position data contained in this Presentation come from official or third party sources believed to be .... ALROSA is a p
Disclaimer
The information contained herein has been prepared for the use in this Presentation (the “Presentation”) and has not been independently verified. Such information is confidential and is being provided to you solely for your information and may not be reproduced, retransmitted, further distributed to any other person or published, in whole or in part, for any purpose. The opinions presented herein are based on general information gathered at the time of writing and are subject to change without notice. Certain industry, market and competitive position data contained in this Presentation come from official or third party sources believed to be reliable but ALROSA does not guarantee its accuracy or completeness. This Presentation contains statements about future events and expectations that are forward-looking statements. Any statement in this Presentation that is not a statement of historical fact is a forward-looking statement that involves known and unknown risks, uncertainties and other factors which may cause the ALROSA’s actual results, performance or achievements to be materially different from any future results, performance or achievements expressed or implied by such forward-looking statements. Past performance should not be taken as an indication or guarantee of future results, and no representation or warranty, express or implied, is made regarding future performance. ALROSA assumes no obligation to update, supplement or revise forward-looking or any other statements contained herein to reflect actual results, changes in assumptions or changes in factors affecting these statements. ALROSA does not intend or have any duty or obligation to update or to keep current any information contained in this Presentation. The diamond resources and reserves estimates provided in this Presentation have been prepared and presented in accordance with the standards and classifications of the JORC Code (the Australasian Code for Reporting of Exploration Results, Mineral Resources and Ore Reserves as promulgated by the Australasian Joint Ore Reserves Committee), which differ in significant respects from the standards and classifications applicable to the disclosure of mineral resources and reserves under the laws and regulations of certain other jurisdictions, including the regulations of the U.S. Securities Exchange Commission (the “SEC”) with respect to registration statements and other documents filed with the SEC. Among other things, in accordance with the JORC Code, this Presentation provides certain mineral resources estimates classified as “inferred”, “indicated” or “measured”, which differ in significant respects from “probable” and “proven” mineral reserves estimates and are not disclosed in certain jurisdictions, including in SEC filings. There can be significant uncertainty as to whether mineral resources can ever be feasibly and commercially mined. For further explanation of the JORC Code, see the JORC website at www.jorc.org. This Presentation does not constitute an offer to sell, or any solicitation of any offer to subscribe for or purchase, any securities. No part of this Presentation, nor the fact of its distribution, should form any basis of, or be relied on in connection with, any contract or commitment or investment decision whatsoever.
The information in this Presentation is subject to verification, completion and change. No representation or warranty or undertaking, express or implied, is made as to, and no reliance should be placed on, the accuracy or completeness of the information or opinions contained in this Presentation. None of ALROSA nor any of its shareholders, directors, officers or employees, affiliates, advisors, representatives nor any other person accepts any liability whatsoever for any loss howsoever arising from any use of this Presentation or its contents or otherwise arising in connection therewith. This Presentation is not directed to, or intended for distribution to or use by, any person or entity that is a citizen or resident or located in any locality, state, country or other jurisdiction where such distribution, publication, availability or use would be contrary to law or regulation or which would require any registration or licensing within such jurisdiction. This Presentation is not for distribution, directly or indirectly, to the public in the United States (including its territories and possessions, any State of the United States and the District of Columbia). These materials are not an offer or solicitation to purchase or subscribe for securities in the United States or any other jurisdiction. Securities may not be offered or sold in the United States absent registration with the U.S. Securities and Exchange Commission or an exemption from registration under the U.S. Securities Act of 1933, as amended. ALROSA does not intend to register any part of any offering in the United States or to conduct a public offering of any of its securities in the United States. By attending a meeting where this Presentation is made or reviewing this Presentation you acknowledge and agree to be bound by the foregoing. 2
Contents
1
Market and Sales Overview
4
2
Market Overview Operations Overview
16
3
Financial ALROSA Overview Performance Overview
24 21
4
3
Market and Sales Overview
4
ALROSA is a global leader in rough diamond production with a strong financial profile ALROSA’s financial results summary Revenue, RUB bn
• ALROSA is a public diamond mining company with a
EBITDA, RUB bn
Free Cash Flow
EBITDA margin, %
34% free-float on the Moscow Exchange
• ALROSA’s production totaled 37.4 mln ct in 2016 representing 29% of global diamond output
317 300 250 200
• Strong financial performance resulting in 41% y-o-y revenue growth to RUB 317 bn, 49% y-o-y EBITDA growth to RUB 176 bn, EBITDA margin of 56% and robust free cash flow of RUB 111 bn
225
207
56% 176
169
53%
150 100
118
111
45% 94 41% 69
42
50
41
17
0 2013
ALROSA’s shareholder structure
2014
2015
2016
Global diamond production
33% The Russian Federation
29% ALROSA
25% The Republic of Sakha
21% De Beers
(Yakutia)
127 mln ct
14% Rio Tinto
8% Yakutian municipal districts 34% Free float
7% Catoca 6% Dominion Diamond Corp 23% Other 5
Rough diamond production is dominated by a few mining companies with the highest margins across diamond pipeline
Rough diamond production
Sales of rough diamonds from major producers
Cutting & polishing of diamonds
Diamond jewelry manufacturing
Retail sales of diamond jewelry
Margins
18‒22%
1‒3%
< 1%
3‒5%
4‒11%
Players
Top 5 players control ~ 70% of the market
~ 100 players
~ 5,000 players
> 10,000 players
Major retailers control ~ 35% of the market
Entry barriers
High
High
Low
Medium
Medium
Source: Company data, Kimberley Process, Euromonitor, AWDC Bain report “The Global Diamond industry 2016”, AWDC Bain report “The Global Diamond industry 2015”, AWDC Bain report “The Global Diamond Report 2014”, AWDC Bain report “The Global Diamond Report 2013”.
6
Global diamond jewelry sales expanded by 4% annually over the past decade and are expected to show mid-single digit growth in the coming years Global diamond jewelry sales grew 4% annually over the past decade $ bn
The Americas and Asia-Pacific comprise 70% of diamond jewelry market
4% per year 80
The Americas
40 Other Asia-Pacific
Japan
Europe
India
0 2006 2007 2008 2009 2010 2011 2012 2013 2014 2015 2016
Global diamond jewelry sales were almost flat in 2016, as growth in the Americas was offset by decline in Asia-Pacific
Driven by macroeconomic indicators diamond jewelry consumption in key markets is expected to grow in mid-single digit numbers
$ bn (9%)
India
Asia-Pacific
40
Europe
The Americas
(3%)
+5%
(1%)
Other countries
(3%)
Japan
+3%
80
USA
(1%) GDP
China Personal disposable income
GDP
Personal disposable income
6.0% 4.2% 2.0%
2.4%
60 0 2015
2016
2017-2021F
2017-2021F
2017-2021F
2017-2021F
Source: IMF, Economist Intelligence Unit 7
Despite production increases announced by mining companies in recent years global rough diamond production has remained relatively flat Global diamond production forecast (based on diamond producers’ plans and life-of-mines periods) mln ct, y-o-y CAGR ~ 4%
~ 0%
135
127
2016F
2017F
Existing mines
2018F
2019F
2020F
2021F
2022F
2023F
2024F
2025F
New mines
Global rough diamond production historical data mln ct 176 169 mln ct
168
163
average
120
128
123
128
130
125
127
127 126 mln ct average
2006
2007
2008
2009
2010
2011
2012
2013
2014
2015
2016F
8
Diamond exploration becomes increasingly challenging
• Approximately 15% of kimberlites discovered are diamond-bearing, with 1% of these typically becoming producing mines • Currently, the search of new kimberlite pipes is complicated due to overburden, all surface kimberlite pipes have already been discovered
• The average time from discovery to production for diamond mines is approximately 6 years
Discovery of new kimberlites is much more challenging now
It takes around 6 years from discovery to start of production at a mine
Development process + dewatering
Kimberlite pipes
Sandstones (overburden)
Host rocks
Discovery-to-production period, years
Aikhal International Jubilee
Development process
I
9
Botuobinskaya Nyurbinskaya Mayskaya
III
II 9m
7 6
6
60 m
6 4
4
Diavik
Ekati
Argyle
Nyurbinskaya
Catoca
Finsch
Orapa
(Rio Tinto / Dominion Diamond Corp.)
(Dominion Diamond Corp.)
(Rio Tinto)
(ALROSA)
(ALROSA/ Endiama / Odebrecht / LLI Holding )
(Petra Diamonds)
(De Beers)
19541956
1960
1969
19741975
80 m
1994 1996
70 m
2006
Year of discovery
9
Rough diamonds market is expected to be balanced in the mid-term, demand is expected to exceed supply after major diamond producers sell off inventories accumulated prior to 2015 Excess inventories in midstream were released in 2015‒2016 $ bn
+2,5
24
(0,4)
+0,7
(0,5)
(3,1)
Polished diamonds produced Polished diamonds exported
12
Inventory accumulation (decrease) 0 2012
2013
2014
2015
2016
Source: Gem Jewellery Export Promotion Council, Company estimates
Global demand and supply imbalance $ bn 20 Rough diamonds demand
Rough diamonds demand: 3% annually
Rough diamonds production Rough diamonds supply including sales from inventories
15
Rough diamonds supply: 4% annually
Rough diamonds sales from inventories
Rough diamonds supply: 0% annually
10 2016F
2017F
2018F
2019F
2020F
2021F
2022F
2023F
2024F
2025F
10
ALROSA’s sales in 2016 and expectations for Q1 2017 reflect normalized market demand ALROSA’s rough diamond sales $ mln
ALROSA’s rough diamond price index under long-term agreements and spot sales +21%
+46%
(20%)
+7%
0%
0%
(15%)
+2%
4,901 4,274
4,450
4,375
4,793 3,437
3,334
+27% 1,325
~ 1,250
1,225
2010
2011
2012
2013
2014
976
849
2015
Q1 2016
Q2 2016
Q3 2016
Q4 2016
2016
Q1 2017F
ALROSA rough diamond sales and production mln ct 2010
2011
2012
2013
2014
2015
Q1 2016
Q2 2016
Q3 2016
Q4 2016
2016
Sales
39.4
32.9
33.2
38.0
39.6
30.0
12.1
9.6
8.3
10.1
40.0
Production
34.3
34.6
34.4
36.9
36.2
38.3
8.2
8.7
11.0
9.5
37.4
5.1
(1.7)
(1.2)
1.1
3.4
(8.3)
3.9
0.9
(2.7)
0.6
2.6
Sales above/(below) production
11
Gem-quality diamond sales account for 71% of total sales volume and 98% of sales value
2016 diamond sales breakdown
by sales volume
Gem-quality (more than 0.03 ct or more than 1.5 mm)
by sales value
71% 98%
Industrial (less than 0.03 ct or less than 1.5 mm)
29% 2%
12
Rough diamonds are sorted by size, shape, clarity and color into 204 boxes
Rough diamonds are sorted by size, shape, clarity and color into 8,013 classification positions…
26 sizes
16 shapes
5 clarity categories
34 colors
…which are combined to form 204 rough diamond boxes ready for sale 5-10CT Stones & Shapes Yellow
5-10CT Black Makeable White
5-10CT Rejections Brown
13
ALROSA has a diverse distribution platform by channel and geography
Rough diamond sales by channel 69% Long-term contracts 15% Spot sales
Geography of sales 49% Belgium 17% India
11% Israel
16% Tenders 10% Russia 6% UAE 4% China
3% Other
• ALROSA has a three-channel distribution strategy focused on long-term contracts, tenders and spot sales
• Currently ALROSA has 69 clients under long-term contracts, including 57 for gem-quality diamonds, with committed volumes and assortment
• Long-term clients are selected based on their financial position, reputation and track record
14
ALROSA has a rigorous client management policy which has increased diversification and number of clients across all sales channels
Approval of clients subject to:
•
Number of clients by sales channel
appropriate legal capacity
•
sustainable financial position
•
track record in diamond business
•
sufficient level of solvency
Sales diversification conditions:
2010
2016
Change
Long-term contracts
15
69
+54
Spot sales and tenders
176
712
+536
Total number of clients
191
781
+590
•
no more than $20 mln per month per client
Average monthly sales per client, $ mln
1.45
0.47
(68%)
•
no more than 5% of total monthly sales per client
Top 5 share in total sales
24%
18%
(6)pp
15
Operations Overview
16
ALROSA’s diamond production is well-diversified between divisions and types of mining Geography of production assets 33%
Aikhal Division
18%
Nyurba Division Nyurbinskaya pipe Botuobinskaya pipe Alluvial deposits (2)
94%
6% Arkhangelsk Region
12.2 Aikhal pipe Jubilee pipe mln ct Komsomolskaya pipe
21%
Russian Federation
Mirny Division Mir pipe International pipe Alluvial deposits (3)
Republic of Sakha (Yakutia) 8%
ALROSA owns 32.8% of Catoca Ltd (Angola) • •
Production 6.7 mln ct Grade 0.69 ct/t
51%
Share of open-pit mining from 8 mines in 2016 production
30%
Share of underground mining from 4 mines in 2016 production
19% Angola
3.2 mln ct
Almazy Anabara
3.4 Alluvial deposits (5)
5%
7.8 mln ct
Udachny Division Udachny pipe Zarnitsa pipe Alluvial deposits (1)
9%
6.8 mln ct
mln ct
Nizhne-Lenskoe Alluvial deposits (4)
1.8 mln ct
Share of alluvial mining from 15 alluvial placers in 2016 production
1,030 mln ct
Total resources, including reserves
653 mln ct
Total reserves
6%
Severalmaz 2.2 Arkhangelskaya pipe mln ct Karpinskogo-1 pipe
17
ALROSA’s diamond pipes vary by average diamond price and grade with underground mines being at the top-end of revenue per ton range Range of average mined diamond value
Range of average mined diamond grade 7.96
$/ct
189
ALROSA total
ct/t
5.36 4.27 3.34
129
126
111
ALROSA total
112
86 0.98
42
1.01 0.43
Alluvials
Open-pit mining
Underground mining
Aikhail Mir International underground underground underground mine mine mine
Alluvials
Open-pit mining
Underground mining
Mir Aikhail International underground underground underground mine mine mine
Value of ton of ore range International underground mine
$/t
~1,503 $/t
Aikhal underground mine
Mir underground mine
Underground mining
~538 $/t
~432
Open-pit mining
$/t
~226 $/t
ALROSA total
Alluvials
~113 ~37 $/t
$/t
~109 $/t
t
18
Cost of underground production per carat is close to open-pit mining due to higher grade at underground mines
• Underground mining cost of production per ton of ore is 5 times higher than open-pit mining cost of production
• Due to the fact that underground mining average grade is higher vs. open-pit mining, underground mining cost of production per carat is close to open-pit mining
Cash cost of production per carat
Cash cost of production per ton of ore
Underground mining
Underground mining
$/ct
$/t
~38 ~161
Open-pit mining
$/t
~35 Alluvials
$/t
ALROSA total
$/ct
ALROSA total
Alluvials
~36
~35
Open-pit mining
~36
$/ct
$/ct
$/t
~35 $/ct
~15 $/t
t
ct
19
ALROSA plans to continue increasing diamond output to over 40 mln ct in the medium term
2016
2017F
2021F
Grade, ct/t
0.98
0.98
1.00
Ore and gravels processed, mln t
38.1
39.9
40.6
Production, mln ct
37.4
39.2
40.4
2.2 2.2 -
3.8 2.4 -
5.7 4.3 1.8
including
Udachny Severalmaz Verkhne-Munskoe
Forecasted average grade improved from 0.9 to 1.0 ct/t in 2021 mostly due to increase of expected grade at:
• Nyurba division from 3.2 to 3.9 ct/t resulting from shifting production focus to open-pit mining from alluvial fields with relatively lower average grade;
• Verkhne-Munskoe deposit from 0.4 to 0.6 ct/t as resource base is revised; • Zarnitsa open-pit mine from 0.2 to 0.24 ct/t as resources with relatively higher grade are included in projections.
Share of underground mining, %
30%
33%
38%
CAPEX, RUB bn
31.8
36.5
33.3
share of expansion
31%
48%
17%
share of maintenance
69%
52%
83% 20
ALROSA runs long-term operational excellence program which is expected to result in OPEX savings of up to RUB 9 bn annually Key operational excellence targets Mining
Processing
Transport
Administrative costs
Organizational structure
Maintenance
Production development
Energy use
Automation
In 2017 - 2026 ALROSA expects to save up to RUB 9 bn annually from further improvement of operating efficiency including as follows:
• steeper mine ramps to cut down on stripping; • road trains to replace mine trucks at the Zarnitsa pipe of Udachny Division; • block caving at Udachny and Aikhal underground mines; • fuel gas and oil to reduce diesel fuel consumption. 21
Economic efficiency of Udachny underground mine will be fostered by block caving mining method
Traditional cut-and-fill mining Mir underground mine
International underground mine
Aikhal underground mine
Block caving method
Udachny underground mine
Production level Backfilled production level
Next production level Next production level
Cut-and-fill mining method at Udachny underground mine would have required more than 330 thousand tons of cement a year (~ RUB 1bn in current prices), which is an equivalent of total cement output in the Republic of Sakha (Yakutia). 22
ALROSA keeps streamlining its operations to focus on diamond mining
Number of subsidiaries 70
39
34
32 20
01.01.2009
01.01.2015
01.01.2016
Prior to 2017, ALROSA sold 38 non-core assets with total proceeds of RUB 9.2 bn, including:
• Timir iron ore project • Irelyakhneft oil project • ALROSA Insurance Company • Arcos Ltd
• • • • •
ALROSA-VGS MAK-Bank Nikonovka M&Diamond Suntarceolit
current state
01.01.2020
Major non-core assets ALROSA intends to sell, including:
• • • •
Geotransgaz Urengoy Gas Company Viluiskaya-3 HPP HIDROCHICAPA
23
Financial Overview
24
2016 financial performance substantially exceed results of 2015 and 2014
2016
2015
2014
Diamond production
37.4
38.3
36.2
mln ct
mln ct
mln ct
Diamond sales
40.0
30.0
39.6
mln ct
mln ct
mln ct
Revenue
317.1
224.5
207.1
RUB bn
RUB bn
RUB bn
Cost of sales
(129.8)
(93.2)
(99.3)
RUB bn
RUB bn
RUB bn
EBITDA
176.4
118.5
93.9
RUB bn
RUB bn
RUB bn
EBITDA margin: 56%
EBITDA margin: 53%
EBITDA margin: 45%
Free cash flow
111.4
41.3
42.1
RUB bn
RUB bn
RUB bn
25
ALROSA’s financial results are impacted by foreign exchange fluctuations Sensitivity analysis RUB mln
-1 RUB/$
2016
+1 RUB/$
312,693
317,090
321,487
>90%
Revenue
20% (1.39%)
(129,417)
(129,751)
(130,085)
70%
