RAPAPORT... Russia’s largest diamond miner ALROSA is planning to produce 34.438 million carats in 2011, up from 34.336 million carats in 2010. Last year’s results made the company the world’s largest diamond producer in carat terms for the second consecutive year, having first overtaken De Beers in 2009.
The miner also hopes for 3.5 percent higher revenue in 2011 than in 2010. ALROSA’s spending would grow considerably as the company already has announced plans to invest more in geological exploration and the construction of underground mines. More than $160 million is earmarked for underground development, which is over 60 percent of the total amount the company is spending on industrial construction. Its overall capital expenditures are scheduled to increase by 27 percent to $360 million. The company is planning to receive more than $260 million in net revenue and cut its debt to less than $3 billion.
Selling off Severalmaz
ALROSA is considering the sale of just less than half of Severalmaz, a diamond mining company in Northwest Russia, to Rio Tinto. Russian daily newspaper Vedomosti reported that Rio Tinto would pay $250 million for 50 percent minus 1 share and invest another $135 million, which would help Severalmaz reach its project capacity of 2 million carats a year by 2015. Severalmaz confirmed it has talked to Rio Tinto as a possible investor, but no deal has been finalized.
Severalmaz holds a license for developing Lomonosov, Europe’s largest diamond field, where gems have been mined since 2005. The field’s current production capacity is 1 million tons of ore and Vedomosti said that ALROSA would need around $185 million to bring the facility to its full capacity. It has been well known for several months that ALROSA was looking for a strategic investor who could bring both finances and technology to Severalmaz. Even if ALROSA’s board agrees to the deal, it would still have to be approved by the Russian authority on foreign investment.
A Good Year for Russian Manufacturer
The sales of Russia’s largest manufacturer Kristall Smolensk reached $365 million in 2010, exceeding the sales level of 2008 and 44 percent higher than in 2009, but still below 2007 sales. “The year was good and healthy and there’s a steady demand for all items that we are producing,” said Nikolay Afanasiev, the company’s head of marketing and sales.
Afanasiev noted that the world diamond market has become much healthier in 2010. “Indian companies don’t enjoy unreasonable credit lines and do not provide privileges whereby their customers can take goods on commission,” he said. Such an environment allows companies more flexibility in increasing their polished prices.
Kristall raised the prices on its product by 25 percent on average through 2010. Despite those hikes, polished prices are still lagging behind rough in terms of growth rates.
“The trend throughout the industry is higher requirements in the quality of polishing,” said Afanasiev. In response, Kristall Smolensk is investing in re-equipping its plant, including new laser marking machines, in order to meet the higher standards. Afanasiev said that beginning in March, those higher quality levels would be reflected in the company’s products.
The company’s domestic sales are growing slower than its international sales. “The crisis came to Russia six months later than it came to the rest of the world, and the country is recovering much slower as well,” said Afanasiev. Yet, he expects the Russian market to be strengthened by the new regulations introduced with the creation of the customs union between Russia, Kazakhstan and Belarus. Many of the new regulations are not yet clear but one of the most significant changes for manufacturers was lifting the 15 percent quota on selling rough.
There is also talk that this year Russia may join the World Trade Organization (WTO). That was not a welcome idea for Russian companies a few years ago, but now, with rough prices in Russia and abroad almost equal, manufacturers think it may be time for them to start working under the same regulations and requirements as their foreign competitors.
Jewelry Sales
Jewelry sales leading up to the holiday season were slower than expected, with many Russians not yet recovered from the financial troubles of the past two years. Jewelers said items with semiprecious stones, in conjunction with diamonds, were in demand as customers were looking for something less expensive. The average purchase at one jewelry trade show in early December ranged between $1,000 to $3,000.
“Among diamond items, people are asking for gems of 0.3 carat to 1 carat of average quality,” said Aleksandra Ostreldina of EPL Diamonds, a jewelry manufacturer. Strongest demand at the show was for engagement rings and classical items, with jewelers noting that the purchases were being made for special occasions, not for holidays. Even at the high end of luxury jewelry sales, prudence prevails. “Russian customers became more mature during the crisis and we won’t see many impulsive, extravagant purchases,” said Dmitry Yeremeev, Russian director of Richemont.
The Marketplace
• Russian jewelry makers produced 26.2 million gold items in the first ten months of 2010, 20.8 percent more than in the same period in 2009, according to the Russian Assay Chamber.
• Russia imported 63.3 percent more gold items during the first ten months of 2010 than during the same period in 2009.
• Production of silver items in Russia increased by 10 percent to 3.6 million items in the first ten months of 2010 against the same period in 2009, while imports of silver jewelry rose by 56.3 percent in those ten months, compared to 2009.
Article from the Rapaport Magazine - January 2011. To subscribe click here.