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Flexible destocking by ALROSA

28 july 2014

Following the sellout of nearly 5 million carats of rough in the first quarter of this year, ALROSA sold no more than 400,000 carats of diamonds fr om its stocks in the second quarter. Meanwhile, global prices for rough diamonds went up 2% in the second quarter compared with the first quarter, which made it possible for ALROSA to have much higher sales. Why was it that ALROSA did not take advantage of the positive market conjuncture and refrained from boosting its destocking schedule? This can be explained both by the miner’s reluctance to saturate the market offering excessive supply and by the seasonal factor.

ALROSA’s sales in the second quarter totaled 8.4 million carats going down by 34% compared with the first quarter and by 6% in annual terms. The second quarter sales exceeded the company’s output by mere 400,000 carats. This may be due to the fact that ALROSA renounced the possibility to exert pressure on the market and besides this was the result of lower production (which decreased by 7% in the first six months), according to Vadim Astapovich of VTB Capital.

The sharp decline in sales in the second quarter compared with one year ago is explained by the high benchmark effect - ALROSA had a massive clearance sale of rough in the first quarter involving 4.8 million carats (3.1 million carats of gem-quality diamonds and 1.7 million carats of industrial diamonds). As a result, ALROSA’s stock decreased to 13 million carats in January-March 2014 from 18 million carats at the beginning of the year, according to the company's management.

The company mainly sold inexpensive rough from its stock in January-March 2014, which devalued the average sales price of diamonds (to $ 118.5 per carat) and this explains the 25% increase in the average price in the second quarter going up  to $ 148 per carat. ALROSA’s gem-quality rough was sold at $ 200 per carat in the second quarter (up 29% in price over the previous period). This level outran the expectations of the Otkrytie Investment Bank as it follows from their review. The bank’s forecast was $ 185 - $ 190 per carat.

In addition to improving the miner’s product mix, the growth in its average prices points to an improved environment in the world diamond market. ALROSA estimates the growth of world prices for diamonds at 6% since the beginning of the year. In annual terms, the average sales price of diamonds produced by ALROSA in the second quarter was up 7%. Higher prices for gem-quality diamonds offset the miner’s smaller sales and ALROSA raked in $ 2.7 billion (RUB 95 billion) in the first half of this year, which is 15% higher than in January-June 2013. VTB Capital predicts that ALROSA will drive its revenue to RUB 176 billion by the end of 2014.

Totally, ALROSA sold 21.1 million carats in the first half of this year. In order to reach the target for 2014 sales - 38 million carats (including 2 million carats from the company’s stock – we shall revert to this figure later) - ALROSA should sell 8.5 million carats every quarter. This is achievable, but in the third quarter of 2014 the rough diamond market will experience a seasonal pressure, VTB Capital notes in its review.

Otkrytie believes that if ALROSA will fail to replenish its stock in 2014, its sales may even exceed the company's forecast, amounting to 40 million carats or more.

The figure of sales from the company’s stock in the first quarter of 2014 - 4.8 million carats - looks daunting, if we recall that at the beginning of this year the miner announced its plans to sell only 2 million carats from its stock (“Assessing the forecast level of sales ALROSA takes into account about 2 million carats of diamonds to be sold from its stock”). The answer lies in the methodology for calculating the actual stock. According to one method, the accounting takes into consideration only rough, which is currently in stock. Whereas the other method says it may be rough to be processed, i. e. diamonds in the ore, which are only on their way to the warehouse. However, it may take them one year to cover the distance.

In assessing the volume of diamond stock the accounting also takes into consideration the rough coming from ALROSA’s placers (developed by its subsidiaries, Almazy Anabara and Nizhne-Lenskoye), wh ere mining operations are seasonal and carried out in the second and third quarters. As it was explained by ALROSA’s executives in late June during a conference call on the results of the first quarter under IFRS, diamonds recovered from placers will be sorted out to the end of this year and then sold in the first quarter of next year. Almazy Anabara and Nizhne-Lenskoye together produced about 4.5 million carats (about 12% of the total output of ALROSA Group) in 2013. Comparable amounts of diamonds may "technically" supplement ALROSA’s stock also at the end of 2014, and based on this the miner’s net sales can reach two million carats for the reporting date. And these belatedly sold diamonds could have been a part of those 4.8 million carats, which ALROSA put up for sale in January-March 2014.

If we analyze the data for 2013, we may find similar dynamics - sales exceed production in the first quarter and then sales intensity is reduced.

ALROSA’s output, sales and prices in the first quarter of 2013 to the second quarter of 2014*


* Data furnished by ALROSA and VTB Capital

By the end of 2014, about 2 or 3 million carats should return to the miner’s stock, Vadim Astapovich of VTB Capital agrees. This can be not only rough recovered at alluvial deposits, he says, but also diamonds from Aikhal, the underground mine, which was dispatching its production to the warehouse in the second quarter due to renovations performed at the concentrator of the Aikhal Mining Division.

The ore coming from the Aikhal Diamond Pipe known for its high grade (5.51 carats per tonne) was stored in the second quarter and most likely will be handled in the second half of this year. The delay in processing of this ore will make it possible for ALROSA to catch up with its production target in 2014. ALROSA produced 15.9 million carats in January-June and is still planning to produce 36 million carats at year-end. To achieve the production target, ALROSA will have to mine 20 million carats of diamonds in the second half of this year.

Igor Leikin for Rough&Polished