Bloomberg News

Lukoil Said to Spend $1 Billion to Open Diamond Mine Next Year

March 15, 2012

The OAO Lukoil headquarters stands in Moscow. Photographer: Andrey Rudakov/Bloomberg

The OAO Lukoil headquarters stands in Moscow. Photographer: Andrey Rudakov/Bloomberg

OAO Lukoil (LKOH), Russia’s largest non- state oil producer, plans to start a diamond mining project next year after investing about $1 billion in a possible challenge to OAO Alrosa (ALRS)’s monopoly, said two people familiar with the matter.

Lukoil would emulate BHP Billiton Ltd., the world’s largest mining company and one of the few to produce both diamonds and oil. The Moscow-based oil company may mine as much as 4 million carats of rough diamonds a year at the Grib pipe in Russia’s northern Arkhangelsk region, once co-owned by De Beers, supplier of about a third of the world’s rough diamonds, the people said.

After the start of production, Lukoil plans to sell the project to a strategic investor such as state-controlled Alrosa, the people said. Alrosa, the world’s largest diamond miner by output, produced more than 34 million carats last year. The oil producer will invest $1 billion in the project before the first stone is produced, one of the people said.

“Diamond mining in Russia is now more profitable than oil,” said Denis Gabrielik, an analyst at Otkritie Capital in Moscow. Alrosa had a 54 percent margin on earnings before interest, taxes, depreciation and amortization for the first nine months of 2011, while Lukoil (LKOH) reported an Ebitda margin of about 14 percent for the full year.

Gleb Ovsyannikov, a Lukoil spokesman, declined to comment. Andrey Polyakov, Alrosa’s spokesman, said no talks have been held with Lukoil about the mine.

To contact the reporters on this story: Ilya Khrennikov in Moscow at ikhrennikov@bloomberg.net; Lyubov Pronina in Moscow at lpronina@bloomberg.net

To contact the editors responsible for this story: John Viljoen at jviljoen@bloomberg.net; Matthew G. Miller at mmiller144@bloomberg.net


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