By John Helmer in Moscow
Alrosa chief executive Fyodor Andreyev has attempted to persuade the Sakha region to lift its veto on restructuring the shareholding of the company, and then selling shares in a public privatization or initial public offering (IPO).
Andreyev made his pitch in a presentation to the Sakha republic parliament on May 24. His spokesman Andrei Polyakov was unable to confirm the report of the remarks on the website of the Sakha Il Tumen (parliament). Nor would he clarify the timetable of what Andreyev and the Russian government, the controlling shareholder of Alrosa with a 51% stake, intend to do. The Sakha republic (Yakutia), led by Vyacheslav Shtirov, a former chief executive himself of Alrosa, controls 40% of Alrosa’s shares; probably more if individual management and veteran stakeholders are counted; the latter currently hold about 9% of the shares.
Andreyev has now served ten months in office at Alrosa, after being called from his financial strategy post at the state-owned Russian Railways, and instructed by the Alrosa board to clean up the company’s embarrassing balance-sheets, reduce its ballooning debt, and improve its creditworthiness as a borrower in the international market. In this time, Andreyev has given no Russian press conference, and answered no unscripted questions from the diamond market media. His presentation appears to have won some support from the Yakuts, but others remain suspicious and critical.
According to the Sakha parliamentary record, Andreyev admitted that “there have been violations on all the indicators characterizing the stability of the company, resulting in a [negative] rating feedback rating. The quality of the borrower company [Alrosa] has considerably worsened.” In order to fund its planned mining expansion, new exploration, and build the required infrastructure, Alrosa will have to borrow anew.
He repeated the earlier position of the Alrosa management and board that the company should be converted from a closed joint stockholding form, to an open one, and should sell shares to the public. He justified the conversion and privatization plan by saying it would enable the company to raise badly needed money without debt charges. “The crisis is not over, a second wave is expected. In these conditions, the company needs to be able to raise capital, which is only possible after creating a joint-stock company,” Andreyev reportedly said. “It’s easier for a joint-stock company with a transparent management system to raise cheap loans.”
Andreyev’s reference to transparency was intended to contrast his approach with that of his predecessor, Sergei Vybornov, who served as Alrosa’s chief executive between February 2007 and July 2009. Vybornov made a great many public presentations, while the financial position of the company deteriorated sharply. Vybornov was also criticized by Shtirov and Sakha region politicans and administrators for spending the company’s funds on projects in Africa, and non-diamond mining assets elsewhere, short-changing the region where Alrosa is the principal employer and taxpayer.
Several weeks ago, Andreyev said he is considering divesting the African mine and exploration assets which Alrosa owns in Angola, Namibia, and elsewhere in southwestern Africa, in a separate, small-scale IPO. In this week’s presentation to the Sakha parliament, he said that shares of the parent company might be sold to investors and the general public in Siberia, making Alrosa what he called a “people’s company”. He also suggested that if the Yakuts go along with this, such a share sale could provide cash for development of the Sakha region’s mineable deposits of iron-ore and other, non-diamond resources.
“Ideally, we want to turn Alrosa into a people’s company. A public offering will allow the company’s staff and residents of the republic to acquire shares,” Andreyev reportedly said. Changing Alrosa’s legal status would benefit minority shareholders, who want to sell their shares but cannot do so at the moment, he added.
The company’s current debt is Rb106 billion ($3.4 billion), Andreyev reported to the Il Tumen, costing Rb15 billion ($474 million) to service. At least $3 billion in new capital expenditure will be required for the company’s diamond mines and deposits in the Sakha region.
Raising unsecured money by selling shares, in order to pay down the secured debt, should be done gradually, according to Andreyev. “My opinion, as a hired manager, and given the social importance of the company, is that the process of converting the company to OAO [open joint stockholding] should proceed in stages. The first step is simply opening Alrosa, without discussing the issue of a public offering. Attracting more shareholders and raising additional capital can become the second step.”
The head of the Russian Diamond Manufacturers’ Association, Ararat Evoyan, said there was no news in Andreyev’s presentation. The plan of conversion from closed to open stockholding, and of privatization of part of the shareholding, “was declared five or six years ago — it’s no news.” But a veto on stock conversion and IPO by the Sakha republic is unlikely to last, Evioyan added. “I believe that the federal and the Yakutian government will reach an agreement that will suit both. Anyway, if some measures are planned, they should be profitable for the company itself, and only then for its shareholders. Opening of a company mostly benefits the minority shareholders, as the company grows more transparent and rating agencies get an opportunity to evaluate it more precisely. If the company goes public, I doubt that a big stake will be sold, and certainly not to foreigners.”
A leading Russian diamantaire told PolishedPrices.com the value of the share strategy depends on the price of the shares, noting that skepticism on the part of the Sakha stakeholders about the cash benefit to their region may be warranted. “Opening Alrosa can raise its value, but they should be very careful in estimating the price of this operation. Will the result meet the shareholders’ expectations? That’s the question. When a company goes public, the shareholders who benefit most are the minority ones. But if the management publicly announces they are opening the company, this is probably going to bring profit for both the federal and the Yakutian government.”
Monday’s parliamentary record reveals that several Yakut deputies asked critical questions. One, Oksana Vinokourov, is reported as asking whether the Sakha stake will be diluted. Andreyev replied this would not happen, but he hinted that it might. “I think that for the [Sakha] republic it is not so important what percentage of shares it owns – 25% or 40% — because this is a blocking stake”.
Vyacheslav Kulichkin raised the Yakuts’ fear that if there is privatization of the company, the social welfare programs on which the region depends on Alrosa will shrink. Andreyev reportedly acknowledged that the bulk of the region’s social programs are financed by Alrosa’s profits, and that if these dwindle, so do the regional benefits. “What you say is absolutely true,” Andreyev replied. ” But there are [new] sources of funding for social programs [outside the profit stream]. For the exercise of social policies [it is] necessary to attract additional capital.”
Without reporting in detail, the parliamentary record says there was additional discussion among the Yakut deputies of “the danger of Alrosa becoming a private firm, the prospects for exploration, plans for the payment of accounts payable, support of the jewelry enterprises of Yakutia by providing raw materials, personnel policy, measures to ensure environmental security, and much more”. Andreyev’s responses are not recorded.
The Sakha republic representative in the Federation Council, Alexander Matveyev, told Polished Prices.com the republic shareholders “treated Andreyev’s suggestion to open the company with good will.” He added that he expects the federal and the Yakutian governments “will find common ground on this matter.”
This falls well short of an endorsement of Andreyev’s stock conversion and IPO plan. Matveyev signalled that the time to be taken by the Sakha government for negotiating the common ground may be a long one. For the time being, he hinted, the veto remains in place. “As to the terms for opening the company,” Matveyev cautioned, “there is a standing procedure for such operations, and the company will carefully observe this procedure.”