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By John Helmer in Moscow

A meeting of Alrosa management board, followed by the board of directors, last week decided to modify earlier estimates of this year’s mine production plan, but slashed this year’s target profit figure. This is the first official indication of how effective the state purchasing scheme for Alrosa diamonds is proving to be. But it also reveals the low, virtual cost price at which the state stockpile agency Gokhran is purchasing the goods.

According to a prominent international diamantaire, the outcome should mean that Alrosa will operate a much higher capacity than its international rivals, De Beers and Rio Tinto, but without a bottom-line loss.

The Executive Board met on April 13, and was followed the next day by the Supervisory Board. No decision was taken on the highly sensitive issue of whether to replace the current chief executive, Sergei Vybornov. Sources close to the company confirm that the chief executive’s position has been under review and debate for months. It is now believed that if no consensus candidate is agreed by June 20, the scheduled date of the annual general meeting of Alrosa shareholders, Vybornov will have successfully fought off his critics and rivals.

The latter continue to maintain their confidence the chief executive will be replaced. But Vybornov, who has not responded to direct questions for some time, has issued an optimistic bulletin for the company’s prospects this year. “I believe there is a very good outlook in terms of demand for Russian rough,” he said in a series of statements recently delivered to the Russian news agency, Interfax. According to Vybornov, there is global shift in demand under way, away from the US. “On the whole, demand in America may drop considerably since they all there lived on credit for a long time…As for other markets, they are already recovering. Dubai is a very good market – it is a new world-scale center of diamond jewelry trade…It is likely that the market will shift to Asia and Europe and I think it will virtually balance off the drop in U.S. demand completely.”

Vybornov also said he is negotiating new spot and long-term deals with selected Europe-based buyers. “In February and March, we were very busy improving our customer base. We have chosen a group of 15 companies in Antwerp which have their own free funds, no problems with banks and a short credit leverage of about 10-20%. We offered these companies to build a long-term partnership – from 6 months to 3 years, taking our bearings on prices leveled at an average between the August 2008 peaks and current values. The representatives of these companies are right now in Moscow examining the goods and we shall sign these contracts. Putting it in other words, these people are investing into the future paying in excess. They understand they are overpaying, but they also understand that in three years prices are most likely to go upwards.”

He claims that there has been a price gain of 10% to 15% in the first quarter; even greater for some sizes. At the same time, he was critical of dumping-price sales of rough in the first quarter. Referring to African and Canadian diamond sales, Vybornov said “prices there have dropped sharply and rough diamonds were dumped for any money. There are economies 80-percent dependent on diamond mining. Obviously, such countries decided to get their money here and now letting diamond prices swoop down and driving mining efficiency to incredibly low levels.”

In its customary communique, released by the Supervisory Board after its meeting on April 14, the company referred to “a number of factors materially affecting production and financial performance”, and announced that it was reducing production and sales targets for this year. Alrosa does not release carat data for production, and instead gives a US dollar equivalent. The production target for 2009, according to the board, will now be $1,655 million for Alrosa’s mines, plus $448.7 million for the Nyurba mine, which is part-owned with the Saka republic administration.

Media reports have misunderstood the new data, reporting them as significantly down on last year’s levels and values. While this is true in relation to 2008, that is old news.

As Polished Prices reported the revised targets agreed at the April Executive Board meeting, it now appears that Alrosa has either increased its production estimate for the year, or increased its per-carat price, or both. In April, the targets were $1,530 million for the Alrosa mines, and $336.9 million for Nyurba. A month later, these targets have now been upped by 8% and 33%, respectively.

The newly decided diamond sales targets for 2009 are $2,531.4 million for rough; $100 million for polished. The rough target appears to have been raised by 26% since April; the polished target remains the same.

On the other hand, the Supervisory Board has released a new profit target for the year of Rb454.4 million (currently $14.2 million). This has been cut from Rb2,180.3 million ($68.1 million), a reduction of 79%.

Vybornov’s spokesman, Alexei Polyakov, will not respond to requests for clarification. Vybornov said in the Interfax interview on April 29 that production this year will fall by 4%, presumably in volume terms. But the new targets have already been increased on the basis of a greater price increase than Vybornov has claimed for the first quarter. “We are cutting our output approximately by 4%, but this had to be done a long time ago. There were several diamond fields which were economically on the brink of break-even efficiency. For instance, the Zarnitsa diamond pipe is the very first pipe discovered in Yakutia. So diamond mining there was more based on image-making. This we are going to cut. But the main thing is that we are preserving our plans to switch over to underground mining.”

Alrosa is not disclosing how much of current production is being sold to Gokhran, and how much stockpiled by the company. “The sales to Gokhran were less than what we would like to sell on the market, ” Vybornov told Interfax. “However, all-in-all the company managed to meet its operational targets for Q4]….[In Q1] we continued our sales to Gokhran and did not go out to the market. I cannot disclose our sales figures to the State Reserve since this information is confidential under the law. I would like to note however, that it is significantly less than we could have sold on a regular market.”

Vybornov has also hinted that as much as half of the company’s production this year will be held back from Gokhran’s cost-price terms, and offered to the market instead. According to Vybornov, “the amount is $500-700 million and maybe more and we would like to sell that much per long-term contracts till the end of this year.”

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