UPDATE 4-Russia to cut stake in diamond miner Alrosa

Wed Oct 2, 2013 11:55am EDT

* Alrosa will be one of a handful of listed diamond miners

* Will sell 16 percent stake in Moscow this month

* Alrosa targets valuation of more than $10 billion - sources

By Polina Devitt and Clara Ferreira-Marques

MOSCOW/LONDON, Oct 2 (Reuters) - Russia pushed ahead with its drive to raise cash from state-owned assets, deciding to cut its stake in diamond miner Alrosa in an up to $1.8 billion share sale that is the gem industry's largest in over a century.

Alrosa - whose roots date back to the first Russian diamond mine, discovered in the 1950s - has been steadily growing its production and market share over the decades, overtaking Anglo American-owned De Beers in 2009 as the world's biggest diamond producer by volume, though it has yet to catch it in value terms.

Russia's federal and regional governments will sell 14 percent of Alrosa's shares, using the cash to bolster state finances. An additional 2 percent will be sold by an Alrosa subsidiary and these proceeds will be used to pay down debt.

Olga Dergunova, the head of Russia's Federal Agency for State Property Management, declined to comment on the timing of the sale which has been planned for more than a decade.

Alrosa is already listed on the Moscow stock exchange, with a free-float of around 9 percent. But only a small amount of those shares are actively traded and the market is illiquid.

That accounts for a market value of just over $8 billion, based on current trading, compared with the target valuation implied by the share sale, according to a banking source, of between $10 billion and $11 billion.

A separate source familiar with the deal said Alrosa was targeting a valuation of more than $10 billion. Alrosa declined to comment, though in May CEO Fyodor Andreev put the value at between $9 billion and $15 billion.

The target valuation is between 38-44 roubles per share, said another banking source, and 40-47 roubles per share, according to a separate banking source. This would put the stake sale in a $1.4-1.8 billion range.

Alrosa's shares rose 6 percent to 38.5 roubles on Wednesday.

"The asset is unique - at the moment Alrosa has no direct peers among public companies," Barclays Capital analyst Vladimir Sergievsky said. De Beers, Alrosa's most direct competitor, delisted in 2001 and is now 85 percent owned by Anglo.

"Investors who buy Alrosa shares will get exposure to the consumer sector, which is unusual for mining companies. Demand should be good."

Analysts also point to a positive outlook for diamond prices in the longer term, with demand expected to outpace supply towards the end of this decade, as existing mines age with new deposits unlikely. The last major mine was discovered in 1997.

The roadshow ahead of the sale is expected to start around Oct. 14, with the deal set to close by the end of the month.

Goldman Sachs, JPMorgan, Morgan Stanley and VTB Capital are joint global coordinators and joint bookrunners for the offering. Renaissance Capital is a joint bookrunner.

Following the sale, Russia's federal and regional governments will own 43.9 percent and 25 percent respectively.

A STRATEGIC ASSET

Alrosa's main assets are located in Yakutia in Russia's Far East, a remote region of tundra and forest, and the country's largest province, also a repository of large deposits of natural resources from oil and gas to gold and coal.

Alrosa has long been seen as a strategic asset by Russian and regional governments, complicating the approval of a share sale, which is much needed as the company seeks to invest in its mines and equipment. The company itself has said it is ready for a public offering, and banking sources said last month the share sale was set for October.

The sale is part of a $50 billion, multi-year drive to dispose of state assets that was launched in 2010 by reformist former finance minister Alexei Kudrin. The privatisation plans have been only partially implemented in a faltering global economy, and in June the government cut its target.

Last week, Alrosa also sold its gas assets to Russia's top oil producer Rosneft for $1.4 billion, meaning the company is now purely focused on diamond mining.

Alrosa will be one of very few pure listed diamond miners - its nearest rival is London-listed Petra Diamonds, with a market capitalisation of less than $1 billion - but it could remain out of reach for many, as it will be listed in Moscow.

That will also complicate comparisons for investors.

Societe Generale analyst Sergei Donskoy said that assuming a valuation of $9 to $10 billion, and assuming the company's net debt will decrease to slightly less than $2 billion by the end of 2013 from current $3 billion, the company's EV/EBITDA at such an equity valuation would be around 5 times.

That is below 2014 valuations for the precious metals and diversified miners, but above the average for the diamond sector of 3.5 times, according to Nomura and based on consensus estimates. That number, though, includes rivals as varied as fast-growing Petra, trading at almost 6 times, and troubled smaller players like Gem Mining at just over 3, according to Thomson Reuters data.

Apart from its mines in Russia, Alrosa is also a shareholder in the Catoca mine in Angola, the country's largest.

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