| Alrosa diamonds after sorting for size | ||||||
An old Russian legend has it that just after god created the world he was flying across it with all the treasures of the earth in the back of his sledge. He hadn’t tied them down securely and gold, diamonds and other precious metals and stones were scattered across northern Russia as he passed over it. Once he realized what had happened, he went back to what is now the tundra of Russia’s Siberian far east and froze the ground solid to protect these natural riches from money-grubbing hands.
The Sakha Autonomous Republic (better known to the players of the board game Risk as Yakutiya) is the one of the coldest places in the world, with temperatures in the winter – about 10 months of the year – plunging to around minus 70°C. The ground is frozen solid to a depth of 1,400 metres in places and in the short summer only the top two metres thaw, enough for stunted trees and moss to grow a few feet until the permafrost rises to the surface again.
In a small island of civilization surrounded by thousands of square kilometres of tundra, the Alrosa diamond mine produces precious stones worth about $1.6 billion every year. Alrosa accounts for nearly all of Russia’s diamond production and about a fifth of the world’s total supply. With a new $3 billion investment programme and plans to raise some $650 million next year, partly through a $300 million Eurobond issue, the company hopes to boost production to $2 billion a year over the next five years. A new agreement that will soon be signed with international diamond cartel De Beers will guarantee the sale of half of Alrosa’s rough diamonds.
Alrosa was created by Boris Yeltsin in 1993 by presidential decree as an early exercise in privatization designed to boost the weak state budget. Russia’s biggest diamond asset was divided between the federal government and the local region, which still takes about 16% of the company’s production as rent.
“There was a need for a new relationship between the federal centre and the regions. We decided to try a model of mixing the authority of the two power centres,” says Vyacheslav Shtyrov, Alrosa’s president. “We were established by presidential decree and were a model for reforms in other regions. And it was a success.”
There has been mining in Sakha since the early 1950s, but as part of the Soviet system of total control the mine merely processed the diamond-bearing blue earth of the Russian far east. Sorting, sales and marketing was handled by the federal depository, Gokhran.
Even then the Soviet authorities didn’t want to sully their hands by trading directly with the rapacious capitalists of the diamond business and for the past 40 years up to 80% of Russia’s diamonds were sold to De Beers.
Following the fall of the Soviet Union the old diamond system collapsed. Gokhran was embroiled in scandals as hundreds of millions of dollars-worth of diamonds disappeared.
The creation of the Alrosa joint stock company didn’t help matters. Although organizing the entire production under one vertically organized company was a good idea in theory, relations with De Beers soured.
Kate Evens-Jones, De Beers’ spokesperson, explains how hard it was to work in Yeltsin’s Russia. “Negotiating with finance ministers was like playing musical chairs. In one year we had to deal with five different men.”
De Beers became worried that Russian diamonds smuggled out of the country and onto the international market would upset the cartel arrangements and push down prices. Relations broke down entirely and after much bickering the two sides finally signed a temporary three-year agreement that is due to expire at the start of next year.
With Putin’s dictatorship of the law these problems seem to have largely gone away. The state budget is in surplus. The capital of Sakha, Yakutiya, sports new schools and hospitals. And most of the thieving has been stopped. Alrosa and De Beers are now negotiating a new five-year agreement that both sides say they want to sign.
“We are very keen to sign a new agreement with Alrosa,” says Evens-Jones. “And the same is true for Alrosa. We don’t think that they want to do anything that upsets the market as it is not in their interests either.”
Although talks are still under way, Shtyrov says that he is hoping De Beers will agree to take half of Alrosa’s annual production: about $750 million-worth of rough stones. De Beers bought about $800 million-worth last year.
“From January 1 2002, we will begin a new period. We have already started consultations with De Beers, and are waiting on the decision of the Russian government which will set our parameters before we can start negotiations,” says Shtyrov. “It will lead to an agreement that is beneficial for both sides and ensure stability on the world diamond market.”
Towards added value
Like many Soviet enterprises, Alrosa knew little about marketing and had no contact with distributors in other countries, which is why the distribution contract with De Beers is so important.
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Udachni’s opencast workings: soon to be abandoned for underground mining |
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And De Beers brings some much-appreciated income, though now Alrosa wants to increase its own production of cut diamonds. Under the current agreement Alrosa can sell 5% of its production, largely a marketing exercise to give it some idea of pricing.
Alrosa has been investing in production, but over the past year it has also begun investing in machines for cutting and polishing, since a rough stone that will fetch a few hundred dollars per carat will earn 10 times as much when cut.
At the central sorting organization in downtown Moscow, dozens of middle-aged women work their way through piles of diamonds, sorting them by quality, size and colour. Downstairs, men in overalls use cutting wheels to produce finished gems. In the corridors outside the work rooms more equipment stands still wrapped in plastic waiting to be moved into other rooms.
There are already 120 cutting works in Russia, of which Brilliant Alrosa in Moscow, founded one and half years ago, is the biggest. Production of cut stones is rising fast from the $60 million-worth turned out last year to the $150 million planned for the end of this year.
Udachni: a terrible place
“Welcome dear guests to a little island of socialism!” says Anton Popov, the general director of the Udachni Mine, toasting a group of foreign journalists. “We took the best things from communism and keep them here.”
It must be one of the worst places on earth. Every day an Antonov cargo aircraft brings fresh fruit and vegetables for the 40,000 people that live at the mine, Alrosa’s most productive.
Conditions for the workers are hellish. Only 8,000 are directly involved in bring the ore out of the pit but their monthly earnings of between $500 and $800 are several times more than anyone else in Udachni gets.
“The problems are worse in the winter when the temperature drops to about minus 60°C,” says Popov. “When it is so cold the trucks’ exhaust fumes can’t escape from the pit and all the drivers have to wear gas masks. They never get out of the cabin in the winter.”
But this is relative luxury – in the 1950s, when mining began, the heavy machinery was basic and supplies could only be brought in during the winter, using the frozen rivers as an ice road. “In the 1970s we would have tinned fruit as a special treat at Christmas,” recalls Eduard Lazutin, the chief engineer of the Mirny mine 40 minutes flight away, Alrosa’s first mine.
Popov is right when he says that Udachni is an island of socialism as the company provides for all the employees’ needs and runs everything. He points to the new part of town, built 25 years ago, where houses are in good condition by Russian standards, sporting a fresh coat of the pastel-coloured paint Russians favour to spruce up the monochrome landscape. There is a modern gym, a swimming pool where the Udachni synchronized swimming team trains, and even a nightclub. A cinema was recently closed down.
Work began at Udachni in 1955 and it is now the world’s second-biggest diamond mine – the biggest is in Botswana – accounting for 60% of Alrosa’s production. Over its 50 years of working life the mine has already produced some $25 billion-worth of diamonds. But as the huge two-kilometre-wide crater approaches 500 metres in depth, opencast mining is about to be abandoned. The floor of the crater is now about the size of a football pitch and if the pit is made any deeper there is a danger that the sides will cave in.
However, Popov says there is up to 500 metres of diamond-bearing pipe below the pit and work on an underground shaft to reach these reserves is about to begin. Popov believes that another $50 billion-worth of diamonds can be extracted and there is another 50 years of life left in the mine.
At Mirny workers are already digging two 1,100-metre shafts about a kilometre from the pit, where opencast mining has already come to a halt. Underground mining will begin next year.
“[An underground mine] is more expensive but worth it,” says Eduard Lazutin, the Mirny mine’s chief engineer. “The Mirny diamonds are some of the best in the world: clear, with a beautiful colour. Every fourth diamond ring is probably a Mirny diamond.”
With some of the biggest processing factories in the world sitting alongside both mines, Alrosa is a rare example of the Soviet Union’s love of building for gargantuan economies of scale actually paying off. It costs less to bring up a diamond from Udachni than to print a $1 bill, according to one visiting expert.
Investment plans
In all, Alrosa has five working mines but elsewhere it has discovered about 800 kimberlite pipes bearing diamonds, of which maybe a dozen will be economical to mine.
With exploration and exploitation of the diamond pipes in Sakha well under way, Alrosa is casting its net farther. As part of its 2001-05 investment plan, it will start working more diamond deposits in the European part of Russia. Production at the Lomonosovskoye diamond deposit, located in the northwestern coastal Arkhangelsk region, is expected to start next year and another field in the Karelia region bordering Finland may follow.
With money pouring in, Alrosa is looking to expand in Africa. In conjunction with its Israeli partner, Lev Leviev, the company has bought a stake in Angola’s Catoca mine, which has reserves estimated at 200 million carats of diamonds worth about $15 billion. Alrosa has a 32.8% stake in Sociedade Mineria de Catoca, the field development licence holder. In September Alrosa announced that it was negotiating with the Angolan government to acquire rights to four more mine sites.
Alrosa also holds 50% of Namdeb mining company in Namibia, which accounts for about 90% of the country’s annual diamond production of $460 million. The company is prospecting in Namibia, according to Sergei Ulin, Alrosa’s vice president.
In all, the company wants to spend some $3 billion over the next five years. It is already active on the domestic rouble bond market and has plans to raise $300 million with a Eurobond next year.
“This is a long-term industry,” says Shtyrov. “We have to plan our investment programme over the next 20 to 30 years and forecast production over the next 15 years.”
The strategy of long-term planning is new and springs from the political stability that president Putin has brought. In addition to boosting production and increasing the value-added sales of finished gems, the company is investing in its own infrastructure as part of a cost-cutting programme.
A 360MW hydroelectric plant is being built near the Udachni mine to supply the company. As well as diamonds there are economically viable deposits of oil and gas in the region. Alrosa produces 100,000 tonnes of oil a year and 1 billion cubic metres of gas. An oil refinery is being built near the Udachni mine and a 400 kilometre gas pipeline to Minry will provide Alrosa with fuel.
“If we implement all these plans we expect that production can be boosted to $2 billion a year, and we can cut the costs of production by about $50 million a year through the power and other infrastructure projects,” says Shtyrov. “The Eurobond will be used for the development of the mines.”
