Home > Financial reports, Market change > Russia’s Alrosa shaping up for flotation

Russia’s Alrosa shaping up for flotation

December 21, 2010

“Alrosa, De Beers’ Russian rival, is considering a stock market flotation in 2012 in a move that would open the traditionally closed diamond industry to outside investors. Alrosa, controlled by Russia’s federal and regional governments, has long been the second-largest producer of diamonds behind De Beers. In 2009 the two companies mined half of the world’s diamonds, measured by carat volume. Both are private, limiting opportunities for investors in a commodity that is expected to face a supply crunch in coming years.

Fyodor Andreev, Alrosa’s chief executive, has said this would change next year. The Siberia-based miner is converting itself from a closed to an open joint stock company – or from a ZAO to an OAO in Russian corporate terminology. This will allow outside investors to buy new shares and relax ownership restrictions on the tightly-held miner.”

Source: Financial Times, December 19 2010

Observations:

  • Alrosa is currently owned by federal and regional governments. It operates mines in Russia and Angola, accounting for 25% of global carat production and 97% of the Russian production.
  • Total equity value of the company is highly uncertain, making an IPO a high-risk way of raising money. Company profit over 2009 was approx. $110mln, while loss over 2008 was approx. $1bln. The company income appears to suffer from very high cost of debt, with interest rate on interest bearing debt at approx. 13%.

Implications:

  • Alrosa will need considerable amounts of cash to be able to move to underground mining in various mines in Siberia. As the governments are not able to provide the money required for this expansion, they are forced to open up the shareholding structure to attract capital from the market.
  • Although the ownership of the company will be loosened, it is unlikely the free floating shares will be a major part of the total company ownership. However, the redistribution of government ownership might cause internal struggles: the federal government currently holds just over 50% of the shares, which would be diluted to below 50% after an IPO.

©2010 | Wilfred Visser | thebusinessofmining.com

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