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Edited Transcript of ALRS.MZ earnings conference call or presentation 8-Nov-19 2:00pm GMT

Q3 & 9M 2019 AK Alrosa PAO Earnings Call (IFRS)

Moscow Nov 22, 2019 (Thomson StreetEvents) -- Edited Transcript of AK Alrosa PAO earnings conference call or presentation Friday, November 8, 2019 at 2:00:00pm GMT

TEXT version of Transcript

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Corporate Participants

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* Alexey Nikolaevich Philippovskiy

Public Joint Stock Company ALROSA - CFO & Member of the Executive Committee

* Evgeny Agureev

Public Joint Stock Company ALROSA - Director, United Selling Organization

* Sergey Takhiev

Public Joint Stock Company ALROSA - Head of Corporate Finance

* Sergey Sergeevich Ivanov

Public Joint Stock Company ALROSA - President, CEO, General Director, Chairman of Mgmt. Board & Deputy Chairman of the Supervisory Board

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Conference Call Participants

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* Anton Fedotov

BofA Merrill Lynch, Research Division - Analyst

* Daniel Edward Major

UBS Investment Bank, Research Division - Director and Analyst

* Daniel Harry David Shaw

Morgan Stanley, Research Division - Research Analyst

* Sergey Donskoy

Societe Generale Cross Asset Research - Equity Analyst

* Timothy William Riminton

Barclays Bank PLC, Research Division - Research Analyst

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Presentation

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Operator [1]

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Dear ladies and gentlemen, welcome to the Q3 2019 IFRS Results Conference Call of ALROSA. At our customer's request, this conference will be recorded. (Operator Instructions) May I now hand you over to Sergey Takhiev, who will lead you through this conference. Please go ahead, sir.

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Sergey Takhiev, Public Joint Stock Company ALROSA - Head of Corporate Finance [2]

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Thank you. Good morning and good afternoon, ladies and gentlemen. My name is Sergey Takhiev, Head of Corporate Finance, and I'm happy to welcome you at our third quarter 2019 results conference call. Today, our company represented by CFO, Alexey Philippovskiy; and Head of Sales, Evgeny Agureev. Alexey will start with a discussion of key developments and highlights at the company, and then we'll be happy to take your questions.

As always, elements of our presentations are forward-looking and based on our best view of the market. Then I will pass the floor to our CFO, Alexey Philippovskiy, please.

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Alexey Nikolaevich Philippovskiy, Public Joint Stock Company ALROSA - CFO & Member of the Executive Committee [3]

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Thank you. Dear colleagues, I'm happy to welcome you to our conference call for the third quarter of 2019. I would like to start my presentation with a couple of words on market fundamentals.

In the first 9 months of 2019, diamond jewelry consumers' confidence was negatively impacted by macro uncertainty and rising trade tensions. This has led to lower sales and higher-than-expected inventories in both jewelry and polished stones and, as a consequence, weaker demand for rough stones. Another factor which probably has had an even stronger impact on the whole diamond pipeline is the ongoing financing difficulties faced by the midstream in India, which has led to a strong deleveraging of the midstream. According to our estimates, available credit to polishers in India decreased by up to $4 billion, which is quite a sizable decrease for the whole rough diamond market of $15 billion.

These factors turned the industry towards a destocking cycle, which had translated into both a decrease in the volume of rough stones and the shift towards smaller stones. However, as we see the market today, destocking at midstream reached its most acute phase in mid-summer, and we believe the market is moving towards a gradual supply-demand balance recovery, which might take still some time.

The mining industry responded with reduced supply. As you can see on Slide #3, 9 months diamond supply was down by 26% year-on-year in dollar terms. Year-to-date, diamond production was marginally down, but we expect this trend to accelerate into 2020 and 2021 with a number of assets running out of stores. Our Q3 diamond output grew by 24% quarter-on-quarter, mostly due to seasonal activity at alluvial deposits. A year-on-year growth of 15% was due to 2 factors: first, the launching of production at the Verkhne-Munskoe deposit; and second, an increase in higher-grade ore processing at Nyurba division as an operational efficiency project is underway. Going forward, in order to hold back pressure on the markets and support the process of software modernization in the system, we will keep implementing our balanced sales strategy with a price-over-volume approach.

Now let's look at the sales numbers. Q3 sales in volumes decreased by 23% quarter-on-quarter to 6.4 million carats, which was partially caused by seasonally lower buying activity. Year-on-year sales volumes were down by 5%. In U.S. dollar terms, Q3 sales decreased by 24% to $600 million. However, from August, we saw an upward trend in diamond sales as the most acute phase of destocking occurred in midsummer. 9 months 2019 sales in U.S. dollars were down by 34% to $2.4 billion on lower sales volumes and prices, both due to mix and like-for-like price decrease factors.

Our 2019 sales outlook is forecasted to come at 32 million to 33 million carats. In response to the market conditions and the accumulation of high inventories of rough diamonds, we revised our 2020 production outlook from 38.7 million to 34.3 million carats. However, I would like to stress that this number represents the current view of the management, and the final decision will be made by our Supervisory Board in December.

The market conditions, which we discussed earlier, were behind the 7.5% like-for-like price index decrease, as you can see on page #8. In addition, the average selling price for 9 months was down 23%, which is also due to a higher share of smaller stones in the sales structure.

Now let's turn to Slide #9. I would like to take you through the key financials for the third quarter, which were under pressure mainly due to a 23% decline quarter-on-quarter in sales volumes. Our revenue decreased by 20% to RUB 45.7 billion. EBITDA came to RUB 21 billion. However, our profitability slightly increased from 42% to 46%.

Our total costs, the breakdown is shown on Slide #11, were down by 23% to RUB 24.7 billion. Third quarter CapEx marginally grew by 2% quarter-on-quarter to 5 -- RUB 4.5 billion, a 47% drop year-on-year was mainly driven by the launching of the Verkhne-Munskoe deposit a year ago. Our total debt increased by 15% quarter-on-quarter to $1.6 billion and while our cash position stayed at a healthy $650 million.

Net debt-to-EBITDA ratio grew to 0.6 on the back of lower EBITDA and higher net debt but stayed in the target range. Q3 free cash flow slightly increased to RUB 2.5 billion from RUB 2.4 billion in Q2. The working capital grew by 13% quarter-on-quarter or by RUB 12 billion. This was mostly driven by several factors: first of all, an increase in rough diamond inventories by RUB 19 billion as Q3 production of 12.1 million carats exceeded sales of 6.4 million carats; second, the seasonal decrease in ore and sands inventories by RUB 7.6 billion; and finally, seasonal rise in supplies of fuel, spare parts and materials by RUB 4.6 billion, driven by the navigation period on the Lena River. Year-on-year, our working capital increased by 21% or RUB 17.5 billion, driven by an increase in diamond inventories.

Now a few words about dividends. In September, the General Meeting of Shareholders approved dividends for the first half of 2019 in the amount of RUB 28.3 billion or 100% of the free cash flow for the period. Following the weaker financial results in 2019, the dividends for the second half of the year could be based on net income rather than free cash flow for the period. This is due to our dividend policy, which has the provision of a minimum payout ratio of 50% of our net income.

Before we conclude our presentation, I would like to reiterate that the recent market weakness came largely as a result of the banking crisis in India, resulting from financing issues for the midstream. As a consequence, the midstream went through quite a painful deleverage increase, impacting its ability to purchase rough stones from the producers. I would also like to say that long-term fundamentals for jewelry demand growth remain strong, and recent U.S. statistics support this statement. The recent data shows that the September jewelry sales in the U.S. increased by 5.9% year-on-year, while year-to-date, U.S. spending on jewelry was flat compared to record levels in 2018.

We as the management of the company will do what should be done in this situation: pursue price-over-volume strategy, maintain supply discipline and continue to drive projects which will solidify our competitive position in the industry. This concludes my presentation, and we are now ready to take your questions. Thank you.

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Questions and Answers

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Operator [1]

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(Operator Instructions) The first question is from Dan Shaw, Morgan Stanley.

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Daniel Harry David Shaw, Morgan Stanley, Research Division - Research Analyst [2]

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Just 2 for me. The first one on -- well, actually, both of them on CapEx. But the first one, you're keeping your guidance at RUB 23 billion for this year, which implies around RUB 10 billion in the fourth quarter. Can you talk in a little bit more detail about what drives that big step-up in the end -- at the end of the year?

And then secondly, for the next couple of years, your guidance is sort of mid- to high RUB 20 billion, so sort of up towards RUB 30 million for the next couple of years. Do you see this as a sustainable level, a level that can support your current level of production in the years to come? Or is there an element of spending less this year due to market conditions? I'm just interested in how you see that dynamic.

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Alexey Nikolaevich Philippovskiy, Public Joint Stock Company ALROSA - CFO & Member of the Executive Committee [3]

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Thank you, Dan. For the CapEx for this year, the final number will be in the range between RUB 20 million to RUB 23 billion for the end of the year. And the step-up in the last quarter will be driven by the ongoing purchase of the building for our sales and sourcing organization in Moscow. It could be that we will have to prepay for a portion of the building before the year-end. However, I would like to point your attention that the original number for the year was around RUB 28 billion. And we realized a number of initiatives to bring the overall CapEx down to RUB 23 billion, in line with the current economic situation.

Going forward, for the next year, the CapEx will be substantially lower than RUB 30 billion that you mentioned. Currently, we see that the number will be in the range between RUB 20 billion to RUB 25 billion, and the decrease will be driven by the decrease in our production as we will have to invest less in the current facilities. Did I answer your question?

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Daniel Harry David Shaw, Morgan Stanley, Research Division - Research Analyst [4]

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Yes. Yes.

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Operator [5]

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The next question is from Daniel Major at UBS.

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Daniel Edward Major, UBS Investment Bank, Research Division - Director and Analyst [6]

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3 questions. Firstly, on the market, you mentioned about a degree of confidence we might be coming close to the end of the destocking phase in the midstream. Can you give us any commentary on the signals around destocking at the retailer level and what you think the outlook there is in terms of further reduction in inventory of polished or of jewelry from retailers? That's the first question.

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Sergey Sergeevich Ivanov, Public Joint Stock Company ALROSA - President, CEO, General Director, Chairman of Mgmt. Board & Deputy Chairman of the Supervisory Board [7]

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This question will be answered by Evgeny Agureev, our Head of Sales.

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Evgeny Agureev, Public Joint Stock Company ALROSA - Director, United Selling Organization [8]

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Thank you very much. Hello, everybody. Thank you very much for the question. And regarding the destocking, and as we can see from the sales figures for this year, we -- to get -- or the majors together the sales of the rough good for this year are less for 25%. And if we can compare this to the polished sales, we see that the overall decrease is about 15%. It means that there is a trend. The trend was good, but we are -- we are not -- we are monitoring the situation. And from a fundamental point of view, they can become the price-over-volume strategy. That show finally support the overall destocking in the market. And if talking about the signals, we can see that starting from the September, we recognized that in some of the rough positions, there is a deficit on the market. So the midstream is some of positions buying very well.

And looking on our sales figures, also, you can see there's some good trend starting from the August. So September's sales are above August. October, we already announced our figures. You can see also figures are with a positive trend. It seems to us that the current situation is much more balanced as it was during the summer period. What is important to understand what kind of request we will demonstrate, will receive from the jewelry producers from China, from U.S., and especially after Diwali period. It's an important period for our industry in India. So now factories are going to restart their production. So in this period of time, it's very important to understand what will be the request from the contracts -- on the new contracts in the world.

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Daniel Edward Major, UBS Investment Bank, Research Division - Director and Analyst [9]

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Okay, very helpful. Second question is around -- you provided guidance, obviously, for production in 2020. Can you give us, based on your current outlook of market conditions, any indication on the level of sales and whether you think you're going to be able to reduce inventory next year?

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Alexey Nikolaevich Philippovskiy, Public Joint Stock Company ALROSA - CFO & Member of the Executive Committee [10]

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This is Alexey. It will depend -- it depends on the market. We expect that towards the end of the year, the company will have between 23 million to 24 million carats of inventory, which will take some time to sell. So our expectation for the next year, that next year, it will be definitely better in terms of the volumes than this year. And that the sales will be in line with our production plus 2 million to 3 million carats that we will take out of our inventory. So to give you a number, we expect 37 million to 38 million, maybe 39 million carats in a very optimistic case for the next year.

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Daniel Edward Major, UBS Investment Bank, Research Division - Director and Analyst [11]

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Very clear. And just final question. You're obviously bringing down production at the alluvial operations as you highlighted to be the main area where you'll reduce production next year. Can you give us any sense of the impact on group costs per carat?

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Alexey Nikolaevich Philippovskiy, Public Joint Stock Company ALROSA - CFO & Member of the Executive Committee [12]

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Very good question. We do not have a goal to reduce production for the sake of reducing production. What we are trying to do, we are trying to identify facilities where reduction in production will result in increase in the free cash flow for the company. So we could increase our dividend base. Given that on many of our deposits and facilities, the share of the fixed cost is quite high, ranging between 40% to 90%.

The decrease in production will free up some free cash -- some cash, but it will result in the higher cost per carat. To give you specific numbers, and this is a very preliminary number, we expect that the cost per carat will grow by about 4% to 6% next year. However, the decrease in production will allow the company to free up between RUB 4 billion to RUB 7 billion and increase our free cash flow.

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Daniel Edward Major, UBS Investment Bank, Research Division - Director and Analyst [13]

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Okay. So sorry, this is 4% to 6% growth in units, in increasing unit cost, but you'll free up an additional RUB 4 billion to RUB 6 billion of working capital beyond -- outside of the reduction in diamond inventory. Is that correct?

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Alexey Nikolaevich Philippovskiy, Public Joint Stock Company ALROSA - CFO & Member of the Executive Committee [14]

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The decrease in costs -- actually, the decrease in cash outflows outside of the working capital will be in the range between RUB 4 million to RUB 7 billion. That's not in current -- not counting the working capital decrease. And the cost per unit in rubles per carat will grow between 4% to 6%.

In other words, by decreasing the production by roughly 3 million carats, the company will be able to free up between RUB 4 billion to RUB 7 billion, not counting the working capital decrease, yes.

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Operator [15]

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The next question is from Sergey Donskoy, SocGen.

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Sergey Donskoy, Societe Generale Cross Asset Research - Equity Analyst [16]

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This is Sergey Donskoy from Societe Generale. I have 3 questions maybe (technical difficulty) inflation. So it's not in real terms, it's in nominal terms?

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Sergey Sergeevich Ivanov, Public Joint Stock Company ALROSA - President, CEO, General Director, Chairman of Mgmt. Board & Deputy Chairman of the Supervisory Board [17]

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Sergey, I'm sorry. We missed your question. There was a trouble on the line. Would you please repeat it?

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Sergey Donskoy, Societe Generale Cross Asset Research - Equity Analyst [18]

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Yes, assuredly. The guidance that you gave for 4% to 6% increase in cost per carat next year, do I understand that it's in rubles, first of all? And second, it includes your expectations for general cost inflation. So it's in nominal terms and not in real terms?

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Sergey Sergeevich Ivanov, Public Joint Stock Company ALROSA - President, CEO, General Director, Chairman of Mgmt. Board & Deputy Chairman of the Supervisory Board [19]

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Yes, that is correct.

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Sergey Donskoy, Societe Generale Cross Asset Research - Equity Analyst [20]

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Okay. And then 2 more questions on pricing. One, given this -- these changes to your production plan, and the way how mines will now differently contribute to your total output, what will be the impact on the average value per carat or price per carat? Is it going to increase, decrease? And if possible, if you could give some indication by how much in current prices, for instance.

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Evgeny Agureev, Public Joint Stock Company ALROSA - Director, United Selling Organization [21]

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Thank you for the question, Sergey. It's Evgeny Agureev. I will answer. From the pricing -- average pricing point of view, this year was a specific year, taking into account the low demand. Also, we recognize that demand was specific in different areas and very volatile because we started the year with the demand on -- for the big size of them. We -- sorry, we started this year with a quite good demand for the low size of goods. And then we worked with this situation the first half of the year. Now we see the trend change. So now we see the growing demand for the big sizes, and that is also a good trend. But from the average pricing point of view, that influence, finally, the average price for this year. And -- so taking into account the forecast for the next year, we see that there should be some recoveries. So with the growing demand for the big sizes, that will influence the average price per carat in 2020.

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Sergey Donskoy, Societe Generale Cross Asset Research - Equity Analyst [22]

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Yes. I understand that. But I was just trying to understand or maybe to separate 2 different things, general market trends and the way your production mix changes, because, I guess, these 2 things, they overlap. And for us to better understand and predict your performance, it would help to understand how the mix is changing. Is it changing in favor of more valuable stones or in favor of cheaper stones, at least maybe in qualitative terms?

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Alexey Nikolaevich Philippovskiy, Public Joint Stock Company ALROSA - CFO & Member of the Executive Committee [23]

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The production mix will stay roughly the same, at the same level as it is for this year. However, speaking about the mix in terms of sales, we believe that the mix impact will be positive. If you look at the average price for gem quality diamonds for this year, it was $123 in the first quarter, $130 in the second quarter and $135 in the third quarter. So we believe that in the next year, it will be more like the third quarter, so $135, adjusted for the like-for-like index changes that will take place before the end of the year.

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Sergey Donskoy, Societe Generale Cross Asset Research - Equity Analyst [24]

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Yes. And my second question, actually, it relates to exactly this. Your realized price in the second -- in the third quarter was higher than in the second. But as I understand, that was on the back of significant increase in stocks. I suspect that you mainly increased inventories of low-value carats, and you were selling higher-value carats. So the question is, if we take a look at your current inventories, which are -- well, I think something like 21 million, 22 million carats right now, the value of these inventories at current market prices, is it kind of in line with the average sales price in the third quarter? Below? Above? I'm just trying to understand the -- kind of the mix of those carats. Is it comparable to what you were selling in the third quarter? Is it better or worse?

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Alexey Nikolaevich Philippovskiy, Public Joint Stock Company ALROSA - CFO & Member of the Executive Committee [25]

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It is better than what we were selling in the first and second quarter, and it's more or less in line with what we saw in the third quarter.

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Sergey Donskoy, Societe Generale Cross Asset Research - Equity Analyst [26]

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Okay. And lastly, maybe you comment -- commented on this before but I would appreciate if you remind me. The increase in labor costs this year, 9-months-to-9-months last year is, I think, plus 18%, and we don't see much increase in production volumes and in ore throughput for that matter. What was the reason for such a sharp increase? And what is the outlook for the full year?

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Sergey Sergeevich Ivanov, Public Joint Stock Company ALROSA - President, CEO, General Director, Chairman of Mgmt. Board & Deputy Chairman of the Supervisory Board [27]

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There are actually 3 reasons, actually 4 reasons for the increase in production labor cost. First of all, the increase in the run-of-mine. The run-of-mine, the volume of ore that we mined, had increased by actually 8% to 62.8 million cubic meters year-to-date, driven by the launch of Verkhne-Munskoe deposits and the general production increase.

We also saw a 63% increase in the volume of transportation, measured in tons per kilometer transported. And that is explained by, again, by the launch of Verkhne-Munskoe deposit. The deposit is located roughly 170 kilometers away from the enrichment facility. So the ore has to be carried by the distance by trucks. And that increased our overall transportation for the group of companies by 63% to 985 million tonnes per kilometer.

The third reason is the salary indexation, in line with our collective labor agreement, we have to index the salaries for the workers by the level of inflation, which was 4%. So it has to -- that also contributed to the increase. And finally, looking at the last year, the bonus that was paid in 2018 was quite low because it included the Mir accident that happened in 2017. It accounted for Mir accident, so the bonus was very low. 2018 was a good year. So in the first half of 2019, there was a bonus that was paid for 2018, which was higher. And that's the fourth reason for the increase.

I also have to say that there was a number of initiatives to decrease headcount within this year. So our headcount has decreased despite the increase in the headcount due to the launch of Verkhne-Munskoe deposit. For the year, to give you a guidance for the whole year, we believe that there will be a double-digit growth in the production labor cost due to all these reasons that I mentioned, but it will be slightly less than the 18% that you see for the 9 month of this year.

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Sergey Donskoy, Societe Generale Cross Asset Research - Equity Analyst [28]

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I see. And just maybe the very last question to follow-up on what you just said about Verkhne-Munskoe, given such an outsized impact on costs for the entire group. I guess that means that the mining costs and operating costs per tonne of ore there are quite high. Does the mine is actually -- does the mine currently make profit?

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Sergey Sergeevich Ivanov, Public Joint Stock Company ALROSA - President, CEO, General Director, Chairman of Mgmt. Board & Deputy Chairman of the Supervisory Board [29]

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Yes. The mine makes good profits. It's just it's actually less profitable than the mines that are located closer to the enrichment facilities. The margin, I cannot give you the margin from the top of my head, but it's definitely higher than 30% in terms of the variable cost margin.

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Operator [30]

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The next question is from Timothy Riminton, Barclays.

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Timothy William Riminton, Barclays Bank PLC, Research Division - Research Analyst [31]

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So just to follow-up a few questions on mix. So your October results came in, and as you commented on, showed a bit of stabilization over the last 3 months. But was that sort of improvement generally driven by mix? How do you see the general market dynamics so far in Q4? And I noticed that last week, De Beers came out and said that they'd actually had to drop prices. So just wondering why there was a sort of divergence in [14s] there. That would be my first question.

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Evgeny Agureev, Public Joint Stock Company ALROSA - Director, United Selling Organization [32]

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It's Evgeny Agureev. I will answer this question. Thank you. And what is the outlook for the -- for this quarter and taking into account this -- the news about decision for the other company, our competitor. It's not easy to comment on. We are not commenting this such kind of steps and from one side -- for one side. From the other side, I will explain that there is not a drop in prices. There are some price corrections. And we see that it's -- the overall situation is much more balanced as it was in the previous quarter and for one side.

October sales are in positive trend, and we expect that such kinds of trend will keep in coming 2 months until year-end. And currently, we see the request for the November session coming from our customers. So next week, we'll start our [loss] of sales. We see that there is a stable, if you can see in the -- in this year, stable demand. We are not going to repeat such kind of -- or follow such kind of big price changes, but I will bring some example from the previous crisis from 2015. And that time, once it was really a big drop in prices by 2 companies. It was like minus 10% in 1 month, and that was the significant step. So summarizing altogether, we -- our forecast for this quarter is -- should be stable quarter. And if we can compare for the previous quarters this year. And it should not happen, any big significant price changes.

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Sergey Sergeevich Ivanov, Public Joint Stock Company ALROSA - President, CEO, General Director, Chairman of Mgmt. Board & Deputy Chairman of the Supervisory Board [33]

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In terms of numbers, we expect the sales in carats for the fourth quarter will be in the range between 6.5 million to 7 million carats and without no drastic changes in pricing.

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Timothy William Riminton, Barclays Bank PLC, Research Division - Research Analyst [34]

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That's very helpful. And my second question and final question is just in terms of net leverage. So should the sort of weak market conditions continue (technical difficulty)

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Sergey Sergeevich Ivanov, Public Joint Stock Company ALROSA - President, CEO, General Director, Chairman of Mgmt. Board & Deputy Chairman of the Supervisory Board [35]

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We cannot hear you.

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Operator [36]

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One moment, please. I will search him.

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Timothy William Riminton, Barclays Bank PLC, Research Division - Research Analyst [37]

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Can you hear me now? So my second question and final question was on net leverage. Just in the case that weak market conditions continue and free cash flow remains very low and dividends continue to be paid, I'm just wondering at what sort of net leverage level you're comfortable with it rising to before you might consider cutting dividends or making alternative changes to prevent net leverage rising further?

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Alexey Nikolaevich Philippovskiy, Public Joint Stock Company ALROSA - CFO & Member of the Executive Committee [38]

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Yes, this is Alexey. I do not see -- I do not foresee a scenario where we will have to deviate from our current dividend policy. And our current dividend policy stipulates that we pay, in any scenario, no less than 50% of dividends. Usually, our dividends are based on the free cash flow. If our leverage stays between 0 to [1.0], or we can pay up to 100% of the free cash flow. If it stays between 1.4 to 1.5, in that case, we pay between 50% to 70% of our free cash flows.

I expect that the net debt-to-EBITDA level at the end of this year will be around 1.0, accounting for the dividends that we are paying in November. And in April, our Supervisory Council will decide on the appropriate amount of dividends in line with our current dividend policy. But to give you a short answer, if it's below 1.5, this is a level that is comfortable for us. However, we will try to stay between 0.5 to 1.4 net debt-to-EBITDA.

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Operator [39]

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The next question is from [Alex Gordon,] [CH Bank].

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Unidentified Analyst [40]

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I have a question about ALROSA-Nyurba. As we know, there was a decision about its liquidation made by ALROSA, minority holders are against this. But I think it would be fair to give some chance to quit, I mean, buyback option or tender offer by ALROSA side. Otherwise, there is a good chance that minority holders lose the bigger part of their investments.

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Alexey Nikolaevich Philippovskiy, Public Joint Stock Company ALROSA - CFO & Member of the Executive Committee [41]

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Yes, this is Alexey. I will take this question. The Board of Directors of ALROSA-Nyurba, on October 31, has made a decision to liquidate ALROSA-Nyurba through the process of liquidation. The most recent share price of ALROSA-Nyurba, if I'm not mistaken, was around RUB 66,000 per share. We believe that the liquidation value will be more or less in line with these numbers. So we do not see that the rights of the existing minority shareholders will be violated by this process.

Speaking about the very high share price that we saw a couple of years ago, between RUB 120,000 to RUB 150,000 per share, I would like to stress that this was on the back of very low liquidity. 1 to 2 to 3 shares per day. That was the turnover on the market, and it was also at 2 years ago. I mean if you look at the share price of ALROSA even a year ago, it was also higher. So we believe that this decision is fair, and it takes into account the interest of all shareholders of ALROSA-Nyurba.

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Operator [42]

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The next question is from Daniel Major at UBS.

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Daniel Edward Major, UBS Investment Bank, Research Division - Director and Analyst [43]

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A couple of follow-up questions. You mentioned that your press release and your statements highlight the closing of the Kristall transaction in October. And obviously that will be reflected in the fourth quarter statement. You stated the equity value at RUB 1.8 billion. Can you give us any guidance on how much working capital and debt you seem to -- you will take on as part of the transaction?

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Alexey Nikolaevich Philippovskiy, Public Joint Stock Company ALROSA - CFO & Member of the Executive Committee [44]

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The external debt of Kristall is around $100 million, and that debt is totally covered by the inventory and cash on the balance of Kristall. So the capital is positive. In terms of the working capital, I know that it is higher than the debt, but I cannot give you the specific number at this point as I don't have it on the top of my head.

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Daniel Edward Major, UBS Investment Bank, Research Division - Director and Analyst [45]

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Okay. So just to be clear, the -- including the working capital as a consequence of the transaction, it would have an impact of increasing net debt like-for-like post the consolidation of the transaction. Is that correct?

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Alexey Nikolaevich Philippovskiy, Public Joint Stock Company ALROSA - CFO & Member of the Executive Committee [46]

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That is correct. We'll increase the net debt, and it will increase the working capital of ALROSA. The impact on net assets will be positive in the range between RUB 3 billion to RUB 4 billion. Those are the net assets of Kristall and the debt of acquisition.

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Daniel Edward Major, UBS Investment Bank, Research Division - Director and Analyst [47]

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Got it. And then a final question. You gave guidance, 6 million to 7 million carats of sales in the fourth quarter based on your expectation. Can you give us just a sense on the split between industrial and gem quality? Is there any reason to believe it should be a significant year-on-year change in the sales of industrial quality diamonds?

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Alexey Nikolaevich Philippovskiy, Public Joint Stock Company ALROSA - CFO & Member of the Executive Committee [48]

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No significant change is expected in the share of industrial diamonds. Roughly 35% of industrial, in terms of volumes and 65% of gem [time] diamonds as we saw earlier this year and last year. This ratio, this proportion stays more or less the same.

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Operator [49]

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There are no further questions. So I would like to hand back to you, gentlemen.

The next question is from Anton Fedotov, Bank of America Merrill Lynch.

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Anton Fedotov, BofA Merrill Lynch, Research Division - Analyst [50]

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Most of my questions have been answered already. I just have one, and the last remaining one. Do you plan any cash outflows to some of your overseas projects in the next 12, 13 months? I mean mainly at the main Angola or possibly Zimbabwe (multiple speakers)?

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Alexey Nikolaevich Philippovskiy, Public Joint Stock Company ALROSA - CFO & Member of the Executive Committee [51]

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No. No, we are not planning. It will not happen, and we do not expect it to happen.

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Operator [52]

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The next question is [Danron Alexey Gillikczek], Sberbank.

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Unidentified Analyst [53]

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Just one very small question from our side. We have seen quite low level of salary expenses in your G&A for the third quarter. So it is almost twofold below the second quarter level and the third quarter level of the last year. So what sort of dynamics for this item can we expect for the fourth quarter? And what could be the level?

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Sergey Sergeevich Ivanov, Public Joint Stock Company ALROSA - President, CEO, General Director, Chairman of Mgmt. Board & Deputy Chairman of the Supervisory Board [54]

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Our KPI system links the variable portion of the salaries for the middle and top managements to the performance of the company, namely to the level of sales and profits that the company generates. Given that -- and measures it against the plan that -- or budget that was approved by our Supervisory Council. Starting from the second quarter, we were not -- we were below the budget. So that impacted the variable part of our salaries, and it went down. We expect it will still be down in the fourth quarter.

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Operator [55]

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So there are actually no further questions. I would like to hand back to you, gentlemen.

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Sergey Sergeevich Ivanov, Public Joint Stock Company ALROSA - President, CEO, General Director, Chairman of Mgmt. Board & Deputy Chairman of the Supervisory Board [56]

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Just one addition to the last answer I gave on the G&A salaries. Another reason for the decrease is the revaluation of the management options program, which is tied to the TSR. And as TSR went down in the third quarter, we had to revalue this options program, the obligations on the options program. That also decreased the salary costs in the G&A section. And that will also most likely will be -- we will stay in the fourth quarter.

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Operator [57]

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The follow-up question is from Sergey Donskoy.

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Sergey Donskoy, Societe Generale Cross Asset Research - Equity Analyst [58]

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Just one question on one particular mine: Jubilee. Looking at your production outlook for 2020. There is quite an abrupt change in direction. And previously, you expected production to keep declining from 6.5 to 4.4, and now you're going to see -- you're expecting it to increase actually to 7.2. That's, so far as I understand, against the background of generally declining grades. Could you comment a bit why this change? How it is going to be achieved, higher volumes, temporarily higher grades? Is it just a temporary measure to offset the overall reduction in volumes to bring costs to an acceptable level?

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Alexey Nikolaevich Philippovskiy, Public Joint Stock Company ALROSA - CFO & Member of the Executive Committee [59]

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Sure. The Jubilee mine has 3 ore bodies. The center ore body has a higher grade than the other 2. So in line with the mining schedule, in 2019, the company was mostly mining the -- other than central ore bodies. And in 2020, we will resume mining the central ore body with the higher grade. So the overall grade -- overall realized grade at the Jubilee mine will increase to 1.2 carats per tonne, and that will drive the increase in the output. In terms of the run-of-mine, it will stay more or less the same in 2020.

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Operator [60]

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There are no further questions. So I'll hand back to ALROSA for some closing words.

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Sergey Takhiev, Public Joint Stock Company ALROSA - Head of Corporate Finance [61]

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Okay. Thank you for the participation in today's call. So we appreciate your attention and your time. And if you have any further questions, you know that you can always direct them to the Investor Relations team.

So with this, I would like to thank you all the participants and conclude this conference call. Have a great day.

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Operator [62]

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Ladies and gentlemen, thank you for your attendance. This call has been concluded. You may disconnect.