Going Public, Standing Strong, Heading Down

1. Is Alrosa worth $9 billion? After years of preparation, on Wednesday morning Alrosa announced a free float of up to 16% of its shares. The company already has some shares trading on the Moscow Exchange at a price of about 39 rubbles and rising (once the float was announced the share price started to rise quickly), which places the value of the float currently at about $1.38 billion.

This gives the company a valuation of about $8.6 billion, but because of limited liquidity, the shares are undervalued. A source involved in the float revealed that the company’s valuation is about $9 billion. If the liquidity issues are removed, a target price of 41 rubles is expected.

By comparison, the Oppenheimers sold their 40% stake in De Beers for $5.3 billion, a valuation of $13.25 billion. True, the De Beers Group includes more than mining – there is a 50% stake in De Beers Diamond Jewellers, a stake in Element 6 and more, but mining and selling rough diamonds is the core of the company business. Nicky Oppenheimer, according to some accounts, got a sweet deal. If Alrosa’s shares are still undervalued, De Beers’ (privately held) shares were overvalued, partially due to very high rough diamond prices at the time of the negotiations.

The float is a major event for the Moscow Exchange and an exceptionally large one for the diamond industry where IPOs raised far less. Alrosa is, after all, a well-established and highly profitable firm with huge proven diamond resources. On the downside, it carries a massive $4.3 billion debt. Proceeds from Alrosa’s share of the float, about 2% or ~$173 million, are intended to put a small dent in this debt.

The Russian Federation and the republic of Yakutia, each offering a 7% stake that may generate more than $600 million, intend to invest the proceeds in Yakutia. Russia says it will invest in federal programs such as roads, government housing and airports. Yakutia apparently intends to invest in business development.

What is important for the diamond industry is that a large diamond firm is now open to the scrutinizing eyes of financial firms, which will contribute to the industry’s transparency and the financial markets’ confidence in the industry. After the road show, which is due to visit Moscow, London, New York City and other financial centers, all the major investment houses will have a chance to see up close what the diamond industry has to offer the financial markets. The contribution to the industry is immense.

2. While in Moscow Alrosa is enjoying its growth, in Mumbai, the source of financing for much of this growth, diamond manufacturers are in a less celebratory mood. They recently announced plans to curtail rough diamond buying due to high prices and low profitability. Can you imagine? Indian traders giving up on rough are like living creatures giving up on oxygen. No oxygen, no life. However, exposure to high concentrations of oxygen for long periods can lead to oxygen poisoning – a potentially lethal condition.

The Indian sector is saying that it does not want to suffer from rough diamond poisoning. After the banks placed some limitations on financing rough purchases, the Indian sector took a logical, possibly lifesaving step.

Longer term, if Alrosa’s float is a success, manufacturers may enjoy the ripple effect and see banks more willing to finance the industry, including banks not currently in the game. The lesson is to learn from Alrosa – improve corporate transparency and operating efficiencies.

3. Prayers offered in Mumbai (and Antwerp, Tel Aviv, etc.) are being answered in London. First, more than anything, it’s time for goodbyes this week. On Friday, De Beers will conclude the last Sight to be held in London, ending 100 years of London Sights. The move is trailed by rumors of executive departures and grumbling Sightholders who prefer London to anything in Africa. Gaborone does not seem like the Promised Land to many in the industry. Right or wrong, the move is set and in November, all will meet in Botswana to write a new chapter in diamond history.

Back in London and De Beers’ Sight this week, prices of rough diamonds are lower, answering the prayers of traders everywhere. The reductions are not as deep as those made during the previous Sight; however, the direction is down, where it should head.

4. The diamond sector is proving to be dynamic. Alrosa is starting to privatize, the Indians are taking a stand with a back wind from the banks, De Beers is setting its sails back to Africa and rough prices are cooling. These are all important developments for the industry, moving it forward both in the short and the long-term.

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