After ALROSA held a meeting of shareholders on June 29, its President Fyodor Andreev gave an interview to corporate mass media published by yakutia24.ru.
Mr. Andreev, your company held an annual meeting of shareholders. There are lots of events, news and discussions. How do you assess the state of the company at the moment and its future potential?
This issue is of global nature and largely related to making the company public and placing its shares on the stock exchange. The company's value is now generated by such factors as its leading position in diamond mining (34 million carats per year), increased sales in 2012 ($ 4.6 billion) and defining strategy for further development. We believe that the company is making the right steps in its development. For example, recently bought OAO Nizhne-Lenskoye will give us two million carats of diamonds this year, bringing the company close to $ 5 billion in sales. I would like to remind that De Beers’ rough sales last year reached $ 6 billion. And for us this competition is a good driver. Our company is restructuring its non-core assets to a great extent. We sold a 51-percent stake in the iron ore project of Timir to Evraz and we are currently selling our gas assets...
The work gets going in earnest, and we may tell our investors and shareholders with confidence that the company has a value growth potential. And it's big enough. The strategy we adopted until 2020 is targeted at driving output to 40 million carats! This is a fairly conservative strategy. We do not expect any fits and starts. And we cannot say that the company’s value will go up 30%-50%. But every year (and this can be seen), the company adds 3% to 4% to its major economic and financial indicators. In other words, it is a strategy of organic and slow growth in the company’s value.
Last year it was said that the company faced a decline in demand for diamonds. Now the situation has changed. What was the performance of your company in the first half of this year?
The fall in demand for diamonds in the past year was significant. Without the help from Gokhran and the Ministry of Finance, which increased their plans to purchase goods from the company, we would not have achieved our targets. The plan was fulfilled only due to the support rendered by the state. But the year’s start was very positive, although the second quarter saw a seasonal slowdown due to the nature of the jewelry and diamond cutting industry. The results achieved in the first half of the year were very good, as we sold $ 2.5 billion worth of diamonds. This is a record. Possibly, we may be able to reach even a $ 5 billion level of sales by the end of the year. It all depends on whether the markets will be hit by financial turmoil comparable with that happened in Greece and Cyprus. However, my mood is very optimistic.
It was decided to carry out a radical reduction in the composition of the company’s Executive Committee. What prompted to take this decision?
The decision was prompted by criticism from the Supervisory Board, which is partly true. Having more than 20 members means a not too much efficient structure. The Executive Committee fulfills a representative role: it presents corporate budgets. There are no lively debates or clashes of opinion at its meetings. So we decided to reduce the number of its members to 13 people. To be honest, this did not make the Committee workable to the extent of what I would like to see it. But this is an ongoing process in the company, and this decision is correct (all the best practices suggest a number from 7 to 13 people on the board). This is not the final process, and we will go down this path, so there will be rotation among Committee members and testing new ways.
So, the reduction of the Committee was not aimed at specific persons, but it was conceptual?
Of course, conceptual! We tried to functionally identify those people who run large enough lines of business. Speaking of the staff, we take into account the contribution of each participant in the work of the Committee to single out those who speak more professionally and who are able to defend their positions. For example, I could name Ravil Sanatulov, who is always standing his own ground in spite of everything. This is the reform which is necessary to be implemented, so to say, in people’s heads, including your own.
The state of industrial safety appears to be one of the major challenges facing the company. What is your take on this and what is the aim to be reached?
This is still a major challenge, especially in a period of transition to underground mining. There are problems at the Mir Mine, where wrong design decisions were taken at one time. When we commissioned the underground mine to Vladimir Putin in 2009, it was believed that water inflow will not reach such a level. The reality turned out harder. We conducted a research and practice conference and invited scholars from around the world. It was found that our expectations were utopian. And now we are changing the drainage project and we are going to reconstruct the open-pit mine. Is it possible to solve this problem immediately? No. But we are working hard to solve our problems. If you study the statistics, we had 40 accidents in 2007 and a total of 26 in 2012. But there were 24 in 2011. So we still cannot cope with the situation, and there are real people behind these numbers...
Yes, sometimes we suffer setbacks and we make errors. But I believe that our engineers are now sufficiently focused on the problem. There is understanding, there are solutions. We need a balanced approach. The company is ready to invest in new clothing and special equipment, upgrade technology and production. When going down into the mine, people told us that the equipment and machinery, where they work, are past all the normal depreciation terms. Now we are increasing investments in these areas. This is part of our strategy.
On the eve of the meeting of shareholders, the Russian Federation Government discussed the changes in the privatization schedule for companies in which the state has its share. They also discussed ALROSA...
The government is discussing such giants as Rosneft, Sberbank or VTB, and we are somewhere at the very end... I have carefully reviewed the records of the government meeting, and there were no discussion as such there. We can say that their new approach is actually our old approach that was agreed with Alexei Kudrin and the former government of the Russian Federation. That decision was taken by the Supervisory Board of our company, which had the courage to offer it. We said that Russia must not sell its 51-percent interest in ALROSA until 2016 (to exit from the company). It is possible to reduce its shareholding to a blocking stake. A similar decision was taken by the Parliament of Yakutia. Thus, the major shareholders will be able to exercise joint control.
Since everyone considers the "7 + 7" deal to be agreed upon, the question is what comes next? I do not want to specifically discuss this issue here, because life will put everything in its place. We have to see how the company will operate with minority shareholders, which will already have a 14-percent stake, how major shareholders will co-exist and how much efficient this work will be. Time will tell what kind of interaction mechanism minority shareholders will have.
The attractiveness of any company depends on the ability to make profits and pay dividends. At the same time, ALROSA carries a huge social function. No private investor would be able to create such a diamond mining company, which was created by the Soviet Union. What will happen to the social policies pursued by the company after its privatization?
The Government of Russia and Yakutia say something like: "We must strive to ensure that the company is focused on diamond mining, while the social infrastructure in the Republic of Sakha (Yakutia) should be maintained at the expense of its budget." This is it, the perfect picture. How to reach it? It's a long way, and the reform will take decades. I believe that it will be successful. We are very carefully discussing our plans concerning each asset. It is important to preserve a pay-your-way economic model, even if at the expense of subsidies. Each step in this direction brings about much debate, both in Il Tumen and in society. Among market economy adherents, socialists, communists... There is a "but" concerning all this. We have to do it without a dramatic loss of jobs and avoiding social conflicts. Any discussions, any disputes are accepted.
Two weeks ago, the media spread your statement that you think African projects are very promising and ALROSA will be there to invest $500 million. What kind of project is it and where will you take money for it?
You know that we have long been working in Angola. The company has a successful project called "Catoka," which is producing 6.5 million carats. We have partners there, and these are a Chinese fund, the Government of Angola and a Brazilian company. We have received $300 million in dividends from this project during its entire history. Simultaneously, we entered in not sufficiently successful projects, where a comparable amount of money was written off. This caused a certain shock, and we even discussed the option of selling our African assets. The Angolan projects have been saved largely due to the enthusiasm of Sergei Mityukhin and Victor Ustinov, who seriously considered the history of diamond projects in Angola and studied the maps of the Natural Resources Ministry in this country, having identified as promising those placers, which exist along the Kwanza River. Their research led to the conclusion that this area is very promising in terms of finding primary deposits. We discussed this with our Angolan partners and decided to create a new joint venture, 50 to 50, with the Angolan side. The samples that we have seen are high value stones. The structure is very similar to the Nakyn area [in Yakutia]. Probable reserves estimated by our geologists go up to one billion carats. The cost of open-pit diamond mining in Angola is $ 10 per carat, while here it is $ 60. However, the amount of $ 500 million in investments is so far tentative. The deposit is still to be found. We assume to invest about $60-70 million in exploration in the course of three to four years. If there is a find, then we shall have to build a plant, and this is what can really be as high as $ 400 million. Naturally, we took into account the errors of the previous period when the company, as a team of young scouts, rushed to develop poor diamond fields. Now the approach is different.
Recently, at a meeting of Il Tumen, Yakutia’s Parliament, and at the shareholders' meeting of ALROSA Yuri Doynikov heavily criticized ALROSA, addressing some of the claims to you. Can you comment on this?
I’ve said that I consider it improper for me, being President of the company, to enter into a public debate with the current Vice President. This is a gross violation of the corporate culture. The Russian Government has come forward with an initiative to eliminate "golden parachutes" for the top managers of state-owned companies. The Supervisory Board of ALROSA took a similar decision. We, including myself, have agreed to changes in our contracts. Yuri Doynikov refused to do so. According to the decision of the Supervisory Board, if someone refuses to sign a new contract, this person is excluded from the Board and this triggers legal proceedings for the termination of his or hers contract. That's the whole story. I know that the federal law which is soon to be passed will even be more stringent than those decisions that have been adopted by the company. I believe that we cannot make exceptions. Everyone has the right to revolt and say, "This is mine." So, either you play by common rules, or by your own, but in a different place.
What would you wish to your workers?
We are to face some difficulties in diamond mining, in sales and in dealing with non-core assets. We have not yet created a playing team, which usually consists of like-minded people and is able to achieve great results. There are many challenges. But at least I see the backbone of this team having such people as Sobolev, Ryaschin... with whom we can wonder, “Why not outplay De Beers?" I wish that everyone in this company could feel the team spirit and did everything possible to win. This is the most important thing in any corporation. We started the conversation with a question about the value of the company. So, the value may be increased only by a team of players. If you are dragging a cart in different directions, it means that so far we have no fiesty team ready for open and honest debate. But it must be made.
