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Botswana mining industry players speak on speculative exploration licences

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Design is the key to all markets

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Mutual mass destruction will not serve anybody’s purposes

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Pavel Sokolov: Every stone has its beauty

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27 may 2019

ALROSA 2019 - Airports and Sales

18 march 2019

At the end of last year, I was immersed in an exceptionally curious activity — the study of the updated strategy of the ALROSA Group (see “The tobacco is excellent. The pipe of peace is put out,” “The “Jubilee” Speeches”).

Let me remind you that the key issue I raised was the lack of recovery prospects for the Mir mine, along with a very strange desire to accomplish a hard-to-do engineering task - to build a new underground mine on the Jubilee diamond pipe.

In turn, the Group’s CEO said that it was all nonsense and when the project of restoring Mir would come to existence, it would be included in ALROSA’s new strategy.

Sounds good, and any approach has the right to exist. We can judge about the intentions of the company’s management only by their public statements. Nevertheless, being obviously informed better than anyone else about the long-term projections of ALROSA, its CEO got rid of a significant part of his stake in the company - and did the right thing.

At that time, I found amusing the term coined in the bowels of ALROSA about the planned loss-making economics inherent to a number of the company’s projects. We then made a cautious assumption that an increase in the number of such projects could turn ALROSA itself into a planned loss-making venture. As it turned out, the reality surpassed even the wildest assumptions.

Airport

ALROSA is going to invest 10.4 billion rubles in the construction of a new airport in the city of Mirny.

Why expand the airport if the amount of cargo traffic is being reduced due to the completion of major resource construction projects both in Yakutia itself and in Eastern Siberia as a whole and if the personnel in Mirny is being reduced and there is outflow of population from this region? This is a question for shareholders. I think we should only note here that the notorious diamond placer buried under the active airstrip is an extremely dubious sweetener for another round of building up non-production costs. Therefore, we can safely attribute 10.4 billion rubles to this kind of expenses, which the shareholders did not come across in the ALROSA Group’s updated strategy and updated long-term investment program approved at the end of 2018. At the same time, following the management’s logic - if there will be a project “it will quickly appear in our strategy” - it should probably appear.

New Moscow office

ALROSA is going to pay 4 billion rubles for the purchase of yet another office in Moscow - this time in the interests of its United Selling Organization (USO).

The old Gazprom ARETI-ITERA building in Sevastopolsky Avenue in Moscow built more than 20 years ago in the mid-1990s requires major overhaul, as due to its initial designation it does not comply with the strict requirements of a sensitive facility and in its current condition it is hardly suitable for installing heavy production equipment, storing and sorting rough diamonds, which will require additional investments. The talk about the need in a building of its own for ALROSA’s sales arm has been going on for a long time. First of all, this was due to the fact that the company is holding a lease for its current site from Gokhran and this contract has a term. However, there were counterarguments: as long as ALROSA is under state control and has the same curator as Gokhran, such questions are not relevant. In addition, the building used by Gokhran was specially designed for the work with precious materials on such a scale. There are simply no other similar buildings in Moscow. Consequently, it would then make sense, as in the case of DTC De Beers and their relocation from London to Gaborone, to talk about building a new complex within a large logistic hub for convenient work with customers and getting rid of all the company’s supplemental (non-productive) property.

But here there is still a practical question, whether ALROSA really needs additional sites given the fact that it is reducing the staff of its USO. If the brave new world of fully automated sorting and artificial intelligence determining the parameters of sales and the customer base is already close, then why the old Gazprom high-rise building? There is one more “but,” which is the factor hardly controllable by sorting machines and this is the actual amount of goods for this sorting and aggregation. And this amount of goods produced by the company is not increasing judging by the published metrics, but on the contrary, it is decreasing.

Re-equipment of the Aikhal mine

ALROSA will invest 316 million rubles in the re-equipment of the Aikhal mine.

The Aikhal underground mine is relatively young - it does not require large-scale technical re-equipment, as after the mine was flooded in 2004 it was completely rebuilt and re-equipped by 2011. In other words, due to serious technical incidents and management mistakes (which, by the way, have a certain similarity in their consequences with the flooding of the Mir mine – though, thank God, there were no casualties), the Aikhal underground mine was actually built twice. Taking into account the additional investments in its new construction and low prices for diamonds produced at the mine, the project's viability tends to zero at best, with all the ensuing economic consequences.

So, this year alone, ALROSA announced additional expenses in the amount of 14.716 billion rubles, or nearly USD 163 million at the current exchange rate.

And what about the income part?

There was a 36-percent decrease in sales of natural diamonds versus February 2018 and a 23-percent increase versus January 2019. It makes sense to compare technical and economic indicators on a year-to-year basis due to the relatively high turnover and inertia of the production processes in the diamond business, so comparing February with the traditionally passive January is a rather meaningless exercise, which does not carry any practical use in forecasting. The fall in sales of 36 percent to February 2018 is a wake-up call for the leader of the global diamond industry. An objective picture, which will make it possible to produce more thorough forecasts (including the quality and structure of diamond stocks, which will have to be sold to avoid endless accumulation), will take shape by September or October - we will see then, as it’s not a long wait.

To be fair, I must say that the only instrument of influence on the global diamond market, which ALROSA had and still has, is the output of rough diamonds by volume, which also decreased in 2018. Only the lazy ones do not say nowadays that the very fundamentals of this market are changing, and the production volume here will no longer help. Another major factor helping to survive in the modern diamond business is effective cost management. The business, which is inherently associated with huge production costs, can no longer boast of the earning power it had in previous years.

And this is where the problems begin, leading ALROSA into the planned loss-making field. Building new airports on the backdrop of declining cargo traffic, constructing the Jubilee underground mine, which the officials of the USSR Ministry of Non-Ferrous Industry could not think of even in their nightmares, putting into operation lean-ore diamond fields located far away from the company’s production infrastructure at a time when rich ore is depleting, re-equipping the twice built Aikhal in the absence of plans in the company’s strategy for the Mir mine, and all this amid increasingly persistent appeals for aid from the State... Yes, I almost forgot the announced purchase of Smolensk-based Kristall...

A shareholder represented by the State can say that not everything is determined by economic efficiency and that social results produced by a company such as ALROSA are no less important. This is all true if this were followed by an increase in employment, income levels and the economic activity associated with the core business in Yakutia. However, in Western Yakutia, everything happens exactly in the opposite way resulting in personnel retrenchments, as it is extremely difficult there to find a job anywhere, but ALROSA, especially for the engineering staff. Some of the company’s business units are transferred to Novosibirsk. Why there? There are many other wonderful cities in Russia... As it turns out, due to the company-town infrastructure ALROSA employs entire families – for instance, a husband works as an engineer, while his wife as an accountant – so, if one of them has to quit, both have to look for other jobs or split their family. You can sure find specialists in Novosibirsk and probably it is even cheaper than in Mirny. But then it is necessary to fire people in Mirny, which discredits the miner’s above-mentioned social function allegedly opposing the world of greedy profit-chasing and hard cash owned by square-shouldered atlantes? Recently, ALROSA began trading in the city of Vladivostok. They created some kind of a cluster and even opened a branch there... Is anyone alive there, I wonder? In general, the process of finding the right corporate decisions is eternal and boundless like Russia itself - as long as there is money to spend.

There is another way, which is the easiest - to disburden everything upon the State and let it grapple with this task. Think of old times after all and recall the Yakutalmaz Trust, which spent less and earned more. But this will only briefly postpone the need to return to the main issue, which is the foundation of the very business itself. And there is no way to avoid this, be it Yakutalmaz or ALROSA.

Sergey Goryainov, Rough&Polished