Permafrost Melting: A Candid Discussion with ALROSA CEO Sergey Ivanov (The Diamond Loupe)

Interview at The Diamond Loupe website

Sergey Ivanov (37), the young CEO and Chairman of the Executive Committee of the world’s largest diamond miner, ALROSA, was in Antwerp for the company’s annual meeting with its 56 long-term clients. ALROSA is a traditional company in a traditional business, and still evokes the reputation of a state-owned giant despite the partial privatization (currently 34%) of the company a few years ago.

However, to anyone paying attention, there has been a palpable change in the style and scope of the company’s communications this past year, and after the discussion The Diamond Loupe was granted with Mr. Ivanov, it became clear that this shift toward a policy of openness started at the top. The Russian permafrost appears to be melting (no, the title does not refer to global warming). What follows is a summary of a most candid and substantial conversation in which no topic was off limits – neither questions about his appointment as CEO, nor his appearance on the U.S. ‘Kremlin list’.

The Diamond Loupe: Why did you select Antwerp to hold your sightholder meeting?

Ivanov: Antwerp has been for centuries, and still is, the world’s largest diamond hub. This year we have 56 long-term customers, and 22 are based in Belgium. More than 100 of the companies that attend our auctions and spot sales are based in Belgium. Our clients prefer Belgium not only because of the history of doing business here, but also due to the infrastructure, logistics and security, which enables them to do business safely, quickly, properly and in a comfortable atmosphere. That is why Antwerp is the number one trade center, and a key partner for our company.

We also have a long-standing relationship with the AWDC. Together we promote the development of a competitive and transparent diamond trade. We interact on issues related to the Kimberley Process, exchange views on industry developments and work to harmonize legislative matters and find ways to do more business.

DL: Other locations, like Dubai and India, have made efforts to unseat Antwerp as the diamond capital. Might this change your focus on Antwerp?

Ivanov: I don’t think so. India’s importance is undeniable, as they are responsible for 90% of the polishing trade. But most of those diamonds pass through Antwerp first. The infrastructure here facilitates our customers’ business. The introduction of the Carat Tax two years ago was a very smart initiative the government supported. Our clients tell me Antwerp is still the best location for doing business. Dubai often changes regarding tax issues. There is a new State tax in India on imports of polished diamonds. In this regard, Antwerp is a more fiscally stable and predictable environment for diamond trading.

Our trade with Antwerp is more than $2 billion a year, so about a half of our rough production is sold in Antwerp. The Belgian government is also doing everything it can to keep Antwerp the most competitive and advanced location for the diamond business. We prefer stability.

Demand & Supply: Our diamonds will find their customers

DL: Speaking of stability, one major concern for the diamond industry is faltering consumer demand. What is your view?

Ivanov: Based on the recent Bain Report, as well as other experts, we expect to see moderate growth in demand, around 1% to 4%. The US is still a solid market, and the middle class in China and India is growing. We do not see a slowdown in China, based on our analysis of the major jewelry retailers. We have also spent a significant marketing budget to promote natural diamonds, together with the Diamond Producers Association’s “Real is Rare” campaign. We will see results.

We do see changes in the assortments desired by different regions, but ALROSA does not have an issue with changing customer behavior from different groups, because we produce the entire range of goods. We are very diversified. Whether Indian consumers prefer jewelry with smaller diamonds, or US and Middle-East customers prefer larger stones of better quality, our diamonds will find their customers all over the world, from the small to the exceptional.

DL: If we talk about demand, we should talk about rough supply. Are diamond resources declining?

Ivanov: Global diamond production will stay around 130 million carats for the next years.  There have been no large discoveries of diamond deposits, but Luaxe in Angola has interesting reserves and is close to our facility at Catoca. It will enter production in 4-5 years. In Russia we invest around $100 million in exploration each year, and are not planning to increase it. This is mainly in Yakutia, but we also have some interesting exploration projects in Africa. Even if we were lucky enough to find something tomorrow, it would still take 5-7 years to develop.

There are many kimberlite pipes in Yakutia, huge kimberlite pipes, but they are covered with hundreds of meters of rock. It may not be economically viable to remove it, but we are confident we will find a huge pipe in the coming years. The problem is the economics of developing it. The potential for new exploration in Angola is also quite significant. Maybe even more than Yakutia. In Angola, at Luaxe, you only need to remove 10-20 meters of rock mass and you can start producing diamonds. It has totally different geology. In Yakutia, we operate in permafrost conditions.

DL: And if you do not find anything new?

Ivanov: ALROSA is the world leader in reserves. We have a billion carats in reserve, which makes for a resource base for 25-30 years even if we do not find any new fields. Last year we produced 39.6 million carats - the record for post-Soviet production, since 1990. This year production will decline a little.

DL: Could you speak about the economic issues of mining in Yakutia?

Ivanov: We hope to find something in the area of our enrichment facilities so we do not have to create new infrastructure. That is never guaranteed, so we have to adapt. For example, this year we are bringing our Verkhne-Munkoe deposit online, with reserves of around 40 million carats. We will ship this ore from the field to the facility in Udachny, called Factory #12, which is 170km away. We have special heavy trucks designed for our company to handle this task. Each one holds 80 tons of ore, and we have 40 of them. It is still economically viable.

If we find something 400-500km away from our facilities, we will have to create the entire infrastructure. It is a big investment, but I am certain there will be discoveries interesting enough to develop, and some we have to leave until we have the right technology - the fourth industrial revolution tech: drones, machine learning, big data mining. Things that will lower production costs. We will have some new technology in our plants in the coming 5-10 years, and we are already among the leaders in enrichment technologies. We have excellent X-ray separators produced by Bourevestnik, one of our subsidiaries, and we sell them to other companies as well. It is not part of our diversification, but is still positive.

Responsible Mining: A brand and a way of life

DL: Speaking of diversification, have you considered heading downstream into manufacturing or creating an ALROSA consumer brand?

Ivanov: We have a good business selling rough. We have our own polishing division and are examining options to develop it. But that does not mean we would switch to polishing. It is not part of our strategy. We are also not looking to invest in a jewelry brand. The company has considered buying international jewelry brands in the past, but we do not think investing in jewelry companies gives miners a big competitive advantage. Of course, if the market changes, we would consider it.

I would say our brand as a producer is well-known, and we are not so sure it would be popular in terms of jewelry. However, customers are becoming more focused on the sourcing of diamonds - responsible sourcing, the ethical and social responsibilities of mining - and in this regard we are very strong. We are more ecologically friendly and more responsible than other industries. In Yakutia, we spend $180 million a year investing in school facilities, hospitals, sports centers, theatres and another $100 million for environmental projects. We pay more than $1 billion in taxes, the dividends to the federal budget are 50% of IFRS net profits. We are socially responsible and our clients know that.

DL: That is the question we have, not just for ALROSA but for other miners. Do people know it? Because the synthetics producers are doing everything they can to say otherwise.

Ivanov: I would not say the production of laboratory-grown diamonds is all that ecologically friendly, but that is beside the point. The point is rather that, because of our extensive CSR policy, it is beneficial to communicate to consumers that diamonds are of Russian origin. I would like ALROSA not just to be the leader in production and sales volumes, but also the most technically innovative and most socially responsible company through our investments in Yakutia.  We need to show that we conduct business responsibly.

ALROSA has sophisticated technologies, highly-trained personnel whose salaries are three times higher than the average in Russia. For many of our workers, ALROSA is a way of life. Some are third-generation employees. We house and educate them, and I would like to improve their lives, their future. Again, we have to communicate this if we really wish to be a world leader.

Coexisting with synthetics

DL: We cannot avoid the topic of synthetics. What is your view? Are they a threat to the diamond industry, and if so, how do you plan to address it?

Ivanov: We are monitoring the situation with synthetics very closely. There are two issues: disclosed and undisclosed synthetics. As long as they are disclosed, we do not see a problem. When a customer knows it is grown in a laboratory, they are free to decide. Synthetics will have their niche, but I am sure we can coexist in a friendly manner. We just want a clear differentiation.

The danger is undisclosed synthetics, which we must avoid at all costs. If a customer buying a diamond feels cheated, we have a problem. We have to make sure synthetics do not penetrate the natural pipeline. The entire pipeline is now equipped with screening equipment. As for ALROSA’s rough goods, as long as shipments are sealed by ALROSA they cannot be compromised.

Synthetic diamonds may increase their share of the market in the coming years, and they will find their customers, but I do not think it is a threat for us because it will be two different markets, and the clients will understand this. It is the same as how we coexist with other gems and precious stones. People make their choice. We think there will be sufficient market share for both, so we do not see a serious problem.

DL: Then why is the DPA taking the fight to synthetic diamond producers?

Ivanov: We do not see it as a fight. It is rather a good motivation for us to do better, to stay on our toes and not lose our competitive focus. Synthetics and real diamonds are on separate tracks. There is zero demand for synthetics in China or the Middle East. Maybe people on a tight budget or US Millennials in tune with Silicon Valley are excited about them. But it is in our hands to tackle the issue.

Furthermore, the core task of the DPA is not to compete with synthetics, but to promote natural diamonds. It would be a mistake to try to get rid of them. And it would not make any sense. They are cheap to produce. It is a new reality. Are they a threat? They could become one if we do nothing … if we do not listen to our customers, and fail to give them confidence about diamond sourcing. But we are taking the necessary measures.

DL: About your position as CEO and your impression after your first year. Were you surprised at being named CEO?

Ivanov: It is a very interesting job, and I have enjoyed every day at ALROSA. The diamond business and ALROSA are still very conservative. My task is to transform it into a more flexible, efficient, investor-friendly company, and to raise capitalization. But I am becoming more of a miner. I am learning more about the business. It takes 2-3 years to understand this business well, to develop a strategy and implement it.

In terms of the year thus far, I am pleased with the transparency of the company, cost control and changes to the management team. I have not been so satisfied with some issues concerning health and safety, which we have to address. We will invest more money and revise the whole system. This may slow down some projects, but it will force us to look more deeply into how we are implementing them.

Addressing the Mir mine tragedy

DL: The Mir mine disaster must have caused you and the company to do some soul-searching. What has been the impact of the Mir accident, in terms of production as well as internal assessment? Has anyone been held accountable?

Ivanov: The accident at the Mir mine is a great tragedy for the company and for me personally, as a manager and as a person. Hopefully this is the first and last experience of this kind. We will do our best to avoid any accidents in the future.

Immediately after the accident, an investigation was conducted. Based on its results, the federal supervisor (Federal Environmental, Industrial and Nuclear Supervision Service of Russia) identified 16 officials responsible for violations that led to the accident. Internally, we have expanded this list to 24 persons. A number of managers have been fired, and there may still be another staffing decisions. The rest are also subject to penalties. Tough measures were needed because we lost 8 people, hundreds of people lost their means of employment and the company lost a first-class asset. We are currently strengthening the vertical shaft for industrial safety: at the beginning of the year the company hired specialists with extensive experience in this field.

Our main task after the accident was to find employment for the workers. Mirny is a small town for which diamond mining is the main occupation. More than 1,000 people worked at the Mir mine. Immediately after the accident, we began to employ them in other ALROSA enterprises, retraining them as necessary. To this point it has been highly successful: only about 50 of the 1,000 people have yet to find employment.

The Mir mine represented about 8% of ALROSA’s production, around 3 million carats per year. In 2017, we partially replaced this volume with diamonds from other fields. The growth of production at the Udachny mine, Severalmaz, and the launch of a new Verkhne-Munskoye field will also help us in future. But we will definitely try to restore "Mir". It is an excellent deposit with a good grade of carats per ton, one of the highest in our company asset portfolio.

But we first must evaluate all design solutions and analyze the feasibility studies. The most difficult question is coming up with a total project solution. We will recruit the leading members of the scientific community, Russian as well as international experts, because it is very complicated. The company can afford to take several years to find an appropriate solution.

DL: It sounds like you are introducing a private business mentality. Is further privatization on the horizon?

Ivanov: State-owned companies also need a modern mentality. You have to be efficient, be transparent and control costs. If you lose control of costs, you lose competitiveness, and we have no intention of doing that. We are not looking at a larger private stake at this time. The government has looked into it, but there are no immediate plans. If they decide otherwise, we can easily reduce state control in the company, down to perhaps a minimum majority stake. Personally, I do not believe it is the right time to sell ALROSA to benefit the government budget. It may happen someday, but we do not expect any changes in the next three years.

The ‘Kremlin list’ and the path to CEO

DL: When people, particularly in the West, hear someone with ties to the Kremlin - in this case through your father, the former Russian Minister of Defense and Chief of Staff to Vladimir Putin - is chosen to lead a State company, they assume it is nothing more than a political appointment. What do you say to this?

Ivanov: I expect this type of assessment, and I have grown accustomed to it. It is an image that has stuck to me since I started my career. I have had to prove myself as much as anyone else, perhaps even more. I can only let my results speak for themselves. When I started my career at Gazprombank, I was assistant to the Chair. The bank expanded and increased my opportunities. When I later worked at SOGAZ (insurance), everyone said my father was helping me to bring in new customers.

There is no question that I have good connections with Russian corporate business. I started building them in 2004. During the economic crisis, I spent much time in government groups to discuss the economy, so I know many high officials, but at that time we were all on the same level. Now they are ministers or CEOs of state companies, so yes, I had many good relationships with business and political figures as a professional network. It was part of my job. But I did not bring old friends on board, or my SOGAZ colleagues. At ALROSA I created a team from various industries to bring in the best expertise to achieve our goals.

The issue remains one of scrutiny, so it comes down to the results to determine whether this was a proper appointment for ALROSA. In SOGAZ we managed to triple its business and quadruple net profit. It is unlikely to triple ALROSA’s business, but we can fulfill our projects and leave a strong legacy behind.

DL: Russia has been subject to sanctions over the Ukraine crisis. Has this had an impact on Russian-Belgian relations, or ALROSAs ability to operate?

Ivanov: Fortunately, there has been no discussion of putting restrictions on the diamond business. I was put on the ‘Kremlin list’ in the U.S., together with all Russian CEOs. This does not mean there are sanctions, and they were never raised by the officials. As far as I know, the Belgian and EU government would do everything possible to prevent diamonds from being restricted. Furthermore, it would be difficult for such sanctions to harm ALROSA, because we do not use significant American or European technologies, and we do not need finance from American banks.

The Russian government wants to safeguard the business, and based on press releases and our discussions, I am confident the Belgian Prime Minister would not support any sanctions from America. We do not see a real threat at this point, but confidence and stability is important for our industry. Escalation of any kind is bad for business.

This page was last updated on 20 February 2018 at 18.05