COMMENTARY: Alrosa's new deposits could fuel reserve growth
MOSCOW. March 13 (Interfax) - The core mining divisions of Alrosa - Udachny, Aikhal, Mirny and Nyurba - account for about 95% of the output of the world's largest diamond miner. Understandably, these assets are the investment priorities for Alrosa, which is shifting to deep mining at Udachny (Udachnaya pipe) and Aikhal (Yubileinaya and Komsomolskaya pipes). But the need to replenish its resource base will require the company to actively develop new deposits.
In search of new sources of growth, Alrosa in 2011 began exploration work at five new deposits in western Yakutia, including three primary ones - Verkhne-Munskoye, Maiskoye and Dalnaya pipe - and two alluvial - Ebelyakh and Gusiny. The company acquired the licenses to these deposits in April last year: Ebelyakh and Gusiny at auctions, Dalnaya in a tender, and Verkhne-Munskoye and Maiskoye based on the rights of discovery. Alrosa has not published official figures on the resources of these deposits, but Interfax has obtained preliminary data from an assessment of their potential.
Western Yakutia deposits
The largest of these deposits, Verkhne-Munskoye is located 180 km from the Udachny mine and consists of four kimberlite pipes (Zapolyarnaya, Deimos, Novinka and Komsomolskaya-Magnitnaya). In the past, Alrosa gave an estimate of this deposit's reserves at more than 38 million carats of diamonds, with an average grade of 0.6 carats/t. For comparison, the company's richest pipe, Internatsionalnaya has a grade of 8.74 carats/t, and its poorest pipe, Zarnitsa has a grade of 0.21 carats/t. The ore of the company's largest deposit, the Udachnaya pipe, contains 2-2.5 carats/t.
Verkhne-Munskoye has commercial ore reserves of 64.082 million tonnes, the Udachny mine's chief geologist, Gleb Shmarov said in a recent interview with Alrosa's corporate magazine. Mining is scheduled to start in 2018 at a rate of 3 million tonnes of ore per year, which will give the deposit a mine life of at least 20 years. Samples will be taken this year to assess the quality of the diamonds.
The diamonds at Verkhne-Munskoye are of very high quality, Alrosa said earlier. The average price per carat was over $210 in April 2011, compared to an average of $119 for Alrosa's diamonds in the second quarter of 2011. This is because small diamonds will not be mined at Verkhne-Munskoye, as they are, for example, at the Udachnaya mine, where the whole range of stones, from industrial to gem quality, is mined, Shmarov said.
The Maiskoye deposit consists of one kimberlite pipe, with reserves as of April 2011 estimated at 12 million carats, with an average grade of 3.7 carats/t and an average price per carat of about $90.
Both of these deposits are located near Alrosa's existing production facilities in western Yakutia, so their development will not require heavy investment, the company said earlier.
The director of the Geology and Mineralogy Institute at the Siberian department of the Russian Academy of Sciences, Nikolai Pokhilenko said it makes sense to develop the Verkhne-Munskoye deposit in the current market climate, where demand exceeds supply. The deposit's diamonds are of good quality and large stones can be found there.
The updated reserve estimates obtained by Interfax differ slightly from the figures provided by the company a year ago:
| Deposit | Diamond reserves, mln carats |
| Verkhne-Munskoye | 40 |
| Maiskoye | 13.3 |
| Dalnaya Pipe | 10.2 |
| Ebelyakh | 25.1 |
| Gusinaya | 3.4 |
| Total: | 92 |
Revenue
Preliminary estimates indicate that, if the favorable market situation continues, diamond sales from the five new deposits could total $14 billion.
This is quite a reasonable estimate, Metropol analyst Sergei Filchenkov said. It assumes an average sales price of $152 per carat, which reflects current price trends on the world diamond market, and factors in price growth in the near future, he said. This price could be reached as early as 2015, he added.
"This is quite an achievable goal for Alrosa for sales of diamonds from these deposits - taking into account that exploration work at them has just begun," Filchenkov said.
Alexander Morin of Sovlink agreed, adding that Alrosa could earn $14 billion from the sale of diamonds from these deposits in three years. However, Morin was less optimistic about the current prices threshold, which he put at above $140 per carat.
The revenue forecast depends a great deal on the quality of the diamonds, including the content of large stones and industrial stones in the ore of these deposits, Aton analyst Dinur Galikhanov said. Alrosa could begin mining the alluvial deposits in the next two or three years, as they are easier to access, he added.
The new deposits account for only 7-8% of the Alrosa group's total reserves, they do not look significant and Alrosa has not said officially that production would increase on the back of these assets, said Vladimir Sergiyevsky of Finam.
"I don't see fundamental points of growth in them, particularly since there is unlikely to be any talk of production growth in the next few years, as there is the obvious problem of transitioning from open-pit to deep mining. Maintaining production at the current level would be a good result," Sergiyevsky said.
Book prices
In addition to the understandable indicator of anticipated revenue generated by the sale of diamonds from the five deposits, for which Alrosa already holds the licenses, there is another indicator: the value of commercial product in book prices according to the Finance Ministry's pricelist. It amounts to $6.85 billion.
| Deposit | Value of commercial product, mln USD |
| Verkhne-Munskoye | 4 300 |
| Maiskoye | 930 |
| Dalnaya Pipe | 600 |
| Ebelyakh | 900 |
| Gusinaya | 120 |
| Total: | 6 850 |
VTB Capital's Vadim Astapovich said prices in this pricelist are significantly lower than market prices. For example, Gokhran, which is restricted by budget targets for sales of reserves from the state precious metals and stones repository, usually sells rough diamonds at a 36% premium to this pricelist. The pricelist is used to calculate export duties - the declared customs value cannot be lower than the prices in the pricelist; the export duty on rough diamonds is currently 6.5%.
This indicator makes it possible to calculate the value of one carat from each of the deposits, Astapovich said. The book price for Verkhne-Munskoye diamonds is about $100, he reckons, which exceeds the price of diamonds at Udachny. "In other words, the Verkhne-Munskoye diamonds are high quality. Maiskoye is also a fairly high quality asset, which can't be said about the Gusinaya placer and the Dalnaya pipe," Astapovich said.
Filchenkov said the value of commercial product in book prices is an indicator for calculating the reserves on the company's books based on the amount of reserves and the average cost of mining. It is essentially the cost of production. In a breakdown for the five deposits, the assumed average production cost per carat is $59-$108 at the primary deposits and $35-$36 at the alluvial deposits, which corresponds to the type and structural particulars of these deposits, he said.
This is an approximate estimate of how much the company can earn from the sale of diamonds given the development of the deposits by standard mining methods, an estimate of how much the project could be worth as a potential investment, Aton's Galikhanov said.
Zarya and Pionerskaya
Other potential assets that could renew Alrosa's mineral resource base are the Pionerskaya pipe, which is part of the Lomonosov deposit (Severalmaz), and the Zarya pipe, located 2 km from Aikhal. These deposits will be developed given positive exploration results.
Pionerskaya has estimated diamond reserves of 50 million carats in 117 million tonnes of ore. Exploration of this property began last year.
The reserves of Zarya, for the discovery of which Alrosa received a state certificate of verification in November 2011, will be fully assessed in the course of exploration scheduled to begin in the fourth quarter of 2012, after Alrosa receives a license to the property. For now, the State Committee for Reserves has confirmed reserves only for the upper horizons of the pipe, which amount to 4.6 million carats.
Pokhilenko said Russia's Northwest is very difficult in terms of geology. Kimberlite at deposits in the Arkhangelsk Region is covered by younger formations that do not contain diamonds. Even the Grib pipe being mined by a subsidiary of oil major Lukoil is covered by a layer of recent deposits, and in such conditions it is too expensive and ineffective to prospect for new deposits in this regions, he said.
In the development of Pionerskaya, Alrosa will face the same problem of pumping out water that has plagued the development of Severalmaz's Arkhangelskaya pipe, VTB Capital's Astapovich said. But the quality of the deposit's diamonds is fairly high, and current prices allow Alrosa to mine the deposit independently, though a year to 18 months ago it plans to bring in Rio Tinto as a partner. Severalmaz could double production to 1 million carats in 2012, Astapovich estimates.
Pionerskaya, like the whole Lomonosov deposit, is potentially promising given Alrosa's developed infrastructure in this region, the presence of a processing plant, the proximity of the key diamond market in Antwerp and the possibility that Lukoil will sell the neighboring Grib pipe, Galikhanov said. De Beers earlier appraised Severalmaz diamonds at $60 per carat, but Alrosa now appraises them at $80, and with current prices the investment could be recovered and the project could be made profitable, he said.
Pionerskaya's reserves are impressive, amounting to about 22% of the current reserves of all Severalmaz deposits, Metropol's Filchenkov said. Nonetheless, Severalmaz has historically been Alrosa's most troubled mining subsidiary due to high operating costs, less efficient mining technology, and difficulties related to the geological conditions at Lomonosov, he said. The prospects for developing Pionerskaya are fairly uncertain at this point, but could become clearer upon further exploration, he added.
Zarya is quite a promising deposit with fairly high quality diamonds (price of about $139 per carat), judging by the company's data, Filchenkov said.
Following exploration in 2013, the overall reserves of the deposits could increase, he said.
Long-awaited JORC
Alrosa is not commenting for now on forecasts for the new deposits, or the company's overall reserves. Alrosa spokesman Andrei Polyakov said the company is now wrapping up an audit of reserves in line with the international JORC classifications. The deposits in western Yakutia, and the Zarya and Pionerskaya pipes, which are still being explored, "are not being audited to JORC standards - these are prospects for renewing the company's mineral resource base," he said.
Analysts agree that it will only be possible to make final conclusions about Alrosa's current resource situation after the publication of the JORC report. The audit to JORC, the transition to which Alrosa timed to coincide with preparations for an IPO, is being done by Micon. Its results were initially supposed to be released in the fourth quarter of 2011, but now Alrosa is promising to publish them at the end of the first quarter of this year.
Following the release of the JORC report, reserve estimates to Russian standards will not be given much weight, VTB Capital's Astapovich reckons. JORC reserves will probably be lower than reserves to Russian standards, but much will depend on the diamond prices forecast by the consultant, and the cut-off grade, which will determine the economic effectiveness of mining, he said.
JORC will more adequately reflect Alrosa's reserves, Filchenkov concurred.
The Russian system for assessing reserves is fairly competent and detailed, but it does not take into account the economic effect of developing reserves, Aton's Galikhanov said. If JORC shows 1 billion carats, it will be good news for the company, he said.
After confirming reserves to JORC standards ahead of a possible IPO, Alrosa can later review reserves based on exploration results, but already according to JORC.