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fyi: AP ~ Russian Diamond Co. Looking Abroad
By MARIA DANILOVA , 10.03.2006, 01:46 PM

Just below the Arctic circle, amid sprawling tundra forests that are the only sign of life for hundreds of miles, geologists from Russia's state diamond monopoly Alrosa drill deep into grayish mud in search of precious gems.

But the world's No. 2 producer of raw diamonds after South Africa's De Beers Group is no longer content with mining gems alone - it plans to expand into coal and gold mining, as well as exploring oil and gas fields at home and abroad.

The Kremlin, which is increasingly consolidating its control over the country's key industries, is rumored to be eyeing Alrosa as a nucleus for a state-controlled mining holding company.

Once a closed and secretive entity, some of whose mines and towns were hidden off the map in Soviet times, Alrosa today is seeking to change its legal structure to enable it to list its shares on Russian and international markets.

"Yes, we do have ambitions, I can confirm that," Alrosa's president Alexander Nichiporuk said in response to a journalist's question about future plans, on a recent tour of the company's diamond fields and plants in the Siberian province of Yakutia.

Such a makeover won't be easy.

Before opening up the company, which it views as strategically important, the federal government wants to increase its share to majority control from the current 37 percent.

The Kremlin plans to raise its stake by redistributing the company's capital assets between the federal and the local government, which was handed most of Alrosa's physical property when the company was born out of its Soviet-era predecessor in the early 1990s. The Yakut government currently owns 32 percent, its provinces have 8 percent and the remaining 23 percent are held by other entities, including a government-owned bank and investors.

Moscow is promising Yakutia to fully reimburse the transfer by plowing more tax revenue into the provincial budget, as well as increase funding for social and environmental projects. The Yakut government, however, has fiercely opposed the move, fearing it would lose its say in the company and its share in profits.

In Yakutia, an India-sized, scarcely populated region of forested tundra and permafrost, diamonds are a source of living and pride, accounting for 99 percent of Russia's and up to 25 percent of the world's gems. Diamonds from Russia are popular because many buyers are wary of "conflict diamonds" from African countries.

A court is adjudicating the case. Nichiporuk, who has served in the country's Finance Ministry and is said to be a trusted confidant of President Vladimir Putin, predicted it would be settled after New Year.

Analysts say a public listing would be a logical move for Alrosa, which would make the company attractive to investors and raise capital for the much-needed, costly exploration work.

"After restructuring its capital and shareholders the company is very likely to conduct a public offering of their shares," said Denis Mushtayev, a metals analyst with Metropol financial investment company.

Government-hired experts have valued the company at $6.1 billion, while independent observers estimate it to be worth $8 billion to 10 billion once it is reorganized, Alrosa says. Mushtayev valued the company at $12 billion to $15 billion.

But an IPO would require a major image change for the secretive company, bringing higher transparency and corporate governance requirements, observers note.

Alrosa is also busy contesting a recent antitrust ruling by the European Commission, which ordered the company to scale down and eventually stop all trade with De Beers, its biggest client for decades, by 2009. EU regulators argue the trade between De Beers, which controls about 60 percent of the world's rough diamond supplies and Alrosa, which produces up to 25 percent, restricts fair competition.

The move is a major setback for the company, which currently sells 24 percent of its diamonds to De Beers, and Alrosa has challenged the decision with the European Court of Justice, which is expected to rule within six months.

Simultaneously, the company has also begun expanding its own marketing network by setting up trading companies abroad. The company recently signed a cooperation agreement with De Beers for joint research and exploration work in Russia and other countries.

Over the past several years, Alrosa has been showing robust growth, last year selling diamonds worth $3.4 billion, compared to $2.7 billion in 2004 and $1.8 billion in 2003. The company also boasts an average salary of some $1,080 a month - nearly three times the country's average monthly pay of $410.

Alrosa also heavily invests in the social sector, maintaining hospitals and kindergartens and building sport stadiums and churches in its Yakut mining towns.

The company has moved outside Yakutia too - mining for diamonds in Russia's northern Arkhangelsk region and owning stock in two major diamond fields in Angola. It also plans to develop diamond deposits in Guinea, the Democratic Republic of Congo and possibly Canada.

And it plans to explore oil fields in Yakutia and outside Russia - in Angola - in partnership with state oil company Zarubezhneft.

"One cannot rule out that the state will use Alrosa to cement its influence in the metals mining sector - the state already has such sectors in the oil and gas fields," said Mikhail Galkin, an analyst with MDM bank.

Rumors swirled earlier this year that Alrosa could be used by the state to take over Norilsk Nickel, the world's No. 1 palladium and zinc miner. Nichiporuk said the idea is not being discussed at the moment.

Observers note Alrosa's progress, but say it still has a long way to go before becoming an open and effectively-run Western company.

They also take a dim view of the company's plans to enter a swathe of noncore sectors at once: gold, coal, oil and gas. Timothy McCutcheon, a partner at DBM Capital corporate finance boutique and a specialist in mining called the plan "a value destroying activity."

"If you are a huge company building cars that's OK, but if 80 percent of what you make are diamonds and 20 percent is everything else, that raises the question - why bother?" he said.

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