Russians dig carats; De Beers digs dollars

Russians dig carats; De Beers digs dollars

I like numbers (it must be my engineering background). They can tell stories, if you know where to look.

So I was interested by some numbers recently produced by (or about) the world's largest diamond mining companies.

In the diamond mining jungle there are two alpha-male gorillas: one name we all know - De Beers - and another name largely unknown to young couples out browsing for engagement rings: Alrosa, the (mostly) state-owned Russian diamond miner with operations in Yakutia, north-eastern Siberia. Much has been made - not least by the Russians themselves - of the fact that Alrosa produced more carats in 2009 and 2010 than De Beers: in 2010 Alrosa recovered 34 million rough carats whilst De Beers managed only 33 million carats.

Reports have breathlessly labelled Alrosa the "world's biggest producer of diamonds" in advance of a possible 2012 flotation.

I find it ironic that one of the world's most glamorous products is routinely talked about in terms of carat volume rather than dollar value or (even better), profitability.

Then again, whilst more sophisticated marketers of diamonds and diamond jewellery take fright at anything that hints at commoditisation, wholesalers of rough diamonds are not so squeamish.

But if we're all being invited to buy shares in Alrosa next year then we'd better have a closer look at those numbers.

As we've seen, in 2010 Alrosa and De Beers mined a similar volume of rough diamonds, but De Beers posted rough diamond sales of $5.08 billion, with Alrosa trailing by quite some distance with sales of around $3.4 billion. Profitability is hard to assess because we're not really comparing like with like. Those Alrosa numbers include some sales of polished diamonds, and De Beers' profitability is only expressed for the whole Group, which includes a further $800 million of sales from its non-rough diamond businesses: Element 6, De Beers Diamond Jewellers, and Forevermark.

But the difference between the two businesses is further highlighted by what we know (or is reported) about sales in the first quarter of 2011, just ended.

Alrosa reported Q1 sales of $953 million (again, including some polished diamonds), but De Beers has just completed its third monthly 'Sight' (rough diamond sales week) of the year, and one report estimated Q1 sales at $1.75 billion, almost double the Alrosa number.

Alrosa might have been digging up more carats, but on current form De Beers appears to be bringing home the dollars, and in the world of diamonds, it's also got the ultimate brand name.

So which company would you buy shares in?

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