Russian Diamond Mining Company That Outmatches De Beers

With De Beers brand name all over around as the world leading diamond mining company and a huge diamond jewelry manufacturer it’s sometimes hard to imagine there can be another great company in diamond industry. But it really exist – ALROSA, a company you probably haven’t heard of. Want to know more about it? A giant that outdid De Beers? Read the full article below:

Meet ALROSA, the Russian diamond giant that mined 26% of the worlds supply in 2012; De Beers mined 22%. Together, the two account for almost half of the world’s diamond production. The diamond industry, which today can be considered “fragmented” relative to historical standards, was at one point unequivocally driven by De Beers, which single-handedly controlled 85% of the worlds supply in the 1980s. However, starting in the 1950s, diamond discoveries in Russia, Australia, and then Canada eventually halved De Beers market share as new participants chose not to adhere to the monopolistic De Beers model.

In 1954 the first primary diamondiferous kimberlite was discovered in what is now the Sakha Republic of Russia, an autonomous republic in Northeastern Siberia, a couple hundred kilometers south of the Arctic Circle. The following year, two more diamond bearing kimberlites were discovered in the same region, and the first Soviet diamonds were commercially recovered only 2 years later. By the 1960s, Russia had four major diamond mines in production, producing a considerable amount of global supply. Soviet diamonds were characterized as lower quality diamonds than those being mined by De Beers in Africa, although the quantity of diamonds being recovered was much higher.

The high quantity of Soviet diamond production posed a threat to the De Beers cartel, and in 1963 De Beers convinced the USSR to sell through the De Beers distribution company. This arrangement quickly became extremely costly to De Beers as the Soviet mines produced even greater quantity and even lower quality diamonds than initially anticipated. This prompted De Beers to market the lower quality diamonds to a new middle class American market, in an effort to absorb the overwhelming new supply. After nearly 40 years, the Russian’s business relationship with De Beers began deteriorating during the collapse of the USSR in the 1990s, and by the 2000s, European antitrust pressures left the two completely separated, which eventually lead to the restructuring of the De Beers monopolistic model.

Figure 1.1

 

[a] The Russian Federation became the USSR’s successor state after dissolution of the Soviet Union in 1991

[b] Sakha (Yakutia) is an autonomous republic in Northeast Russia

[c] Nafta Moskva is a private investment company owned by Russian billionaire Suleiman Kerimov

Source: ALROSA, Paul Zimnisky analysis

In 1992 under Boris Yeltsin, the first president of the Russian Federation (the USSR’s successor state), the Russian diamond complex was officially established as joint-stock company ALROSA, with an ownership structure including the Russian Federation, the Sakha Republic, and Sakha Republic Regional Administrations. In 2011 ALROSA became an open joint-stock company and a 9% float (only 4% free-float, see figure 1.1) became available for public trading on Moscow’s RTS exchange (now the Moscow Exchange) under the stock symbol ALRS.

ALRS is an extremely thinly traded stock with only a few thousand shares changing hands on an average day. Despite the lackluster trading volume, eight banks have analyst coverage on the stock, including two European banks, and one American bank.

Since the mid-2000s, the Russian government has publically expressed interest in selling a portion of the company through an IPO, and has since made significant strides in providing the public with information on the company’s assets and financials, shedding light on what traditionally has been a very private enterprise. According to a Reuters article in May of this year, ALROSA is planning a share sale of up to 14% of the company in late fall 2013 that could value the company at up to $15 billion. However, Russian president Vladimir Putin has insisted that public offerings of Russian state firms are to be done on the Moscow Exchange, ruling out more liquid, deeper markets in Hong Kong, London and New York, limiting access to Western investors.

Figure 1.2

 

[a] Sakha (Yakutia) is an autonomous republic in Northeast Russia

[b] Production at Udachniy is scheduled to go underground in 2014

[c] Primary production at Zarnitsa has been suspended since 2010 as a result of unfavorable production economics

[d] ALROSA is the largest diamond producer in the world in terms of carats produced, however De Beers is the largest diamond producer in the world in terms of total carat value produced.

Source: ALROSA, Paul Zimnisky analysis

ALROSA has nine primary diamond mines, 10 alluvial mines, and two mines in development (See Figure 1.2). The company also holds a 32.8% stake in the Catoca mine in Angola, Africa. According to the Kimberly Process, in 2012 Russia was the largest diamond producing country in the world, supplying 27% of the world’s diamonds, with ALROSA representing approximately 95% of all Russian production.

The article is taken from http://www.resourceinvestor.com/2013/08/05/the-worlds-biggest-diamond-producer-a-company-you?ref=hp&t=mining-investments&page=2

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