November 2011 Confidential Fleming Family and Partners Asset Management LLC

diamonds in 2011 is estimated at 124 million carats. Major

producers are Botswana (21% of total), Democratic Republic of the Congo (21%), Russia (17%), Canada (10%), Angola and Australia (contribute 9% each), South Africa (8%) and Namibia (accounts for 2% of world production). Among the leading companies are: De Beers with 25% (85% of the company belongs to Anglo American) and Alrosa (26%). Rio Tinto holds 10%, BHP Billiton – around 2%.
Market of diamonds is characterized majorly by decreasing or flat production and rising demand from the US (40%), China and India sides. There were no significant discoveries of the diamond fields for the last 10 years, the share of open-pit mining falls and the closed way is substantially more complicated and expensive. There are 30 major diamond mines globally, and of the annual $12 billion world diamond production, only 13 mines produced $300 million or more each.
Alrosa OAO – is a major diamond-mining Russian company. Core shareholders are - Federal Agency for the Administration of State Property (50.93%), Ministry of Property Relations of the Republic of Sakha-Yakutia (32.00%), uluses of RoS-Yakutia own 8%. Treasury stocks of the company for the 1H 2011 have risen from 0.3% to 2%. The residual 7% make up a free float and are distributed between a group of investment companies (VTB Capital (>0.5%), Kit Finance, Vostok Nafta (0.5%), BCS, Metropol), high net worth individuals (for instance, Kerimov owns about 1%) and the Alrosa employees.
In 2010 Alrosa has increased its diamonds production by 5% compared to 2009, to the level of 34.3 million carats a year. The same year the company sold 5.2 million carats from its own stocks. In the 1H 2011 it was produced 10% more than in the 1H 2010. Average price of the carat sold has increased from $72 (2009) to $79 (2010) and now beats $113 (+43%). Alrosa has launched a brand new distribution system and has started to sign the long-run contracts tied to market prices. Average duration of such contracts exceeds 3 years and thus ensures the revenue flow.
In the 1H 2011 EBIT has increased by 22%, net income has risen x5.2 times, COGS decreased by 25%. EBITDA margin reached 54%. The debts are majorly long-run. Net Debt/EBITDA gradually falls from 5.9 (2009) to 2.9 (2010). We expect the further decrease to final 1.82 in 2011.

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of companies to be privatized in 2012-2017 on a first-priority

basis. It is known the government intention to sell 50.9%, but the final decision will be known later.
The government is interested in the development of company. Alrosa reports the government is to support the rough diamonds sale as it was done in 2010. This means that sales are at least partially ensured and therefore the cash flow is more stable than ever before.
Alrosa has a 25% market share of rough diamonds. In April 2011 the company has changed its form from CJSC to OJSC. In September 2011 it was made a split of shares with the coefficient 1:27005. Since 13 of October, 2011 the shares are on the market again.
Company plans IPO (possibly, simultaneously with SPO) in Spring 2013. Now the trade is available via the OTC market. We also expect the listing on MICEX (March 2012).
Alrosa is going to become the largest public diamond-producing company. Now it is announced the interest from Indian state-owned company MMTC on the block of 10%.
Top management of Alrosa and analysts expect the price to be in the range of $1.63 – $1.9 per share to the end of 2012- beginning 2013. We are ready to offer for sale up to 40 million shares (about 0.5% of the company).
Demand for diamonds and gemstones significantly exceeds the supply and this spread keeps widening thus creating deficit. This is fueled by the rising middle class population (growth rate over 10-12% per year) in China and the Indian rough diamond processing industry. Since 1990 there was no significant diamond deposit discoveries, which supports the trend for a further rise in prices.
Strong fundamentals keep on strengthening: in 1H 2011 revenue reached 66 bn. RUR, EBITDA margin: 54%, net income increased x5.2 times, COGS fell 39.2% down, Net Debt/EBITDA is now less than 2.
Alrosa is excluded from the list of strategic entities. This enables it to get rid of some restrictions and get more business development opportunities.
Diamonds are not traded as the commodities. This means the absence of speculative capital in their prices.
Investors have a strong interest in new hedging instruments: gold is overbought, silver’s volatility is too high, the US government bonds don’t look so attractive anymore. European bonds depend a lot on market expectations and situation in PIIGS countries.
Support level for Alrosa shares is at $1.32, that is the equivalent price Russian government paid in 2008 to buy out the additional emission. We see this price as minimum in the offering price range.

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in 2011 and +22% in 2012 due to the demand

boost in India and China.
According to the internal forecasts the accumulated net income for 2012-2018 will make up over $5.7 bn.
Company looks good if compared to the peers group. Core multipliers are:
P/E = 16, P/S = 2.2, EV/EBITDA = 6.3. All estimates do not take account of that Alrosa is about to become the largest publicly traded diamond company, this fact will add a premium for market capitalization and will further increase attractiveness of the stock.
Alrosa estimates itself at 1.35 USD/share till the end of 2011 and at 1.63-1.90 USD/share on the IPO/SPO in 2013.

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EBITDA forecast for Alrosa OAO, mln. RUR

The price is received from the RTS Board quote which is just an indicator, not the real price for deals (please, see www.rts.ru/s1011 for reference).

LLC
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