Rapaport Magazine


By Svetlana Shelest
ALROSA Goes Conservative Route

In line with its prior decision to go after one of the two production targets for 2016 — 37 million or 39 million carats, respectively — ALROSA, having reported its first-quarter sales, appears to have chosen to stick to its more conservative option and remain cautious. As the miner’s President Andrey Zharkov said in a recent interview with Interfax, “Our Supervisory Board and Strategic Committee will now be considering reducing the production target down to 37 million carats. This decision has to be approved by the Board as it has certain implications for the company’s overall budget. Our objective for the year is to avoid increasing the stocks, as they have already grown significantly in 2015.”
   In the first three months of 2016, ALROSA reported a 2 percent year-on-year decrease in production, having mined 8.2 million carats, and at least an 18 percent year-on-year increase in sales, based on its preliminary sales results estimated at $1.3 billion against the $1.1 billion sold in the same period in 2015. In total, ALROSA sold an estimated 12.1 million carats of rough, including 8.9 million carats of gem-quality diamonds that traded at an average price of $146 per carat and 3.2 million carats of industrial-grade stones that sold at an average price of $7 per carat.

Investment Diamonds
   In addition to the privatization plan that has been considered by the Russian government since early 2016, ALROSA has come up with a proposal to launch trading of investment diamonds at the Moscow Exchange as yet another anticrisis measure intended to make up for the 30 percent slump in rough sales in 2015. The pitch was supported by Yuri Trutnev, deputy prime minister of Russia and presidential envoy to the Far Eastern federal district, which incorporates the Republic of Yakutia, ALROSA’s main mining site.
   Unlike the Singapore Diamond Investment Exchange (SDiX), which kicked off the world’s first commodity exchange trading in physically settled diamonds in early May, ALROSA is considering trading diamonds under contracts for deliverable futures. This will provide a temporary solution to the two main problems arising from the Russian legislation. One is the licensing issue, as all operations with precious stones in Russia require a government-issued license.This, however, is not necessary for trading in financial instruments. The other is the country’s VAT regulation, which imposes an 18 percent tax on all purchases made by physical persons, yet does not apply to further resale deals. According to Zharkov, the company “is planning to organize trading in deliverable contracts only after the taxation issue is solved.” To that effect, the company is in negotiations with the Ministry of Finance.
   ALROSA announced that its main goal for the project is to uphold the investment appeal of diamonds. As the demand for hedging assets appears to be growing in the unstable economy, the company believes that diamonds may prove to be an attractive investment vehicle, since in the long term, polished does show a steady increase in value. And even in the short term, it demonstrates a less significant value decrease than other types of commodities.
   At the initial stage of its pilot project, ALROSA is planning to trade in two categories of polished: .5-carat and 1-carat VVS1 to VS1, F to H diamonds, which will be supplied by ALROSA’s own polishing branch, Brillianty ALROSA. According to the company’s own assessment, gems of these characteristics make up about a fourth of ALROSA’s output in value terms, i.e., from $500 million to $1 billion.

No Clash with Vladivostok
   Zharkov also emphasized in his interview to the Russian media that the investment diamond trade at the Moscow Exchange does not in any way conflict with the miner’s project to develop a rough and polished trading platform in Vladivostok, announced in 2015. Trading in Vladivostok will be organized and run by ALROSA itself — unlike trading at the Moscow Exchange — and primarily be aimed at developing an export-import exchange with the Asia-Pacific region, taking advantage of the miner’s stock and infrastructure and free port privileges of Vladivostok.

Privatization Takes Shape
   On May 12, Russian President Putin determined the size of the mining giant’s stock to go in free float, when the privatization plan gets the green light. He signed a decree setting the threshold of the state-owned stake in ALROSA to 33.001 percent, which allows for no more than 10.9 percent of the miner’s shares to change hands. This is 8 percent less than the Ministry of Economic Development has been recommending since the beginning of 2016. The Ministry, however, promptly reacted to the decree through its press service, issuing the statement that “as a next step, the presidential decree may be amended to lower the stake of the Russian Federation to 25 percent plus one share.”

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

Comment Comment Email Email Print Print Facebook Facebook Twitter Twitter Share Share