Almazy Rossii-Sakha Co., Ltd. Asgnd BB- Rtg By S&P.
The rating reflects the company's strong position in the relatively entrenched world rough diamond-gem industry, good reserves, and relatively healthy capital structure. This, however, is largely offset by Alrosa's lack of financial liquidity and difficult operating conditions -- partly reflecting the geographical location of the mines and partly the challenging operating environment in Russia. The two main owners of Alrosa are the Russian Federation and the Republic of Sakha, with 32% each. Alrosa's ratings are not constrained by the ratings on the Russian Federation itself.
Difficult operating conditions are mainly the extreme weather conditions and the extreme remoteness of the mines, which are situated in eastern Siberia just below the arctic circle. Alrosa is lagging behind its South African competitors in terms of operating margins and financial strength due to higher costs and lack of investments in the past five years.
These negative rating considerations are somewhat mitigated by Alrosa's strong reserves of good quality diamonds (although unverified by third parties), and the company's access to foreign currency through its export sales. Of particular importance is Alrosa's relations with De Beers, the South African diamond producer, which dominates the wholesale rough gem industry worldwide through its powerful marketing channel for diamond rough gems, the Central Selling Organization (CSO). In October 1997, Alrosa and De Beers signed a one-year contract under which De Beers will buy diamonds from Alrosa for an amount that should represent approximately 40% of Alrosa's sales in that period. Ratings assume that the contract with De Beers will be extended at the end of 1998.
Financially, Alrosa is characterized by favorable operating margins (between 50%-60% before depreciation) and relatively conservative financial policies. These are counterbalanced on the negative side by a severe lack of capital expenditure over the past decade, and a punitively heavy tax burden (in excess of 50% of sales in 1996). In 1997 fiscal pressures combined with lower exports (as negotiations with De Beers were slow to be completed) to create a serious liquidity problem that Alrosa solved by deferring wage payments. While financial flexibility is limited, Alrosa maintains a stock of diamonds that could be used as a source of liquidity. However, the liquidity issue is expected to improve since the De Beers agreement is now in place and Alrosa has access to better working capital facilities from international banks to cater for its seasonal financial needs. Tax reforms in Russia are also expected to improve Alrosa's net margins in the medium term. Sales in 1996 amounted to US$1.6 billion, and at Dec. 31, 1996, Alrosa's debt-to-capital ratio stood at 20%. ---CreditWire
CONTACT: Olivier Beroud, London (44) 171-826-3508
Lars Bjorklund, Stockholm (46) 8-440-5915
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|Date:||Dec 9, 1997|
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