ALROSA? The recommendation is Strong Buy!

Sergei Goryainov

The transformation of ALROSA into a public company and its subsequent access to the stock exchange were accompanied by rosy forecasts from stock market analysts and by blissful expectations on the part of traders.

The vast majority of experts pointed to the uniqueness of this asset, favorable price movements in the rough diamond market and the company’s fairly good financial performance. All agreed that the asset is significantly undervalued relative to its foreign counterparts and gave the recommendation to buy, saying that a fair price would be around 45 rubles per share.

This reasoning was very convincing, almost flawless. The diamond market bounced over the pre-crisis levels, while ALROSA displayed the best financial results in its history… Yet, the company’s stock quotes followed a steady – one can even say scheduled – downward trend and instead of achieving the 45-ruble target slipped below 25 rubles. Formally, for all the while its shares are in free circulation, ALROSA’s “capitalization” (it is impossible to assess the real value of the company proceeding from such a free float) has fallen by nearly half – a sad and seemingly strange result, paranormal both in terms of fundamental and technical analysis. The claim that prices for the shares of the diamond monopoly fluctuate together with the values of Russian stock market indices are unlikely to be taken seriously: a high weight of oil and gas companies in these indices provides a true correlation with prices for hydrocarbons. But diamonds are not oil and gas, it is a quite different market featuring radically different pricing mechanisms, and this year ALROSA seems to have every reason to look “better than the market.” But, as it was rightly noted by one trader: “Any news, whether good or bad, inevitably triggers a decrease in quotes for ALROSA’s stock. It’s a miracle!” It is really a miracle. And it seems to us that it is a man-made miracle.

How many times the world was told that a small free float creates a perfect prerequisite for manipulating stock quotes. The gimmick is simple. You may circulate a certain number of shares around several accounts, buying from yourself at a price you yourself offered. The important thing in this case is the proportion between the number of shares included in such transactions and the total number of shares traded on the stock exchange. So, if you look at the existing volume of trading in ALROSA shares, it is easy to see that in order to force down stock quotes smoothly, you need to manipulate a 1% to 1.5% stake.

The most reasonable solution would be to sell up to 25% of shares through the stock exchange to an indefinite number of investors. In this case, investment funds and banks would give a real market valuation of ALROSA, which would in the long run make it possible for the State to withdraw completely from the capital of the diamond giant and have a maximum profit.

In the meantime, the chart of trading in ALROSA shares over the entire period, in our opinion, represents an almost perfect reflection of the manipulation strategy, except for a few spikes in February and March 2012. These spikes in volumes demonstrated that there emerged (but quickly vanished) an owner of a stake able to influence the manipulation game. The key to this enigma was found several days ago – Swedish investment fund Vostok Nafta reported that it had sold nearly half of its shares in ALROSA in the first quarter of 2012. “The balance between risks and gains has dropped to a level where we found it was necessary to withdraw” – this diplomatic comment from the managing director of Vostok Nafta “translated into plain English” could mean something like “The company whose stock price is purposefully forced down prior to be sold to the “right people” cannot attract the interest of a civilized investor.

By a strange coincidence, almost simultaneously with the appearance of ALROSA on the stock exchange the company faced a mass media attack launched against it – and it was no less consistent and systematic than the manipulation of its shares. The scope of mudslinging and the range of mass media involved in this operation are extremely wide: from allegations of corruption in deals with oil and gas assets to accusations of financing fringe politicians. By itself, the negative information background generated by such amusing means did not pose any special threat to the company, especially taking into account its good reporting data, but the combination of even far-fetched mudslinging aimed at the company’s management with a spectacular “fall” of its capitalization is quite suitable as an argument for appropriate punitive sanctions. Most likely, the manipulation of quotes and the media attacks have close sources.

The new government of Dmitry Medvedev declares the privatization of state-owned companies as one of its main tasks. Until now, the privatization of major assets in Russia was carried out solely by giving the property to business people close to the persons on the political Olympus, and today it is hardly useful to reckon on exceptions. Introducing Anton Siluanov to the staff of the Ministry of Finance Igor Shuvalov, First Deputy Prime Minister, implied in a rather transparent manner that this ministry had some subordinate assets (“nest eggs,” in the words of Shuvalov) earmarked for an early privatization. And the new Prime Minister has also displayed remarkable determination: “The decisions are blurred for reasons of “expediency”, for instance, for reasons based on such arguments as “not to touch this plant, because it is so important to us, or to privatize this company in two to three years, when the market situation will be better.” And indeed, what could be a better situation than when an asset is formally not worth half of its real price and the trusted people have already received the highest recommendation: “Buy!

The modern history of Russia suggests that economic tenets are often perceived as a kind of religious doctrines. The doctrine of Marx is omnipotent because it is true. A fast and total privatization is the only way to build a happy and Europe-like Russia in no time. However, the economy consists of industries and each industry requires a clear understanding of what benefit you want to get from it, what role you are going to give it and what kind of opportunities you have for this purpose…

Source Rough & Polished