Alrosa · RUS:ALRS
Alrosa — Investor Day (March 2020)
62 slides from Alrosa's investor day presentation, Mar 10, 2020
Slide 1: ALROSA Investor Day 2020
ALROSA Investor Day 2020 10 March 2020
Slide 2: Disclaimer
Disclaimer For notes: The below applies to the presentation (the “Presentation”) following this important notice, and you are therefore advised to read this important notice carefully before reading, accessing or making any other use of this Presentation. This Presentation contains statements about
Slide 3: Table of Content
Table of Content 01. Message from CEO p.4 02. Market update p.18 03. Strategy execution p.25 04. 2019 financials and outlook p.41 05. Appendix p.44
Slide 4: Message from CEO
01 MESSAGE FROM CEO
Slide 5: ALROSA at a Glance
ALROSA at a Glance Global market leader with best-in-class assets and returns ❶ Leader in diamond production Yakutia of Sakha 27% market share in global diamond mining Russia Republic Arkhangelsk (Yakutia) region ❷ High-quality asset base with the largest reserves base Resources of 1,064 m ct, incl.
Slide 6: Diamond Market Update: Perfect Storm in 2019
Diamond Market Update: “Perfect Storm” in 2019 When it rains it pours Retailers: (too) optimistic expectations in 2018 Financial bubble burst hitting mid-stream Retail: Rise of on-line • Strong 2017/2018 Christmas and growth • In early ‘10s Indian banks beefed-up • ‘Shopping around’ online to buy je
Slide 7: Managing Through the Downturn
Managing Through the Downturn Customer-centric approach and focus on maximizing cash flows Min. allowed contract allocation level Output cut down Capex downscaled m ct RUB bn Initial Revised 80% -4.5 m ct 70% 38.5 38.7 34.2 29 26 20 22 55% 55% Jan'18 Sep'18 Jul'19 Dec'19 2019 2020E 2020E 2019 2020E
Slide 8: 2019 Dashboard
2019 Dashboard How we performed Global output leader with flexible sales Resilient superior profitability Sustaining cost leadership m ct Production Sales EBITDA, $ bn EBITDA margin (RUB) Per unit nominal cost, RUB '000/m3 38.4 37.1 38.5 51% 52% 36.7 38.1 45% 1.15 33.4 1.14 1.12 2.2 2.5 1.7 Av. 2015
Slide 9: Management Action Plan
Management Action Plan Sustainability Efficiency Growth opportunities Innovations ESG centric approach Operational Efficiency Projects Customer-centric approach in sales Digitalization of operations Health and Safety Production System launch and new channels development B2B and B2C dig
Slide 10: Employee Safety is Our Top Priority
Employee Safety is Our Top Priority Initiatives started to deliver qualitative changes Prevention program success … which translates into “systemic” change LTIFR – ALROSA vs industry1 Number of accidents Lost Time Injury Frequency Rate per 200,000 hours Potential accidents Non-potential Fatalities S
Slide 11: Creating a Clearer and Sustainable Environment
Creating a Clearer and Sustainable Environment Funds for green initiatives Unique business model Tier 1 positions among M&M peer group 2 RUB bn, cumulative Share of “green1” energy as % of total consumption ALROSA M&M peers 21% 25.6 Emissions/$ 100% 19.0 6.6 Green1 energy 14.8 4.2 Water 97% 10.4 4.4
Slide 12: Employee Training and Development System
Employee Training and Development System … to further improve long term competitiveness and productivity Key initiatives and programmes Continued investments in human capital development Remuneration system simplified – clear links % of employees having received training Improvement to performance
Slide 13: Support to Local Communities
Support to Local Communities Contribution to local society Investments in community programs2 Breakdown of community expenditures3 RUB bn %, 2016-2018 median 30% Local Taxes 49 3.0% infrastructure 4% Healthcare 2% Education Wages 32 RUB 11% Other 1.2% 7.3 bn Dividends 19 0.6% 0.5% 0.5% 53% Charity 1
Slide 14: Corporate Governance
Corporate Governance Acting in best interests of shareholders and focusing on the long term value creation Board of Directors structure • Active Board agenda: 15 members o Focus on continuous business transformation to ensure long-term competitiveness and sustainable production 6 – Russian Federatio
Slide 15: Diamond Producers Association
Diamond Producers Association Key initiatives DPA marketing campaigns by regions Latest DPA’s activities include: % represents share of a region in global jewelry consumption 360 consumer advertising campaigns across all key markets (USA – 6% India (from 2017) “Diamond journey”, China – “Hands of
Slide 16: Marketing Strategic Initiatives
Marketing Strategic Initiatives Generic marketing Category marketing Participation in Diamond Producers Association (DPA) to • Diamonds with provenance program maintain and enhance consumer demand for natural (collaboration with leading European jewelry brands) diamonds • Branding initiatives pilo
Slide 17: Journey Ahead
Journey Ahead Developing Efficient Organisation... …and Taking Advantage of Strong Market Fundamentals… Focus on Core Business and Efficiency Unique Product …to Maximise Free Cash Prudent Capital Allocation Growing Demand Flow and Shareholder Returns Conservative Financial Policy Declining Supply 01
Slide 18: Market Update
02 MARKET UPDATE
Slide 19: Diamond Industry Dynamics
Diamond Industry Dynamics Diamond jewelry sales Rough diamond sales Rough diamond output $ bn $ bn m ct 15 17 15 ~80 14 176 80 13 13 151 142 61 12 12 8 52% 57 120 126 25% 20% 19% 11% 13% 7% 5% 3% 4% 0% 5% 4% 3% 9% 1% 5% 7% 4% 1% 2% (7%)(5%) (3%) (2%)-0% (0%)(2%) (5%) (5%)(3%) (4%) (4%) (1%) (2%)(4%)
Slide 20: Diamond Jewelry Demand
Diamond Jewelry Demand Stable with solid growth fundamentals Diamond jewelry demand geography Undisputed symbol of love Long-term fundamentals remain intact 2019 – $80 bn Real disposable income growth CAGR 2019-2030F India Gulf RoW Natural beauty that 74% India 6% can’t be replicated Pass down China
Slide 21: 2019 Rough Diamond Sales
2019 Rough Diamond Sales Rational behavior is needed to maintain the value of the diamond Rough diamond supply decreased ALROSA LFL prices kept resilience Market turned to recovery in mid-2019 $ bn Other producers Av. index change, % $m MoM change ALROSA and De Beers ARP (gem-quality diamonds) per c
Slide 22: Supply Continues to Tighten
Supply Continues to Tighten Due to the depletion of existing deposits 2018 to 2024E supply forecast – 22 m ct down Depletions: ~30 m ct @ $54/ct3 m ct $/ct, price per ct on depleting projects in 2018-2024E2 148 Victor: $219/ct 142 138 Other1 Debswana: $155/ct 129 128 126 126 South Africa Angola Cato
Slide 23: Favorable Supply/Demand Fundamentals
Favorable Supply/Demand Fundamentals … will drive the market into a deficit and support positive diamond price pressure Global Supply / Demand balance outlook m ct Demand base-case scenario (1% CAGR) Supply Accumulated diamond deficit 151 156 in 2019-2023 ~100 m ct 130 70% of annual 126 production 2
Slide 24: Man-made Products (LGDs) Update
Man-made Products (LGDs) Update Drifting down to find its niche Recent trends: 2019 price trends in LGD market LGDs – feedstock for a non-diamond jewelry Like-for-like prices LGD vs Natural diverge $ bn ❶ Capacity goes up Clear labeling enforced by ❷ LGD Natural Diamond jewelry regulators (e.g.
Slide 25: Strategy Execution
03 STRATEGY EXECUTION
Slide 26: Production Outlook
Production Outlook Potential to produce up to 38 m ct per year Production outlook Key drivers m ct 38.5 2020 output was reduced in response to the market 36.7 37-38 situation 1.4 Other1 1.5 34.2 Aikhal Division Jubilee 0.6 Development of new projects/debottlenecking vs 2018: 7.2 Aikhal 9.1 7.2 o
Slide 27: Focus on Value Accretive Capex
Focus on Value Accretive Capex Capital-intensive phase is over Capex dynamics Key projects RUB bn Infrastructure: total 2020-24 capex – RUB 32 bn Mirny Airport: 2020-’23 Capex ~RUB 8 bn 29 Gasification of Udachny Division: 2020-’22 Capex RUB 5.4 bn 28 26 Infrastructure 3 Sales and sorting faci
Slide 28: Focus on Operational Efficiency
Focus on Operational Efficiency Expansion of the program translates into lower costs and higher productivity Group-wide ongoing initiatives Apply strict control over costs Number of top-down / bottom-up initiatives Nominal 1, 000 RUB/m3 2 %, YoY in real terms 1.16 1.15 267 1.14 1.12 6 Other Business
Slide 29: Case Study: Operational Turnaround Program at Nyurba
Case Study: Operational Turnaround Program at Nyurba To be replicated and scaled up across other divisions Key streams and initiatives Run of mine Diamond production m m3 m ct Improving mine fleet dispatching +11% +33% processes by SIC1 procedures 10.3 implementation 17 19 1.8 Optimizing equipme
Slide 30: Case Study: Operational Efficiency at Udachny
Case Study: Operational Efficiency at Udachny Production facilities of Key streams and initiatives UG mine production capacity Udachny Division are based in m t pa town of Udachny (550 km New management team – revision of +2x north of Mirny) organizational structure and processes Ore from V. Munsk
Slide 31: Case Study: Automotive Transport Optimization
Case Study: Automotive Transport Optimization Centralization and usage-based approach provide long-term cost cutting effect Key streams and initiatives Number of vehicles Cumulative effect in cost cutting Units -38% RUB m, expenses related to transportation Enhanced vehicles utilization 1,240 Ro
Slide 32: Case Study: Improving Efficiency of Support Functions
Case Study: Improving Efficiency of Support Functions Optimization of sourcing/logistics and centralization of support functions Sourcing and Logistics Shared Service Centre Scope Program launch Scale Scope Program launch Scale Expanding 2018/19 RUB124 bn1 Group-level 2017/18 RUB1.4 bn2 to Group-lev
Slide 33: Case Study: Working Capital Management
Case Study: Working Capital Management Reduction in rough diamond WIP inventory days Key enablers Reduction of diamonds WIP2 cycle Team and capability development Decrease in average … leading to lower rough diamond … and by Value2 WIP Cycle WIP inventory by Volume Productivity monitoring and be
Slide 34: New Initiative: Production System Launch
New Initiative: Production System Launch Building continuous improvement culture ALROSA Production System launched in 2019 Key stages: Diagnostics/Piloting > System Adjusting > Scaling up 2019 results: Nyurba Division project – elements of PS were introduced From Project Success… …to Systemic Chan
Slide 35: New Initiative: Dedicated Digitalization Program
New Initiative: Dedicated Digitalization Program All-encompassing digitalization program at all levels of ALROSA’s operations Program description Key initiatives Plans for 2020 Digitalization program was launched Organizational redesign to ease digital in December 2019 Advancement of project ini
Slide 36: Digitalization Project Overview
Digitalization Project Overview Digital twin and online auctions Diamonds tracing Project envisages creation of digital twins for diamonds of 2CT+ Given increasing importance of sustainable consumption and unifying various diamond parameters collected preference for ethically sourced products, d
Slide 37: New Initiative: Maintenance Efficiency Improvement
New Initiative: Maintenance Efficiency Improvement Program launch Scale Scope 2020 RUB 20 bn1 Group-level Key initiatives in 2020-2021 Centralization through organization redesign and model of competences distribution Processes optimization (operational efficiency, IT, standardization of the pro
Slide 38: Capital Allocation – Key Principles and Policy Overview
Capital Allocation – Key Principles and Policy Overview Key principles and policy overview Focus on Core Prudent Capital Conservative Business Allocation Financial Policy Organic Growth Investment Program Commitment to with 20%+ IRR1 Balanced Debt Profile Operating Efficiency Divestiture of FCF-link
Slide 39: Strong Balance Sheet
Strong Balance Sheet … with leverage at historic-lows Highlights Net Debt evolution to investment grade credit ratings • Total debt is $1.9bn with the average cost of 4.8% pa $m 1.9x 1.9x 1.7x • Investment grade credit rating 3,951 0.7x 0.7x • S&P – BBB- (Stable) 3,119 2,781 0.5x 0.4x • Fitch – BBB-
Slide 40: Dividend Policy Focused on Maximisation of Shareholder Returns
Dividend Policy Focused on Maximisation of Shareholder Returns Historical dividend payments1 Dividend policy overview $m 1,281 1,110 Dividend 929 Free Cash Flow 662 Base H1’18 448 12M’16 H1’19 311 244 190 619 480 Frequency Semi-annual 12M’17 12M’13 12M’14 12M’15 H2’18 2014 2015 2016 2017 2018 2019 D
Slide 41: 2019 Financials and Outlook
04 2019 FINANCIALS AND OUTLOOK
Slide 42: Key Financials
Key Financials Resilient financial performance with strong margins and positive free cash flow Highlights Superior profitability $ bn Revenue EBITDA EBITDA margin (RUB) Q4’19: 52% 45% 57% 57% Revenue came at $1.0 bn (+43% QoQ) due 50% 44% 46% 46% 44% 44% to a 28% growth in sales in carats. 10% YoY
Slide 43: Outlook
Outlook Market outlook ALROSA performance Long-term fundamentals of the industry remain strong – 2020 production to decrease to 34.2 m ct diamond jewelry demand continues to expand as real disposable income grows 2020 sales will depend on market conditions, but expected to recover from 2019 tr
Slide 44: Appendix
05 APPENDIX
Slide 45: ALROSA: Key Highlights
ALROSA: Key Highlights Rough diamond sales m ct ● Company demonstrates stable – above 45% margins Av. selling price for gem-quality diamonds, $/ct 174 172 ● … well supported by cost control / high utilization rates at the 170 149 164 136 133 mines ● Capex to trend down as growth projects are up and
Slide 46: Diamond Value Chain
Diamond Value Chain Rough diamonds Polished diamonds Diamond jewelry Cutting & Jewelry Production Sales Sales Sales polishing manufacturing • Exploration of diamond • Sale of rough diamonds • Cutting and polishing • Polished diamond • Jewelry design and • Diamond jewelry resources from producers rou
Slide 47: Consolidated Diamond Supply
Consolidated Diamond Supply ~60% of global rough diamond output Core diamond mines of the BIG-3 market leaders is attributable to BIG-3 2019, share in global diamond production 5% Catoca1 27% ALROSA 22% De Beers 142 m ct 12% Rio Tinto Republic of Sakha (Yakutia) 31% Other Arkhangelsk 3% Petra Diamon
Slide 48: Information on Assets
Information on Assets Type Cash costs, $/ct Price, $/ct Spread, $/ct Grade, ct/t Diamond production, ‘000 ct Expected JORC reserves, of mining LOM ‘000 ct 2017 2018 2017 2018 2017 2018 2018 2019 2017 2018 2019 2020F Aikhal Division 13,011 11,850 10,147 9,495 175,561 Jubilee pipe open-pit 18 191 141
Slide 49: Delivering Superior Shareholder Return
Delivering Superior Shareholder Return Total shareholder return since the IPO date (October 28, 2013) ❶ ALROSA’s free float increased by 10.9% in July 2016 93.4% 81.7% ❷ ALROSA’s shares included in MSCI Russia Index (May 2014) ❸ ALROSA’s dividends reached 100% of FCF (starting H2’18) ❹ Highest TSR v
Slide 50: Demand Drivers
Demand Drivers Highlights Global luxury market breakdown in 2019E € bn 2019E luxury market valued at c. €1.3 trillion Incl. ~1/3 42 34 26 1,268 76 53 (+8% YoY) is steadily growing of diamond jewelry 206 550 Most dynamic growth is concentrated in Asia 281 incl. Japan and China Diamond jewelry c
Slide 51: Financial Crisis in India
Financial Crisis in India Bad loans problem in banking sector Midstream leverage Financial bubble burst hitting mid-stream % of non-performing assets % of revenue $ bn 11% 75% 9% -$4 bn 61% 7% 53% 3% 4% 4% 16.5 2% 2% 2% 3% 13.5 10,5 9.7 6,5 2009 2010 2011 2012 2013 2014 2015 2016 2017 2018 2002 2008
Slide 52: 2019 Indian Trade Statistics
2019 Indian Trade Statistics By the year end inventory level in the system has been normalized – destocking is over Drivers of destocking Indian midstream destocking in 2019 $ bn Lower demand from retailers (demand + on-line factors) 12M'18 12M'19 -16% YoY Level of stocks is approaching low leve
Slide 53: Destocking Decelerates
Destocking Decelerates Highlights End-demand: Swiss watch exports as a “canary in the mine” End-market consumers: luxury & jewelry demand CHF m USA (RHS) China (RHS) Total (LHS) to returns to historical growth rates, USA and 1,828 1,994 2,065 1,818 1,653 1,631 Mainland China driving recovery 1,620
Slide 54: Sales Structure and Channels
Sales Structure and Channels Multichannel distribution with growing focus on long-term contracts Overview of sales channels ALROSA’s rough diamond sales channel breakdown Long-term contracts which provide stable sales and 10% 19% 17% 10-20% predictable prices during volatility on diamond market 12
Slide 55: Key Investment Projects
Key Investment Projects 1 Udachny VM1 3 Maiskaya 4 VG2 UG mine deposit pipe deposit Type of mining Underground Open-pit Open-pit Alluvials Production start 2014 2018 2025 2024 Ramp-up 2021 2019 2027 2025 2 Yakutia Target ore output pa, m t 4.0 3.0 0.3 1.1 Udachny 1 Aikhal Nyurba Target production pa
Slide 56: Profit Curve of Existing Diamond Mines
Profit Curve of Existing Diamond Mines Margin per carat by mines Tier-1 performing mines (1st quartile, 0-25%) Tier-2 performing mines (2nd quartile, 25-50%) (Price per ct - Cash Cost per ct), $ (Price per ct - Cash Cost per ct), $ Tier-3 performing mines (3rd quartile, 50-75%) Tier-4 performing min
Slide 57: Projects in Africa
Projects in Africa Promising region with high exploration potential Improved financial performance at Catoca Development of Luele pipe Production and sales, m ct EBITDA, $ m Luale kimberlite pipe is the largest diamond discovery over the past 60 Production Sales years $89/ct $110/ct $100/ct 7.5 7.
Slide 58: M&A: Focus on Organic Growth
M&A: Focus on Organic Growth Growth is coming from organic growth of existing portfolio Number of non-core ALROSA’s subsidiaries As at the end of the period, subsidiaries included in the program to divest Program to divest non-core assets started in 2013 includes assets in real estate, energy (g
Slide 59: FX Rate
FX Rate Financial metrics breakdown by currency ALROSA is an exporter with 90% of revenue % of metric's total, 2019 denominated in USD RUB Major portion of costs and capex is denominated in USD RUB, 92% of the Company’s debt portfolio is denominated in USD to create a natural hedge 10% 8% agains
Slide 60: Board Agenda for Coming Years
Board Agenda for Coming Years 1 Focus on continuous business transformation to ensure long-term competitiveness and sustainable production 2 Emphasis on developing risk management culture within the company 3 Highlight long-term strategic issues in marketing 4 Focus on ESG aspects to ensure long-ter
Slide 61: Glossary
Glossary Term Definition ARP Average realized price (sales revenue divided by sales volumes in carat terms) ct Carat : one of the four main diamond characteristics, the others being colour, cut and clarity; 1 carat=200 mg m ct Million carats CVD Chemical vapour deposition: a high-temperature, but no
Slide 62: Thank You!
THANK YOU! RUSSIA, 115184 SERGEY TAKHIEV DMITRY BYALOSHITSKIY MOSCOW HEAD OF CORPORATE FINANCE CORPORATE FINANCE 24 OZERKOVSKAYA EMB. M: +7 985 760 55 74 M: +7 915 113 32 04 E: [email protected] E: [email protected]