New Alrosa chief says IPO possible if sales increase

Sergei Vybornov, the new president of Alrosa, said an IPO by the Russian diamond monopoly was possible, but only provided the company increases sales.

"I would not start talking about an IPO while sales are at around $3 billion. As soon as Alrosa opens up then things will become clear. A share float? Why not? But we'd need to be cautious because there are no diamond companies there yet, no history track, let's say," Vybornov told Interfax on March 1.

"If we do this, it'll be a pilot project from the point of view of the world diamond business. It's a good project because if you talk about the diamond business as a whole, then openness and transparency are long overdue," Vybornov said.

Vybornov said the "federalization" of Alrosa – by which the federal government will increase its interest in Alrosa to controlling – should be done by the end of 2007.
But he said the term "federalization" was inappropriate.

"Russia is a federal country. The president has issued instructions on acquiring control of the company. From my point of view, this issue is settled. The court has approved a set of amicable agreements that resolved the property issues. The process is going according to plan, but with certain legal deadlines and procedures. I reckon it will all take around nine months purely for technical reasons," Vybornov said.

"And there's no political divide between the Yakuts and Federals, if you'll forgive the expression, any more. Strictly speaking, we're all Federals. At least from the point of view of the company's management, this subject is now closed," Vybornov said.

Vybornov said none of the other major players on the diamond market could be considered to be public companies because diamonds form a small portion of sales by Anglo American, BHP Billiton and Rio Tinto.

Long-term strategy. Regarding Alrosa's long-term strategy to 2015, Vybornov said this involved increasing output and Alrosa's share of the world diamond market, as well as increasing the company's geological resources. As far as geological exploration is concerned, Vybornov said Alrosa would be focusing on two or three sites. Vybornov said that the company should be on a par with De Beers as a player on the world diamond market by 2015.

"I'm not saying that the companies will split the market fifty-fifty, but the gap will narrow from what it is today," he said.

Vybornov was an investment officer at Arctic mining and smelting giant Norilsk Nickel before taking over at IG Alrosa. His appointment as Alrosa's president in February this year virtually coincided with the asset split announced by Norilsk Nickel's co-owners Vladimir Potanin and Mikhail Prokhorov. This prompted speculation that Alrosa and Norilsk Nickel might merge.

Asked whether there is any truth in these rumors, Vybornov said, "The market rumors only have anything to do with names – my own and some of my colleagues who used to work at Norilsk Nickel. A company worth, say, $10 billion is hardly likely to take over a company worth $40 billion. Nobody is discussing a merger, and it doesn't matter where such and such a person used to work," Vybornov said.

Rumors of a possible merger between Norilsk Nickel and Alrosa started to circulate at the beginning of 2006. Krasnoyarsk territory Governor Alexander Khloponin, a former top executive at Norilsk Nickel, said at the time that the shareholders of the two companies had discussed possible options under which a 25% stake in the merged company would remain with the state and the current shareholders of the companies would own the remaining 75%.

Vybornov has started a reshuffle at Alrosa.

"There'll probably be more reshuffling to come," he said.
"Some of the new appointments are long overdue, but have not been made for various reasons. But they are not radical in nature and if they have any impact on the company it will only be a positive one," Vybornov said.

Vybornov said that Yury Dudenkov, who was responsible for sales at Alrosa, had retired just days before the new president was appointed.
"I'll be responsible for sales for the time being. We have a single selling organization and there haven't been any staff changes there," he said.

Sales strategy adjustments. Vybornov plans to adjust the Russian diamond monopoly's sales strategy.

"I think it might be best to set a trading floor up in Moscow and to sell most of our diamonds there," Vybornov said.

"It might also be worth doing this in Yakutia – after all that's where the diamonds are mined," Vybornov said.

Alrosa's former management had pushed a foreign sales network and long-term contracts with clients. Vybornov said Alrosa wouldn't be abandoning these aspects of its sales policy, however long-term contracts needed some fine-tuning.

"Contracts of sorts already exist, but for now at any rate they differ greatly from what our colleagues from De Beers, BHP Billiton and Rio Tinto have because these contracts aren't tailor-made for clients. They are so far the same for everybody but, if major clients are looking to buy goods long-term they ought to be paying a certain premium," he said.

"We've only just started to switch to long-term contracts and we don't have the same system as our colleagues in place, but we're getting there," Vybornov said.

Vybornov said he thought Alrosa should only use traders abroad to sell diamonds in order to get a feel for the market.

"The export quotas have been scrapped and the market is fully liberalized, so Russian and non-Russian buyers are in more or less the same boat. But it might be more logical if everybody who wanted to buy rough diamonds for the company came here," Vybornov said.

Regarding the situation on the world diamond market, Vybornov said that it was not very "comfortable" right now, but it ought to stabilize by the summer. The diamond market was in oversupply in 2006.

"It's not that this is a problem for Alrosa, but, as trade with De Beers is being scaled down, we'll need to build our own sales strategy and network very quickly. The years of generally fruitful partnership with De Beers have limited Alrosa's own experience of these matters. This showed when the export quotas were scrapped," he said.

Alrosa could withdraw EC appeal. Alrosa is considering withdrawing an appeal against a European Commission decision on a trade agreement with De Beers, Vybornov said.

Alrosa has filed an appeal with the European High Court challenging a decision that commits De Beers to stop buying uncut diamonds from the Russian company with effect from 2009, accusing the EC of violating freedom of contract.

In the summer of 2005, De Beers and Alrosa submitted a proposal to the EC that would have enabled Alrosa first to scale deliveries to De Beers down gradually and then to sell De Beers up to $275 million in uncut diamonds per year.

At the start of 2006, the EC asked De Beers to stop buying rough diamonds from Alrosa from 2009 after a phasing out period from 2006 to 2008. During this period, De Beers' purchases of rough diamonds from Alrosa will decrease from $600 million in 2006 to $500 million in 2007 and $400 million in 2008, according to the EC's decision.

"I don't think our legal action really solves anything. Procedures are at issue and this won't change the EC's stance. Our lawyers reckon some procedures were violated when the decision was reached, but this isn't the issue," Vybornov said.

"They could acknowledge that procedures were violated and return everything to square one, start considering the affair all over again. But a lengthy court case isn't what we want. The ban doesn't concern us, it concerns De Beers," Vybornov said.

Even if the sales contract with De Beers is reinstated, Alrosa will still need to be selling diamonds on its own now that Russia has scrapped export quotas for rough diamonds, Vybornov said.

The first contract with De Beers to sell Soviet diamonds was signed in 1959 and regular sales began in 1960.

IG Alrosa to handle non-diamond projects. The Alrosa Investment Group (IG Alrosa) plans to consolidate diamond monopoly Alrosa's "non-diamond" projects, Vybornov said.

Those projects include business diversification, fuel and energy projects and gold mining.

"I think the investment group will deal with those projects, including oil and gas. This is investment business and it was for this purpose that the investment group was set up," Vybornov said.

Vybornov said that Igor Prokhorenko, IG Alrosa's former chief financial officer, would be the investment group's new general director. Vybornov himself was in charge of IG Alrosa before being appointed president of Alrosa itself. The mining company owns a controlling stake in IG Alrosa.

Vybornov said IG Alrosa had recently acquired a license to the Azatek gold deposit in Armenia and was negotiating the acquisition of the rights to the Zod (Sot) gold deposit in that country.

IG Alrosa is also holding talks regarding the Jerooy gold deposit in Kyrgyzstan.
Vybornov said that other countries where Alrosa was considering gold projects included Congo and Tanzania.

In addition, Alrosa is interested in acquiring blocks of shares in coal producers Yakutugol and Elgaugol, which Yakutia's government plans to offer at auctions.

Asked whether IG Alrosa was interested in the license to the Grib diamond pipe in Russia's Arkhangelsk region, Vybornov said, "The pipe is 70 km from Severalmaz's [Lomonosov] field, so we are thinking about it to some extent."

"But Lukoil and De Beers are still in litigation over the [Grib] pipe and it's not our turn yet to think about it more seriously," Vybornov said.

IG Alrosa controls Severalmaz.

The JerooyAltyn joint venture between Kyrgyzstan's state-owned Kyrgyzaltyn and Australia's Global Gold is currently preparing to mine the Jerooy deposit. Global Gold owns 60% of the joint venture.

Lukoil's subsidiary ArkhangelskGeolDobycha (AGD) and Canada's Archangel Diamond Corporation (ADC, owned by De Beers) have been locked in a dispute since 1993, when they signed an agreement to conduct a joint appraisal of the Verkhotinskaya property, which hosts the Grib pipe with a view to mining any commercial deposits on the basis of a license issued to AGD.

The Grib kimberlite pipe, which is thought to contain $5 billion worth of diamonds, was discovered at the beginning of 1996 at the Verkhotinskaya property.

Cooperation with Gazprom possible. Alrosa is discussing possible cooperation with Gazprom, the country's gas monopoly, Vybornov said.

"We're having certain discussions with Gazprom. We might even be in a position to sign a partnership agreement before long, but it would not be entirely accurate to describe this as a joint venture. We're close to signing a document which maps out our cooperation with respect to hydrocarbons in Yakutia," Vybornov said.

Vybornov said that legal disputes concerning gas producer Yakutgazprom will be resolved. Alrosa currently owns a controlling interest in Sakhaneftegaz and 100% of Alrosa-Gas and Irelyakhneft. It is in litigation regarding an additional share issue by Yakutgazprom.

source news : interfax.com