Alrosa · RUS:ALRS
Alrosa — Investor Presentation (November 2019)
75 slides from Alrosa's investor presentation, Nov 29, 2019
Slide 1: ALROSA Investor Presentation
ALROSA Investor Presentation 29 November 2019
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. About ALROSA – strategic priorities p.4 02. Market fundamentals p.11 03. Executing to strengthen our business p.28 04. Q3 2019 results p.44 05. Corporate governance p.52 06. Appendix
Slide 4: About ALROSA – Strategic Priorities
01 ABOUT ALROSA – STRATEGIC PRIORITIES
Slide 5: High Quality Assets
03. Executing to strengthen 01. Strategic priorities 02. Market fundamentals our business 04. Q3 2019 results 05. Corporate governance 5 High Quality Assets ALROSA’s assets geography • ALROSA develops world’s largest reserves with strong cost/quality balance allowing to achieve the highest EBITDA ma
Slide 6: Focus on Responsible Mining
03. Executing to strengthen 01. Strategic priorities 02. Market fundamentals our business 04. Q3 2019 results 05. Corporate governance 6 Focus on Responsible Mining • Improving industrial safety with focus on prevention • Structural reform promoting a culture of safety • Diagnostic and treatment ser
Slide 7: Creating a Clearer and Sustainable Environment
03. Executing to strengthen 01. Strategic priorities 02. Market fundamentals our business 04. Q3 2019 results 05. Corporate governance 7 Creating a Clearer and Sustainable Environment Latest developments Reduction of CO2 emissions1 CO2 emissions down by c.20% from 2016 ths tonnes Already impress
Slide 8: Employee Safety is Our Top Priority
03. Executing to strengthen 01. Strategic priorities 02. Market fundamentals our business 04. Q3 2019 results 05. Corporate governance 8 Employee Safety is Our Top Priority Strong Commitment to Promote a Culture of Safety and Reduce the Number of Accidents One of the lowest LTIFR compared to the dia
Slide 9: Superior TSR Compared to Global Peers
03. Executing to strengthen 01. Strategic priorities 02. Market fundamentals our business 04. Q3 2019 results 05. Corporate governance 9 Superior TSR Compared to Global Peers Cumulative total USD TSR since ALROSA IPO in October 2013, % 200% +57.1% Luxury goods producers 150% +41.9% ALROSA 100% Diver
Slide 10: Journey Ahead
03. Executing to strengthen 01. Strategic priorities 02. Market fundamentals our business 04. Q3 2019 results 05. Corporate governance 10 Journey Ahead Developing Efficient Organisation... …and Taking Advantage of Strong Market Fundamentals… Focus on Core Business and Unique Product Efficiency …to M
Slide 11: Market Fundamentals
02 MARKET FUNDAMENTALS
Slide 12: Diamond Value Chain
03. Executing to strengthen 01. Strategic priorities 02. Market fundamentals our business 04. Q3 2019 results 05. Corporate governance 12 Diamond Value Chain Rough diamonds Polished diamonds Diamond jewelry Cutting & Jewelry Production Sales Sales Sales polishing manufacturing • Exploration of diamo
Slide 13: Historical Statistics
03. Executing to strengthen 01. Strategic priorities 02. Market fundamentals our business 04. Q3 2019 results 05. Corporate governance 13 Historical Statistics “Whip Effect” on Demand Suppliers Illustrated Diamond jewellery sales Rough diamond sales Rough diamond output $ bn $ bn m ct 17 15 15 14 17
Slide 14: "Perfect Storm" Ingredients in 2019
03. Executing to strengthen 01. Strategic priorities 02. Market fundamentals our business 04. Q3 2019 results 05. Corporate governance 14 “Perfect Storm” Ingredients in 2019 Key factors impacting diamond markets Retailers: over-optimism in 2018 Financial bubble burst hitting mid-stream Retail: Rise
Slide 15: Indian Trade Statistics
03. Executing to strengthen 01. Strategic priorities 02. Market fundamentals our business 04. Q3 2019 results 05. Corporate governance 15 Indian Trade Statistics Drivers of destocking Indian midstream destocking in 2019 $ bn Lower demand from retailers (demand + on-line factors) -15% YoY 10M'18 10
Slide 16: Financial Crisis in India
03. Executing to strengthen 01. Strategic priorities 02. Market fundamentals our business 04. Q3 2019 results 05. Corporate governance 16 Financial Crisis in India Bad loans problem in banking sector Midstream leverage Financial bubble burst hitting mid-stream % of non-performing assets % of revenue
Slide 17: Diamond Miners Decreased Supply by ~25%
03. Executing to strengthen 01. Strategic priorities 02. Market fundamentals our business 04. Q3 2019 results 05. Corporate governance 17 Diamond Miners Decreased Supply by ~25% Rough diamonds sales – 2019 factors analysis 2019 ALROSA and De Beers supply – decreased by 1/4 $ bn $ bn -24% -25% -25% 1
Slide 18: Price Dynamics for Gem-quality Diamonds
03. Executing to strengthen 01. Strategic priorities 02. Market fundamentals our business 04. Q3 2019 results 05. Corporate governance 18 Price Dynamics for Gem-quality Diamonds Highlights ALROSA price index for like-for-like gem-quality diamonds mix Q3’19 like-for-like price index (LFL PI) was -3
Slide 19: Consolidated Diamond Supply
03. Executing to strengthen 01. Strategic priorities 02. Market fundamentals our business 04. Q3 2019 results 05. Corporate governance 19 Consolidated Diamond Supply About 60% of global rough diamond output is Core diamond mines of the BIG-3 market leaders attributable to BIG-3 6% Catoca1 25% ALROSA
Slide 20: Supply Continues to Tighten
03. Executing to strengthen 01. Strategic priorities 02. Market fundamentals our business 04. Q3 2019 results 05. Corporate governance 20 Supply Continues to Tighten Due to depletion of deposits and lack of exploration capex over the last 10-15Y 2018 to 2023 supply forecast – 9 m ct down 2019 to 202
Slide 21: Favorable Supply/Demand Fundamentals
03. Executing to strengthen 01. Strategic priorities 02. Market fundamentals our business 04. Q3 2019 results 05. Corporate governance 21 Favorable Supply/Demand Fundamentals … will drive the market into a deficit and support positive diamond price pressure Global Supply / Demand balance outlook Acc
Slide 22: Demand Drivers
03. Executing to strengthen 01. Strategic priorities 02. Market fundamentals our business 04. Q3 2019 results 05. Corporate governance 22 Demand Drivers Highlights Global luxury market breakdown in 2019E 2019E luxury market valued at c. €1.3 trillion € bn (+8% YoY) is steadily growing Incl. ~1/3 4
Slide 23: Strong Long Term Demand Outlook
03. Executing to strengthen 01. Strategic priorities 02. Market fundamentals our business 04. Q3 2019 results 05. Corporate governance 23 Strong Long Term Demand Outlook ...driven by disposable income growth and middle class expansion Real disposable income growth Middle class growth Diamond jewelle
Slide 24: As Jewelry Demand Quality Improves in EMs
03. Executing to strengthen 01. Strategic priorities 02. Market fundamentals our business 04. Q3 2019 results 05. Corporate governance 24 … As Jewelry Demand “Quality” Improves in EMs Highlights Total jewellery market vs diamond jewellery Total jewelry market (from cheaper items – e.g. $ bn $ bn P
Slide 25: Diamonds are Different from Commodities
03. Executing to strengthen 01. Strategic priorities 02. Market fundamentals our business 04. Q3 2019 results 05. Corporate governance 25 Diamonds are Different from Commodities Mature demand and supply discipline result in low price volatility Mature and stable consumer-driven demand Consolidated p
Slide 26: Demystifying LGDs
03. Executing to strengthen 01. Strategic priorities 02. Market fundamentals our business 04. Q3 2019 results 05. Corporate governance 26 Demystifying LGDs LGD myth #1: LGD myth #3: Case study: LGD positioning Myth: LGD and diamonds are identical Myth: Launch of LGD brand by a major natural by a maj
Slide 27: Expanding LGD Discount Illustrates Different Market Perception
03. Executing to strengthen 01. Strategic priorities 02. Market fundamentals our business 04. Q3 2019 results 05. Corporate governance 27 Expanding LGD Discount Illustrates Different Market Perception of LGD vs. Diamonds LGD discount to natural diamonds Price of 1 carat polished diamond: Round, VS c
Slide 28: Executing to Strengthen Our Business
03 EXECUTING TO STRENGTHEN OUR BUSINESS
Slide 29: ALROSA: the Story of the Industry Leader in Charts
03. Executing to strengthen 01. Strategic priorities 02. Market fundamentals our business 04. Q3 2019 results 05. Corporate governance 29 ALROSA: the Story of the Industry Leader in 4 Charts The largest and most profitable player in the industry Reserves1 Production ‘18 EBITDA ‘18 EBITDA margin ‘18
Slide 30: Key Challenges for the Industry
03. Executing to strengthen 01. Strategic priorities 02. Market fundamentals our business 04. Q3 2019 results 05. Corporate governance 30 Key Challenges for the Industry … and how we address them from a value creation perspective 1 Lack of new deposits, limited • Investment in exploration and produc
Slide 31: Superior Exploration Capabilities
03. Executing to strengthen 01. Strategic priorities 02. Market fundamentals our business 04. Q3 2019 results 05. Corporate governance 31 Superior Exploration Capabilities … result in solid track record of resource replenishment at low finding costs Unique full-cycle exploration operations… Track re
Slide 32: Production Outlook Supported by New Projects
03. Executing to strengthen 01. Strategic priorities 02. Market fundamentals our business 04. Q3 2019 results 05. Corporate governance 32 Production Outlook Supported by New Projects 2020 output revised downward in response to the current market situation Production outlook Key drivers m ct • Develo
Slide 33: Focus on Value Accretive Capex
03. Executing to strengthen 01. Strategic priorities 02. Market fundamentals our business 04. Q3 2019 results 05. Corporate governance 33 Focus on Value Accretive Capex Capital-intensive phase is over Capex dynamics Key projects RUB bn Infrastructure: total 2019-24 capex – RUB 35 bn 2020 capex expec
Slide 34: Focus on Efficiency
03. Executing to strengthen 01. Strategic priorities 02. Market fundamentals our business 04. Q3 2019 results 05. Corporate governance 34 Focus on Efficiency Dedicated operating efficiency program launched in 2017 Scaling up initiatives Delivering tangible results Key initiatives Number of Initiativ
Slide 35: Case Study: Operational Turnaround Program at Nyurba
03. Executing to strengthen 01. Strategic priorities 02. Market fundamentals our business 04. Q3 2019 results 05. Corporate governance 35 Case Study: Operational Turnaround Program at Nyurba Nyurba’s success can be replicated and scaled up across other divisions Key streams and initiatives Run of mi
Slide 36: Case Study: Automotive Transport Optimization
03. Executing to strengthen 01. Strategic priorities 02. Market fundamentals our business 04. Q3 2019 results 05. Corporate governance 36 Case Study: Automotive Transport Optimization Centralization and usage-based approach provide long-term cost cutting effect Key streams and initiatives Number of
Slide 37: Case Study: Working Capital Management
03. Executing to strengthen 01. Strategic priorities 02. Market fundamentals our business 04. Q3 2019 results 05. Corporate governance 37 Case Study: Working Capital Management Reduction in rough diamond WIP inventory days Optimization levers Reduction of diamonds WIP1 cycle 99 Production Chain of R
Slide 38: Employee Training and Development System
03. Executing to strengthen 01. Strategic priorities 02. Market fundamentals our business 04. Q3 2019 results 05. Corporate governance 38 Employee Training and Development System … to further improve long term competitiveness and productivity Key initiatives and programmes Labour productivity growth
Slide 39: Marketing Strategic Initiatives and Ongoing Digitalization
03. Executing to strengthen 01. Strategic priorities 02. Market fundamentals our business 04. Q3 2019 results 05. Corporate governance 39 Marketing Strategic Initiatives and Ongoing Digitalization Industry initiative Ongoing digitalization in ALROSA • Participation in DPA to promote the integrity Ge
Slide 40: Diamond Producers Association
03. Executing to strengthen 01. Strategic priorities 02. Market fundamentals our business 04. Q3 2019 results 05. Corporate governance 40 Diamond Producers Association Key initiatives DPA marketing campaigns by regions Diamond Producers Association (DPA) formed by 7 major diamond % represents shar
Slide 41: Capital Allocation – Key Principles and Policy Overview
03. Executing to strengthen 01. Strategic priorities 02. Market fundamentals our business 04. Q3 2019 results 05. Corporate governance 41 Capital Allocation – Key Principles and Policy Overview Focus on Core Prudent Capital Conservative Business Allocation Financial Policy Organic Growth Investment
Slide 42: Strong Balance Sheet
03. Executing to strengthen 01. Strategic priorities 02. Market fundamentals our business 04. Q3 2019 results 05. Corporate governance 42 Strong Balance Sheet … with leverage at historic-lows Highlights Net Debt evolution to investment grade credit ratings $m • Total debt is $1.6bn with the weighted
Slide 43: Dividend Policy Focused on Maximisation of Shareholder Returns
03. Executing to strengthen 01. Strategic priorities 02. Market fundamentals our business 04. Q3 2019 results 05. Corporate governance 43 Dividend Policy Focused on Maximisation of Shareholder Returns Historical dividend payments1 Dividend policy overview $m 1,281 1,110 Dividend 929 Free Cash Flow 6
Slide 44: Q3 2019 Results
04 Q3 2019 RESULTS
Slide 45: Sales
03. Executing to strengthen 01. Strategic priorities 02. Market fundamentals our business 04. Q3 2019 results 05. Corporate governance 45 Sales Lower supply as mid-stream destocks Highlights Diamond sales in carats Q3’19 Sales m ct Industrial quality diamonds Gem-quality diamonds 13.4 29.1 Diamond
Slide 46: Output
03. Executing to strengthen 01. Strategic priorities 02. Market fundamentals our business 04. Q3 2019 results 05. Corporate governance 46 Output Q3 2019: increase in diamond production Highlights Ore and sands processing Q3’19 mt Grade, cpt 0.80 0.87 Production grew 24% QoQ (up 15% YoY) primarily
Slide 47: Key Financials
03. Executing to strengthen 01. Strategic priorities 02. Market fundamentals our business 04. Q3 2019 results 05. Corporate governance 47 Key Financials Resilient financial performance with strong margins and positive free cash flow Highlights Superior profitability Q3’19: $ bn Revenue EBITDA EBITDA
Slide 48: Revenue Drivers
03. Executing to strengthen 01. Strategic priorities 02. Market fundamentals our business 04. Q3 2019 results 05. Corporate governance 48 Revenue Drivers Highlights Q3 2019 gem-quality rough diamond revenue bridge (QoQ) Q3 ‘19 gem-diamond sales were down by 25% RUB bn QoQ to RUB 38 bn driven by: o
Slide 49: Profitability Drivers
03. Executing to strengthen 01. Strategic priorities 02. Market fundamentals our business 04. Q3 2019 results 05. Corporate governance 49 Profitability Drivers Highlights Q3 2019 EBITDA – key drivers (QoQ) Q3 ‘19 EBITDA was down by 16% QoQ driven by: RUB bn o (-) 23% decrease in volumes: net impac
Slide 50: Free Cash Flow and Total Debt Analysis
03. Executing to strengthen 01. Strategic priorities 02. Market fundamentals our business 04. Q3 2019 results 05. Corporate governance 50 Free Cash Flow and Total Debt Analysis EBITDA to Free Cash Flow bridge Q3 2019 Net debt1 bridge RUB bn RUB bn ND / LTM EBITDA Q2 EBITDA 25.1 Q2'19 Net Debt 35.4 0
Slide 51: Outlook
03. Executing to strengthen 01. Strategic priorities 02. Market fundamentals our business 04. Q3 2019 results 05. Corporate governance 51 Outlook Market outlook ALROSA performance Diamond jewelry sales in 2019, following a several 2019 capex outlook revised down from RUB 28 to 23 bn with consecu
Slide 52: Corporate Governance
05 CORPORATE GOVERNANCE
Slide 53: Corporate Governance and Shareholder Support
03. Executing to strengthen 01. Strategic priorities 02. Market fundamentals our business 04. Q3 2019 results 05. Corporate governance 53 Corporate Governance and Shareholder Support Commitment to improving standards of corporate governance Increased share of INEDs in the Board of Directors • Regula
Slide 54: Current Board has Supported Initiatives to Improve Alignment of Shareholder Interests
03. Executing to strengthen 01. Strategic priorities 02. Market fundamentals our business 04. Q3 2019 results 05. Corporate governance 54 Current Board has Supported Initiatives to Improve Alignment of Shareholder Interests New management team Transparency and disclosure New senior management team w
Slide 55: Board Agenda for 2019-2020
03. Executing to strengthen 01. Strategic priorities 02. Market fundamentals our business 04. Q3 2019 results 05. Corporate governance 55 Board Agenda for 2019-2020 1 Focus on continuous business transformation to ensure long-term competitiveness and sustainable production 2 Emphasis on developing r
Slide 56: Appendix
06 APPENDIX
Slide 57: ALROSA: Key Highlights
57 ALROSA: Key Highlights Rough diamond sales ● Revenue is set to stabilize on stable sales volumes m ct Av. selling price for gem-quality diamonds, $/ct ● Company demonstrates stable – above 45% margins – well 174 172 170 164 supported by cost control / high utilization rates at the mines 149 136 ●
Slide 58: Information On Assets
58 Information On Assets Type Cash costs, $/ct Price, $/ct Spread, $/ct Grade, ct/t Diamond production, ‘000 ct Expected JORC reserves of mining LOM (1 July 2018), ‘000 ct 2017 2018 2017 2018 2017 2018 2017 2018 2017 2018 2019E 2020F Aikhal Division 13,011 11,850 9,622 175,561 Jubilee pipe open-pit
Slide 59: Key Investment Projects
59 Key Investment Projects 1 Udachny 2 VM1 3 Zaria 4 Maiskaya 5 VG2 UG mine deposit pipe pipe deposit Type of mining Underground Open-pit Open-pit Open-pit Alluvials Production start 2014 2018 2020 2025 2024 Ramp-up 2021 2020 2021 2027 2025 2 Yakutia Target ore output pa, m t 4.0 3.0 1.2 0.3 1.1 1 U
Slide 60: Projects under Consideration
60 Projects under Consideration Decision on the mines construction will be taken after the feasibility studies will be completed, all numbers are indicative and based on preliminary estimate 1 Jubilee UG mine 2 Mir UG mine Type of mining Underground Underground Ramp-up (preliminarily) 2032 2031-32 T
Slide 61: Sales Structure and Channels
61 Sales Structure and Channels Multichannel distribution with growing focus on long-term contracts ALROSA’s rough diamond sales channel breakdown 88% 98% / 70% 10% 19% 17% 10-20% of ALROSA’s diamond sales of ALROSA’s diamond sales / volume 12% 10-20% accounted for exports1 generated by sales of 17%
Slide 62: Expansion to Africa
62 Expansion to Africa Promising region with high exploration potential Improved financial performance at Catoca Development of Luele pipe Production and sales, m ct EBITDA, $ mn Luale kimberlite pipe is the largest diamond discovery over the past 60 years Production Sales $84/ct $89/ct $110/ct
Slide 63: Indian Trade Statistics
63 Indian Trade Statistics Monthly volumes and prices of imported rough and exported polished diamonds Monthly volumes of rough imported and polished exported diamonds m ct Net imports (LHS) Net exports (RHS) 20 4 15 3 10 2 5 1 0 0 2015 2016 2017 2018 2019 Monthly prices of rough imported and polish
Slide 64: Destocking Decelerates
64 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 1,945 1,818 1,994 2,065 2,038 1,896 2,025 1,828 1,820 1,620 1,697 1,669 1,762 1
Slide 65: Case Study: LGD – the Future is History
65 Case Study: LGD – the Future is History Similar scenario has already realised on the market for lab grown sapphires Indexed price per carat of natural Price per carat discount Lab grown stones Gem quality lab grown sapphires first sapphire¹ (2017)2 production share (2017) appeared in 1970s and
Slide 66: Synthetic Stones: Key Marketing Messages
66 Synthetic Stones: Key Marketing Messages …of lab-grown sapphires producers are similar to the ones used now by LGD producers Key marketing messages of lab-grown coloured gemstones (incl. sapphires) producers in 1960-2000s Key marketing messages of LGD producers today High quality Real Unique Inno
Slide 67: Diamonds and Their Synthetic Substitutes
67 Diamonds and Their Synthetic Substitutes Have different price drivers and value to consumers Natural diamonds LGD LGD is not the first synthetic alternative to diamonds LGD Moissanite Product of nature VS Industrial product Rare, unique and Can be produced inherently valuable in any volum
Slide 68: M&A: Focus on Organic Growth
68 M&A: Focus on Organic Growth Growth is coming from organic growth of existing portfolio (see Number of ALROSA’s subsidiaries As at the end of the period capex slide) 47 Program to divest non-core assets started in 2013 includes assets in 39 real estate, energy (gas) farming, insurance, etc. 3
Slide 69: Profit Curve of Existing Diamond Mines
69 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
Slide 70: FX Rate
70 FX Rate Financial metrics breakdown by currency (Q3’19) ALROSA is an exporter with 91% of revenue denominated % of metric's total in USD RUB Major portion (74%) of costs and capex is denominated in USD RUB, 96% of the Company’s debt portfolio is denominated in USD to create a natural hedge ag
Slide 71: Management Team
71 Management Team Committed to deliver on ALROSA’s development plans Executive team Operational team Sergey Ivanov Alexey Kovalenko Division Chief Executive Officer Director, Mirny mining and processing division Mirny • Joined the Company in 1996 • Joined the Company in 2017 CEO • Over 20 years of
Slide 72: Supervisory Board Overview
72 Supervisory Board Overview 1 Anton Siluanov 2 Aysen Nikolaev 3 Andrey Donets 4 Vladimir Solodov First Deputy Chairman of the Government Head of the Republic of Sakha (Yakutia) First Deputy CEO of the Far East Investment Chairman of the Government of the of the Russian Federation and Expert Agency
Slide 73: Supervisory Board Overview
73 Supervisory Board Overview 9 Evgenia Grigorieva 10 Sergey Ivanov 11 Dmitry Konov 12 Galina Makarova Minister of Property and Land Relations of Chief Executive Officer of ALROSA Member of the Board of Directors, Independent director the Republic of Sakha (Yakutia) Chairman of the Management Board
Slide 74: Glossary
74 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
Slide 75: 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]