ALMAR is a case in point that will serve to develop the process of funding junior companies and geological exploration in general.
Arkticheskaya Gornaya Kompaniya (AGK, Arctic Mining Company) develops the diamond deposits in the Lena-Anabar diamondiferous sub-province of Yakutia under the ALMAR (Diamonds of the Arctic) brand. ALMAR attracts investments for this project and Rough&Polished asked Andrey Novikov, the company’s Deputy Director General for Commerce, to speak on this.
Please tell us about the deposits developed by your company.
Arkticheskaya Gornaya Kompaniya was established in 2015 when our legislation allowed the regional companies to obtain licences for alluvial diamond deposits. Taking advantage of this opportunity, a team of professionals from the diamond business conducted a comprehensive analysis of the diamond placers discovered in Yakutia and received two licences for geological exploration of two deposits located in the north-west of the republic in the Bulunsky and Olenyoksky districts (Yakut: uluses), not far from the placer deposits developed by the Almazy Anabara Company.
Our resource base consists of two placer deposits – the classic Beenchime placer deposit along the Beenchime River bed 150 km from the Molodo deposit mined by Almazy Anabara Company and the Khatystakh placer deposit located in the mouth of the Lena River, in the basins of the Bulkur and Khatystakh rivers. In our opinion, this deposit has a good potential since it is associated with highly diamond-bearing Triassic tuffaceous sedimentary rock beds. In both deposits, the “northern” type diamonds – typical of all placer deposits in the northern Yakutia – prevail. The samples for the Beenchime placer are characterized by an average grade but the quality of rough diamonds is high, while at Khatystakh, the rough diamond quality is lower, but the diamond potential is huge.
Both deposits were discovered by the geologists of the Amakinskaya Expedition, as well as the Aerogeologiya and Nizhne-Lenskoye companies. After obtaining the licences, AGK carried out small-volume and bulk sampling at both placers in 2016 -2017, which made it possible to determine the commercial diamond content of both placers and to assess their inferred resources. In 2019, an expert examination of the resources by an independent competent expert was carried out according to standard NI43-101.
In early 2020, when it became clear that the economy would be impacted seriously by the coronavirus pandemic, including the diamond industry’s upstream segment, we realized that we needed a different approach to continue operations – otherwise, we would not be able to cope with the difficulties we faced in the crisis during the lockdown. As a result, we had to significantly revise our plans for the geological exploration, production organization, and financing required for the development of ALMAR. This resulted mainly in the optimization of costs, the active use of outsourcing to minimize the procurement of expensive mining machinery and equipment at the geological exploration stage, and detailed financial planning and risk management were required. It should be noted that we did not reinvent the wheel – this was the approach used by junior mining companies all over the world.
To summarize our approach to project management – we make all decisions based on the fullest possible data and strive to reduce the operating costs to the minimum. To do this, we hired a KPMG expert to do financial planning and carried out an independent examination of the reserves and our investment project. Our choice of the independent examiners was based on their competence in the diamond business and the knowledge of our region peculiarities, and we chose the international company SRK because it had been evaluating the reserves for ALROSA for many years, and FBK Grant Thornton, the first major auditor of ALROSA, working in the diamond mining industry from the mid-1990s to the present time.
Until last year, we did small-volume sampling as the geological field party mined using small-scale mechanization. This year, we switched to bulk sampling – we cooperated with ALROSA represented by Almazy Anabara, to carry out most geological surveys and sample evaluations for us under a contract, and we paid them the entire volume of the exploration work done. The advantage of a contract is that we don’t have to buy equipment now. In principle, we do not buy anything now because two-thirds of our entire production budget before placing the commercial minerals on the State balance sheet are the payments to Almazy Anabara, and one-third is the payroll and administrative expenses and also taxes. As soon as we place the reserves on the balance sheet, it will be necessary to attract significantly greater funds to organize the production and purchase the mining equipment like excavators, bulldozers, dump trucks, beneficiation plants, etc. We will start mining in 2024, and the first revenue will be only by the end of 2024. The financiers think this is a long time and, in fact, it is a huge problem for all junior companies. And besides, with large-scale plans (and at the time of production we will have up to 300 employees) we will produce up to 1 mn carats a year, so, we will potentially embrace 0.5% of the world market; however, now we have a little more than 10 people in our team and we are a startup, a so-called junior company. Our task now is to complete geological exploration as successfully as possible with minimal costs, so even now we work mainly part-time in order to save money and spend as little money as possible at the initial stage.
Why do you use two names, AGR and ALMAR, what is the difference?
The subsoil user is Arkticheskaya Gornaya Kompaniya (Arctic Mining Company), but all the companies here are named “Arctic” or ”mining”, therefore, to stand out of the others, we carried out a rebranding in 2019. ALMAR is a name in the spirit of the industry, like the names ALROSA stands for “Almazy Rossii” (Diamonds of Russia), so, our name ALMAR stands for “Almazy Arktiki” (Diamonds of the Arctic) – the analogy is clear; there also the Almazy Anabara (Diamonds of Anabara) company.
The ALMAR logo is the arctic poppy – an endemic to the Arctic, a small flower but bright and very resilient. The arctic poppy is also one-of-a-kind as it is the only poppy without opiates. The logo symbolizes a diamond – our core product and a quarry in a kimberlite pipe symbolizes a mining industry, traditionally in the national colours of Yakutia.
Who are the members of the ALMAR team?
In fact, earlier, our team took part in the production at the Nizhne-Lenskoye and the Almazy Anabara mining enterprises, subsidiaries of ALROSA, including the Almazy Anabara’s chief engineer, Nizhne-Lenskoye company’s chief geologist, and the deputy chief Beneficiation Officer.
Director General Andrey Karkhu is an Honored Miner of the Russian Federation, a well-known expert in the diamond mining industry both in Yakutia and abroad. Sergey Grakhanov is Chief Geologist and the discoverer of the largest placer deposits in Yakutia (Ebelyakh, Gusinaya, Yraas-Yuryakh, Bolshaya Kuonamka placers), Dr. Sci. in Geology and Mineralogy. Andrey Zudikhin is chief Beneficiation Officer, the discoverer of the Bolshaya Kuonamka. The founders of the Arkticheskaya Gornaya Kompaniya are among its shareholders, for example, the first Director General, Pavel Andreyev, formerly a top-level regional official; Roman Nogovitsyn, Academician of the Yakutia’s Academy of Sciences, Doctor of Economics, Professor; Sergey Grakhanov, Dr. Sci. in Geology and Mineralogy, Honoured Geologist of the Republic of Sakha (Yakutia); financier Lyudmila Nikolayeva who took part in the development of a diamond processing cluster in the republic when she was the head of Almazergienbank. She was the first to enter this project in 2016 with her own money, at first as a creditor, and then as an investor, assuming risks at the earliest stage of exploration. And at the beginning of 2019, I joined the ALMAR team being at that time the director of the Regional Projects at Diamond Trading NV.
You were the director of the branch of the Belgian Diamond Trading NV in China, were not you?
Not exactly, this company has a subsidiary in China – Deltatau Diamond (Shanghai) Co Ltd, and I was responsible for purchases in Russia and for the sales development in the Chinese market. The matter is that I have worked in China at a consulting company for many years. Diamond Trading NV is one of the top 15 global diamond dealers, it is one of the oldest diamond dealers in the world with over 150 years of experience.
Before joining Diamond Trading NV, I was in charge of the ALROSA’s sales branch in Vladivostok as its first director and created a diamond cluster in the free port of Vladivostok. Prior to that, I worked in the consultancy team that optimized the activities of ALROSA, in general, I gained diversified experience in the rough and polished diamond sector.
What are your goals?
We plan to complete the exploration work in Q4 2022 and to confirm and place the reserves on the balance sheet in 2023. We expect to start mining in 2024 and to start selling rough diamonds in Q4.
We want ALMAR to remain a Yakut-based company, so, it is necessary to attract money from the financial market. Until the beginning of 2021, we did the investments on our own. In general, for a junior company, the most affordable way of financing is using its own capital. You can try and find a strategic investor. However, there was no such a case in the diamond mining sector yet, but such a practice exists in a gold mining sector and it shows that if a strategic investor comes at this stage, then it usually takes a minimum of 70% and is interested in the full control over the company. And our model of attracting investments is to arrange all our processes so that the company could become attractive for institutional financial investors in terms of the risk level and we could attract funds from the investors interested in the income, and not in the control over the company. And this requires either going to the stock exchange or to large investment companies – the Russian or foreign ones. Since 2019, we have been very actively negotiating with large Russian institutional investors and showing them the company’s progress.
In addition, we want our approach, if successful, to pave the way to the financial market for other Yakut junior companies. Therefore, we are very transparent and show the project progress on the ALMAR website. In the future, we hope to become a public company, but now we are taking into account the standards used by public companies.
It was no coincidence that you held the presentation of your project for investors in Moscow together with De Beers Jewellers?
For us, their participation was a sign of a certain trust. But their customers are more important to us – the wealthy people who invest in premium jewellery, in the diamond mining companies, they are of interest to us in terms of investments. They also show a certain interest in the company and their investment interest is quite strong. This year, we expect to attract funds that will be sufficient for the entire exploration stage before placing the reserves on the balance sheet. This investment model allows us to hope that we will be able to attract funding while maintaining our control and the company will remain in the Republic of Sakha (Yakutia).
Several other subsoil users with licences for geological exploration at diamond placers appeared in the Arctic districts of Yakutia, the RosGeologia company received several licences after us, and there are several more companies having the licences. Now, in my opinion, this area develops into a kind of diamond Klondike. It is very interesting to observe the development of other companies and the district. In general, I believe that now there is a great upsurge in Yakutia and this is one of the regions that will be the basis for the further development of Russia.
But you were the first to start, so are you in a better position?
We had the opportunity to choose. We have recently signed an agreement with RosGeologia, under which we plan to exchange data, and, perhaps, we will jointly carry out the exploration work. The plans have not yet been confirmed, but we are currently studying this possibility. That is, the potential of the Arctic region is very high in terms of mining diamonds. Of course, ALROSA – as a major company and a market maker – works on the large primary deposits, and new primary deposits have not yet been found in the Arctic, but a lot of placer deposits have been discovered, so small-scale companies have a high potential for a rough diamond base.
We still bear high geological risks, but the junior company format allows us to limit our costs and use the investment funds very effectively. We try to attain and maintain our competitive advantages such as flexibility, mobility, profitability, use of new technologies, and to create a new diamond mining company that is a small, flexible, up-to-date junior one combining the traditions of the Russian diamond mining practices highly valued all over the world with modern approaches of the junior business.
Implementing the ALMAR project, we set a broader task and we want our experience to be in demand and used by other Yakut companies. It is very difficult to raise funds as the mining industry is very capital-intensive and the investment market is global, so, the investors have an opportunity to invest all over the world. That is why the Yakut companies have to compete for investments globally. At this stage, the problem of raising the funds for the development is a common problem for the companies in Russia, especially for the ones in the Far East.
Therefore, our task is to develop the company in such a way and assess and manage its risks as transparently as possible so that the financial market could believe in us. At the same time, our investors will receive higher returns than in the upstream diamond market due to the low base effect.
This is a case in point that will serve to develop the process of funding junior companies and geological exploration in general. After all, a problem is emerging with the raw-material base, as well as the problem in the diamond industry regarding the proven reserves in the Arctic zone placed on the balance sheet for many deposits – until 2025, for primary deposits – until 2030. Investments in geological exploration are always risky, and it is very difficult for a single company, even the largest one, to carry out the resource base replenishment, especially in the current unstable economy. On the one hand, the state is now engaged in this and the RosGeology company works actively, but on the other hand, this process can also be at the level of junior companies. This is even more relevant in the gold mining sector, where there are hundreds of deposits with reserves that are, in principle, of no interest to major companies, the reserves are from 200-500 kg to a tonne, this equals several billion roubles, but their development is easy enough, so, the local companies are able to develop them if they have funding. And if there is a chance that a regional company – a junior one like us – could receive funds for the exploration, go through all the stages to the production and sales, and at the same time, would be able to retain its control and remain a regional company, I think, this case would be interesting to many players.
Rough&Polished is an industry analytical agency specializing in the study of the processes determining the development of the world market for rough and polished diamonds, precious stones and precious metals.