(RBC-TV) - The world's largest diamond producer, ALROSA, has put into operation the Udachny Mine. Its nameplate capacity is 4 million tonnes of ore per year. It is the largest underground mine in Russia. ALROSA expects that this asset will increase the company’s output by more than five million carats per year. Fyodor Andreev, President of ALROSA, told the RBC-TV Channel about the plans, prices and risks associated with diamond mining.
Pavel Fyodorov, Special Correspondent: Mr. Andreev, thank you very much for taking your time. The first question I would like to ask: How much important for the company is the current project that you have launched?
Fyodor Andreev, President of ALROSA: Well, probably there are two main reasons. The first reason is that our strategy is aimed at reaching the benchmark of 40 million carats a year by 2020, and the opening of this mine, as well as the opening of our mine in Arkhangelsk last March, is part of this strategy. The nameplate capacity of the mine is six million carats. For that matter, it is the operation, which caused the greatest number of questions on the part of investors. This is because we are going to use the caving method at this mine in contrast to our other three mines. Our other mines are using the stowing technique. The production scale at Udachny is large enough, so we believe that this is a great event for the company. Moreover, it is a great event for the town there. There is the second aspect in all this, which is social. There is an ore-concentrating factory not far from here, named A12. At one time, it used to process 12 million tonnes of ore. The concentrator employed 7,000 people. Currently, its operations are being reduced. So, not to virtually close this town, if we are to call things by their names, we decided to build the underground mine.
At the RBC Channel, we are continually interested in money issues. Therefore, I would like to ask you about the level of investments put into this project.
In fact, every underground mine costs us on an average $1 billion. However, this project proved to be more labor-intensive. So, we have invested RUB 35 billion. Additionally, we shall have to invest about RUB 22 billion. This will exactly cover the start of the second stage of operations and ramp up production to 6 million carats fr om 1.5 million.
If we talk about the industry in general, on a global scale, won’t this increase in production result in a market glut?
No, because this was the main task for us starting from the 2000s and in fact our strategy… There was a period, when ALROSA went into production of gas, when it made a bash at mining iron ore and wanted to tackle gold. There was even a general concept that the company will be fading in its development, as the Soviet-time mines will be retiring, while no new mines will be launched. Underground mining is more costly. So, let's say, that our company took up this challenge. Over the past 10-15 years, we built four underground mines and began operations in Arkhangelsk. Actually, it is not an absolute increase in production, because, for instance, we shall complete open-pit mining at Udachny during the next year gradually replacing it with underground operations.
Is ALROSA still mulling plans to enter other markets, like gas and oil?
Currently, we consider all this to be non-core assets and are busy to sell these operations. We sold 51% in our iron-ore project to Evraz. We are negotiating our gas assets with Rosneft. It is part of our strategy, and we shall focus only on diamond mining.
At what stage are these negotiations?
With Rosneft? Next winter we shall have to bring drilling rigs to the gas field using the winter road, make two wells to verify natural gas reserves, and then we shall return to negotiations in March.
Speaking of competition, how much confident does ALROSA feel itself on the global scale, without taking Russia into account, wh ere everything is clear in this respect?
In fact, it feels confident, if you look at the picture, wh ere De Beers produces 31 million carats and we produce 37 million carats, which, in essence, is an oligopoly, isn’t it? Indeed, these are two major players, which largely control the market.
What is the state of the sales market? Is the crises effect felt there?
You know, the market was pressing us very hard in 2012 and 2013, as prices were in fact flat at that time. And there was even a drop in prices in 2012. But this year, America began to grow and the situation stabilized with India and China demonstrating essentially double-digit growth rates in consumption of diamond jewelry. The market is definitely going up. So, our forecast for this year is positive.
How about a forecast for prices?
As for prices, from the beginning of this year we, in fact, offset the discount, which we made in prices last year. It is about 3-4%. We have straightened the market. Now there are actually all the prerequisites for raising prices, but I think that this price raise will not exceed 3-5% this year.
We have our own diamond manufacturing operation. There are also a number of companies engaged in diamond cutting in Yakutia. Their production levels vary depending on the situation from $ 700 to $900 million. Because labor costs are high here, unlike in India and China, the specific feature of Russia is that it is efficient to cut stones from 5 carats and above. It is the same thing in Europe and in the United States. Hence, the illusion that you can cut everything produced by ALROSA in Russia seems to be a project not thought-out thoroughly. We did appropriate calculations. And if, contingently, we shall cut all the 37 million carats in Russia, then by the end of the year this will result in a loss exactly due to labor costs.
In light of the recent events, I cannot miss the opportunity to ask a question about possible sanctions. Diamonds were on the list of possible economic restrictions. In your opinion, what will happen if such sanctions will finally be applied?
Of course, we analyzed various stress scenarios. Sanctions may take different forms, including the prohibition to trade in dollars and so on and so forth. Our company is operating through Hong Kong and Dubai and we have an office in Israel. Our customers are mainly from around the whole world. In other words, if sanctions will be based on the territorial principle, it will not be difficult for us to move trading operations anywhere in the world. If they will be more serious... We shall respond in line with a situation.
Many players in the oil, gas and gold industries say that they have a big problem related to lack of qualified personnel. Are you facing such a problem as well?
With regard to higher engineering staff, yes. This is generally a problem, let’s say, for entire Russia. But in recent years we raised salaries for engineers, and basically the situation is improving.
What is the average wage at ALROSA today?
At ALROSA it is 90,000 rubles a month. But starting from the level of an engineer it may be considerably higher.
Mr. Andreev, thank you very much for your time. We wish you good luck.
