Alrosa Company Ltd. - Company Profile, Information, Business Description, History, Background Information on Alrosa Company Ltd.

6 Ul. Lenina
Mirny 678170
Republic of Sakha (Yakutia)

Company Perspectives:

ALROSA Co. Ltd. was set up under Decree 158C of the President of the Russian Federation 'On the Establishment of the Almazy Rossii-Sakha Joint Stock Company' signed on 19 February 1992. It is Russia's largest diamond company engaged in exploration, mining, manufacture and sales of diamonds and one of the world's major rough diamond producers. ALROSA accounts for about 100% of all rough diamonds produced in Russia and for about 20% of the world's rough diamond output. In 1996 the company's rough diamond sales amounted to US $1.6 billion. Geological surveys indicate that the company has sufficient diamond reserves to maintain production at the current level for the next 50 years.

History of Alrosa Company Ltd.

Based in the frigid expanses of Russia's Far East, Alrosa Company Ltd. accounts for about 20 percent of the world's rough diamond output. The company has a near-monopoly on diamond mining in Russia and is also engaged in geological exploration, diamond cutting, and retail sales of diamonds. Its primary mines are located in the Republic of Sakha, an area about four times the size of Texas, which holds some of the coldest permanently inhabited communities in the world. The Soviets started a mining enterprise in the area after rich diamond deposits were discovered there in the 1950s. With the fall of communism, mining operations were privatized and transferred to a newly created company that became known as Alrosa. The federal and local governments, however, retain majority control of the company. As its original open-pit mines become depleted, Alrosa is starting to construct underground mines to access the remaining deposits. The company also is looking farther afield for rich deposits and has started operations in northwest Russia and in Angola. Alrosa has sold its diamonds through De Beers, the South African diamond monopoly, for more than four decades. More recently, Alrosa is selling more of its gems through its own contacts and is working on building a marketing network at home and abroad.

Mining Pioneers in the 1950s

The first deposit of the diamond-bearing mineral kimberlite was discovered in Russia's far eastern Republic of Sakha, also known as Yakutia, in 1954. It was given the name Zarnitsa or "Lightning." As later discoveries proved, kimberlite deposits were scattered throughout Yakutia in formations known as pipes. Two of the largest deposits in the world were discovered in 1955: the Mir ("Peace") Pipe and the Udachny ("Lucky") Pipe. Over the next year, an expeditionary force built a pilot ore processing facility at the Mir site. In 1957 the Soviet Ministry of Non-Ferrous Metallurgy adopted a resolution providing for the construction of diamond mining and processing facilities in the vicinity of the Mir Pipe. The Yakutalmaz ("Yakutia Diamond") Trust was established to manage the operations. Victor Tikhonov was the first director of Yakutalmaz.

The territory where the first mines were built was rich in minerals but inhospitable in almost every other way. Temperatures in the winter regularly dropped to around -60 degrees Celsius. The area was covered in permafrost hundreds of meters deep; only the top few meters thawed in the short summer, allowing some small trees to grow. The ground consisted mostly of sand and would have been unstable if not for the ice holding it together. As a result, dwellings had to be built on high concrete piles to keep them from melting the ground under them and collapsing. Nevertheless, the Soviet government was ready to meet any challenge necessary to access the valuable mineral resources. In 1958 several hundred young people from the southern parts of the republic were directed north to establish the mining town of Mirny. After a year, the town had a population of more than 5,000 and two more factories had been built. The town grew in size while the open pit mine on its outskirts grew deeper.

The U.S.S.R. sold its first lot of diamonds on the world market in 1959. From the beginning, Yakutalmaz marketed its diamonds through De Beers's Central Selling Organization (CSO). Until the emergence of Russia, the CSO had been dominated by southern African countries. But over the next few decades, the mines of Yakutalmaz became one of the most important sources of rough diamonds for De Beers. The trade relationship was threatened in the early 1960s when the United Nations imposed sanctions on South Africa related to apartheid. Publicly, Soviet leaders denounced apartheid while De Beers's 1963 annual report stated that trade with the U.S.S.R. was ended due to the boycott. But the two countries immediately cut a secret deal and the U.S.S.R. continued to sell all of its exports to the CSO through the next several decades.

Not only trade agreements, but most of the arrangements concerning diamond mining operations in the U.S.S.R. were kept secret under communism. The lucrative industry was a crucial source of hard currency for the regime, and decisions concerning it were made at the highest levels of government. The industry developed along branches that involved several different government organizations. Yakutalmaz was responsible only for diamond extraction. Gokhran, a division of the Finance Ministry, sorted the diamonds and the Almazyuvelirexport concern was responsible for marketing. Gokhran also stored a considerable amount of gems that were unable to be sold in a given year.

Investment and Production Growth: 1960-90

In 1961 the Aikhal mine, located about 450 kilometers north of Mirny, was established. Mining and processing facilities were fully developed there by the early 1970s. Factory No. 3, the largest mining facility yet, was completed at the Mir pipe in 1966. The next year Yakutalmaz was restructured into two separate organizations: Yakutalmaz and Aikhalalmaz. The two organizations were then reunited into a single production association in 1969 and Lev Soldatov was appointed director. Also that year, the Internatsionalnaya ("International") Pipe was discovered near Mirny.

The Udachny Pipe began to be exploited in the mid-1970s. Processing Factory No. 11 extracted the first ore from the pipe in 1974 and by 1979 mining and processing facilities were fully developed. A powerful bucket excavator and a fleet of 120-ton dump trucks were first brought to the Far East to work in the Udachny pit. Over the decades, the mine produced more rough diamonds than any of the company's other sites.

Valeri Rudakov was appointed general director of Yakutalmaz in 1978. He was succeeded by Vladimir Piskunov in 1983. In the early 1980s, the extensive capital investments of the previous decades led to a considerable increase in diamond production. Yakutalmaz accounted for 10 percent of world rough diamond exports in 1985; by the end of the decade its annual exports of mostly rough diamonds were worth more than $2 billion. In addition, a domestic cutting industry had grown up around the Kristall concern in Moscow, Smolensk, and Barnaul and carried out exports of polished diamonds independently of Yakutalmaz. By this time, the town of Mirny had more than 30,000 residents. Because mining dominated the town, Yakutalmaz took on the responsibility of providing a range of amenities to workers, including a gym, a night club, a kindergarten, and a pool with a synchronized swimming team.

In 1987 the Ministry of Non-Ferrous Metallurgy reorganized Yakutalmaz into the Yakutsk Diamond Production and Research Association, or NPO "Yakutalmaz." Development of the Yubileinaya ("Jubilee") Pipe, which was discovered in 1975 near Aikhal, had just begun on a trial basis. By the early 1990s, however, the diamond business was faltering in the aftermath of the collapse of the Soviet regime. Production was expensive in the extreme Siberian conditions and the government was not making up for investments. Rough diamond exports in 1990 were only about $1 billion.

The U.S.S.R. signed a new five-year diamond trade agreement with De Beers in 1991. Under the deal, Yakutalmaz received $1 billion from De Beers against the collateral of gems stored by Gokhran; Yakutalmaz agreed to sell 95 percent of its export output through the Central Selling Organization. Over the next two years, however, diamond production fell about 40 percent due to the lack of funds from the federal government. Yakutalmaz threatened to withhold diamonds unless the federal government provided money for fuel, machinery, and food. Meanwhile, some officials in Moscow were suggesting that the contract with De Beers be terminated. Industry and government leaders also were debating how to reorganize the various sectors of the diamond industry now that the economy was no longer under Communist control.

Privatization: 1992

On February 19, 1992, President Boris Yeltsin signed a decree effecting the privatization of the diamond industry. The decree created a single entity, the Almazy Rossii-Sakha (ARS) Joint Stock Company, to be responsible for extraction, sorting, and marketing of diamonds. The company was the legal successor to NPO Yakutalmaz, the Almazjuvelirexport Foreign Trade Association, and the sorting division of the State Committee For Precious Metals and Gemstones (formerly Gokhran). The federal government and the Republic of Sakha shared control of the new entity with a 32 percent stake each. The remaining shares were divided among the company employee collective (23 percent), the eight local district authorities in Sakha (1 percent each), and a state pension fund (5 percent). At a July meeting, the company charter was adopted and Valeri Rudakov was appointed president. Yakutalmaz was liquidated and replaced by ARS at the start of 1993.

In August 1993 Andrei Kirillin replaced Rudakov as president. As the former deputy chairman of the Yakut parliament, Kirillin was expected to push for more independence from Moscow than his predecessor. He departed after two years and was replaced by Vyacheslav Shtyrov, the vice-president of the republic of Sakha, who was also likely to promote local control of the diamond industry. Meanwhile, diamond production rose slightly in 1994 for the first time in several years. Overall production, however, was not enough to meet De Beers export quotas, and the lack was made up by shipping diamonds from the stockpile maintained by the state committee Komdragmet (successor to Gokhran). In order to remain viable over the long term, ARS needed to improve production. Its major open pit mines were becoming so deep that the sides would soon start caving in. Investment in exploration led to the discoveries of the Botuobinskaya Pipe in 1994 and the Nyurbinskaya Pipe in 1996, both located in the new kimberlite field of Nakynskoye east of Mirny. But ARS had to ride out several rough years before it would be able to make real progress on its production problems.

Instability and Conflict in the Mid-1990s

The export contract with De Beers was due to expire at the end of 1995. Strained relations with the South African company, as well as disagreements between Moscow and Yakutsk on how to handle exports, caused the contract renewal process to drag on for nearly two years. De Beers was upset because an estimated $1 billion worth of diamonds was being leaked to international markets from Russia, depressing world prices and violating the terms of the 1991 contract. Russia also was accused of picking prime diamonds for the local cutting industry and leaving De Beers with the dregs. ARS president Shtyrov wanted the stability of a De Beers contract, but some industry overseers in Moscow were advocating for Russia to take a more independent route and develop its own diamond cutting and marketing capacities.

As part of the federal/regional conflict, Moscow accused ARS of tax fraud and raided its offices in early 1997. The instability caused international banks to freeze loans that had been granted to ARS. Meanwhile, the existing contract with De Beers was extended a month at a time until, at the end of 1996, De Beers cut off trade altogether. For the first three quarters of 1997, ARS did not export any diamonds. Finally, a one-year trade agreement was signed that October. It was extended for another three years in 1998. At the time, the Asian financial crisis was hurting worldwide diamond sales and ARS was inclined to look favorably on any deal that provided a reliable income. Under the agreement, De Beers would buy at least $550 of uncut Russian diamonds a year, and could buy up to 26 percent of its total sales from the Russian company. ARS was allowed to sell only 5 percent of international exports independently.

In 1998 the Almazy Rossii-Sakha company officially shortened its name to Alrosa Co. Ltd. The company had made some advances in production despite the upheaval of the last few years. In 1997 a technically sophisticated processing plant was put into operation at the Yubileinaya Pipe, where trial operations had first begun a decade earlier. Alrosa also began its first international venture at the Catoca deposit in Angola, one of the richest deposits in the world. Alrosa beat De Beers to win a 40 percent share in the operation and subsequently opened an office in the Angolan capital of Luanda.

In March 1998 Yeltsin signed legislation that codified Alrosa's control of the diamond industry. The legislation had been in the works for years; previous versions had been vetoed or stalled as Moscow used the diamond industry in an attempt to gain more control of the relatively autonomous Republic of Sakha. The final legislation was favorable to Alrosa. It granted the company a monopoly, prohibiting any smaller groups from mining and exporting diamonds. The government would still set export quotas. The law reinforced Alrosa's authority to sell diamonds; before this existing statutes could have been construed to prove that all diamonds were government property.

1999 and Beyond

With the most tumultuous years behind it, Alrosa moved ahead with plans to increase production and expand its activities in the areas of diamond cutting and marketing. The first underground diamond mine in Russia began operation at the Internatsionalnaya Pipe in 1999. The Anabar processing facility also was established that year to extract an alluvial deposit in the far northern city of Ebelyakh. Another new mining complex started on a pilot basis in Nyurba, at the Nakynskoye field, and began full-scale operations after a year. Total production in 1999 was $1.54 billion in rough and finished diamonds, $900 million of which was sold to De Beers. Alrosa reported a profit of several billion rubles, as it had for many years in a row, but 40 to 60 percent of profits was generally paid in taxes.

Alrosa made several advances related to its downstream activities in 2000. That year the subsidiary Brillianty Alrosa was founded to carry out diamond cutting and polishing. Cut diamonds could be worth almost ten times as much per carat as raw stones, so Alrosa was eager to increase exports of polished stones. Brillianty Alrosa opened a factory in Moscow in cooperation with Kristall, the longstanding Smolensk-based diamond cutting company. The factory used the highly regarded "Russian cut," which Kristall had introduced a few years earlier. Whereas diamonds were usually cut to retain as many carats as possible, the Russian cut sliced away all imperfections, with a wasteful yet stunning result. Alrosa opened offices in the diamond cutting centers of London, Antwerp, and Israel in order to develop marketing contacts. It also introduced the "Kristall-ALROSA" diamond brand in late 2001, a logo that would be stamped on all polished diamonds.

Alrosa entered the domestic jewelry retail market in 2000 with the opening of Almazny Dvor, or "Diamond Courtyard," just off Red Square in Moscow. At the grand opening, models walked the aisles wearing diamonds the size of golf balls. But the store's primary market, since Russian consumers were not particularly wealthy, would be small diamonds in the $100-$300 range.

These developments increased Alrosa's ability to market its production independently of De Beers. In the summer of 2000, De Beers had departed from its decades-old strategy of stockpiling diamonds to control prices. Instead, it would seek to increase demand through better marketing. The change raised a lot of questions about what sort of relationship Alrosa would maintain with De Beers once the current contract expired at the end of 2001. In the end, the two parties signed a five-year agreement that allowed Alrosa to market half of its output independently to the domestic cutting industry as well as companies in Israel and India. For the first time, Alrosa itself signed the agreement rather than the government. The deal could not be finalized, however, because it was being investigated by the European Commission for reasons of anti-trust regulation.

In the summer of 2001 open-pit mining stopped at the Mir Pipe because all the easily accessible ore had been extracted. Production was coming to a close at Aikhal and Udachny as well. Construction of underground mines had started at all those sites. Alrosa also was turning its attention to untapped deposits elsewhere in Russia. The so-called Lomonosov deposit had been discovered in the northwest region of Arkhangelsk in 1980. De Beers had started work on the site but backed out in 2000 because the local climate was not favorable to a foreign company. Over the next few years Alrosa acquired a more than 70 percent stake in Severalmaz, the company that had a tender to develop the field. In addition, Alrosa partnered with the Australian company Ashton Mining to explore for deposits in Karelia, the province bordering Finland.

Alrosa president Vyacheslav Shtyrov was elected president of the Republic of Sakha at the end of 2001. Vladimir Kalitin, Alrosa's chief engineer and a longtime employee, was appointed in 2002 to replace him. That year new legislation was passed regarding the diamond industry. Alrosa now was allowed to choose its own buyers and prices, although export quotas would still be set by the government. Alrosa also lost its monopoly as the export market was opened to other producers and diamond cutters.

In 2003 Alrosa finally was able to launch its first unsecured financing in the form of a $500 million Eurobond. The capital would help finance an investment plan that aimed to bring production to $2 billion worth of diamonds a year. The investment in the Angolan mine Catoca had already paid back, since production was much less expensive in Africa's warmer climate. Alrosa signed an agreement in late 2002 to develop the Luo deposit in Angola as well. Domestically, the company was moving ahead with the construction of underground mines and looking to start an open-pit mine at the more easily accessible Lomonosov deposit. Sales in 2003 were expected to reach $1.8 billion, $122 million of which came from polished stones. Alrosa estimated that it had sufficient reserves to maintain production at its current level for another 50 years.

Principal Subsidiaries: Udachninskii GOK; Mirninskii GOK; Aikhalskii GOK; Nyurbinskii GOK; Anabarskii GOK; Center for Diamond Sorting; Brillianty ALROSA.

Principal Competitors: De Beers Consolidated Mines Ltd.; Rio Tinto plc.


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