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Posts Tagged ‘Alrosa’

Mining Week 13/’12: Diamonds are not forever, neither are iron ore chiefs

March 31, 2012 Comments off

Top Stories of the Week:

  • Rio Tinto puts its diamond division up for sale
    • Rio Tinto started a ‘strategic review’ of its diamond business to explore divestment options for the 4 assets. The move comes only months after BHP Billiton announced it intends to sell its only diamond project.
    • Rio Tinto was seen as the most likely buyer of BHP’s Ekati project because of the close proximity to it’s Diavik operation.
    • Sources: Rio Tinto press release; Financial Times; Wall Street Journal
  • BHP Billiton iron ore president quits; replaced by insider
    • Ian Ashby, president of BHP Billiton’s iron ore division, announced he will step down in July. BHP will replace him with the head of the energy coal business: Jimmy Wilson.
    • The leadership change comes during an aggressive investment program to expand capacity of the Pilbara operations.
    • Sources: BHP Billiton press released; Wall Street Journal
  • Indian privatization of coal mines backfires
    • A leaked government report states that the Indian government missed out on $210bln by selling state owned coal assets to cheaply without having a proper auctioning mechanism in place.
    • The hedge fund TCI, which owns close to 2% of Coal India, has started a process to sue the management of Coal India for allowing too much government interference related to the sale of assets.
    • Sources: Financial Times; Times of India; Financial Times II

Trends & Implications:

  • In March of last year Rio Tinto was said to explore a partnership with Alrosa, the world’s second largest diamond miner. This cooperation never materialized, and it appears Rio Tinto’s management has decided the iron ore business does not fit in its strategy of running large scale operations of traded minerals. With the presence of DeBeers and Alrosa it is unlikely that a third player will be able to invest to buy both Rio Tinto’s and BHP Billiton’s operations.
  • India is one of the few mineral rich countries in the world that had to go through a large scale privatization program in the last years. Typically domestic investors who know the businesses and have access to influential officials manage to get good deals in buying assets (Russia is another good example). Often the real value of the formerly government owned assets only becomes apparent after a couple of years of operation in private hands.

©2012 | Wilfred Visser | thebusinessofmining.com

Rio Tinto plans Russian diamond push

March 22, 2011 Comments off

“Rio Tinto is planning a push into Russian diamond mining, eyeing a tie-up with Alrosa, the state-owned miner, as the global industry looks ahead to rising demand from China amid tight supply constraints. Rio is understood to be a final contender to form a partnership with Alrosa to develop a large deposit near the northern port of Archangel, according to diamond market insiders.

The company declined to comment on its intentions or on wider reports that Tom Albanese, chief executive, had travelled repeatedly over the past year to Russia, a country where Rio has no operations. Rio makes the bulk of its profits from iron ore but it is also a significant diamond miner, producing 13.8m carats last year, compared with De Beers’ 33m and Alrosa’s 34.3m. Alrosa exceeded De Beers’ production for a second year.”

Source: Financial Times, March 20 2011

Observations:

  • Rio Tinto mined 13.8m carats last year in its Diavik and Argyle mines, the lowest volume in over 5 years. Relative importance of diamonds in Rio Tinto’s portfolio has decreased from over 20% of EBITDA 10 years ago to only some 2% now.
  • Argyle and Diavik have approximately similar proved reserves, but probable reserves for Argyle are much higher than for Diavik. Additionally the company has some low grade probable reserves in Murowa (Zimbabwe) and an ongoing feasibility study in India (Bunder). Total recoverable reserves at end of 2010 stands at 206mln carats. In the last annual report the company listed the search for opportunities for inorganic growth in Diamonds and Minerals as key priority.

Implications:

  • Alrosa is facing high levels of investment to increase production in challenging arctic underground mining conditions. Because of low cash flow from operations it has to look to financial markets (IPO) and partnerships to secure funds for capital expenditure.
  • Teaming up with Rio Tinto gives Alrosa not only access to development capital, but also to the extensive knowledge Rio Tinto has gained by operating Diavik’s mine in Northern Canada. However, Rio Tinto will not step into a partnership with a state-controlled Russian company without getting strong commitments to secure its returns.

©2011 | Wilfred Visser | thebusinessofmining.com

Russia’s Alrosa shaping up for flotation

December 21, 2010 Comments off

“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