An overview of OJSC ALROSA’s financial results per IFRS
The ALROSA Group revenue increased by 10% from RUB 137,732 million in 2011 to RUB 150,880 million in 2012.
Sales of rough and polished diamonds (the diamond sector) account for 90% of total earnings, this share has not changed significantly over the past three years. In 2012, diamond earnings increased by 9% in comparison with RUB 125,340 million in 2011 totalling RUB 136,417 million, as a result of increase of the volume of carats sold and the average price for carat of diamond.
Earnings, billions of roubles
Earnings from other sources (transport, social infrastructure, trading, construction etc.) increased from RUB 12,392 million in 2011 to RUB 14,463 million in 2012.
Earnings by area of activity in 2012, %
Cost of sales and royalties
Gross margin, %
The cost of sales increased by 22% from RUB 56,005 million in 2011 to RUB 68,467 million in 2012.The major factors facilitating this increase were: an index-linked pay rise in the fourth quarter of 2011, an increase in the cost of fuel and an increase in transportation costs, as a result of an increase in the share of diamonds extracted underground from 18% to 26% over the course of 2012.
The volume of royalties fell from RUB 3,509 million in 2011 to RUB 1,209 million in 2012, as a result of changes of contractual terms and conditions. According to the addendum to the licensing agreement signed by Sakha Republic (Yakutia) and OJSC ALROSA-Nyurba, one of the Group’s subsidiaries, the latter, was obliged to make annual royalty payments to the budget of Sakha Republic (Yakutia) in the amount of RUB 3,509 million from the 1st of January of 2007 to the 31st of December of 2011, and RUB 1,209 million from the 1st of January of 2012.
The diagram below illustrates how the cost of sales was structured in 2012:
Structure of cost of sales
In 2012, the payroll accounted for 46% of the cost of sales (42% in 2011). Payroll costs increased by 11%, from RUB 25,616 million in 2011 to RUB 28,451 million in 2012, mainly as a result of a significant one-off index-linked pay rise in the fourth quarter of 2011 to make levels of pay competitive.
Depreciation costs increased by 21%, from RUB 9,846 million in 2011 to RUB 11,943 million in 2012, accounting for 17% of the total cost of sales. The main reason for the rise was an increase in the volume of fixed assets that entered into service in 2012 in comparison with 2011.
In 2012, the cost of sales increased more rapidly than revenue. As a result, the Company’s pre-tax profit was smaller than the growth in revenue in relative terms. Pre-tax profits rose by 4%, from RUB 78,218 million in 2011 to RUB 81,204 million in 2012. The difference between the rates of growth of revenue and cost of sales led to reduction in gross margin of the Company from 57% in 2011 to 54% in 2012.
Operating costs and operating profits
General and administrative costs increased by 38%, from RUB 6,188 million in 2011 to RUB 8,509 million in 2012. Commercial costs also increased, from RUB 1,639 million in 2011 to RUB 2,018 million in this reporting period. The aforementioned index-linked pay rise in the fourth quarter of 2011 was also one of the reasons for the increase in general and administrative costs.
Other operating costs increased by 29%, from RUB 19,205 million in 2011 to RUB 24,725 million in 2012. Social welfare expenditure and the costs of geological exploration are the two main categories of other operating costs.
In 2012, social welfare expenditure more than doubled from RUB 4,382 million in 2011 to RUB 9,249 million in the reporting period. The main reason for the increase in social welfare expenditure was due to a series of contracts signed by the Company with Sakha Republic (Yakutia) to support the region’s socioeconomic development. Under these contracts, the Group assumed certain obligations relating to social welfare, among them the repair of social infrastructure belonging to municipal authorities, the demolition of dilapidated and unsafe housing etc. The Group will honour these commitments during the period
Costs relating to geological exploration rose by 9%, from RUB 7,071 million in 2011 to RUB 7,727 million in 2012.
EBITDA margin, %
The Company’s operating profit rose by 4%, from RUB 47,263 million in 2011 to RUB 49,039 million in 2012. EBITDA totalled RUB 61,950 million, 5% less than in 2011 (RUB 65,217 million).
The EBITDA margin was 41% in 2012, compared with 47% in 2011.
Comparison of operating profits and EBITDA in 2012, RUB bln
Comparison of operating profits and EBITDA in 2011, RUB bln
Profits for the year
Financial expenditure fell by 23%, from RUB 11,682 million in 2011 to RUB 9,054 million in 2012. The sum of financial expenditure reflects losses from exchange rate differences, which totalled RUB 798 million in 2012, compared with RUB 4,412 million in 2011. Interest costs included in financial expenditures totalled RUB 8,256 million in 2012, having increased by RUB 986 million in comparison with 2011, as the Company secured additional debt financing during 2012 in the form of European commercial paper.
Profit margin by reporting period, %
Financial income includes interest income and income from exchange rate differences. Interest income totalled RUB 292 million in 2012, which is RUB 40 million less than in the previous year. Income from exchange rate differences totalled RUB 2,725 million in 2012, whereas in 2011 it totalled RUB 1,160 million.
Net income from exchange rate differences totalled RUB 1,927 million in 2012, whereas in 2011 the Company recorded a net loss from exchange rate differences in the amount of RUB 3,252 million. Exchange rate differences mainly arise as a result of reassessment of the Company’s debt obligations denominated in US dollars, and changes in the exchange rate between the US dollar and the rouble.
In 2012, pre-tax profit totalled RUB 44,151 million which is 15% higher than in the previous reporting period.
The effective rate of profits tax in 2012 was 24% which is 6.6% less than in 2011. The main reason for the reduction was the decrease in untaxed total expenditure. In 2011, the high level of untaxed total expenditure was due to the loss relating to the decommissioning of social infrastructure.
Net profit totalled RUB 33,634 million in 2012, 26% higher than the figure of RUB 26,658 million recorded in 2011. The net profit margin for the reporting period was 22%, in comparison with 19% in 2011.
The return on shareholder capital (ROE), which is calculated on the basis of the profit for the year and the average value of the capital owned by ALROSA’s shareholders through the year, increased from 26% in 2011 to 28% in 2012. An analysis of ROE using the DuPont method indicates that the main driver behind ROE growth was the decrease in interest and tax payments in 2012 (an increase in interest and tax burden) in comparison with 2011. These factors more than compensated for the insignificant reduction in capital turnover, as well as in the Company’s financial leverage.
Base and diluted profit per ALROSA’s share increased by 23% during the reporting period, from RUB 3.69 in 2011 to RUB 4.52 in 2012.
Changes in ROE using the DuPont method
| Tax burden
(profit for the year / pre-tax profit)
| Interest burden
Pre-tax profit / operating profit)
|x||Operating profit margin (Operating profit / earnings)||x|| Capital turnover
(Earnings / average value of assets over the year)
|x|| Financial leverage
(average value of assets over the year / average shareholder capital for the year)
|=||Return on shareholder capital (ROE) (profit for the year / average shareholder capital for the year)|
Capital structure and terms of liabilities
Total long-term and current liabilities increased by 31%, from RUB 127,867 million in 2011 to RUB 166,860 million in 2012. Liabilities increased as a result of ALROSA attracting debt financing for acquisition of 100% stake in CJSC Geotransgaz and 100% stake in Urengoy Gas Company LLC (UGK). These transactions cost USD 1,137 million in total.
The ratio between the Company’s own assets and liabilities remained at a stable level in 2012. The volume of liabilities in comparison with the total volume of assets marginally increased from 53% in 2011 to 55% in 2012, with the volume of long-term liabilities compared with the total volume of assets totalling 36%, slightly more than in 2011 (35%).
At the end of 2012, the debt burden stood at 2.0 x EBITDA, which is in line with the Company’s target. This indicator increased during 2012 because of the additional finance that was secured in order to buy up gas assets.
The structure of long-term credits and loans changed in 2012, as a result of reduction of the share of long-term liabilities (with a term of more than four years). The share of such liabilities fell from 63% in 2011 to 41% in 2012.
Most of the total long-term and short-term debt comprises public debt instruments, which account for 77% of the portfolio, where in 70% of total debt is denominated in US dollars.
Changes to the capital structure between the previous reporting period and the position at 31 December 2012 are illustrated in the table below (billions of roubles, with the exception of the ratio of total liabilities to EBITDA):
|Position on 31 December 2012||Position on 31 December 2011||Change (year on year)|
|Current liabilities as a share of total liabilities||34.3%||33.9%||+0.4%|
|Net debt / EBITDA||1.9||1.3||—|
|Capital relating to ALROSA’s shareholders||138,297||113,814||+21.5%|
The structure of long-term credits and loans for 2011 and 2012, broken down by repayment period, is shown in the diagrams below:
Working capital and liquidity
The Company’s net working capital fell from RUB 22,104 million in 2011 to RUB 16,461 million in 2012. The main reason for the reduction in net working capital was first of all a 32% increase in the Company’s current liabilities, from RUB 43,310 million in 2011 to RUB 57,230 million in 2012. The increase in current liabilities was partly reset by an increase of 13% in working assets, from RUB 65,414 million in 2011 to RUB 73,691 million in 2012.
Liquidity indicators, which reflect the Company’s ability to pay daily costs and settle short-term liabilities in full and on time, fell over the course of 2012, but remained at a sustainable level.
Working capital and liquidity
investment in new production facilities
Capital investment grew by 40%, from RUB 21,420 million in 2011 to RUB 30,050 in 2012, primarily as a result of doubling of investment in new production facilities (RUB 17,875 million in 2012 in comparison with RUB 8,968 million in 2011).
The doubling of the volume of investment in new production facilities relates primarily to the construction of infrastructure at the Udachny underground mine, the construction of an ore-processing plant and the development of tailings facility at OJSC Severalmaz, and the introduction of integrated gas processing of the Company’s gas assets.
Cash flow from operations fell by 15% over the course of the reporting period, from RUB 49,182 million in 2011 to RUB 42,007 million in 2012. This reduction is primarily the result of an increase in investment in working capital. Excluding changes in working capital, cash flow from operations remained at approximately the same level as in the previous reporting period — RUB 61,830 million in 2012, in comparison with RUB 62,189 million in 2011.
cash flow from operations
The net sum of funds used for investment purposes increased by almost 250% in 2012, from RUB 17,894 million to RUB 61,122 million (including RUB 32,756 million for the purchase of gas assets), as a result of the Company’s large investment programme.
In 2012, net cash inflow from financial activities totalled RUB 13,654 million, as a result of raising funds for the purchase of gas assets. In 2011, net cash inflow from financial activities totalled RUB 23,002 million, since the Company used its own funds to cover its liabilities.
Thus, in 2011 the Company financed its own capital investment and financial liabilities by using funds obtained from operations, while in 2012, due to the need of acquisition of the gas companies, the Company attracted additional funding.