On March 29 in Mirny, the ALROSA Group held the 12th Meeting of its Managers and Employee Activists. This was a traditional session between the Company management and the representatives of labor teams to sum up the results of the year passed and to discuss the future development, as well as the problems related to social welfare. Sergey Vybornov, President of AK ALROSA, made a report to this meeting.

Dear colleagues and our guests!

The performance of AK ALROSA in 2007 was altogether successful. I am sure that you are familiar with basic indicators of the ALROSA Group for the year passed since you have made your own direct contribution to their accomplishment.
I would like to dwell on the set of most important tasks, whose urgency for the Company is literally growing from day to day, while their solution requires strategic initiatives.

First of all I mean the mineral resources base of the Company. Today Russia is the world’s leader by prospected reserves of rough diamonds. Today the balance-sheet of this Company and its subsidiaries includes considerable amounts of reserves rated under industrially relevant categories. This creates grounds for strengthening and developing our positions in the world diamond market. However, the share of deep-seated ores in the total amount of reserves is relatively great and mining and geological conditions of deposits currently under development are permanently increasing in complicacy. Working out underground mines means not only significantly increased diamond cost, but new technical and financial risks, which are inevitably accompanying the construction of unique industrial facilities.

We must protect the Company from these risks by intensifying the prospecting of diamond deposits in the promising territories of Russia and in Africa as well as by modernizing the sales strategy.
In 2007, financial allocations for geological exploration were increased by 16.3% as compared with 2006. In physical terms, the amount of work done exceeded the indicators of 2006 by 8.1%. Exploration works were performed in the territory of four entities of the Russian Federation, as well as in Angola.

85% of geological exploration was concentrated in the territory of Western Yakutia. It resulted in completed prospecting and including the Verkhnyaya Muna Deposit in the operational area of the Udachninsky Mining-and-Processing Integrated Works, the Botuobinskaya Deposit and the Nyurbinskaya Placer Deposit in the operational area of the Nyurbinsky Mining-and-Processing Integrated Works into the Company’s balance-sheet.
Prospecting of the Mayskoye Deposit was started in Nakyn. Preliminary prospecting of the Zarya Diamond Pipe, whose results gave hope to discover a new deposit, was performed in the operational area of the Aikhalsky Mining-and-Processing Integrated Works.

In 2008, there was set up a new Arctic Geological Exploration Expedition. Totally, 2.9 billion roubles will be allocated this year to finance prospecting works. These are significant funds. However, the Company cannot restrict itself only to this.
During this month I held negotiations with the political leadership of the Democratic Republic of Congo, Namibia and Angola concerning the Company’s operation in these countries in the field of geological prospecting and power engineering. The reached agreements as I hope will permit to broaden our cooperation in the Company’s interests. Our working experience in Angola has convincingly demonstrated that the African projects are one of the most efficient ways to develop our Company under the conditions of forthcoming decrease in the global diamond output. In other words, we must use any chance to expand our mineral resources base in Africa. Control over resources means control over the market.

To achieve this, we can offer our assistance in solving serious energy problems in the African Continent in the field of geological prospecting and construction of large-scale industrial facilities.
Africa is a key region from the point of view of those countries, which happen to be the largest consumers of natural resources. China’s presence in Africa is growing every year on a wonton scale. The United States offered to build up military presence in this continent, including their own. So far Russia has no such global-scale possibilities in Africa, but we, the ALROSA Company, have our own competitive advantages. First of all, these include efficient techniques of prospecting and developing diamond deposits.

We are feeling support for our projects in Africa and are ready to develop concurrent programs to promote them: the above mentioned power engineering, oil and gas prospecting and recovery as well as construction.
Of no less importance is the task of reorganizing the Company and turning it into a modern, efficient and investments attractive framework. The extraordinary general meeting of stockholders held in 2007 decided to increase the authorized capital of AK ALROSA by 982.0 million roubles through placing additional registered ordinary shares by way of private offering among the Russian Federation, Republic of Sakha (Yakutia) and eight municipal entities of the Republic. The next stage will be to turn AK ALROSA into an Open Joint-Stock Company and to implement the strategy of attracting capital from the market.

The change of joint-stock capital structure brought about a sufficient amount of questions. This decision taken by the meeting of stockholders was preceded by a serious and intense discussion at the level of all branches of power and in expert community and here I would like to say the following.
The economic basis of modern Russia and accordingly the place of this country in the global economic system today are determined by the oil and gas industry and the mineral mining industry. Their aggregate products reach about 70% of Russian export. This factor is often used as a basis for criticism aimed at would-be Russia’s drift to the outskirts of world economy and turning into a raw appendix of the world’s leading countries.

I believe that similar assessments are superficial and dogmatic. In my view, the truth is that nonrenewable raw mineral resources of this planet are sufficiently quickly exhausting, while the demand for them is equally quickly increasing.
This is very clearly seen in the diamond market – there was not a single substantially large deposit discovered during the past decade in the world. Meanwhile old deposits are being worked out, while the demand is invariably growing.
Under these conditions, everything, which implies development of the industry, requires scientific, engineering and technological support no less perfect than in the “hi-tech” industry.

This is why the extracting industries in the economic structure of Russia, and this is distinctly seen by the example of our Company, are by no means depriving it of intellectual capital.
Moreover, the state and the national economy require maximum efficiency from extracting companies in scientific and technological development. To solve these tasks, large corporations like ALROSA should be able to respond in a flexible manner to the changing reality in the world markets relying on the powerful support from the state. I am sure that the decisions taken by our stockholders, the production and personnel potential of the Company will permit ALROSA to strengthen its positions in the world market to a significant extent.

Shaping up a new sales strategy is the third strategic streamline. The Company should plan its future based on comprehension of the market, demand and effective cost in relation to all the range of products sold. Such a system cannot be built without long-term partnership relations with the world’s largest manufacturers of polished diamonds and jewelry. We just have no right to base our analysis taking into account only the current market environment, since we are facing large-scale and very costly modernization of our production facilities. It is evident to anyone that this Company possesses unique techniques of prospecting and developing diamond deposits in extreme natural environment. However, the market, the world market of rough and polished diamonds, was not created by us. The diamond industry of the USSR and later that of ALROSA was quite comfortably existing in the system of the global monopolist, which controlled the market and was responsible for it.

Fundamental changes in the market are making their headway fast. 2008 is the last year in our direct trade relations with De Beers in their former and classic shape. Planning our mining works we relied on the market stability provided by others. Now we shall have to do this job on our own.
The current relations of De Beers with African national governments and the policy of establishing new sales centers are making the world market situation hardly predictable.

The consumer market for our products is undergoing serious changes. It seems that the U.S. recession is gaining stable character, and this affects one half of all diamonds consumed in the world. The fast falling U.S. dollar rate generated discussions about changing the diamond trade currency not only among us, the diamond mining companies, but also among manufacturers of polished diamonds, dealers and jewelers, which earlier for them was just unthinkable. All this is going on the background of very good growth rates in diamond consumption demonstrated by Asia and first of all China, as well as at last by our country – the Russian Federation.
All these changes do not suggest fatal outlooks for ALROSA, on the contrary they are giving us a unique chance. May be we are not ready for it so far, but there is no other way. The largest manufacturers of polished diamonds and world jewelry brands are ready to occupy the place of De Beers in trade relations with the Company. For this purpose they need clearly formulated principles and a long-term character of such cooperation. The Company needs this too. The market is interested in stability and permanent growth of polished diamonds value, which means that we shall find common grounds with its participants on all key problems.

At the same time, the market should be ridden from come-and-go people, whose activity leads to lower prices for polished diamonds, growth of uncontrolled stocks and declining prestige of polished diamonds in the eyes of consumers. Here we have a broad program of cooperation with our market colleagues.
But the main thing should be done by us and here the strategy is evident. ALROSA is shifting to long-term and transparent relations with its partners and seriously reducing the number of buyers for its rough to the benefit of large-scale and stable companies, which have sufficient resources and proper development strategies. This will be systematic and long-term work and there is just no other way out.

The operation of our foreign subsidiaries acquires new significance in the context of sales strategy modernization. Their new task is to monitor the current market environment obtaining direct information from major world diamond centers. This allows real-time monitoring taking into account shifts in demand affecting price formation and in future it will give a possibility to influence demand via marketing programs.

I am going to repeat it once again –in 2008 the program of cardinal modernization in sales policy must be adopted and put into operation. This is the requirement of our stockholders backed up by objective reality.
Closing my address let me again delineate the current positions of ALROSA in the market. We have at our disposal the largest prospected diamond deposits. The main part of our resources base is located in the sovereign territory of the Russian Federation and is not subject to political risks. Moreover, the Government of Russia is rendering and will render all its assistance to the Company. Today, while drawing up our mining plans and social policy we should take into account that now we are making the market on our own.
The market is anticipating difficult times and serious changes, but we are objectively prepared for them better than others. And we are obliged to use this opportunity.

Possible achievements in developing the technical, scientific and personnel potential here in Yakutia and in the Arkhangelsk Region, and first of all the living standards, social security level and well-being of our Company employees will depend on our success. I am sure that we shall discuss this here in detail and substance.
Thank you for your attention.