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fyi: JP Morgan forecast gives thumbs up to Alrosa
By: John Helmer

Posted: '04-SEP-06 07:00' GMT © Mineweb 1997-2006

MOSCOW (Mineweb.com) --Weaker market demand for diamonds, suppressed by growing inventories, is hurting De Beers, but Alrosa, the Russian rival to the world leader, should continue strong growth, according to a new forecast by JP Morgan Securities in London.

De Beers has reported revenue growth in the six months to June 30 of 1%, with Ebitda rising by just 2%. Rio Tinto reported better growth performance from its Australian diamond mining operations, although on a smaller revenue base.

Alrosa has not issued a first-half summary yet; but according to the JP Morgan report, the 2005 performance should be sustainable this year. Last year, according to Alrosa company reports issued in June, total revenues, including sales of Alrosa's share of production from the Catoca mine in Angola, grew 26% to $3.4 billion. Cost of sales grew at 42%, compared with 2004, to $1.8 billion, fuelled mainly by rising energy charges, a stronger rouble, and elevated costs of operation in Angola. Ebitda was up 19% to $1.2 billion.

JP Morgan analyst and Russian specialist, Tatiana Tchembarova said she expects Alrosa to continue performing strongly, despite the current difficulties in the international diamond market and weakening prices.

"Revenue growth from continued liberalization of diamond prices in Russia," Tchembarova reports, "should outstrip the impact of weaker global markets, driving revenues and margins higher." She also noted that "once Federal [Government] control is formalized, we envision that the company will take a greater strategic role in the Russian mining sector overall."

The June shareholder vote indicated that the federal takeover target of 50% plus one share had not been reached. But court action to enforce it had been settled between the federal and Sakha governments. Formal control is expected to occur before the year's end.

Even if Alrosa may be holding larger inventories of rough out of the market, while cutting prices for smaller goods to encourage demand, the JP Morgan report suggests "prices for polished higher-range diamonds -- which represents most of Alrosa's production -- have remained robust. Contrasting what Tchembarova terms "disappointing" results from De Beers for H1 2006, the outlook for Alrosa is more positive, she said.

At the start of this year, Alrosa's long-term debt stood at $1.2 billion, up just $36 million on the 2004 level. Short-term debt was $596 million, up $243 million from the year before. About half of the latter figure was accounted for by debt financing related to the trading of Angolan diamonds. Fresh debt may be required, the report noted, since "we understand that any further share buybacks associated with the move to achieve Federal government control may be financed by Alrosa itself."

DeBeers is reporting that its current debt is at $2.5 billion, and this is projected to rise toward $3 billion in order to finance high-cost exploration for new diamond sources in Canada and South Africa. This year De Beers is projecting exploration spending of about $800 million.

Alrosa's cost of exploration -- mostly in Russia and Angola -- is significantly less, and is projected at about $110 million this year.

Alrosa's share of the global diamond mining market is now 25%, making it the largest diamond-miner in the world after De Beers.


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