The highly anticipated sale of a part of the state-owned stake in ALROSA may finally be held this year, if the decision will be made until June 25, Denis Kozhevnikov says on 1prime.ru. But the question remains whether the company is guaranteed to be an attractive investment or will turn into a "pig in a poke," especially taking into account a weak market or time factor.
Currently, it is supposed to float a 14-percent shareholding in the company (7% from the basket owned by the Russian government and 7% from the basket owned by the government of Yakutia, who now hold 50.9% and 32%, respectively) to be placed on the Moscow Stock Exchange in October or November.
BACKGROUND
The idea to make ALROSA public was first aired in 2010 by Alexei Kudrin, who was then Deputy Prime Minister and Finance Minister heading the Supervisory Board of the company. In his opinion, the funds raised during privatization could help the federal government to attract less borrowing from the international market, thus producing an overall positive impact on the economy.
However, the privatization of ALROSA, in addition to a number of coordinated approvals between government departments, also required an approval from the Government of the Republic of Sakha (Yakutia). In November 2010, ALROSA changed its type of business organization turning an open joint stock company from a closed joint stock entity for which Yakutia gave its consent, and in December of that year, the Parliament of Yakutia approved the amendments, according to which Yakutia’s stake in ALROSA could not be less than 25% plus one share.
In the opinion of the company’s management, for ALROSA in its new status of an open joint stock entity it will be easier and cheaper to borrow funds, while the company's shares will be freely available on the Stock Exchange at a market price. After its re-organization, the company planned to issue additional shares and carry out an IPO on the Russian Stock Exchange.
In late 2010, ALROSA’s President Fyodor Andreyev said that his company could float up to 20-25% of its shares on the Stock Exchange in 2012 in case of an IPO. ALROSA was going to use the proceeds of up to $ 3 billion for development and repayment of debt. However, later on the IPO was postponed due to improved diamond market conditions and the miner’s management focused on the privatization program proposed by the government.
TIME FACTOR
Currently, the price of ALROSA shares on the Moscow Stock Exchange runs approximately at RUB 32 per share, while their fair price, according to most analysts, is about RUB 40 per share.
If placed on the Stock Exchange, the company’s stock may go up by 20-30%, but given there will be no delay with such a placement, otherwise investors may lose interest in these equities, Ivan Fomenko, Asset Management Head at Absolut Bank, believes.
"Since the placement is to be carried out by Goldman Sachs, it is most likely that the price will be good, but any further growth will depend on the situation in the world diamond market. Speculatively, the company's stock is quite interesting and worth to be closely monitored. ALROSA’s shares may show returns of about 30% by the end of the year, but only on condition that they will be floated and everything will go as scheduled," Fomenko said.
Dmitry Mikhailov, Portfolio Manager of Renaissance Asset Management, also points to the time factor, which could have a negative impact on the share price. "The sale of 14% of shares in an IPO will attract interest to the company and increase its liquidity. On the other hand, in order to attract investors there should be a discount to its fair price, otherwise investors will have no incentive to participate in the placement. You must also take into account the unfavorable external environment - it is very difficult to hold an IPO during an economic downturn and fading interest in the stock market as such," he said.
According to Mikhailov, there is another argument in favor of neutrality of the IPO factor and it is time. Ever since it was reported that Yakutia agreed to offer the 7% to the market, investors have had enough time to react.
"To sell a stale piece of news is not easier than to sell stale fish or meat. If the placement will be transferred to the next year, much will depend on the reasons for the transfer. If investors will believe that the IPO was postponed solely due to the unfavorable external environment, then there is virtually no reason to be wary of a serious fall. On the contrary, if the IPO will be postponed because of any new disagreements and inconsistencies emerged at the federal and regional levels, the company’s shares may fall significantly in price," he said.
Yulia Oniksimova, an analyst of BFA Bank, sees two future scenarios and agrees with the views expressed by her colleagues. "In case of a final decision taken in appropriate time, the company has good growth prospects. During an IPO the company’s stock may reach RUB 41 in price per share, but in the future everything will depend on ALROSA’s performance. However, if the placement will be postponed, then its stock will be traded at its current level or even lower, according to our conservative forecast," Oniksimova says.
EXPECTATIONS
At present, there is no consensus on the prospects for these shares. According to analysts, the market capitalization of ALROSA can grow several times at the end of the privatization process in 2016 - up to $18-21 billion, compared with the current estimate running approximately at $ 7.5 billion. On the other hand, this estimate is unlikely to take into account the annual increase in the cost of production, the state of the diamond market in general, and possible instances of force majeure.
"An important point, which may affect the investment attractiveness, may be associated with the ability of the organizers to show that the company is ready to focus on the effectiveness of its core business and will not engage in non-core activities, such as insurance and air transportation, even when it gets rid of some part of such assets like gas and iron ore," Fomenko said.
In April, ALROSA signed an agreement to sell its 51-percent stake in the Timir iron ore project to Evraz Plc for $ 160 million. Now, the company is also in talks regarding its gas assets that can be sold in the near future for about $1.15 billion.
Oniksimova believes that if the company’s gas assets will be sold successfully, ALROSA may decide to pay out special dividends. “ALROSA has sufficient funds for operations. Therefore, part of the proceeds from the sale of assets may be directed for paying special dividends prior to an IPO to attract investor interest," she said.
In his turn, Andrey Tretelnikov, an analyst at Rye, Man & Gor Securities, said that ALROSA may be attractive in the long term. "Currently, the market is expected to experience a small deficit, since there are no new deposits. The company has no plans to significantly increase production, but will maintain the current volumes. The situation will become clear by the autumn, when Goldman Sachs will give a preliminary assessment. Now the estimates vary from $9 to $15 billion. Our fair price for the company is $ 1.6 or RUB 45-48 per share."
Summing up all the views, it can be noted that ALROSA’s stock is undervalued. However, only time will tell how the events will unfold. On the one hand, it is a company, which is unique, but given the state of the market, and in particular the diamond market, investments in this case could be a "pig in a poke."
However, this pig may turn out to be big and fat.
