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S&P: Russian Diamond Miner ALROSA Upgraded To 'BB' On Increased State Support; Outlook Stable

February 05, 2008 | Сbonds

LONDON (Standard & Poor's) Feb. 5, 2008--Standard & Poor’s Ratings Services said today it raised its long-term corporate credit rating on Russian diamond miner ALROSA Co. Ltd. to ‘BB’ from ‘BB-'. The outlook is stable.

The rating action follows the decision of the company's shareholder meeting to issue new equity, with the Russian government set to become Alrosa's majority shareholder.

"Given the Russian state's focus on increasing its control over strategic industries, the upgrade reflects our view that a controlling stake in Alrosa indicates the government’s higher commitment to supporting the company if necessary and to controlling its strategy more closely," said Standard & Poor's credit analyst Elena Anankina.

The government’s ability to provide financial support through growing state-owned financial institutions has risen considerably in recent years, and Alrosa has been enjoying large, although uncommitted, lines from these institutions. The shareholding change will also reduce the substantial royalties the company pays to the Republic of Sakha (Yakutia). Alrosa previously paid about Russian ruble (RUR) 10.5 billion (about $0.4 billion) annually, but this reduced to RUR5.0 billion in 2007 and is set to be cancelled in 2009.

"Nevertheless, Alrosa remains an autonomously run commercial company," Ms. Anankina added. "Although core to its region, its systemic importance to the country’s economy is considerably lower than that of some other entities."
The rating on Alrosa is therefore based on a "bottom-up" methodology. We assess the company’s stand-alone credit quality at ‘BB-' and add one notch for potential extraordinary state support.

Standard & Poor's expects that Alrosa’s free cash flow will be limited in the next three years because of the heavy investments needed to switch to underground mining. At the same time, production will be broadly stable or even somewhat declining. Alrosa should, however, benefit from relatively favorable prices due to limited supply increments globally, while demand for diamonds has proved to be relatively resilient to global economic conditions.

The rating will be most likely driven by the company’s stand-alone credit characteristics, particularly its cash flow pattern. The rating and outlook assume no large-scale debt-financed acquisitions. If such acquisitions were to occur, or if Alrosa were to demonstrate a more ambitious strategy regarding noncore investments, this could pressure the rating or outlook, unless more tangible state support offsets the risks of higher leverage.

Company: ALROSA

Full company namePJSC ALROSA
Country of riskRussia
Country of registrationRussia
IndustryMining industry

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