Alrosa (MCX: ALRS) — state diamond mining holding, world leader in terms of diamond production.
11 November, the company published consolidated financial statements based on the results of the first 9 months of 2021. According to the report, revenue increased by more than 2 Times, and the net profit in 7,2 times higher than the results of the same period last year. I propose to take a closer look at the key financial indicators, to understand, how did the business manage to provide such a strong momentum.
Disclaimer: if we write, that something went up or down by X%, then by default we mean a comparison with the report data for the same period last year, unless otherwise stated.
Position in the industry
The multiple growth of financial indicators is associated with the recovery of sales after the crisis and the low base of 2020. Let me remind you, that in the previous two years, the diamond mining industry faced two serious crises at once.
Customs crisis. Diamond demand and prices collapse in 2019 due to customs problems in India, where the world's largest diamond cutting and polishing facilities are located. The introduction of additional customs restrictions has complicated the import of raw materials into the country. As a result, Indian manufacturers reduced their cutting volumes by 20%, what affected the business of Alrosa.
Coronavirus pandemic. 2020 year has prepared new challenges for the diamond industry. Coronavirus and the imposition of restrictive measures have led to a drop in demand for diamonds around the world and disrupted supply chains. From April to July, Alrosa's sales fell to almost zero, and management suspended production at several enterprises, to prevent a crisis of overproduction. Since August, market demand has begun to recover, and in December, the company recorded a monthly sales record. But overall sales in 2020 turned out to be a failure, updating the lows of recent years.
After two difficult years, 2021 turned out to be a truly breakthrough year for Alrosa. Against the backdrop of a recovery in global demand for rough diamonds, sales in the first 9 months grew in 2,4 times - up to 36.1 billion carats, which allowed the holding to break the 2017 record.
It is worth noting, that production can't keep up with demand, despite the resumption of production at previously closed fields. As a result, Alrosa is selling off stocks, which decreased by 72% and are based on 3 quarter near multiyear lows. Against the backdrop of a shortage of rough diamonds, the company's management purchased diamonds from the state at the auction of the Gokhran of Russia for resale. This solution allows the company to meet customer demand., but reduces the overall profitability of sales.
Diamond sales per 9 Months, million carats
| 2016 | 30 |
| 2017 | 31,8 |
| 2018 | 29,1 |
| 2019 | 25,3 |
| 2020 | 15,1 |
| 2021 | 36,1 |
30
Revenue and profit
Against the backdrop of growing rough diamond sales, Alrosa's revenue from sales for 9 months of 2021 grew by more than 2 times - up to 257.4 billion rubles. This result not only exceeded the levels of pre-crisis years, but also allowed to update the historical maximum. Moreover, more 91% sales of diamond products were exported.
The structure of revenue from the sale of rough and polished diamonds
| Export | 91,2% |
| Domestic sales | 5,1% |
| Revenue from the resale of diamonds | 3,7% |
91,2%
Along with the income, the cost of sales also increased in 2,4 times - up to 134 billion rubles, – which is mainly due to the increase in taxes on mining, increase in the cost of diamonds for resale, as well as with the reduction of own stocks.
General and administrative expenses increased by 31% - up to 13.1 billion rubles - due to an increase in salaries and other payments to employees. Moreover, the costs, related to commercial activities, increased by 26% - up to 2.5 billion rubles. Other operating income decreased by 2,4 times - up to 6 billion rubles - against the background of a decrease in income from exchange rate differences. As a result, operating profit increased by 2 times and reached 97.1 billion rubles.
Finance income fell by almost 3 times - up to 10.7 billion rubles, and financial expenses fell to 4,4 times - up to 15 billion rubles. This is due to the revaluation of exchange rate differences. At the same time, profit from participation in joint ventures against the background of a favorable market environment increased from 1,3 up to RUB 7.1 bln thanks to an increase in the profit of a joint diamond mining enterprise in Angola. Income tax expense increased from 3,8 up to 20.8 billion rubles.
As a result, the net profit of the holding for 9 months of the current year increased by 7,3 times - up to 79.2 billion rubles.
Financial performance of Alrosa for 9 Months, billion rubles
| Revenue | Operating profit | Net profit | |
|---|---|---|---|
| 2016 | 255,6 | 127,8 | 116,9 |
| 2017 | 211,1 | 75,9 | 61,9 |
| 2018 | 234,2 | 112,7 | 82,5 |
| 2019 | 169,9 | 60,8 | 51,1 |
| 2020 | 119,5 | 48 | 10,9 |
| 2021 | 257,4 | 97,1 | 79,2 |
Dividends and debt
10 March 2021, the company approved a new version of the dividend policy, in which management clarified the methodology for determining the amount of dividend payments.
Free cash flow for the reporting period - the basis for calculating dividends, at the same time, the share of payments depends on the current level of debt burden, which is calculated using the net debt / EBITDA ratio.
The total payment must be at least 50% from the consolidated net profit at the end of the reporting year. Besides, the total amount of dividends must not be less 50% of the amount of net profit under IFRS for the corresponding year.
Net debt of Alrosa according to the results 1 half of 2021 was in the negative area, this means, that the company's total loans and borrowings were less, than the amount of money and their equivalents in the accounts. Based on the results of 3 quarter, after payment of dividends for 2 half year 2021, net debt returned to positive territory and amounted to 8.9 billion rubles. At the same time, the net debt / EBITDA ratio has decreased since the beginning of the year from 0,4 up to 0.1 ×, which indicates a low level of debt and high financial stability of the holding, which means, dividend payments are not threatened.
Free cash flow of the company following the results of the first 9 months grew in 6,3 times and reached a record 89.2 billion rubles. Thanks to this, the company announced interim dividends based on the 1 half of this year in the amount of 64.7 billion rubles, or 100% free cash flow.
Dynamics of the debt burden at the end of the period, billion rubles
| net debt | Net debt / 12mEBITDA | |
|---|---|---|
| 2017 | 86,0 | 0,7× |
| 2018 | 67,4 | 0,4× |
| 2019 | 79,6 | 0,7× |
| 2020 | 31,2 | 0,4× |
| 9м2021 | 8,9 | 0,1× |
Free cash flow for 9 Months, billion rubles
| 2017 | 61,8 |
| 2018 | 62,0 |
| 2019 | 30,8 |
| 2020 | 14,3 |
| 2021 | 89,2 |
61,8
History of dividend payments, billion rubles
| 2016 | 65,8 |
| 2017 | 38,6 |
| 2018 | 73,9 |
| 2019 | 47,7 |
| 2020 | 70,3 |
| 1п2021 | 64,7 |
65,8
What's the bottom line?
After two years of crisis in a row, the situation on the diamond market has finally turned out to be favorable. Against the background of a low base in 2020, the growth of operating and financial indicators of Alrosa following the results of the first 9 months of 2021 looks impressive. The company managed to earn record revenue, significantly increased profits and free cash flow. At the same time, the debt burden is at an all-time low.. Against this background, shareholders received generous dividends in the first half of the year and can expect to continue in the second.
But new problems have emerged due to the rapid recovery of the market.. World production is not keeping up with demand. Diamond mining companies cannot ramp up diamond production as quickly, and this leads to a reduction in raw material reserves not only in Russia, but all over the world. We see this problem in the results of Alrosa, which not only removed record volumes of diamonds from its vaults and reduced stocks to multi-year lows, but she also bought additional volumes from the state.
Management predicts, that by the end of the whole of 2021, production volumes will amount to about 32.5 million carats, which is on average lower than the pre-crisis level. In the coming years, the company expects to return to the average level of production in the region of 35-36 million carats. At the same time, the diamond mining industry has a rather long investment cycle and more than 10 years. This means, what, even if demand grows even stronger, the company is unlikely to be able to significantly increase production volumes.
Against the backdrop of declining rough diamond reserves and the industry's limited ability to quickly increase production, the global market may face a shortage of rough diamonds in the coming years. This, in its turn, could lead to a sharp rise in prices for rough diamonds and positively affect the revenues of diamond mining companies.
