Page 178 - RusRPTApr21

continue to see further upside to 2021 production (our expectations remain at 33mnct), while believe that improved market conditions will drive production up to 37.8mnct in 2022. We note the potential capex upside risks to achieve this level, in excess of the capex rise just announced and in addition to our forecasts.
Sales guidance slightly increased, the company expects a drastic decrease in inventories. Management now expects 2021 sales of 34- 36mnct, slightly up from the 34-35mnct guided in November, while it sees drastic destocking in 1Q21, leading to historically low inventories (supports our take on robust 1Q21 sales). We remain more positive, expecting that both the global market would allow, and Alrosa would be willing to sell, USD 3.9bn worth of roughs in 2021, implying sales volumes of 43mnct and an inventory decline to 10.5mnct. This equates to four months of 2021F production; that is a long-standing target of the company (the actual level of the last several years was six months). The company has also noted that after selling-down inventory of poor-quality diamonds in 4Q20, its average price of diamonds from inventory is now in line with the production mix.
Price upside in excess of our forecast for 2021 looms. Management stressed that the low inventories, not only at Alrosa, but also at other miners, as well as the industry’s inability to ramp-up production quickly, might contribute to growth in rough diamond prices in excess of pre-pandemic levels (i.e. more than the 10% YTD increase). That remains an upside case for us. Given that Alrosa and De Beers had both increased LFL prices 9-10% YTD as of the end of February, that would imply further growth in March and onwards, which we currently do not expect (instead, we think miners will tap inventories accumulated in 2020). We note that global miners’ inventories stood at more than 60mnct, almost 60% of 2020 production – the largest since at least 2008 and well above the lows of 2014.
Sales mix to provide additional support for prices in 2021. In addition to the like-for-like price increase, management expects the mix improvement in 2021 vs. 2020 (due to the poor mix sold in 4Q20) to contribute to a 4-5pp rise in the average realised price of diamonds, all other factors being unchanged.
Catoca mine in Angola beats our EBITDA forecasts, might increase almost 50% in 2022-23 thanks to satellite deposit. Management expects its Catoca mine in Angola (41% owned) to have generated USD 300mn EBITDA and USD 160mn net income in 2020 (with production at 7mnct). That would be notably above our expectations and mean no production hit in 2020 (as opposed to Alrosa’s operations in Russia). Management is steadily progressing with developing the Luaxe mine, targeting 3-4mnct of production from as early as 2022-23. The terms of Alrosa’s participation in these projects are to be
178 RUSSIA Country Report April 2021 www.intellinews.com