9 december 2011

Prime Minister Vladimir Putin holds a working meeting with the President of ALROSA, Fyodor Andreev

At the meeting, they discussed the company’s interim results in the year that is coming to a close, plans for the near future, as well as ALROSA’s relationship with its major business partners.

Transcript of the beginning of the meeting:

Vladimir Putin: Mr Andreev, the year is coming to an end, and I know it has been a successful one for the company. I would like to discuss the company’s results in more detail, its plans for the near future and its relationship with major business partners.

Fyodor Andreev: Mr Putin, if you don’t object, I have prepared a brief presentation for you. I think we should start with your visit to the city of Mirny on August 18, 2009, after which an anti-crisis programme was adopted, which provided for the purchasing of $1 billion worth of raw materials from the company and extending the company a loan for $2 billion from VTB bank. 

Vladimir Putin: Yes, it was a large-scale plan to assist the company at a time when it needed help.

Fyodor Andreev: Exactly. The main result of this assistance has been that, unlike our competitors such as De Beers, who has essentially cut back on their production by half, our company has maintained its pre-crisis production level. Thanks to these measures, in 2009 and 2010, ALROSA was the world’s largest producer of diamonds, and hopefully it will maintain its leadership in 2011. This has provided us with tangible market benefits.    

As you can see, since 2009, the company’s revenue has increased from 77 billion to 148 billion. This is a result of our marketing strategy, but it is mainly thanks to the 50% price increase in 2010. Today, we expect to turn a profit of about 47 billion roubles, according to international financial reporting standards (IFRS) and about 30 billion roubles, according to Russian standards. As you can see, all of these measures have allowed us to increase the returns on assets from 3% or 4% in 2009 to 14%.

Our return on equity is 33%, which is comparable with similar indicators of major companies like De Beers, Rio Tinto and BHP Billiton. We believe that we have created a fairly solid foundation on which the company can strive for leadership in the world diamond market.  

Separately, I would like to pause over the information presented on slide number 6. There is the misconception that our company is running out of resources. However, I would like to emphasise that a similar pattern existed in the 1980s, the 1990s and the 2000s. Today, our geologists are capable of renewing and replenishing the company’s resource base annually. We ordered an international audit of our reserves under the JORC system, which has demonstrated that the company’s proven reserves are sufficient to last for the next 37 years.        

Still, with regard to the economic downturn, I would like to offer my personal opinion. I interpret the crisis not as simply an incident of sorts that occurred in America as the result of an erroneous financial policy or a meltdown of the financial markets. I believe that the company’s economic model was chosen incorrectly. First, the company should not have actively diversified its so-called non-core assets using borrowed funds. Specifically, I am referring to projects aimed at the development of iron and gas deposits.      

In essence, these were credits; the assets failed to work, and more and more credit was being accumulated each year. Therefore, we are currently actively seeking partners for these projects. Another important issue that has affected our profitability is the fact that the company has been involved in all kinds of economic activities, including aviation, airports, agriculture, etc.   

This is largely due to the fact that historically, the company has been working in underdeveloped regions and single-industry towns. But today, we are working with the government of Yakutia to restructure and reform these assets gradually. The idea is to transfer the real estate assets and airports to federal ownership, which is extremely important. Therefore, today, we are approaching the idea of treating the company as a valuable asset, one that is owned by the government. 

Today, as a company, ALROSA is unique in the world. And if we set ourselves the task of creating a financial centre, the company can be used as a pilot asset for issuing these shares and selling them on Russian stock markets. Our situation is rather paradoxical, whereby on the one hand we are seeking to create a financial centre in Russia, but on the other hand all major companies are striving to sell their shares in London and Singapore.   

We have arranged a meeting, which was attended by representatives of the Moscow stock exchange and leading banks such as VTB, JP Morgan, and Morgan Stanley. As it turned out, there are no limitations, except for mental barriers, to the full scale placement of shares in Russia. That is why I wanted to share my opinion with you and ask for your support.   

Vladimir Putin: Thank you. We will have an opportunity to discuss this in more detail. What about your partners, are you on good terms with them?

Fyodor Andreev: In 2009, we modified our sales strategy by switching to long-term contracts. Currently, about 60% of our products are sold through long-term contracts. When the market was rising, we did not see any benefit to selling through long-term contracts. However, in today’s falling market, long-term contracts hedge our revenues. We have divided our sales between Russian companies and companies that are based in Antwerp and India, so we feel quite comfortable. 

Moreover, due to the specifics of the diamond industry and the absence of any new discoveries in the last 10 years, there is currently a fairly large gap between supply and demand. In essence, this drove prices up by 50% in 2010. Today, we have created a fairly balanced business model, which allows the company to work steadily even in times of crisis, which has not been the case in the past.      

Vladimir Putin: Thank you.