According to Dinnur Galikhanov, an analyst of the Aton Investments Company (www.finam.ru), the report released last Monday by ALROSA for the second quarter and first half of 2013 in line with the IFRS produced generally mixed feelings. The analyst says it has both positive and negative aspects.
The latter, Galikhanov says, in my opinion, include the decline in diamond sales in the reporting period, which was below our expectations. The company produced much more diamonds in the second quarter than it sold. It turns out that ALROSA left a very large amount of goods unsold keeping them in inventory. At the same time, I believe that it is too early to sound the alarm. This happened before - for example, in the third quarter of 2012 the company’s stocks were even bigger than now.
At the same time, the fact that the company was not able to sell everything on the market is alarming. Especially given the negative expectations for the third quarter of this year. There is indirect evidence that demand in the third quarter is going to be far worse than in the second. And it is not clear why this happens: rough prices in the second quarter of 2013 were quite good, higher than those in the first quarter. Perhaps the company is trying to reduce supply and maintain a good level of market prices for rough diamonds.
On the positive side, I would like to note that ALROSA managed to keep good control over expenses. They have a high EBITDA index, which was slightly above market expectations. The EBITDA margin was 45%, which is very good. If the company will keep the costs under such efficient control in the second half of the year, I think ALROSA will be able to preserve EBITDA in 2013 at the last year’s level.
As for the diamond company's share price movement, I think the market will nonetheless react positively to the issued report, given the miner’s positive EBITDA. In addition, ALROSA’s stock movement will be influenced by other news, besides its reporting data. For example, on Monday there came the news that Rosneft was ready to close the deal with ALROSA for purchasing the latter’s gas assets. If the deal will be closed, this will be a positive highlight in a purely market sense. Fundamentally, the news will not particularly affect the financial condition of the diamond miner, because a while back these gas assets were bought on credit and the money that will be received from their sale is likely to be used to sink the company’s debt. But the market will perceive the news positively - the less debt the company has, the more credible its stock looks to investors.
In addition, the market is discussing the possibility of floating a 14-percent stake from the state ownership held by Yakutia. So far at least, the government has not reported the cancellation of those plans. The situation in the stock market has improved in the mining sector and since early July its shares were going up in price. Thus, the market situation develops positively enough to float the state share in the company. And if in the near future the situation will not change dramatically, the placement is likely to happen. Its success will depend on the offering price. In the case of too high a price, ALROSA may face an initially negative movement of its shares due to their increased liquidity.
Also, there are still a lot of risks for the company associated with the development of the Udachny underground mine after the transition from open pit to underground mining. ALROSA’s stock movement in the coming months will depend on how much this project will be successful and on the company’s ability to stay within the budget and timeline.
