ALROSA: Industry leader by 2018 (DIB)

ALROSA has ambitious plans to be the world’s largest diamond producer for years to come and its upcoming IPO is part of those plans

ALROSA: INDUSTRY LEADER BY 2018
20 June 2013
RACHEL SEGAL
As the legend goes, in the mid-1950s, while Russian geologists were braving extreme weather conditions in their search for kimberlite pipes in the vast forests of the Republic of Sakha (Yakutia), a fox with a blue-tinted underbelly caught the eye of one explorer.  This geologist, who was specifically looking for kimberlite indicator minerals, was then said to have followed the fox as it scurried into a hole surrounded by blue-tinged earth. This foxhole subsequently became part of the Mir kimberlite pipe in 1955.Needless to say, almost six decades and hundreds of millions of carats of diamonds later, Russia has come a long way in its diamond journey. More than this, though, the country's diamond conglomerate, Alrosa, has also come a long way in its determination to be open and transparent, as evidenced by a recent press tour of some of its mines and diamond-processing and -sorting facilities.

Alrosa's Current and Future Rough Output

Historically, Russia's official rough diamond output figures were considered a state secret. However, today, especially ahead of its upcoming planned secondary public offering, Alrosa is forthcoming about sharing its current and future production figures, strategies and growth plans.

The Alrosa Group produced 34.4 million carats in 2012. It plans to maintain that same figure this year, according to Alrosa First Vice President Igor Sobolov, who spoke candidly to journalists in his Mirny office during the May press tour.  While the company aims to increase its production from 2014, with the supervisory board approving a rise to 38-40 million carats by 2020, the miner's long-term goal is to remain at 34 million carats by 2035.

In so doing, Sobolev said that, based on its known reserves, Alrosa will decrease output from its Yakutian operations from about 34 million carats to 24 million carats in 2035. To offset this decline, the company will increase output levels at its Severalmaz subsidiary, whose operation is located outside of Yakutia. Severalmaz, of which Alrosa owns a 95 percent share, will see production from its Lomonosov deposit in in the Arkhangelsk region of northwest Russia jump from 500,000 carats a year to about 10 million carats by 2035. (To handle the significant increase in the amount of ore being processed there, a processing plant is to be constructed.)

Production Progress

Alrosa sits on proven diamond reserves of 1.154 billion carats, most of which are located in Yakutia, Russia's largest republic stretching across 3.1 million square kilometers. Within Yakutia, Alrosa has four mining and processing divisions: the Mirny, Aikhal, Udachny and Nyurba divisions. It also has a wholly owned mining affiliate, Anabar Almazy, which focuses on alluvial mining in northern Yakutia.

Among its operating mines and alluvial deposits, Alrosa's three main pipes, Mir, International and Aikhal, currently have expanded into underground operations. As the company continues to increase the levels of ore output (and processing) at these underground mines, it also plans to launch the Udachny underground mine in 2015.  Overall, about 10 million carats of diamonds are currently being mined underground, which will exceed 15 million carats by 2020, according to Sobolev.

To keep up with the increase of its underground mining operations - and the risks and costs associated with digging deeper underground in order to extend the life of the mines - the company has also invested in remote mining technology, which it plans to install this year for use in 2014, Sobolev disclosed.

Continued Exploration

In spite of the current activity in Alrosa's on-stream deposits, the group is still exploring for and developing new deposits. For example, from 2019, the company will start operations at the Verkhne-Munskoye deposit in western Yakutia, which contains three kimberlite pipes; they are currently under exploration but are projected to produce two million carats per year by 2021. Also, the Aikhal Division aims to start operations at another new pipe, Zarya, in 2020.

According to Sobolev, there is still "high potential" to find new deposits and reserves within Yakutia. Additionally, outside of Russia, Alrosa also plans to continue geological exploration in Africa, specifically in Angola, Botswana and Zimbabwe. Sobolev revealed that the company's geologists have new technology that can detect whether sedimentary rock contains diamondiferous kimberlite.

Given the company's focus on increased mining operations, exploration and prospecting, Sobolev emphasized that company's biggest challenge is optimizing its costs. Currently, the company spends 4 billion rubles a year on exploration, he said.

And what is driving the Russian producer to keep searching farther, digging deeper and investing more? Sobolev said that by 2018, the company intends to be the world's largest diamond miner measured by revenue, "if the market helps us," he added.  By volume, the company has already achieved the title of the world's number one miner.

Secondary Public Offering

To help achieve its aim of becoming the world's largest diamond miner by both volume and value, the company has begun a streamlining process that will help it become more economically efficient by being able to focus solely on mining. As part of this effort, Sobolev confirmed that Alrosa is planning its secondary public offering for October 2013; it plans on selling 14 percent of its shares: seven belonging to the government of Russia and seven belonging to the government of Yakutia.

Currently, the Russian government owns 50.9 percent of the company, the Yakutian government 32 percent, regional municipalities hold 8 percent and other legal entities and individuals hold 9 percent.

"The market will determine the price per share," projected Sobolev. While Alrosa's shareholders haven't yet decided what they will do with the expected proceeds from the IPO, Sobolev stated that the company is proposing to its shareholders that they allocate part of the funds for developing infrastructure in Yakutia, including construction of a flight field in Mirny, and the development of roads and water purification and removal systems. Sobolev said that Alrosa now bears the costs of such social and communal projects, which, he reasoned, should instead be the responsibility of the federal governments. His aim is to reduce the company's expenses for such communal services, currently estimated at 3.4 billion rubles, so as to make Alrosa's focus and budget solely geared toward mining.

As such, Alrosa is actively divesting from its non-core/non-mining activities and ridding itself of their associated expenses. This move, forecast to be complete within the next five years, is supported by both the Russian and Yakutian governments, noted Sobolev. So far, the company has disposed of its hydropower, oil and agricultural companies. It has also sold its Timir iron ore project as well as its hotels. The company does intend to keep its aviation company, as it is a separate commercial company.

Looking Ahead

In all respects, Alrosa seems to be moving forward with incredible focus and at an impressive pace, something of a known and proven equation for the miner. Yet despite such progress and growth, the company has also succeeded in not losing sight of its origins. On some of its signs, the picture of a fox can still be seen near the company logo, perhaps as a reminder of the initial perseverance that went into discovering Russia's first diamond mines.

It is clear from Alrosa's near-term and long-term growth and production strategies that, in addition to diamonds, the company has plenty of determination, ambition and resources in its reserves to fortify its position as industry leader.

This page was last updated on 20 June 2013 at 11.02