Rapaport Magazine

ALROSA Exceeds Precrisis Figures

Russia November Market Report

By Anastasia Serdyukova
Russia’s largest diamond miner ALROSA produced approximately 50 percent more sales revenue in the first nine months of 2010 than in the same periods of precrisis 2007 and 2008. The company’s preliminary report for the period showed sales of $2.7 billion, evidence that the global diamond market is reviving after the economic turmoil. The miner also managed to cut its costs by $13 million during those nine months. The company’s net income was around $200 million, which is 40 percent more than in 2008, but approximately 40 percent less than in 2007.

ALROSA President Fyodor Andreev said it is necessary for the company to stay with its previously announced plans for constructing underground mines, while curbing production costs. The company is planning to spend more than $800 million on underground mines in 2010 to 2012, two of which, Aikhal and Mir, are scheduled to reach project capacity in 2012, and the third, Udachny, in 2016.

IPO Track

ALROSA took a first step on its way to a possible initial public offering (IPO). Changes to the law that would allow the company to convert from a closed joint-stock company to an open one were approved in the first reading by the parliament of Yakutia. The majority of ALROSA’s mines are located in Yakutia, a Russian republic in Eastern Siberia, and the republic holds 32 percent of the miner’s stock. The amendments have to win approvals in two more readings by the end of 2010. The changes paving the way for an eventual IPO appear to have the support of Yakutia President Egor Borisov, who told Yakutian media the company may float no more than 20 percent to 25 percent of its shares. But some Yakutia government members and local industry representatives fear an IPO would damage the region’s interests.

Speaking at the parliament’s meeting, Andreev said the reorganization would help the company raise new capital for development in today’s tough financial environment, as well as create new jobs, according to the Interfax news agency. “According to our boldest scenarios, we may issue $2 billion worth of shares, which constitutes 20 percent of the company’s market value,” he said. Andreev said the new capital also would help the company diversify its activity, similar to Rio Tinto, by developing gold and iron ore deposits in Yakutia. The company had been looking into diversifying its activity a few years before the world crisis, but it sold off some of its noncore assets in 2009. It currently has licenses for developing four iron ore deposits in Yakutia.

So far, the diamond miner has refrained from disclosing when it may go public. “There are no such plans,” Alexei Kudrin, Russia’s finance minister and the chairman of ALROSA’s board, told RIA Novosti news agency.

With an IPO in the distant future, the company is planning to raise money for the near term by selling $1 billion worth of 10-year U.S. dollar bonds. This first issue of a foreign-currency debt in six years is expected to attract much interest, because Russian bonds usually provide better returns than those of other emerging markets.

Rough Sales Limits Lifted

Russian diamond manufacturers can sell rough abroad without any limitations, according to a new law on the import and export of precious metals and stones. The ruling lifted the prior ban on exporting more than 15 percent of gems purchased yearly from miners. The regulation was introduced back in 2002 to prevent speculation with rough, which Russian manufacturers could buy cheaper than foreign companies.

There was some criticism over lifting the ban for fear that manufacturers would now be inclined to sell rough, instead of polishing it. But many see it as a positive move. “The quotas do not work as a market-regulating mechanism because Russian manufacturers now pay market price,” said Maksim Shkadov, director general of Kristall Smolensk. Some manufacturers say the old restriction did more harm than good in recent years because companies could neither sell rough that was not profitable to cut nor outsource it to places with cheaper labor. “One had to polish those tails and sell them at a discount,” said Anton Schepotiev from Almoss, a diamond manufacturer and wholesaler. “This measure is a bit too late.”

Duty-Free Jewelry

Jewelry items made of gold and precious stones are now allowed to be sold in duty-free shops, according to a new ruling of the Customs Union Commission. The union, consisting of Russia, Belarus and Kazakhstan, introduced new customs regulations for the three countries when it came into effect in July 2010. Several jewelry dealers have jumped at the opportunity to create shops in the airports of Moscow, which are considered potentially very lucrative. “People trust duty-free shops and know the prices there are often lower than in the city,” said Alex Popov, who is planning to open two stores in one of Moscow’s airports. “There have been a number of instances where people have made purchases totaling several thousand dollars while waiting for a connecting flight,” he said. “Russians tend to be very spontaneous when they travel.”

The Marketplace

• Jewelry items with diamonds worth less than $500 account for almost half of sales as the holiday season approaches, according to jewelers interviewed by RDR.

• In a poll conducted by marketing agency RusJuwellerExpert, 26.8 percent of women attending the Junwex Moscow show were buying items below $200, while 22.2 percent of men were choosing items over $1,600.

• Among Junwex attendees, 38.8 percent said they preferred jewelry items in white gold and 34 percent preferred yellow gold, according to the same poll.

Article from the Rapaport Magazine - November 2010. To subscribe click here.

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