Rapaport Magazine


By Svetlana Shelest
Privatizing ALROSA

The Russian government has been considering the potential sale of a sizable stake in ALROSA since the beginning of the year as an anti-crisis measure. The proposal for privatization of some of the nation’s largest publicly owned businesses, including the world’s leading diamond miner, was initiated by the Russian Ministry of Economic Development. As head of the ministry, Alexey Ulyukayev explained at a ministry meeting in early February, “Although running major privatization deals under highly unfavorable market circumstances is very challenging, it is now clear that we cannot wait any longer.”
   Deputy Minister Nikolay Podguzov confirmed at the Moscow Exchange Forum on April 12 that the ministry hopes for three privatization deals by the end of 2016, including ALROSA. “A lot will depend on how much time the preparations will take, but we do hope it will be this year,” he said. A week earlier, the ministry announced that Sberbank CIB, an investment and asset management subsidiary of Sberbank, Russia’s largest banking company, will handle the privatization of ALROSA. Earlier, Ulyukayev had shared the information that some overseas banks expressed interest in handling the deal; however, they had not been short-listed.

Russian Buyers Wanted
   While there is no official information about the potential buyers at the current stage, it is known that Russian President Putin set out desirable criteria for the prospective shareholders of the country’s strategic businesses at a top-level meeting held on February 1 that was dedicated to discussing the privatization plan. “They should be within the jurisdiction of the Russian Federation,” he said, adding that any schemes involving offshore transactions or that concealed true identities of the new stock owners are inadmissible. ALROSA President Andrey Zharkov has been quoted by Interfax saying that the optimal solution would involve selling the company’s shares to a wide circle of investors.
   As the process appears to be gaining momentum, however, the size of the ALROSA stake to go under the hammer has not yet been finalized. The dispute over the matter continues between Russia’s two ministries, the Ministry of Economic Development, which set things in motion, and the Ministry of Finance. The former initially recommended selling off 18.9 percent of the miner’s shares, which would allow the Russian government to keep the controlling package of 25 percent plus one share jointly with Yakutia’s government. However, the Finance Ministry has been pitching a counterplan to sell a 10.9 percent stake in ALROSA and keep the 8 percent of the stock in excess of the controlling share.
   However, if the government decides to go with the 10.9 percent option, the Ministry of Economic Development does not rule out the possibility of auctioning off the remaining 8 percent in 2017 or 2018, as Minister Ulyukayev said to the Russian press earlier in March.
   Previously, ALROSA completed its initial public offering (IPO) in 2013, selling a 16 percent stake worth $1.3 billion, at the 2013 ruble-to-dollar exchange rate, in a state privatization move that also was supposed to spur the nation’s weakening economy. The biggest buyers at the time were U.S. investors, who purchased 60 percent of the stake. Russian investors accounted for about 14 percent.

Cautiously Optimistic for Rough
   Meanwhile, ALROSA has announced its preliminary 2015 results, reporting a 6 percent year-on-year output increase, having mined a total of 38.3 million carats. This allows the miner to still keep the mantle of the world’s largest diamond producer, accounting for 29 percent of worldwide rough production. In sales, ALROSA has managed to withstand the challenges of the global diamond market situation and increase its rough sales by 3.8 percent in carats and by 8 percent in revenue, which totaled $3.4 billion,at the current ruble-to-U.S.-dollar exchange rate. The company’s market capitalization is estimated at $6.2 billion as per the results of the year.
   As for the further plans of the mining giant, the “future is brighter and the clouds are disappearing,” according to Zharkov, who spoke at the Investor Day meeting on March 23 in London. He said that the company has achieved at least 25 percent sales increase in the first two months of 2016 compared to the same period in 2015, raising a total of $776 million. “We are being cautiously optimistic,” he said. In keeping with that sentiment, ALROSA’s Supervisory Board approved two production plans, one for 39 million carats and the other for 37 million carats. As the company’s first vice president Igor Sobolev explained further during the meeting, the miner’s management is currently monitoring sales volumes, and at the end of the first quarter, “might consider the potential reduction of the production in order to boost the sales.” Reiterating Zharkov’s message, Sobolev said the key objective of ALROSA for 2016 is not to increase the stocks.

Article from the Rapaport Magazine - May 2016. To subscribe click here.

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