«The main thing now is not just to mine diamonds but to have their guaranteed sales»
The financial crisis has affected not only stock exchanges, but the «eternal values» as well, hitting both rough and polished diamonds. To prevent a landslide in prices for rough, the world’s major diamond miners were forced to curtail their sales on the market and Russia’s ALROSA was no exception in this sense. Now the company is reaching after an efficient sales system which would protect the market from touts. Sergey Vybornov, President of ALROSA, told Interfax about the company’s sales strategy, its production schedules and non-core projects.
- The past year was very tough for the diamond-mining industry. What is your evaluation of its results? Was your company able to adapt to crisis environment?
- For ALROSA, 2008 was a successful year despite the difficult sales in its last quarter. In December, sales were virtually reduced to zero and we left the market selling rough to Gokhran only. Naturally, the sales to Gokhran were less than what we would like to sell on the market. However, all-in-all the company managed to meet its operational targets.
- And the first quarter of this year?
- 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 if confidential under the law. I would like to note however, that it is significantly less than we could have sold on a regular market.
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. The representatives of ALROSA’s shareholders have approved such an approach.
- For some time, it has been said that these long-term contracts are worth $500 million — Is it for this year only or for the whole contract term?
- 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. There are companies seeking to get on our client list. However, to «flood» the market with rough under the current conditions is very dangerous — the emerging demand may be nipped in the bud. I hope that in May all the agreements will be executed. We shall analyze market reaction then and probably expand our customer base.
- What share of long-term contracts in the total sales is viewed as optimal by ALROSA?
- Ideally, it would probably be incorrect to take the crisis period into account — long-term contracts should account for 60–70% of sales. The remaining rough may be sold on the free market which is the spot market.
To deliver such a result it is essential to realize that marketing is no less important a component of the diamond business than diamond mining. You may extract a heap of diamonds and fail to sell any of them. Formerly, no one even thought about it. Until recently, De Beers was our major foreign buyer and one half of rough stock was sold at a discount on the domestic market — and it was readily bought for immediate re-sale. Now the necessity of a new sales system is evident for everyone. For instance, for me it was somewhat unexpected that our trade union leader at the Udachny Mine voiced absolutely professional criticism in relation to the company’s sales organization.
- Recently, your company announced reorganization of it sales system.
- The main idea is to have three independent divisions: sales, marketing and rough sorting and preparation. Such a structure will permit to avoid conflict of interests which was inevitable when these operations were concentrated in the same hands.
The marketing group is currently headed by Mike Brooker. He is a former employee of De Beers. So far he is working under a contract since he has not yet passed all the migration procedures. He is a rough diamond expert and worked with De Beers’ marketing subsidiary, which was also a broker. For a long time Mike headed the rough team which used to buy rough diamonds from us, in other words he knows the Russian assortment perfectly. So far he has a compact group of five or six persons under his command and it is going to grow. Our marketing division is currently promoting polished diamonds as investment goods — this is our joint project together with Leader Asset Management.
- Is this project already operational?
- It is operational, the first diamond parcel has been cut and the second is in process.
- How large are the parcels?
- Their total value is relatively small, but this project is not aimed at gaining significant profits. It is clear that this market will not be enormous and it will never be worth anything around $500 millions. The main thing here is to solve marketing tasks. It includes promoting our values, promoting Russian goods. We are to return the notion of «Russian quality» to the market. The notion of «Russian quality» started shifting to the background fading away from the market. Yakut diamonds have unique color characteristics and shape which is familiar to diamond cutters who used to work with it. When we created shortage of rough diamonds we also meant this — that our rough diamonds are substantially different in their quality in the best sense.
- What is your general evaluation of the market?
- It started to grow and recover much faster than other markets and prices have gone up probably by 10–15%. It is clear that they rise differently depending on the different categories of rough, where growth is sometimes reaching 50%.
- Prices are growing, but what is happening to demand?
If we take America, the situation there is specific. According to the last surveys by Prince and Associates, a U.S. agency researching wealthy consumers, 82% of U.S. males owning fortunes worth over $25 million are mulling to cut spending on their mistresses. It is clear that they will still buy food, necessities and dwellings. But they evidently plan to diminish their budgets for gifts.
- Besides their mistresses there are wives.
- Somehow no one asked about wives. However, on the whole demand in America may drop considerably since they all there lived on credit for a long time. Any person buying a ring for his or her daughter did not even understand that it will be the daughter to pay for it. Such buyers just used their credit cards, which had no real money on them.
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. Besides, no one cancelled human emotions so far. There are anyway certain events within the year which make people give diamond gifts. 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.
- And what about demand for rough diamonds and not polished diamonds?
- I believe there is a very good outlook in terms of demand for Russian rough. For me it is difficult to give judgments on other rough diamonds, African or Canadian, because 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 incredible bottom marks. It was a mistake, although I understand there is no Gokhran in every country.
- Incidentally, when the company is going to return to the free market?
- Should the market be optimistic, I would increase the share of long-term contracts, as any single sales involve hesitating clients who may not return in future. There are a lot of come-and-go people in our business. There are four major mining companies, 50 brands and 100,000 small enterprises in between. I don’t know how many of them are to survive the recession but obviously there will be a few to go out, which is good. As soon as we feel upturn trends on the market — and here I mean Russian rough — we shall just increase the number of long-term clients. Maybe we shall sell something on the spot market, but the amount will hardly be great.
- Has the market situation affected the company’s output?
- We cannot stop diamond mining since we have a different country and different climate. Besides, ALROSA is a company contributing to the budget of Yakutia and we are bearing an enormous social burden. These were the same reasons why we could not allow decreasing prices. 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 breakeven 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. On Metallurgist’s Day we are going to launch the underground Mir Mine officially and in the end of the year — in November-December — the Aikhal Mine. With Mir, we are significantly outrunning the schedule — for one and a half year.
- And what is going on at the Udachny Mine?
- Construction is going on there.
- What will happen to open-pit mining after the company will go underground?
- According to our mining regulations we are obliged to extract everything there is in a deposit. After we are through with the quarry and open-pit mining the next step will be to go underground to make our work efficient or otherwise we shall have to extract hundreds of tons of barren rock which is counter productive. We have managed to solve a rather complicated task avoiding mining disruption: underground mining will start simultaneously with closing open-pit mining.
- Does underground mining mean some decrease in output?
- Naturally, underground mining yields less, significantly. Underground mining costs are 20–30% higher on the average. Diamond output is considerably decreased — depending on the specificity of a diamond field.
- All that said, the company is planning not only to decrease its output, but to increase its production to a certain extent…
- We shall simultaneously launch new diamond pipes.
- Will it be the one discovered in 2007? (The Verkhne-Munskoye Diamond Field in Yakutia. — IF)
- There are others as well, just the geologists have not yet completed their work there. In this country diamonds are attributed to strategic mineral resources, but the procedure of issuing licenses to strategic miners is not finalized. So far we have no license we cannot formally say that the diamond pipe is ours. ALROSA has intensified exploration and prospecting and one year ago surpassed the level of the Soviet period. We have a sufficiently great number of good and perspective diamond pipes. We shall develop them and this will be open-pit mining.
- In what way does your company implement its projects in Africa?
- The Luo-Camatchia-Camagico Project has been significantly impaired, although even before the crisis it was almost beyond the margin of break-even efficiency. Now on the background of a price slump it crossed this margin. The decision is to be taken by the Supervisory Board, but I will recommend to ALROSA to end its participation in this project (Currently ALROSA holds 45% in this project and 55% belongs to Portugese Eskom.- IF). The second joint venture — Sociedad Mineira de Catoca — is feeling well trying to weather out the crisis, but sales of course proceed at a lower margin and this year we do not expect great dividends.
- Is Luo functioning now or its operation has been suspended?
- Luo is virtually at a standstill since the project there was very poorly done. The diamond field was badly prospected and an avalanche of mining mistakes was made. The situation around the ore body is not that simple and costs are high. There is a Portuguese shareholder there which is actually a financial institution, so they give money to pay salaries with and sometimes the ore treatment plant is put operational.
- And geological exploration projects?
- The Cacolu Project is performing well enough having good outlooks. The market treats it with interest — recently we were approached by a company to buy it. This is a positive sign and we continue our work on Cacolu.
Yet the other ambitious project — construction of two hydro power stations (one in the boarder area shared by Namibia and Angola and the other on the Orange River on the boarder between Namibia and South Africa) — has been cancelled from ALROSA’s plans. There have arisen too many legal problems in organizing construction in the boarder areas. Besides, we planned 100-percent bank financing and now there is none.
- Earlier you said your company intended to get rid of non-core assets — at the level of the diamond-mining company itself and at the level of the ALROSA Investment Group. What kind of non-core assets are you going to cancel?
- We have several categories of non-core assets. First of all, it is non-core companies which were established quite a long time ago and performed some service functions. In this case it is better to have competitive environment among suppliers of goods and services. For instance, sales of explosives are better performed on a competitive basis — this is one part of the task to be solved just by bringing the companies to the open market. Secondly, there are non-core companies related to the fuel-and-power sector, which were established to make ALROSA have its own gas, petroleum, and processing to render it independent. Now there is no such a necessity. We have gas assets in the Yamal Peninsular now put for sale and as I hope they will be sold in May.
- Do you appraise these hydrocarbon companies to be worth $600–700 million, as before?
- Yes. They have deposits there which have not yet been prospected completely. For example, right now one of the companies has an agreed approval to be connected to the gas pipeline, which is a dear thing in itself by the way. The oil company we have is very small. The company based in Yakutia will be also sold during May.
What can you say about the iron ore project in Yakutia?
It is of interest to investors from China. No one will sell a controlling stake to the Chinese; we could sell them a non-controlling stake, but this is also considered to be a strategic asset. This is the world’s biggest group of iron ore assets. The investor wishes to pay a market price for a non-controlling stake and evidently this will be executed on paper in the nearest time as well.
- What is the price of this stake?
- Roughly priced by way of recalculating deposit reserves into U.S. dollars, it will make some $300–400 million, not for the entire project, but for some stake. Now there is quietly proceeding preparation under way to prepare projects for detailed exploration and actual mining because one of the deposit clusters is very close to the railway. If the approach is accurate and well disciplined it will take three years to start selling iron-ore concentrate.
- Which Chinese company is it namely?
- Actually there are two companies, but so far it is too early to name them.
- Has there been any interest on the part of Russian companies?
- No, probably because of some money problems. Iron-ore concentrate or iron ore is in demand in China. There is no such demand anywhere else. And money is also only there, in my opinion. China is really interested and even saying that like Russia it has the same rail gauge.
- Have you already addressed the Commission for Foreign Investments in this connection?
- Not yet. Generally speaking, there is a double obligation for the investor there — to pay money for the stake and finance the development. I believe this can be done with such an approach. This is also important because, firstly, we know how to work in Yakutia and we have there the necessary experience and people to implement the project and, secondly, this is the matter related to employment and new jobs. The implementation of the whole project, including all the four deposits, will cost about $10 billion. This is a great sum to be spent over a long period. It will produce a significant amount of additional jobs in Yakutia — as I see it, for up to 15,000–20,000 people.