ALROSA: prospects for global leadership and privatization

Rough and Polished

Diamond mining year in review
In 2012, ALROSA Group preserved the world leadership in diamond mining in terms of volume achieved in the period of economic crisis. It should be noted that in late 2012, ALROSA Group acting through its subsidiary Almazy Anabara bought a 51-percent shareholding in Nizhne-Lenskoye, which is producing more than 1.3 million carats of diamonds worth about $ 130 million. The acquisition of a new diamond asset will increase ALROSA’s resource base by 26.4 million carats adding about two million carats to the miner’s annual output. So, if we take into account the output generated by Sociedade Mineira de Catoca in Angola, it means that ALROSA Group produced more than 42 million carats of diamonds last year.

The table is compiled by the author based on the annual and quarterly reports published by De Beers, BHP Billiton, Rio Tinto, ALROSA and Sociedade Mineira de Catoca in 2009-2012.
* Diamond output/sales
** Estimate
*** Including Nizhne-Lenskoye

Taking into consideration the above, ALROSA’s sales of diamond goods will reach $ 5,230 million in 2012, which makes it comparable with De Beers. Thus, if ALROSA Group will be able to maintain this pace further it may become the world’s absolute leader in diamond mining.

Privatization of ALROSA

Keeping in mind the edict of the Russian Federation Government issued on June 20, 2012 it is expected that the Russian Federation will terminate its participation in the authorized capital of ALROSA by 2016, which will be accompanied by a coordinated sale of shares held by the Republic of Sakha (Yakutia) and Yakutia’s municipalities, as well as possibly by channeling the funds from stock floating for the development of regional infrastructure.

However, it would be wrong to sell even a single share from the basket of shares belonging to the Republic of Sakha (Yakutia) (32%), because in this case Yakutia will later be left with a 19.5-percent stake for a subsequent IPO, or in other words it will lose the blocking shareholding since the shares owned by the local uluses (municipalities) appear to be municipal property different from the state ownership of the Republic of Sakha (Yakutia).

Yakutia is expected to facilitate the sale of a 7-percent stake out of the 8 percent of shares owned by the eight municipalities in this diamond province. In this case, after the IPO the government of the Republic of Sakha (Yakutia) will reliably secure a blocking stake (25% +1 share), while the uluses will hold their remaining 0.1% each. Taking into account that the diamond industry is a strategic sector of Yakutia’s economy and a major contributor to the local budget, which makes ALROSA’s stock the last major asset owned by this republic, it is necessary to maintain state control over it. As it was proved by the experience of recent years, it is the state support that can keep the diamond industry from sharp declines in times of economic instability and downturns in the global economy, since the main value component of diamond goods is formed in the luxury market.

If you follow the movement of indices generated by major stock exchanges since 2009, you will immediately see the growth performance of Dow Jones, which may be indicative of dampened recession phenomena in the U.S. and pointing to gradual recovery of the global economy from crisis. Earlier this year, we could see a sharp rise in world stock markets, which makes ALROSA’s IPO relevant this year.

Movement of indices generated by major world stock exchanges in 2003-2012.

The company’s capitalization or everyone gets his just desserts

To determine the company’s value appears to be the most important thing for turning it public by way of an IPO. If you calculate the value of ALROSA on the basis of its current stock quotes, it will be about $ 7.3 billion. Thus, if ALROSA’s shares are to be floated within an IPO today, the company may raise about $ 2.0 billion, while a 7-percent stake will be worth in this case more than $ 500 million. This is the amount of money which will be due to the Russian Federation in case it will sell its part of shareholding, whereas every ulus of the diamond province may get about 2 billion rubles.

Yuri Danilov, Ph. D., Director of the Department of Regional Subsoil Management Economics, Institute for Regional Economics of the North at Ammosov North-Eastern Federal University.

Source Rough and Polished