Russia’s diamond miner to start new kimberlite pipe and plug state budget holes

By Marina Romanova

Russian diamond miner Alrosa PJSC has announced the start of the development of Zarya kimberlite pipe, a new deposit in its Aikhal Mining and Processing Division (MPD) located in Mirny District of Russian Republic of Sakha. The initial investment estimated by the company to approximately US $150 million. The announcement came along with the news of 10.9 percent of central government Alrosa’s stake, valued at more than US$860 million, to be auction soon.

The new deposit

The first commercial blasting on brand new Zarya pipe reportedly took place on June 10th and triggered the first stage of the deposit development – surface stripping to remove barren sedimentary rock overlying the ore body, Diamond World News Service explains.

The mine is expected to reach its targeted capacity of 1 million tons of ore per year by 2021, providing a total of 3.6 million carats over the life of the mine. The mine life is expected to be 13 years, ALROSA said.

“The construction of an open-pit mine on the deposit is a very important investment project,” said Igor Sobolev, ALROSA’s first vice president and executive director. “The start of mining operations at Zarya pipe will allow us to replace dwindling reserves at Komsomolsky open-pit mine.”

The diamond mining world leader, ALROSA has three deposits in its Aikhal MPD: two open-pits Yubileyny (in operation since 1989) and Komsomolsky (since 2002), and one underground mine Aikhal (since 2005). Two of them – Yubileyny open-pit with its current depth of 310 m and Aikhal underground mine – are expected to deplete its resources by 2030 and 2020 respectively. Komsomolsky open-pit with its current depth of 460 m is to deplete by 2023. Four years ago, in 2012, it reached the design capacity of 500 thousand tons of ore per year.

The Aikhal Mining and Processing Division was established in 1986. The division now employs more than 4,300 people.

In 2014, the Aikhal MPD produced 12.565 million carats of rough diamonds, ALROSA says. Its share in company production totaled 35 percent in 2014 and 32 percent in 2015.  In Q1 2016, Aikhal Mining and Processing Division mined 2.68 million carats.

“The development of Zarya (pipe) will guarantee stable use of existing capacities and ensure total rough diamond recovery of 3.6 million carats throughout the mine development,” Andrey Zharkov, Alrosa president said reporters.

The miner also said it signed an agreement with JSC Alfa-Bank to extend the maturity date of a US$720 million loan from April 2017 to July 2019.

10.9 percent stake

Kremlin was not disclosed the timing of the sale of another stake in diamonds miner yet. Since the beginning of this year company shares have jumped 29 percent, which among other reasons made Alrosa “good candidate” to be one of the first on the government’s auction block, Alexey Ulyukaev, Russian Economy Minister told reporters.

“Alrosa is a really unique asset in the state portfolio,” Bloomberg quated Konstantin Yuminov, an Raiffesenbank JCS analyst in Moscow, as saying. Compare to other state-conrolled assets Kremlin is announced to unload – among them are oil producer Bashneft PJSC and 10.9 percent of VTB Bank – Alrosa, in  Yuminov’s words, is the most intriguing for foreign investors.

In 2013 Russia sold its 16 percent stake to foreign investors during company’s Moscow initial public offering (IPO) including 7 percent of central government stake; another 7 percent stake own by the regional government of Republic Sakha (Yakutia); company itself sold 2 percent stake in the form of treasury shares. Alrosa then has raised US$1.3bn.

The offering was backed by US funds including Oppenheimer and Lazard, as well as the Russian Direct Investment Fund, Russia’s US$10bn sovereign wealth fund, The Financial Times then reports.

Alrosa is the world’s largest producer of rough diamonds by volume; it produces over a quarter of all rough diamonds globally. Together with De Beers, the company controls almost two-thirds of the global market.

In 2015 global diamond demand slipped 2 percent as a stronger dollar and collapse in oil income for buyers in Russia. In the first quarter of 2016 Russian miner had record profit of 49.2 billion rubles (around US$750 million) up from 22.2 billion in the same period a year ago, which considered as very promising after market recovery from last year record prices down to 18 percent, the most since 2008. Net income in the first quarter of 2016 more than doubled from a year earlier as the company raised sales and cut costs.

Following the 2013 deal, federal government now owns 43.9 percent of the company. Republic of Sakha, the region where Alrosa’s main operations are based including new Zarya pipe, holds 25 percent of its assets. Sakha districts, where actual open-pits deposits and diamonds rich Anabar river’s placer deposits are located, hold 8 percent. According to the company website, around 23 percent of the company’s shares are in the free float.

Alrosa’s share price almost doubled since the 2013 IPO. The company has benefited from a weak ruble over the past two years, which boosts revenue in the local currency from selling diamonds in dollars.

“We were able to increase our sales volumes, which led to a reduction in our inventories accumulated in the second half of 2015,” Andrey Zharkov, ALROSA’s chief executive officer said to Rapaport news.

As company said erlier this June, its forign sharehoders American Oppenheimer Funds Inc. (about 3 percent stake), and Gam UK fund, which also holds miner’s shares, already “expressed interst”.

Federal government is aiming to earn more than 60 billion roubles from selling a 10.9 percent stake in the company.