By John Helmer in Moscow
On most indicators the first full financial report issued since Sergei Vybornov took command of Alrosa in February 2007 indicates modest retreat.
Sales totalled Rb90.7 billion; converted to US dollars at the December 31, 2007, rate, this is equivalent to $3.7 billion. The result marks a 4% decline in Alrosa revenues, compared to 2006.
Cost of sales diminished slightly to Rb51.4 billion ($2.1 billion), and royalty payments were cut in half to Rb4.8 billion ($196 million).
Net profit was Rb16.2 billion ($659 million), a drop of 6% compared with 2006.
Operating profit, before increased financing costs and income tax were taken, amounted to Rb24.4 billion ($995 million). This trailed the result for 2006 by just Rb109 million ($4.4 million).
The result would have been more positive, had it not been for the write-off associated with operations of Investment Group Alrosa in the gold mining sector.
Diamond sale revenues turned out to be significantly more profitable from export than from the domestic market, according to a company breakdown.
Pure diamond sale revenues totalled Rb79.8 billion for the year, down 6.4% year on year. But revenues from exports moved in the opposite direction, growing 4.6% to Rb47.5 billion ($1.9 billion).
The value to Alrosa of its diamond sales to the domestic cutting market dropped quite sharply to Rb27.7 billion ($1.1 billion), down 21%. This is one of the drivers for this year’s actions by the company to raise prices to domestic buyers, and cut their VAT privilege.
The financial report refers to Alrosa’s right, since 2005, “to purchase diamonds produced in Angola from specially authorised local exporters and subsequently resell these diamonds in the open market.” No itemization of the Angolan diamond sales revenues is reported for 2007, however.
In earlier Angolan trading transactions, Alrosa reports that it “obtained additional profit due to a reduction in the purchase prices for diamonds supplied in 2005 and recognised income totalling RR’mln 766 in its financial statements for the year ended 31 December 2006.” This was through an agreement with Sunland Mining.
Other Angolan financial results include the report that Alrosa’s dividends from its equity position in Catoca Mining more than doubled to Rb234 million ($9.5 million); while receivables increased from PIC Orel Almaz and LUO-Camachia-Camagico.
In the past, Alrosa reports have detailed the value of diamond shipments to De Beers. The only information available in the latest report is a reference to the European Commission proceedings, and the note: “The Group has one individual customer, De Beers that accounted for 15% of its diamond sales during the year ended 31 December 2007 (year ended 31 December 2006: 17%).”
This suggests that the value of diamond sales to De Beers was Rb11 billion in 2007 ($488 million); compared with Rb14.5 billion ($550 million) in 2006.
One of the biggest items explaining Alrosa’s overall cost increase is the general and administrative expense line. This jumped 33% to Rb5.3 billion ($215 million).
The company’s wage and staff bill jumped 47% to Rb1,741 million ($68 million), and there was a one-off bad debt expense of Rb589 million ($24 million).
According to the auditor this was the result of a write-off from gold mining asset transactions Vybornov supervised between 2005 and 2007 as chief executive of Investment Group Alrosa, a subsidiary of the parent company. The complicated accounting of these gold assets has been controversial for some time.
According to the new Alrosa report, in 2005 IG Alrosa sold its stakes in three Sakha region gold mining assets (including the Nezhdaninskoye and Kuranakh deposits, and the Kyuchus prospect) “for an estimated consideration of US$255 million.” Only part of this was paid in cash in 2005. Subsequent events, and negotiations with the buyer, the Polyus gold mining company, delayed receipt of payments and accounting.
According to the latest report, Vybornov then negotiated with Polyus in 2007 “to reduce the amount of consideration payable to the [Alrosa] Group by RR’mln 378 (US$’mln 15). The uncollectible amount was written-off in these consolidated financial statements.”
In 2007, five months after Vybornov’s move from chief of IG Alrosa to chief executive of the parent company, the report says IG Alrosa bought out minority shareholdings for Rb85 million ($3.3 million), and raising Alrosa’s stake in the subsidiary to 100%.
The “negative goodwill” from this transaction is accounted as Rb2.1 billion ($84 million) in additional operating income for Alrosa.
Without this item of IG Alrosa income, Alrosa’s operating profit would have turned out to be 9% lower for the year, and the deterioration in operating profit over the past year 9%, rather than the 0.4% shown in the accounts.