Pillars of Progress: ALROSA’s Core Strategic Directives

ALROSA’s robust strategic update, meticulously presented during its Capital Markets Day, is anchored by several foundational pillars. These directives are meticulously crafted to ensure the company’s long-term sustainability, reinforce its operational prowess, and ultimately generate superior returns for its investors. Each pillar represents a critical area of focus, collectively designed to maintain ALROSA’s leadership in the intensely competitive global diamond mining industry.

Commitment to Sustainable Development and Workplace Safety

At the heart of ALROSA’s operational philosophy lies an unwavering dedication to sustainable development and the paramount importance of safety in the workplace. The company views these aspects not merely as compliance requirements but as fundamental drivers of long-term value and social responsibility.

• Prioritizing Safety and Well-being: Workplace safety continues to be ALROSA’s absolute top priority. While the company proudly maintains a Lost Time Injury Frequency Rate (LTIFR) significantly below the industry average, this achievement is viewed not as a finishing line but as a benchmark for continuous improvement. ALROSA is relentless in its pursuit of further decreasing this indicator, with an ambitious target to achieve zero fatality rates across all its operations. This commitment is supported by continuous investment in safety protocols, advanced training programs, and the fostering of a proactive safety culture that empowers every employee to identify and mitigate risks.
• Environmental Stewardship and Climate Action: ALROSA’s environmental program is meticulously designed to minimize its ecological footprint. A key objective is the further reduction of CO2 emissions from its operations. The company is actively investing in and exploring renewable energy sources, with an ambitious goal for renewables to constitute a significant portion of its total energy consumption by 2024. This transition not only contributes to global climate action efforts but also enhances operational resilience and reduces reliance on fossil fuels. Beyond emissions, ALROSA focuses on responsible water usage, biodiversity preservation, and land rehabilitation in the areas it operates, reinforcing its role as an environmentally conscious diamond producer.
• Robust Community Engagement and Social Investment: ALROSA deeply understands its role as a responsible corporate citizen within the communities where it operates. The company remains a steadfast supporter of local communities through extensive charitable initiatives and crucial infrastructure development projects. These social investments account for nearly 90% of ALROSA’s total social expenditure, reflecting a profound commitment to improving living standards, fostering economic development, and enhancing public services such as education, healthcare, and cultural facilities in its operational regions. This localized approach ensures that the benefits of diamond mining are shared broadly, contributing to the sustainable prosperity of its stakeholders.

Driving Operational Efficiency and Innovation

Operational efficiency is a cornerstone of ALROSA’s strategy, designed to enhance profitability and solidify its competitive advantage in the global diamond market. The company has made remarkable strides in this area since launching its comprehensive operational efficiency program in 2017.

• Comprehensive Efficiency Program: Currently, over 200 distinct efficiency initiatives are actively underway across all divisions of the company. These initiatives span a wide spectrum of operations, from mining and processing to logistics and administrative functions. The overarching aim is to systematically identify and eliminate bottlenecks, streamline workflows, and adopt best practices from around the world to further strengthen ALROSA’s position as a world-class leader in operational efficiency.
• Tangible Performance Improvements: The program has already yielded impressive results. Labor productivity, defined as thousands of cubic meters of run-of-mine ore per employee, surged by a remarkable 17% in 2018 compared to 2014, showcasing significant gains in human capital optimization. Looking ahead, this metric is projected to grow by an additional 12% over the next five years, indicating sustained focus on workforce effectiveness. Concurrently, per unit operating costs saw a real-term decline of 5% year-on-year in 2018 and are forecast to decrease further by 2% per annum over a five-year horizon. General and administrative (G&A) expenses also demonstrated a disciplined reduction, falling by 10% in real terms in 2017 and by an additional 2% in 2018. These reductions underscore the effectiveness of the efficiency drive across both direct operational and supporting functions.
• Holistic Approach to Future Efficiency: The efficiency program is multifaceted, encompassing key strategic areas such as extensive digitalization of processes, comprehensive business process optimization, and a strategic revision of organizational structure. Crucially, it also emphasizes the promotion of an operational efficiency culture among all employees, fostering an environment where continuous improvement is ingrained at every level. ALROSA foresees ample further room for efficiency gains, which are expected to significantly reinforce its status as the most profitable player in the diamond industry, consistently achieving operating margins that are double the global industry average. This strategic focus ensures that ALROSA remains resilient and highly competitive, irrespective of market fluctuations.

Maintaining a Best-in-Class Resource Base for Long-Term Supply

ALROSA’s long-term sustainability and market leadership are intrinsically linked to its exceptional resource base, which stands as a testament to its superior geological understanding and exploration capabilities.

• Unparalleled Diamond Reserves: ALROSA boasts an outstanding resource base, estimated to be approximately twice the size of its nearest competitor. This vast reserve allows the company unparalleled flexibility and security in its long-term production planning, ensuring a stable supply of natural diamonds to the global market for decades to come. The sheer scale and quality of these resources represent a significant competitive advantage, underpinning ALROSA’s enduring market influence.
• Advanced Exploration Technologies: The company’s superior exploration capabilities are backed by the deployment of cutting-edge modern technologies. These include advanced georadar footage, sophisticated radio wave geointroscopy, and high-resolution seismic surveys conducted in both 3D and 2D. Such state-of-the-art tools enable ALROSA to conduct highly precise and efficient geological prospecting, allowing for the replenishment of its resource base at remarkably low finding costs. This technological edge translates into greater capital efficiency and a more robust pipeline of future diamond deposits.
• Sustainable Production Outlook: The combination of an extensive resource base and advanced exploration techniques provides ALROSA with a highly sustainable production outlook. The company anticipates maintaining an annual production level of approximately 38 million carats (m ct/year) well into 2030. This consistent and predictable supply is crucial for global diamond buyers and ensures ALROSA’s continuous contribution to the natural diamond value chain, offering stability and confidence to the market.

Enhancing Global Marketing Efforts for Natural Diamonds

In an evolving global market, ALROSA’s marketing strategy is designed to amplify the intrinsic value of natural diamonds, foster long-term demand, and adapt to modern consumer behaviors. This includes both broad industry initiatives and targeted product strategies.

• Promoting the Uniqueness of Natural Diamonds: ALROSA’s marketing program encompasses a range of generic marketing initiatives implemented under the esteemed auspices of the Diamond Producers Association (DPA). These campaigns are strategically aimed at generating sustained, long-term demand for natural diamond jewellery by highlighting its inherent rarity, enduring beauty, and emotional significance. A crucial aspect of this strategy is to clearly differentiate natural diamonds from synthetic (laboratory-grown) diamonds, educating consumers on their distinct characteristics, value propositions, and the unique story behind each natural stone.
• Targeted Product Marketing and Value Creation: The company also executes initiatives to market specific product categories. This includes promoting fluorescent rough and polished diamonds in both business-to-business (B2B) and business-to-consumer (B2C) markets, recognizing their unique properties and appeal. Furthermore, ALROSA actively promotes exceptional polished diamonds, including unique, large, and rare coloured gemstones, which command premium values in the luxury market. These targeted efforts ensure that the full spectrum of ALROSA’s product offering is strategically positioned to capture maximum market value.
• Digital Transformation in Marketing and Sales: Recognizing the increasing importance of digital channels, ALROSA is heavily investing in digital marketing initiatives. This includes the development and implementation of advanced tracing systems that provide transparency and provenance for diamonds, further enhancing consumer trust. Extensive digitalization efforts are improving efficiency and reach across all marketing touchpoints. Furthermore, the company is expanding its online sales capabilities, making its exquisite natural diamonds more accessible to a global audience and streamlining the purchasing process for both wholesale and retail clients. These digital advancements are crucial for engaging modern consumers and ensuring ALROSA remains at the forefront of the luxury goods market.

Prudent Capital Allocation for Maximized Shareholder Returns

ALROSA’s capital allocation strategy is meticulously designed to maximize returns for its shareholders by focusing on core competencies, disciplined investment, and a conservative financial framework.

• Strategic Focus on Core Business: A key priority of ALROSA’s capital allocation policy is an intensified focus on its core diamond mining business. This involves the continued divestment of non-core business units and assets that do not directly contribute to its primary strategic objectives, thereby streamlining operations and optimizing capital deployment. Concurrently, the company is firmly committed to organic growth and brownfield expansion projects, which involve leveraging existing infrastructure and proven reserves to incrementally increase production and efficiency. This disciplined approach ensures that capital is channeled into areas with the highest potential for value creation.
• Disciplined Investment Program: ALROSA has approved a robust five-year investment program totaling RUR 40 billion. This significant capital outlay is subject to stringent financial criteria, including a minimum Internal Rate of Return (IRR) hurdle level of 20% for all new projects. This rigorous evaluation process ensures that only the most promising and financially sound ventures receive investment, safeguarding capital and prioritizing projects that are expected to generate substantial long-term returns and reinforce the company’s competitive position.
• Conservative Financial Policy and Credit Strength: ALROSA’s consistent and conservative financial policy has been widely recognized, leading to the assignment of investment-grade credit ratings by leading agencies Moody’s and S&P in 2018. This strong financial standing is a testament to the company’s prudent management of its balance sheet. ALROSA intends to maintain this conservative debt profile moving forward, targeting a Net Debt/EBITDA ratio typically between 0.5x and 1.0x. This approach minimizes financial risk, provides stability, and ensures flexibility for future strategic investments and shareholder distributions, cementing investor confidence in the company’s financial health and sustainability.

Leadership’s Vision: Maximizing Value and Aligning Interests

Sergey Ivanov, ALROSA’s esteemed CEO and Chairman of the Board, provided critical insights into the company’s overarching vision, emphasizing a resolute commitment to shareholder value and aligning the interests of all stakeholders. His statements at the Capital Markets Day underscored a strategic evolution aimed at fostering transparency and performance-driven growth.

“We are steadfast in our mission to cultivate a world-class, commercially driven enterprise, with the ultimate objective of maximizing value for our esteemed shareholders. A significant milestone in this endeavor was our strategic transition in 2018 to a more transparent and performance-linked dividend policy. By pegging dividend distributions directly to Free Cash Flow (FCF) – a departure from our previous net profit basis – we have instilled greater predictability and accountability. This revised framework dictates the distribution of between 70% and 100% of our FCF to shareholders, contingent on our leverage level, specifically the Net Debt/EBITDA ratio. This ensures a balanced approach to capital returns while maintaining financial prudence and safeguarding the company’s long-term stability and investment capacity.”

“Furthermore, recognizing the critical importance of aligning the interests of our leadership with those of our investors, the Supervisory Board, in December 2017, approved a comprehensive three-year long-term incentive (LTI) program for our employees. This forward-looking program is meticulously designed to link employee compensation to a clear set of financial, operational, and Total Shareholder Return (TSR) targets. By doing so, we foster a culture where every member of our team is incentivized to contribute directly to ALROSA’s overarching success and the generation of superior shareholder value. This strategic alignment ensures that our collective efforts are focused on delivering robust performance and sustainable growth for the benefit of all our stakeholders.”

This dual approach – a transparent, FCF-linked dividend policy coupled with a robust Long-Term Incentive program – solidifies ALROSA’s commitment to not only generating substantial financial returns but also ensuring that all stakeholders, from investors to employees, are integral to the company’s journey of growth and value creation. It reflects a modern governance approach focused on long-term sustainable value for the entire enterprise.

Conclusion: ALROSA’s Path to Enduring Leadership

The strategic update presented at ALROSA’s Capital Markets Day in London paints a clear picture of a company poised for sustained success and continued leadership in the global diamond industry. By prioritizing sustainable and responsible mining practices, relentlessly pursuing operational excellence, leveraging an unparalleled resource base, innovating in marketing, and adopting a disciplined approach to capital allocation, ALROSA is building a resilient and highly profitable business. The leadership’s vision, underscored by a transparent dividend policy and a robust employee incentive program, ensures that the company’s strategic objectives are firmly aligned with the interests of its shareholders and employees. As ALROSA moves forward, its comprehensive strategy is designed not only to navigate market complexities but also to unlock new growth opportunities, reinforce its competitive advantages, and deliver enduring value to all its stakeholders. This forward-thinking blueprint positions ALROSA as a trusted and leading force in the supply of natural diamonds to the world.