Tuesday, October 18, 2011

Alrosa Boosts Profit Fivefold on Higher Diamond Prices

OAO Alrosa, the largest diamond miner by output, posted a fivefold gain in first-half profit as prices surged, reducing the need to pare debt with an initial public offering, Chief Executive Officer Fyodor Andreev said.

Net income climbed to 26.3 billion rubles ($854 million) in the six months through June from 5 billion rubles a year earlier, Alrosa said in a statement. Revenue rose 3 percent to 66.1 billion rubles even as volumes dropped 23 percent because of sales from stockpiles in the first half of 2010.

“We had record financial results,” Andreev said in Moscow. “It’s doubtful now whether we need to sell new shares in an IPO. It’s more likely the government will sell existing shares to generate proceeds.”

Alrosa, which mined more diamonds than global rival De Beers in 2009, 2010 and the first half of 2011, is benefiting from higher prices for rough diamonds driven by increased demand in India and China. Average sales prices rose to $109 a carat in the first half, compared with $84 over the whole of 2010, the company said in a presentation.

Alrosa said in March it planned to sell a stake as large as 25 percent in the Mirney, Siberia-based company to fund expansion and cut debt. While the company is still prepared for a share sale by late 2012, a decision on the size and timing of an IPO will depend on the government, Andreev said.

Profit Margin

An Alrosa share sale may be held on the Micex stock exchange in Moscow to support the Russian government’s efforts to transform the country’s capital into an international financial center, Andreev said.

Profitability at the diamond producer is improving, he said.

“For full 2011, we plan to achieve about $5 billion of revenue and $2 billion of earnings before interest, taxes, depreciation and amortization,” Andreev said. Alrosa’s Ebitda margin, a measure of profitability, widened to 54 percent in the first half from 32 percent a year earlier. The ratio of net debt to Ebitda fell to 2 after peaking at 6.1 in 2009, the company said.

The company plans to sell $400 million of bonds by year-end to help fund the $1 billion acquisition of natural-gas assets from VTB Group. Alrosa will then seek a strategic investor for those fields in the same way it attracted Evraz Group SA to help develop the Timir iron ore deposit, Andreev said.

Derivative Product

Alrosa accounted for 26 percent of global diamond production in 2010, according to its presentation. De Beers was responsible for 25 percent and Rio Tinto Group for 10 percent.

Demand for rough diamonds has fallen this year in the U.S., while it remains flat in Europe and is surging in India and China, Andreev said. Demand in Russia has slowed after large domestic buyers cut purchases in October, he said.

Alrosa has discussed the creation of a derivative product backed by physical stocks of rough diamonds with investment banks, Andreev said. That could attract investors after prices for the gems rose 40 percent in the last two years.

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