Alrosa · RUS:ALRS
Alrosa — Investor Day (March 2021)
73 slides from Alrosa's investor day presentation, Mar 2, 2021
Slide 1: Capital Markets Day 2021
ALROSA Capital Markets Day 2021 March 2, 2021
Slide 2: Disclaimer
Disclaimer The below applies to the presentation (the “Presentation”) following this important notice, and you 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 future even
Slide 3: Today's Speakers
Today’s Speakers Maria Gordon Sergey Ivanov Alexey Philippovskiy Non-executive Chief Executive Officer Chief Financial Officer Independent Director
Slide 4: Table of Content
Table of Content 01. Message from Independent Director p.6 02. Message from CEO (Market update) p.14 03. ALROSA Results (Strategy Execution) p.25 04. 2020 Performance and Outlook p.45 05. Appendix p.53
Slide 5: ALROSA at a Glance
ALROSA at a Glance Global market leader with best-in-class assets and returns Republic of Sakha (Yakutia) ❶ Leader in diamond production Arkhangelsk Russia Republic of Sakha 91% of 2020 production (Yakutia) 2020 diamond production: 30 m ct (28% market share) region ❷ High-quality asset base with the
Slide 6: Message from Independent Director
01 MESSAGE FROM INDEPENDENT DIRECTOR Sustainability & Corporate Governance
Slide 7: ALROSA ESG Landscape
ALROSA ESG Landscape Setting a goal for the best sector performance Environment Social Governance • Development of new comprehensive • Adopted new H&S Strategy till 2025 • Ranked top-3 Best Environment, Social, ESG strategy till 2024 with targets set Governance1 (to be approved in March, 2021 by • A
Slide 8: Environment
Environment Creating a clearer and sustainable future Funds for green initiatives Unique business model ALROSA vs its peers RUB bn Share of total consumption, 2020 Per revenue share in total revenue ALROSA Diamond producers 3% 3% 2% 2% 2% 3% 3% >90% Energy 1.6 Water reused & consumption 2.9 42 36 re
Slide 9: Our Communities
Our Communities Responsible approach and support to local communities Highest social investments in M&M 1 Breakdown of social expenditures2 Contribution to local communities RUB bn share in total revenue 2020 RUB bn, 2020 30% 5% 5% 5% 5% Taxes 32 4% 4% 4% Local 5% Healthcare infrastructure 84 2% Edu
Slide 10: Our People
Our People ALROSA payroll: 80%+ of employees work in Yakutia 2.5x higher than Russian average Highest share of women as employees Av. headcount Located in other regions Thousand RUB per month, 2019 average 2019 av. indicator Located in Yakutia 38,104 124 31% 36,897 34,532 34,579 32,475 24% 18% 23% 7
Slide 11: Health & Safety
Health & Safety Zero tolerance to any injuries & trauma for employees and contractors LTIFR is on par with global good practice • Prevention program launched in 2017 to enhance transparency and disclosure Lost Time Injury Frequency Rate per 200,000 hours of accidents resulted in a significant drop i
Slide 12: Governance
Governance Acting in best interests of shareholders and focusing on the long-term value creation Board of Directors strengthened with industry experts • Board members meet regularly to discuss strategic issues and 15 members maintain direct dialogue with all stakeholders INEDs1 • Due to COVID-19 mee
Slide 13: What's Next?
What’s Next? … never stop improving ourselves 1 2 3 4 5 Roadmap Board Strategy Governance Initiatives and KPIs Dedicated sub-committee New ESG strategy for 2021- The ESG Strategy will Further sustainability • Implementation of OECD for ESG matters 2024 to be approved in H1’21 define KPIs in all key
Slide 14: Message from CEO: Market Update
02 MESSAGE FROM CEO Market Update
Slide 15: End Demand
End Demand Resilient rebound after COVID-19 shock in the first half of the year 2020 jewelry …showing superior resilience demonstrated strong recovery in personal luxury End-demand to further expand in 2021 yoy change yoy change, 2020E/2019 25% 15% 17% 17% Leather Personal luxury Apparel Europe 7% 8
Slide 16: Midstream
Midstream Ticking all the boxes Margins expanded Deleveraged Destocked Profitability $ bn, level of outstanding debt Indexed value, level of inventories +2.5x -2x -$2.5-3 bn over 5% 14 100 10 76 7-8 63 2% 2010s 2020 2000s 2010s 2020 Av. 2010-18 2019 2020 Polished diamond prices were recovered in
Slide 17: Rational Supply Response in 2020
Rational Supply Response in 2020 Q2’20: ~35% of output cut (annualized) Majors cut diamond sales… …prompting faster market recovery in H2’20 m ct $ m, 12M $ m, ALROSA monthly sales De Beers 3Y Average 2020 501 9,905 ALROSA 522 BIG-2 430 (ALROSA + De Beers) 405 7,382 347 342 336 390 ~20% 326 310 2019
Slide 18: Supply / Demand at Inflection Point
Supply / Demand at Inflection Point Global Supply / Demand balance outlook Personal luxury is set for 3 years of growth € bn m ct 320 Supply 281 290 260 187-262 217 Demand (conservative scenario) 151 148 2011-18 2019 2020E 2021F 2022F 2023F 130 138 128 120 Net supply decrease in 2019-25E 126 m cts 1
Slide 19: State of the Diamond Market – Implications for Prices
State of the Diamond Market – Implications for Prices Rough prices started to recover on improved S/D balance 2020 highlights: Indexed prices, 2020 ~25% decrease in rough diamonds supply ~20% decrease in mid-stream stock 100% -15% decrease in jewelry demand 92% and what we see for 2021-23 87% +1-2%
Slide 20: Market Trends
Market Trends Short / Mid-term Long-term Retail: rise of Share of online diamond jewelry sales ESG becoming a top priority for all players of online jewelry 22-25% the diamond industry sales ~10% 1-3% Sustainability agenda is set by all stakeholders 2010 2019 2020 Clear Discount of LGD price segment
Slide 21: ALROSA: COVID-19 Response in 2020
ALROSA: COVID-19 Response in 2020 Team Communities Customers Operations Preventive measures: temperature Support to the healthcare system: Commitment to support clients Crisis management committee checks 2x a day, provision of PPE, RUB 1+ bn allocated to safety Contracts with flexibility a
Slide 22: ALROSA: Managing Through the Downturn
ALROSA: Managing Through the Downturn Focus on long-term sustainability of the value chain and financial health Increased flexibility for customers Output reduced Capex downscaled Min. allowed contract allocation level m ct RUB bn Initial (Mar'19) New Starting Apr’20 -4 m ct up to 100% of min allowe
Slide 23: 2020 Dashboard
2020 Dashboard Global output leader with flexible sales Resilient superior profitability Sustaining cost leadership m ct Production Sales EBITDA, RUB bn EBITDA margin Per unit nominal cost, RUB '000/m3 Production costs (excl. movements), RUB bn 37.9 39.8 38.5 51% 1.42 33.4 45% 30.0 32.1 40% 1.12 1.1
Slide 24: Management action plan
Management action plan Aimed to implement Company strategy in a proper and sustainable way Sustainability Efficiency o Sustainability Strategy and KPIs o Organizational Ecosystem development o Environment o Operational Efficiency Program (including o Climate and Energy optimization of business proce
Slide 25: ALROSA Results: Strategy Execution
03 ALROSA RESULTS STRATEGY EXECUTION
Slide 26: Strategy Execution Framework
Strategy Execution Framework Pursuing sustainable cost leadership and maximum productivity Client-centricity remains at the core of Scaling-up of in-house best practices ALROSA’s business Building systems to ensure employees; buy-in at all levels Operational Unfolding the potential of online channel
Slide 27: Focus on Operational Efficiency
1 Focus on Operational Efficiency Expansion of the program translates into lower costs and higher productivity Group-wide initiatives up by 70% Production costs decreased on savings Unit costs up as run-of-mine dropped 33% Number of ongoing initiatives % yoy Savings, RUB bn, 2020 Nominal 2, 000 RUB/
Slide 28: Case Study: Operational Improvement at Aikhal
1 Case Study: Operational Improvement at Aikhal ALROSA demonstrated material improvement …on the back of expanding load capacity… …resulting in lower number of trucks required in intensity of trucks usage… Trucks Utilisation, % Trucks Capacity, % Number of trucks in use +8 p.p. +8 p.p. -2 trucks …an
Slide 29: Large-scale Reform of Maintenance System
1 Large-scale Reform of Maintenance System … with centralization of all functions into single SAP-integrated service Project overview Key ongoing initiatives The group-wide program aims to strengthen preventive planning, Reduction of downtime driven by optimal maintenance processes reduce downti
Slide 30: Improving Efficiency of Support Functions
1 Improving Efficiency of Support Functions Optimization of sourcing/logistics and centralization of support functions Sourcing and Logistics Shared Service Centre Program launch Scale Program launch Scale 2018/19 RUB 124 bn1 2017/18 RUB 1.4 bn2 Key initiatives in 2020-21: Key goals: Implementatio
Slide 31: Production System: from One-offs to Systemic Change
1 Production System: from One-offs to Systemic Change Elements of PS Successful cases Systemic approach leading to cultural changes E.g. Nyurba Division project – elements Education / Group-wide giving standard goals cascaded of PS were introduced in 2018-20 toolbox (6S, etc.) to employees o Visuali
Slide 32: Continuing Digitalization: IT Platform Development
2 Continuing Digitalization: IT Platform Development All-encompassing digitalization program at all levels of ALROSA’s operations Program description Key initiatives Plans for 2021 Digitalization program was launched Advancement of project Consolidation of IT specialists under the in Dec’19 plan
Slide 33: Case Study: MES Project at Nyurba
2 Case Study: MES Project at Nyurba Already implemented at Aikhal and Nyurba – to be rolled out across other divisions Project overview Operating improvements Plans for 2021+ Project timeline CAPEX1 Downtime2, ths hours Roll-out on MGOK (2021), Unified Dispatch 2019-20 RUB 59 m -28% Center (2021),
Slide 34: Sales Enhancement
3 Sales Enhancement Balancing the evolving needs of customer base and sales efficiency Client centricity Sales Channels and Infrastructure Turnover efficiency Client-centric model crystalized in the “new Online auctions and digital twins Despite the challenges of 2020, ALROSA normal” environment
Slide 35: Adding New Facets in Customer Service
3 Adding New Facets in Customer Service Key sales features introduced by ALROSA in 2020 ALROSA Tracing ALROSA Provenance Digital Stocks Diamond tracing assures authenticity and Diamond passports to be issued The service provides for digitalization of ethical sourcing of the stones automaticall
Slide 36: Marketing Strategic Initiatives
3 Marketing Strategic Initiatives Generic marketing Digital Polished diamonds marketing • Participation in Natural Diamond • Branding initiatives: piloting in • Promotion of Fancy coloured Council (NDC) to maintain and collaboration with major US & China diamonds (True Colours program) enhance consu
Slide 37: Capital Allocation – Maximising Shareholder Returns
4 Capital Allocation – Maximising Shareholder Returns Focus on Core Business Focused on Conservative Financial Policy Value-accretive Projects Organic Growth Investment Program Commitment to with 20%+ IRR1 Balanced Debt Profile Operational Efficiency Divestiture of Strong Non-core Assets Liquidity P
Slide 38: Investments
4 Investments 2021-24E capex was revised Key projects RUB bn Infrastructure: total 2021-24 capex – RUB 32 bn Infrastructure Mining capacity Reconstruction of Mirny Airport (RUB 9 bn) Gasification of Udachny Division (RUB 4 bn) Initial outlook Equipment maintenance Gas processing plant (RUB 4 b
Slide 39: Strong Balance Sheet
4 Strong Balance Sheet Sound financial profile • Total debt is $2.3 bn with an average cost of 3.7% pa $m 1 • Net debt/EBITDA decreased from 1.25x in Q3’20 to 0.4x Total Debt Net Debt Net Debt / EBITDA, x 1.7x • Liquidity position: $1.8 bn • Proactive steps to decrease leverage in Q4’20: 0.5x 0.7x 0
Slide 40: Proposals to Financial and Dividend Policies
4 Proposals to Financial and Dividend Policies 2020 case: net cash change during the crisis Proposed changes Cash inflow minus outflow 1 Financial policy 40 • Minimum cash position should be increased from RUB 25 bn to RUB 50 bn Market downturn to enhance sustainability of operations 30 • New expand
Slide 41: Simplified Dividend Policy
4 Simplified Dividend Policy Current Dividend Policy Proposed Dividend Policy Dividend Base: FCF (Operating CF-CapEx) Frequency: Semi-annual Dividend Base: FCF (Operating CF-CapEx) Frequency: Semi-annual if if Net Debt/ < 0.0x 0.0-0.5x 0.5-1.0x 1.0-1.5x Net Debt/ < 0.0x 0.0-1.0x 1.0-1.5x EBITDA1 EBI
Slide 42: Dividends' Payment
4 Dividends’ Payment Dividend payout ratio Excessive cash is distributed as dividends 1 Based on accrued dividends for the period $m 1,281 % of IFRS net income % of FCF 1,110 100% 100% 100% 919 662 H1 ’18 76% 95% 439 70% 59% H1 ’19 50% 76% 78% 52% 12M ’16 70% 311 272 26% 50% 50% 244 619 190 12M ’17
Slide 43: Delivering Superior Shareholder Returns
Delivering Superior Shareholder Returns Cumulative total USD TSR since ALROSA IPO (October 2013) 96.8% ALROSA 73.7% Luxury Goods 1 62.5% MSCI Emerging Markets 1.0% Diversified Miners, incl. 100 other Diamond Producers 2 (2.0)% MOEX Russia Index (15.7)% MSCI Russia Oct-13 Jan-15 Apr-16 Jun-17 Sep-18
Slide 44: Strategic Priorities Remain Unchanged
Strategic Priorities Remain Unchanged Developing efficient organisation... …taking advantage of strong market fundamentals Growing demand Balanced and Disciplined Financial policy supply Prudent Maximisation of Capital allocation Free Cash Flow and Focus on Shareholder returns core business and Effi
Slide 45: 2020 Performance and Outlook
04 2020 PERFORMANCE AND OUTLOOK
Slide 46: Rough Diamond Sales
Rough Diamond Sales • Q4’20 diamond sales increased by 3.4x qoq Q4’20 diamond sales grew by 3.4x qoq reaching 17 m ct, incl. 12.2 m ct of gem-quality m ct Gem-quality diamonds Industrial quality diamonds diamonds, due to continued recovery of end- 2.1x 38.1 33.4 32.1 demand in key markets (US and Ch
Slide 47: Key Financials
Key Financials Improved financials on the back of sales recovery • Q4‘20: RUB bn Revenue EBITDA Net profit EBITDA margin o Revenue: RUB 98.6 bn, up by 2x QoQ on the back of strong demand recovery toward year-end 52% 46% 45% 40% o EBITDA: RUB 31.8 bn (+24% QoQ, +8% YoY) 32% o Profitability amounted t
Slide 48: Profitability Analysis
Profitability Analysis Q3’20 to Q4’20 EBITDA bridge • Q4‘20 EBITDA: RUB 32 bn, up by 24% QoQ driven by: RUB bn (+) increase of revenue: +RUB 49 bn due to rebounded sales volumes 49 (41) (-) increase of cost of goods sold: -RUB 41 bn due to increase 0.03 of sales volumes (-) increase of SG&A expenses
Slide 49: Free Cash Flow
Free Cash Flow Q4‘20 FCF increased to RUB 65.2 bn from RUB 22.6 bn in Q3‘20 due to: EBITDA to Free Cash Flow bridge (+) Profitability growth by RUB 6.1 bn QoQ on recovered sales RUB bn (+) W/C release of RUB 41.2 bn with the key drivers: Q4’20 12M’20 +RUB 29.2 bn – decrease of diamond inventories EB
Slide 50: Rough Diamond Inventories
Rough Diamond Inventories Q4 ALROSA's diamond inventories decreased by 32% QoQ • Q4‘20 diamond inventories were down by 32% QoQ m ct, end of the period (-9.9 m ct) to 20.7 m ct as sales volumes (17.0 m ct) -8% exceeded production (7.1 m ct) due to stronger demand and lower output • 8% yoy decline in
Slide 51: Production Outlook
Production Outlook Production in 2021 revised upwards 2020 to 2021 output change by deposits m ct m ct Av. price1, $/ct V.Munskoye deposit 2.0 107 Mid-term target of 38.5 +1.5 m ct Aikhal UG mine 1.5 45 37-38 m cts Almazy Anabara 5.2 Botuobinskaya pipe 1.0 94 31.5 Severalmaz 30.0 42 4.2 1.3 Severalm
Slide 52: Summary
Summary Market outlook ALROSA performance Resilient consumer demand – diamond jewelry remains the product 2021 outlook: of choice for “special moments in life”, and is being culturally o Production is expected to recover up to ~31.5 m ct accepted in new geographies. o Sales volumes will depend o
Slide 53: Appendix
05 APPENDIX
Slide 54: New Initiative: Transformation Office
New Initiative: Transformation Office Systematic approach to changes across the vertical Key decision making Project Management Board Control of interim and final project’s results ALROSA senior management (incl. CEO & CFO) External consultant Risk control Budgeting Operating Committee Ope
Slide 55: Targeted Production System – Vision for 2023
Targeted Production System – Vision for 2023 Engineering Centre Remote control centre and dispatch function • Medium-term planning for all production assets, including geotechnical and geological • Centralised dispatch function to become all- support of mining operations encompassing and cover all t
Slide 56: Enterprise Risk Management
Enterprise Risk Management Integration and compliance with regulatory requirements and external threats Implemented ERM Concept 2020 key external threats and focus areas Business Mission, vision Strategy Implementation Enhanced objective & core values Development & performance value formulation Gove
Slide 57: Internal Control and Risk Management System
Internal Control and Risk Management System System improvement is carried out on all management levels Preventive control Operational control Follow-up control Preventive control procedures are Control procedures within separate Internal audit, asset soundness, carried out in the context of Risk ope
Slide 58: Natural Diamond Council (former DPA)
Natural Diamond Council (former DPA) ● In 2020, the former DPA was relaunched as the Natural Diamond Council focusing on the positive attributes and values of natural diamonds and Marketing budget of the industry association growth diamond jewelry and reducing the conflict with the LGD industry $ m
Slide 59: ALROSA: Key Highlights Since 2013
ALROSA: Key Highlights Since 2013 Operating results and selling prices ● High utilization rates through the cycle m cts Output Sales ARP for gem-quality diamonds, $/ct ● Company demonstrates stable – 40-50% margins 174 172 170 164 149 ● … well supported by cost control and product mix 136 132 109 ●
Slide 60: FX Rate
FX Rate Financial metrics breakdown by currency ALROSA is an exporter with ~90% of revenue % of metric's total, 2020 denominated in USD USD Costs and capex are denominated mainly in RUB, RUB 90% and 75% respectively 9% 3% 79% of the Company’s debt portfolio1 is 21% denominated in USD to create
Slide 61: Diamond Value Chain
Diamond Value Chain Rough diamonds Polished diamonds Diamond jewelry Cutting & Jewelry Production Sales Sales Sales polishing manufacturing • Exploration of diamond • Sale of rough diamonds • Cutting and polishing • Polished diamond • Jewelry design and • Diamond jewelry resources from producers rou
Slide 62: Diamond Industry Dynamics
Diamond Industry Dynamics Diamond jewelry sales Rough diamond sales Rough diamond output $ bn $ bn m ct 15 17 15 81 86 14 176 13 13 73 151 138 61 12 12 109 8 52% 9 57 120 126 25% 20% 19% 11% 13% 7% 5% 3% 4% 0% 5% 4% 3% 9% 1% 5% 7% 4% 1% 2% (7%)(5%) (3%) ~0% (0%)(2%) (5%) (5%)(3%) (4%) (4%) (1%) (2%)
Slide 63: ALROSA ESG Ratings & Indexes
ALROSA ESG Ratings & Indexes Setting a goal for the best sector performance BB 59 34 D ALROSA retains BB Score retained in 2019 ALROSA has doubled its Information on the rating since 2018, score in 2020 vs 2019 emissions submitted for reconfirmed in 2020 the first time in 2020 D+ 8 49 • Governance:
Slide 64: Demand Drivers
Demand Drivers Highlights Global luxury market breakdown in 2020E € bn 2020E global luxury market contracting to ~34 ~1 ~68 ~45 ~38 ~€1 trillion on the back of COVID-19 Incl. ~1/3 of diamond ~85 jewelry ~2Y is needed to bring the personal luxury market to the pre-COVID levels ~503 ~1T 217 Chin
Slide 65: Sales Structure and Channels
Sales Structure and Channels Multichannel distribution with growing focus on long-term contracts Overview of sales channels ALROSA’s rough diamond sales channel breakdown Long-term contracts which provide stable sales and 10% 19% 17% 10-20% predictable prices during volatility on diamond market 12
Slide 66: Key Investment Projects
Key Investment Projects 1 Udachny 2 VM1 3 Maiskaya 4 VG2 UG mine deposit pipe deposit Type of mining Underground Open-pit Open-pit Alluvials Production start 2015 2018 2025 2026 2 Yakutia Ramp-up 2021 2019 2027 2028 1 Udachny Nyurba Target ore output pa, m t 4.0 3.0 0.3 1.4 3 Mirny 4 Yakutsk Target
Slide 67: Projects in Africa
Projects in Africa Promising region with high exploration potential Operational & financial performance at Catoca Development of Luele pipe Production and sales, m ct EBITDA, $ m Luele kimberlite pipe is the largest diamond discovery over the past 60 Production Sales Av. realized price years $110/
Slide 68: Focus on Organic Growth with "Back to Basics" Approach
Focus on Organic Growth with “Back to Basics” Approach Growth is coming from organic growth of existing portfolio Number of non-core ALROSA’s subsidiaries As at the end of the period, subsidiaries included in the program to divest Program to divest non-core assets started in 2013 includes assets
Slide 69: Management Team
Management Team Committed to deliver on ALROSA’s development plans Executive team Operational team Sergey Ivanov Alexey Kovalenko Division Chief Executive Officer Director, Mirny mining and processing division Mirny • Joined the Company in 1996 CEO • Joined the Company in 2017 • Senior Vice Presiden
Slide 70: Supervisory Board Overview (1/2)
Supervisory Board Overview (1/2) 1 2 3 4 Anton Siluanov Aysen Nikolaev Andrey Donets Maxim Tereshchenko Minister of Finance of the Russian Head of the Republic of Sakha (Yakutia) – First Deputy General Director of Minister of Industry and Geology of the Federation – Chairman of the Board First Deput
Slide 71: Supervisory Board Overview (2/2)
Supervisory Board Overview (2/2) 9 10 11 12 Evgenia Grigorieva Sergey Ivanov Dmitry Konov Alexey Noskov Member of the Supervisory Board Chief Executive Officer – Deputy Chairman Independent director Independent director of the Board – Chairman of the Executive of the Supervisory Board, ALROSA of the
Slide 72: Glossary
Glossary Term Definition ARP Average realized price (sales revenue divided by sales volumes in carat terms) ct Carat : one of the four main diamond characteristics, the others being colour, cut and clarity; 1 carat=200 mg m ct Million carats NDC Natural Diamond Council (ex. Diamond Producers Associa
Slide 73: Thank You!
THANK YOU! RUSSIA, 115184 SERGEY TAKHIEV DMITRY BYALOSHITSKIY MOSCOW HEAD OF CORPORATE FINANCE CORPORATE FINANCE 24 OZERKOVSKAYA EMB. M: +7 985 760 55 74 M: +7 915 113 32 04 E: ST@ALROSA.RU E: DB@ALROSA.RU