24 Aug 2009 16:39

Diamond cutter Kristall expects to break even in Q3

MOSCOW. Aug 24 (Interfax) - Kristall of Smolensk, Russia's biggest diamond cutting enterprise, closed the first half of 2009 with net losses but expects to break even in the third quarter, Maxim Shkadov, the state-owned company's general director, told Interfax.

"We had losses of about 200 million rubles, but a very good tendency is emerging. The end of last year and the first quarter were just a nightmare for everybody. We accomplished our social mission and kept ourselves functioning, hence the losses. We worked those losses off for almost the entire second quarter and we should finally make them good in the third quarter," Shkadov said.

Changing terms for bank loans and the ruble's devaluation were mainly responsible for the losses. "From an operating point of view we've never had losses like that. The losses were caused solely by the banks, which changed the terms for lending. The second reason was of course the devaluation - our loans are in forex. If we borrowed 1 billion rubles this already cost us 1.2 billion rubles by the end of the first quarter. So there you are - 200 million rubles losses out of nowhere. And then there are the diamonds that we buy which are priced in dollars," he said.

Shkadov said Kristall planned to buy $200 million-$220 million worth of rough diamonds this year. It had already bought $100 million since the start of the year and intended to buy the same amount from Alrosa, Russia's diamond monopoly, by the end of the year. "If we do more business with Alrosa then we'll not really need anybody else. Of course we work with De Beers, and we've been buying from Rio Tinto, but not to the same extent. The Russian cut depends on Russian diamonds, you can't get the same from African diamonds," Shkadov said.

Shkadov also said sales were starting to pick up. "We've already brought market sales up to half the pre-crisis level, which isn't bad. These had been around 10%. We're looking at $10 million-$12 million per month, but we've even managed $15 million, so there is a tendency towards growth," he said.

Kristall saw its sales revenue plummet 27.9% in 2008 to 10.422 billion rubles. Kristall performed well for most of the year, but a sharp drop in sales in the fourth quarter did the damage.

Rough diamond procurement has also decreased, mainly because Kristal has been buying lower-cost diamonds. It used to buy diamonds for $500-$600 a carat, but started buying at $200 a carat after the crisis set in, so that it could keep its capacity utilized and not have to shut it down.

Shkadov also said Kristall was asking the state to increase its capitalization. "We were originally incorporated on the basis of what we had in the way of buildings, machinery and equipment. We generated working capital somehow, but not enough to sustain output. Our turnover had gone up four-fold since we were incorporated, and we need funding," Shkadov said.

Turnover has been as high as 14 billion rubles, and could recover to that level if the diamond market recovers. "Our share capital is just 1.5 billion rubles, and 80% of that consists of non-financial assets, so it is hard to sustain that sort of turnover," Shkadov said.

Kristall depends on bank loans to make its working capital deficit good, he said.

"If the money that the state is giving the banks were to be invested in our share capital, then we'd be paying the state the same profit in dividends instead of paying crazy interest on bank loans. That would be a good investment," Shkadov said.

Shkadov did not say how much equity it was looking to raise. "The Finance Ministry is looking at the proposals, and we'll be able to name a figure once it has reached a decision. But we think this would be a normal, rational investment," he said.

The State Precious Metals and Gemstones Repository (Gokhran) could also buy cut diamonds from Kristall, Shkadov said. A Gokhran source has told Interfax that the repository had bought 1.96 billion rubles in cut diamonds from Kristall this year, up from 1 billion rubles in the whole of 2008.

Shkadov said the Gokhran could increase procurement this year. "I think it will buy more. The thing is, the issue is resolved not with Kristall in mind specifically, but for the sector as a whole. If as is likely they decide to buy more from Alrosa, there'll be more in it for us too," he said.

Russian Prime Minister Vladimir Putin said on Friday that the state has decided to increase rough diamond procurement significantly in order to support the sector. "Spending on gemstone procurement for the State Fund will rise almost four-fold, from 3.7 billion rubles to 14.5 billion rubles. And I think that will be sufficient. The sector has generated a lot of revenue both for the federal and regional budgets, but today, in view of the global situation, it needs support. I think overall support for the sector ought to be approximately 30 billion-35 billion rubles. This won't be easy in times of financial and economic crisis, but we'll do it," Putin said.

Kristall is also discussing zero VAT with the Finance Ministry.

"We have a very serious problem in the market with VAT, which we've been trying to tackle for years," Shkadov said. "VAT has a transit status as far as we're concerned. We pay VAT when we buy rough diamonds, and that money is taken away from us. It takes nine or ten months to get it back. But we buy rough diamonds every month. So all our working capital is tied up in VAT for half a year, and we don't have any cash. The ideal solution might be to set zero VAT to avoid the transit problem. This VAT doesn't settle in any budgets - it goes here and there. We're effectively lending to the budget. It's a complicated process, and we've proven it at all levels. The Finance Ministry knows it, and the Duma is looking at the issue. I think there'll be a decision after all," Shkadov said.

Regarding state support for the diamond industry, Shkadov said: "The state is the [gem industry's] main regulator at present. It's the main large investor, the one with the money. Of course it regulates. But it is regulating not so much from a market point of view as from a social one. The state is more concerned about those who work in the industry. Alrosa has 40,000 workers, plus all the infrastructure. Our own figures are more modest, I reckon around 5,000 depend on us, but that's a lot of people in a city like Smolensk."