OAO Alrosa (ALRS), Russia’s state-run mining company, sees buying shares in diamond producers as the best way for investors to benefit from gem prices that are rising for a fourth year.
Rough diamond prices may climb 4 percent this year from the 2011 average of $132 a carat, even as economic turmoil weighs on demand in some developed countries, said Leonid Tolpezhnikov, head of market analysis at Alrosa. Prices rose 32 percent in both 2009 and 2010, and added 24 percent last year.
“Diamonds aren’t truly commodities,” Tolpezhnikov said. “The value of each stone is appraised by independent experts. The result is subjective and unclear for investors. We think buying shares in diamond producers and jewelry houses may become an alternative for mass investors.”
Alrosa has advanced 15 percent this year to $1.10 in Moscow trading, valuing the company at $8.1 billion. Harry Winston Diamond Corp. (HW) has risen 24 percent in New York in the same period. Chow Tai Fook Jewellery Group Ltd (1929)., a Hong Kong-based chain with revenue that exceeds Tiffany & Co. (TIF:US)’s, has dropped 12 percent.
Investors may soon have greater access to Alrosa stock. Its board agreed March 16 that the government can sell 14 percent of the company’s shares in a public offering as soon as first-half results are released under international standards, due in the second half of 2012. The yield on Alrosa’s 2020 dollar bonds dropped 5 basis points today to 6.714 percent.
Global production of the precious stones has reached a “plateau” of about 130 million carats a year, Tolpezhnikov said in an interview in Moscow.
De Beers, Alrosa’s biggest rival, missed its revised output estimate by 5.1 percent last year, mining 31.3 million carats. BHP Billiton Ltd. (BHP) cut its output of the gems by 29 percent last year and Rio Tinto Group reduced its volumes by 15 percent. Both are reviewing whether to retain their diamond operations, with BHP inviting bids for its Ekati mine in Canada and Rio considering disposing of assets including its Argyle mine.
Rather than pursuing acquisitions, Alrosa plans to spend about $3 billion by 2015 developing its Russian mines, Tolpezhnikov said. Most of Alrosa’s open pits date back to the 1970s, and the company needs to make investments to allow underground mining and increase output at newer sites, he said.
“We aren’t interested in buying small or aging mines,” he said.
Zimbabwean diamond production and the release of stones from Russian stockpiles are unlikely to erase the shortfall in supplies, largely due to increasing sales to consumers in China and India, Tolpezhnikov said.
“Those factors can’t help catch up with larger demand driven by an emerging middle class in Asia,” he said.
Zimbabwe started selling stones after gaining approval from the Kimberley Process, which monitors the trade of conflict gems. The Russian government has $1 billion of rough diamonds in storage, purchased from Alrosa after the 2008 financial crisis.
Zimbabwe’s ability to increase sales from last year’s 8 million carats is limited, while Russia has capped potential disposals from its stockpiles this year to less than $300 million, Tolpezhnikov said.
Rough-diamond prices are unlikely to repeat the volatility of last year, when they jumped as much as 50 percent during the year on speculative demand, before retreating to end 24 percent higher, Tolpezhnikov said. Banks are less willing to finance speculators in Europe and India, which should remove “temporary bubbles” from the market, he said.
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