ALROSA Opens Up

RAPAPORT… The possibility of ALROSA going public is in the headlines again as the company’s management works through the process of changing from a closed joint-stock company (CJSC) to an open one. “The first step is just to transfer ALROSA into an OJSC [Open Joint-Stock Company] without issuing additional shares; the second step may be attracting more shareholders and financing,” Fyodor Andreev, ALROSA’s president, told the news agency RIA Novosti in Yakutia.

Although the idea of transforming Russia’s largest diamond miner into an OJSC has been in the air for two years, the timing seems particularly good right now because the company is trying to lighten its hefty debt burden and raise money for underground mine construction. Going public will help with both goals. “ALROSA ended 2009 with $3.5 billion outstanding debt,” Andreev told RIA Novosti. “The company is paying interest on that debt of almost $500 million a year.”

ALROSA is not alone among diamond miners in its initial public offering (IPO) plans; according to other reports, De Beers is considering going public in London.

ALROSA’s transition into an OJSC is certain to be debated in the parliament of Yakutia, a Russian republic in Eastern Siberia where most of ALROSA’s mines are located and where the company has considerable social responsibilities. Yakutia is the company’s second largest shareholder, with 32 percent of the stock, while the Russian government holds 50 percent plus one share of ALROSA. The remaining stock belongs to different regions of Yakutia — 8 percent — and other shareholders.

Looking for More Gems

Russia’s leading science and research institutions have united their efforts to identify untapped diamond deposits in Siberia using sophisticated data and research methods. “As a result of the research, we expect to single out three or four lots that could contain at least 145 million carats,” said Nikolay Pokhilenko, the director of the Institute of Geology and Mineralogy, which heads the three-year-long project. The lots would then be studied more closely with onsite drilling to determine how best to launch full-fledged mining operations.

Pokhilenko said new diamond deposits have not been discovered in Russia since the mid-1990s and only a quarter of the sites that could potentially contain diamond deposits have been thoroughly studied. The research project, which is costing $6.5 million and is sponsored by Russia’s Federal Agency for Subsoil (Rosnedra), will focus primarily on Yakutia, but also study other regions of Siberia. Pokhilenko said the search for new diamond deposits was crucial as current deposits are being depleted, which could result in a shortage of supplies to the market.

Shortage of Rough

Although the demand for polished diamonds remains steady, Russian manufacturers are facing the challenge of finding enough rough. “It’s not just the matter of high prices, there’s not enough rough in the market,” said Ararat Evoyan, the vice president of the Russian Diamond Manufacturers Association. For many small companies, it’s difficult to buy rough abroad because of the distance. On the other hand, insiders say much of ALROSA’s product goes to cover its own long-term contracts, which leaves small manufacturers with little to choose from. Reports that De Beers is planning to reduce production to extend the life of its mines is further aggravating the situation.

“There are fears that the shortage of diamonds could lead to a new price bubble,” said Valery Morozov, the director of Ruis Diamonds, one of Russia’s largest manufacturers. “Indian companies are increasing their demands without a direct connection to the demand for polished stones.” The expectation of a new price hike has given little boost to polished sales. “People buy gems because they fear that when De Beers cuts production, the rough prices will increase, taking up the polished prices as well,” said Svetlana Maksimova from Yakutia Diamonds.

Consumer Preferences

Rings designed with one single diamond are the biggest hit of summer for two reasons: first, more Russian newlyweds prefer rings with gems and summer is a traditional nuptial season; second, buyers, discouraged by the economic crisis, want to buy classical items. Stones between 0.10 carats and 0.30 carats are selling best due to their low price. Gems of 0.70 carats to 0.90 carats are in demand because of their price advantage over 1 carats.

In other positive market news, those who are ready to spend more on jewelry are returning to the market. “There’s an interesting trend — items costing less than $3,000 are selling, and then those costing $10,000, but nothing in between,” said Flun Gumerov, president of Almaz Holding. However, Russian jewelry makers face increasing competition from imported goods. “Because of the economic crisis, many Russian companies stick to the designs that are selling the best and do not offer much new, while consumers want variety, which foreign items provide,” said Aleksand Andrushkevich, the director general of Jewelland Holding, a retailer of Russian and foreign jewelry.

The Marketplace

• ALROSA sold $31 million worth of rough diamonds at its May 28 auction in Moscow.
• The company sold 281 lots out of 291 offered, with the final price exceeding the starting one by 81 percent.
• Buyers from 51 companies were offered 830 stones weighing over 14,800 carats.
• The biggest gem weighed 188.12 carats.