ALROSA, Russia’s largest diamond miner, got the first public indication
of what its shares may be worth when the company’s bonds were submitted to the Russian Trading System (RTS) Board, the system used for quotations of securities not listed on the Russian Stock Exchange. The move is another step in preparation for the company’s initial public offering (IPO) in 2012.
ALROSA’s shares — those not belonging to the Russian or Yakutian governments — are currently traded over the counter. Analysts say interest in them is strong and expected to grow, as a wider range of investors becomes interested in buying them. “Now, because ALROSA’s shares are included on the RTS Board, they can be bought by funds that don’t buy unlisted stock,” said Sergey Filchenkov, mining analyst from IFC Metropol.
Although the RTS Board indicators are not considered official calculations of market capitalization, the first day of trading, July 18, put ALROSA’s value at $7.1 billion. Filchenkov said the company’s value has a potential of growing by 30 percent, especially after the company splits its shares by 27,005 times, which it plans to do in September 2011. The stock-splitting decision was made at ALROSA’s board meeting in June 2011 to increase the company’s liquidity. Fyodor Andreev, ALROSA’s chief executive officer (CEO), predicted earlier in 2011 that the miner could be valued at $10 billion to $12 billion by the end of the year.
According to media reports, the Ministry of Finance has suggested selling 14 percent of shares, in equal amounts from the Russian Federation and the Republic of Yakutia, in 2012-2013. Russia’s Deputy Finance Minister Aleksey Savatyugin also said the government may be left with only a control packet of 50 percent plus one share within the next three years.
ALROSA’ s Online Auction
ALROSA sold 108 lots of rough worth $11 million at its first online auction in Moscow in July, with 30 companies bidding. The company’s representative said it was a test run, with the next auction expected in the last quarter of 2011.
“The prices were running pretty high,” said Nikolay Afanasiev, sales director of Kristall Smolensk, Russia’s largest manufacturer, who took part in the auction, but didn’t buy anything. A number of Russian manufacturers said they are planning to participate in the next auction.
Polished Prices
Russian manufacturers generally are content with the results of the first six months of 2011. “The bottom line looks pretty good and the market is reviving faster than expected,” said Valery Morozov, the director of Ruis Diamonds, among the largest manufacturers in the country and part of the Leviev Group. “The market is moving up, and companies don’t have much stock,” said Afanasiev, noting that Kristall Smolensk earned around $350 million in sales in the first half of 2011. The company said earlier in the year that its 2011 target was over $400 million.
Russian manufacturers, who sell most of their product abroad, say all types of diamonds are in demand. “Diamonds of less than .3 carats traditionally sell best in Russia,” said Alex Popov, head of the Moscow Diamond Bourse. “Russian buyers are reacting more slowly to price increases and are often not ready to pay at the current rate,” said Rajesh Gandhi, director general of Choron Diamond. Polished prices reportedly are growing at a rate of 15 percent to 20 percent, although rough prices rose 30 percent to 40 percent over the past six months. “It’s still a question as to what part of the growth is due to the economy improving, and what part is due to speculation,” said Morozov.
Colored Diamonds
The market for colored diamonds is a gray area in Russia. There’s no state standard for colored gemstones and the few companies that produce them have to develop their own standards. Gemological centers that certify the stones indicate if a gem is artificially colored, but it’s left for the jewelers and shop owners to disclose that fact if they are selling the item. “We certified only two colored stones, each over 2 carats, in 2010,” said Denis Slabkovsky, the director of Smolensk Gemological Center. However, he said he had seen a large number of jewelry items in stores containing diamonds he suspected of being colored, although the sellers weren’t disclosing that fact.
A few companies that sell jewelry with colored diamonds were reluctant to disclose the stones’ origins or prices. “The demand for colored stones is growing, although people in Russia still are somewhat suspicious of such goods,” said Irakly Aneli, the director of Nevsky Diamond, whose sister company Inreal produces colored gemstones and sells them abroad.
Aneli said the production of colored gemstones makes sense for a manufacturer. “When you buy a rough lot, it often contains brown stones, which can be more profitable to color than to simply polish,” he said. He noted the price of treated colored gemstones would be 30 percent to 50 percent less than the price of a natural stone of the same color and clarity.
The Marketplace
• ALROSA mined 19 million carats of diamonds in the first half of 2011 — compared to De Beers 15.5 million carats — for an 8 percent increase in production over the first half of 2010.
• First-half sales volume declined by 23 percent from 2010 but operating profit increased by 22 percent and net profit by 5.5. times. The profit totals reflect the fact that 2011 per-carat diamond prices are 41 percent higher at $113 per carat.
• ALROSA plans to increase its total amount of capital investment for 2011 by 40 percent to $725.5 million, with expenditures on prospecting raised by 16 percent and investment on underground construction by 6 percent.
Article from the Rapaport Magazine - August 2011. To subscribe click here.