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27.03.2012

PRIME: Analysts optimistic about ALROSA privatization, if government retains major stake

Analysts remain optimistic about the planned privatization of Russian uncut diamond mining giant ALROSA if the government retains a controlling stake in the company. Experts believe that a full withdrawal from the stake will cause significant damage, while a partial privatization will likely have a positive effect on the company.

The federal government currently owns a 50.9% stake in ALROSA via the Federal State Property Management Agency, the government of the constituent republic of Sakha (Yakutia) holds a 32% stake, while the republic’s municipalities jointly own an 8% stake.

A privatization only became possible after the Yakut parliament approved an amendment to the laws governing ALROSA’s operations, which allowed the company to be transformed into an open joint stock company.

The executives of ALROSA supported the decision on the company’s transformation in an effort to improve the transparency of its management, allowing the company to borrow funds at lower rates and list the company’s shares on exchanges at market prices.

After the transformation, ALROSA planned to make an initial public offering (IPO) on a Russian stock exchange and issue additional shares. However, the plans were postponed because of improved diamond market conditions, forcing the company’s management to focus on the privatization program proposed by the government.

Under the plan, the federal government and the government of Yakutia will each offer 7% in the company on the recently merged MICEX-RTS stock exchange and raise a total of about U.S. $1 billion. The federal government will then hold 42.92% in Alrosa, while the republic’s government is to hold 25.00%.

«The privatization will provide the company with the possibility to obtain an adequate market estimate, due to the increased number of investors and free float. At the same time, government influence is to decrease following the entrance of new representatives to the company’s supervisory board,» Metropol analyst Sergei Filchenkov said..

«The listing of shares is expected to stimulate the company’s corporate governance and make it more public. It will also make it easier for the company to borrow funds, as well as raise funds, through share placements,» Otkrite Bank analyst Denis Gabrielik said.

In August 2011, Deputy Prime Minister Igor Shuvalov introduced a plan on the sale of the government’s entire stake in the company by 2017 to Russian President Dmitry Medvedev. The plan envisaged transferring funds raised from the sale of a stake in ALROSA into the development of infrastructure in Yakutia, which is expected to retain its stake in the company, while the federal government is to hold a golden share. However, the plan has not yet been discussed.

«The state will possibly continue with the privatization after the sale of the first stake, but in a way that ensures its control over the company. To fully divulge itself of the stake would only be positive from the point of view of governance and effectiveness. This is unlikely to happen, as ALROSA carries important social responsibilities that, in one way or another, are under government control,» Gabrielik added.

Sergei Goryainov, expert from Rough&Polished, believes that the final parameters of the privatization would be developed under the incoming administration for president-elect Vladimir Putin.

Goryainov said that the idea of the government to fully sell its stake in the company is misguided as ALROSA is required to be both private and state-owned.

«ALROSA was only able to survive the (2008-09 global economic) crisis as result of the government’s support. At the time, the company decided not to reduce production levels, while at the same time selling diamonds to Russia’s State Treasury Gokhran; raising $1 billion in the process. If ALROSA were to become fully private, nobody can guarantee the same support for the company,» Goryainov.

Investment bank analysts remain optimistic about the company’s planned privatization, estimating the price tag of 45 rubles per share as fair.

ALROSA has traded within a non-listed securities segment on the MICEX since November 31, 2011. The shares were traded at 31.85 rubles each as of the March 23 closing.

«ALROSA is currently traded with an 83% discount to analogue global companies under a P/E (price/earnings) ratio and 57% discount under an EV/EBITDA ratio. We believe that the current market value of ALROSA’s shares, which also takes into account lower forecasts for diamond prices, as unfairly low», Metropol analysts said.

Roman Tkachuk, analyst at investment group Nord-Capital, agrees that the current price of ALROSA’s shares is very low -- comparing the company with foreign diamond mining giants Anglo American plc, which controls De Beers, Gem Diamonds, Harry Winston, Petra Diamonds -- saying that the companies are trading much higher.

Tkachuk added that the company trades several times lower than Russian gold mining giants Polyus Gold and Polymetal.

Analysts expect that the first stage of the privatization is to take place sometime in late 2012, or mid- 2013.

Natalia Lesina, head of the analytical department of the ALOR group of companies said, that the markets are overheated and without investment plans. That it is within this context that ALROSA is privatizing now as a number of participants are willing to acquire the company’s shares. However, the company is not prepared for such a rapid privatization program. Furthermore, Lesina does not expect an IPO to take place before late 2012.

At the same time, Oleg Dushin, analyst from Zerich Capital Management, said, «In my opionion, sometime in the winter of 2013 would be a more likely date. That will be an important trial period in the wake of the U.S.’ presidential elections in November. If Barack Obama is re-elected, the U.S. dollar may falter, which may lead to an increased interest in precious metals.

Pavel Yemelyantsev, analyst at InvestCafe, said that the size of the stake to be put up for sale will not have any effect on the company’s value. «The current market capitalization of ALROSA stands at $7.97 billion. The14% stake, planned for sale, is worth $1.12 billion. I think that the company will sell the stake in May 2013. The government may cut its stake in the company to a blocking one. ALROSA operates in the strategic industry sector, which carries a heavy social burden. It wouldn’t be unreasonable that the government opts to voluntarily relinquish control of the company».

On March 16, the supervisory board of ALROSA decided to propose that the government consider retaining a controlling stake in the company, and particularly, that the Russian government and the government of Yakutia retain a 25% plus one share, each, in the company after ALROSA’s privatization.

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