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Russia
By Anastasia Serdyukova
Russia’s largest diamond miner ALROSA went public at the end of October on the Moscow Stock Exchange. The initial public offering (IPO) consisted of 16 percent of the company’s shares belonging to the Russian government and the Republic of Yakutia. The target price per share ranged from $1.08 to $1.18, according to the company’s presale estimate available at press time. This would place the miner’s capitalization at $8 billion to $8.6 billion.
In the days preceding the setting of the price on October 28, Interfax reported that order booking for the IPO was weak, leading to speculation that the offering would come in at the lower end of the price range. The order book was scheduled to close October 25 so the possibility remained that big investors and institutional investors could place large orders at the last minute.
“Going public will mean more transparency for the company,” said ALROSA’s representative. The money from the IPO will not go to ALROSA’s balance sheet because the stock belongs to the shareholders, but part of the sale proceeds will be used to develop infrastructure in Yakutia. ALROSA also sold its gas deposits in Yakutia to Russian oil and gas company Rosneft for $1.38 billion. The money from this sale will be used to pay down the miner’s outstanding debt. Both the IPO and the gas deposits deal are part of the company’s strategy to sell off its noncore assets so it can focus on one type of production: diamond mining.
ALROSA mined 9.9 million carats in the third quarter of 2013, 9 percent higher than for the same period in 2012, while its overall production for the year’s first nine months reached 27.9 million carats, 6 percent higher than in 2012. The company is planning to mine 36.4 million carats by the end of 2013.
The miner implemented a number of measures in response to the continued stagnation in the diamond markets. In September, the company corrected prices for its boxes of jewelry-quality diamonds. Even though the company increased prices for some categories, overall, prices were 4 percent lower. Prices for industrial diamonds were 1 percent higher in general.
ALROSA also allowed its clients to refuse up to 20 percent of the volume they were contracted to take in September 2013, which is a higher percentage than in previous months. It extended this provision in October. Starting in July 2013, the company also allowed delayed payments of the value-added tax (VAT), which is 18 percent currently, for Russian manufacturers. That provision also has been extended to the end of 2013.
Manufacturers say some types of rough are overpriced to the extent they become unprofitable to polish, especially 1-carat stones. “The price of a 1-carat polished stone doesn’t cover the price of rough from which it was cut. The rough that is the most interesting to polish at the moment is 4-grainers to 6-grainers, which produce diamonds of .30 carats to .90 carats,” said Alexander Malinin, the head of Brillianty ALROSA, the company’s manufacturing facility, which buys stones on the same terms as other manufacturers. Nikolay Afanasiev, the head of sales for the country’s largest manufacturer, Kristall Smolensk, said that 4-grainers to 6-grainers are still 3 percent to 5 percent overpriced.
The other problem is that companies in India are selling diamonds at “dumping” prices because they are experiencing liquidity problems. Manufacturers say that even though Indian and Russian gems are in different niches because of the polishing quality, this dumping creates additional pressure on Russian companies. “The pressure from Indian manufacturers is strong in the categories smaller than .30 carats, which are traditionally produced in India and which are not the major category for Russian manufacturers,” said Malinin. “The pressure in .30 carats to .90 carats is much less, although it is still felt.” Afanasiev said that his company is not lowering prices, but it is carefully selecting what rough it takes. “This is a low market at the moment and this situation may last for awhile,” he said.
The best-selling category of diamonds is between .30 carats and .90 carats of VS to SI quality. Fancy colors of varied clarity are selling well. As for shapes, princesses are not doing as well as they used to. Some manufacturers attribute this to the stagnation at the U.S. market, where such stones are popular.
Russian companies say that the 16-day shutdown of the U.S. government did not affect their sales, but they are concerned that a prolonged political crisis will have a negative effect on the economy and thus diamond sales. That concern is heightened by the fact that autumn is traditionally the high season because jewelers are getting ready for holiday sales at the end of the year.
The problems of manufacturers may be a bit of good news for jewelry makers. Svetlana Rakhmanina from Ekaterinburg-based Rifesta said that more manufacturers and dealers are approaching the company offering good prices for diamonds. Companies also are selling polished without advanced payments.
Following the usual lull in October, sales of jewelry are going well in Russia and are expected to pick up in November in advance of the year-end holidays. Rakhmanina said more expensive items, such as $1,500 to $2,000 rings and $3,000 to $5,000 earrings, are going well.Article from the Rapaport Magazine - November 2013. To subscribe click here.
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