News
ALROSA generated RUB 33.634 billion of net profit for 2012 under IFRS, up 26.2% compared with RUB 26.658 billion a year earlier. This is disclosed in the statement released by the company.
Comment
Alexander Morin, Analyst of OOO SOVLINK
ALROSA managed to finish 2012 posting strong financial and production results, the Finam News Agency writes. The company’s return on assets has actually not changed and remained at a high level (its operating margin in USD terms was 33%, EBITDA margin - 40%), while its net margin increased up to 22% from 19% a year earlier due to reduced financial costs and foreign exchange losses.
The growing demand for diamonds from developing countries resulting in higher prices for these minerals and improved quality and quantity of produced diamonds due to expanding underground mining, as well as the company’s possible interest towards joint ventures in promising diamond exploration and mining projects will remain to be long-term growth drivers for the company's shares.
In the updated assessment model for the stock of ALROSA we took into account the increased diamond output due to the consolidation of OAO Nizhne-Lenskoye and minor adjustments in the company’s cost forecasts.
In early 2013, ALROSA’s subsidiary acquired 51% in OAO Nizhne-Lenskoye, whose annual diamond output is about 1.7-2 million carats. The acquisition will have a positive impact on the operating and financial performance of the company in the long term and may turn into one of the drivers for ALROSA’s stock. However, investment costs will inevitably increase along the way. Thus, we have previously suggested that ALROSA will annually spend about $ 700-800 million in capital investments, but due to the consolidation of OAO Nizhne-Lenskoye and because of investments in the natural gas assets, earmarked by the company for future sale, its annual forecast CAPEX increased to $ 800-900 million, and may continue to grow.
Since ALROSA plans to reflect its consolidated interest in OAO Nizhne-Lenskoye in the results for 2013, we have revised the assessment model for the company’s shares, as well as our forecasts for its financial results. It is expected that the company will produce and sell about 36.21 million carats of diamond in 2013, while the average selling price of industrial and gem-quality diamonds will grow by 3% and 5%, respectively. Thus, due to the projected increase in prices and sales our forecast for ALROSA’s revenue in 2013 has been increased by 6% compared to the previous one.
However, forecasts for EBITDA and net income have been decreased due to expected higher operating expenses and interest expense on debt service. Hence, we have reduced the EBITDA forecast by 4%, and net profit by 14%.
We believe that in 2013 the company’s total debt will remain at $ 4 billion, and the ratio of total debt to EBITDA will be about 1.89x, while in 2012 it was at the level of 2.06x.
As before, among the key risks of investing into the shares of ALROSA we identify risks related to higher production costs due to the transition to underground diamond mining from alluvial mining. In 2012, the company’s cost of diamond production reached $ 69.64 per carat, which is above the level of 2011 by 12%.
The diamond miner’s business also runs the risks of increased debt burden. Although ALROSA, as we expect, will be able to maintain a total-debt-to-EBITDA ratio of about 2x, we believe that the company’s possible further acquisitions, participation in joint ventures, etc. may significantly affect the growth of capital investment and the amount of debt.
During 2013, the sale of the 14-percent interest (7% from the federal package, and 7% from Yakutia’s share) will be the main driver for the stock of ALROSA to grow in value in the course of privatization. We believe that since ALROSA is a one of a kind diamond mining company, which occupies a key position in the diamond market and has a significant market control (about 30% of world production), it may be of interest to a wide range of investors. The most favorable scenario to increase the company’s value will be to place its stock among a large number of market players, which may produce a positive impact on the overall liquidity of shares.
We have updated our assessment of the target value to be reached by the stock of ALROSA increasing it to $ 1.22 from $ 1.06 per share, while maintaining the BUY recommendation. The increase in the fair price of ALROSA is mainly due to the decreased discount rate and the extension of the forecasting horizon. Based on this estimate, the target price for the shares of ALROSA is 20.73% above the current market price.
