Evgeny Agureev: Overall Industry Is In Good Financial & Operational Health

From output forecasts, financial health, midstream stock levels and more, EVGENY AGUREEV, Deputy CEO of Alrosa, shares his views on all this and more.

Evgeny Agureev

With retail jewellery demand showing no signs of slowing down and midstream stocks at historic lows, diamond miners are in an enviable position today. How do you envision this scenario (in terms of rough pricing, production, inventory, etc.) playing out through 2022-23?

Our outlook for the diamond jewellery market remains very positive. Of course, there was an effect of pent-up demand especially in the first half of this year. Diamond jewellery sales in 2021 are expected to hit an all-time high of over $90 billion, close to 20% growth vs 2020, and over 5% vs pre-Covid levels. The largest driver was the USA where demand was over 50% vs pre-Covid levels. Prospects of personal luxury goods and jewellery sales in particular look good on the back of the growth in savings from lower spending on experiential luxury and the significant increase in a number of high-networth individuals, specifically in USA and Asia. The Asian factor, and Chinese in particular, should not be downplayed as these regions demonstrate a quick growth in the middle class and disposable income as well as adopts diamond jewellery gifting culture. We see hundreds of the shops are being opened in the Mainland China, and this growth is far from saturation. We are also excited to see young consumers joining the jewellery consumers’ pool and retailers increasing their marketing budgets.

On the other hand, inventories of both rough and polished goods along the value chain are reportedly low. We hear from the market players that the midstream sold out even least liquid, so called “dead” stocks. What is essential, the overall industry is in a good financial and operational health, pursuing balanced approach to borrowing and focusing on catering real demand for polished diamonds.

Alrosa’s own inventories declined to record low level by the mid-2021, and since then we sell everything we produce.

Moreover, mid-term growth potential for rough diamond production is restrained. Global rough diamond capacity structurally decreased. Starting 2021 and onwards global production is estimated to stand at around 110-120 million carats per year as compared to 140-150 million carats prior to 2019.

We believe that these factors, jewellery demand reaching an all-time high level, lean stocks, limited rough diamonds supply – will offer a good support to retain and grow the value of our market both in the short and long term.

Please provide details about Alrosa’s capital investment in mines to secure future diamond supplies.

Alrosa pays great attention to securing future production. Our mid-term target is to recover our production to 35-36 million carats by 2025-2026 from 32.5 million carats in 2021. This means close to 10% growth, but still 3-5% lower vs our previous peaks of 2018.

Our official production target for 2022 currently stands at 33-34 million carats. However, there might be some upside potential of up to 1 million carats a year. But we do not think we can return back to 37-38 million carats per year. Though we explore all existing opportunities to satisfy end demand, we should be realistic about our ability to increase production.

The increase in production anticipated in 2022 will be mostly due to the ramp-up of the Udachny underground mine that was commissioned in 2015, and the resumption of production at the Ebelyakh alluvial deposit of our Almazy Anabara subsidiary. Ebelyakh couldn’t be revamped in 2021 due to its remoteness and sophisticated logistics.

As for the longer term, we expect the Alrosa Supervisory Board to consider the Mir mine restoration early next year. Once we receive a formal Board approval, we will launch this project, with an active investment phase starting 2025 and the construction taking 6-7 years. After 2030, Mir can contribute 3 million carats of output of high quality rough with a double-digit price premium versus our standard mix. But one should remember that some other assets are exhausting, and these potential 3 million carats per annum will just help us to keep a stable production after 2030s.

Tell us more about the way forward for polished diamond auctions. Does Alrosa guarantee minimum supply of rough to its Cutting & Polishing Division? If yes, in what sizes and categories?

Alrosa Cutting and Polishing Division includes two famous facilities with highly skilled craftsmen and state-of-the-art equipment in Moscow and Smolensk. We are focusing on the upper price range goods, including fancy coloured. Such rough diamonds are scarce by their nature. We draft our production plans based on the market situation, available rough supply and other factors.

In 2021, we hosted five polished auctions instead of initially planned four. For 2022, we have already planned five international online polished tenders with physical viewings in Ramat Gan, New York and Dubai. As in previous years, we will auction regular diamonds 5.00 carats up and fancy coloured diamonds, as well as regular and coloured sets assembled for using in jewellery.

How did Alrosa manage the wellbeing of communities living near mining sites in remote regions during Covid?

Since the beginning of the pandemic, Alrosa has allocated more than $14 million to combat the spread of the coronavirus in Yakutia, where 90% of the company’s operations are located. The company provides financial assistance and medical supplies and equipment to hospitals. Alrosa equips hospitals with medicines, bactericidal units, consumable medical materials, artificial lung ventilators, bedside monitors, oxygen concentrators, ultraviolet units, oxygenators, disinfection equipment, personal pros, equipment and supplies for Covid testing, X-ray machines, etc.

What are some tough decisions that lie ahead you?

As I have already said, we do not anticipate a dramatic increase in rough diamond production in the years to come. With inventories and consumer demand at their current levels, managing the limited supply would be hard work. We highly value all our clients, focusing on additional value creation and satisfying the real-backed demand first.

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