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Table of Contents

Global Markets for Diamonds – Part 5


2.2.2 ALROSA

ALROSA Co. Ltd. is the second-largest diamond mining company all over the world. It accounts for more than 98 percent of the total Russian diamond production. (The New York Times, 2006) ALROSA is owned by the Russian Federation. It also made an impressive performance in 2010, recording $3.4 billion sales that are 1.5 times bigger than the previous year. (Interesting Diamond Facts, 2011)

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In 2005, ALROSA reached $2,510 million in sales. (Rudnicka, 2010) ALROSA Co. Ltd. was established under the president of the Russian Federation's Decree 158C entitled "On the Establishment of the Almazy Rossii-Sakha Joint Stock Company." (Thornhill, 1996) It was enacted on February 19, 1992. In 1996, its rough diamond sales amounted to US$1.6 billion.

Geological surveys showed that ALROSA has ample diamond supplies which can last the company for the next fifty years, given their current production level. Its major mines are situated in the Republic of Sakha. This diamond territory is about four times the size of Texas and its one of the coldest places on earth. The Soviets originally established this mining operation after the discovery of rich diamond deposits in this area during the 1950's. After the collapse of communism, mining operations were privatized. This mining operation was transferred to a new company which they called as ALROSA.

The major stocks of this newly formed diamond company were retained by the federal and local governments. ALROSA began to construct underground mines after its original open-pit mines were depleted. It then accessed the remaining deposits in the area. The company searched farther afield for rich deposits and extended its mining operations in Northwest Russia and in Angola. ALROSA used to sell its diamonds through De Beers for more than forty years. At present, it sells more of its gems through its own direct contacts and through its marketing networks all over the world.

ALROSA has emerged as an industry leader. It has become an independent diamond player in the global diamond market after the Soviet Union collapsed in 1991. (The Global Diamond Industry Report, 2011) It has toppled its industry competitors, De Beers, during the global economic recession. When all the others were reducing their diamond outputs in 2009, ALROSA sustained its production. Hence, it assumed a volume leadership position in the same year.

ALROSA maintained this position in 2010 with a diamond production of 34.3 million carats. Meanwhile, rival De Beers also magnified its production by 35 percent to 33 million carats in 2010 after it dramatically cut back its diamond production during the recession. Rio Tinto and BHP Billiton slightly reduced their production in 2009. In the following year, Rio Tinto produced 13.8 carats while BHP Billiton produced 3.0 million carats, respectively. (The Global Diamond Industry Report, 2011)

Just like De Beers, ALROSA is involved in various aspects of diamond chain, which includes exploration, mining, manufacturing, and diamond sale. It produces almost one hundred percent of Russia's rough diamonds and more than 20 percent of the global rough diamond production. It holds 12 percent of the diamond exploration spending. (Chang, 2002) Aside from its Russian mines, ALROSA also mines in Catoca Kimberlite, Angola. This site is fourth largest mine globally. It is also Angola's biggest producer of diamonds.

Although ALROSA has supplied De Beer's Diamond Trading Co. with rough diamonds, it now aggressively markets its own diamonds to fully uplift the Russian diamond-cutting industry. By establishing its own diamond marketing company, ALROSA intends to cut the agents and directly market its own diamonds. This is how it leverages itself in the global diamond market.

The two other major players in the global market for rough diamonds are Rio Tinto and BHP Billiton. Each of them hold less than 10 percent market share in the total market. (The New York Times, 2006) (Aber is also a significant rough diamond player with less than 10 percent of the rough diamond market but it will be discussed later in the general discussion of the diamond industry players. Aber, just like Leviev, is relatively new in the industry; unlike these big four which are institutional players in the rough diamond sales.)

Rio Tinto is a key Australian player in diamond mining. It accounts for 9 percent of the world diamond production and 12 percent of exploration spending. (The Global Diamond Industry Report, 2011) In 2005, it has total sales of $19,033 million and a net income of $4,969 million. (Rudnicka, 2010) However, its sales portfolio includes coal sales, which is about 20% of its total sales. It also produces aluminum copper, gold, iron, and uranium. Rio Tinto's mother companies were established in 1873 and 1905. The Rio Tinto Company was created by several investors in 1873 to mine old copper workings at Rio Tinto, near Seville, Spain. In 1905, the Consolidated Zinc Corporation was incorporated to treat zinc bearing mine waste at Broken Hill, New South Wales, Australia. In 1962, the RTZ Corporation (formerly The Rio Tinto-Zinc Corporation) was born out of the merger between The Consolidated Zinc Corporation and Rio Tinto Company. (Rio Tinto Website, 2012)

Another mining company known as CRA Limited was formed at the same time RTZ was merged. This was roughly between 1962 and 1995. Both RTZ and CRA explored and discovered important mineral deposits. They shared on various large, mining projects. Hence, they later consolidated as one major company in 1995 through a dual listed companies structure. By this corporate structure, RTZ and CRA both had its identical board of directors and shareholders who hold the same powers, voting rights, rights to dividends, and other corporate features. In 1997, the RTZ Corporation was changed into Rio Tinto Plc and CRA Limited was changed into Rio Tinto Limited. They together formed a major company called Rio Tinto Group. The company's mines produce the highest mass of diamonds. However, these diamonds are not of highest value. Its two large Australian mines are Argyle Mine and Merline Mine. The former produced 30.91 million carats in 2005 while the latter produced 62,000 carats in the same year.

Rio Tinto has recently operated its Canadian mines. It has a 60 percent stake on Canada's Diavik Mine. This mine has produced 3.8 million carats in its initial year of operations and it proved to be a highly profitable venture for Rio Tinto as this mine produced 9,829,000 carats in 2005. The company also operates in Murawa, Zimbabwe, in which it has a 77.8 percent share. This African mine produced 240,000 carats in December, 2006. (The Global Diamond Industry Report, 2011)

Rio Tinto sells its rough diamonds in Antwerp, Belgium and it also sells polished pink diamonds from its Argyle Mine to various wholesalers, retailers and manufacturers. (Rio Tinto Annual Report, 2011) Over the last years, the Rio Tinto Group of Companies has assailed the global diamond markets by investing in developments and acquisitions in order to keep its strategy. (Rio Tinto Website, 2012) Unlike the other producers, Rio Tinto seems to scale back rather than expand its operations. It is gaining strong footing in Australia and Canada and its strategy includes strengthening its market hold of two important markets for the next few years. According to Chang (2002), it aims to concentrate its efforts in these operations because it intends to avoid the risk of over extending itself and thus failing to lead in any diamond market.

The fourth and final historic industry player in the rough diamond sales is BHP Billiton, another Australian diamond mining firm. Billiton is the largest world resources company. (The Global Diamond Industry Report, 2011) Like Rio Tinto, it is also involved in mining other products. Aside from diamonds, it produces aluminum, base metals, coal, iron ore, manganese, petroleum products, and stainless steel. Billiton has also developed a vital and growing copper portfolio (BHP Billiton Website, 2012).

The humble beginnings of Billiton trace back to a tin mine on a little known Indonesian Island called Billiton (Belitung) in 1860. It merged with another silver, lead and zinc mine in Broken Hill Australia, which was incorporated in 1885 as Broken Hill Proprietary or BHP. Their merger happened in June 2001 and it consolidated their position as "one of the world's largest diversified resources company." Billiton plays a relatively important role in the diamond industry. It constitutes about 6 percent of world diamond production.

Its major cash cow for the diamond industry is its Ekati Pipe in Canada (Billiton owns 80 percent). Ekati produces about 4 million carats of rough diamonds annually and this is about 3 percent of the world market share of rough diamond production in terms of weight. It constitutes about 6 percent of the world market in terms of value. Most of BHP Billiton's sales are gathered from the Antwerp Exchange Center. Billiton sells both rough and polished diamonds to many manufacturers. The company sells about 10 percent of its rough diamonds to Canadian manufacturers. It sells its polished diamonds through its contract polishing arrangements by its CanadaMark™ and AURIAS ™ brands.

BHP Billiton is in a good market position since it has vital subsidiaries performing well for the major company in Australia. However, Billiton needs to expand into direct retail sales in order to retain and increase its market shares in the global diamond business. The operating margins for these industry players stay at the range of 25 to 50 percent.

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Based on public data, De Beers and ALROSA make the most financial gains out of their large diamond production. Their EBITDA margins are 24 percent and 31 percent, respectively. On the average, junior diamond players (as they are called in the diamond industry), tend to have relatively comparable or even higher operating margins. For instance, Petra Diamonds gathered 43 percent margin. Meanwhile, the remarkably high operating margin of BHP Billiton of 51 percent is due to the company's highly profitable Ekati mine in Canada, Billiton's cash cow. It is the company's only diamond asset.

The latest development in the diamond industry happened at the start of the new millennium when the European Commission received De Beers' commitment to slowly reduce and finally terminated its purchase of rough diamonds from ALROSA, Russia's largest diamond company. Those transactions started to diminish in 2006 and completely ended after 2008 (The Global Diamond Industry Report, 2011).

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