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Alrosa chief sees higher sales, earnings in 2016 on market recovery

PJSC ALROSA is on track to sell 37 million carats of diamonds in 2016, up from 30 million last year, while net earnings are expected to jump "two to three times" from last year's total of 32.19 billion Russian rubles, President Andrey Zharkov said.

In an interview broadcast on Russian state TV channel Rossiya-24 Oct. 11, Zharkov said the diamond market has recovered strongly from last year's "serious" market downturn, when diamond demand fell in some major countries, and cutters and polishers delayed purchases due to restrictions on credit imposed by specialist diamond-sector banks.

Zharkov also said that by the end of 2016, Alrosa's diamond stockpile should fall between 5% to 6% from the level seen at the start of the year, when the company said it had 22 million carats in unsold stones.

Despite the optimism, he still expected a slight fall in rough diamond prices of between 2% and 3%, which was less than the 5% to 6% price fall originally forecast at the start of the year.

With earnings much higher than last year, Zharkov said the board may look at paying out more than 50% of net earnings as dividends, compared to at least 35% under its current dividend policy.

And contrary to suggestions in recent press reports, Zharkov said he did not believe the Russian government would sell more of its stock in the diamond miner. After selling a 10.9% stake earlier in the summer, the Kremlin's stake in the diamond miner fell to just under 44%.

Net earnings should fall to about US$2.45 billion by the end of the year, from US$2.78 billion in January, he said. He confirmed the company repaid US$350 million this year, and plans to repay another US$1 billion in debt in 2017, but will refinance about US$720 million in loans from Alfa Bank due next year.

Synthetics challenge

Asked whether synthetic diamonds were a threat to the company, Zharkov said the share of man-made stones in the jewelry market totaled "just a few percent," but could grow.

Alrosa, which mines a greater volume of very small stones than other major producers, is considered particularly vulnerable to the progress of synthetic diamonds, which are already showing up in low-end jewelry.

"Russia is the world's largest producer of the smallest possible rough diamonds — also because of their cut-off size in mining. Some 75% of their volume production are well below 0.3 carats rough," said Chaim Even-Zohar, a diamond analyst and owner of Tacy Ltd., a consultancy, in comments emailed to SNL Metals & Mining in September.

"Because of better-quality small gem synthetics, in a few years these goods will probably end up on the bottom of aquariums with gold fish ... as nobody would want to cut them anymore," he said.

About 60% of Alrosa's revenues comprised sales of the biggest 25% of its rough stones by volume, with stones of more than 1.8 carats accounting for approximately 45% of all revenues, Even-Zohar said.

These larger stones are used to leverage the sale of the smaller ones, since buyers purchase bundles of diamonds rather than individual stones.

To counter the threat of synthetics, Alrosa has started the Diamond Producers' Association, a lobby group intent on, among other goals, defining the differences between mined and synthetic diamonds.

Alrosa has also joined forces with Russian technology institutes to design equipment capable of detecting synthetic stones, Zharkov noted.

Botswana, Angola ventures to extend mining life

With discoveries becoming more difficult and expensive to make, Alrosa has between 13 and 18 years of mining left at its Russian assets. The company has identified about 600 million carats in recoverable diamond resources, and further exploration may extend this, Zharkov said.

"The diamond resource base of Angola is very large ... and we are also looking at Botswana," he said.

The company last year agreed to team up with Endiama EP, Angola's state-owned diamond company, to spend up to US$1.5 billion exploring at Luaxe, a diamond deposit in the east of the African country with reserves estimated at 350 million carats, according to Angola Today.

Alrosa also holds a 32.8% interest in the Catoca mine with Endiama, and also has stakes in two other diamond projects in the same country, according to data from SNL Metals & Mining.

Zharkov said Alrosa may also expand its cooperation in Botswana, where the Russian miner has a 50% joint venture with Botswana Diamonds Plc over the Orapa Regional exploration project.

SNL Metals & Mining is owned by S&P Global Inc.

As of Oct. 10, US$1 was equivalent to 62.01 Russian rubles.