Alrosa underpins positive diamond sentiment

[] — MAJOR Russian diamond producer Alrosa has come out with a positive view on the rough diamond market and may be positioning itself for a listing.

That’s the view of RBC Capital Markets analyst Des Kilalea, who commented in a recent research report that Alrosa’s current refinancing programme – along with plans to convert to an open joint-stock company – could be a precursor to a possible listing.

Kilalea said: “Should Alrosa list and De Beers return to the public markets (neither certain), it would be positive for the diamond sector in that it would create a far more investible universe for fund managers.’

He pointed out Alrosa’s results for the six months to end-June provided evidence of a strong recovery in diamond demand and prices, with the group selling $1.93bn worth of rough diamonds.

Kilalea forecast De Beers sales for the six months to June at about $2.5bn. He estimated full calendar 2010 sales at just over $4bn, compared with Alrosa’s full-year sales forecast of $3.3bn for 2010.

He said: “Alrosa sees production peaking in 2015/16 but they believe peak levels are sustainable at least to 2018, slightly more bullish than our research which suggests production declining from 2015.

“It’s likely Alrosa’s models (include) future production from prospective Russian mines which aren’t included in our models.

“Nonetheless, the company expects rough prices could increase by more than 50% in nominal terms over the next seven years as new production fails to keep up with potential demand growth.’

Kilalea pointed out the bullish factor was that the forecast price increase in nominal terms “is from the peak in 2008′.

Kilalea said Alrosa’s outlook confirmed RBC Capital Markets’ positive long-term view on diamond prices. However, he voiced concern over short-term price movements because of volatile financial market conditions and fears of slowing growth in major jewellery markets.

He commented that major producers De Beers, Rio Tinto and Alrosa have all cautioned that the US and Japan economies remain vulnerable, even though China is still growing strongly.

“This could impact on rough diamond prices in the near term, particularly after the rapid recovery from the lows of quarter one 2009.

“We would retain defensive investment positions in the near term in companies with production and no major funding risks,’ Kilalea said.

In separate research, Kilalea has also voiced concern over the possible negative marketing impact on the diamond business of uncontrolled sales of rough diamonds from the Marange alluvial field in Zimbabwe.

That has been the focus of an in-depth study by international non-governmental organisation Global Witness, which is highly critical of state security organisations’ violence on the field against civilians.

Global Witness also condemns the failure of the Kimberley Process (KP) to act on the situation.

The report stated: “Lack of political will on the part of some participant governments, as well as weaknesses in a system in dire need of reform, have left the KP prevaricating in the face of precisely the kinds of diamond-related abuses it is supposed to prevent.’

The great danger is that the pure image of diamonds could be tarnished, leading to a marketing disaster similar to that of the backlash against natural fur products.

The situation in Zimbabwe has been criticised repeatedly by World Diamond Council president Eli Izhakoff, who also indicated in June that various improvements to the KP were being looked at.

A statement concerning the situation in Zimbabwe is expected to be released from the 34th World Diamond Congress now under way in Moscow.