Page 122 - RusRPTDec18

is broadly in line with our estimates (10% for TCC) and might be expected by the market. The focus remains on total cash cost guidance, which has not been given yet (we expect it in 1Q19) and which might include grade depletion at other brownfields. Our conservative forecasts suggest a 4% YoY increase in 2019F TCC.
Alrosa has reported slightly positive 3Q18 results. On the one hand, costs were lower than the consensus expected, but on the other, FCFE adjusted for the insurance premium was lower and the sales guidance was downgraded. As the inventory of melee diamonds is to be accumulated, we assume Alrosa selling down excessive stock in 1H19, helped by seasonally strong period demand after holiday sales of jewellery in Western countries. VTBC unchanged 12-month Target Price of RUB 130 implies a 40% ETR: Buy reiterated. Earnings outperformance on costs. EBITDA of RUB 40.7bn exceeded consensus estimates by 3-9%, largely thanks to better costs. Indeed, we note both lower cost of production, on the back of lower MET (after gas asset sale) and other operating costs. As we expected, due to the seasonal ore inventory release, which offset the diamond inventory build-up in P&L, the cash cost of sales of $48.40/ct was above the $36.40/ct cost of production.
Alrosa has sold 50% of its Botswanan asset, the Sunland Minerals joint venture, to Botswana Diamonds, which became the sole owner of the joint venture. Alrosa’s decision came amid changes in the company’s priorities. Namely, deposits that are at an early stage of development have lost their importance for Alrosa, Botswana Diamonds notes. Alrosa’s main long-term focus in Africa is the development of production in Angola, which is why, in our view, it decided to sell its asset in Botswana. We do not expect the deal to have a significant effect on Alrosa’s fundamentals, and so treat this news as neutral for the company.
Alrosa’s sales in October were $243mn, including rough diamond sales of $234mn and polished diamond sales of $9mn, the company announced in a press release. According to a comment by Deputy CEO Yury Okoemov, the demand for smaller stones continued to remain weak in October, due to the seasonal slowdown, but is expected to stabilise in December 2018-1Q19. Our View: Diamond sales in January-October 2018 grew 6% y/y, but October sales decreased 28% y/y, which we consider marginally negative. We expect sales in November to stay low as well, before picking up in December and 1Q19 due to the holiday sales season. The mix and high price levels are to remain in November. However, in December 2018-1Q19, prices are likely to decrease, we think, due to the mix worsening, given the growth in small stones sales volumes.
Russian diamond producer Alrosa is looking for a new deposit in Angola for its Kimang joint venture. The company’s specialists have inspected the Sombo land area and plan to obtain a geological exploration licence for it in the coming months. As soon as the company obtains all the required permissions, it plans to start field work. The company estimates the project capex to be at least $5m. The news is in line with Alrosa’s strategic priority to increase production in Angola in the long term. The future effect on the company’s fundamentals would depend on the outcome of the geological exploration and a more precise capex estimate.
122 RUSSIA Country Report December 2018 www.intellinews.com