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By John Helmer, Moscow

Alrosa revealed this week that it has suffered a setback in the management’s plan to sell up to 20% of the company’s state-owned shares in an initial public offering (IPO).

In a briefing for a selected group of bank and brokerage analysts in Moscow, the company’s chief financial officer, Igor Kulichik (literally, “little Easter cake”), said that Alrosa is considering privatization of a bloc of shares of between 7% and 9%. That indicates a big change in the Russian government’s target for the share sale. In June the federal Finance Ministry had intimated that during 2012 and 2013 up to 14% of Alrosa shares might be sold to investors, with proceeds, the Ministry claimed, of up to $1.8 billion. This implied a semi-official valuation of the entire company at $13 billion. Five months earlier, in February of this year, Alrosa CEO Fyodor Andreyev claimed his target for the share sale was 20%. During 2010, Andreyev proposed IPO share sales starting from 49% and dwindling to 25%, while the federal minister in charge of privatization, Elvira Nabiullina, claimed in February of that year that she wanted to dispose of the entire federal stake of 50%. None of these proposals could fly in the face of resistance from the Sakha republic, where Alrosa’s mines are located, and from the federal security agencies.

At present, just over 50% of Alrosa’s shares are owned by the federal government; 40% by the Sakha republic administration and its regional districts.

Andreyev refuses to explain the sharp cut in the IPO. In fact, his spokesman Andrei Polyakov said of Kulichik’s statement: “This is not true, I don’t know where you found such information. Moreover, the decisions are not taken by the company, but by the shareholders, that is the government of Russia and the Republic of Sakha. Alrosa as a company neither takes such decisions nor consults the shareholders on the matter.”

Asked to clarify the apparent conflict between Andreyev and his subordinate over how many Alrosa shares the federal and Sakha governments have agreed to sell, Polyakov said: “Whether Kulichik said something or not, the decisions are made by the shareholders. He could only give them a piece of advice, nothing more.” Kulichik himself is now incommunicado, according to Polyakov: “He is out of the country and out of reach”.

Sources close to the company reconfirm that Kulichik did disclose the 7% to 9% figure. The sources also claim that the downsizing of the Alrosa privatization reflects the collapse of the negotiations for Rio Tinto and Alrosa to jointly develop the Severalmaz diamond deposits in the Arkhangelsk region, with concomitant loss of interest on the Russian side in a share swap with Rio Tinto. The Sakha republic government is also reportedly objecting to an IPO that would significantly dilute its 40% stake in the company. Alexei Kudrin, the former board chairman of Alrosa who was ousted last month as Finance Minister, has also lost his power to influence the share sale in which he had an interest.

Alrosa has reported financial results for the first six months of the year, confirming that its production of diamonds continues to accelerate at a year on year rate of 10%, while De Beers output is growing at 1%, and production at Rio Tinto and BHP Billiton is shrinking at rates of 26% and 25%, respectively.

According to a first-ever open briefing book, Alrosa says it is forecasting that global diamond jewellery consumption is growing at “5.6% a year, reaching $128bn by 2020, helping rough diamond demand to grow by 10.4% on average till 2020 and to reach $40.8bn (from 2010 level of $15.1bn).” Global diamond supply, according to Alrosa, is running at 134 million carats this year, with volume from existing mines to start tailing off from 2016, and new mines adding 30 or so million carats from that year onwards.

The company reported that in the first half of this year, 65% of its diamond sales are on long-term contracts, with an average maturity of three years; 15% of sales are on short-term contracts; and 20% by auctions. “Supply is contracted on a monthly basis, with specified assortments and volumes (with agreed minimum volumes). Prices, as a rule, are adjusted every three months, to reflect changes in market conditions. Following strong demand growth, we increased our share of auctioned sales in 1H 2011, which allowed us to capture additional upside in prices compared to contract sales.”

Sales revenue reported for the first half came in at Rb66.2 billion ($2.3 billion), up 3% on the same period of last year, while costs dropped 39% to Rb23 billion ($793 million). This enabled profit to jump fivefold to Rb26 billion ($897 million). Net debt dwindled in the same period to Rb99 billion ($3.4 billion), down 12% year on year. According to the company report, 73% of sales went for exports, 27% to the domestic market. In the flow of diamond exports, 47% went to Antwerp; 11% to India; and 8% to Israel.

In its analysis of costs, Alrosa says that mining charges rose 5% to Rb28.9 billion ($997 million), as output grew 10% to 19.3 million carats. In its breakdown of mining costs, Alrosa says that 39% is accounted for by wages and salaries; 15% by fuel and energy charges; and 13% by extraction tax. Explaining the significant decline in overall cost of sales, a company chart indicates that the biggest factor was the liquidation of the item, cost of diamonds for resale, which fell from Rb5.5 billion in the first half of 2010 to just Rb311 million in the most recent period.

Most of the company’s capital spending is going on completion of its underground mines. “Two underground mines (Internationalny and Mir) have already been completed and are operational; the 3rd (Aikhal) will reach its target output in 2012. Our 4th underground mine (Udachniy) is in the early stages of development 80% of planned underground capex is for Udachny mine. Udachniy mine is expected to reach its target capacity in 2017.

In his conference call, Kulichik claimed that Alrosa may be able to achieve a higher average per carat price in the second half of this year, beating the first half average of $109 per carat. The company’s current unsold diamond stockpile is around 7 million carats, which he told analysts is the normal level required to maintain the proper assortment offered to clients.

Diamond trading is still active, the company believes, conceding that some buyers are now taking a wait-and-see approach. This means that Alrosa expects stabilization of rough diamond prices for the foreseeable future. September sales volumes, the company claims, were not out of line with previous months, but no details have been released. Alrosa also acknowledges that small buyers are stepping away from the market because cheap financing is no longer available; however, large clients reportedly remain active. There are no sales to the state stockpile agency, Gokhran.

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