Rapaport Magazine

More Diamonds for ALROSA

Russia Market Report

By Anastasia Serdyukova
RAPAPORT... New diamond deposits worth $3.5 billion have been discovered by ALROSA, according to a certificate from the Federal Subsoil Resources Management Agency. The company will need to receive a license before it can start exploitation.

The diamond field — Verhne-Munskoe — consists of three kimberlite tubes and is located 80 miles from the Udachninsky mining complex in Yakutia, another ALROSA field. The company estimates the new diamond field’s resources could last for at least 25 years with 1.2 million to 2 million tons of ore extracted a year.

Although the size of the field is considered in the medium range, especially in a rich diamond region like Yakutia, the discovery is especially significant because there have been no new deposits of a similar size opened for a long while.

“There hasn’t been enough geological exploration for more than a decade. Most of the deposits exploited these days were found in the Soviet times,” said Ararat Evoyan, vice president of Russia’s Association of Diamond Producers. And the fields inherited from the Soviet Union are either exhausted or close to being exhausted.

ALROSA representative Andrei Polyakov said the company is running a program of underground excavation through 2015. The company’s website says it has increased its exploration spending 17.5 percent to the level of 2005 and it is planning to spend more than $2.5 billion to construct three mines — at Mir, Aikhal and Udachnaya — that are expected to produce six million tons of ore a year. ALROSA excavated 50 million tons of ore in all of 2006, Reuters reported.

The calls for intensifying geological exploration are heard from all sides, from geologists to Vyacheslav Shtyrov, Sakha president. Shtyrov told the business daily Vedomosti that the licenses on two deposits worth more than $2 billion might be auctioned soon. The company is developing Lomonosovsky diamond complex in Archangelsk in northwest Russia.

More Than Diamonds

August saw a new wave of speculation in the Russian media on whether ALROSA was buying a stake in Polyus Gold, Russia’s largest gold-miner. This time, the rumors gained some heat from a claim by Andrei Kostin, VTB Bank president, that ALROSA management had come to him, asking the bank to finance the purchase. He told Russian daily Kommersant that his bank was ready to participate in the $2-billion-plus deal. Speculation is that the share being sold is a 25 percent share that belongs to one of the company’s owners, Mikhail Prokhorov. Prokhorov and his partner Vladimir Potanin are in the process of separating their assets.

“It is premature to speak of an agreement over Polyus. We are looking at the possibility of taking part in gold assets,” said Russian Finance Minister Alexei Kudrin, who is also chairman of ALROSA, in comments to a number of Russian dailies and wire services.

Analysts say a gold-miner would be a good portfolio investment for ALROSA. Vyachaeslav Zhabin from BrokerCreditService said the company’s unexploited deposits make it more valuable than its current price.
Kuranakh, one of Polyus Gold’s main mines, is located in Yakutia, where ALROSA has a good logistics network. ALROSA’s biggest mine, Olimpiada, is in the neighboring Krasnoyarsk region.

“Participation in projects where ALROSA would have lower costs than other firms is profitable for us,” Kudrin said.

And those projects may not be limited to gold. Media reports suggest the company is a possible contender for a stake in Elgaugol, which controls the Elginskoye coal deposit in Yakutia and is to be sold later this year.

ALROSA’s gold interests may even extend beyond Russia. Russian television station RBC reported that the company would take part in a tender for a Kyrgyz gold field whose deposits are estimated at 50 tons. In early August, ALROSA President Sergei Vybornov met with the Kyrgyz prime minister to discuss gold mining in that country. The company hasn’t commented on any of these statements.

Russian Diamond Cutter Goes to China

While many in the industry keep an eye on diamond cutting in China, a Russian diamond company decided to get a foothold in the fast-growing sector. Yakutia-based EPL Diamond, a Russian cutter with more than $50 million worth of production, has launched a cutting plant in Shanghai. The decision was forced by tense conditions surrounding the cutting industry due to rough price increases.

“Labor costs in Yakutia are more than $71 per carat, while in China they are $15 to $20 per carat,” said Peter Fedorov, chairman of the EPL Diamond board. The move will make cutting small diamonds up to 30 percent less expensive.

Evoyan, of the diamond producers association, said cutting diamonds smaller than 0.09 carats is not profitable in Russia. He added that production in Russia shouldn’t be labor consuming; it should concentrate on high skills.

The Marketplace

At ALROSA and the Diamond Chamber’s 23rd auction:
• 120 lots worth more than $36 million were sold.
• 632 stones weighing more than
11,400 carats were for sale, including 24 stones weighing more than 50 carats.

Article from the Rapaport Magazine - September 2007. To subscribe click here.

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