ALRO ALROSA SA 03 03 October ober 2018 8 Photo: Botuobinsky - - PowerPoint PPT Presentation

ALRO ALROSA SA

03 03 October

• ber 2018

8

Disclaimer

• r implied, is made regarding future performance. ALROSA assumes no obligation to update, supplement or revise forward-looking or any other statements contained herein to reflect actual results, changes in

• f Exploration Results, Mineral Resources and Ore Reserves as promulgated by the Australasian Joint Ore Reserves Committee), which differ in significant respects from the standards and classifications applicable to the

• f any of its securities in the United States.

Diamond industry – key demand drivers

• Luxury market valued at c. €1,200 bn is steadily growing
• Jewelry demand comprises 7% of global luxury market, and 31% of

the personal luxury (annual growth 5%)

• Most dynamic growth is concentrated in Asia incl. Japan and China
• Diamond jewelry consumption is correlated with USA GDP and

disposable income

Personal luxury market growth by region 2017

Indexed diamond jewelry sales vs indexed US’ GDP (2011 = 100)

Global luxury market breakdown in 2017

€ bn

33% 32% 14% 8% 8% 5%

Diamond jewelry sales are highly correlated with GDP

Market size:

Global diamond jewellery market grows by 4%

• Since 2010 diamond jewellery demand increased on average by 4%
• … reaching a 10-year high level in 2017 increasing by +5% yoy driven by

healthy demand across all regions

• H1’18 diamond jewelry in key markets (N.America and Asia-Pacific)

enjoyed even stronger demand amid better consumer sentiment and a favorable macro environment

• US, India and China key drivers for diamond jewellery demand in the

long-term are:

• USA (50% total market): continued real disposable income growth;
• China: economic growth and expansion of the Chinese middle class,

early stage of adoption of bridal rings gifts tradtion;

• India: the ongoing expansion of bridal diamond jewellery and the

middle class. World diamond jewellery sales grew by 4% annually

Diamond jewelry market, $ bn

Outlook for world diamond jewellery demand

CAGR 2016-2030F

• N. America, Asia-Pacific

Marketing spending of the industry

• Diamond Producers Association (DPA) was formed by 7 major diamond

producers in 2015 to support the development of the diamond sector through protection and promotion of reputation of diamonds

• Marketing campaigns with a tagline “Real is Rare. Real is a Diamond”

launched in the US (2016) and in India (2017)

• DPA’s activities include:
• paid advertisement on TV, internet, cinema, social networks;
• promotion in social media by social influencers;
• participation in industry events;
• work with industry and non-industry organizations;
• market surveys and research
• In 2018 DPA’s activities expanded into China (while continued in the US

and India)

• New marketing campaign addressed to women who purchase diamonds

for themselves is called “From Me, To Me”, launched in mid-September 2018

Marketing budget of the industry association growth

$ m

• N. America (USA from 2016)

India (from 2017) Asia Pacific ex. Japan (China from 2018) RoW

DPA marketing campaigns by region

% represents share of a region in global jewelry consumption

Global rough diamond sales and prices

• 220%
• 170%
• 120%
• 70%
• 20%

• Rough diamond sales follow trend of demand for diamond jewellery
• In 6M 2018, global diamond sales in value terms were up 5% on the back
• f underlying demand recovery and hence better prices.
• In Q2 average realized price for gem-quality diamonds was up to 164 $/ct

driven by better diamond market demand Rough diamond sales demonstrates moderate recovery

$ bn

Average realized price for ALROSA’s gem-quality rough diamonds

$/ct

• 90%
• 70%
• 50%
• 30%
• 10%

Rough diamond price index is 5% in H1’18 on lower stocks and better demand

Global rough diamond production and midstream situation

• In 6M 2018, major diamond producers’ output decreased by 3% y-o-y,

while in Q2 2018

• In Q2 2018, midstream rough and polished diamond inventories

increased marginally in value terms.

• Indian imports of rough were seasonally down; no excessive buying of

rough in the midstream suggests now inventory overhang in the system.

Decrease in global diamond output, 6M 2018*

m carats

Midstream rough and polished diamond inventories

$ bn

India polished diamond exports value (monthly)

$ m

Long term supply outlook: incremental growth is limited

• Supply is well consolidated with BIG-3 controlling 2/3 of global supply
• Supply is quickly reacting to the demand deterioration
• Lack of new “quick-to-develop” deposits and mines depletion
• Significant decrease in supply is expected by 2020,
• … with limited impact on the market due to sub-par quality of the

products (brown diamonds with 80% price discount to standard gem- quality)

~70% of global rough diamond output controlled by BIG-3

m cts

Exploration periods of deposits

World diamond production forecast

m cts

About ALROSA

• ~30% of rough diamond production globally
• Largest reserves sufficient to support production for ~30 years
• Competitive position on the global cost curve
• Sustainably high profitability margins ~2x exceeding industry average
• Strong FCF generation and balance sheet capability offer solid

foundation for shareholder returns Financial results summary

$ bn

Loans and borrowings

$ m

Dividend payments

$ m

7%

ALROSA: assets geography

Share of division in 2017 diamond production Geography of production assets

1,030 m ct

653 m ct

53% 27% 20% Severalmaz

7% 2.6

Aikhal Division

33% 13.0

Nyurba Division

19% 7.7

18% Mirny Division

7.2

10% Udachny Division

3.8

13% Almazy Anabara & Nizhne-Lenskoye

5.2

33% 19% 18% 10% 13%

Highest quality assets

• ALROSA develops world’s largest reserves with the industry best

cost/quality balance

• One of the lowest cost production at 44 $/ct while company’s average

realized price of gem-quality rough diamond is 160 $/ct

• Cost of underground production per carat is close to open-pit mining

while grades at underground are higher by over 3x ALROSA operates largest reserves with long life of mine

m cts

ALROSA is sustainably tops the ranks as one of the most profitable miner

EBIT margin, %

High profitability margin maintained even at the bottom of the cycle

$/ct

Low cost production platform with moderate growth

• Company operates high quality assets with underground operations

delivering strong diamonds yields

• Output to stabilize at ~38 m ct, which is slightly above 2013-2016

volumes

• New projects to drive production from 2018 and on:
• Ramp up of Verkhne-Munskoye deposit with a design capacity of 1.8 m cts pa (by

2019)

• Increase in production of Severalmaz to 5.1 m cts per year by 2021

Range of average mined diamond grade (2017)

ct/t

ALROSA’s diamond production to stabilize at 37-38 m carats

m ct

36.9 36.2 38.3 37.4 39.6 36.6 ~37.5 – 38 Total

Improved quality of sales with 70% of long term client base

ALROSA’s rough diamond sales channel breakdown

• Diverse product mix (total 204 boxes)with different segment exposure

and price dynamic, e.g.:

• small stones – for mass market bridal rings
• Mid-size and large stones – luxury segment offering resilient prices
• Sales channels based on long-term agreements which provides stable

sales and predictable prices during volatility on diamond market

• Diversified geography of sales:
• presence in all key diamond hubs
• growing focus on Asia

Allocation of rough diamond by quality Sorting of rough diamonds

ALROSA’s geography of sales based on clients legal residences

• 10

Q2 2018 Results

Q2 Sales

Q2 2018 Sales

• Down 32% q-o-q on high base effect of Q1’18 as ~6 m cts were sold from stock
• Down 11% y-o-y on lower output as production at Mir mine was discontinued

6M 2018 Sales

• Sales in carats reduced by 8%, while
• … diamond sales in value terms rose by 8% to $2.6 bn on the back of stronger

prices and a better mix of gem quality diamonds.

• By the end of Q2 2018, inventories were down 11% q-o-q (down 23% y-o-y) to a

low of 11 m carats, approaching the technological minimum on the back of steady demand across the entire sales mix.

Diamond sales

m cts

Increase in diamond sales by value, 6M 2018

$ m

ALROSA's diamond inventories at multi-quarter lows

m cts

Q2 Output

• The volume of processed ore and sands was seasonally up 77% q-o-q

(up 1% y-o-y) due to alluvial deposits output growth (up 4.4 m tonnes), while mined ore output remained flat

• Average grade was down 35% q-o-q (down 18% y-o-y) to 0.84 carat

due to higher share of alluvial production with lower carat/tonne ratios, and lack of higher grade volumes from Mir UM

• Diamond production was up 15% q-o-q (down 18% y-o-y) to 8.5 m

carats due higher output (+77% qoq), largely coming from lower grade deposits

• Y-o-y decrease in diamond production was caused by the shutdown of

the Mir UM with higher carat/tonne ratios, a lower grade at deeper levels of the International UM along with a larger share of lower-grade

• re from the Jubilee pipe and the Aikhal underground mine

Ore and sands processing

m tonnes

Diamond production

m cts

Q2 and 6M Financials

Q2 2018:

• Revenue came in at RUB 72 bn (down 25% q-o-q) as sales in carats

decreased (down 32% q-o-q on a high base of Q1 2018).

• Meanwhile, revenue was up 2% y-o-y driven by stronger pricing and a

better sales mix.

• EBITDA stood at RUB 41 bn (down 13% q-o-q), rising by 10% y-o-y on

the back of cost and pricing improvements.

• EBITDA margin climbed 7 p.p. q-o-q to 57%.

6M 2018:

• Revenue grew by 8% to RUB 168 bn on the back of higher average

selling prices and a better sales mix, despite a 8% decrease in sales in carats, including a 14% drop in gem-quality diamond sales.

• EBITDA hiked by 22% to RUB 89 bn supported by a stronger revenue

and lower production costs.

• EBITDA margin climbed 6 p.p. q-o-q to 53% .
• Leverage slimmed down to an all-time low, with Net debt / EBITDA

standing at 0.04х. Q2 margins expanded

$ bn

Strong Free Cash Flow generation

$ m

Costs dynamics and structure in 6M 2018

• Per unit costs decreased by 4% to RUB 1,200 per cu m supported by

ALROSA’s operational excellence programme

• In 6M 2018, the Company’s costs* went down by 4%, to RUB 79 bn

Key drivers:

• down RUB 1.7 bn: lower SG&A expenses reflecting a reduced

administrative payroll;

• down RUB 1.4 bn: reduced staff costs largely due to optimization;
• down RUB 1.2 bn: lower electricity costs;
• down

RUB 1.0 bn: reduced exploration costs due to (a) exploration restructuring (RUB 0.5 bn of impact) and (b) sale of gas assets;

• down RUB 1.3 bn: lower MET due to a decline in diamond production

(largely the shutdown of the Mir underground mine) and sale of gas assets.

Per unit costs

RUB '000 / cu m

Cost breakdown by category

RUB bn

• 4%

Profitability analysis

Q2 2018:

• EBITDA declined to RUB 41.3 bn (down 13% q-o-q) Key drivers:
• (-) carat sales down 32% due to a high base effect of Q1 2018 when some

6 m carats were sold from stock;

• (+) improved sales mix and prices;
• (+) FX rate impact;
• (+) changes in diamond and ore inventories.

6M 2018:

• EBITDA hiked by 22% to RUB 89.1 bn Key drivers:
• (+) changes in the sales mix of gem-quality diamonds with increased sales
• f premium diamonds;
• (+) stronger diamond prices;
• (+) FX rate impact;
• (+) lower costs;
• (-) an 8% reduction in carat sales, including lower sales of gem-quality

diamonds (down 14%).

EBITDA bridge

RUB bn

89.1 72.8 0.9 1.6 2.6

• 19.2

30.4 EBITDA (2017) Changes in sales mix and pricing Changes in sales volume Rouble devaluation Payroll growth/reduction Other* EBITDA (2018)

6M 2018 y-o-y Q2 2018 q-o-q

41.3 47.7 18.4

• 0.7

5.6

• 33.9

4.2

Annual capex is expected to stabilize at RUB 26-28 bn

• In Q2 2018, capex was up 48% q-o-q. Key drivers:
• larger expansion capex (up RUB 3.6 bn) at the Verkhne-Munskoye deposit

(up RUB 2.1 bn), the Udachny underground mine (up RUB 0.7 bn) and the Zarya pipe (up RUB 0.7 bn) due to partial roll-over caused by weather.

• In Q2, capex was up RUB 1.6 bn y-o-y due to the mining capex cycle.
• 6M: Capex was up 5% to RUB 12 bn as the Verkhne-Munskoye deposit

capex cycle peaked in 2018. Capex

RUB bn

Capex to stabilize

RUB bn

Free cash flow drivers

• In Q2 2018, FCF fell by 49% q-o-q Key drivers:
• (-) lower EBITDA as sales and revenue were down;
• (-) seasonal growth in capex (up 48%);
• (-) seasonal increase in the working capital of RUB 6.1 bn (stockpiling to

ensure reliable operations in winter);

• In Q2 2018, FCF grew by 33% y-o-y due to a stronger operating cash flow

supported by improved sales mix and selling prices.

• 6M: a 23% y-o-y increase in FCF was driven by stronger revenues coupled

by a slight (up RUB 0.6 bn) growth in capex and release of cash from the working capital.

62.1 74.1 74,1 89.1

• 12
• 2.4
• 19.2

6.6

Cash flow bridge

RUB bn EBITDA Changes in working capital Income tax Other Operating cash flow Capex Free cash flow

Operating cash flow and capex

RUB bn 20.9 28.1 41.3

• 7.2

1.1

• 8.2
• 6.1

6M 2018 Q2 2018

Debt position

• Total debt amounted to USD 1 bn, down USD 604 m year-to-date due to
• early repayment of short-term loans of USD 600 m through the proceeds

from gas assets sale

• Cash hiked to USD 922 m against USD 127 m as at the end of 2017 due to

stronger free cash flow

• Net debt / EBITDA reduced to 0.04 on the back of robust free cash flow
• Active debt management drove interest payment 58% down (year-on-

year)

• S&P upgraded ALROSA credit rating to investment grade in July 2018

Debt profile changes

$ m

Liquidity position

$ m

Debt repayment schedule

$ m

Changes in interest on loans and borrowings

$ m Credit lines Cash and equivalents

New Dividend Policy

• Until August 2018, ALROSA’s dividend policy limited the minimum

dividends at 35% of IFRS net income, however, over the recent three years the Company has maintained a 50% net income pay-out ratio

• In August 2018, ALROSA’s Board of Directors approved an updated

dividend policy:

• free cash flow as the basis;
• payments twice a year;
• minimum payout at 50% of IFRS net income.
• Dividend pay-out estimate under the new policy:

❶ Net debt / EBITDA < 0.0 – over 100% FCF; ❷ Net debt / EBITDA: 0.0–1.0 – 70–100% FCF; ❸ Net debt / EBITDA: 1.0–1.5 – 50–70% FCF.

• Based on the Company’s performance in 6M 2018, the Supervisory Board

made a preliminary recommendation that the General Meeting of Shareholders approve dividends of at least RUB 5.93 per share (GM tentatively scheduled on 30 September)

• Targeted leverage at between 0.5x to 1.0x of Net Debt/EBITDA

Dividend payout ratios Dividend payment

$ m

Outlook

Market outlook

• H2 2018 may see a traditional seasonal weakening of demand
• Diamond inventories are below the 5-year average

Operating performance

• In 2018, full-year sales are estimated at 39–40 m carats
• In H2 2018, output is expected to grow, in particular, due to ramp-up at the Udachny UM and seasonal production growth in Q3
• The 2018 production outlook remains unchanged at 36.6 m carats
• 2019 production is expected in the range of 37.5 – 38 m carats

Appendix

Net debt change

• In Q2, net debt was down 68% q-o-q Drivers:
• stronger free cash flow;
• efficient liquidity management.
• 6M: Net debt was down 93% due to FCF.
• To set up its stock option plan, ALROSA bought back 115.4 m

shares (1.6% of the authorised capital).

6 19 86 5 3

• 21
• 3

7

• 30
• 41

Net debt bridge

RUB bn Net debt as at 31 December 2017 Free cash flow in Q1 2018 Sale of gas assets Acquisition of quasi- reasury shares Other Net debt as at 31 March 2018 Free cash flow in Q2 2018 Acquisition of quasi- treasury shares Other Net debt as at 30 June 2018

FX rate

• ALROSA is an exporter with 94% of revenue denominated in

USD.

• Major portion (87%) of costs and capex is denominated in

RUB.

• Some 97% of the Company’s debt portfolio is denominated in

USD.

• ALROSA's financial sensitivity analysis shows that a change in

the USD exchange rate by +/- 1 RUB/USD leads to the following change in metrics:

• revenue – +/-1,58%;
• cost of sales – +/-0,22%;
• EBITDA – +/-2,80%;
• capex – +/-0,23%.

Financial metrics breakdown by currency

% of metric's total

ALROSA’s production forecast

• pen-pit

• pen-pit

• pen-pit

• 13

• Alluvial and technogenic deposits

• pen-pit

• Udachny underground mine

• pen-pit

• pen-pit

• Nyurba Division

• pen-pit

• pen-pit

• pen-pit

• pen-pit

• pen-pit

Key investment projects

Udachny underground mine

Verkhnemunskoye deposit (open pit mining)

Supply of diamonds is constrained by lack and complexity of new diamond discoveries and significant time required to ramp-up production

No less than 4 years is required to ramp-up full scale production on a diamond mine

Discovery and development of new kimberlite pipes are much more challenging now

Rough diamond production is dominated by few mining companies with the highest margins across diamond pipeline, where ALROSA benefits from leading market share of 26%

Diamond pipeline structure Major global diamond producers

Share in global production

• f the market

• f diamonds

Economic efficiency of underground mining is fostered by block caving mining method

Traditional cut-and-fill mining

Block caving method

Cut-and-fill mining method at Udachny underground mine would have required more than 330 thousand tons of cement a year (~ RUB 1 bn in current prices), which is an equivalent of total cement output in the Republic of Sakha (Yakutia)

ALROSA’s low environmental impact, as well as efficient information disclosure are acknowledged by ESG ratings

Water intake

m m3

Area of annually disturbed land

ha

LTIFR

number of lost time injuries per 1 m hours worked

3rd place (out of 33) in the “First rating of environmental performance of mining companies in Russia” (held by the WWF and the Ministry of Natural Resources and Environment of Russian Federation in 2017) Rated among top-10 Russian companies with transparent corporate reporting according to Transparency International-Russia research

Management team is fully committed to deliver on ALROSA’s development plans

Operational Team Executive Team

• Joined the Company in 2017
• Senior Vice President at Sberbank of Russia (2016‒2017)
• Chairman of the Management Board of SOGAZ (2011‒2016)
• Top management positions at Gazprombank (2005‒2011)

• Joined the Company in 2007
• Head of Capital construction division, mining & metallurgical directorate

• Joined the Company in 2017
• CFO of Siberian Generating Company (2015–2017)
• CFO of Sibur (2004–2013)
• Consultant at McKinsey & Co. (2001-2004)

• Joined the Company in 1993
• Vice President of ALROSA for marketing and sales since August 2009

• Joined the Company in 1996
• Over 20 years of industry experience

• Joined the Company in 1979
• Over 38 years of industry experience

• Joined the Company in 1986
• Over 30 years of industry experience

• Joined the Company in 1992
• Over 25 years of industry experience

• Joined the Company in 2016
• First deputy Prime Minister of the Republic of Sakha (Yakutia) (2014‒2016)
• Deputy Prime Minister of the Republic of Sakha (Yakutia) (2010‒2014)

• Joined the Company in 1997
• Over 20 years of industry experience
• Chief engineer of ALROSA in 2010‒2015

• 2009-2011 – Head of New Nations Capital

• 2011-2013 – Director, member of the board,

• Since 2014 – General Director of the Far East

• 2007-2011 – Development Director, President of Icon

• Since 2011 – CEO of Russian Direct Investment Fund

• 2009-2012 – Head, Department of Investment and

• 2012-2014 – Adviser to the Head of the Federal

• Since 2013 – Independent director of the Supervisory

• 1998-2010 – Goldman Sachs, investment activity
• 2010-2014 – PIMCO, investment activity
• Since 2015 – Independent director of the Supervisory

Supervisory Board overview (1/2)

• f the Russian Federation

• 2005-2011 – Deputy Minister of Finance of the

• Since 2011 – Minister of Finance of the Russian

• Since 2018 – First Deputy Chairman of the

• 2003-2010 – Chairman of the Government of the

• 2010-2014 – President of the Republic of Sakha

• 2014-2018 – Head of the Republic of Sakha (Yakutia)
• 2018 – State Counsellor of the Republic of Sakha

• 2009-2015 – Specialist, Senior Specialist, Leading

• 2015-2016 – General Director of the state-run

• Since 2017 – First Deputy Head of Suntarsky Ulus

• 2011-2012 – Head of public-private partnership

• 2012-2016 – Deputy Minister of Economy of the

• 2016-2018 – Chairman of the Government of the

• f the Republic of Sakha (Yakutia)

• 2010-2012 – Deputy Head, Head, Secretariat of Chairman
• f the Government of the Republic of Sakha (Yakutia)
• 2012-2016 – First Deputy Minister of Property and Land

• Since 2016 – CEO of Trust Fund for Future Generations of

• 2001-2010 – Senior Economist, Deputy Head of

• 2010-2012 – Deputy Head of Department, Head of

• Since 2012 – Deputy Minister of Finance of the

• 2010-2012 – Referent of the Department of the

• 2012-2015 – Assistant Chairman of the Government
• f the Russian Federation
• Since 2017 – Assistant Head of the Federal Agency

Supervisory Board overview (2/2)

• 2007-2011 – First Deputy Minister of Property

• Since 2011 – Minister of Property and Land Relations
• f the Republic of Sakha (Yakutia)

• 2011-2016 – Chairman of the Management Board of

• 2016-2017 – Senior Vice President, Head of Wealth

• Since 2017 – CEO of ALROSA

• 2011-2016 – CEO of SIBUR
• Since 2007 – Member of the Board of Directors,

• 2002-2014 – Chair of the State Committee for Pricing

• f Sakha (Yakutia)
• Since 2015 – Independent director of the Supervisory

Resources inclusive of reserves according to JORC Code as of July 1, 2016 (1/2)

Resources inclusive of reserves according to JORC Code as of July 1, 2016 (2/2)

Thank you!

24 Ozerkovskaya emb. Moscow 115184 Russia

• Tel. +7 495 745 58 72

IR@alrosa.ru