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The ALROSA Road Show

Editorial

Jun 2, 2011 2:55 PM   By Avi Krawitz
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RAPAPORT... ALROSA has gone to great lengths to prove its worth in the industry of late. The Russian state-owned diamond miner has claimed the title of world’s largest diamond producer for the past two years. The notoriously discreet company is also revealing some of its secrets as it appears to be raising transparency levels and, it hopes, investor interest ahead of a planned initial public offering (IPO) set for 2012. The listing is highly significant and may prove revealing for the industry, too.

It was about a decade ago that De Beers delisted its shares to become a private company, after which it introduced the Supplier of Choice (SoC) program. Perhaps ironically, ALROSA has adopted a strategy to forge long-term contracts with clients in the run-up to the IPO. These agreements would guarantee a consistent supply of goods to a select group of companies, many of whom are also DTC sightholders, and it is expected that 70 percent of ALROSA’s total sales in 2011 will be made through these contracts.

As De Beers is expected to introduce some flexibility to its SoC doctrine vis-à-vis its soon-to-be announced marketing agreement with the Botswana government, and its successful transformation from being a company focused on controlling market share to one that enables profits, it increasingly seems that ALROSA is picking up where De Beers left off.

Last week, the Russian miner published its diamond reserve and resource data for the first time. The preliminary report makes for some impressive reading and showed that the company holds estimated reserves and resources with 1.28 billion carats of diamonds.

That would enable it to maintain an average annual output of around 32 million carats over the next 40 years. It is likely to aim much higher in the short term and the company has embarked on a development strategy to increase output to around 39 million carats by 2018. Production in 2010 rose 5 percent year on year to 34.3 million carats, slightly more than that of De Beers. As part of the new strategy, ALROSA’s executive committee in May approved an exploration program that is expected to increase its resource base by 100 million carats through the next seven years.

Company president Fyodor Andreyev estimated in a recent interview that Russia has the world’s largest reserves. By volume, the country has long been the number-one producer of diamonds, although its low average prices — about $79 per carat in 2010 — generally push it to second place in the value standings, behind Botswana. De Beers does not disclose its diamond resource data.

ALROSA appears to have embarked on a public relations campaign, albeit subtle, to entrench its leadership position. While being labeled number one or two may be a trivial matter, it is important for ALROSA to show it has the longevity and growth prospects that investors seek. The company is reportedly hoping to raise over $3 billion in a listing that will make up to 25 percent of its ownership available to the public. It plans to use the funds to finance its development strategy, reduce debt, and invest in technological and equipment upgrades.

With the volumes of rough coming through, and given the strong outlook for diamond demand, the company does not appear to have a hard sell. Last year was an all-round successful one for ALROSA, as it was for most diamond mining companies, spurred by strong demand and price increases that are expected to continue in 2011. Diamond sales rose 53 percent to $3.9 billion (RUB 101.27 billion) and net profits nearly tripled to $422 million (RUB 11.73 billion), according to its recently published IFRS financial statements. Significantly, the company reduced its diamond inventory by 20 percent, or about 5.2 million carats, to end the year with diamond stock valued at $557 million (RUB 15.84 billion).

While the numbers fall short of De Beers rough sales of $5.8 billion and earnings of $546 million in 2010, they are large enough to count, especially for a public company. As a result, from an industry perspective, the listing will offer an important gauge with which to measure the state of the market and investor sentiment toward the diamond sector.

Therefore, it is hoped that the new prospective shareholders will require a level of transparency from ALROSA that will prevent it from misusing its position in the market. There do remain concerns surrounding the company, most notably that it facilitates the Russian stockpiling of diamonds through its sales to Gokhran. In addition, as a pure mining company, ALROSA appears to be focused too squarely on its market position — a sensitive issue for an industry dominated by one player for so long.

But of course, that may just be pre-IPO talk. The listing could well mark the beginning of a new era for the diamond industry with the introduction of a second market maker on an equal playing field with De Beers. Let’s hope that ALROSA uses its growing size and importance not only to woo investors, but to enable free, market-driven trade.

The writer can be contacted at avi@diamonds.net.

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Tags: Alrosa, Avi Krawitz, De Beers, Diamond mining, Rough Diamonds
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