Alrosa hosts Analyst Briefing
Alrosa, the world’s leading diamond mining company, hosted Analyst Briefing. The Company’s management discussed the key industry challenges faced in 2019 and how the Company managed to navigate through them, provided an update on most recent financial performance and progress regarding the implementation of its strategic initiatives,
Managing through the Industry Challenges:
2019 was a challenging year for the diamond industry due to a combination of factors, which resulted in weaker demand for rough diamonds, 1: Excessive inventory build-up at the beginning of 2019 driven by over-optimistic expectations following high demand in 2017/2018, 2: Weaker demand from India’s midstream due to tightening of borrowing terms for manufactures, 3: Increase in share of online sales disrupting traditional marketing channels and approach to inventory management.
To address these market challenges, Alrosa introduced a number of initiatives based on “price over the volume” approach and aimed at maximisation of its free cash flow. The Company adjusted the minimum allowed contract allocation level, decreasing it from 80% to 55%, adhered to prudent supply-side management by reducing production at the highest cost/low margin mines and scaled-down its investment programme.
The diamond industry came out of 2018/2019 crisis year healthier, with balanced stocks, disciplined supply management across the chain, and a more financially sustainable mid-stream segment. However, in the short-term certain headwinds, which are exogenous to the industry such as COVID-19 outbreak, could decelerate demand recovery, which started to materialize in the second half of 2019.
The management’s outlook for the diamond industry remains optimistic in the mid- to long-term, which is supported by expanding demand fueled by the expanding middle class, the continued growth of disposable income and tightening supply.
Overview of FY2019 results:
Alrosa’s 2019 sales decreased by 12% to 33.4 m cts following the implementation of its ‘price over volume’ approach in sales, while Q4 diamond sales increased by 28% q-o-q to 8.2 m cts as the market was gradually turning back into balance.
Revenue from rough and polished diamond sales for FY2019 decreased by 26% to $3,338 m on lower sales volumes and higher demand for smaller stones. 2019 output increased by 5% to 38.5 m cts as the Company was ramping up newly launched facilities, and increasing productivity at existing assets.
Net debt to EBITDA ratio was within the target range and stood at 0.7x. EBITDA margin was 45%, which is twice the industry average. The market in 2019 stress-tested the Company’s ability to generate free cash flow in a tough market environment and in 2019 the free cash flow did not fall below $0.7bn.
Enhance sustainable development and safety at the workplace. Focus on responsible mining:
Safety in the workplace remains a key priority for Alrosa. Prevention programme launched in 2017/2018 to enhance transparency and disclosure of accidents continues delivering tangible results including a significant drop in “serious” accidents in 2019. The management will strive to reduce it further and targets to achieve a zero accident rate in the long term.
The Company retains leading positions by water recycling and CO2 emission among metals and mining companies globally and continues to implement its environmental programme aimed at further reduction of carbon footprint.
Alrosa plans to keep supporting local communities through charitable and infrastructure development initiatives. According to the study, conducted by PWC in 2019, Alrosa tops the list of the companies in diamond and gold mining industries with the highest share of social investments. In 2019, Alrosa was honoured with Community Stewardship from Diamond Empowerment Fund for its social projects.
Focus on operational efficiency programme:
Alrosa continued implementing the operational efficiency programme and achieved a 6% decrease in production costs in 2019 (in real terms). The number of initiatives surpassed 260 projects (187 in 2018) across the entire production chain with a number of them delivering impressive results including 33% production growth at Nyurba division and 68% increase in capacity of Udachny division. The next step is to replicate and scale up those successful initiatives across other divisions and functions of the Company through the launch of Alrosa Production System in 2019, programme aimed to make transformation initiative systemic.
Following the global best practice, Alrosa has also centralised the maintenance and supply management functions and created a shared service centre, both of which are expected to deliver tangible financial results in the near term. The management sees strong potential for further efficiency gains that would help reinforce the Company’s status of the most profitable player in the industry.
The Company is launching the Digitalization Programme aiming to unlock the untapped value of the Company’s best-in-class assets through productivity improvements, efficiency growth and enhanced sustainability and safety of the operations. The Programme is to be launched this year and aims to cover all operations and functions of the business.
Alrosa’s marketing plan involves the launch of a number of marketing initiatives in cooperation with jewellery retailers in USA and China, as well as the support of the regional sales offices in the key markers, promotion of niche product categories of rough diamonds, along with the promotion of the diamonds polished by Alrosa, and development of the digital initiatives.
The Company is currently testing diamond digital twin technology which is anticipated to increase stones turnover and substantially reduce the time and efforts spent on sales sessions. Alrosa is also participating in a number of marketing initiatives implemented under the auspices of the International Diamond Manufacturers Association (DPA) aimed to maintain and enhance long-term demand for natural diamond jewellery, while also drawing a distinction between the natural and synthetic diamond markets.
Maintain a best-in-class resource base:
Alrosa has an excellent resource base which is ~2x the resources of the nearest peer. While keeping stable annual production over the past 10 years, Alrosa has maintained resource base at the same level thanks to superior exploration capabilities backed by modern technologies including complex aero geophysical footage-5, radio wave geointroscopy, georadar footage and high-resolution seismic survey in 3D/2D. In 2019, the Company continued to developing and applying new methods and technologies which allowed replenishing resources at low finding costs.
Prudent capital allocation strategy focused on the maximization of shareholders’ returns:
Despite a challenging market environment, the Company continues diligent implementation of its strategy focusing on core business and adhering to conservative financial policy. In 2019, Alrosa disposed of a number of non-core assets with total proceeds of c.$50 mn.
Sticking to a minimum 20% IRR hurdle rate and taking into account near term demand outlook, Alrosa reduced production at lowest margin mines. The Company has also issued a 5-year $500 mn Eurobond, reducing the cost of debt and significantly extending the average maturity of credit portfolio. Following the new dividend policy approved in 2018, Alrosa distributed 100% of FCF for 1H 2019 as dividends and is committed to delivering superior return to its shareholders going forward.