ALROSA’s auditing is completed
(www.kommersant.ru) – The Kommersant Daily happened to know the results of a comprehensive audit of ALROSA carried out by Russia’s Accounts Chamber, whose Collegium will meet today to discuss the related report. The audit, during which the Chamber examined the biggest deals concluded by the diamond miner and its subsidiaries in 2008-2014, revealed the ineffectiveness of a number of decisions regarding their borrowings policy and management of non-core assets. Actually, this audit deals with the management decisions taken by the team of Fyodor Andreev, ex-president of ALROSA, but experts point out that the majority of non-core transactions were generated by the previous management team.
The fact that the Accounts Chamber has completed a comprehensive review of ALROSA was made known to the Kommersant Daily by two sources familiar with the situation. According to one of them, the review, which lasted four months, covered all the financial and operational activities of the Group in 2008-2014 and was finalized on January 30, 2015, after which the parties were busy working on a disagreements protocol in the course of one month. The auditing report shall be submitted to the Accounts Chamber Collegium for consideration at its nearest meeting. The Chamber’s press service said this issue was included in the order of business for the meeting to be held today. ALROSA declined to comment.
The audit of ALROSA was authorized by President Vladimir Putin, but it had been initiated by Deputy Prime Minister Yuri Trutnev, who oversees the industry. Last summer, he sent a letter to the President with the motivation of his reluctance to sign a directive on the reappointment of the head of ALROSA. The official, in particular, questioned the effectiveness of Fyodor Andreev as head of the company and offered to test the feasibility of a number of major transactions, including the IPO carried out in 2013. "In fact, the audit is dealing with the management decisions taken by the team of Fyodor Andreev, who came to head ALROSA in 2009 and resigned last fall for medical reasons (and then died in January, 2015 – Kommersant)," said one of the above sources.
According to the daily’s sources familiar with the auditing report, the auditors have no formal claims to the IPO held by ALROSA. "The preparations for privatizing the company were completed in full, but there are claims regarding the program to increase the investment attractiveness of ALROSA. Basically, the report points to the ineffectiveness of a number of long-term investments," one of the sources said. In 2008-2014, ALROSA sold 19 non-core businesses, having gained 1.3 billion rubles, but a number of them were sold below the market price in the opinion of the Accounts Chamber.
Thus, ALROSA Hotels, ZAO (having at its disposal four four-star hotels in Moscow, St. Petersburg, Arkhangelsk and Anapa with a total of 30,000 rooms, as well as a pleasure boat in Yakutsk) was sold in 2013 at a public auction won by Nord, OOO, which paid RUB 351.1 million. However, this amount exceeded ALROSA’s development investments in these assets only by RUB 125.5 million. The deal to sell a 92-percent stake in Terra, OAO, a northern mining and exploration company, was closed in 2012. The amount involved was RUB 16.6 million, which is by RUB 15.6 million less than ALROSA’s investments in the authorized capital of Terra. There were no dividends from the participation in both companies.
Another claim to ALROSA regards its inefficient borrowings policy. As it was established by the audit, the company’s credit burden as at December 31, 2014 reached the highest level since 2008 (its debt ratio was 0.8 with the critical level being 1), mainly due to the devaluation of the ruble – 90% of the company’s loan portfolio in 2008-2014 was in USD. It is due to the revaluation of its debt portfolio while posting results in 2014 under the IFRS that ALROSA may have a net loss of RUB 12.55 billion on the backdrop of a revenue reaching RUB 204.7 billion (see the Kommersant Daily issue of February 18, 2015). ALROSA’s net debt was also affected by the deal to buy back its gas assets (Geotransgaz and Urengoy Gas Company).
Sergei Goryainov of Rough & Polished believes that ALROSA’s borrowings policy should be viewed in the context of its economic performance. During the five years of work carried out by Fyodor Andreev, ALROSA’s diamond production increased by 12%, its revenue more than doubled, its profits went up 9 times, tax payments almost doubled, and dividends surged more than 40 times. The total debt / EBITDA ratio fell more than 2.5 times, "indicating increased financial sustainability of ALROSA." The expert emphasized that the majority of non-core acquisitions were made before 2009. "Fyodor Andreev came to the company burdened with costly projects not related to diamond mining,” the expert said. “The Accounts Chamber is right pointing to the wrong investment decisions, but to be fair it should be noted, who took those decisions." For example, the gas assets were bought by ALROSA’s ex-president Alexander Nichiporuk. In the crisis of 2008, one of the measures of state support rendered to ALROSA was the acquisition of these gas assets by the VTB Group on condition of a buyback and the agreement was signed by Sergey Vybornov, who succeeded Mr. Nichiporuk.
