Research Notes

Alrosa Nyurba – a Great Opportunity to Enter Alrosa's Charter Capital

Many market participants expect diamond product prices to climb in the coming years and Alrosa stands to gain the most among domestic peers from this trend. Since the company's shares do not trade on the stock market, investors are advised to pay attention to the shares of its subsidiaries, primarily Alrosa-Nyurba whose stock valuations should climb. We view as another upside factor possible swap of the company's shares for Alrosa securities as part of the latter's asset consolidation.

Alrosa, one of the world's largest diamond producers, engages in diamond exploration, production, processing and sales. The company produces around 95% of diamonds in the Russian Federation and it accounts for nearly 20% of the global market in kind and 25% of terms of value. Aggregate diamond output amounted to $2.33 bln in 2006 (Alrosa-Nyurba accounted for 23% of output) and sales of diamond feedstock generated $2.86 bln and diamonds $141 mln.

Ongoing changes in the diamond industry will help further ramp up Alrosa's diamond sales, which will boost the company's earnings. Alrosa Nyurba could also capitalize on higher prices, since the subsidiary obtained an export license for diamond products, which will enable Alrosa-Nyurba to bypass Alrosa as an intermediary.

We expect Alrosa to consolidate subsidiaries on its balance sheet in 2008 in order to prepare for an IPO by swapping subsidiary shares for securities in Alrosa itself (the company's reorganization from a closed to an open joint stock company will be another step towards this goal). For this reason, we view the acquisition of shares in Alrosa's subsidiaries as the most efficient way to enter the company's charter capital.

Alrosa has already started to buy out shares in subsidiaries. With 51% in its subsidiary Almazy Anabara on its balance sheet, Alrosa acquired the remaining 49% at the auction for nearly Rub 2.278 bln (around $90 mln) in September. Thus, the entire subsidiary was valued at nearly $184 mln. Based on this valuation, P/E (2006) is around 15 and EV/EBITDA around 6. If such ratios are applied to Alrosa-Nyurba's financials, the share price will significantly exceed the current market valuations.

Alrosa-Nyurba currently trades at 7.1, 1.7 and 5.1 on P/E, EV/S and EV/EBITDA, respectively. This is much lower than average values for foreign peers (P/E=19.1; EV/EBITDA=10.8 and EV/S=4.4), which provides for considerable upside potential of the company's shares.

According to our estimates, based on a comparative analysis with industry peers, the fair price of Alrosa-Nyurba should be around $3,331 per share, up 120% on the current average market price.

Clients of Finam Investment Company may receive full versions of analytical research reports translated into English by sending requests to the International Trading Department.

Denis Gorev

* Short overviews of equity research reports and sector reports are posted on the website http://www.finamrus.com with a 1-day delay after their full versions are emailed to the company’s clients. To get overviews on the day of their release, please contact your manager at Finam to sign up for full versions of research reports.

Sector: Metals, Non-Ferrous Metals
Company: Alrosa-Nyurba

All Research Notes >>