ALMAR Commercial Director Andrey Novikov told Russian jeweler Ilya Klyuev about the diamond market and the development of ALMAR in the program “Time to Do” on the TV channel ABOUT BUSINESS.
You have a very interesting experience: You have worked both at ALROSA and in various companies related to diamond mining. How do you look at the future of the global diamond market now, based on two factors: the economic crisis around the world and laboratory diamonds. How will the diamond market be affected? To buy or not to buy now?
I worked at ALROSA, was responsible for the creation of the second export branch in Vladivostok. I have experience working with diamond dealers, I personally know half of ALROSA’s clients. After ALROSA, I worked for two years in one of the oldest diamond dealers in the world, which is 20 years older than De Beers. I was able to get some expertise both from the point of view of upstream (mining companies) and from the point of view of diamond dealers.
I’ll start with synthetic stones. I believe that this topic actually only contributes to the growth of sales of natural diamonds, because it teaches new consumers to buy jewelry with natural diamonds. And the cheaper synthetics will become over time, the further it will move away from natural diamonds in the minds of consumers. Here it is rather a positive fact. As for the ways to recognize and evaluate them, they are also developing. Now there are blockchain-based technologies that track stones from the moment of extraction to the moment of sale already in jewelry networks.
As for the market itself. This market is very many years old and it was created by De Beers due to powerful product branding. De Beers has spent decades branding diamonds. Therefore, demand is stable, and supply, on the contrary, is decreasing, because the reserves of natural diamonds are being exhausted.
Economic realities. Now the price of light in Germany has risen. Maybe they don’t have time for diamonds now? There is a certain experience in the anti-crisis. After all, demand began to recover after the pandemic. As far as I remember, 2021 and 2020 were very successful, and before that there was a recession and the stones fell in price. Now what do your partners, dealers say, what do they expect?
If we take the average of the diamond index, then the stones have not fallen much in price, just sales have stopped. This is the policy of the largest diamond miners, ALROSA and De Beers, who simply stop selling when demand drops. Therefore, there was no special volatility here. In addition, demand is concentrated mainly not in Europe, but in Asia, the Persian Gulf and the United States. There is another significant factor that experts are now highlighting. The consensus forecast is that in the next decade there will be a significant shortage of stones on the market due to the fact that production is declining, deposits are being liquidated, new deposits are becoming more difficult to develop, because there are few of them left. There are studies according to which in the next 50 years the shortage of diamonds will amount to 10-15% of the demand.
And if we talk about production? After all, Russia is one of the largest players, there is ALROSA, there are other private companies. Tell us from an insider’s point of view, what does the Russian market of diamond miners look like, who is mining in Russia?
ALROSA it has existed since Soviet times. Until the end of the last century, it supplied products only to De Beers. Since 1999, she began to sell her own products. This, by the way, was the reason why the Oppenheimer family was sold to De Beers. They were afraid that due to competition with the second significant supplier, the market would collapse. In fact, the market has only strengthened and prices have gone up. Here is such a fact.
And who owns De Beers?
Now Anglo American is the world’s largest mining company. De Beers takes about 5% of their total revenue.
There is another company – AGD-Diamonds. The second diamond mining company (in Russia). It used to be called “Arkhangelsk geologodobycha”, it is 90 years old, it is older than ”ALROSA”. It started mining diamonds somewhere in the middle of the last decade, that is, less than ten years ago. Lukoil owned it, then he sold it to Otkritie, now it belongs to VTB.
How are their shares divided? If my memory serves me right, ALROSA produces 30 million carats and occupies 93% of the market. This is about 1 million carats?
No, it occupies 90% of the market, and 10% is occupied by AGD Diamonds (in money). They’re just growing really fast. Now they produce about 5 million carats a year.
ALROSA sells under long-term contracts to India. And where do they sell AGD-Diamonds? Is it a state-owned company or is it a joint-stock company?
This is a private company that was owned by different shareholders. They are mined in the Arkhangelsk region at the deposit named by Vladimir Grib. They have their own sales system, just like ALROSA, which is almost entirely export-oriented. Basically, medium and small diamond dealers buy from them, which ALROSA does not give the opportunity to become a long-term client.
Tell me, what is the future of Russian diamonds, mining? I understand that there are certain difficulties with geological exploration. The project that you are currently heading is connected with the first IPO of a diamond mining company in Russia. Where did this idea come from? What is she like?
Until 2015, diamonds were a strategic raw material, only ALROSA in Yakutia could get a search license. AGD-Diamonds, another Soviet geological exploration company that opened this tube, was able to obtain a license in the Arkhangelsk region. In 2015, diamond placers ceased to be a strategic raw material. Since 2016, anyone could get a license. ALMAR Company has received two licenses for exploration of placers in the north of Yakutia at two fields.
What does mining look like in these cases? Do people throw shovels into a dump truck?
At the initial stage of exploration, in principle, it was. Of course, all this is mechanized, the technology is very simple. Mining operations: in winter, sand is collected when streams freeze, bulldozers are opened with large enough teeth, then excavators load them into a dump truck, dump trucks are taken to special storage facilities. In the summer, all this melts and enters the processing plant, which consists of several sieves with different sizes and at the end of special equipment – X-ray telescopes that track diamonds. They are expensive, because unlike deposits of other minerals, diamonds are common in only a few countries and their number is gradually decreasing. For example, in 2020, Australia dropped out of the diamond-producing countries, because the deposits there were simply exhausted. There is a forecast that by 2030, only Russia and several African countries will remain the main diamond mining regions. In Canada and Australia, the deposits will run out.
And what changes are taking place in sales now? Did the sanctions have a certain effect?
They imposed the main effect on ALROSA because it was sanctioned. Diamond dealers still do not understand how secondary sanctions will affect them, because the countries that included stones in the sanctions list included Russian diamonds, not raw diamonds. But Russia exports very little diamonds. If we take the total volume, it is somewhere around a few percent of the total sales. Raw diamonds are mainly exported. 90% is supplied to India, the remaining 10% goes to other countries, about 5% to China. The problem is that buyers are afraid of secondary sanctions if these stones that they bought from ALROSA are cut and delivered, for example, to the US market in the form of diamonds. But AGD-Diamonds now has sales volumes at a historical maximum.
Who, besides ALROSA will mine diamonds in Russia? Tell us about this project, when a private company attracts investment in the development of diamonds.
In 2016, ALMAR received two licenses. The company was created by former employees of ALROSA. These are people who explored diamond placer deposits in this region, who mastered them in the positions of chief geologist, chief engineer, chief concentrator. People who sold diamonds. They have a very large expertise. (The team) selected several sites that are the most promising and engaged in their exploration.
How many have you found?
Several hundred carats. Now, in principle, this is enough. In order to protect the reserves, several thousand carats are needed. 3,000 samples of tons were taken, which are now being enriched. As a result, we expect that there will be several thousand carats, which will further allow us to confirm reserves and obtain a mining license.
Do you expect 30 million carats at two deposits?
There is one classic placer deposit there. Now, according to forecasts, the volume is about 2 million carats, but with a good average value of $ 90. This is slightly higher than that of ALROSA in neighboring areas. Usually, it’s about $80. And the second one is significantly more – about 7 million carats. But the average cost is lower – about $ 17.
Do I understand correctly that 50% of these diamonds are industrial?
At placers there are fewer. If we compare the northern Yakut type at ALROSA with the deposits in Arkhangelsk, there are about 30-40% of technical raw materials in carats, and in money it is 2-3% of everything.
And where are they used?
According to the classics, they go to the production of abrasive equipment. But ALROSA sells everything for jewelry purposes, including industrial raw materials, too. We expect to sell as well.
Why does Russia not get raw materials to the domestic market? And why are there no diamonds in Russia?
From the manufacturer’s side, I can say, as a person who sold diamonds to ALROSA, who will do it in the future as part of ALMAR: a large diamond miner is interested in volumes. The average size of the box that ALROSA puts up is 300 thousand dollars.
It’s fine, we’re buying. But for some reason we are at the end of the list that nothing has ever reached us.
Well, because you need to buy 1000 of these boxes to get at least into the middle of the customers list/
Is it 300 million?
But what about the patriotism of Russian companies? How to grow to such a size?
For many years, there was a preference for Russian cutters – an export duty of 6%. But this resulted in the fact that many companies only said that they were engaged in cutting, but in fact they resold to foreign markets, due to this margin they existed. I agree that now there is a bias in the other direction, but it seems to me that after some time they will still balance. Now is just a good time for Russian cutters to declare themselves. To consolidate around the association of jewelers and declare itself to the state, because the state is the main shareholder of ALROSA.
We have such an ambitious plan. We have to cut about 100,000 carats in 5-7 years and buy about $25 million from ALROSA. We even counted how many riders we needed: about 500 people. What do I need to do to make this project come true? We have investors, we have money, we will increase the volume.
I think there used to be an objective barrier, let’s say VAT on diamonds, now it has been removed.
We have no cutters, by and large there are 2 thousand cutters left in the country. For comparison, there are 700 thousand cutters in India, according to some estimates. That is, there is no one to exchange with. The key to success is the right price offer from ALROSA?
What does right mean?
Let it be the same as they sell to the same Indians. Is that okay?
Fine, yes. It’s just that Indians can buy more expensive. It’s no secret that ALROSA, due to the fact that there is a mechanism in India to support subsidizing the interest rate on lending, can afford to sell them a little more expensive than the market.
I don’t really understand.
Why do diamond dealers exist? They, like midstream, are an intermediate link between miners, cutters and jewelry. They buy what they sell to a large company – market makers. Then they sort out what the cutters need and sell them, but they often sell at the same price as they bought from ALROSA, even a little cheaper. How do they earn money? Due to the fact that they sell on credit to cutters and get about 1 percent per month for it. Taking into account the fact that ALROSA and De Beers give long-term customers a 90-day deferred payment, he gets, roughly speaking, 20% per annum there. This is what diamond dealers live on. In fact, it’s all very simplistic. The price is still volatile, it changes, there are periods when demand is high, when it is low and, in fact, they have a yield of only 5-10%.
Do you think that now is not a good moment for collaboration with the state, some kind of special support policy?
Now is a very good moment, because now ALROSA has accumulated quite large stock and it seems to me that this is a good reason to go and talk, to ask the state to help in terms of providing financial opportunities for Russian buyers.
We will be asking for this for a long time. It’s easier to “give us raw materials, we’ll do it ourselves.” Do you believe in the Russian diamond market? It’s no secret that the gray market is estimated at $500 to $1 billion. And officially we are cutting $100 million. What is the reason for this imbalance?
The imbalance is that the state is the main shareholder of ALROSA, it is difficult for it to sit on several chairs at once. Obviously, if some preferences are created for someone, even for local Russian cutters, in this case ALROSA loses revenue, respectively, the state loses in the mineral extraction tax, in other taxes, in dividends and so on. It’s very difficult for him to exchange money here. After all, it is easier to work with one large taxpayer and a source of income than with many small ones. The flair, which lasted until 2016 with an export duty, created certain negative perceptions about the Russian diamond market. I think it takes time and systematic efforts for the state to believe in the market again and support them. But at least in Yakutia, the local authorities are very actively supporting ALMAR and local cutters and jewelers.
It’s strange, you were in China, you worked in Belgium – these are countries that do not have raw materials, but which have created a separate industry in their economy related to diamonds. The same Dubai. Don’t you think that this is not only a state feature of the absence of state privileges, but there may still be something in people, maybe we are not finishing something?
This is probably due to the fact that we have very rich natural resources, there is no such thing there. There you have to work with your own hands. Here you can dig up minerals with a shovel and sell, as now there is such an image of diamond miners that people just shovel money. In fact, I think this is due to the fact that the state is focused more on major market players and historically, the main resources that are understandable to the state are natural resources, not labor. If we take China, India, the main resource there is labor, the cost of the cutter’s work is significantly cheaper, access to financial resources is simpler.