By John Helmer in Moscow
Underground mine costs are pushing Alrosa towards diamond prospects in southwestern Africa
Back in the good old friendly days,one thing was always understood by the senior executives and mine engineers of De Beers and Alrosa, the world’s diamond mining leaders. Alrosa faced serious risks and incalculable costs in trying to mine underground, as its open-pit operations at Mirny and Udachny reached exhaustion.
From the De Beers point of view at the time, that meant that Alrosa’s annual production of rough diamonds was facing inevitable decline — and with that, its global market challenge to De Beers itself.
Alrosa’s annual report for 2006 showed what was happening. Udachny, supplying 35% of Alrosa’s total carat output, had suffered a 13% decline over the prior two years (measured in dollar value, because carat data are not released). Offsetting the decline at the Udachny open-pit operation, the new Nyurba mine grew 29% in value, while Mirny,where underground mining had started, gained 28%. Gain overall, however, was less than 8%, and rising dollar prices for diamonds in the period masked the trouble carat volumes were facing.
Sincedecline remained an unpleasant prospect, Alrosa’s planners and prospectors argued, it stood to reason that it might be cheaper for the company to try to find new diamond pipes in Russia — starting, naturally, in Alrosa’s backyard, Yakutia (Sakha), and in Arkhangelsk, on the western side of Russia.
But the Alrosa managementhas also believed it could keep annual production rising, even gain global market share against De Beers, by expanding its exploration in Angola; there it already is an operating partner in the Catoca mine, and is developing the new Lour mine. Framework agreements for this form of expansion have also been signed in neighbouring South Africa, Botswana, Namibia, and the Democratic Republic of Congo (DRC). Sierra Leone has been contemplated for prospecting, too.
All of a sudden, however, the Sakha president, Vyacheslav Shtirov — a former chief executive of Alrosa — declared himself xenophobic towardsthe Africa option. In early 2006, both Shtirov and his sidekick, Sakha prime minister Yegor Borisov, declared that Alrosa’s interest in Africa was draining capital of out the home region.
Opening the attack on Alexander Nichiporuk, then Alrosa’s CEO, Borisov declared: “If Alrosa will not invest money in [domestic] research work, the republic will find other companies for this work.” He was especially critical of Alrosa for allegedly failing to despatch a geological exploration expedition to the Sakha districts of Zhigansky, Bulunsky, and Oleneksky, and claimed the money had gone todiamond search in Angola instead.
Nichiporuk understood the criticism as personal — an attempt by the two Sakha leaders to undermine the federal government’s appointee in the company. Nichiporuk replied to Borisov:”the African direction is not an alternative, but a serious addition to the industrial and exploration work which is conducted in the basic region of Alrosa’s activity, the republic of Sakha.”
Nichiporuk estimated that exploration spending by his company in 2005 was the equivalent of $72 million, up 30% on 2004. He identified as promising areas along the Lena River in the Zhigansky and Bulunsky districts. Actual exploration spending by Alrosa is difficult to compare from year to year. The annual report for 2006 says that exploration and prospecting amounted to Rb2,865.1 million ($105 million), reportedly ip 13% on the 2005 level. The annual report for 2007 has yet to be issued, but management says that spending on this function last year grew 16% to about Rb3.3 billion.
Shtirov and Borisov didn’t really mean what they said in 2006. They were bluffing Nichiporuk and the federal government in a fight over the shareholding and capital the Sakha region would retain, as the Kremlin increased its control over Alrosa. Africa was Shtirov’s stick with which he beat Nichiporuk out of his job.
That happened in February 2007, and in his place, Shtirov’s man, Sergei Vybornov — an diplomat in central Africa in his early days — has had no qualms about renewing Alrosa’s interest in African diamond mines.
This March, Vybornov reopened talks with government officials in the DRC. A press release from Alrosa confirms that Vybornov met President Josef Kabila at an undisclosed location in the DRC on March 18. Vybornov visited the DRC after earlier stops in Namibia, where he met President Hifikepunye Pohamba, and Angola, where he met President Jose Eduardo dos Santos. The communique issued after the Kabila meeting said the talks focused on “issues related to cooperation between ALROSA and the DRC in diamond exploration and energy sector”.
This was not Alrosa’s maiden visit to Kabila. That happened in April 2005, when Nichiporuk had visited the DRC and met Kabila, along with Israeli Dan Gertler; Gertler was then personally close to Kabila, and held the concession to market most of the DRC’s diamond exports. Alrosa’s interest in Gertler was intended to buttress the break the Russian company had made with Lev Leviev, the biggest of the Israeli diamantaires, with whom, until then, Alrosa had been partnering for the sale of the Catoca diamonds.
This week, Vybornov’s spokesman declined to say if Alrosa has reopened its interest in the Sengamines diamond mine; this is a DRC asset which has been mired in controversy, debt, and challenges to title for several years now. Current claimant to operational control of Sengamines is South African Mike Nunn and First African Diamonds Limited; they announced that they had acquired an 80% stake in Sengamines in April of 2006.
Nunn subsequently approached De Beers, Alrosa, and other international diamond miners. But First African’s acquisition has been challenged by local interests. By the time of Nunn’s approach, Alrosa had already reviewed data on the low-carat Sengamines mine, and of higher quality diamond prospects elsewhere in the DRC. BHP Billiton and De Beers are also believed to have commissioned reports on Sengamines and other DRC diamond prospects.
On March 29, at the traditional overview for shareholders which Alrosa leaders give each year at Mirny, both Vybornov and Alrosa board chairman, Deputy Prime Minister Alexei Kudrin said that Alrosa is committed to new diamond prospects in Africa as a hedge against the rising costs and technical risks of underground mine production in Russia.
Vybornov said the steep fall in the US dollar rate “has forced us to start talking about a currency change in diamond trading. And not only us, the mining companies, but also manufacturers of diamonds, dealers, jewellers, for whom this was simply not imaginable before.” Noting that the recession effect in the US is likely to cut into demand for diamonds this year, Vybornov said there are “very good dynamics of growth for demand of polished in Asia, first of all China, and also, but not least, in the Russian Federation. They give us a unique chance. The largest manufacturers of diamonds and global jewellery brands are ready to take the place of De Beers in trade relations with the company.”
As he has done before, Vybornov urged a cutback in small dealers and intermediaries in diamond trade, in favour of pricing and reputational stability.
Kudrin told shareholders at the meeting that Alrosa’s move into African projects as a “timely and right decision. The domestic reserve base of Alrosa is potentially the best in the world and it is necessary to undertake all efforts that this potential can be realised.”
Vybornov explained that construction of underground mines in Russia “means not only substantial growth of the cost price of diamond production, but also the occurrence of technical and financial risks. We should protect the company from these risks by an intensification of prospecting for diamond deposits in Russia, and in Africa.”
He was careful not to suggest that Africa was supplanting Alrosa’s priority to find new mines in Sakha. An estimated 85% of last year’s exploration budget, Vybornov noted, was spent at home; he identified new mine targets at Verkhnyaya Muna, near Udachny, as well as Botubinsky, Nyurba, Maiskoye, in the Nakyn diamond field, and Zarya, near Aikhal. According to Vybornov, “the results give us hope for the discovery of a new diamond deposit.”
In 2008, he added, Rb2.9 billion will be allocated to prospecting for new deposits, including a new expedition to the Arctic region of northernmost Yakutia. Taking into account inflation, Alrosa’s exploration budget is contracting.
In separate briefings at the shareholders’ session, Alrosa reported that its diamond output increased 1.6% year-on-year to $2.37 billion in 2007. Rough diamond sales, including domestically mined rough and Alrosa’s share of the Catoca mine output, had exceeded target figures by $11.6 million, and cut diamonds by $9.6 million, the company claimed. For this year, Alrosa is expecting aggregate sales for 2008 to stay at the same level as 2007 at about $2.9 billion, vice president Yury Doinikov told shareholders. The ruble’s strengthening had reduced the company’s sales by 45.8 billion rubles ($2 billion) over the past five years, he added.