ALROSA Management Shake-up

RAPAPORT… ALROSA President and Chief Executive Officer (CEO) Alexander Nichiporuk resigned on February 2. Nichiporuk stepped down after completing the main tasks the shareholders had set in front of him; most importantly, “safeguarding government ownership of the diamond industry,” according to a statement from ALROSA.

The following week, ALROSA’s supervisory board appointed Sergei Vybornov, head of the diamond miner’s subsidiary Investment Group ALROSA, to steer the parent company, starting February 9.

A shake-up within ALROSA management was somewhat expected after Vyacheslav Shtyrov managed to secure the Kremlin’s support and get reappointed in December for a second term as Yakutia’s president. Nichiporuk, an appointee of Russian Finance Minister Alexei Kudrin who was put in charge of ALROSA two years ago to facilitate the federal takeover of the company, reportedly failed to get along with Shtyrov, who himself was ALROSA’s CEO until 2001.

In the spring of 2006, Shtyrov lambasted Nichiporuk’s policies, with special emphasis on the failure to prospect new deposits and the slow construction of underground mines. When asked by daily newspaper Kommersant whether his resignation resulted from personal conflict with Yakutia’s president, Nichiporuk acknowledged there were issues in his relationship with Shtyrov. “Of course, there were certain problems and arguments,” Nichiporuk said. “It’s uncomfortable to be in a situation when you see no understanding. And there is always something to criticize.” Nichiporuk maintained that Shtyrov’s criticism targeted long-term projects, impossible to accomplish during Nichiporuk’s short tenure.

New Blood

Unlike his predecessors in the ALROSA CEO chair, Nichiporuk had neither Yakutian nor diamond background when he took over the company. But neither does the new appointee Vybornov. At 49, Vybornov is also the youngest ALROSA CEO to date. He started his career in the Russian Foreign Affairs Ministry and served in a diplomatic posting in central Africa for a while. Before joining ALROSA, Vybornov was a senior investment manager at Norilsk Nickel, the country’s leading producer of palladium, platinum, copper and nickel.

Like Nichiporuk, Vybornov is a financier and joined ALROSA around the same time as his former chief. As head of ALROSA’s investment arm, Vybornov secured several profitable gold mining ventures in the Russian Far East. Vybornov is said to strongly oppose the presence of the major foreign diamond miners, such as De Beers and BHP Billiton, in the Russian mining sector.

Norilsk Nickel Merger Rumors

In view of his past affiliation with Norilsk Nickel, Vybornov’s appointment has stirred speculation about the possibility of a merger between ALROSA and Norilsk Nickel to form a government-owned mining holding company. Similar rumors have circulated since 2005, but became more active again after Norilsk Nickel CEO Mikhail Prokhorov recently announced he would step down and sell out his share of the business to his partner, Vladimir Potanin, Russia’s ninth-richest man. The deal comes as part of the larger restructuring of Potanin’s Interros holding company. Analysts say this shift could be the first step in a government takeover of Norilsk Nickel.

The company, the world’s largest platinum exporter, has a capitalization of $30 billion, while ALROSA is valued at about $10 billion to $11 billion. In 2006, Norilsk Nickel produced 98.4 tons of palladium and 23.4 tons of platinum, but it expects lower output this year — 93 to 95 tons of palladium and 22 tons of platinum — due to major reconstruction of production facilities.

In an interview with Kommersant, Nichiporuk said there would be no serious discussion of an ALROSA-Norilsk merger for at least six months, while both companies are being restructured. ALROSA is currently preparing to issue additional shares following its minority shares buyout in 2006 and a property dispute settlement between the Yakutian and federal governments, also in 2006, that cleared the way for the federal government to get a controling stake in ALROSA. Norilsk Nickel, on the other hand, has to wait until the two current owners, Potanin and Prokhorov, split their assets.

Government Strategies

“When both companies have finished restructuring, it’s quite possible that one of them will step forward with the initiative,” Nichiporuk said. He added that it was no secret the government wants to secure control over strategic deposits, including metals. In recent years, the Kremlin has sought to recover control over the key parts of the economy, with Gazprom and Rosneft leading in the energy sector, and Rosoboronexport controling arms and autos.

“My understanding is that the government and the Russian state are interested in Russian companies becoming competitive in the world market, and having an appropriate size to handle major, investment-intensive mining projects,” Nichiporuk said. “That is why, in my opinion, it’s a timely target to create a national mining company on the base of ALROSA. Otherwise, we won’t be able to develop our own deposits, or expand in the world.”

The Marketplace

• ALROSA sold $2.865 billion of rough in 2006, exceeding its sales target by 1.23 percent. Export sales of rough topped 55 percent. ALROSA’s total sales, including polished diamonds, were more than $3 billion in 2006.
• Kristall Smolensk sold $358.2 million worth of polished diamonds in 2006, 3.2 percent more year-on-year from $347 million in 2005. Export sales were at 97 percent, compared to 99 percent in recent years.