Page 2 of 2 Diamond cartel meltdown By John Helmer
with ADC and De Beers, the notice implies that the effective cutoff date would
fall on December 31.
In addition, two conditions precedent stipulated
in the SPA, namely, approval under the Russian Federation law on foreign
investment in strategic assets and approval under the Russian Federation
competition law, are still outstanding and have not yet been satisfied. If the
outstanding conditions precedent are not satisfied by December 31, 2008, under
the SPA either Archangel or LUKOIL may thereafter terminate the SPA. This will
result in the other transaction agreements being terminated. As regards the
former condition precedent, discussions
are currently ongoing between Archangel and the Russian Federal Anti-Monopoly
Service ("FAS") regarding the draft ancillary agreement and the application for
consent made in August 2008 by its wholly owned subsidiary. There can be no
assurance that agreement on the final terms of an ancillary agreement will be
reached in any event and there can be no assurance that one party would not
unilaterally decide at any time to treat such discussions as at an end. If this
occurs, the effect would be that consent for the transaction would be refused.
De Beers has made little secret of its frustration at the unreadiness of the
Russian government agency reviewing the joint venture deal, the Federal
Antimonopoly Service (FAS), to devise clear terms of a diamond cutting and
polishing agreement, which the mining venture must accept in order to proceed.
De Beers believes that without clarity on what such a beneficiation agreement
would cost, and on whether LUKoil will share the cost proportionate to its
equity stake, there is a serious financial risk in continuing.
The April agreement with LUKoil provided that De Beers would hold a 49.99%
stake in the mining venture, and LUKoil would hold the rest, if the project
agreement goes through. De Beers would then act as technical consultant to the
project, retained by the project operator, Arkhangelsgeoldobycha (AGD), the
LUKoil-owned geological company and license holder. In practical effect, De
Beers would run the project, but avoid the Russian legislative ban on foreign
miner control over domestic diamond mines.
The price De Beers and ADC agreed to pay was divided into three tranches - $100
million in down-payment, when and if the transaction closes; $75 million when
LUKoil and ADC agree to go ahead with the construction of a diamond mine at the
Grib Pipe and AGD gives its accord to mine; and $50 million when commercial
diamond production starts. It is estimated by the Russians that the mine
go-ahead would be unlikely before 2011; commercial production by 2015.
These payment and equity arrangements indicate a total valuation of the mine
asset at present at a modest $450.1 million. In May, De Beers and ADC published
a technical report of estimates of diamond reserves and resources totaling
almost $10 billion, if it proves possible to mine to the thousand-meter mark.
But the report qualified that by adding calculations of net present value (NPV)
for virtually every imaginable application of pit design, and according to a
half dozen interest rates. After subtracting taxes and royalties, the report
claimed one pit design would result in a negative value for NPV. An alternative
pit design for the mine suggested an NPV of no more than $400 million.
These numbers are turning out to be more deterring for those with the smaller
pockets - the Oppenheimers, rather than the Russians.
The spokesman for LUKoil chief executive, Vagit Alekperov, has told Asia Times
Online: "Formally, we have time until December 31. That is the date by which
the decision on the deal should be made. It is premature to talk numbers. There
is no FAS approval yet, so the number is not significant before the approval
will be granted. If there will be no approval, there could be no deal."
Alekperov had said earlier that he expected the deal to close by the end of
December.
Since it hasn't, the delay increasingly points to the close-out of De Beers's
last remaining position in Russia. Its most experienced Russia hand, Nigel
Kieser, head of the Moscow representative office, left the company in December.
Michael Brooker, one of its veteran diamond valuers for the Russian trade, has
become a consultant to Alrosa. A veteran of the company in London observes that
the company has lost its diamond mining and industry specialists and replaced
them with management consultants and marketers who don't know the diamond
business. "De Beers seems to have lost its way," he concludes.
The trouble in which Alrosa finds itself is more of a tangle in briar-patch.
Following a board meeting on December 30, the company reports that its rough
diamond sales this year have slipped by 1.1% and will slip by 10 times that
margin in 2009.
Although the data are no longer state secrets, Alrosa does not issue production
and financial results by the half-year or quarter. It also does not disclose
conventional production data by diamond weight (carats). Like-for-like
comparisons by carat, mine source and year are also not available. Instead,
production results are cited in ore tonnage excavated, and in US-dollar value
terms for diamonds recovered, making precise volume comparisons by year, or
between Alrosa and De Beers, impossible. Announcements of result data are timed
arbitrarily, and executives do not respond to detailed questions.
In the latest press release posted on the Alrosa website, rough sales by
Alrosa, excluding its share of sales of production from the Catoca mine in
Angola, are reported as totaling $2.76 billion. This was down of 1.1% on the
2007 level. It is also down 3.2% on the sales projection by the board issued
just three months ago. It is obvious that the international downturn in diamond
demand and prices has caught Alrosa by surprise.
In the latest press release, polished diamond sales by Alrosa are reported for
2008 at $157.2 million. This marks year-on-year growth of 0.6%. However, Alrosa
in September had said it was expecting polished sales this year would reach
$190 million.
The latest press release also claims that for 2009 the Alrosa board agreed at
its December 30 meeting to reduce the rough sales target to $2.44 billion. This
marks a projected decline of 12%. Demonstrating a level of naivety rarely seen
in an international mining corporation of its size, Alrosa's board, composed
primarily of state officials, announced that it has "instructed the Executive
Board to improve the Company’s tentative targets for 2009 in order to increase
the expected net profit".
Net profit for Alrosa, disclosed by the board for 2008, comes to 1,422.4
million rubles (currently about $47.4 million). In 2009, this is projected to
rise by 173% to 3,875.5 million rubles.
How this can be achieved with lower sales revenues is also unexplained, unless
the state stockpile agency Gokhran, a branch of the federal Ministry of
Finance, agrees to buy Alrosa diamonds at above-market prices. Although there
have been speculative reports that a scheme of diamond stockpiling may be
agreed by the finance ministry and funded out of the state budget, no agreement
and no details have yet been disclosed.
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