The state will keep the diamonds – Newspaper Kommersant No. 31 (7476) dated 20.02.2023

As it became known to Kommersant, the authorities of the Russian Federation and Yakutia are going to extend the shareholder agreement of ALROSA, which expires in 2023, for five years on the same terms. The parties that currently own approximately 33% of ALROSA will be required to retain at least 25% plus 1 share in the diamond company. Dividends from ALROSA are an important source of replenishment for the budget of Yakutia, but the company has not paid them since the first half of 2021. According to analysts, there are chances for the resumption of payments already this year, despite the unplanned increase in the severance tax for the company in the first quarter.

The Ministry of Finance and the government of Yakutia are in favor of extending the ALROSA shareholder agreement, which expires this year, both sides told Kommersant. The agreement obliges the Russian Federation and Yakutia to retain at least 25% plus 1 share of the diamond company, as well as to coordinate corporate governance. Now the Russian Federation and Yakutia (through the Ministry of Property and eight uluses of the republic) own ALROSA’s stakes at slightly more than 33% of the shares each, the remaining 34% are in free float.

The agreement provides for automatic renewal for the next five years, unless the parties decide otherwise. The Ministry of Property and Land Relations of Yakutia reported that they support the extension of the agreement on the same terms. The press service of ALROSA stated that the effectiveness of the current shareholder agreement “is confirmed by the historical statistics of good operating results” of the company, and “ALROSA’s management cooperates productively with both major shareholders.”

The shareholder agreement has historically been the result of a discussion between the authorities of Yakutia and the government of the Russian Federation on the prospects for the full privatization of ALROSA with the state retaining only a “golden share”. It was first signed in November 2013 after ALROSA’s IPO on the Moscow Exchange and then extended in 2018. Yegor Borisov, who headed the republic until May 2018, has repeatedly advocated maintaining state control in the company, which provides a significant share of the Yakut budget revenues.

In 2013, Mr. Borisov stated that “the signing of the agreement puts an end to the history of the ill-conceived decision to fully privatize ALROSA.” In 2017, when the sale of 8% of ALROSA (4% each from the Russian Federation and Yakutia) approved by the Russian government in the forecast plan for 2017-2019, Egor Borisov again insisted: “Our 25% plus 1 share is protected by law, so we we do not plan to privatize them, uluses are also tied to the law.”

According to the dividend policy, ALROSA pays dividends based on free cash flow: the share of payments depends on the level of debt, but in any case should not be less than 50% of IFRS net income. The last time the company paid dividends for the first half of 2021 in the amount of RUB 64 billion, the final dividends for 2021 were not paid, as well as the interim dividends for 2022.

Nevertheless, the Russian government found an opportunity to get additional money from the company. In December 2022, the Ministry of Finance prepared amendments to the Tax Code, which increase the tax on the extraction of natural diamonds by ALROSA in the first quarter of 2023 by 19 billion rubles. The company has not yet announced whether it will pay a final dividend for 2022.

“We see a certain probability of ALROSA dividend payments for 2022 and 2023,” says Boris Krasnozhenov from Alfa-Bank. “The company has restored sales volumes, while there is a shortage of rough diamonds in the global diamond market. Supply has fallen 25% from pre-pandemic levels with no prospect of recovery, while demand for polished diamonds has risen by around 10% over the period. The concomitant rise in diamond prices over this period amounted to 25-30%. The largest diamond producers have no reserves.”

According to the analyst, given the growth in diamond prices and the weakening of the ruble, ALROSA can generate significant free cash flow. “You can jokingly call it a three-figure company: revenue of $4 billion, EBITDA of $2 billion, net income of $1 billion. These are the average historical financials of the company over the cycle,” he comments.

ALROSA now does not disclose data on sales volumes and prices, but the market dynamics is positive, Mr. Krasnozhenov notes. “If we talk about dividend payments for 2022, then, according to our estimates, ALROSA’s dividend yield could be 6–8% even after adjusting free cash flow for a one-time payment of increased MET in the first quarter of 2023 in the amount of RUB 19 billion,”— specifies the analyst. The question of how much of the company’s net cash flow will be used to pay dividends, he adds, remains open.

Evgeny Zainullin; Nikolai Borisov, Yakutsk