Regional Gov't Has Backup Plan for Alrosa: up to $1B in Sales to Gokhran

Rough Market
22/01/2020 09:32

The government of Russia’s Yakutia region, a major shareholder in diamond producer Alrosa, has proposed that precious metals and gems repository Gokhran buy $0.5-$1 billion of the firm’s rough diamonds in the event of diminished demand, Interfax news agency reported. Based on reporting from Reuters, the proposal was made to President Vladimir Putin and Russia’s finance ministry, which is responsible for Gokhran within the government, Interfax quoted Aysen Nikolaev, the head of Yakutia region, as saying. The idea of selling rough goods to the Gokhran would only be considered after analyzing Alrosa's first-half sales.

Alrosa's 2019 sales declinesd 26% to $3.274 billion in rough diamonds, more than $1 billion lower than the $4.412 billion sold in 2018. The company's downturn is consistent wih industry averages in a year of macroeconomic uncertainty, elevated polished inventories and decreased demand for rough goods - pushing prices down and causing producers to curtail supply. Despite the government of Yakutia's backup plan, which gives the impression of significant concern for the company, Alrosa said in a statement to Reuters that such a sale would only be undertaken if the market situation deteriorates significantly. The company remains profitable and fully able to meet its social obligations, it said. The miner has said repeatedly it sees the market stabilizing, and reiterated, “Based on the results of the Christmas retail season, we see signs of a revival of demand in the main market and a decrease in midstream stocks,” Alrosa added.

Nikolaev, who also serves as first deputy chairman of Alrosa’s board of directors, told Interfax that “there are different options - from $500 million to $1 billion." He added, “Perhaps it makes sense (for Alrosa) not to sell them [to the market] for several years before demand recovers, but to sell them to Gokhran, as was done in the late 2000s,” Nikolaev said. Gokhran bought diamonds worth $1 billion from Alrosa, which is 33% held by Yakutia and its regions, during years of weak demand caused by the global financial crisis in 2008-2009. If approved by the finance ministry and the government, the proposal would require a sharp increase in Gokhran’s current 2020 budget for purchases, as it is limited to 10.5 billion roubles ($170 million). The Yakutia region, Alrosa’s management and the finance ministry have agreed to review the idea in detail after Alrosa’s first-half sales, Nikolaev said.