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16 march 2012

The major mining units of ALROSA – Udachninsky, Aikhalsky, Mirninsky and Nyurbinsky GOKs (mining and beneficiation mills) - provide about 95% of the output recovered by the world’s largest diamond mining company in carat terms. It is logical that these assets are the priority areas of investments made by ALROSA switching over to underground mining at the Udachny Diamond Field (Udachny Diamond Pipe) and Aikhal Diamond Field (Yubileinaya and Komsomolskaya Diamond Pipes). But the need to increase its resource base requires active involvement of the company in the development of new fields.

In 2011, in search of new points of growth ALROSA started exploration works on five new diamond fields in Western Yakutia, three of which are primary (Verkhne-Munskoye, Maiskoye and Dalnyaya Diamond Pipe) and two alluvial (Ebelyakh and Gusinaya). ALROSA was granted licenses for these deposits last April: for Ebelyah and Gusinaya through auctions, for Dalnyaya on a competitive basis, and for Verkhne-Munskoye and Maiskoye by the right of discoverer. So far, the company did not publish any official data on their reserves, but Interfax has preliminary estimate data on the potential of these new diamond fields.

Diamond deposits in Western Yakutia

The largest of them, Verkhne-Munskoye is located 180 km from Udachninsky GOK and consists of four kimberlite pipes (IF: Zapolyarnaya, Deimos, Novinka and Komsomolskaya-Magnitnaya). In previous years, ALROSA assessed the reserve of this field and the estimate yielded over 38 million carats of diamonds, the diamond grade being 0.6 carats per tonne. For comparison, the International Diamond Pipe, the richest by the diamond content, features 8.74 ct/t, while Zarnitsa has the leanest ore of 0.21 ct/t. The Udachnaya Diamond Pipe, the company’s largest diamond mine, contains 2-2.5 ct/t.

Verkhne-Munskoye accounts for 64.082 million tons of commercial ore reserves, according to Gleb Shmarov, Chief Geologist at Udachninsky GOK, who disclosed the figure in a recent interview to the corporate magazine of ALROSA. Mining is scheduled to start in 2018 at the rate of three million tons per year, which will permit to develop the diamond field for at least 20 years. This year the company will take samples to assess the quality of diamonds.

Diamonds from Verkhne-Munskoye are distinct by their very high quality, according to earlier reports by ALROSA: in April 2011, the average price per carat exceeded $210 (in the second quarter of 2011, the average price of diamonds produced by ALROSA was $119). This is because ALROSA will not extract small diamonds at Verkhne-Munskoye, which, for instance, are mined at Udachnaya, where the company is producing the entire range of stones - from industrial grades to jeweler quality, Shmarov said.

The Maiskoye Diamond Field has a single kimberlite pipe. As of April 2011, its diamond reserves were estimated at 12 million carats, while the average diamond grade reached 3.7 carats per tonne and the average price per carat was about $90.

Both deposits are located close to ALROSA’s mining facilities in Western Yakutia, so their development will not require significant investments, the company reported earlier.

According to Nicholay Pokhilenko, Doctor of Geological and Mineralogical Sciences and Director of the Institute of Geology and Mineralogy, Siberian Branch of RAS, it is indeed expedient to develop Verkhne-Munskoye under current market conditions with demand outpacing supply. This field yields diamonds of good quality with occurrence of large stones.

The current estimates of the diamond deposits’ reserves available at Interfax slightly differ from those disclosed by the company last year:

Diamond fields and diamond reserves (million carats):

Verkhne-Munskoye - 40

Maiskoye - 13.3

Dalnyaya - 10.2

Ebelyakh - 25.1

Gusinaya - 3.4

Total: 92


According to preliminary estimates, if favorable market environment will be maintained the company’s sale revenue from the 5 new diamond deposits is estimated at $14 billion.

This is quite a reasonable estimate, Sergei Filchenkov, an analyst of Metropol, believes, it means the average sales price of $152 per carat, which reflects the current price trends in the global diamond market. The figure also includes future price increases in the short term, he said. According Filchenkov, such a sale price can be achieved by 2015. "This is a quite attainable goal for ALROSA’s sales of diamonds from these fields - taking into account that the exploration work on them has just begun," says the analyst of Metropol.

Alexander Morin from Sovlink agrees with him - in his opinion, ALROSA may drive its proceeds from diamond sales involving these deposits to $14 billion within 3 years. At the same time, Morin is less optimistic about the current price level for diamond sales - according to him, it is more than $140 per carat.

Revenue forecast largely depends on the quality of diamonds, including the content of large stones and "industrial-grade" stones in the ore of these deposits, said Dinur Galikhanov, an analyst of Aton. “ALROSA may start to develop diamond placers in the next 2 to 3 years, since they are easier to access.”

The new diamond fields account for only 7-8% of ALROSA’s reserves, said Vladimir Sergiyevsky of Finam, they do not look great and so far the company has not officially announced any increment in diamond output involving these assets. "I do not see any principal points of growth in them, especially since it is hardly necessary to speak about increased production in the coming years, because there is an obvious problem with the transition from open-pit to underground mining. A good result will be to maintain production at current levels," he said.

Book prices

In addition to the understandable figure of expected proceeds from diamond sales involving the above five deposits, for which ALROSA has already received licenses, there is another indicator, which is the value of saleable output expressed in book prices given in the price list of the Russian Federation Ministry of Finance. It is $6.85 billion.

Diamond deposits and saleable output value, $ million

Verkhne-Munskoye – 4,300

Maiskoye - 930

Dalnyaya - 600

Ebelyakh - 900

Gusinaya - 120

Total: 6,850

Vadim Astapovich of VTB Capital notes that prices in this price list are substantially lower than the market: for example, Gokhran limited by the state budget task to derive income from the sale of State Fund reserves mostly sells diamonds at a 36% premium to the price list. The price list is used to calculate export duties (IF: declared customs value cannot be lower than prices in the price list and currently there is a 6.5% export duty on diamonds).

This indicator allows us to calculate the per carat cost for each of the fields, Astapovich said. Verkhne-Munskoye diamonds have a book price of about $100, according to the VTB Capital analyst’s calculations, which exceeds the price of diamonds recovered at Udachnoye. "It means that Verkhne-Munskoye diamonds are of high quality. Maiskoye is also a rather high quality asset, which cannot be said of the Gusinaya Diamond Placer or Dalnyaya Kimberlite Pipe,” Astapovich said.

According to Filchenkov, Metropol, "the cost of saleable output at book prices" is a measure of inventory on the company’s balance sheet based on the size of reserves and average cost of mining. In fact, this is production cost. The breakdown of data on the five diamond fields implies an average per carat cost of $59-108 for underground deposits and $35-36 for placers, which is adequate for the type and structural characteristics of these deposits held by ALROSA, says the analyst of Metropol.

This is a rough estimate of how much the company can gain from the sale of diamonds recovered at the deposits developed by standard mining methods and also an estimate of how much the project could cost as a potential investment, according to Dinnur Galikhanov of Aton.

Zarya and Pionerskaya kimberlite pipes

The other potential targets contributing to replenishment of mineral resources at ALROSA’s disposal are the Pionerskaya Diamond Pipe within the Lomonosov Diamond Field (Severalmaz) and the Zarya Diamond Pipe located 2 km away from Aikhal. These deposits will be put in operation in case of positive results from exploration.

Pionerskaya has diamond reserves estimated at 50 million carats (contained in 117 million tonnes of ore). The area is under exploration since last year.

Zarya, for which ALROSA received a certificate of discovery in November 2011, will be completely evaluated in the course of exploration, which will begin in the fourth quarter of this year, after ALROSA will get a license for the facility. So far, the State Committee for Reserves approved the deposit’s reserves only based on the upper horizons of the diamond pipe - they account for 4.6 million carats.

Geologically, the north-western area is very complex, said Pokhilenko (Institute of Geology and Mineralogy, Siberian Branch of RAS). The kimberlites in the Arkhangelsk Region are overlain by younger formations which are not diamond-bearing. Even the Grib Diamond Pipe (developed by LUKOIL’s subsidiary) is superposed by a layer of younger sediments and in such an environment it is too costly and inefficient to search for new deposits in this area, he said.

ALROSA while tackling Pionerskaya will face the same problem of pumping out water, which makes it so difficult to develop the Arkhangelskaya Diamond Pipe of Severalmaz, said Astapovich (VTB Capital). However, the quality of the diamond deposits is high enough, and the current prices allow ALROSA to continue independent production, although a year and a half ago the company planned to attract investments from Rio Tinto. According to Astapovich, Severalmaz can produce 1 million carats by doubling production in 2012.

Potentially, Pionerskaya, as well as the entire Lomonosov Diamond Field, appear to be a promising line of business taking into account the well-developed infrastructure which ALROSA has in the area, the available processing plant there, the closeness of the main diamond market (Antwerp) and a possible sale of the adjacent Grib pipe by LUKOIL, says Dinnur Galikhanov, the analyst from Aton. Previously, De Beers estimated the stones produced by Severalmaz at $60 per carat, while ALROSA’s current evaluation runs at $80, he recalls, so at current prices it is possible to recoup investments and make the project profitable, he said.

Pionerskaya’s reserves are impressive accounting for about 22% of all the current deposits possessed by Severalmaz, notes Filchenkov of Metropol. Nevertheless, Severalmaz is historically the most problematic mining subsidiary of ALROSA because of high operational costs, less efficient production technologies and difficulties associated with the mining and geological situation in the Lomonosov field, the analyst reminds. In his view, the prospects of developing Pionerskaya at the moment are quite uncertain and perhaps they will become clearer after further exploration.

Filchenkov says that Zarya is quite a promising field and according to the company, diamonds recovered at this deposit are quite good (their cost price is about $139 per carat). As a result of exploration in 2013, the deposit’s total reserves may increase, the Metropol analyst predicts.

The long-awaited JORC

So far, ALROSA does not comment on the forecasts made for the new diamond fields and the company’s total diamond reserves. ALROSA’s spokesman Andrey Polyakov said that the company is now completing the auditing of reserves in accordance with the international classification of JORC. The deposits in Western Yakutia, the Zarya and Pionerskaya diamond pipes on which the company is carrying out exploration works are "not audited by the standards of JORC – these are prospects for replenishing the mineral resource base of the company," Polyakov said.

Experts also agree that any final conclusions about the current situation in ALROSA’s resource availability may only be done after the publication of a JORC report. The audit under the JORC standards, which ALROSA timed to preparations for an IPO, is conducted by Micon. Initially, it was planned to be published in the fourth quarter of 2011, but now ALROSA promises to do so at the end of the first quarter this year.

After the release of a JORC report, the estimate based on the Russian method of reserves reporting will not be given much importance any more, Astapovich (VTB Capital) says. The reserves evaluated under JORC are likely to be lower than those evaluated by the Russian method, but much depends on the price of diamonds and the cut-off grade, which determines the level of cost-effective production, the consultant predicts.

It is JORC that will reflect ALROSA’s reserves most relevantly, Filchenkov of Metropol agrees.

The Russian system of evaluating reserves is sufficiently qualified and detailed, but it does not take into account the economic effect of developing reserves, Galikhanov (Aton) said. If JORC will show the level of 1 billion carats, it will be positive news for the company, he said. Having confirmed the company’s reserves by JORC in anticipation of a possible IPO, ALROSA can then revise its reserves based on the results of exploration, but according to the JORC code.