Igor Sobolev’s interview with the newspaper ‘Mirninsky Rabochy’ and the ‘Almazny Kray’ TV

The First Vice President and Executive Director of OJSC ALROSA Igor Sobolev gave an interview to the ‘Almazny Kray’ TV and ‘Mirninsky Rabochy’ newspaper.

Question: Mr. Sobolev, the Udachny underground mine has recently been launched and the main concerns of Udachny’s residents are about the number of jobs. When will these new jobs appear? When will life in Udachny start to improve?

Answer: Answering your question it is important to consider all the deposits which the Udachny Mining and Processing Division is working on. The Udachny underground mine with an estimated capacity of 4 million tons of ore per year, does not replenish all the volumes that are eliminated with the closure of the open-pit. The plant capacity is now 10 million tons, it handled 12 million tons at its peak, so all its production systems were geared to this volume. It is clear that ore from the Udachny mine alone will not be able to replace all the ore from the open-pit. That’s why the company is now developing a feasibility study which should help to answer the question: in what form will the Udachny mine operate in the most profitable way? The cost effectiveness of the joint work of the Zarnitsa pipe, the Udachny pipe and the Verkhne-Munskoye field will be evaluated.

In addition to technical calculations this year we have also planned a production experiment; one part of this experiment has already taken place - shipping ore from the Zarnitsa pipe using Scania trains. The point of the experiment is to significantly reduce the cost of the ore supply from remote and relatively poor fields to the factory. The first results are encouraging. Costs look very attractive in comparison to the delivery of ore using Zarnitsa mine trucks. When the results of the experiment are ready Yakutniproalmaz institute will calculate the job options of the Udachny Mining and Processing Division.

Our goal is to maintain all production volumes of the Udachny Mining and Processing Division and preserve all the jobs. Regarding the jobs at the Udachny mine, then for the most part they have already been created. A mining crew has been formed and has started work. Major operations at the mine will employ about 1,200 people, with 200-300 people working as contractors and in service organizations. Construction is still under way, and the share of constructors is high. We should more talk about preserving jobs in all areas - that's energy, heat and water supply and construction. I’d like to point out that on the basis of communication with people, it is clear that the residents of Udachny have a firm belief that the town has a future, and there will be jobs.

Question: The Mir mine is still not working at full capacity. Please tell us what the current situation is.

Answer: It’s not entirely true that Mir is still not working at full capacity. One and a half years ago we took the decision to alter the production capacity schedule and we are keeping to the new schedule. There have been no attempts to rapidly bring it up to the million tons a year that were projected. After a significant increase in water inflow into the mine, additional drainage projects have been developed and a project to trap all the water that comes out of the Mir quarry on the highest levels. These projects have been reviewed, and we have been implementing them for almost a year and I must say, successfully. Auxiliary drainage has already been built and is in operation. All the trapped water is thrown back into the quarry. At the minus 210 level a water trapping and processing complex has been built.  Directly under the bottom of the open-pit is the so-called "trident" (three workings in the form of a trident). Now work is being actively carried out of the concrete reinforcing of the soil in these workings and drilling, throughout the whole ore body such a system of interceptor wells will be set in place.

Yakutniproalmaz have developed a project to increase the performance of the main drainage, which will protect the mine from a breakthrough of all the water from the Mir quarry. There are also measures that involve the construction of a waterproof layer of filling mixtures. This layer does not allow water through, even if it remains and penetrates the second block or lower. But it's more for the future mining of the lower layers.

The next set of measures is the preparation of the second block itself. Initially, we had to work at minus 210-310 levels. Now we have suspended work on the upper elevations due to the large water influx, performance is getting worse and the safety leaves a lot to be desired. We are also actively preparing the ore at elevations of minus 310-410. By the end of the month, mine constructors will give the Mirny Mining and Processing Division ownership of an overland conveyor, which will enable ore conveyance from strata of minus 410. The Yakutniproalmaz Institute proposed in conjunction with the mine some modifications in the ore preparation process. The ore will be mined using larger chambers that will improve the quality of the filling operations. Now we are working in long drawn out strips, and when we pour concrete, places with the kinks remain empty. They become sources of water for the neighbouring works. Our task is to eliminate the gaps in the concrete fills to form a unified mass of concrete that allows water to leak as little as possible. All these activities are planned.

Starting from the second half of the year the power will increase, and within two years, when we are ready to remove all of these complicating factors, we expect the mine to operate at full capacity.

Question: The International mine is currently undergoing large repairs. It is said that after the repairs the mine will be given a second life. What plans does the management of ALROSA have for Inter?

Answer: Well, it’s not the fact of repairs that gives a second life to a mine, although it's really necessary work. Conductors are being replaced in the shaft. This is a replacement planned due to normal wear and tear. This work is important and difficult and until it has been carried out the movement of all loads through the shaft are stopped, so the performance of Inter in the summer months for the period of repair is reduced. If we talk about future prospects, we have already made ​​a decision and are implementing a project that will extract ore at a depth of 1,400 meters.

The initial project was to a depth of one kilometer. Now in addition to preparatory work for the mining at these layers, we are carrying out operational exploration. It may be decided to fully process this ore body. In the next 2 years we have to do feasibility studies, then we can talk about the end of drilling and the prospects of the mine.

The prospects are good even now. We anticipated a decline in production by 50,000 tons by 2019. Some processing combination should extend the life of mine, which is a jewel of our diamond crown, because the grades and value of diamonds from the mine are the highest.

Question: If we talk about housing, the company participated in the construction of two houses on the Yakutia’s resettlement program. But does the company have its own housing program?

Answer: In fact, this program is not funded by the Republic of Sakha (Yakutia); it has been funded by ALROSA. There is an agreement between the company and the Government of Yakutia, according to conditions of this agreement housing is placed under the control of the local authorities. One of these conditions has been the funding (more than 1 billion roubles) of the demolition of slum housing and resettlement in Mirny, Udachny and Aikhal. Initially oriented on the market price of that time - it in fact totaled 25,000 rubles per 1 square meter.  Given the increased cost of the program a cost of 35,000 rubles per 1 square meter was set. Already in 2012, local authorities have experienced difficulties in implementing this program. The company will have to finance the demolition and relocation, and the authorities will have to oversee the process. They were to buy apartments, to re-house people. So in 2012, there were already difficulties in buying apartments for resettlement. In 2013, this work was simply paralyzed.

During the first quarter, in Mirny no applications were received for the tender announced by city administration. Consultations with the Mayor led us to believe that it is necessary to change the approach in general. Otherwise, for a great expense - more than 35,000 rubles per 1 square meter - we will be buying the same wooden housing and resettling people there. It did not make sense, after five years their homes will also become dilapidated. Therefore we together with the town council came to the government to agree a proposal that instead of purchasing housing on the market we construct and relocate people in new homes. We acquired two items of construction technology, which we wanted to try to somehow reduce the cost of 1 square meter.

We tried to construct wooden houses using the new technology. These were panel houses, the panels are made from specially treated boards, and as a result the homes do not sag. The Capital Construction Division also held a tender for the fixed frame construction, and one stone house was built. The construction of wooden houses did not show the effect that the manufacturer of the panels stated. Since the wooden and stone houses are comparable in value, we decided to continue with construction of stone houses. Cost is the only complicating factor.

Now the mayor has appealed to the president of the company about the possibility of the continued financing of the program by ALROSA. From my part, I would suggest we participate in the program of demolition, but on condition of co-financing with the republic, as the republic authorities should bear the burden of the costs. There’re many questions from residents of the area, why the money received from the sale of ALROSA’s shares are not spent to the development of the Mirny area. This is a subject of negotiations with the government, though right now I'm not ready to predict how they will end. If there is an agreement, it will be long-term program. These houses are comfortable; they stand on substantial foundations and are therefore less affected by ground motion.

Question: In the company's annual report it is stated that the production decline at Mir was offset by the acquisition of OJSC Nizhnelenskoe, which became part of the OJSC Almazy Anabara. Recently there have been reports that the company had reached some new high-grade deposits.

Answer: Nizhnelenskoe did not become part of Almazy Anabara, it’s just that Almazy Anabara are the owners of Nizhnelenskoe. It’s true that the production decline of the Mir mine was compensated with diamonds from Nizhnelenskoe. But it wouldn’t be right to say that we are now moving to exceptionally rich deposits. Two deposits, for which Almazy Anabara were licensed in 2013, show significant declines in the quality of stones. Nizhnelenskoe is really working on rather rich deposits, and exploration results suggest that the production volumes there will be stable. Last year, they demonstrated results even higher than planned. This also applies to Almazy Anabara. They may also end up this year ahead of planned targets. A large amount of investments in the construction of camps and necessary infrastructure has been agreed upon. They are constantly moving to new areas in order to maintain production volume.

Question: This year, ALROSA considered transition from traditional fuels to gas. How would you assess the prospect of such a substitution?

Answer: Indeed, I personally as well as some experts have found ourselves in a kind of euphoria from the fact that the transition to liquefied fuel can be done rather quickly. These feelings were based on the fact that an actual investor was found, who proposed to construct at its own expense a mini-factory for the production of liquefied natural gas, to provide services for the transition of our vehicles to liquefied gas and to sell it as an ordinary fuel at a gas station. We formed a project team that is currently working in this direction; Severalmaz experts are also working on this. This team prepared specifications describing all kinds of fuel consumption in our company. Not only general vehicles are in question, but also mining ones and electricity production at diesel power plants. Our engineering service has studied the issue, and according to them, all of the major equipment manufacturers are working now on pure gas power engine. Nowadays gas engines can only reach power of less than 250 hp. And if large motors work on gas power after all, it is only in two-fuel mode, which means these are diesel motors with the possibility of fuel substitution by LPG.

It became clear that when mine trucks will be working on LPG and when diesel power plants will be able to run on gas, it will be possible to get a "hurricane" effect by leaving the idea of diesel fuel delivery. A tender was announced for the people who are deeply engaged in this topic to come and present to us their concept of how to start, where to build a plant, how to deliver, and whether it is necessary to deliver liquefied gas to Nakyn field.

It turned out that nothing is as easy as it would seem at first glance. The technology does exist, low power car park can be converted to gas power today, but these are high power vehicles, mining equipment, diesel power plants, which will give us the main effect. It would seem that it will be profitable at Nakyn field where up to 900 million rubles are spent on diesel fuel for power generation, but it turned out that production of storage tanks for liquefied gas is very expensive, and LPG can only be stored without losses up to 6 months. So this option is unattractive already at this stage.

There are also some concerns about high power vehicles safe work using gas engines at low temperatures. We had planned to purchase a container plant for the production of liquefied natural gas or try the option of LPG delivery by winter road for Almazdortrans to be able to run these engines, that is, to carry out an experiment: does a vehicle lose power, how much time is spent on refueling, how does it work at very low temperatures. But we still haven't gone ahead with these plans. We haven't found acceptable options. There are no appropriate container plants; experts do not recommend delivery by winter road, because bumpings will lead to big losses of gas. But anyway, we have to decide on development option to adopt following the contest, the results of which are currently summarized.

I believe that we started to study this topic on time, and we will see the technologies related to liquefied gas developing rapidly in the next five years. Having a gas field at our territory, we simply couldn’t afford ourselves not to develop this. I hope that by the end of this year we’ll outline a new plan of action. As for the passenger cars, we will be able to do this starting next year.

Question: In the nearest future, transfer of housing and communal services to local authorities will occur. How far the process has advanced, and what assistance will you provide to local authorities for the quality of services not to be affected?

Answer: Obligations on the transfer of utility services from ALROSA to local authorities are secured by the agreement between the Republic of Sakha and the company. According to it, we had to withdraw from the provision of housing services to residents of Udachny since January 2014. But when we started to develop a step-by-step program, we realized that January is not the best month for such revolutionary changes. It was decided that the transfer will take place on July 1, and that was done on term. We considered two different options for the towns of Aikhal and Udachny. The first is the creation of a single inter-municipal company to provide housing services in two settlements. But we have listened to the opinion of the heads of the local authorities and agreed that it is necessary to create separate municipal societies based on our housing service offices in each town. It is more convenient for the municipalities to run their business this way. It is obvious that the income level that can be provided by the municipal companies is not comparable to what we have in our business units. Therefore, the transmission model included subsidizing municipal administrations by our company for five years in order to maintain the acceptable level of wages.

We assume that within five years costs will be optimized. It is difficult to do within the company. It is too big mechanism where incidentals are just rounded. The Materials Supplies and Logistics Division provides the entire company, and costs of each valve and pipe are not considered separately. On the other hand, newly created independent societies will have the opportunity to consider and assess their costs down to the same valve, that is, to make more informed decisions on cost savings. Thus, we expect that within five years these companies will come to self-sufficiency and do their business on the basis of payments for housing services received from citizens.

I would like to emphasize that the company realizes that it’s a quality of life of our employees and is not abandoning the support of newly created municipal enterprises. All requests of the housing services office concerning the acquisition of new equipment, which later will be freely transferred to municipalities, were satisfied. In addition, we have retained some of the benefits enjoyed by the employees of the company that will pass into these societies. It is clear that for a person who has, let’s say, only two years before the "Diamond Fall" retirement plan, this will be a major factor in the decision to move. We preserved benefits partially, not fully. The next housing and communal services to be transferred to a municipality are these of Aikhal, it will happen in January 2015 according to the agreement. A great deal of preparatory work has been done. In 2016, the same will take place in Mirny and the surrounding villages. We also have to develop a step-by-step program here.

Question: Will there be any changes in the incentive of the company’s employees? And if yes, what kind of changes?

Answer: Answering the questions on economic assets, I said that we have to rethink the system within three years. The first stage, which is the certification of workplaces, is performed this year. This certification is required in order to meet the legal requirements, as well as to understand which harmful working conditions are present at which jobs, what are the production factors, for which a person shall receive an extra charge. A very professional organization, Klin institute that participated in the preparation of legislation relating to workplace certification, is working on this. They have developed these standards, and they are now making assessments basing on them. The workplace certification results will allow us to make decisions on certain categories of workers and on labor incentive. Now there is a certain egalitarianism, which is only limited by the list of occupations, while the actual work conditions of a person can be ignored by the current system.

System of the Personal business qualities coefficients has also been investigated, and large gaps in its application were identified. Personal business qualities coefficients system does not work fully as a tool for assessing the work of a particular employee. Experts who were involved in the study noted this; they have recommended revising the system. I am not ready to say now which approaches we will use. After we receive the proposals of experts, it will be discussed with Profalmaz Trade Union, which expresses the needs that are present at every workplace. The remuneration system shall launch and support the process of creating and maintaining a quality team. A person working very efficiently, in hazardous conditions, who has several professions shall definitely be paid more. We have to move away from leveling. We have to develop a new system, especially from the viewpoint of production efficiency.

Question: This summer, the investors have increased their interest in the company; there were already several visits. How do foreign businessmen evaluate the company, and does the current situation with sanctions that may follow against Russia frighten them?

Answer: I hasten to say that I will express a subjective opinion. Indeed, the production visit of analysts, investment funds managers and investment banks that participated in the IPO took place. Such visits are normal in international practice. An investor who bought shares in the company, invested his money, does not want to just read the reports, he wants to make sure himself that these reports are close to the truth. Thus, these people shall prepare their own conclusion for the funds they represent following the visit. Since the lion’s share of the stakes was bought by long-term investment funds, they expect the company’s value increase in the long term. They evaluate how our company is able to maintain the declared level of efficiency, profits, dividends, and how it is able to manage the growth of costs. They visited all our mining and processing divisions. Serious analysts who have already visited all the diamond mines in the world were present. This is to say that they can compare our production with that in South Africa, Canada and Australia. I can say that they have left satisfied. They loved the mood of the people, it became clear while communicating with them that people believe in the company, understand its perspectives, and talk confidently about their plans. All analysts were comforted; this gave ground for the forecasts that are their main job. Presentations on the status of our mineral resource base prepared by Yakutniproalmaz institute were made. Leaders of the Botuobinskaya Exploration Expedition reported on new methods of exploration. All of this, in my opinion, has left a positive impression.

I don’t think there will be significant changes in the strategy applied by these funds. The current situation is indeed complicated, there is a threat of sanctions, it is unclear how the market will react, but the long-term funds do not make decisions based only on current difficulties and successes; they make a forecast for nearest decade and want to understand how their investments are protected. We can say that the funds that have invested in ALROSA did it right, because until today, the cost of shares rose surely enough. I think that the funds won’t take decisions that may adversely affect the value of the company.

Question: What large work remains to be done before the end of the year?

Answer: Technical and economic evaluation of the three fields and integrated assessment of Udachny Mining and Processing Division. The topics underway include Zarya pipe, which is to replace the retiring Komsomolskaya pipe, Verkhne-Munskoye deposit assessment and Zarnitsa pipe mining options evaluation. These are strategic objectives having a significant impact on our future plans in terms of decisions on the development of the company and diamond production.

All other tasks are tactical. We have to finish the summertime repair work at all of our factories. We have to prepare for the winter, which is a traditional problem. So far, everything is going according to the plan and there is no reason for concern.

The topic of navigational delivery closure is also becoming a traditional one. Again this year, a relatively low water level in the Lena River is observed. Accordingly, ships are underused. There are difficulties with importation of fuel following an accident at the Achinsky plant of Rosneft. Rosneft is currently trying to replace supplies by those from other sources. Importation began with better results than last year. We have sufficient accumulation of goods. This said all our decisions have been made assuming similar course of events. I would not like to look at all through rose-colored glasses, still a lot of equipment isn't purchased nor delivered. I hope that we can still handle this and won’t have emergency importations by winter road.

Interviewed by A. BOCHARNIKOV

This page was last updated on 15 August 2014 at 14.54