Executive Summary: A Quarter of Stabilization and Strategic Adjustment

For the fourth quarter of 2019, ALROSA reported diamond production of 8.8 million carats, accompanied by robust sales totaling 8.2 million carats. This surge in sales, particularly for rough and polished diamonds, generated an impressive $916 million. While the quarter saw a seasonal dip in production, the overall market environment showed promising signs of recovery, with consumer sentiment improving and midstream inventories adjusting. ALROSA’s strategic flexibility in sales played a crucial role in balancing supply and demand, setting a positive tone for the upcoming year, further bolstered by the strategic acquisition of Kristall Production Corporation.

Q4 2019 Production Landscape: Navigating Operational Shifts

The final quarter of 2019 presented a typical seasonal decline in ALROSA’s diamond production, which fell by 27% quarter-on-quarter to 8.8 million carats. This seasonal adjustment is often influenced by operational cycles, weather conditions, and planned maintenance at mining sites. Compared to the same period in the previous year, a 15% year-on-year reduction was observed, primarily attributed to reduced output at two key assets: the Jubilee pipe and the International underground mine. These changes underscore the dynamic nature of large-scale mining operations and the ongoing efforts to optimize resource extraction.

Annual Production Highlights: Growth Despite Quarterly Fluctuations

Despite the Q4 decline, ALROSA’s total diamond output for the entire 2019 fiscal year demonstrated resilience, increasing by 5% to a substantial 38.5 million carats. This impressive annual growth was predominantly driven by enhanced production at the Botuobinskaya pipe and the successful ramp-up of operations at the V.Munskoye deposit. These assets proved instrumental in offsetting production decreases elsewhere, illustrating ALROSA’s diversified production base and its capacity to bring new high-performing projects online effectively.

Ore and Gravel Processing: Strategic Adjustments and Increased Productivity

Processing of ore and gravels also experienced a seasonal downturn in Q4 2019, decreasing by 58% quarter-on-quarter to 7.2 million tonnes. This reduction is largely due to the seasonal suspension of operations at alluvial deposits, which are particularly susceptible to environmental conditions. On a year-on-year basis, the decline was a more moderate 3%. Over the full 12-month period, however, ore and gravel processing volumes increased by 2% to 41.3 million tonnes. This annual improvement was a direct result of the launch of the V.Munskoye deposit and a significant boost in productivity across the Nyurba Division, reflecting ongoing operational efficiencies and investment in new capacities.

Diamond Grades and Inventories: Optimizing Resource Utilization

The average diamond grade for Q4 2019 stood at 1.22 carats per tonne, representing a substantial seasonal increase of 72% quarter-on-quarter. This rise indicates a strategic focus on processing higher-grade ore during certain periods, optimizing the yield from mined material. For the full year, the average diamond grade improved by 3% to 0.93 carats per tonne, primarily driven by an increase in the processing of high-grade ore from the Botuobinskaya pipe. Concurrently, ore and gravel inventories at the end of Q4 2019 saw a seasonal increase of 12% quarter-on-quarter, and an 11% year-on-year rise, reaching 26.5 million tonnes. This reflects strategic inventory management to ensure continuous supply for processing, even during periods of operational adjustments.

Sales Performance and Market Stabilization: Responding to Demand Shifts

ALROSA’s diamond sales demonstrated a strong rebound in Q4 2019, increasing by 28% quarter-on-quarter to 8.2 million carats. This positive momentum was largely fueled by stabilizing demand as the global diamond market gradually moved towards a more balanced state. While year-on-year sales still showed a 9% decrease, the quarterly recovery was a clear indicator of improving market sentiment. Gem-quality diamonds, a crucial segment for ALROSA, saw an even more robust increase of 38% quarter-on-quarter and 13% year-on-year, totaling 5.9 million carats. This surge suggests renewed interest from cutters and polishers preparing for upcoming retail seasons.

Annual Sales Review: A Challenging Year with Signs of Recovery

Despite the strong Q4 performance, the full 12-month sales for 2019 reflected a challenging year for the diamond industry, decreasing by 12% to 33.4 million carats. This annual decline underscores the broader market pressures experienced throughout the year, including inventory overhangs in the midstream and fluctuating consumer demand. However, the strong finish to the year signals a potential turning point.

Pricing Trends and Realized Values: Factors Influencing Market Value

Average realized prices for gem-quality diamonds in Q4 2019 rose by 9% quarter-on-quarter to $148 per carat. This increase was primarily driven by an increased share of medium- and large-size diamonds in the sales mix, which typically command higher per-carat prices. Despite this quarterly improvement, year-on-year prices for gem-quality diamonds were still down by 3%, and the 12-month average price stood at $133 per carat, a 19% decrease compared to the previous year. The overall diamond price index also declined by 2% quarter-on-quarter in Q4, with the 12-month average for 2019 falling by 6% compared to 2018. These figures reflect a period of price correction and adjustment within the global diamond supply chain.

Inventories and Supply Management: Balancing Production and Demand

Diamond inventories at the close of Q4 2019 increased by 33% year-on-year, reaching 22.6 million carats. This rise was a direct consequence of diamond production exceeding sales volumes consistently throughout the year. While an increase in inventory can indicate a mismatch between supply and demand, it also provides ALROSA with strategic flexibility to meet future market upturns. Effective inventory management is critical in maintaining market stability and ensuring a consistent supply of rough diamonds to the midstream.

A Deep Dive into the Diamond Market: Trends Shaping the Industry

The fourth quarter of 2019 was a pivotal period for the global diamond market, characterized by a normalization of the environment after earlier challenges. Several key factors contributed to this stabilization, signaling a healthier outlook for the industry.

US Consumer Sentiment and Holiday Season Boost

A significant driver of market recovery was the noticeable improvement in consumer sentiment in the United States, particularly ahead of the crucial holiday season. Preliminary data on US retail sales during Christmas suggested an overall successful period for retailers. This robust consumer activity in the largest diamond jewelry market provided a much-needed boost to demand, permeating through the entire supply chain from retailers to miners.

The Role of Online Sales: A Paradigm Shift in Retail

Online sales emerged as a key engine of demand for diamond jewelry during the holiday season. According to Mastercard data, overall Christmas sales of jewelry increased by 2%, while online sales within the jewelry category delivered a remarkable growth of 9%. This highlights the accelerating trend of digital transformation in retail and the increasing importance of e-commerce platforms for luxury goods, including diamond jewelry. Companies that effectively leveraged online channels were better positioned to capture this evolving consumer preference.

Midstream Destocking and Supply-Demand Balance

The diamond midstream, comprising cutters and polishers, underwent a necessary period of destocking in Q4 2019. This process was facilitated by a combination of reduced diamond supply from miners and a decline in cutting and polishing operations earlier in the year. As inventories in the midstream became leaner, coupled with a rise in demand for specific categories of polished diamonds – particularly those driven by orders from the US in preparation for Christmas – the market began to find its equilibrium. This natural adjustment of supply and demand dynamics was crucial for restoring confidence in the market.

Strategic Responses from Diamond Miners

The flexible sales approach adopted by major diamond miners, including ALROSA, played a vital role in stabilizing demand. By adjusting sales volumes and pricing strategies in response to market conditions, miners helped prevent further oversupply and supported price stability. This proactive stance allowed cutting and polishing companies to strategically increase their production and volumes of purchased diamonds in anticipation of Q1 2020. This timing is critical, as jewelry businesses typically begin restocking after the busy Christmas sales period, preparing for subsequent demand cycles.

Financial Overview: Revenue Highlights and Annual Performance

ALROSA’s revenue from rough and polished diamond sales for Q4 2019 significantly increased by 50% quarter-on-quarter and 8% year-on-year, reaching $916 million. This substantial quarterly growth underscores the positive impact of improved sales volumes and stabilized prices during the period. The total revenue for the entire 12-month period, however, stood at $3,338 million, representing a 26% decrease compared to 2018, reflecting the challenging market conditions prevalent for much of the year. Focusing specifically on rough diamond sales, Q4 saw an increase to $888 million, marking a 48% quarter-on-quarter rise and an 8% year-on-year improvement. For the full year, rough diamond sales amounted to $3,273 million, a 26% decrease from the previous year. These figures highlight the significant rebound in the final quarter, offering a more optimistic outlook heading into 2020.

Forward-Looking Statements and Future Integration: The Kristall Acquisition

It is important to note that the data presented for Q4 2019 and the full year 2019 production, sales, prices, and inventories are preliminary and subject to updates. This report also clarifies that the presented data does not yet include the consolidation of Kristall Production Corporation, which ALROSA Group strategically acquired in October 2019. The financial results of Kristall will be fully integrated into ALROSA Group’s consolidated 2019 financial statements, which are scheduled for release on March 10, 2020. Information related to Kristall’s production, sales, and inventories provided separately for informational purposes is also preliminary and may be updated. The market data and estimates discussed within this report are based on the Company’s internal assessments and market intelligence. The integration of Kristall is expected to further strengthen ALROSA’s position in the polished diamond segment and optimize its value chain, marking a significant strategic move for future growth.

Conclusion: A Resilient Leader Poised for Continued Growth

ALROSA’s Q4 2019 performance, while reflecting seasonal and year-on-year adjustments, ultimately demonstrated the company’s resilience and strategic agility in a complex global diamond market. The significant stabilization in demand, particularly driven by positive US consumer sentiment and the burgeoning influence of online sales, signals a healthier environment for the industry. ALROSA’s flexible sales approach, combined with its robust production capabilities and strategic acquisitions like Kristall, positions it favorably to capitalize on improving market conditions. As the diamond market continues to evolve, ALROSA remains a pivotal player, adapting to shifts in consumer behavior and supply chain dynamics to maintain its leadership in the production and sale of natural diamonds.