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ANALYSIS |
 The resignation of Fyodor Andreyev from the post of CEO of Russian uncut diamond mining giant ALROSA is negative news in the medium-term prospect, the company may change the strategy, which was presented during the initial public offering (IPO), analysts said to RIA Novosti.
Andreyev left the company due to medical reasons, at the same time, Andreyev will continue participating in the company's management as a member of the supervisory board.
"The entire story is not good for the market people, it was said one thing during the IPO, but now it is said that the company has neither good strategy, nor the appropriate management. All this is not fair", said BCS Analyst Oleg Petropavlovsky.
ALROSA shares declined 3% after Andreyev's resignation.
Under pressure
Since April, there were a number of media reports about the possible replacement of ALROSA CEO due to disagreements between Andreyev and Deputy Prime Minister Yury Trutnev, who is the company’s supervisor from the government.
On the other hand, Director of the Federal State Property Management Service Olga Dergunova said that she had sent a letter to government offering to extend the 5-year term contract with Andreyev, which expired on July 14. Yegor Borisov, head of Sakha (Yakutia) Republic had also offered keeping the same management.
Trutnev is not satisfied with the company’s strategy, which was approved late last year. In particular, Trutnev insisted on development of cutting business in the region with participation of ALROSA, but the company regarded the idea not promising.
Dergunova recently said that Trutnev asked the Federal State Property Management Service, the Finance Ministry and the Audit Chamber to complete a full-scope inspection of ALROSA. Dergunova added that Trutnev asked to draw more attention to the company’s economic efficiency.
According to business daily Kommersant, Trutnev also asked the authorities to study the company’s largest deals, including an initial public offering (IPO) held in 2013. There were also claims to the company's sales policy, which is focused mainly on long-term contracts with foreign companies, leading to lower domestic diamond sales.
"Diamond Valley"
The Yakutian government calls setting up a jewelry and cutting complex Diamond Valley in the framework of discussions to create the advanced development territory with custom and tax preferences. However, creation of such territory is only the idea now, the law was not considered.
Experts are highly skeptical about setting up large cutting center in Russia. Currently, 90% of all diamonds are cut in India, where production and labor costs are significantly less.
"I consider this a reckless scheme. There should not be any economical reasons for this. Thoughts that it will bring additional value are wrong. Cutting is a low marginal business with a profitability of about 5-10% in the best case", said Sergei Goryainov, Rough&Polished expert.
He noted that the idea is not new and the similar experiment, which took place in 1990-s, demonstrated an extremely negative result - uncut diamonds were resold abroad. In 1990-2000, ALROSA sales were more than twice less than now at about $2 billion.
"Before shifting to new sales policy in 2009, ALROSA sent the best product range to so called domestic market, while the foreign market obtained the remaining part. After that the bulk of diamonds earmarked for the Russian market appeared abroad, but the profits were received not by ALROSA, but the army of numerous entrepreneurs. Almost drowned after this in 2009", said Andrei Polyakov, ALROSA vice president, to Kommersant-Vlast.
Alexander Akhpolov, head of an administrative department at the Finance Ministry, said in an interview with the same media source that he sees no competitive advantages, which promote to setting up a diamond cutting center in the Far East Federal District. "If we are speaking about the government's support, thus diamonds are not a basic necessity to donate its production", he added.
ALROSA is not Apple
Andreyev worked in ALROSA in 2002-2003 as a vice president for finance and seven years in Russian Railways. From July 15, 2009 he was in the post of president and led ALROSA to the IPO in 2013.
ALROSA management had repeatedly mentioned that the company's good financial results were achieved mostly due to the shift to new sales policy from 2009, which is based on signing long-term agreements. Additionally, the company has chosen the strategy, which focuses on core diamond business and envisages disposal of non-core assets.
As a result, ALROSA's revenue more than doubled in 2013, the net profit increased nine fold as compared with 2009. At the same time, the crisis 2008 years was finished with a loss. Moderate improvement in the results allowed ALROSA to make the IPO to 2013 on the Moscow Exchange.
"It is possible that we will see a renewed strategy in the medium-term and it is negative", said Mikhail Smirnov, analyst at IFC Metropol.
In its turn, the Federal State Property Management Service released a statement saying that it regrets the resignation of Andreyev, but hopes that it will not influence the company’s plans and development strategy.
Oleg Petropavlovsky, analyst at BCS, added that it is more important to keep the team after the CEO resignation. "The resignation of one man is not critical. ALROSA is not Apple, which was left by Steve Jobs, and the company started making Samsung", Petropavlovsky said.
End
30.09.2014 20:34
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