Alrosa · RUS:ALRS
Alrosa — Investor Presentation (December 2018)
47 slides from Alrosa's investor presentation, Dec 13, 2018
Slide 1: ALROSA Investor Presentation
ALROSA Investor Presentation 13 December 2018
Slide 2: Disclaimer
DISCLAIMER The below applies to the presentation (the “Presentation”) following this important notice, and you For notes: are therefore advised to read this important notice carefully before reading, accessing or making any other use of this Presentation. This Presentation contains statements about
Slide 3: Diamond Industry – Key Demand Drivers
DIAMOND INDUSTRY – KEY DEMAND DRIVERS • Luxury market valued at c. €1,200 bn is steadily growing Global luxury market breakdown in 2018E € bn • Jewelry demand comprises 7% of global luxury market, and 31% of the personal luxury (annual growth 5%) % 2017-2018E growth at constant exchange rates +5% 23
Slide 4: Global Diamond Jewellery Market Grows by 4%
GLOBAL DIAMOND JEWELLERY MARKET GROWS BY 4% • Since 2010 diamond jewellery demand increased on average by 4% World diamond jewellery sales grew by 4% annually Diamond jewelry market, $ bn • … reaching a 10-year high level in 2017 at +5% yoy driven by steady N. America, Asia-Pacific demand in DM, and
Slide 5: Marketing Spending of the Industry
MARKETING SPENDING OF THE INDUSTRY • Diamond Producers Association (DPA) formed by 7 major diamond DPA marketing campaigns by region producers in 2015 supports the development of the diamond sector % represents share of a region in global jewelry consumption through promotion of reputation of diamon
Slide 6: Rough Diamond Prices
ROUGH DIAMOND PRICES* Average realized price for ALROSA’s gem-quality rough diamonds • 2018 recovery in average realized prices driven by better sales mix $/ct (high share of large stones in mix), and price index (like-for-like mix) price change +60% +23% +18% 22% +21% growth of 5.2% YTD +11% +6% (2
Slide 7: Global Rough Diamond Output and Sales
GLOBAL ROUGH DIAMOND OUTPUT AND SALES Rough diamond sales demonstrates moderate recovery • Global output reached its peak levels in 2017, with a 3% decrease in $ bn 9M 2018 on lower production from ALROSA (~3 m cts down y-o-y) ALROSA Others ~16 ~16 ~15 ~15 ~15 ~15 ~15 • Rough diamond sales follow tr
Slide 8: Midstream Stocks Are Below 5Y Average
MIDSTREAM STOCKS ARE BELOW 5Y AVERAGE • Q3 midstream inventories dropped to a multi-year lows mainly on Midstream rough and polished diamond inventories destocking of small stones $ bn 42.6 41.8 • Indian imports of rough were seasonally down; no excessive buying of 41.5 41.3 40.3 41.0 39.5 40.1 roug
Slide 9: Long Term Supply Turns Negative by 2020
LONG TERM SUPPLY TURNS NEGATIVE BY 2020 • Supply is well consolidated with BIG-3 controlling 2/3 of global supply ~70% of global rough diamond output controlled by BIG-3 m cts • Supply is quickly reacting to the demand deterioration • Lack of new “quick-to-develop” deposits and mines depletion ALROS
Slide 10: About ALROSA
ABOUT ALROSA • ~30% of rough diamond production globally Financial results summary $ bn • Largest reserves sufficient to support production for ~30 years Revenue EBITDA Free cash flow EBITDA margin 56% 55% 52% 47% • Competitive position on the global cost curve 4.6 4.6 3.7 3.9 • Sustainably high pro
Slide 11: ALROSA: Assets Geography
ALROSA: ASSETS GEOGRAPHY Geography of production assets Share of division in 2017 diamond production In expansion mode 33% Aikhal Division Aikhal UG mine 13.0 Jubilee pipe m ct Komsomolskaya pipe 7% 93% 19% Nyurba Division Nyurbinskaya pipe 7.7 Botuobinskaya pipe m ct Arkhangelsk Alluvial deposits R
Slide 12: Highest Quality Assets
HIGHEST QUALITY ASSETS • ALROSA develops world’s largest reserves with the industry best ALROSA operates largest reserves with long life of mine cost/quality balance m cts • One of the lowest cost production at 44 $/ct while company’s average 377 inferred realized price of gem-quality rough diamond
Slide 13: Low Cost Production Platform with Moderate Growth
LOW COST PRODUCTION PLATFORM WITH MODERATE GROWTH • Company operates high quality assets with underground operations Range of average mined diamond grade (2017) delivering strong diamonds yields ct/t 7 6.89 • Output to stabilize at ~38 m ct, which is slightly above 2013-2016 5.83 6 International UG
Slide 14: Improved Quality of Sales with 70% of Long Term Client Base
IMPROVED QUALITY OF SALES WITH 70% OF LONG TERM CLIENT BASE • Diverse product mix (total 204 boxes) with different segment exposure Sorting of rough diamonds and price dynamic, e.g.: o small stones – for mass market bridal rings 26 sizes 16 shapes o Mid-size and large stones – luxury segment offerin
Slide 15: Diamond Sales Structure
DIAMOND SALES STRUCTURE • Gem-quality diamonds sales account for c. 70% of total sales and 98% Allocation of rough diamond by quality pf sales value • The bulk of the sold diamonds in 2017 is less than 3 GR (~0.75 carat) • Diamonds over 1 carat make c. 11% of total diamonds sold in volume ~70% Gem q
Slide 16: Q3 & 9M Results
Q3 & 9M RESULTS
Slide 17: Q3 Sales
Q3 SALES Q3 2018 Sales Diamond sales m cts • In Q3 2018, diamond sales decreased by 2.3 m carats (26% q-o-q) to 6.7 m carats due to a drop in sales of small-size diamonds Industrial quality diamonds 31.8 29.1 • Sales were down 11% y-o-y also due to weaker small-size diamond Gem-quality diamonds 7.8
Slide 18: Q3 Output
Q3 OUTPUT • In Q3 2018, the volume of processed ore and gravels grew by 70% q-o- Ore and sands processing q (up 10% y-o-y) to 17.2 m tonnes, due to a seasonal return to m tonnes production at alluvial deposits (up 7.9 m tonnes) Grade, carat/tonne 1.46 1.03 1.39 1.30 0.93 0.65 0.84 0.61 0.80 • Averag
Slide 19: Key Financials in Q3 & 9M
KEY FINANCIALS IN Q3 & 9M Q3 2018: Superior profitability $ bn • Revenue came in at USD1,046 m (down 8% q-o-q) as sales in carats Revenue EBITDA EBITDA margin decreased (down 26% q-o-q) 58% 57% 54% • 8% y-o-y growth was driven by stronger pricing and a better sales mix 52% 46% 50% 47% 43% 44% • EBIT
Slide 20: Costs Dynamics & Structure
COSTS DYNAMICS & STRUCTURE • Q3 unit costs increased by 18% to RUB1,390 per cu m mainly due to Per unit costs decreased volume of run-of-mine ore RUB '000 / cu m • In 9M 2018, the Company’s costs* went down by 5%, to RUB109 bn 1.39 1.34 1.33 Key drivers: 1.28 1.26 1.23 1.17 1.18 o reduction of sales
Slide 21: Q3 Profitability
Q3 PROFITABILITY Q3 2018 EBITDA declined to RUB40.0 bn (down 3% q-o-q) driven by: Q3 EBITDA – key drivers RUB bn o (-) carat sales down 26% q-o-q due to a drop in sales of small-size diamonds 1.5 o (+) improved sales mix and prices 9.1 (17.5) 3.7 0.3 1.5 o (+) FX rate impact o (+) changes in diamond
Slide 22: Capex to Stabilize at Below RUB30 bn
CAPEX TO STABILIZE AT BELOW RUB30 bn • In Q3 2018, capex was up 22% q-o-q to RUB8.8 bn driven by larger Capex expansion capex (up RUB1.6 bn): RUB bn o the Verkhne-Munskoye deposit (up RUB2.2 bn) 20,8 18,4 o the Udachny underground mine (down RUB0.6 bn) o the Zarya pipe (down RUB0.4 bn) 8,5 8,8 7,0 7
Slide 23: Q3 Free Cash Flow Drivers
Q3 FREE CASH FLOW DRIVERS • Q3 FCF increased by 13% q-o-q (up 2.0x y-o-y) to RUB23.6 bn driven by: Free cash flow bridge RUB bn o Resilient profitability on price growth, mix improvement and FX Q3 2018 9M 2018 o Net working capital build-up on seasonality offset by insurance proceeds EBITDA 40.0 129
Slide 24: Leverage Remains Below Targeted Range of 0.5x to 1.0x
LEVERAGE REMAINS BELOW TARGETED RANGE OF 0.5X TO 1.0X • Total debt amounted to $1.3 bn, down $310 m year-to-date Debt is down on deleveraging efforts and strong FCF generation $m 1.9x 1.9x • Liquidity decreased by 18% q-o-q to $0.75 bn mainly due to 2017 1.7x dividends of RUB38.6 bn payment 0.7x 1.0
Slide 25: New Dividend Policy
NEW DIVIDEND POLICY • In August 2018, ALROSA’s Board of Directors approved an updated Dividend pay-out ratios dividend policy: 70% 75% 59% o free cash flow as the basis 50% 52% 70% o payments twice a year 50% 50% 50% o minimum payout at 50% of IFRS net income 37% 35% 26% • Dividend pay-out estimate
Slide 26: Outlook
OUTLOOK Market outlook • Diamond jewellery demand remains healthy, while softer currencies will start being a drag • Mid-stream stocks are expected to remain low due to FX volatility and rising financing costs for polishers Operating performance • 2018 full-year sales outlook is revised downwards to
Slide 27: Appendix
APPENDIX
Slide 28: Net Debt Change
NET DEBT CHANGE • In Q3, net debt increased from RUB6.0 bn to RUB36.6 bn q-o-q Net debt bridge RUB bn Drivers: Net debt as at 31 December 2017 86 o Dividend payment – RUB38 bn Free cash flow (62) o Purchase of shares of ALROSA-Nyurba in H1 2018 (30) • 9M: Net debt was down 59% due to strong FCF and
Slide 29: FX Rate
FX RATE • ALROSA is an exporter with 93% of revenue denominated in USD Financial metrics breakdown by currency (9M 2018) % of metric's total 6% • Major portion (84%) of costs and capex is denominated in RUB 7% 23% • 94% of the Company’s debt portfolio is denominated in USD to create a 84% 74% RUB na
Slide 30: Lab-Grown Rough Diamonds / Synthetics
LAB-GROWN ROUGH DIAMONDS / SYNTHETICS • Lab-grown diamonds history (key events): Global production Global sales o 1953 – first HPHT diamond synthesized m ct $ bn o 1960s – first CVD diamond synthesized ~2-4 o 1970 – first lab-grown gem quality diamond crystals produced Gem-quality o 1970s – volumes
Slide 31: Lab-Grown Rough Diamonds: Five Facts
LAB-GROWN ROUGH DIAMONDS: FIVE FACTS 1. Lab-grown diamonds have essentially the same physical and chemical Price of 1 carat polished diamond: natural VS synthetic characteristics as natural diamonds, but they are not identical – they Round, VS clarity, F-H color -16% are easily detected since both H
Slide 32: ALROSA's Production Forecast
ALROSA’S PRODUCTION FORECAST Price Cash costs Type of mining Grade, ct/t Diamond production forecast, ‘000 ct per carat, $ per carat, $ 2017 2017 2018F 2019F 2020F Aikhal Division Jubilee pipe open-pit 1.33 141 26 10,160 8,207 5,885 5,410 Aikhal underground mine underground 5.83 47 28 2,480 2,723 2,
Slide 33: Key Investment Projects
KEY INVESTMENT PROJECTS Udachny Verkhne-Munskoe deposit Mayskaya pipe underground mine (open pit mining) (open pit mining) Production start 2014 2018 2025 Expected design capacity 2020 2019 2027 Expected life of mine 2040 2042 2039 Investment start date 2002 2015 2018 Total capex, RUB bn 63.9 63.0 1
Slide 34: Rough Diamond Production Is Dominated by Few Mining Companies
ROUGH DIAMOND PRODUCTION IS DOMINATED BY FEW MINING COMPANIES WITH THE HIGHEST MARGINS ACROSS DIAMOND PIPELINE, WHERE ALROSA BENEFITS FROM LEADING MARKET SHARE OF 26% Diamond pipeline structure Rough diamond Sales of rough diamonds Cutting & polishing Diamond jewelry Retail sales production from maj
Slide 35: Our People
OUR PEOPLE • In 2017 the headcount declined by -2% to 36.4 thousand employees Total headcount as of the end of the year 000’ people • Woman account for 37% of total staff members and 32% of executive staff – according to PWC, ALROSA is a leader in this indicator among 40.3 40.7 40.2 37.2 36.4 indust
Slide 36: Health and Safety
HEALTH AND SAFETY • Expenses on labor protection and industrial safety per 1 employee are Health and safety costs stable at level RUB 39,000 since 2015 and totals RUB 1.1-1.4 bn per year 000’ RUB per 1 person LTIFR • LTIFR1 in 2017 was increased up to 0.94 due to Mir mine accident in 0.94 August whi
Slide 37: Environment and ESG Ratings
ENVIRONMENT AND ESG RATINGS • 2017 capex related to environmental activities stood at the level of RUB Financing of environmental activities 4.4 bn RUB bn • Efficient disclosure are acknowledged by ESG ratings: o 3rd place (out of 33) in the “First rating of environmental performance of mining compa
Slide 38: Energy Resources
ENERGY RESOURCES • ALROSA’s share of renewable energy consumption is 87%, long-term Share of renewable energy consumption target level – 95% • 2017 unit energy consumption decreased by 7% y-o-y to 0.327 GJ/carat meanwhile diamond production increased by 6% y-o-y Renewable energy consumption • 2017 w
Slide 39: Governance
GOVERNANCE • In 2013, the Supervisory board approved the Corporate Governance Code Supervisory Board composition Number of members • Board has three active committees with independent directors: 15 15 15 15 15 o The Strategic Planning Committee o The Auditing Committee 9 9 Other 10 o The HR and Remu
Slide 40: Management Team Is Fully Committed to Deliver on ALROSA's Development Plans
MANAGEMENT TEAM IS FULLY COMMITTED TO DELIVER ON ALROSA’S DEVELOPMENT PLANS Executive Team Operational Team Alexey Kovalenko division Sergey Ivanov Mirny Director, Mirny mining and processing division Chief Executive Officer • Joined the Company in 1996 • Joined the Company in 2017 CEO • Over 20 yea
Slide 41: Supervisory Board Overview (1/2)
SUPERVISORY BOARD OVERVIEW (1/2) 1 2 3 4 Anton Siluanov Aysen Nikolaev Nikolay Alexandrov Vladimir Solodov First Deputy Chairman of the Head of the Republic of Sakha First Deputy Head of Suntarsky Ulus Chairman of the Government of the Government of the Russian (Yakutia) Municipal District of the Re
Slide 42: Supervisory Board Overview (2/2)
SUPERVISORY BOARD OVERVIEW (2/2) 9 10 11 12 Evgenia Grigorieva Sergey Ivanov Dmitry Konov Galina Makarova Minister of Property and Land Chief Executive Officer of ALROSA Member of the Board of Directors, Independent director of the Relations of the Republic of Sakha Chairman of the Management Board
Slide 43: Diamond Discoveries
DIAMOND DISCOVERIES • Supply of diamonds is constrained by lack and complexity of new diamond Discovery and development of new kimberlite pipes are much more challenging now discoveries and significant time required to ramp-up production Host rocks Sandstones Kimberlite pipes Aikhal Botuobinskaya •
Slide 44: Economic Efficiency of Underground Mining Is Fostered by Block Caving
ECONOMIC EFFICIENCY OF UNDERGROUND MINING IS FOSTERED BY BLOCK CAVING MINING METHOD Traditional cut-and-fill mining Block caving method International Aikhal underground Mir underground mine Udachny underground mine underground mine mine Production level Backfilled production level Next production le
Slide 45: Resources Inclusive of Reserves According to JORC Code (1/2)
RESOURCES INCLUSIVE OF RESERVES ACCORDING TO JORC CODE AS OF JULY 1, 2016 (1/2) Tonnage Resource grade Contained diamonds Deposit Resource category ('000 t) (cpt) ('000 cts) Udachny division Measured 13,646 1.16 15,812 Udachnaya Pipe Indicated 83,524 1.53 127,801 Inferred 53,991 1.28 68,978 Zarnitsa
Slide 46: Resources Inclusive of Reserves According to JORC Code (2/2)
RESOURCES INCLUSIVE OF RESERVES ACCORDING TO JORC CODE AS OF JULY 1, 2016 (2/2) Tonnage Resource grade Contained diamonds Deposit Resource category ('000 t) (cpt) ('000 cts) Nyurba division Measured 1,432 4.12 5,905 Nyurbinskaya Pipe Indicated 7,095 4.32 30,623 Inferred 1,217 5.56 6,767 Measured 3,1
Slide 47: Thank You!
THANK YOU! 24 Ozerkovskaya emb. Tel. +7 495 620 92 50 (ex. 1178) Moscow 115184 st@alrosa.ru Russia