skeptical about the project of ALROSA.
In the crisis period Gokhran purchased diamonds from ALROSA at non-market prices to support the company, to keep the infrastructure in Western Siberia and arrest a possible social upheaval. In the end it was a profitable investment, but how much this situation is typical for the diamond market in general and whether it could serve as an argument for investing in rough and polished diamonds appears to be a big question, Rough&Polished expert Sergei Goryainov says. "At a time when the market is suffering an obvious shortage of reliable instruments for investing and saving money in a crisis, such instruments may attract attention, Kozlov agrees. "But diamonds are one-of-a-kind goods, and it is difficult to create a vast and liquid market for this kind of instrument," the expert said.
Diamonds are hard to evaluate because they have several thousand properties, as opposed, for instance, to gold, which is assessed only by weight and metal content in the ingot. It is this circumstance that does not allow diamonds to become a full-fledged stock-exchange and investment product, Goryainov agrees.
In addition, the diamond market is quite narrow, so there is a problem of low liquidity, the expert adds.
The idea of such funds began to emerge in the mid 1970s. Then, in particular in Antwerp, there were attempts to create a special "diamond basket" and later derivatives based on diamonds, followed by diamond-based mutual funds. However, all these concepts have not been successful. ALROSA's chief competitor, diamond giant De Beers, has almost completely refused to consider any versions of diamond-based investment funds.
