ALROSA in its annual report for 2011 examines the risks associated with the implementation of its current operating activities and investment projects.
In particular, the Russian diamond miner believes that the risks for the industry associated with the current financial crisis can be regarded as average. The company also does not anticipate reducing its production of rough diamonds, given the commissioning of new mines.
The company does not expect lower consumption of diamond jewelry in the short term and equally does not see any possibility for a decrease in its sales and profits, even taking into account the risks associated with the replacement of natural diamonds by high-quality synthetics, which in the medium term are estimated as minor.
Pointing to the high import duties on foreign processing equipment in the domestic market, ALROSA believes that this situation cannot significantly affect the company’s final results and simultaneously does not exclude the possibility of reducing the duties after Russia will join the WTO. In addition, the diamond miner expects that in this case the country’s tax laws will be softened.
As it is noted in the report, Russia's economy is vulnerable to market downturns and economic slowdowns in other parts of the world, which made its government to draw a list of strategic enterprises, which are guaranteed to receive state support in obtaining state credits. ALROSA is among the 295 such companies. Thus, in view of the existing risks and uncertainties in financing the state has undertaken to offset some of these risks.
The company also points to the fact that the bulk of its assets is located in the Republic of Sakha (Yakutia), considered to be a politically, economically and socially stable region of Russia, as it is evidenced by the ratings assigned to Yakutia by Standard & Poor's and Fitch.
In order to reduce foreign exchange risks associated with fluctuations in USD/RUB rates, ALROSA developed and implemented a five-year program of hedging such risks. In addition, the company attracted long-term and short-term borrowings primarily in U.S. dollars, that is in the currency of its revenues.
Interest rate exposures are not material to the company due to the fact that most of ALROSA’s accounts payable are made up of long-term ruble-denominated bonds and Eurobond loans, for which interest rates are fixed and not subject to change until final repayment. ALROSA has a positive credit history, which makes it possible to borrow timely and on favorable terms.
On the whole, the company estimates inflation risks as average. Changes in the consumer price index produce a definite impact on the company’s breakeven level and consequently on its financial situation, however without direct relationship. Critical inflation values are much higher than the actual rate of inflation forecast by Russia’s Ministry of Economic Development and stay at a 40-percent level and above. But upon reaching this level the company will take measures to reduce accounts receivable, as well as to reduce costs and accounts payable.
Due to the dynamic nature of the diamond business the company’s directors pursuing the strategy of liquidity risk management maintain sufficient cash funds and preserve financial flexibility providing for available credit facilities and expected cash flows from operating activities, monitoring current forecasts for the reserve of liquid assets on a monthly and annual basis.
ALROSA is also continuously monitoring legislation in all areas of its activity, which makes it possible, if necessary, to adjust business operations, thereby reducing legal risks.
Currently, the company is not involved and is not expected to take part in any judicial proceedings that could have a material impact on its operations.
Rough & Polished
