ALROSA Mulls Production Cut in 2016

Moscow: ALROSA may reduce production in 2016 as its rough diamond inventory is at a critical level in a weak market.

“Currently, our inventory stands in excess of 20 million carats and increasing inventory further would not be feasible for the company, or it would be difficult economically,” Ilya Ryashchin, ALROSA’s first vice president in charge of finance and economy, said in a call with analysts on November 25. “In case 2016 will not see consumption levels back to normal, we would probably reconsider production volumes.

ALROSA maintained its production in 2015 and is on track to recover 38 million carats even as it has seen sales slump this year. Management previously explained that the company would prefer to raise inventory rather than lower output as the cost of adjusting operations is high.

Consequently, ALROSA’s diamond inventory increased from about 14 million carats at the beginning of the year to 17 million carats reported in August and now 20 million carats, which Ryashchin estimated is valued at more than $2 billion.

Analysts at VTB Capital viewed the possible production cut as positive but stressed that the mining company’s options are limited given the unit cost implications at its open pit and underground operations. The most likely target will be ALROSA’s alluvial deposits which are more seasonal and contribute about 15 percent of overall production, the analysts wrote in a November 26 note to investors.