Following ALROSA’s prospective initial public offering (IPO) can be confusing at times, says Avi Krawitz in his analysis posted on www.diamonds.net on February 10. While management remains understandably aloof in discussing the listing, its actions have been intent on driving up the value — if and when the offering takes place, It has that luxury for now, but once it goes public, ALROSA will need to do more to drive growth.
If there was any doubt about whether the on-again-off-again IPO will take place, this month has brought some clarification – or at least an update.
Alexey Uvarov, director of Russia’s Ministry of Economic Development, said last week that the government has made a final decision to exclude ALROSA from the list of strategic Russian companies. As a result, he reported that the government intends to sell a 14 percent stake in ALROSA, consisting of 7 percent from the Federal government’s stake and 7 percent from the Yakutian regional authorities’ stake.
Essentially, ALROSA entered the public fray in July 2011 when 9 percent of its shares were free-floated and began trading on the Russian Trading System (RTS) exchange. Many viewed this as the first significant step toward an IPO. However recent rumblings within the government have indicated opposition to the planned sell-off of a number of state assets, including that of ALROSA.
Press reports indicate that the regional authorities are trying to block the sale saying the company is not ready to go public. They stand to lose significant revenue streams should they relinquish shares in diamond miner. Sergey Filchenkov, an analyst at IFC Metropol, told Rapaport News that any such opposition should have little influence on the IPO plans, or its timing. In any case, the sell-off would still leave the Federal government with about 44 percent and the Yakutia regional authorities with approximately 33 percent combined. It may even raise the value of their stake in the long run.
Local analysts are bullish about ALROSA’s prospects, as they have good reason to be given the positive outlook for diamond prices. The company is the world’s largest diamond producer by volume and second to De Beers by value. Production in 2011 is expected to be in line with 2010 at around 34 to 35 million carats, but revenues are forecasted to have jumped by more than 30 percent year on year to about $4.76 billion in 2011, according to IFC Metropol’s estimates. Net income is expected to triple to around $1.37 billion for the year, while double-digit growth is also anticipated in 2012.
For its part, ALROSA has done what it can to raise its profile and value, assumingly with the IPO in sight. In fact, its revenues probably should not be that high. For most of the second half of 2011, ALROSA goods were considered the most expensive rough on the market as the company kept its high prices stable, even as demand fell. It was able to sell almost exclusively through its newly formed long-term contracts in the fourth quarter, while its ability to do so may have pleased potential investors more than it did the diamond market.
ALROSA is also playing up its strength in volume. Unlike De Beers, which appears content to work with its stable resource to drive up value, the Russian company is extremely carat conscious. Interestingly, while De Beers sells its rough in boxes according to a dollar value at its sights, ALROSA sells according to volume. The company reported this week that its aggregate diamond reserves increased by some 30 million carats in 2011 as exploration and mining licenses for five new diamond deposits were obtained. Management has increased its 2012 exploration budget to $168 million (RUB 5 billion), from $135 million (RUB 4 billion) last year.
The company is also streamlining its assets and embarking on a few sell-offs of its own. These include transportation and infrastructure operations that enable its mining activities. The company also recently formed an agreement for the joint development of three gas fields. Filchenkov explained that management is planning to sell 25 percent of the projects for about $250 million once they are operating and a further stake in the future. “We view the news as positive for ALROSA in the wake of its planned IPO in 2012-13 as it signals final realization of its strategic plans of a gradual exit from non-core assets so that it can focus on the development of its diamond assets,” he said.
The news is positive for the diamond market too. The IPO should bring greater transparency not only at the company, but to the industry as a whole. Historically, ALROSA has been a bit of an enigma. For a long time, it sold most of its production through a marketing agreement with De Beers, while also having the security of selling to Russia’s state depository Gokhran when it was unable to unleash its inventory to the market. Only recently, as IPO talk increased, has the company become more open about revealing its sales and production levels. It has been less forthcoming about its pricing policy.
There certainly is value in understanding what the largest diamond companies are doing and what their prospects are - which being public enables - be it De Beers, Chow Tai Fook or Tiffany. And ALROSA ranks with them. As with Anglo American’s ownership of De Beers and the recent Chow Tai Fook listing, taking ALROSA public will provide an important benchmark with which to measure the state of the market and investor sentiment toward the industry as a whole. In the Russian company’s case, there is even greater value in minimizing any government influence over the market.
Therefore, there is hope that ALROSA will be able to change focus once the IPO is out of the way. At some point it will need to provide more than just the large quantities of rough that it does and inject some creativity to the operation. The company has the potential to become an important brand and, like others in the industry, will need to show how it is adding value to diamonds in order to drive growth and ultimately shareholder value.
But it will require the IPO to gain the freedom to do that. Until it actually happens, the ALROSA IPO will likely continue to be a source of speculation while its management will be happy to let confusion reign. Either way, they need to let ALROSA list.
