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By John Helmer in Moscow

Even if you had all the kit you need – auditor’s green eyeshade, diamantaire’s magnifying loupe – it is not easy to find what is news in yesterday’s release of Alrosa’s financial report for 2009, audited according to International Financial Reporting Standards (IFRS) by PriceWaterhouseCoopers.

The difficulty of understanding has been compounded by the chief executive, Fyodor Andreyev, who refuses to answer questions. He is also not disclosing publicly what the latest report reveals he has done in private.

For example, Alrosa, the second diamond miner in the world after De Beers, is selling out of Angola, according to Note 5, page 25 of the latest report. This reveals for the first time that on December 30 of 2009, Alrosa 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 reveals that the company has agreed to defer receipt for ten years “for the possible risk”, Alrosa’s audit note claims, “that this amount will not be recovered”.

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). After Alrosa’s sale, Escom announced in January that it plans to inject $750 million in the Angolan diamond mining sector over the next five years.

There has been no explanation from Alrosa for the exit from the Camachia-Camagico project, as the Luo mine is also known. Yet in January of this year, Andreyev claimed through a spokesman that Alrosa was thinking of spinning off its 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 almost 200,000 carats per month and with reserves of 14 million carats, had been disposed of.

According to this week’s financial report, the only African asset with value remaining to Alrosa is the Catoca Mining Company, in which Alrosa holds a 33% stake.

But the new financial report indicates that the asset value of Catoca has been reduced on Alrosa’s balance-sheet from Rb11.3 billion ($385 million) in 2008 to Rb9.8 billion ($324 million) in 2009. Revenues from the mine are also reported as falling from Rb14.5 billion ($494 million) in 2008 to Rb13.3 billion (($440 million) in 2009. Catoca’s profit for 2009 was Rb1.7 billion ($56 million), but the company reports that it drew just Rb46 million ($1.5 million) in “currency translation income” from Catoca. Catoca’s debts and liabilities are estimated at about $200 million. The new financial report appears to put such a low current or future value on Catoca as to rule out an IPO for Alrosa’s African assets.

There is another, bigger anomaly in the latest financial report, which Alrosa hasn’t disclosed before.

According to announcements this year and last from the chief executive and his spokesman, Alrosa has been successful in reducing its heavy debts by selling off non-core, non-diamond mining assets which had been acquired earlier with the approval of board chairman, Alexei Kudrin, Russia’s finance minister. Kudrin refuses to answer questions about the asset purchases, or their sale.

When Alrosa first announced this asset disposal, here is what it claimed on November 3, 2009: “ALROSA Co. Ltd. has closed a deal of sale of its equity interest in ZAO Geotransgas and OOO Urengoyskaya Gazovaya Kompania (Urengoy Gas Company). The transaction amount is USD 620 m. ALROSA’s exclusive financial adviser in this deal was VTB Capital. The sale of non-core assets is part of ALROSA’s program aimed at reducing its debt portfolio. All the proceeds from this transaction have been used for repayment of the Company’s debts. During the last quarter ALROSA has reduced its total loan portfolio by RUR 30 billion.”

A year earlier, in the autumn of 2008, there had been reports that the oil and gas assets referred to had been the focus of a bidding contest arranged for Alrosa by JP Morgan. Before Oleg Deripaska’s companies collapsed into insolvency, they were reportedly interested in buying. Both asset holdings were identified in earlier Alrosa records as operating in the Tyumen region of Siberia. Geotransgas was a producer of gas and gas condensate; Urengoyskaya a development-stage company with licenses for oil and gas deposits.

Alrosa reported that it first bought into Geotransgas through a British Virgin Islands vehicle called New Technologies Holdings (NTHL) at the end of 2005. Who owned and sold NTHL to Alrosa isn’t disclosed. The purchase price reported by Alrosa – then headed by Alexander Nichiporuk – is difficult to fathom, and the bank which mediated the deal isn’t named.

The Alrosa financial report for 2005 describes the transaction as the purchase of NTHL, then its sale, and finally its repurchase again: “the Group sold NTHL to an investment bank and simultaneously concluded a forward repurchase agreement with the bank providing for the repurchase by the Group of 100 percent of NTHL in December 2007 for an aggregate purchase price of US$’mln 140 plus periodic payments in respect of this amount at a rate of six-months LIBOR plus 2.35 percent per annum payable semi-annually. The assets and liabilities of NTHL as at 31 December 2005 were consolidated in the Group’s consolidated financial statements. The corresponding liability totalling RR’mln 4,030 (US$’mln 140), which represents a deferred purchase consideration payable to the investment bank, was recognised within long-term debt as at 31 December 2005 in the Group’s consolidated financial statements.”

In 2006 and 2007, the London inter-bank offered rate (Libor) ranged from a low of 4.5% and a high of 5.8%. If an average for the period is assumed of 5%, then Alrosa’s deal for NTHL should have cost the principal of $140 million plus 7.35% interest over 24 months. That makes just over $160 million.

Next, in April 2006, Alrosa appears to have bought Urengoyskaya through another special purpose vehicle called Rolant Investments, which was owned at the time by Morgan Stanley. As with the NTHL assets in Tyumen, Alrosa does not reveal who was the owner and seller into Rolant.

Again, the transaction chain was a complicated one, in which Morgan Stanley put up $300 million for Urengoyskaya and two other assets. Alrosa agreed to buy them from Morgan Stanley by October 2007 for $300 million, plus interest at 7.5% per annum. In the interval, the assets save for Urengoyskaya were sold to “a third party” for $48 million. Who pocketed these proceeds isn’t clear.

According to the Alrosa financial report at the time, Rolant Investments “was structured as described above primarily to give the Group greater flexibility to resell its rights to the interests in the oil and gas companies if the Group were to decide not to develop its oil and gas activities, than if the Company directly held the interests in the individual oil and gas companies.”

Another rough estimation of principal and interest over 18 months suggests that Alrosa paid Morgan Stanley a total of $334 million, not counting the side deal for $48 million. If that is subtracted from Alrosa’s purchase price, then the deal cost to Alrosa was $286 million. Add that to the $160 million cost of NTHL, and Alrosa should have booked both transactions at an aggregate outlay of $446 million. The financial record indicates that there were no operating costs for Rolant. “At the transaction date Rolant Investments Ltd. had only a portfolio of production licenses, it had not performed any activities to develop the licensed areas and had no other operations. Therefore the acquisition of Rolant Investments Ltd. was treated as an acquisition of assets, not as a business combination.”

When Chairman Kudrin and CEO Andreyev got around to disclosing publicly that Alrosa had successfully sold off NTHL and Rolant for $620 million, noone asked them to explain the cost price; the subsequent asset valuation (as oil and gas assets plummeted in value during the crash); and the markup agreed to by the state-controlled VTB bank of $174 million. If the calculations reported are correct, Alrosa earned from the VTB transaction a 39% profit for nothing more than holding the assets over three years.

Since Kudrin was chairman of both the Alrosa board and the VTB board at the time, noone should be better placed than he is to explain why it was so profitable to move money between his right and left pockets. He remains silent.

But according to auditors PriceWaterhouse Coopers, in the report they have just signed for Alrosa, Alrosa cannot exactly claim to have sold the assets at all.
 

According to the note on page 23 of the new financial report: “In October 2009 the [Alrosa] Group sold a 90 percent interest in ZAO Geotransgaz and a 90 percent interest in OOO Urengoyskaya Gazovaya Company to the companies affiliated with OOO Bank VTB for a total cash consideration of RRmln 18,615 (US$620 million).

Simultaneously, the Group entered into put option agreements with the buyers and the bank pursuant to which the Group may be required to repurchase 90 percent interest in OOO Urengoyskaya Gazovaya Company and a 90 percent interest in ZAO Geotransgaz back during 30 days following 1 October 2012 at a strike price of US$870 million.”

For that yo-yo, Alrosa appears to have accepted the obligation to pay a 40% premium when the time comes. And not only that — VTB and Alrosa have agreed between themselves that Geotransgas and Urengoyskaya will double in value from $446 million in 2007 to $870 million in 2011. Putting on the green eyeshade, it looks like VTB is charging Alrosa 13.3% per annum for keeping the assets off the company’s books.

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