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By John Helmer, Moscow

Alrosa has announced that the privatization plan for sale of its shares on the open market should be restricted in order to preserve government control of the company. The announcement was released Friday after a meeting of the Supervisory Board, Alrosa’s board of directors.

Now why exactly would this group of government officials representing the principal and controlling shares in the Russian diamond mining monopoly go to all the trouble of declaring the obvious? Who doesn’t already know and accept this policy?

According to the Alrosa website announcement, “the compulsory retention of the controlling interest [is] indispensable (the Russian Federation must retain 25%+1 share, and the Republic of Sakha (Yakutia) must retain 25%+1 share.” At present, the federal government holds 50.9%, while the Sakha republic holds 40%. A reduction to equal-sized stakes implies that the board – 15 members, including 6 from the federal government, 5 from Sakha, 2 from the company management, 2 independents — has discussed a plan to sell off more of the federal stake than of the Sakha stake.

The board also announced publicly a proposal for a significantly smaller share sale than has been advocated by Alrosa’s chief executive, Fyodor Andreyev, endorsing the sale of “seven (7) percent of ALROSA’s shares being the federal property, and privatization of seven (7) percent of ALROSA’s shares being the property of the Republic of Sakha (Yakutia)”. Proportionately, this would mean a larger reduction in the Sakha shareholding than in the federal one.

For two years now, Andreyev has said he favours the sale of at least 20% as soon as possible. In January, the Ministry of Economic Development, which oversees the privatization process, issued a paper in which the sale of 50.9% of Alrosa’s shares was contemplated by the year 2017. A month earlier, on December 9, Andreyev had met Prime Minister Vladimir Putin to discuss the terms of privatization, and also the governance of the company since the resignation of Alexei Kudrin, the Finance Minister who has run the supervisory board for many years. No announcement was made on the size of the state shares to be sold, nor the timing of the sale.

Last October Alrosa’s chief financial officer Igor Kulichik had told a meeting of aspiring advisors and underwriters that the share sale might be cut to between 7% and 9%. The previous June the Finance Ministry had said its target for the share sale was 14%.

As for timing, the latest Alrosa board statement is vague, saying the sale should be “conditioned by [the] readiness and relevance of ALROSA’s IFRS statements for 1H2012, or for 2012.” The hint there is that Alrosa’s management and directors do not know what schedule for the share sale will be adopted by the new government, to be named in May after Putin is inaugurated as president. According to Ararat Evoyan, vice president of the Russian Association of Diamond Manufacturers, “there is a lot of of talk, but little action in reality. They will not soon begin to sell shares. It takes a lot to be done for the shares to appeal to professionals. So the statement was made with the purpose that they won’t be forgotten in the media.”

Sergei Goryainov, editor of the leading Russian diamond publication Rough&Polished, believes the object of the announcement is to demonstrate a united front in the event that, after the government is formed, the new finance minister may promote an end to state control of the company. At least one rumoured candidate for the post, who favours privatization of more than 50%, is Arkady Dvorkovich, an advisor to outgoing President Dmitry Medvedev.

The board statement also warns that if a new minister tries forcing the sale of a majority of the company’s shares, that would violate the current Sakha law. If a selloff of 50% plus 1 share is attempted, the board warns there will be a bill for the federal treasury, obliging the federal government to redeem the 2010 Eurobond issue of $1 billion; that isn’t due for repayment until 2020.

In parallel, LUKoil, Russia’s second largest oil producer, has made a fresh statement suggesting it wants to sell its Grib diamond mine in northwestern Russia to the state, but Alrosa is reluctant to buy.

An investment target of $1 billion, attributed by Bloomberg to two sources at LUKoil, has been reported as the precondition for this selloff. The news agency claims LUKoil will invest $1 billion “before the first stone is produced”. The reported LUKoil plan is then to mine 4 million carats per annum before selling the project to Alrosa. The latter currently produces 35 million carats at its eastern Siberian mines, and is developing Lomonosov, a new Arkhangelsk region diamond mine close to the Grib pipe.

LUKoil executives regularly announce ambitious plans for Grib in an effort to induce Alrosa to make a bid to acquire the property. A month ago, PolishedPrices.com reported LUKoil chief executive Leonid Fedun as saying that he has been receiving buyout offers for the Grib mine from Asia and the US, and would consider a deal to sell if the price is right. He did not indicate a value. Fedun added at the time that LUKoil was not under pressure to accept an offer as the company is “not worried about not being able to sell the diamonds.” LUKoil spokesman, Dmitry Dolgov, also told PolishedPrices.com that Fedun “didn’t state exactly that Arkhangelskgeoldobycha [the LUKoil diamond-mining subsidiary] will be sold, but he made a suggestion. First we’d like to capitalize the deposit, to start mining, and then we’ll decide whether to keep or to sell it. There is no final decision yet.”

When LUKoil was asked in Moscow today to clarify the latest press report, Dolgov said: “I have no idea where the amount of one billion [dollars] came from.”

Documents released by Archangel Diamond Corporation (ADC), when it was the De Beers subsidiary engaged in developing a Grib mine plan with LUKoil in 2008, reveal that two open-pit mining plans were under consideration then, instead of the combination open-pit and underground plan proposed by LUKoil’s Arkhangelskgeoldobycha (AGD). One of the De Beers plans called for reducing initial capital expenditure by cutting steep pit slopes and postponing the stripping of waste rock, but incurring higher operating costs. That option was estimated by De Beers to cost $1.132 billion. The alternative option was estimated at $1.6 billion. Both estimates were in 2008 dollars, and are believed by experts to have grown significantly since then.

Uncertainties about these current and future costs, and skepticism towards LUKoil’s selling price, have inhibited Alrosa from responding to LUKoil’s announcements and approaches.

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