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Industry
The View From ALROSA
By Svetlana Shelest
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| Igor Sobolov |
Igor Sobolev, ALROSA’s first vice president and executive director, spoke to Rapaport Magazine and a pool of representatives from Russia’s top five national media at the opening of ALROSA’s new mine in Yakutia in March 2015. He discussed the company’s performance to date, as well as its short- and long-term plans in view of recent economic developments in Russia. He also talked about the overall trends in the international diamond market and their implications for the global mining industry.
What was ALROSA’s economic performance in 2014?
Igor Sobolev: I would call 2014 quite a successful year. We met our production plan of 36.2 million carats of rough. This is slightly below the production figures of 2013, but this decline was preplanned and due to, among other things, extensive capital repairs at the Mir underground mine. The decline in production, however, did not affect our sales. At the beginning of 2014, ALROSA had nearly 18 million carats in stock; part of it had already been prepared for sale, which enabled our sales departments to operate flexibly on the market.
Speaking of rough prices, despite the Bain & Co. industry forecast predicting that global demand would basically match global supply of rough until 2018 — which would result in mostly stable prices — rough prices were growing quite well in the first half of 2014. After that, there was a certain decline in demand in the second half of the year. However, despite that decline, we finished the year with good results, making over $5 billion in total sales of rough and polished for the first time in the company’s history. Our revenue for 2014 under the Russian Accounting Standards was approximately $2.8 billion.
ALROSA predicted a 3 percent rise in rough diamond prices for 2015. However, we are currently observing weaker demand in the market. Are you going to revise your forecast?
IS: We have not yet revised our forecast for 3 percent growth in rough diamond prices in 2015. It would not be right to do so on the basis of market performance in just two months of the year. Indeed, we see that demand slackened in January and February. Our clients still have sizable stock. We did not change our prices in January and lowered them slightly in February to support the market. Our pricing policy takes multiple factors into account, such as our market assessment of demand and supply and publicly available sales reports of other companies. Our analytical service constantly monitors jewelry sales in the U.S., China and India. We also monitor currency exchange rates, including the rate of the Indian rupee since India is today’s world leader in the polished market. This is a complex process and, as a major market participant, we try to avoid any sharp fluctuations so we have to be fairly conservative in our forecasts.
In recent years, ALROSA has maintained a relatively stable production level. The long-term strategic plan, announced in 2015, however, includes an increase in annual production to 41 million carats of rough by 2021. How did you come up with that figure? Is it based on limitations of the company’s processing capacities or is that the supply level you consider to be the best for the market?
IS: This projection was determined by a number of factors. First and foremost, we have planned long-term growth to 41 million carats based on our investments made over the previous years. All our major projects have already completed the investment stage and are now on track to reach their design capacity. This is true, for instance, in the case of our underground mines. We made a decision that the company’s strategic production growth will be driven by our Severalmaz Mining and Processing Division (MPD). Before we built new processing facilities there, it used to produce about 600,000 carats per year. This year, we plan for it to mine 2 million carats, and then we will step up production to 4 million carats by 2018. At its peak capacity, Severalmaz will be producing 5 million carats annually.
As for our Yakutia mines, we plan to maintain stable production levels there. We believe that efficient production management strategy is to keep the facilities operating at their full design capacity. Any decrease or increase has certain drawbacks. We certainly could have opted to step up diamond production in Yakutia, but this would undermine our future prospects. The more we mine now, the faster we’ll exhaust the reserves. Also, increased production would require us to expand processing capacities, which means additional investment, and we do not plan on doing that.
And, of course, our projections take into account the global market situation. The market analysis indicates that all major diamond-mining companies have been heavily investing in their development over the past four years. The last thing the market needs right now is excess supply, as it would slash rough diamond prices. Being a major market player, ALROSA is trying to act responsibly and carefully, in a way that prevents any sharp market fluctuations from happening.
As for global production, the market study by Bain shows that from 2018 onward, the existing global production capacities will start to decline gradually. For instance, Argyle, a major production site in Australia currently producing on average well over 7 million carats per year, will be stepping down its production after 2018. The market will have to deal with the natural depletion of deposits. Therefore, starting with 2018, we expect demand for rough to begin exceeding the supply. In other words, the world will be facing a shortage of rough diamonds.
If it’s true that from 2018 onward global production capacities will start to decline, can you predict when global production will start growing again, if it will?
IS: Any forecasts for the global diamond market would take into account the discovery of new diamond deposits. The fact very much speaks for itself that no new deposits have been discovered worldwide over the past ten years. Even if discoveries were made, it takes on average more than five years to launch a new mine into production. So while the preproduction work on these new discoveries would continue for five years, the existing facilities will continue to exhaust their deposits.
In general, the geologists’ reports indicate that all easily accessible deposits — those that allowed for inexpensive development technologies — have already been discovered and tapped. All known diamond sites across the globe have been carefully researched. Even if a surprise discovery is made, it will most likely be a one-off find, which will not be sufficient to replace the capacities of the 30 major diamond mines currently operating on the planet.
What are the company’s plans for 2015? Do you expect any changes in your strategy this year?
IS: We approved our long-term development strategy in 2014. This year, we plan to increase total production to 38 billion carats. The growth will be driven by our successfully completed investment projects. After capital repairs, the Mir underground mine will increase production from 500,000 to 700,000 tons of ore. Severalmaz MPD’s new facilities are rapidly reaching their production capacity. The division’s second mine, Karpinskogo-1, was launched into operation in 2014. I do not really see any factors that might change our production strategy.
If we speak hypothetically, the market situation could change in a way that prices would fall. In this case, we might feel the need to revise our production plans for some low-profit mines. However, we keep monitoring all the market indicators and, as of today, we believe such a situation is not likely to happen.
In view of the recently imposed economic sanctions against Russia and a dramatic decline in the national currency, there has been much talk across various industries — not just diamond mining — about the need to seek alternatives to imported equipment. Have you encountered any problems with the equipment ALROSA was traditionally importing? Do you have any plans to switch suppliers?
IS: Clearly, the major problem is the sharp rise in the dollar against the ruble. For example, a truck we used to purchase for 20 million rubles — equivalent to approximately $330,000 — will cost us now nearly twice as much. Obviously, we cannot allow such a dramatic increase in costs. Yet another factor is that it is not clear yet whether this currency situation is temporary or long-term.
Our first response was to suspend all our purchases of equipment that is not critical for the main production. We then set up an interim commission to review all equipment procurement problems. For some equipment, the decision has been made to seek new suppliers. For example, we have been testing the Belarus-manufactured 136-ton BelAZ mining dump truck designed specifically for ALROSA at the Yubileyny open-pit mine. And we no longer list any specific manufacturers when posting technical specifications for the bid invitations we publish on our website. If European manufacturers can offer competitive prices, we welcome it. Of course, there can be no single solution to all situations. All the equipment operating currently at the Udachny underground mine is produced by Sweden’s Sandvik, and we still need a few more units. Switching a supplier in such a situation would make little sense in terms of future supply of spare parts, compatibility, etc., so we are using a balanced approach.Article from the Rapaport Magazine - May 2015. To subscribe click here.
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