By John Helmer, Moscow
Budding actors are usually taught to beware the unintended effects of spotlights. By focusing light, they can bring out an audience’s curiosity in what is going on in the dark, off stage, especially if the actor delivers lines that have been heard before, or delivered weakly.
Fyodor Andreyev, chief executive of Alrosa, invited Bloomberg television to film him in Moscow without questioning him on the detail the diamond markets are curious about. The film was made on March 10, but not released until eleven days later . The timing followed the official release of Alrosa’s production and financial results for the past year at a meeting in Mirny, in the Sakha republic, on March 18. A company press release reports a session of the executive committee, a management group headed by Andreyev, as approving the publication of the company’s annual report and financial results, which now go to the board of directors, known as the Supervisory Board, for final approval.
Alrosa says it produced 34.3 million carats. A table prepared by the company indicates that it is the leading rough diamond producer for the second year, beating De Beers whose production was 32.997 million carats, up 34% on last year. Rio Tinto ranked third at 13.8 million carats, down 1%; BHP Billiton dropped further behind, with output of 2.9 million carats, down 15%. Earlier announcements suggest that Alrosa’s output this year will be no more than 100,000 carats greater. But De Beers has the capacity to lift its production significantly ahead of that: in 2007 De Beers’s mines hit their production peak at almost 50 million carats per annum.
For Alrosa, total sales in 2010 came to $3,483.6 million, according to the latest release, including rough and polished diamonds. The breakdown between the two has yet to be reported. De Beers has reported its 2010 sales of fewer carats at the higher revenue figure of $5.9 billion . Rio Tinto reports that its diamond division had $682 million in sales revenues for 2010. BHP Billiton’s financial reports are not directly comparable, because the results are grouped by the financial year ending June 30, 2010, and because BHP issues an earnings figure (Ebit), not a net profit figure for a division which includes diamonds, as well as titanium and potash; the last of these does not yet generate sales revenues. Notwithstanding, according to a special a breakdown of its divisional results, BHP reports pure diamond sale revenues for FY 2010 of $901 million.
The De Beers results indicate that its profit amounted to 10% of sales; for Alrosa the comparable percentage was smaller at 8%. Rio Tinto reports that its diamond profit was $70 million; that was 10% of revenues. BHP’s FY 2010 earnings figures represent 52% of revenues but cannot be compared to the others.
On the measure of average carat price realized — dividing carats mined into sales revenues reported — De Beers achieved $179 per carat, while Alrosa trailed behind at $102 per carat. This weakness of Alrosa’s sales performance, compared to De Beers, has never been discussed by Alrosa executives nor is it reported in the bond prospectus Alrosa issued in October of 2010. Rio Tinto earned $49 per carat, reflecting the well-known low value of much of the company’s production in West Australia. On the available figures, BHP’s average realized price appears to be $311 per carat.
Alrosa’s net profit was Rb8,777 million ($293 million); De Beers reports its net number at $598 million. This suggests that despite its global leadership in mining carats, Alrosa is trailing De Beers in the competition for sales value; and also in the ability to extract profit from revenues. Bloomberg didn’t ask Andreyev why this might be the case.
Alrosa has announced that out of its profit aggregate, Rb2.9 billion ($96 million), will be used to pay down long-term loans; Rb4.1 billion ($136 million) will be allocated to investment in unspecified financial assets; and Rb1.9 billion ($61 million) will be paid out in dividends. According to Alrosa’s shareholding structure, roughly half of the dividend amount will go to the federal government, and 40% to the Sakha republic government and the Sakha district administrations, which together hold 40% of the shares.
Compared to last year, Alrosa has done exceptionally well. Production is up 5% in carat volume; sales are up 52% on the 2009 level; cost of production at Rb49 billion ($1.6 billion) is up 31%; profit is up 273%. Alrosa’s last normal year was 2007, and compared to the results of that year, revenues are up 7%. However, bottom-line profit, Rb16.2 billion in 2007 ($633 million), is down by 84%. This too has so far gone unreported by Bloomberg, and Andreyev refuses to respond to questions from the diamond media.
He did tell Bloomberg that he is now considering the prospect of an initial share offering (IPO) “in the middle of next year”. This is more than six months later than previous announcements from Andreyev. He now says that between 20% and 25% of the company’s shares will be offered for sale and that market valuation should be up to $3 billion, based on his idea that Alrosa should be valued by investors “at similar multiples to gold producers”. He said Alrosa is now valued between $6 billion and $12 billion. In February Andreyev claimed the valuation of his company was between $8 billion and $10 billion, and that just 20% of the company’s shares would be available in an IPO.
Andreyev also mentioned his preferred list of bank advisors and underwriters for the IPO — Morgan Stanley, JP Morgan, Goldman Sachs, and VTB; the last of these is Alrosa’s biggest domestic creditor.
A Russian diamond analyst told PolishedPrices.com there will be an extraordinary shareholders’ meeting on April 5, when details of the conversion of the company to an open joint stockholding company, according to the Russian legislation, will be finalized. Details of the agenda of that meeting were posted by Alrosa a month ago .
“Preparations for the IPO take at least a year, and so Andreyev is talking about 2012, and it is the most optimistic variant, ” the source said. Before then, Alrosa is also hoping to announce details of a joint mining venture in Arkhanglesk region with Rio Tinto.