Alrosa - Modest 4Q17 Trading Update

Alrosa has published its 4Q17 trading update. Rough diamond output for the full year 2017 totaled 39.6 mln cts, up 6% y-o-y. The company managed to increase production across almost all of its assets to offset the loss of the Mirny underground mine, which in 2016 accounted for 8.5% of output. Total rough diamond output in 4Q17 was 10.1 mln cts (up 6% y-o-y) at an average grade of 1.39 ct/tonne (up 4.5% y-o-y). The major production growth driver was the Aikhal Division, the Jubilee pipe in particular, where since this past summer the company has been processing the richest part of the ore body (1.46 ct/tonne in 2H17 versus 1.14 ct/tonne in 2H16) to ensure that the initial group production guidance is met even despite the Mirny accident. Overall, the Jubilee pipe produced a record 3.6 mln cts in 4Q17 and 10.2 mln cts for 2017 (26% of the company's total production).
To recap, the company plans to produce 36.6 mln cts in 2018, down 7.5% y-o-y, meaning that the high-grade was apparently a one-off in 2H17 and that this year the company has decided to sell stones from its stockpiles (18 mln cts, according to the CEO) to compensate for the Mirny loss.
Despite the strong operating results, the trading update was fairly modest - the company reported that sales of gem-quality diamonds were down 6% y-o-y to 6.2 mln cts and comprised 66% of total sales. Gem-quality diamond prices were down 18% Q-o-Q to $139/ct on a seasonally weaker product mix, bringing the company's average realized price for both types of stone to just $101/cts for 2017, down 7% y-o-y.
Taking into account almost flattish revenues but higher grades and cost-cutting initiatives, we expect adjusted 4Q17 EBITDA to come in at around $465 mln, just slightly up Q-o-Q. This suggests that the full-year 2017 consensus has yet to be adjusted downward, although we believe that investors will take the downgrade neutrally. The 4Q17 financial results will be interesting primarily from the standpoint of the cash cost dynamic, while the focus should now shift to the first signs of a recovery in diamond prices. Based on various media sources, the latter are up 1-3% YTD.
Marked to market, Alrosa is trading at around 5 EV/EBITDA 2018 (net debt adjusted for dividends). The dividend for 2017 could be around $650 mln (yielding roughly 6%), while 2018 leveraged cash flow could be up to $1.0-1.1 bln from core operations (10%), potentially boosted to $1.6-1.7 bln by one-offs (the gas assets sale and insurance payment). Should the positive diamond price trend persist in 1Q18, the stock will likely be well supported. Alrosa will report full-year 2017 IFRS results on March 15 and will hold a conference call the next day.