CLEAN UP AND SHUT UP — ANDREYEV’S MANDATE AT ALROSA RUNS INTO MARKET SKEPTICISM OVER REVENUE AND DIAMOND PRICE CLAIMS
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By John Helmer in Moscow A flurry of sales and revenue claims posted on the Alrosa website have yet to be substantiated by the chief executive, Fyodor Andreyev, or his spokesman, Andrei Polyakov. Their silence four months into Andreyev’s term in office recalls the claims, issued in June and July by the former chief executive, Sergei Vybornov, that he had fixed from 6 to 15 sales contracts for a total value of $900 million. The pricing formula, according to Vybornov, was “the price-list of the Ministry of Finance plus 17 %”. Each contract, according to Vybornov, had been for not less than $200 million, and for terms of 3 to 5 years. The buyers, Vybornov claimed, included Tiffany of the US; Dali Diamonds and Diarough of Belgium; and some unidentified Israeli companies. “We have begun with [the Belgian companies],” Vybornov said publicly, “for the simple reason that the Belgian government declared the granting of guarantees to the diamond banks for a total of $1 billion A bit later, this initiative got the [additional] support of the Flemish authorities, declaring guarantees for $250 million.”Israeli and London sources confirm that Alrosa’s marketing effort is visible. “We do see a big volume of Russian goods on the market,” according to one. The value of the volume in circulation may be as high as $1 billion. However, he noted, price is a sticking point. “This month the asking prices of the goods we have seen are ridiculously high. Last month some of the importers were complaining they were taking losses.”
Other sources are skeptical that Alrosa’s new director of sales, Yury Okoyomov, is capable of implementing a billion dollars’ worth of new sales to the market, because the process for vetting contracts is “painfully slow”, according to one.
Andreyev has authorized a series of website releases since he took office, claiming that commercial sales of Alrosa’s rough have been accelerating. In July, Andreyev claimed the value of these sales for that month amounted to $150 million, plus $13 million for a relatively unsuccessful auction of specials which brought in $13 million.
In September, a new announcement authorized by Andreyev claimed the company had booked $651.5 million worth of rough for the month. But most of that, the company acknowledged, went to the state stockpile agency, Gokhran. On October 22, Andreyev issued a new claim that for the month of October, Alrosa had sold rough for a total of $351 million, of which $255 million were commercial sales, and the balance of $96 million sales to Gokhran. The statement also claimed that in the nine-month period to September 30, “the Alrosa Group sold rough and polished for a total of $1.730 billion, with nearly $1 billion out of that in the third quarter of 2009.”
Andreyev was asked to explain the difference between conflicting reports of the 9-month sales total, and the apparent drop in the value of sales between September and October. He refused to respond. Polyakov, the head of the company’s press office under Vybornov, remained in office after the changeover at the top, according to another member of the press office. However, Polyakov neither responds to emails or telephone calls, and the press office is no longer confirming that he remains the company spokesman.
The slowness of the marketing department under Okoyomov to prepare new sales contracts for Andreyev’s approval also indicates internal uncertainty over who is in charge; what the authorized sales policy is; and what price has been fixed to clear sales and lift the revenue line above the level of state-financed buying by Gokhran. According to statements by Prime Minister Vladimir Putin, Alrosa releases, and comments by Gokhran, the Russian government has spent Rb35.4 billion ($1.2 billion). Anecdotal evidence suggests the carat price of the sales to Gokhran has been above the prevailing market price. Although the Russian state secrecy regulations do not oblige Alrosa to withhold the information, carat production figures and realized dollar-per-carat sale prices are kept secret by Alrosa.
To date, Alrosa has issued three year-end value estimates — production value of $2.1 billion; sales value for rough equal to 2008 of $2.3 billion; and sales value, including rough, polished, and possibly the Russian share of Angolan diamond sales, totaling $2.75 billion. Andreyev refuses to clarify these data. However, it can be inferred that If Alrosa is to reach an end-of-year sales level for rough of over $2 billion, commercial sales should amount to not less than $1 billion. Ararat Evoyan, head of the Russian Association of Diamond Manufacturers, told PolishedPrices.com he will be glad if Alrosa does reach this commercial sales target: “I believe they will be pretty close to that sum by the turn of the year”. Evoyan noted that at the start of the year Alrosa would only sell for export, but that “now after Andreyev took his chair, they are actively selling inside the country, too.” Evoyan said he could say what the sales split has been since July between exports and domestic sales.
Smolensk Kristall told PolishedPrices.com that it started buying from Alrosa in july, and expects to buy about $100 million of rough by December 31. At peak in 2007, Kristall produced cut diamonds worth $404 million. In 2008, this total fell to $280 million. This year, Kristall sources suggest their production will be worth $200 million, rising to as much as $240 million next year.
A source close to Lev Leviev’s Ruis Diamonds — the largest diamond cutter in Russia after the state-owned Kristall — told PolishedPrices.com that “there are some major transactions ahead” that will boost this year’s rough purchasing total, as well as the value of Ruis’s polished output and sales. The source said also the total value of rough bought by Ruis this year was less than last year, and the value of purchases from Alrosa was “considerably less” than in 2008. According to the source, the Leviev enterprise did not buy any Alrosa stones until September.
At peak in 2007, Ruis was producing $300 million worth of polished.
Alrosa is the first company which Andreyev, a corporate finance expert, has led as chief executive. He has little career experience outside closed state-owned enterprises, or companies with publicly audited balance-sheets and stock exchange-regulated requirements for accountability. He was drafted from the state railways company into taking charge of Alrosa, after state auditors at the Accounting Chamber reported serious financial problems under Vybornov. At the time, faction-fighting between the federal government and the Sakha region — holders of 51% and 32% of the company’s shareholdings — had led to awkward press leaks about scandal inside the company; oddly expensive transactions in non-core business; and runaway debts.
According to a public statement in July by the Accounting Chamber chairman, Sergei Stepashin, a former prime minister, he had urged action at Alrosa by federal officials, including the Prosecutor-General. Since Vybornov had worked closely for years with the Alrosa board chairman, Finance Minister Alexei Kudrin, this may have proved awkward. And so a discreet arrangement was decided on, and Andreyev ordered to implement it. In effect, Andreyev was told to clean up, and shut up.
Alrosa insiders have told PolishedPrices.com that Andreyev’s appointment also marked the end of the informal involvement in the company’s affairs of Otar Marganya. Of Georgian origin, with an office at the state-controlled Vneshtorgbank (VTB), Marganya has enjoyed the reputation of being the key mediator between the board chairman, federal Finance Minister Alexei Kudrin, and Sakha president, Vyacheslav Shtirov, as well as the fixer of senior management appointments over several years. Marganya has also played an influential role in asset acquisitions negotiated by Vybornov.
By taking public credit for a series of non-diamond asset selloffs since he took over — at high values booked to state banks without independent audit valuations — Andreyev has indirectly corroborated the speculation that he has been ordered to reduce the debt Alrosa had run up in making these deals. The latest of Andreyev’s announcements, dated November 3, reports the disposal of two gasfield stakes for $620 million. The published announcement says that Alrosa’s “exclusive financial adviser in this deal was VTB Capital. The sale of non-core assets is part of ALROSA’s program aimed at reducing its debt portfolio. All the proceeds from this transaction have been used for repayment of the Company’s debts. During the last quarter ALROSA has reduced its total loan portfolio by RUR 30 billion [$1 billion].” The buyer of the assets is not disclosed. Russian press and Reuters reports claim that VTB was both adviser and buyer of the assets; and that the state bank deal is intended as a temporary expedient to reduce the liabilities on Alrosa’s balance-sheet, and warehouse the assets until a genuine purchaser can be found.
The initiative was Vybornov’s, however, not Andreyev’s. In April, Vybornov announced detailed terms of the selloff of oil, gas and iron-ore assets which Alrosa had been holding. “We have several categories of non-core assets,” Vybornov explained. “First of all, it is non-core companies which were established quite a long time ago and performed some service functions. In this case it is better to have competitive environment among suppliers of goods and services. For instance, sales of explosives are better performed on a competitive basis – this is one part of the task to be solved just by bringing the companies to the open market. Secondly, there are non-core companies related to the fuel-and-power sector, which were established to make ALROSA have its own gas, petroleum, and processing to render it independent. Now there is no such a necessity. We have gas assets in the Yamal Peninsular now put for sale and as I hope they will be sold in May.”
On the valuation for the selloff, Vybornov said more in April than Andreyev has said for publication in four months. Agreeing that the oil and gas stakes might be worth between $600 million and $700 million, Vybornov explained: “They have deposits there which have not yet been prospected completely. For example, right now one of the companies has an agreed approval to be connected to the gas pipeline, which is a valuable thing in itself by the way. The oil company we have is very small. The company based in Yakutia will be also sold during May.” It is now clear in retrospect that Vybornov missed the sale deadline, either because there was no market purchaser, or because the Kremlin could not decide how the state banks would handle the transaction.
As for Alrosa’s iron-ore deposit for sale in Sakha, Vybornov went on: “It is of interest to investors from China. No one will sell a controlling stake to the Chinese; we could sell them a non-controlling stake, but this is also considered to be a strategic asset. This is the world’s biggest group of iron ore assets. The investor wishes to pay a market price for a non-controlling stake and evidently this will be executed on paper in the nearest time as well.” Vybornov put a price of $300 million to $400 million on the asset. Andreyev has so far not announced a deal.
The former chief executive of Alrosa and former head of Gokhran, Valery Rudakov, has hinted at how little has changed inside Alrosa, making a veiled criticism of the lack of improvement since Andreyev replaced Vybornov in July. According to a published interview this month, Rudakov said he is “in support of maximum transparency in the diamond market and I believe that any movement in this direction is positive…. In Russia, cancelling of many diamond industry secrets inherited since the Soviet time was favorable for market development. As for pricing, today it is governed by competition. Formerly, prices set by De Beers for their sightholders were actually world prices, being some kind of analogue to the London fixing for gold. No price-list was published, but all the buyers knew the prices. Now any agreement between major diamond miners on some uniform principles in marketing policy or on some kind of uniform price-list appears to be problematic since the market is functioning in a competitive environment.
Therefore, promptly published information about price movement for rough diamonds based on real transactions could be a useful reference point for market participants.”
Andreyev also appears to be under instruction from Kudrin that, once he’s cleaned up the company books, he should get Alrosa ready for conversion into an open stockholding company, with the aim of converting some of its long-term debt and capital shortage into privatization of some of its shares. A commentary this month in Moscow by an industry magazine backed by Alrosa recommended a share sale to the market, and proposed steamrollering over objections from the Sakha region shareholder to accomplish that. “State support cannot be indefinitely used to keep ALROSA alive,” wrote Sergei Goryainov for the journal, Rough& Polished. The company should have an opportunity to attract funds to the industry and use its significant investment potential.”
What this means, Goryainov concedes, is that “the two largest shareholders are required to reconcile their positions. However, there is a resolution of the Yakut Parliament passed in 2005 saying that organizationally and legally preserving Alrosa as a closed joint-stock company meets Yakutia’s [Sakha] state interests.” What follows is a blunt attack on Shtirov’s administration.
“The state interests of Yakutia are in this case only a reflection of the now absolutely irrelevant four-year-old intra-corporate tussle and are very wide of the present crisis realities in the diamond market. But formally, this resolution remains in force and may oblige the shareholder representing the Republic of Yakutia to vote against ALROSA’s transformation into an open join-stock company.”
Ever since the collapse of the state economic plan system in 1991, the Sakha region has sought to improve its bargaining position for federal funds and local revenue autonomy through retaining control over the region’s principal cashcow, Alrosa. In the absence of trust in a succession of Kremlin promises and Finance Ministry undertakings, retaining the present shareholding structure of Alrosa has been an obvious, and a strategic necessity for the region’s poiliticians. No Alrosa chief executive has been strong enough to overcome this.
“Taking into account the current debts of Alrosa,” argues Goryainov, “the federal authorities and Yakutia most likely do not have any potential objections to raise the level of Alrosa’s capitalization by contributing financial assets on the one hand, and material assets on the other.
But to assess the necessary scale of additional plough-back, without an objective estimate of the company’s current value, is practically impossible. Alrosa’s additional capitalization is necessary to solve the key problem of re-structuring its huge debt liabilities, which consequently means that this company has an unbiased interest in turning ‘open’.”
Andreyev declined the invitation to confirm whether this is his view, or not.
If Andreyev’s instructions are to dilute the Sakha stake in Alrosa and are accurately reflected in this public statement, then he is in for trouble. Keeping quiet now will become, in no time at all, the silence of the lambs.
by John Helmer - Wednesday, November 11th, 2009
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