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ALROSA DROPS SOVIET-ERA SECRET AND RELEASES DIAMOND RESERVE FIGURE – BUT IT IS SMALLER THAN PREVIOUS ESTIMATES

By John Helmer, Moscow

Alrosa’s chief executive Fyodor Andreyev has announced that the state-owned diamond monopoly of Russia holds diamond reserves of 1.23 billion carats. Calculated according to the Russian mineral reserves classification, he said that 1.014 billion carats are proven, 211 million carats are probable.

The new numbers were mentioned in a briefing for Russian reporters, and are not an official statement of reserves. Two Moscow business newspapers reported what Andreyev said. Andreyev’s spokesman said this [1] is the official release of the reserves.

Last week, the company issued a different reserves number when it reported that its senior management board has authorized an exploration and production plan to the year 2018. According to this, Alrosa said in a May 20 release, “until 2018, it is planned to list over 430 million carats of diamonds in the fixed assets of the ALROSA Group. When implemented, the program will not just replenish the mineral basis of the Company but also ensure additional growth in its resources over the period by more than 100 million carats. (Reference: the previous program enabled replenishment of ALROSA’s mineral basis by only 70%, due to lack of technical and production facilities).”

The wording is misleading. It has been clarified by Alrosa to refer to a net addition to the company’s reserves over their 2010 level by 100 million carats after compensating for depletion of the 2010 level by mining of about 34 to 35 million carats per annum.

The actual Russian reserves number is not a state secret, because changes in the law governing strategic minerals and mineable commodities have allowed Alrosa to release its reserves if it wishes to. Choosing not to has been awkward for the company’s bond-raisings on the international market.

In its Eurobond prospectus, issued last October by JP Morgan, a Russian Finance Ministry document was published in lieu of the reserves disclosure. This says: “approved reserves of rough diamonds (categories A+B+C1), as of January 1, 2010, are sufficient to permit extraction over the next 24 years, i.e., until December 31, 2034, of an average annual volume of diamonds at least as great as that extracted during 2009.”

Since Alrosa had released its production figure for 2009 at 34 million carats, the implication was that Alrosa was telling its Eurobond creditors that reserves in 2010 amounted to 24 times 34 million, or 816 million carats.

According to Alrosa’s bond prospectus, the reason for not releasing its reserves was this: “the units of presentation and methodology for preparing ALROSA’s internal reserves information differ substantially from international presentation standards, ALROSA believes that such information would be of limited utility to investors, and accordingly, that information has not been presented in this Prospectus.”

This in turn implies that the company may — but then again it may not — arrange for an international audit of its reserves, making its assets comparable to those of other publicly listed diamond miners, such as Rio Tinto and BHP Billiton. Rio Tinto, for example, issues reserves data for each of its mines. The Argyle mining complex, now moving into an underground mine mode in Western Australia, counts more than 198 million carats in proven reserves; with about half as much again in probable reserves yet to be tested. Rio Tinto’s Diavik mine in Canada is counted as holding between 77 million and 90.2 million carats.

Andreyev told reporters in Moscow yesterday he thinks a count of Alrosa’s reserves according to the Australian Joint Ore Reserves Committee (JORC) standard would produce a figure even larger than the Russian number he released. In its release on reserves, dated may 24, Alrosa says it is “working on an independent review of reserv es and resources according to international reserve reporting practice. The independent review…is also to be disclosed as soon as ready.”

If from the Alrosa prospectus calculation of 816 million carats is subtracted 238 milllion carats of mine output over the next seven years, and reserves replenishment added of 430 million carats, then the sum would come to 1.008 billion carats. That is close to what Andreyev has now released.

Alrosa has already released excerpts of the 2018 plan, but withheld the reserves estimation from that document. Instead, a press leak to a Moscow newspaper in February was the channel for the claim that the company is expecting higher production, as underground mines come on stream at Mir, Aikhal, and Udachny, as well as expansion of accessible diamond reserves. The leak [2] suggested a reserves number of 1.48 billion carats. Andreyev’s leak this week makes Alrosa’s reserves appear to have shrunk from the 2018 plan by 15%. Andreyev’s spokesman denied there is any discrepancy.

Excerpts of a financial report for last year were also handed out by the Alrosa chief executive. In a posting of the excerpts on the company website, Alrosa reports that it lifted diamond sales revenues by 45% over 2009 to Rb113.4 billion ($3.7 billion). Production volume was 34.3 million carats; sales volume, including inventory and polished diamond sales, came to 39.5 million carats.

The cost of Alrosa’s production also grew to $53 per carat mined; that was up 18% over 2009. Operating profit growth was 16% to reach Rb27.1 billion ($328 million). Net profit was Rb11.8 billion ($387 million), an increase over 2009 of 3.4 times. Net debt at year’s end was $3.2 billion, down 13% from the year earlier.

In his briefing and the partial financial report, Andreyev’s objective appears to be to prepare the ground for what the newspapers now report as the possibility that Alrosa will not attempt an initial public offering (IPO) of its shares in the international markets, as the chief executive has repeatedly said he intends.

Instead, the federal and Sakha republic governments must first decide whether to confirm Alrosa’s identity as a diversified, multi-mineral miner – with iron-ore and other mineable oil and gas deposits, in addition to diamonds – or a pure diamond-mining enterprise. Andreyev is now claiming that if Alrosa can make enough profit to clear much of the debt he inherited from his predecessor, Sergei Vybornov, the necessity to raise funds by selling shares will diminish. Andreyev also reportedly spoke of the idea of a private placement, arranged by the Kremlin with an unidentified “strategic” (read Russian) stakeholder, for roughly half the 20% issue promised for the IPO.

There is a hint in the Alrosa press disclosures that Andreyev’s IPO plan is running into strong opposition from the government shareholders, who don’t want to share their corporate governance with anyone new.