Industry News by Nemesis

ALROSA Considers Production Cut in 2016

November 30, 2015

ALROSA may reduce production in 2016 as its rough diamond inventory is at a critical level in a weak market.

 

“Currently, our inventory stands in excess of 20 million carats and increasing inventory further would not be feasible for the company, or it would be difficult economically,” Ilya Ryashchin, ALROSA’s first vice president in charge of finance and economy, said in a call with analysts on November 25. “In case 2016 will not see consumption levels back to normal, we would probably reconsider production volumes.”

 

ALROSA maintained its production in 2015 and is on track to recover 38 million carats even as it has seen sales slump this year. Management previously explained that the company would prefer to raise inventory rather than lower output as the cost of adjusting operations is high.

 

Consequently, ALROSA’s diamond inventory increased from about 14 million carats at the beginning of the year to 17 million carats reported in August and now 20 million carats, which Ryashchin estimated is valued at more than $2 billion.

 

Analysts at VTB Capital viewed the possible production cut as positive but stressed that the mining company’s options are limited given the unit cost implications at its open pit and underground operations. The most likely target will be ALROSA’s alluvial deposits which are more seasonal and contribute about 15 percent of overall production, the analysts wrote in a November 26 note to investors. 

 

Looking to the Market

 

Ryashchin stressed that the company will be looking first and foremost to sell off its inventory in the market as it considers its options for 2016. While he acknowledged the company has the option to sell to the Gokhran state depository, as it has in the past, such a sale wouldn’t be enough to restore ALROSA’s budget.

 

The executive expects the market to stabilize next year although it will take some time to work through the large inventories still evident among diamond and jewelry manufacturers. While ALROSA cut rough diamond prices by 15 percent in the first nine months of 2015, he said it usually takes about 18 to 24 months for prices to rebound.

 

He noted that the price reductions so far have not revived the market and producers continue to focus on constraining supply in an attempt to revive the market. As a result, ALROSA’s November and December sales volume will be very low, at 30 percent to 40 percent below normal levels, Ryashchin said.

 

Revised Sales Forecast

 

VTB Capital expects inventory to increase further as sales could drop 50 percent in the fourth quarter and potentially again in the first quarter of 2016, leaving more diamonds unsold. The analysts expect sales to drop 24 percent year on year to 29.95 million carats for the full 12 months. 

 

ALROSA has revised its sales forecast for this year although Ryashchin declined to say by how much. In the first nine months of 2015, revenue increased 17 percent to $2.6 billion (RUB 172.5 billion), while profit more than doubled to $491.4 million (RUB 32.2 billion), the company reported on Thursday.

 

While the results beat expectations, investors responded to the weak diamond market outlook the company provided. ALROSA shares fell about 3.4 percent to RUB 52.72 a share by Friday’s close on the Moscow Stock Exchange and VTB Capital cut its target price by 19 percent to RUB 72 from RUB 89. 

“Weak sales are set to continue into 1H 2016 as Indian cutters remain under financing pressure while, despite significant inventory drawdown in the past 12 months, stocks held by cutters and jewelers remain ample,” the analysts wrote. “We expect sales to remain under pressure into 2016.” 

 

 

Source: Rapaport

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