“Jewel in the crown” is a well-worn and frequently misused term, but in the case of the Russian diamond mining company Alrosa, it is entirely appropriate. The company is responsible for 95% of all rough diamond production in the Russian Federation and with a 28% share of global diamond output, and its East Siberian diamond mines are confidently estimated to have sufficient mineral resources to maintain today’s levels of production for at least the next 25 years.
Set up as a joint-stock company in 1992 after the dissolution of the Soviet Union, Alrosa’s core business was (and remains to this day) the exploration and extraction of the diamond reserves that had been discovered in the frozen tundra of the Sakha Republic (aka Yakutia), in the northeastern part of what was then the Soviet Union, some 40 years earlier. These mines have been of key strategic importance to the Russian economy ever since. After decades of depending on South Africa’s De Beers for the industrial diamonds it required for its oil drilling equipment, their discovery of these mines instantly transformed the country into one of the world’s largest diamond producers in its own right.
Today, thanks to several decades of strategic foresight and prudent financial management, Russia has secured itself a reputation as a global center for the mining, trading and manufacturing of the precious gems for jewelry as well as industrial use. And in addition to being the world’s largest diamond producer by volume, Russia is also the largest producer by value while Botswana holds second place.
For “Russia” read “Alrosa,” as the majority of its shares are held by a combination of Russia’s central and regional governments. Alrosa’s prized Jubilee mine alone is estimated to produce 9.2 million carats a year—worth US$1.48 billion at 2017 prices—while its portfolio also includes a further nine open-pits and underground mines and 16 alluvial operations. It also owns two of only three new diamond mines in development in the world.
It is not just the treasuries in Moscow and Yakutsk (the capital of the Sakha Republic) that value Alrosa’s worth: When part of the company was floated through an IPO in 2013, there was no shortage of U.S. and European investors on hand to snap up the shares.
They have not been disappointed. While the discovery of an enormous 27.85-carat pink diamond may have grabbed the headlines last September, it is the quality of Alrosa’s long-term financial performance that has given stakeholders greater cause for satisfaction. With a market capitalization on the Moscow Stock Exchange of almost 658 billion rubles (just over US$11.4 billion) Alrosa is certainly large enough to be able to withstand short-term fluctuations in the financial markets; and with a credit rating of BB+, it currently enjoys the financial flexibility and independence it needs to dictate its own future.
And that future is beginning to sparkle as brightly as its pink diamond, partly because of recent upgrades in the estimated volumes of reserves at its International and Jubilee kimberlite pipes and its Nyurbinskaya deposits. But there is another reason for investor optimism, and that is the added energy that has been injected into the company by Sergey Ivanov. Appointed president of Alrosa in March 2017, Ivanov is a veteran of both Gazprombank (a state-owned Russian bank) and Sogaz (a Russian insurance company), and as such he knows exactly what it takes to make the corporate cultures of state-run enterprises work in a global economy.
“I had to make some senior management changes pretty quickly because there were a lot of people who weren’t motivated and were laboring under the illusion that Alrosa was some sort of cash cow and faced no competition,” Ivanov recalls. “A lot of the business processes were being run the same way they had been 10 years ago, and nobody could remember why we did things that way, or could understand why other Russian companies had changed their modus operandi over the past five years or had any clue what benefits those changes had brought.”After this initial overhaul, Ivanov then set about devising a plan for Alrosa’s future that was both strategic and operational. On the strategic level, he determined that the company should concentrate on its core activities, and in 2017 he put Alrosa’s gas assets up for auction. The sale netted the company US$600 million, and those assets are now in the capable hands of Novatek (the majority stakeholder in the massive Yamal LNG project), a company that Ivanov is more than happy to concede knows a lot more about gas asset management than either he or anyone on his senior team.
From an operational point of view, Ivanov also set about improving productivity levels, particularly energy efficiencies. Due to the remoteness of Alrosa’s mines, supplying them with fuel has traditionally represented a significant cost. To counter this, the company is in the process of introducing generators that can run on crude rather than refined oil and which can subsequently be supplied by nearby deposits. And by dewatering the mines’ dump tailings (which in layman’s terms means removing the water from the rubble that’s left over after the diamonds have been extracted) Ivanov also expects to save, as well as to make operations greener, by reducing the size of Alrosa’s waste deposit zones. He has also begun the process of converting the company’s fleet of heavy machinery to run on liquid gas.
This combination of top-level thinking and practical solutions has, so far, gone down well with investors—helped immeasurably by Ivanov’s transparent and personable approach. “I think that they [the investors] were scared that I would be like some guy from the financial services sector with his own hidden agenda,” he says, “but I met them all personally and we had very open discussions about our future strategy. That helped, and they were also reassured by our ability to control costs and by the initiatives we have put in place to keep it up.”
Then there is the enduring strength of demand for diamond jewelry, which contributed to Alrosa selling some US$4.3 billion worth of the precious stone in 2017. And with long-term demand in the growth markets of India, China and Southeast Asia showing no signs of tailing off, there is every reason to expect that figure to continue to grow.
These days, Alrosa is not just a jewel in Russia’s domestic crown but a global brand in its own right and, what is more, a pillar of the diamond industry. In 2015, it was one of seven founding members of the Diamond Producers Association, which was set up to ensure the diamond industry’s long-term sustainability by promoting its integrity and reputation. And last year, according to research conducted by PwC, Alrosa invested more in social programs than any of its peers.
“There are 37,000 people living in towns and cities that are almost entirely dependent economically on Alrosa, and there is no question that they are the responsibility of top management,” Ivanov says. “If something goes wrong—regardless of whether it is anything to do with us or not—they turn to Alrosa for help. We spend more than US$150 million a year on social programs in underdeveloped regions that lack things like infrastructure and medical care to fund kindergartens, clinics, schools, universities and hospitals. We also work with local utility companies to supply power and water to people’s homes. In 2017, we implemented more than 500 social and charity initiatives.”
Alrosa is the world leader in diamond mining.
39.6 million carats in 2017.
Not less than 28% of the global market.
The world’s largest diamond resource base.
More than 1 billion carats in resources, enough for at least 25 years of mining.
US$150 million on social projects in 2017
More than 500 social and charity initiatives in 2017
US$100 million for environmental projects in 2017