20 February, 2016

Russia to sell majority shares in Alrosa diamond producer

The Russian government is planning to sell off its entire share of Russia’s largest diamond miner ALROSA within the state privatization plan. Yet the move is facing opposition in Yakutia, the Russian republic where most of ALROSA’s mines are located.

The Russian government owns 50.9 percent of ALROSA’s shares, Yakutia owns 32 percent and eight municipalities of the republic jointly own 8 percent, while the remaining shares belong to various minority investors. When announcing the initiative, First Deputy Prime Minister Igor Shuvalov said the government will “co-ordinate the sales with the region” and “the money received from privatization will all or partly be allocated for developing the infrastructure of Yakutia.” He said such investment would help develop new diamond fields and the Yakutian treasury would receive more revenue from the mines than it does now because ALROSA pays few dividends.

The Yakutian parliament asked Russian President Vladimir Putin to reconsider the plan. The republic fears that a change in ALROSA ownership will lead to a reduction in financial support for the region’s social programs, which would place a bigger burden on the Yakutian budget. The previous proposal to sell 14 percent of state-owned shares of the company was supported by ALROSA’s supervisory board. “It’s difficult to say what would be more profitable for the government,” said Sergey Filchenkov, analyst from IFC Metropol “It’s unlikely that ALROSA will be able to drop its social program obligations any time soon.”

Russia’s largest diamond manufacturer Kristall Smolensk sold 145.6 carats worth $2.2 million in its latest tender for polished stones. The company sold 41 out of 55 lots. “We are satisfied with the results, taking into consideration the overall market,” said the company’s head of sales Nikolay Afanasiev. He explained that the company didn’t set its own presale minimum price, which it had in its first polished auction. That resulted in customers prepared to offer prices below the cutoff not getting the goods. The advantage of not having minimum prices “is that almost every stone can be sold, which is not the case when there’s a minimum price,” he said, noting that the overall revenue from this second auction was good.

The usual summer slowdown of activity for Russian manufacturers is complicated by uncertainty over the global financial turmoil. “The situation is tense at the moment, but not to the extent that someone would dump their stocks,” said Afanasiev.

Manufacturers say that the pressure from high rough prices is felt more when sales slow down. “The rough prices have reached a critical point, with rough sometimes more expensive than polished,” said Irakly Aneli, director general of Nevsky Diamond. “Making jewelry is sometimes the best way to get profit.” He also said that the lack of dealers with big and diverse stocks had become an additional hurdle for jewelers because it means that finding needed gems is more difficult and therefore more expensive.

ALROSA is planning to increase its production volume to 38 million to 40 million carats by 2021 from the current annual level of 34 million carats. The added production will be supplied by its underground mines and by the fields of its subsidiary Severalmaz, in the northwest region of the country, reaching its full production capacity. The share of underground production will increase from 27.2 percent to over 60 percent. The company expects its deposits to reach 1,190 million carats in ten years, which is 451 million carats more than current volume.