• Miner says demand is recovering, shortages to start after 2019
  • Russian producer may curb output in summer to reduce stockpile

Alrosa PJSC, the world’s largest rough diamond producer, said recovering demand is painting a “bright” outlook for the market even as others in the industry remain more cautious.

"Clouds are disappearing,” Chief Executive Officer Andrey Zharkov told investors in London on Wednesday. The Russian miner, which sold $776 million of diamonds in January and February, expects a balanced market until demand starts exceeding supply after 2019, according to a presentation on its website.

China’s slowdown and an industrywide credit crunch pushed prices down 18 percent last year, the most since 2008. That prompted the biggest producers, De Beers and Alrosa, to choke off supply to bolster prices. While that led to shortages of some stone types and helped boost demand this year, Morgan Stanley and Gem Diamonds Ltd.’s CEO are among those who have warned that it’s too early to say how long the recovery will last.

Alrosa and De Beers sold more gems so far this year than the market had expected. Brokerage Liberum Capital Ltd. has said that prices will probably take at least another year to recover because of large stockpiles, while demand in markets such as China remains subdued.

Diamond Inventories

Alrosa, which held about 22 million carats valued at $2.5 billion in stockpiles at the end of 2015, is targeting output of 34 million to 39 million carats this year under several scenarios, Zharkov said last week. The company, which together with De Beers controls almost two-thirds of the market, may cut production in the summer period to help reduce inventories, Chief Operating Officer Igor Sobolev said today. It may curb production by 5 million carats this year if demand stays soft, he said.

The miner may pay as much as half of its net profit under international accounting standards for its 2015 dividend, even though its policy states that the annual payout only needs to be 35 percent, Chief Financial Officer Igor Kulichik said. In the future, the dividend size may be linked to cash flow rather than net income, he said.

That scenario has been recently discussed by Rosimuschestvo, Russia’s state property management agency, Kulichik said. Russia controls 44 percent of Alrosa, with the republic of Yakutia holding 25 percent and its municipal districts another 8 percent. The government is weighing selling its 11 percent stake this year.

"I really can’t imagine a strategic investor buying the stake," and Russia will probably sell the holding on the public market to a wide range of investors, Zharkov said.

Alrosa may raise funds from selling as many as six non-core assets, including power, this year, according to the presentation. Its full-year results released last week exceeded analysts’ expectations as cost savings helped make up for lower diamond prices.

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