By John Helmer, Moscow
Alrosa is reopening its African business but there is no song and dance yet. The chief executive, Fyodor Andreyev, is in Angola this week, the company has confirmed, and is discussing with state diamond company Endiama the formation of joint ventures to explore for diamonds on the Angolan-Congolese border. Similar exploration ventures are being planned with Botswana Diamonds Plc and an unidentified company in Zimbabwe. Andreyev’s negotiations are the result of a still secret shift in Alrosa’s policy towards capital expenditure outside the republic of Sakha.
According to the company announcement [1] on April 2, “in the near future, ALROSA’s geologists will conduct preliminary work to assess the areas most promising in terms of potential discovery of a primary diamond deposit.”
Andreyev is pitching the policy change as adding extra value to Alrosa’s proven diamond search technologies. But he is trying to avoid publicity in order to avoid clashing with Sakha republic officials who have accused Alrosa executives in the past of failing to invest enough in the Sakha republic, and also of corrupt enrichment in offshore ventures, many of them in Angola and across the border in the Democratic Republic of Congo (DRC). There is also the acknowledged risk that in some countries Alrosa may expose its personnel and investment to hostage-taking and violence.
In 2009 Alrosa acknowledged it had sold its interest in the Luo diamond deposit, Angola’s second diamond mine, for a price equivalent to $4.3 million. But Alrosa’s report at the time also revealed that it had accepted the risk that even that amount might never be paid. The sale of Alrosa’s 44% stake in the Luo project to Portuguese partner, Escom Mining, followed a loss for the year of Rb1.2 billion ($38 million). The loss reported for the year before, 2008, had been Rb816 million ($28 million). There was no explanation [2] from Alrosa at the time for the exit from the Camachia-Camagico project, as the Luo mine was also known.
Yet in January of 2010 Andreyev announced [3] he was thinking of spinning off Alrosa’s African assets for an initial public offering. He did not reveal at the time what African assets were being considered; nor that the Luo deposit, producing at the time almost 200,000 carats per month and with reserves of 14 million carats, had been disposed of. When Andreyev was floating this particular balloon, the only African asset with value remaining to Alrosa was the Catoca Mining Company, in which Alrosa holds a 33% stake. But on the company’s balance-sheet the asset value of Catoca was reduced from Rb11.3 billion ($385 million) in 2008 to Rb9.8 billion ($324 million) in 2009. Heavy debts at Catoca also seemed, at least in 2010, to preclude a separate listing of Alrosa’s African assets.
Catoca’s value to Alrosa has continued to shrink in the meantime. According to Alrosa’s last financial report – for the nine months to September 30, issued in December last – Alrosa’s dividend from Catoca’s profit for the period came to Rb816 million (about $26 million); that was down 17% from the the same period of 2011. The dividend was just 3.3% of Alrosa’s aggregate net profit for the period. For reasons not explained in the report, Alrosa’s accounts also wrote down the value of its stake in Catoca’s assets by 27% from the preceding year – to just Rb1.6 billion ($52 million).
Asked recently whether Alrosa was planning to wind down further or sell out of Catoca, Evgeniya Kozenko, a company spokesman for Alrosa, responded; “ “No, ALROSA does not sell its stake in the Catoca project.”
Expanding Alrosa’s investment in southern Africa may be Andreyev’s effort to pitch to international sharebuyers the image of Alrosa as a genuinely international diamond miner. A report to clients today by Alfa Bank mining analyst Barry Ehrlich suggested that “foreign long-term expansion is the correct strategy in the current market environment. We believe the news is NEUTRAL for Alrosa valuation-wise, especially until any further details become available. New potential exploration expenses will most likely not be large enough to negatively affect profitability margins. Current reserves are sufficient for over 27 years of production at the current rate, so Alrosa has no immediate need to expand its resource base.”
A leading Russian diamantaire interprets the move back into Africa as an attempt to find new sources of diamonds where they are already believed to be plentiful and relatively cheap to mine. “The decision is probably logical, given the fact that new fields virtually don’t exist, demand is growing, and the supply of rough diamonds is not increasing. Also, Alrosa has reduced production volume in Yakutia. And what other Alrosa’s subsidiaries can provide, such as Severalmaz [Arkhangelsk region], of course also can not compensate for it. In Angola, the advantage is that there is a much more favorable climate for production. Alrosa has accumulated a lot of experience there too. So this step is quite reasonable – if they have the spare cash, why not invest in production expansion?”
He dismissed the operational risks. “In Angola, I do not think we can talk about any serious risks. That is, Angola is quite stable and under control as a state. This is not Sierra Leone or Mali. In this respect, perhaps it is not Namibia, but more or less there in Angola state institutions are functioning normally and there is security. With all the problems that naturally exist in any developing country, I would not say that there is anything special, any big risks.”
Ararat Evoyan, a veteran of the Russian Association of Diamond Manufacturers, said Alrosa has the extra cash to spend, and the old bones have been buried. “If they will invest in Africa in the development of the diamond mining, it will be very good. Based on the experience and professional skills of Alrosa, they can probably do better than Catoca, so they will have a [positive] result. This will increase diamond production and on the market will be more diamonds.” He noted that it was far better for Alrosa to invest in diamond search in Africa than in non-diamond resources, such as coal, petroleum, gold or gas in Russia.
Evoyan is referring to the business diversification pursued when Sergei Vybornov, chief executive, Alexei Kudrin, chairman of the board, Otar Marganya, scheme advisor, and Vyacheslav Shtirov, Sakha president, ran the company. One of the last from the rucksack of their moneyspinners, the Timir iron-ore deposit in Yakutia, has now been disposed [4] of to Evraz for cash of $140 million for a 51% stake, and no obligation to invest in mine development.
Sergei Goryainov, a leading industry expert at Rough & Polished, the Russian diamond industry bible, believes the target search zone in Angola is “one of the few places on the planet where with a significant probability serious deposits can be found… The proposed investments there, as I understand it, are quite small…so there is not much risk for Alrosa. The result can be managed with a good agreement with the Government of Angola to facilitate a license for joint development in case a deposit will be opened.”
But he cautioned that “political risks in the region are very high, and every day, in my opinion, they are getting higher. And Angola continues to be at risk, because all of the standard features – high level of corruption, high unemployment of the population, the existence of resentment since the days of the Civil War confrontation between the elite groups, and the aging in power of [Angolan President] José Eduardo dos Santos – all together potentially provide the stage for conflict in the country. So, in my opinion, Angola is at risk, as well as the Congo [DRC], and especially Zimbabwe.”
Goryainov suggests that a move into exploration in southern Africa is calculated to compete against De Beers in its backyard, with the risk of push-back on De Beers’s part. “The economy of Botswana is very closely associated with De Beers. There De Beers has serious assets and a long history of interaction with the government of Botswana. So I think De Beers is not very happy to see the arrival of Alrosa in the zone of their influence. Therefore, in the future it is possible this unhappiness can turn into friction with the government. Still, considering the low amount of the investment, the financial risks are not high, and the information to be gained in the field of geology will be very useful. So this is a good step.”