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ALROSA Plans Rise in Production, Sales

Russia Market Report
Dec 30, 2009 12:00 PM   By Anastasia Serdykova
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RAPAPORT... ALROSA, Russia’s largest diamond miner, is planning to increase its overall sales by 51 percent in 2010 from the volume of 2009, when the company sold $2.12 billion worth of rough and $60 million worth of polished stones.

ALROSA says almost 70 percent of its rough will be sold to the market in 2010, distributed among big players through long-term contracts. “We’ll be switching to 3- to 5-year contracts with domestic and international clients,” said Andrey Polyakov, the company’s spokesperson. However, the contracts will be written to provide an opportunity for price adjustments during their term.

Gokhran, Russia’s state treasury, will purchase $872.1 million worth of rough in 2010, which is 6 percent less than in 2009. Gokhran was ALROSA’s sole buyer until the third quarter of 2009, when the company resumed its sales to the market. ALROSA finished the year with $1.2 billion worth of rough sales to foreign and domestic companies.

The company is planning to slightly increase production levels in 2010, mining  $2.3 billion worth of diamonds. ALROSA started the operation of the underground mine Mir in the summer of 2009 and, in December, opened a second start-up facility at the underground mine Aikhal.

The company cut the cost of production by 40 percent in 2009, against 2008. Polyakov said the company is closing down unprofitable production and cutting administrative expenses. The company’s net profit for 2009 is expected to be $105 million.

In a statement on the company’s website, ALROSA’s management expressed the opinion that the company should be changed from a closed joint-stock company (CJSC) to an open joint-stock company (OJSC). “The move will make the company more attractive for investments and will allow easier management of its assets,” said Polyakov. Becoming an OJSC also would help ALROSA ease its debt burden, as it could issue more shares. One possible option is that the Russian Federation could buy out the new shares, thus providing the company with cash to pay down its debt.

ALROSA said it is planning to reduce its outstanding debt to $3.28 billion by the end of 2010 from $3.8 billion currently and to refinance its short-term debt by issuing long-term bonds.

State Treasury Hopes for More
Gokhran announced it is planning to buy 14 million carats of rough diamonds worth around $1 billion in 2010, most of which will come from ALROSA. In polished diamonds, the state treasury plans to purchase 150,000 carats worth $150 million, mostly from Kristall Smolensk, but also from several other manufacturers. In addition, Gokhran is planning to conduct three auctions in 2010, at which it hopes to sell 20,000 carats of rough.

“We hope to earn more money from the auctions than we did in 2009,” said Vyacheslav Ivanov, the head of Gokhran’s planning department. The state treasury sold $17.3 million worth of rough diamonds through auctions in 2009, but only $14.6 million worth were actually paid for — the other deals fell through. “We consider these results positive compared to 2008, which was the worst ever, when less than half of diamonds sold at the auction were actually purchased,” said Ivanov.

Polished Diamond Sales
Manufacturers and diamond dealers sound more optimistic about polished sales than in previous months. “More inquiries are coming in for various gems,” said Alex Popov, the president of the Moscow Diamond Bourse.

However, there’s strong competition from foreign manufacturers. “Indian product is flooding the market and it is difficult to compete with pricewise,” said Aleksandr Uchuvatov, director general of Timeless Diamond. The value-added-tax (VAT), which Russian companies started paying in 2008, remains a strain. And so is supply. Smaller manufacturers say they are having problems getting rough, as Gokhran has sold out its limited quota and ALROSA is selling its rough to big companies.

The most popular sizes are gems of 0.1 carat and smaller and the medium range of 0.5 to 0.7 carats. “The quality and color requirements are no less than H,VS1,” said Marina Yablokova, the head of sales for Arkhangelsk-based manufacturer Zvyozdochka. She noted that yellow diamonds of good quality are seeing good demand.

Jewelry Sales
“The last two weeks of December are when people make most of their purchases for the holiday season,” said Yablokova. “The demand is noticeably growing,” said Viktor Karmanov from Smolensk Diamonds, which is affiliated with Smolensk Kristall. He noted that classical rings with a single round stone are in greatest demand. “Most people are asking commercial characteristics of G to H, VVS1 to VVS2,” said Dmitry Gavrilenko, the head of sales of Moscow-based manufacturer Estet.

The Marketplace
  • Russia exported 5.33 million carats of rough diamonds worth $540.9 million in the third quarter of 2009. That was twice the volume of carats exported in the second quarter of 2009, but 37 percent less than in the third quarter of 2008.
  • Russia imported 36,200 carats of rough diamonds worth $36.3 million in the third quarter of 2009, 10 percent lower than in 2009’s second quarter and 20 percent less than in the year’s first quarter.

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Tags: Alrosa, Anastasia Serdykova, Auctions, Gokhran, Jewelry, Production, Russia
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