Russia May Seek the Privatization of Alrosa

Because of the sharp drop in revenue by the very low price of oil , President Vladimir Putin  may be looking to sell some of the largest companies in the country, including the second largest diamond miner in the world, Alrosa company, according to Reuters sources. Russia currently owns 44% of Alrosa, while the local administration of Yakutia owns 25%. This region, where the headquarters of the company is located is the coldest inhabited area in the world, with temperatures in winter it reaches less than 50 degrees below zero.

The company is listed on the Moscow stock exchange and has a percentage of private ownership of 23%. There is great controversy about the possible privatization method. On the one hand there are fears that the shares at a price too low and close to the President Russian sectors are sold. There is talk of a possible return of capital from Russian businessmen who have investments in areas «of-shore» On the other hand, the tense situation with the major Western countries, in a context of mutual sanctions makes an «open» acquisition difficult , for example through the Moscow Stock Exchange. In addition a large percentage of Russians oppose privatization of this type.

A difficult 2015.
Although Alrosa diamond production increased compared to 2014, reaching the amount of 36 million carats, it had a complicated year for several reasons. First, the falling price of polished diamonds by nearly 18%, the largest decline since 2008. This has meant a reduction in operating margins.

On the other hand, the company accumulated excessive stock of unsold diamonds, problem shared by the other major world producer is De Beers. The situation was particularly serious in the third quarter, where Alrosa could only be placed on the market 40% of its production. As a result of the stock collapses of Chinese stocks, the fall in demand in the Asian giant was palpable. In the fourth quarter it improved Alrosa, growing sales 45 on the third quarter, up from 7 million carats, at a time of apparent recovery of the industry. The company did not disclose all their financial data ending 2015 but is difficult to think that may exceed that  USD 5 billion turnover reached in 2014.

The outlook for 2016 were initially good, a revival in demand and a drop in prices this time more moderate, about 5% is expected. However it remains to be seen the effect it will have on the market of these precious stones the collapse in global stock markets, doubts about the Chinese economy and the continued decline in the price of raw materials, particularly oil.

First operations in 2016.
As reported by Bloomberg, Alrosa have closed an important first rough diamonds operation in early 2016, with a time of larger bargaining usual 10 days and for an amount of 500 million USD. Similar to the first major operation of De Beers, in this case 540 million USD and after reducing prices by 7% so. Alrosa has not revealed details about the prices in its operation.

Remember that De Beers and Alrosa dominate two thirds of the world diamond market. Both companies try to reduce their high stock at a time when the diamond polishing companies have  dwindling margins. Amid this difficult moment, the major producers of diamonds (De Beers, Rio Tinto and Alrosa) have decided to form the Association of Producers of Diamonds, in order to stimulate demand and promote the image of the diamond.

Disclosure: The Luxonomist not responsible for the views expressed in the article. The text was written freely expressing ideas, without receiving any compensation. The author has no business relationship with any of the companies whose shares are listed in this article.