Diamond Miner JCS Alrosa Considers Joint Stock Option to Attract Investment

Jun. 3 – Russian state-owned diamond miner JCS Alrosa has announced intentions to change its business entity to an open joint-stock company to attract investment. If successful, Alrosa then hopes to achieve the next step and list an initial public offering.

According to the RIA Novosti news agency, the company’s president Feodor Andreev has started negotiations with one of Alrosa’s biggest shareholders last week, the Sakha Republic of the Russian Federation. Andreev met members of the local government cabinet and deputies of the parliament.

For the first half of last year, Alrosa had practically suspended its production realization in the market. The anti-recessionary measures taken in these conditions have been aimed at production volume preservation and at keeping workplaces, which has led to an abrupt increase in company debt. By the end of 2009, Alrosa’s bank debts amounted to 106 billion rubles.

“Instead of developing business and making as much income as possible to shareholders, including Sakha Republic, the company is overcoming difficulties now and feeding the banks it owes money to. We spend 15 billion rubles annually to pay bank loans interests,” Andreev said during the meeting with Sakha authorities. As a result, Standard & Poor’s revised Alrosa’s credit rating, suspending it due to the lack of up-to-date operating and financial data. “The crisis is not over and done with, we expect the second wave,” added Andreev.

“In these circumstances, the company is required to have an instrument for money going into capital, which is possible only if we change our type of corporation into an open joint-stock company. Inflow of investments can decrease debt loading and will open up new possibilities for the further development,” he said.

Considering the social status of the company (more then 50 percent of the Sakha Republic’s budget comes from Alrosa profits), the process of transformation for the company will go step by step.

“Openness makes sense,” said BKS analyst Oleg Petropavlovsky. “The company will share the information about its business activity, which will help to employ better managers to attract investors.”

Analysts estimate that the transformation of Alrosa into an open company will take four to six months. Some experts do not believe this is the right moment for listing an IPO. “The world markets are not ready for this yet,” Petropavlovsky said. “The company makes raw materials for the luxury sector, which has fallen last year by 40 percent. Consumer demand decreased dramatically and will not be restored soon.”

KIT Finance analyst Maria Kalvarskaja adheres to the other opinion. “Since the autumn of 2009, the diamond market has been actively restored after the crisis,” Kalvarskaja stated. She believes diamonds are limited resources and the input of new mining sites takes time, but in the future the rising demand for jewellery in developing countries will define the growing appeal of investments into the industry. “Thus, if Alrosa wants to list an IPO after transformation, there are possibilities to attract overseas investors,” she said.

Alrosa is engaged in the exploration, mining, manufacturing and sale of diamonds. The company’s operations are located primarily in the Sakha Republic. Alrosa accounts for approximately 25 percent of the world’s rough diamond supply and 97 percent of Russia’s rough diamond production. The company is also active in diamond mining in Angola and Namibia.