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Dividends from ALROSA

23 january 2012

Until mid last year, it was virtually impossible to become a minority shareholder of ALROSA: its status of a closed joint-stock corporation imposed restrictions on trading the company’s shares. Now the situation has changed. Having set the goal to enter the open market and to become a major public company, ALROSA has transformed into an open joint-stock entity, split its stock into shares of smaller denomination and gained access to trading on MICEX-RTS.

The status of a minority shareholder makes it possible to derive profit in two ways. In the first place, from the growing value of securities at the stock exchange. But these profits are "on paper" only: to cash it out you have to sell your shares and stop being a shareholder. However, the minority shareholder may receive cash in the form of dividends without abandoning corporate capital.

Historically, ALROSA paid dividends quite regularly, but their calculation was focused primarily on the needs of the majority shareholder, which was the State owning 91% of the whole stock. The remaining 9% were initially distributed between employees under an option plan. However, most of them received small blocks of shares resulting in insignificant dividend accrual.

In the near future, ALROSA intends to increase its free float by placing its shares on the market. The dividend rate is an important attractiveness factor for investors, so now when making decisions about dividend payments the company, willing or not, will have to focus both on the needs of minority shareholders and dividend yield standards generally accepted in business.

Pursuing this objective, last year the Supervisory Board of ALROSA accepted a regulation on the company’s dividend policy (outlining a clear and transparent mechanism for accruing dividends), in which there was no need, while the company operated as a closed joint-stock corporation. According to some sources, the regulation provides for annual dividends equal to at least 10% of the company’s net profits. The upper threshold of allowances is not envisaged - it is assumed that the decision on the final amount will be annually taken by the Supervisory Board, depending on the profit and market situation.

In general, in terms of accrued dividends and dividend yield (the ratio of dividends to share price) ALROSA looks good against the world's largest mining companies.

Share of net profit allocated for dividends (according to Factset):

If we compare ALROSA with companies that specialize solely in diamond mining, the position of the Russian monopoly appears even more beneficial. The diamond mining companies currently operating on the market are not big players (Gem Diamonds, Petra Diamonds, Harry Winston) and refrain from dividend payments channeling their profits to finance project development. Of these three, only Harry Winston paid dividends over the past 5 years.

The average level of dividend yield for diversified miners is about 3%. For instance, the dividend yield generated by Anglo American shares in 2010 amounted to 2.4%, by those of Rio Tinto - 4%, BHP - 3.2%, Vale - 2.1%, Xstrata - 0.9%.

In 2010, the dividend yield produced by ALROSA shares was 1.4% - based on 0.25 rubles accrued for the "new" share with a face value of 17.77 rubles.

ALROSA’s shares are now being traded at MICEX-RTS at the rate of about 30 rubles per share. In 2011, the company posted a net profit of 27.4 billion rubles. Based on these metrics, ALROSA should allocate about 25% of its net profit earned in 2011 for dividends in order to maintain the dividend yield at the level of international companies (3%)

After floating its stock, ALROSA will be de facto the only major diamond miner, whose securities will be available on the market. De Beers, which is comparable with ALROSA in terms of output and sales, will soon finally join Anglo American and will not have a separate listing. Therefore, experts predict a keen interest of investors to purchasing shares issued by ALROSA. On the one hand, it will lead to an increase in its market capitalization, while on the other hand it will make ALROSA increase dividends. With the value of its shares going north the company will have to raise the bar of dividend payments to 30 percent of its profit and more to maintain a 3 percent rate of return.

Elena Levina for Rough&Polished