Alrosa Offers 35% Dividend Drawcard in Diamond Share Sale

OAO Alrosa pledged to pay at least 35 percent of net income as dividends as the world’s largest diamond producer seeks to attract investors to a share sale valuing it at as much as 280 billion rubles ($8.7 billion).

Alrosa set the price range for its planned share sale at 35 rubles to 38 rubles apiece, with the final level to be announced on Oct. 28, the diamond miner said today in a statement. The Russian government and the eastern Republic of Sakha (Yakutia), where the monopoly’s main mines are located, are selling a combined 14 percent stake, while Alrosa will offer about 2 percent in treasury stock.

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 forecasts budget revenue from sales this year of about 52 billion rubles.

“The company will be able to sell shares within such a price range only if it has anchor investors,” Kirill Chuyko, head of equity research in BCS Financial Group, said by phone. “The price range is set high, while we expected the company to offer a discounted 32 rubles to 33 rubles a share, as Alrosa has no track record and isn’t well-known to investors yet.”

Alrosa rose 1 percent to 35.145 rubles by 2:27 p.m. in Moscow trading. Within the past month, the shares jumped as much as 19 percent to an almost two-year high of 38.79 rubles on Oct. 2. Billionaire Suleiman Kerimov, who owned from 1 percent to 2 percent of Alrosa, sold his stake on the market about a month before the share offer, Vedomosti newspaper reported today, citing people it didn’t identify.

Dividend Boost

To attract investors, Alrosa’s supervisory board pledged to distribute no less than 35 percent of net income in annual dividends starting from payments for this year.

One near-term concern related to a higher dividend payout could be that it signals that demand from investors for the offering isn’t as strong as initially thought, which could put some pressure on the stock after the sale, George Buzhenitsa, a Deutsche Bank analyst, said in a note today.

In the longer term, Alrosa may be an interesting investment, BCS Financial’s Chuyko said, as gains in demand outstrip supplies of the gems.

Rough diamond prices will increase because supply is expected to expand at a compound annual rate of 2 percent, while demand is expected to grow 5.1 percent in the next 10 years, consulting firm Bain & Co. said in a report on diamonds.

Attractive Investment

“Alrosa’s decision is aimed at increasing the investment attractiveness of the company,” First Deputy Prime Minister Igor Shuvalov said of the dividend policy in a separate statement. Russia’s government won’t sell additional stock in the company for at least 180 days after the share sale, he said.

Russia plans to 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.

State-controlled VTB Capital, acting as a stabilizing manager in Alrosa’s shares sale, may purchase as much as 10 percent of the offered shares within 30 days of the announcement of the offer price, Alrosa said today.

The sale will be the second major state asset offered this year. VTB Group, which owns VTB Capital, sold a $3.3 billion stake in May, boosting its capital and diluting the state’s ownership.

Goldman Sachs Group Inc., JPMorgan Chase & Co., Morgan Stanley and VTB Capital are joint global coordinators and joint book runners of the offering, while Renaissance Capital is a joint book-runner of the offering.

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