Where does Russia stand in terms of diamonds?

Russia ranks first in the world in terms of proven diamond reserves and is a leader in physical volume of production and exports. Diamond mining is carried out in Yakutia and the Arkhangelsk region. AK ALROSA (PJSC) accounts for about 90% of diamonds mined in the Russian Federation. In terms of explored reserves and forecast diamond resources, the Arkhangelsk region ranks second in the Russian Federation – 14,4% – after the Republic of Sakha (Yakutia) – 85,6%. Severalmaz’s share in rough diamond production in the ALROSA group is 11%. Diamond deposit named after. M.V. Lomonosov is a unique discovery for the Arkhangelsk region and for the European North as a whole. Only the explored reserves of the deposit, which is being developed by PJSC Severalmaz, a subsidiary of AK ALROSA, are estimated at 154 million carats! The deposit is located in the Primorsky district of the Arkhangelsk region, 100 km north of the regional center of Arkhangelsk. The deposit includes six kimberlite pipes located in an almost even chain from north to south over a distance of 9,5 km. In terms of the totality of mining and geological characteristics, it has no analogues in the world. Today, PJSC Severalmaz is the largest mining enterprise in the Arkhangelsk region for the extraction and processing of minerals. Industrial diamond mining at the Lomonosov Mining and Processing Plant has been carried out since 2005 by open-pit mining in the quarries of the Arkhangelskaya and Karpinsky-1 pipes. The deposit’s pipes are dominated by gem-quality and semi-jewelry quality diamonds (up to 80% of the mass of mined raw materials), the amount of industrial diamonds is 17–20%. The main objects of LGOK are quarries, an enrichment plant, a gas-diesel power plant, an industrial site, a mechanical repair shop, a rotational camp, etc. LEVEL OF TECHNICAL EQUIPMENT OF FACILITIES. APPLICATION OF THE LATEST TECHNOLOGIES AT EXPLORATION AND PRODUCTION FACILITIES Mining operations are carried out using the classic open-pit method, without the use of drilling and blasting, using hydraulic excavators with a bucket volume of 7 to 15 m 3 . For auxiliary work and ore warehouses, excavators with a bucket capacity of 1 m 3 to 5 m 3 are used. The rock extracted from the quarries is transported by BelAZ-75473 dump trucks (with a carrying capacity of 45 tons), SAT 740V (39,5 tons), BelAZ-75581 (90 tons) and SAT 777 (91 tons) to waste rock dumps, and the ore is transported to warehouses. The ore is shipped to the processing plant. Bulldozer equipment is used to form warehouses and dumps. The ore is processed at a processing plant, which includes two technological lines (1 line with a capacity of 1 million tons of ore per year, 2 line with a capacity of 3 million tons of ore per year). The enrichment technology is at the level of world standards. 2020 – IMPACT OF THE PANDEMIC The coronavirus pandemic has had an extremely negative impact on our production, as well as on the entire world and society as a whole. The entire diamond industry experienced specific changes in 2020, with sales dropping significantly. Accordingly, in connection with this we were forced to reduce the production program. Compared to the previous period, the program was reduced by half. Today this program has been completed, which confirms the correctness of our calculations: this is the volume of mined diamonds that was sold this year. We are focusing on the same mode of operation in the near future. We hope that in 2021 the diamond market will recover and the company’s work will return to its usual rhythm. TRAINING PROFESSIONAL STAFF FOR MINING AND PROCESSING ENTERPRISES As in many mining and processing enterprises, PJSC Severalmaz periodically experiences a shortage of qualified professional personnel in specialized specialties, and for certain positions there is not so much a quantitative, but a qualitative shortage of workers. Therefore, one of the priority areas of Severalmaz’s personnel policy is working with institutions of higher, secondary technical and primary vocational education that train specialists in the company’s core specialties. Among our partners: Northern (Arctic) Federal University named after M.V. Lomonosov, Russian State Geological Prospecting University named after Sergo Ordzhonikidze, St. Petersburg Mining University, Murmansk Arctic State University, Ural State Mining University, Irkutsk State University, Russian Academy of National Economy and public service under the President of the Russian Federation, M.V. Lomonosov Moscow State University, National Mineral Resources University “Mining”, NUST MISiS, St. Petersburg State University of Telecommunications. prof. M. A. Bonch-Bruevich, Technological College of Emperor Peter I, Arkhangelsk Polytechnic College, Onega Industrial College, Miass Geological Exploration College, etc. PJSC Severalmaz actively cooperates with training organizations and educational institutions in the areas of training workers in blue-collar professions and in additional educational programs, in advanced training courses and at seminars; training in retraining and higher education programs, organizing and conducting internships for students; providing social support to students studying under targeted admission conditions with employment prospects. Thanks to the initiative of the Company’s management with the active assistance and financial support of Severalmaz on the basis of the Northern (Arctic) Federal University named after. M. V. Lomonosov started training in a new specialty of higher education “Open-pit mining”, and for about 20 years the department has been successfully developing in the same profile, the training center “Mining” was opened, which trains specialists for mining enterprises in the region in working professions related to mineral processing. The second priority direction of the Company’s personnel policy is focusing on its own personnel, trained at the enterprise’s Training Center. On-the-job training, due to its practical orientation and close connection with production functions, is optimal for developing the skills required to perform production tasks. Russia is the largest diamond-mining nation. Against the background of the position of the main oil and gas exporter, this often remains in the shadows. The status of the “global gas station” forces the authorities and society to remember other industries only in times of crisis. Revenues from diamond mining amount to billions of dollars, but the Russian industry works in an extremely straightforward manner: mined and sold abroad. The country has practically no manufacturing industry of its own, and the Russian monopolist Alrosa is not able to compete with direct competitors on the world market. The multifaceted problems of the “precious industry” are in the material of Lenta.ru. The exploration, mining, processing and sale of diamonds in Russia is actually carried out by one company – Alrosa, which accounts for about 95 percent of all diamonds mined in Russia. In 2013, the company conducted an initial public offering of shares, it was valued at 257,7 billion rubles. De jure the company is private, de facto the main owners of Alrosa are government agencies. The federal government accounts for 33 percent of the company; 25 percent plus one share (blocking stake) belongs to the government of Yakutia; just over 8 percent is divided between the administrations of the regions of Yakutia; the remaining 34 percent are publicly traded on the stock exchange.

Very sharp eye

The company is run by Sergei Ivanov Jr., the son of the former head of the Russian Presidential Administration Sergei Ivanov, who has now faded into the shadows of environmental issues. Before Alrosa, Ivanov Jr. did not work in the diamond mining or related industry; his track record includes the investment subsidiary of Gazprom, Gazprombank, SOGAZ, Rosselkhozbank. Russian Prime Minister Dmitry Medvedev appointed Ivanov Jr. to the post of president of Alrosa on March 6, 2017. The contract with the top manager was concluded for three years. Ivanov, in turn, promised the prime minister to increase the company’s reserves, increase diamond production, get rid of non-core assets and modernize production. In February, Ivanov told Russian President Vladimir Putin about his production successes. “The company reached a record level of diamond production at the end of 2017. This volume was last recorded in 1990. We have mined almost 40 million carats of diamonds,” said the head of Alrosa.

Focus failed

EBITDA is earnings before interest, taxes, fees, depreciation and amortization. The indicator records how successfully and efficiently a business operates. The indicator is useful to evaluate companies in the same industry that have different ownership structures. One of the most important indicators for investors and shareholders who decide to invest in a company. However, the record level of production did not have a positive impact on the company’s financial results – the 60th anniversary year for the Russian diamond giant turned out to be anything but festive. The state-owned company’s profit in 2017 fell 1,7 times, to 78,6 billion compared to 133,5 billion rubles a year earlier. EBITDA decreased by 28 percent and amounted to 127 billion rubles. The company explained the gloomy financial performance by the strengthening of the ruble exchange rate and a decrease in the average price of jewelry diamonds sold on world markets. Production in 2017 could have been even higher if not for the accident at the Mirny Mining and Processing Plant (GOK). The incident occurred on August 4, 2017, when water broke into the mine and flooded it. At that moment, there were 151 people below, 142 of them were rescued on the same day, the next day another miner climbed out of the destroyed mine. For eight people, “Mir” turned out to be a mass grave. According to the conclusions of Rostekhnadzor, the accident was caused by violations of design solutions and industrial safety rules. “Mir” is the oldest mine of the state company; in fact, Alrosa was born from it. A kimberlite pipe was discovered in the west of the Yakut Autonomous Soviet Socialist Republic back in 1955. After the discovery of the first diamonds, exploration geologists sent an encrypted radiogram to management: “We lit a pipe of peace, the tobacco is excellent.” Within two years, industrial mining of precious minerals began at the deposit. In 2016, the mine accounted for less than 9 percent of Alrosa’s diamond production, or about 3 million carats a year. The accident cost Alrosa 10,2 billion rubles. As a result of the investigation, the director and chief engineer of Mir were fired. In 2018, the company will not be able to repeat the successes of 2017 – diamond production is projected at 36,6 million carats, a decrease amounting to the same share that Mir gave to the company. The head of the Alrosa sales directorate, Evgeny Agureev, said that in 2018 the company will try to increase production at other fields. The state-owned company does not intend to give up its position in the sale of diamonds, therefore, contrary to the promise to the Prime Minister, the company will liquidate its own reserves. At the end of 2017, Alrosa’s reserves were estimated at 18 million carats. Agureev calls the volume of reserves at the level of 12-14 million carats “comfortable”; in 2018, the company intends to sell about 4 million carats from its own reserves.

Until better times

Unkept promises, however, had a good impact on the capitalization of the state-owned company – since the beginning of the year, Alrosa shares have grown from 77 rubles in early January to a level of 94 rubles, close to the historical maximum. At the time of writing this material, the company’s capitalization reached 636 billion rubles. The company’s dynamics please the market, however, with such high stock market indicators, the Russian authorities still refuse to privatize the diamond company. Materials on the topic: They let us down. They got off the oil needle and built socialism. Russia has a lot to learn
March 6 2018 The formal reason for this is the same accident at the Mir mine. In January, Deputy Finance Minister Alexei Moiseev said that privatization of the state-owned company in 2018 was out of the question. This issue faded into the background after the accident and “before selling something to investors, we need to figure out what will happen to it,” he said. Deputy Prime Minister and Presidential Plenipotentiary Representative in the Far East Yuri Trutnev used similar arguments in February. Thus, the government’s promised sale of 8 percent of the diamond giant is again postponed indefinitely. The head of the company, Sergei Ivanov Jr., assured that Alrosa will not abandon the mine, on the contrary, it will begin to restore it. However, it will be possible to begin production at Mir only in 2022-2024. “In our understanding, this is at least 5-7 years before the start of production. Everything will depend on the design decision. It is important for us not to repeat the mistakes that were made during the design in the 2000s, so we are in no hurry,” Ivanov said.

Three Fat Men

The diamond industry is based on three pillars: Alrosa, De Beers (the South African subsidiary of Anglo American with formal registration in London) and Rio Tinto. They account for approximately 70 percent of all diamonds mined in the world. The Russian company’s share is about 28 percent of global production. Alrosa is the world’s largest producer of diamonds by carat, but is second to De Beers in terms of revenue. It is believed that African raw materials are on average cheaper than Russian ones; moreover, production costs in Africa are not as high as in Yakutia, where it is necessary to deal with groundwater and permafrost. The main market for diamonds is the United States, which accounts for 45 percent of all diamonds mined. China is in second place with a share of 15 percent, followed by India (8 percent). It’s worth mentioning separately about De Beers – at the beginning of the 90th century, this company was literally a monopolist of the world diamond market. The corporation squeezed out competitors in every possible way: from buying up direct competitors to putting pressure on those who disagree. De Beers was not shy about taking advantage of its monopoly position, throwing tons of diamonds onto the market to squeeze competitors out of the market, and then buying them back at a reduced price in order to resell them at a higher price. However, the development of antitrust legislation and support for competition forced the South African company to reduce its share and follow the rules. As a result, De Beers’ share of the global market has fallen from 1980 percent in 38 to XNUMX percent today. The foreign diamond giant’s revenue in 2017 fell by 4 percent to $5,8 billion (versus $4,7 billion for Alrosa). A year earlier, De Beers earned $6,1 billion, while the company managed to increase its own efficiency – EBITDA for 2017 increased by 2 percent and amounted to $1,43 billion (2,2 billion for Alrosa). The average price of the South African company’s diamonds was $162 per carat, compared to $187 in 2016. In 2017, a Russian company sold one carat for an average of 6058 rubles ($105,77); in 2016, the state-owned company sold a carat of diamonds even cheaper – 5596 rubles. In 2017, De Beers increased its diamond production by 22 percent, to 33,45 million carats. The company plans to continue this trend in 2018, increasing production to 34,6 million carats worth $5,7 billion. The corporation expects an increase in demand for diamonds against the backdrop of global economic growth. In addition to high incomes, diamond giants are significant taxpayers for states. Due to the complex structure of De Beers’ work around the world, it was not possible to trace the company’s tax payments. What is known is that in 2016 the company increased its interest payments to “governments, communities, supply chain and joint venture partners” in Botswana, Canada, Namibia and South Africa by 26 percent, to $5 billion. This amount includes taxes, payments for goods and services and dividends. The Russian state-owned company cannot boast of such indicators. At the end of 2017, Alrosa paid 66 billion rubles in taxes to the budget of Yakutia. Dividend payments to the federal and regional budgets amounted to 22 billion rubles each, for a total of 110 billion rubles, or about 1,9 billion dollars. And this despite the fact that the EBITDA of the Russian company is higher than that of its South African competitor.

Unable to sell

Until 2017, the diamond industry was one of the most problematic in the world in terms of organizing a sales network. Diamonds can easily be compared to other typical exchange products – oil, gas, gold, and so on. All these goods are sold on centralized trading platforms – exchanges. The development of competition and the geographical diversity of the market has led to the fact that for most traditional goods exchanges have been working for decades; with diamonds it is a completely different story. The monopoly position of De Beers in the market until the end of the 80s of the 2017th century did not allow the creation of institutional trading in diamonds: all contracts were concluded directly with the mining company, and De Beers itself dictated terms that were favorable to it. A similar scheme worked until XNUMX – the largest diamond mining companies worked directly with intermediaries. In 2017, India, the largest diamond processing hub on the planet, launched the world’s first diamond futures trading on the Indian Commodity Exchange (ICEX). Initially, the trading platform launched trading in futures for diamonds weighing 1 carat, with plans for 0,3 and 0,5 carats. The exchange is still too young, so market leaders still sell most of their diamonds the old-fashioned way – by entering into medium- and long-term contracts directly. Materials on the topic: Russia got fed up with Belarusian milk. Lukashenko is furious
March 13 2018 For example, Alrosa sells almost half of its diamonds in Belgium at the Antwerp World Diamond Center (AWDC) – this is an analogue of an endless exhibition where everyone can get acquainted with the products of different diamond miners. Fairs, conferences and forums of the diamond mining industry are also held here. Bidding for top stones is carried out in the format of auctions, contracts for large deliveries are concluded in meeting rooms. The main cutter on the planet (India) accounts for about 17 percent of the Russian company’s sales, another 11 percent to Israel, and Alrosa sells only 10 percent in Russia. In 2017, the company generated approximately $4,2 billion in rough sales and less than $100 million in polished sales. In addition to long-term contracts, the Russian company sells raw materials on the spot market, and valuable and unique stones at auctions.

Without a single edge

Russia occupies a tiny share in the global diamond cutting market – only 3-4 percent, losing out to competition from the huge Indian industry. Jewelers in India process 12 of the 14 diamonds sold in the world. The secret of Indian success is not only in the traditions of jewelry making and the gigantic local market, but also in the availability of cheap labor. Until 2018, Russian cutters worked with Alrosa on a common basis. With foreign ones, it turned out that Russian companies did not receive any priority over foreigners when selecting rough diamonds. According to Reuters, Alrosa now has 65 regular buyers (of which only eight are Russian) for jewelry and industrial diamonds, contracts with which are concluded for three years. In January, the supervisory board of Alrosa obliged to increase supplies of rough diamonds weighing more than one carat to Russian cutting enterprises. The decision was made with the participation of Finance Minister Anton Siluanov, who heads the supervisory board of the state-owned company. Also, to develop the diamond cutting industry, Alrosa allowed cutting companies to pay up to 75 percent of the cost of diamonds in installments for six months. Previously, this share was 50 percent – companies often did not have time to complete the work and sell the product; the new rules should help domestic cutters. The key lobbyist for expanding the rights of cutters on the Russian market is another state-owned enterprise – the Crystal cutting company, which is 100 percent owned by the state. This company accounts for about 40 percent of all Russian diamonds. Deputy Finance Minister Alexei Moiseev admitted in March that the state would go ahead with the privatization of Kristall, but the official did not talk about the timing or volume of the placement. Of course, Alrosa is showing interest in the main cutting enterprise in Russia.

Open the showcase

With an eye on the giant Asian markets, in September 2016, Alrosa opened its own trading platform in Vladivostok – the Eurasian Diamond Center (EDC), which includes stands for cutting enterprises, exhibition halls and offices, customs posts and Gokhran enterprises. The simplified customs and visa rules of the free port of Vladivostok facilitate the acceleration of purchase and sale transactions of rough and polished diamonds. The most expensive diamond sold in Vladivostok cost 752 thousand dollars. Last year, the company sold $72 million worth of rough and polished diamonds at the EAC, and the plan for 2018 is to sell $80 million worth of products. Foreigners have flocked to the diamond cluster in the Far East: last fall, the Indian company KGK Diamonds launched a cutting plant in Vladivostok with a processing capacity of 15 thousand carats of diamonds per year.

Vulnerable industry

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March 11 2018 In 2018, the growth in demand for diamonds will be between two and four percent. The main growth drivers will be the US and Chinese markets. At the same time, global diamond production in 2018 will decrease by 3,4 percent against an increase of 11,7 percent last year. Industry giants will have to clear up their reserves if they expect to maintain market share and grow profits. The Russian industry should better insure its own risks – the accident at the Mir mine could not have been a big surprise for the company: the mining and processing plant has been operating for more than 50 years, accordingly, the company must calculate such outcomes. The government should probably reconsider privatization plans while the company’s shares are at record levels. Positive changes are taking place in the diamond cutting market, which are contributing to the development of the industry, but their implementation is taking a very long time – at the current pace, Russia will not soon become a competitor to India in the cutting market.