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Biggest Diamond Miner Alrosa Plans Over $1 Billion Offering

Russia is to offer investors shares in OAO Alrosa, expanding access to the world’s biggest diamond producer as the government seeks to revive asset sales.

A combined 14 percent stake in Alrosa will be sold by the Russian government and the Republic of Yakutia, in the country’s Far East, where its main mines are located, the diamond producer said today in a statement. Alrosa itself will sell about 2 percent of treasury stock, with proceeds used to reduce debt, it said. The stock will trade in Moscow.

The stake in Alrosa, one of the few publicly traded miners focused purely on diamonds, may fetch more than $1 billion, according to Deutsche Bank AG in Moscow. Pre-marketing is set to start this week, two people said last month.

“For a market, $1 billion is quite an acceptable size for investors,” Chief Executive Officer Fyodor Andreev said in an interview with Bloomberg TV in Moscow, when asked why a larger stake isn’t being offered.

Russia is struggling to ramp up an asset sale program aimed at balancing the budget and attracting investment to its financial markets, the cheapest among emerging market peers. The Finance Ministry last week cut its target for budget revenue from sales this year by 86 percent to 60 billion rubles ($1.9 billion), meaning Alrosa may account for more than half.

Photographer: Alexander Zemlianichenko Jr./Bloomberg

Pieces of luxury diamond art jewelry sit on display at the Kremlin Museum during an exhibition by OAO Alrosa in Moscow. Close

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Photographer: Alexander Zemlianichenko Jr./Bloomberg

Pieces of luxury diamond art jewelry sit on display at the Kremlin Museum during an exhibition by OAO Alrosa in Moscow.

Russia will maintain control of Mirny-based Alrosa, which produces a quarter of the world’s diamonds by value and more rough diamonds than De Beers by carat. The sale will be the second major state asset offered this year. VTB Group sold a $3.3 billion stake in May, used to boost the bank’s capital.

Gradual Privatization

“Step-by-step privatization is a very good strategy for all government companies,” Andreev said. “Big privatization will be a big risk as who will be an owner? An oligarch? A foreign company?”

When President Vladimir Putin came to power in 2000, he made a priority of reining in billionaires who made fortunes through privatization deals in the 1990s, responding to widespread resentment in the country. To safeguard resource wealth seen as Russia’s heritage, Putin has put in place legal barriers to keep foreign investors from gaining control of strategic assets.

Alrosa is 50.9 percent owned by Russia and 32 percent by the Republic of Yakutia. The federal and regional governments will each sell 7 percent stakes, adding to the current 9 percent free-float, which includes shares owned by its workers. Municipal districts within Yakutia own 8 percent of Alrosa.

‘Unique Asset’

Goldman Sachs Group Inc. was selected in February to handle the offering. Putin called in January for state asset sales to take place mainly on Russian exchanges.

“The asset is unique and we expect demand to be good,” said George Buzhenitsa, a Deutsche Bank analyst in Moscow.

Alrosa has gained 29 percent this year, while the benchmark Micex Index is little changed and the Bloomberg World Mining Index has plunged to 25 percent. Alrosa advanced 6.2 percent by 12:18 p.m. in Moscow.

Unlike De Beers, which has a diamond-polishing business, Alrosa is concentrating purely on mining, with no plans to diversify into other natural resources or to expand its manufacturing business. The emphasis on mining helps to keep margins high, CEO Andreev said. Alrosa recorded an earnings before interest, tax, depreciation and amortization margin of 40 percent for 2012.

The Russian company produced 34.4 million carats of diamonds last year, surpassing De Beers’ 27.9 million carats. De Beers, 85 percent owned by London-based Anglo American Plc (AAL), had higher sales, posting revenue of $6 billion compared with $4.8 billion for Alrosa.

Gas, Ore

Alrosa’s approach differs from De Beers in that it extracts all available diamonds at its sites, even small stones with industrial applications that fetch as little as $10 a carat, Andreev said. “Why not to do it - it’s money,” he said.

Andreev, 47, has headed Alrosa since 2009 when he joined the company from another state-run enterprise, Russian Railways. A previous spell at Alrosa saw Andreev serve as a vice president in 2002 to 2003.

Alrosa has been sharpening its focus on the precious gems, disposing of assets not related to mining before the stock sale. It agreed last month to sell natural gas assets to OAO Rosneft (ROSN) for $1.38 billion, after divesting control of the Timir iron ore project to Evraz Plc (EVR) in April.

With the world’s biggest reserves of about 970 million carats, Russia will remain Alrosa’s center of production, Andreev said. The company doesn’t see “big opportunities” globally, with the possible exception of Africa, according to the CEO.

Political Risk

Even so, the company is moving “slowly” in Africa, planning to spend about $5 million on geological studies next year, Andreev said. In Russia, that figure is $180 million.

Growth within Alrosa’s operations in Russia is set to help push revenue to $7 billion by 2021 from last year’s $4.8 billion, he said.

“We don’t have political risk,” Andreev said. “Russian political risk is better than in Syria or Africa.”

Andreev said he doesn’t wear the stones himself. “Diamonds are diamonds, for me -- it’s only business. It’s quite an interesting market, quite successful.”

To contact the reporters on this story: Yuliya Fedorinova in Moscow at yfedorinova@bloomberg.net; Ryan Chilcote in London at rchilcote@bloomberg.net

To contact the editor responsible for this story: John Viljoen at jviljoen@bloomberg.net

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