Alrosa - Belgium and Israel Close All Diamond Trading Halls

> Rapaport today reported that all diamond trading halls in Belgium and Israel have been closed until further notice due to restrictions on contact imposed by the governments to combat the virus outbreak. Antwerp's four exchanges will be shut starting today, while Israel's trading floors have been closed since yesterday. Diamond trading in Belgium and Israel had already slowed significantly even before the exchanges shut down due to the virus outbreak. Belgium's polished diamond exports fell 55% in February, while Israel's slumped 73% y-o-y.> Alrosa sells around 70% of its rough diamonds via long-term contracts. Last week, it had announced that it will let its customers off-take only 40% of the initially contracted volume (the minimum volume that customers need to buy without risking violating their contract terms) and carry the remaining part over to the end of May. In March, Alrosa had decreased the minimum offtake from 55% to 50%, versus 80% in 2018 (when demand was strong). > Assuming that January-February sales represented normalized pre-outbreak levels ($350-400 mln), and that Alrosa retains only sales via long-term contracts (70% share in total volumes) at an offtake level of 40%, its March-April sales could drop to $100-150 mln. The closure of the diamond exchanges creates further downside risks for its sales, as it reduces both rough and polished diamond trading activity globally.> As we wrote in a daily comment on Thursday and a report today, we think that Alrosa's sales volumes could fall materially if the global outbreak becomes severe and both demand and business activity collapse. Back in 2009, Alrosa sold just 26 mln cts of diamonds (versus this year's guidance of around 35-37 mln cts and production guidance of 34 mln cts), including $0.9 bln of diamond sales to Gokhran as an emergency measure taken by the Russian government. At the 2009 average realized gem-quality price, $0.9 bln was equivalent to roughly 8 mln cts, so sales to the market in 2009 were around just 18 mln cts.> In a negative scenario - assuming sales of 18-26 mln cts, a 10% decline in the LFL price index and USD/RUB of 75 - Alrosa might generate around just $0.9-1.2 bln in EBITDA this year, compared with the consensus forecast of around $1.5 bln. In the worst case, FCF generation could be close to zero, as the company might build up stocks. The stock is down 40% YTD in dollar terms, but we argue that the risk of volumes collapsing is not yet priced in.