Increased Spending for ALROSA

RAPAPORT... Russia’s ALROSA, the world’s second-largest diamond miner, expects a reduction in its total diamond mine output this year. According to the company’s 2008 forecast, it will mine $2.29 billion worth of diamonds, compared to its 2007 output of $2.33 billion.

ALROSA’s net profit is also expected to fall 27.17 percent in 2008. The company is increasing its capital investments and plans to raise its geological exploration spending by more than 20 percent. ALROSA also is shifting to underground exploitation at a majority of its mines.

The company already had announced that it is cutting down on expenses to cope with its increased spending. Beginning this year, ALROSA will collect value-added tax (VAT) from domestic manufacturers, who had previously been exempt from the tax. The miner also took out a $350 million syndicated loan in December, according to Interfax news agency.

Armenia to Get Russian Diamonds
ALROSA is planning to sell up to $30 million worth of rough diamonds to four Armenian manufacturers in 2008. The company signed a cooperation agreement with the Armenian government last summer.

“We have assessed the work of the country’s diamond manufacturers and our choice was based on this assessment,” said Andrei Polyakov, ALROSA representative.

Sergei Ulin, ALROSA vice president, said the volume of supplies could increase and more companies could join the deal in the future, according to reports by the Regnum news agency. Ulin said the agreements between the company and Armenia also provide for a delay in payments. Manufacturing in Armenia has been in stagnation in recent years due to shortages in rough supplies.

Despite previous reports that ALROSA may start a joint manufacturing company in Armenia, ALROSA President Sergey Vybornov told the Regnum agency that his company is not interested in starting a new manufacturing enterprise. “We are first and foremost a mining company,” he said.

2007 Sales, 2008 Plans
Smolensk-based Kristall, Russia’s largest diamond manufacturer, sold $404.4 million worth of diamonds in 2007. This was a 13 percent increase over the 2006 sales of $358.2 million. The company says this is the highest growth in its history and it is now targeting turnover value of $500 million.

Russia’s Severalmaz, which is 90 percent owned by ALROSA, announced it is going onto the open market with its rough in 2008. The company owns Lomonosov mine, with an estimated $12 billion in deposits, in the northern part of the country. The total volume of rough mined by the company will reach 1 million carats in 2008.

Russian Jeweler in China
The first Russian jewelry store has opened in China. The Yakutia–based diamond manufacturer and jeweler EPL Diamond opened its store in Shanghai in January 2008. EPL is planning to sell gold and platinum items with diamonds, as well as certified diamonds, in the store, according to reports by Interfax. Some of the diamonds will come from Russia; others will be produced at a manufacturing factory the company owns in China.

EPL Diamond opened its cutting factory in Shanghai in August 2007. That factory deals with small diamonds, which are unprofitable to cut in Russia because of rising labor costs.

Gold Investment
Russian oligarchs have been investing in Russian gold, but the industry is still in stagnation. Eight out of the country’s ten richest men, as listed by Forbes magazine, own gold assets. Three of them invested in 2007, including media favorite Roman Abromovich, who paid out $400 million for a 40 percent share in Highland Gold Mining Ltd. But Russia’s gold output still fell an estimated 4 percent in 2007, the third consecutive year of declines. “There is a serious lack of investment in mining projects,” said Viktor Ivanov of the Gold Producers Union.

Holiday Sales High
Russian jewelers have yet to release a final count of their holiday sales, but preliminary reports say Russians spent more on jewelry in 2007. “The mass market was rising the most, but growth was also considerable in the premium sector,” says Dmitry Gavrilenko, marketing director of Moscow–based Estet.

The luxury sector benefited from the fact that Russians like showing off their jewelry. “Unlike in the West, Russians like large items; they want big stones, everything that cries out it is expensive,” said Alena Polyanichko from Mercury, a Russian company that owns shops selling items from Tiffany, Chopard and other luxury brands. Many companies also attribute their sales growth to the additional shops they opened this year, predominantly in the regions.

The Marketplace
Russia’s Ministry of Finance published the following results for rough diamond exports and imports for the first nine months of 2007. 
      • Russia exported more than 14 million carats worth $1.09 billion to European Union (EU) countries. 
      • Russia exported more than 20 million carats of rough diamonds worth
$1.43 billion to other counties. 
      • Most exports went to Belgium — slightly more than 10 million carats worth $708 million. 
      • Russia’s imports totaled more than 250,000 carats worth over $7 million.

Article from the Rapaport Magazine - February 2008. To subscribe click here.