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By John Helmer, Moscow

Alrosa has been attempting to boost its share price, following the start to regular share trading on the Moscow MICEX exchange at the beginning of this month. On December 13, the company released a forecast for next year of rising mine volumes and higher revenues and profits.

But four days earlier, on December 9, Alrosa’s chief executive Fyodor Andreyev (image left) met Prime Minister Vladimir Putin for his first-ever solo session with the head of government (image right). While Putin meets from time to time with heads of the Sakha republic, where Alrosa’s mines are concentrated – the last of those was on January 18 of this year — Putin has not met one on one with a chief executive of the company since 2004. That was when he discussed moving the then chief executive, Vyacheslav Shtirov, from the company to the presidency of the Sakha republic.

What happened at last week’s meeting with Andreyev isn’t clear, at least not from the transcript published on the government website.

Andreyev told Putin he is optimistic for Alrosa’s privatization and was keen to start. “We have arranged a meeting,” Andreyev said, “which was attended by representatives of the Moscow stock exchange and leading banks such as VTB, JP Morgan, and Morgan Stanley. As it turned out, there are no limitations, except for mental barriers, to the full scale placement of shares in Russia. That is why I wanted to share my opinion with you and ask for your support.”

Putin replied: “We will have an opportunity to discuss this in more detail.” The transcript goes on to record Putin as saying next to nothing else. Asked whether he and Andreyev had discussed a target date for the sale of government shares in Alrosa, the size of the share bloc to be privatized, or the valuation for Alrosa’s initial public offering (IPO), Andreyev refuses to say.

In public statements so far this year, Andreyev and other Alrosa executives have claimed they want to sell between 14% to 20% of the company’s shares with a target valuation of at least $13 billion. But there is resistance in the Sakha government and republic parliament to a selloff of shares which would dilute the republic’s 40% stake in the company, and its influence over the company’s spending plans.

A source close to Alrosa told Polished Prices.com he believes that Yakutian (Sakha) objections to the IPO were raised in the meeting with the Prime Minister, along with the problem of who should replace Finance Minister Alexei Kudrin in supervising the Alrosa. Kudrin had stepped down from the Alrosa board on June 30. He was dismissed from the government by President Dmitry Medvedev in September.

“They [Putin and Andreyev] probably discussed the IPO plans and Kudrin’s resignation,” the source told Polished Prices.com. “Kudrin was supporting Alrosa, and now that he’s gone a new mechanism is required. [The Yakutians] are certainly not over-enthusiastic about [the IPO]! They realize that their stake size will eventually diminish because the number of shares will grow, and the new investors will think about getting as much profit for themselves as they can, and the Yakuts will fail to secure the money for their own regional programs. They will not bring the issue up publicly, but they are likely to protest through a different channel.”

Despite the high-profile attention Putin gave Alrosa, in the same week trading in Alrosa shares led to sharp gyrations in the share price resulting in the fall of the company’s market capitalization from $8.8 billion to $7.7 billion. So sharp was the initial rise in the share price on the MICEX exchange, followed by a comparable drop, the Russian government’s stock market regulator, the Federal Financial Markets Service (FSFR is the Russian acronym), announced it was investigating the cause of the volatility.

Oleg Vorotnitsky, an analyst at Uralsib Bank in Moscow, told Polishedprices.com: “When trading volumes are minimal and the market volatility is enormous, it comes to mind that manipulations are possible. This possibility should be checked by FSFR.” For Alrosa, Andreyev’s spokesman told Polished Prices.com: “The explanation is simple: the market is volatile because the volume traded is very small — just Rb. 1.5 million [$47,000], and trade has just begun, so the current situation is not a trend indicator. The market has shown big interest in Alrosa’s shares — that’s what you can say for sure.”

In a reply to questions from Polished Prices.com today, the FSFR said it “has found no signs of market manipulation during the period of abrupt volatility of Alrosa’s shares on MICEX. Given the absence of such information, there is no need for verification. Share price dynamics on MICEX was caused by limited supply of securities in the first days of trading on the stock exchange.”

A Moscow source close to Alrosa claims that “the company itself was trying to raise the quotations, and there was some speculative trade for this purpose.”

In a report of its nine-month financial results, issued on December 15, Alrosa says it produced 6.9 million carats in the third quarter, down 8% from the same period of 2010. Production by year’s end is expected to be 34.5 million carats; last year the total was 34.3 million carats. On a 9-month basis, Alrosa is reporting carat output up 4.5%, compared to De Beers which has registered growth of just 1.5%, while Rio Tinto and BHP Billiton are down 18% and 28%, respectively. Alrosa is leading De Beers in the world diamond producer league by 1.4 million carats; Rio Tnto trails by almost 18 million carats, BHP by 25 million carats. In the third quarter, Alrosa says it sold 68% of its stones on long-term contracts; 11% on short-term or spot-market trades; and 21% at auction. The average sales price for the 9-month period is $121 per carat.

Sales revenue in the third quarter came to Rb41.2 billion ($1.3 billion), up 13% on the second quarter. Cost of sales rose much faster, however — at Rb14.9 billion, up 43%. Earnings (Ebitda) grew by 3% to Rb22.5 billion, while net profit fell 36% to Rb9.3 billion. The company’s debt grew on the quarter by 8% to reach Rb107.5 billion as of September 30. The company is projecting increased production next year of 152,300 carats to 34.6 million carats. Profit for 2012 is projected to grow by 17% above this year’s level.

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