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Russia's Alrosa looks to state fund for rough diamond sales of up to US$1B

The government of the Sakha Republic proposed that a state fund purchase up to US$1 billion of PJSC Alrosa's rough diamonds in 2020, Interfax reported Jan. 21, citing Aysen Nikolaev.

Nikolaev is head of the Sakha Republic and sits on the board of the majority state-owned company as first deputy chairman.

The government of the Sakha Republic is the miner's second-largest shareholder with a 25.54% interest; the Russian government holds 33.74%, according to S&P Global Market Intelligence data.

The state fund of precious metals and gemstones, known as Gokhran, would buy between US$500 million and US$1 billion worth of Alrosa's rough stones, according to Nikolaev's proposal to President Vladimir Putin and Minister of Finance Anton Siluanov. Gokhran's budget for purchases of precious metals and gemstones is US$170 million for 2020.

The proposal will be reviewed in detail following the company's first-half results, and a decision is subject to market sentiment and an increase to the Gokhran budget, Nikolaev said in the report. A solution will be found closer to May or June that suits the regional government, the company and the Ministry of Finance, which administers the fund, Nikolaev added.

The plan would be positive for Alrosa's sales in 2020 if the purchase price is not significantly below the market price, BCS Global Markets analysts wrote in a Jan. 22 note.

Large volumes of rough stones accumulated in late 2019, according to Nikolaev. "It may make sense not to sell them for several years, until demand is restored," he was quoted by the state news agency as saying. It would then be up to Gokhran to sell the stones, depending on market conditions.

An Alrosa representative told Interfax that selling to Gokhran is seen as a last resort and would only be done in the face of significant market deterioration.

The company's net profit slumped 38% year over year to 51.0 billion Russian rubles for the first three quarters of 2019. The Sakha Republic's 2020 budget includes a forecast 6.5 billion rubles of dividends from Alrosa, according to Interfax.

It would not be the first time that the fund has stepped in to help Alrosa. Gokhran spent US$1 billion on the company's diamonds in 2009 and 9.5 billion rubles in 2012 as demand dwindled.

Alrosa's rough diamond sales continued to show signs of recovery in December 2019, reaching a nine-month high of US$352.1 million after a lull of just US$164.6 million in July. The company's full-year rough diamond sales fell 26% to US$3.27 billion in 2019 from US$4.41 billion in 2018.

Moscow-headquartered brokerage BCS Global Markets expects the diamond market to recover in 2020, citing the nascent recovery of Alrosa's sales.

The rough diamond market stabilized in the fourth quarter of 2019 after 12 to 18 months of weak demand, UBS analyst Daniel Major wrote in a Jan. 17 research note. "Although consumer confidence may not be strong enough to support a powerful restocking event in 2020 (like in 2016), we believe the end of destocking will drive a recovery in rough diamond demand and an earnings and [free cash flow] recovery for Alrosa in 2020," Major wrote.

UBS upgraded Alrosa's shares to "buy" from "neutral" in early January, raising its 12-month price target on the stock to 105.00 rubles from 78.00 rubles. Shares closed flat at 90.87 rubles apiece Jan. 21.

Alrosa recently began drilling work for a study on bringing the Mirny Division's flagship mine, Mir, back into production, it said in a Jan. 17 release. The mine has been out of action since it flooded in 2017, killing eight miners.

As of Jan. 21, US$1 was equivalent to 61.81 Russian rubles.