c.2013 New York Times News Service
c.2013 New York Times News Service
MOSCOW — Investors have an opportunity to bet directly on diamond mining, as the Russian government moves to spin off a 16 percent stake in Alrosa.
When shares start trading Thursday afternoon on the Micex stock exchange in Russia, it will provide an opening to a long-cloistered and once highly secretive business.
It will also test an old axiom in the diamond business: that the gems are more plentiful in the earth than their price would suggest and that a cartel is needed to maintain scarcity.
For decades, in a hushed arrangement that began during the Cold War, Alrosa and its principal competitor, De Beers, the diamond company with roots in South Africa, set prices through joint sales agreements. The arrangement ended in 2008, when European Union regulators broke up the global diamond cartel, starting a new era for the industry.
Although per-carat prices vary greatly, overall diamond prices have more than doubled since 2009, according to an index at RoughPrices.com. In this new environment, Alrosa, which mines from large and rich gem deposits in Siberia, hopes to attract private investors, as the only large pure-play diamond business. De Beers is a majority-owned subsidiary of Anglo American, a mining company engaged in many sectors.
“Our company has a unique position on the market,” Yevgenia Kozenko, a spokeswoman for Alrosa, said by telephone before the stock placement. Alrosa priced the shares at 35 rubles, or about $1.09, per common share Monday, at the bottom of its estimated ruble range.
The issue raised $1.3 billion. Although it is not Alrosa’s first offering, it is expected to garner greater attention. Only a tiny number of shares have traded since Alrosa’s initial public offering in 2011, and the volumes have been thin.
Alrosa has long been a mysterious enterprise. For decades it mined a gigantic pit deep in the Arctic that was so rich with gems that at one time it was the single source of about a quarter of the world’s diamonds. These days, Alrosa mines about 34 million carats a year, a volume that only De Beers can rival. De Beers mined fewer carats in 2012, but it still beat Alrosa on revenue, as De Beers’ mines yield higher-grade gems.
Kozenko said a cartel would not be necessary to support diamond prices, given the changing industry dynamics.
“We have lot of hope on India and China, where the middle class is growing and will buy diamonds,” she said.
On the supply side, she added, the rising costs of mining — the barrels of diesel, the gigantic trucks and the salaries for the rough-hewed workers in the Arctic, which are all necessary for finding and extracting the gems — will prevent the market from becoming flooded.
“The reserves are declining,” she said.
But mining analysts say that new technology tends to make everything that comes out of the ground, whether oil or iron ore or gemstones, more plentiful, not more scarce. Over time, they say, that poses a risk to the scarcity notion that underpins diamond prices. Alrosa now mines below the surface and at other, even more remote open-pit sites, which it says highlights its point about rigor and scarcity.
Sergei Donskoy, a mining analyst at Société Générale in Moscow, said, “This argument suggests that every mining company is subjected to the same cost pressures as Alrosa,” adding there was always a chance that the discovery of a major deposit of diamonds could add to the global supply.
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Analysts’ forecasts suggest that diamond extraction will grow at a single-digit pace over the next decade, which would approximately balance the expected new demand from a rising Asian middle class. Contrary to stereotypes, middle-class buyers underpin the business.
“The majority of stones found every year are not those that end up in the crowns of the nobility,” Donskoy said, but rather the small gems found by the thousands that wind up on the engagement rings of working-class women of the United States and Europe.
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Smaller stones found in abundance provide most of a diamond mine’s profits.
With this in mind, Charles Wyndham, the founder of Polished Prices, a company that publishes wholesale polished diamond prices, said by telephone from London, “Our view is that long-term prices remain very positive.”