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interesting read.....................

http://www.telegraph.co.uk/sponsored/russianow/business/8179300/Russian-diamond-mining-company-Alrosa-plans-IPO-as-pit-and-market-struggle.html

Tuesday 07 December 2010

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Russian diamond mining company Alrosa plans IPO as pit and market struggle
This online supplement is produced and published by Rossiyskaya Gazeta (Russia), which takes sole responsibility for the content.
The Mir mine outside the Siberian town of Mirny

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The Mir mine outside the Siberian town of Mirny
A control officer at Alrosa's Moscow facility examines a diamond

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A control officer at Alrosa's Moscow facility examines a diamond
Svetlana Sorokina, special for Russia Now 1:20PM GMT 03 Dec 2010

Saddled with financial and technical troubles, Russia’s Alrosa diamond monopoly will seek a transformation through partial privatisation

Alrosa may be the world’s biggest diamond miner, but production at the Russian company will grind to halt unless it can raise billions of dollars with a partial privatisation – slated to happen as early as next year.

Ageing Soviet mines, a secretive board that picks clients for diamond sales behind closed doors, and a massive social welfare programme have left the company in a financial mess, with debts of $3.7bn (£2.3bn).

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In October, lawmakers in the Republic of Sakha (Yakutia) in remote eastern Siberia, which owns about 40pc of the diamond monopoly, agreed to allow the company to become public. To raise funds, Alrosa has already changed its legal status in order to sell between 20-25pc of its shares, possibly in 2011.

Globally, diamond miners are struggling to keep pace with growing demand in emerging economies as ageing mines are depleted, but Alrosa needs investment more than most.

As well as clearing its debts, the company needs to finance another $1.8bn in investments between now and 2012, analysts say.

Opening the mine to foreign investors may be politically unpopular in Siberia, but Sergei Goryainov, an analyst at online industry resource Rough&Polished, thinks that Alrosa has no choice. “Its debt burden is already too high, and the company needs more and more loans. For example, cash is needed for exploring and further developing new diamond deposits. If Alrosa does not find the money, this could impact production, since the company’s available deposits are close to exhaustion,” he says.

And the investment price tag is about to soar further. Alrosa operates the Mir mine, a huge open-cast pit in the frozen wastes of the Sakha Republic. The pit – which is already more than a mile across – continues to grow deeper, and the sides of the hole will eventually collapse. Given this situation, the mining will have to proceed underground if the company is to get at the rest of the diamonds at the bottom of its kimberlite pipe, and that change is expected to send costs through the roof.

Alrosa is already weighed down by massive social costs, being responsible for virtually everything in Mirny, the town of 40,000 people that has grown up since mining began in the Fifties. Today, the town sits perched on the lip of the giant pit, where employees work in temperatures that can fall to around -50C in the winter.

Production here was cut drastically in 2008 when the financial crisis reached even these remote climes.

As the company struggled to support the workforce without any layoffs, debts grew over the following 18 months by $1.5bn, says Alrosa’s public relations director Andrei Polyakov.

In May 2009, the federal government came to the rescue, purchasing $1bn of diamonds and adding them to the state currency reserves, but this only brought temporary respite.

The company may now sell a stake of up to 25pc to raise $1.5bn to $2.3bn, valuing Alrosa at $7.3bn to $9bn, according to a report in the Russian business daily Vedomosti .

The Sakha Republic’s stake in Alrosa will probably remain above 25pc after a share issue, guaranteeing it a continued blocking vote in the company’s affairs, say analysts. The federal government currently holds about 51pc.

Alrosa accounts for a quarter of world diamond output and forecasts sales of $3.46bn of diamonds this year, compared with $2.21bn in 2009. It is also currently working to build a pool of loyal customers. In spring 2010, Alrosa signed a three-year agreement with India’s Rosy Blue, Diamond India Limited, and Ratilal Becharlal & Sons to supply rough diamonds. And it is considering plans to open an India-based office.

Meanwhile, the company signed long-term contracts with 15 Belgian companies this summer worth about $500m, and talks are underway with companies in China, Armenia, Belarus and Israel.