Russian diamond mining giant Alrosa reported significant improvements in revenue and profitability in Q1 2019 as compared to the previous quarter, with the caveat being that their 2019 financial results are lagging far behind the same period a year earlier (Q1 2018).
Q1 is traditionally the strongest month for rough diamond sales as manufacturers need to restock after the holiday season, but first quarter sales in 2019 fell 38% short of Q1 2018 as India’s cutting and polishing industry experienced liquidity problems after local banks toughened loan security and repayment terms. Alrosa's Q1 financial results essentially mirror the major trends of the past year in the rough diamond trade, as the value of global diamond sales from all the major producers declined in Q1 by 19% year-over-year as overall demand for rough diamonds remained subdued and the share of smaller and less expensive rough diamonds increased.
Alrosa's Q1 revenue increased by 15% q-o-q to $1.08 billion (RUB 70 bn), mainly driven by an 18% increase in the volume of carats sold, which rose to 10.6 million carats from 9 million carats in the previous quarter. Rough sales exceeded production by 35% due to increased sales of smaller-size diamonds from inventories as polishers’ restocked early in 2019. Year-over-year revenue declined by 27% owing to a higher share of small-size rough gem diamonds in the product mix and a 21% drop in the volume of carats sold. The average price per carat obtained for gem-quality diamonds declined in Q1 by 19% q-o-q and 20% y-o-y to $123/ct, due to a larger share of small-size diamonds and lower prices achieved for medium-size diamonds. In Q1 ‘19 average price index decreased by 3.1%, mainly due to oversupply in the diamond market, a weaker Indian rupee and limited access to affordable financing for the mid-stream in India.
“Following a sizable destocking of small-size rough diamonds at cutters and polishers in 2H 2018, we saw an improved demand for this product early in 2019," said Alexey Philippovskiy, Alrosa's Deputy CEO. "Better operating performance coupled with continuous cost control helped us maintain EBITDA margin at 44%. In absolute terms, EBITDA grew by RUB 4.5 bn ($69.7 mn) to RUB 31.4 bn ($486 mn). Our free cash flow grew to an impressive RUB 25.9 bn ($401 million, up 81% q-o-q) on the back of capex reduction by 45% q-o-q (-20% y-o-y)."
On the production side of the equation, Alrosa's first quarter diamond output fell 24% qoq to 7.8 m cts, mostly due to a decrease in the output at the International and Aikhal underground mines and the Jubilee pipe. Compared to the same period a year ago, Q1 output was gained 5% driven by an increase in ore processing at the Botuobinskaya pipe, a gradual ramp-up at the Udachny underground mine, the launch of production at the Verkhne-Munskoye deposit and an increase in the output at Severalmaz due to processing of higher-grade ore. Alrosa's production outlook for 2019 remains unchanged at 38 million carats (+1.3 m ct yoy) on continued ramp-up of Verkhne-Munskoye and Severalmaz
The Russian miner also notes that Fitch, a global credit rating agency, upgraded Alrosa's credit rating to an investment grade in March, highlighting the company’s leadership in the global diamond market, stronger financial position and higher transparency. Currently, Alrosa has investment grade credit ratings from three global credit rating agencies.