Rapaport Magazine

The Russia Connection

Rapaport Diamond Report discusses the changing relationship between De Beers and ALROSA with Nigel Kieser, general director, De Beers Russia.

By Anastasia Serdyukova
RAPAPORT... Rapaport Diamond Report: How will the relations between De Beers and ALROSA develop after 2008?

Nigel Kieser: Our trade agreement with ALROSA ends in 2009. Our commitment to the European Commission (EC) restricts us to buying $400 million worth of rough from ALROSA during 2008 and we will stick to that commitment made to the European Union (EU). The legal situation regarding the arrangement is still unresolved. The EU’s Court of First Instance upheld ALROSA’s challenge, but the EC appealed the ruling. Our position is unchanged — we will abide by our commitments to the EU.

As far as how the relations between De Beers and ALROSA will evolve in 2009 and beyond, we have signed a memorandum of understanding with ALROSA that envisaged a number of areas of potential cooperation between us. The first area is the completion of a trade agreement. But there is also the potential for joint exploration between De Beers and ALROSA, for technical assistance to be supplied by De Beers to ALROSA and for technical assistance provided by ALROSA to De Beers. We are still at a discussion stage in regard to these areas.

RDR:What exploration projects is De Beers interested in?

NK: The Verkhotina project is a primary focus and agreements for that project were signed on April 15 by De Beers, LUKOIL and Archangel Diamond Corporation. There are two major conditions before that agreement is final. The first is the receipt of Russia’s Federal Antimonopoly Service (FAS) approval. And that process is underway. The second condition is approval by a new government commission on foreign investment. That situation is more uncertain because, as far as we know, the commission doesn’t currently exist. And the detailed procedures for actually getting approval from this commission haven’t been defined yet. We are currently in discussions with LUKOIL and the government as to what the requirements are. Archangel will be submitting one of the first applications to this commission and we hope the approval will be secured very quickly so we can proceed.

We are actively talking to representatives from Arkhangelsgeoldobycha (AGD), the Russian company that actually holds the license to explore the mine, LUKOIL, our other joint-venture partners and the third-party contractors so that we can proceed with the project on the ground. It is a requirement of the license agreement that we submit a conceptual study of conditions before the end of 2008 so we want to keep moving forward. AGD is required to complete exploration in the rest of the Verkhotina by the end of 2009 and needs to evaluate the Grib Pipe further. A feasibility study must be completed before we can be sure this is an economically feasible project.

The project timetable is already defined in the license agreement. The license requires a state expert to approve the technical or feasibility study by the middle of 2010. After that, AGD must construct a mine with an annual capacity of no less than 2 million tons by the end of 2014. The mine must reach its capacity by 2017.

RDR: A new law regulating foreign investment in strategic industries has been adopted in Russia. How does it affect you?

NK: In practice, foreign participation in strategic projects has been subject to the same restrictions for some time. Most companies would say that presidential or government approval already has been required for any major investment here. Certainly, that would explain De Beers Chairman Nicky Oppenheimer meeting with Russian President Vladimir Putin before the agreements with LUKOIL were signed.

In some respects, the law simply formalizes what was already a reality and doesn’t present a significant change for foreign investment in diamond mining. Yet, there are a couple of aspects of this law that represent greater restrictions than in the past. The first is the requirement to secure government commission approval for production rights over any discovery, irrespective of whether a combined production and exploration license is held. In my view, that is not necessarily a positive development. Another provision of the new law — and this one is even more restrictive — effectively prohibits the transfer of licenses from one entity with foreign participation to another entity with foreign participation. That is not a terminal restriction, but it certainly reduces the flexibility over the life of the project. It’s always nice to have the flexibility to transfer the license from one entity to another, usually for financial reasons.

It was actually written into the Verkhotina joint venture agreement, for example, that AGD might be transferring the Verkhotina subsoil license to another joint-venture entity very early in the arrangement. Whether this will still be possible, we don’t know. It is something that is still to be discussed with the government.

RDR:What other regions in Russia are attractive to you?

NK: If we look at specific opportunities within Russia from a geological perspective, clearly Yakutia is highly attractive. It is where almost all mining operations are located. All conditions being equal, all diamond companies would focus their efforts on Yakutia. Archangelsk is also attractive, especially the Verkhotina and Lomonosov fields.
In reality, mining exploration companies must have a Russian partner to secure exploration and mining rights for diamonds, as well as all other commodities here in Russia. If a Russian company holds a license for a particular area or site, there should be a reason for this company to enter into a joint venture. In this respect, there is lots of logic in the joint venture between Archangel Diamond Corporation and LUKOIL. LUKOIL is the holder of the Verkhotina license, but it doesn’t have the expertise on its own to bring a project from the exploration stage to a fully operational diamond mine. But De Beers does, so there is very nice alignment here of skills between the joint-venture partners.

RDR:Could you use your expertise in underground development in Russia?

NK: Underground development is an issue that needs to be faced not only by ALROSA, but also by Rio Tinto and BHP Billiton and us, too, of course. It is extremely challenging to take an open-pit mine underground in a way that does not impact the production costs. De Beers has done it quite successfully at Finsch and ALROSA is going through the process at Udachny now. But it’s a challenging process. I think, of all diamond companies, De Beers has the most experience and expertise in underground development. But even we do not have a magic wand. It’s challenging work and every mine is different.

RDR: How is De Beers Jewellers business going in Russia?

NK: A big store is to be opened soon in Moscow in addition to the one that is there already. There has been good growth at the luxury end. Russia is attractive for luxury goods the same way China is. Right now, our interest is at the top end but, as Russia’s middle class expands and the market matures, in about five or ten years, I would expect this demand to become broad based.

RDR: How do you see De Beers position in the global market?

NK: We moved away from our “buyer of last resort”strategy a number of years ago; “Supplier of Choice,” that’s where we want to be. It’s essential for us to be 100 percent compliant with the legal requirements of the geographic regimes in which we operate. Regulating the market is both illegal and entirely contrary to our strategy; we do not want to move back to where we were 15 years ago.

Article from the Rapaport Magazine - August 2008. To subscribe click here.

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