Alrosa Boss Reports Africa Mine Investment An “Incorrect Fashion”

By John Helmer, Moscow

In his first extended interview since taking over Alrosa in July of 2009, chief executive Fyodor Andreyev said in a Moscow newspaper yesterday that Alrosa’s diamond investment strategy puts Russia first, Africa last.

According to Andreyev, his predecessors’ efforts to build new diamond mines in Angola and explore for diamonds in Namibia, the Democratic Republic of Congo, and Bostwana reflect “a kind of fascination with fashion [that] is not quite correct.” The money spent in Africa should have been spent in Russia, he suggested. “At this time we lacked the investment for projects in Arkhangelsk, we do not develop projects in Yakutia. Therefore, my position is — we must complete what we have to”, completing the transition to underground mining as the first priority.

According to Andreyev, Alrosa had been offered to buy De Beers’s Finsch diamond mine in South Africa, before it was sold this past January to Petra Diamonds for Rand 1.4 billion ($210 million). Alrosa turned down the offer, Andreyev claimed. “The conclusion was simple: Why should we invest in the assets of De Beers, when we have our own.”

According to Andreyev, Alrosa now leads the world in diamond mine production, but he admitted: “We must catch up with Rio Tinto, De Beers.” He complains that Alrosa suffers from a reputational drag. “The prices of our diamonds are lower than in the secondary market by 10-15%.”

Diamond data released this week by Alrosa reveal that, although Andreyev claims to be ahead of De Beers, Rio Tinto and BHP Billiton as the world’s largest producer of rough diamonds, Alrosa trails the others in sales and profitability. Alrosa says it produced 34.3 million carats in 2010 (virtually unchanged on the 2009 volume), compared to De Beers, with 32.997 million carats, up 34% on last year. Rio Tinto ranked third at 13.8 million carats, down 1%; BHP Billiton dropped further behind, with output of 3.1 million carats, down 15%. Earlier announcements suggest that Alrosa’s output this year will be no more than 100,000 carats greater. But De Beers has the capacity to lift its production significantly ahead of that: in 2007 De Beers’s mines hit their production peak at almost 50 million carats per annum.

For Alrosa, total sales in 2010 came to $3,483.6 million, according to the latest release, including rough and polished diamonds. The breakdown between the two has yet to be reported. De Beers has reported its 2010 sales of fewer carats at the higher revenue figure of $5.9 billion. Rio Tinto reports that its diamond division had $682 million in sales revenues for 2010. BHP Billiton says that in the financial year ending June 30, 2010, its diamond sale revenues came to $901 million.

The De Beers results indicate that its profit amounted to 10% of sales; for Alrosa the comparable percentage was smaller at 8%. Rio Tinto reports that its diamond profit was $70 million; that was 10% of revenues.
On the measure of average carat price realised — dividing carats mined into sales revenues reported — De Beers achieved $179 per carat, while Alrosa trailed behind at $102 per carat. BHP, with just one mine in Canada, reports $311 per carat. The weakness of Alrosa’s sales performance, compared to De Beers, has never been discussed by Alrosa executives nor is it reported in the bond prospectus Alrosa issued in October of 2010.

An international diamantaire commented: “I find Alrosa’s attempts to pound its chest as No 1 inappropriate. The issue for any investment in diamond mining is how much money it makes, and in particular how much in relation to the cost of the investment. It is profit rather than size that I would be wanting to boast about.”

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