G St. Petersburg G Arkhangelsk G Ebelyakh G Moscow G Orel Udachny G Aikhal G G Chernyshevsky G Nyurba Svetly G G G Gelendzhik Mirny G Krasnodar G Yakutsk G Tuapse G Lensk G Novosibirsk G Barnaul G Irkutsk UNITED KINGDOM London G BELGIUM G Antwerp USA New York G ISRAEL G Ramat Gan UAE Dubai G CHINA Hong Kong G ANGOLA G Luanda TABLE OF CONTENTS ALROSA President’s Statement 4 Corporate Management Supervisory Board 8 Executive Board 10 Auditing Committee 11 Activities of Supervisory Board 12 Structure of ALROSA Group 13 Report on the Company’s Activities in the Main Fields of Operations Mining Operations 16 Marketing. Sales of Rough Diamonds. Manufacture and Sales of Polished Diamonds 16 Geological Prospecting and Exploration 22 Capital Construction 24 Supplies and Logistics 28 Technical Development 28 Diversification of Activities. Subsidiaries and Affiliates 29 Personnel Management Policy 32 Social Development 33 External Relations 34 Regional Policy 35 Environmental Safety 35 Accounting, Economic Performance and Financial Results Accounting Policy 38 Statutory Auditor's Report 40 Consolidated Financial Statement of ALROSA 42 Main Performance Indicators of ALROSA 44 Information for Shareholders 50 Historic Highlights of ALROSA 52 Addresses of ALROSA Main Offices 53 December 20, 2006, a reconciliation agreement, under which an increase in the share capital of ALROSA ensured that at least 50% will belong to the Russian Federation, 32% to the Republic of Sakha (Yakutia) and 8% to the districts of the Diamond Province. The reformed shareholding structure of ALROSA will permit the Company to use in an efficient way the possibilities provided through the support from the state and maintain at the same time a balance of the Shareholders’ interests. A continuous growth of the dividends and stable tax deductions to the state budgets of different levels have been ensured due to the high potential of ALROSA’s personnel. In 2006, the Company’s net profit reached 15,558 million Rubles, of which 2,240 million Rubles are planned for dividend distribution. Efficient operations under conditions of transition to underground mining and use of low-grade reserves necessitate intensive geological prospecting and explo- ration to ensure adequate ore reserves. The volume of geological prospecting and exploration had increased in the reporting year by 17.5% and by 62.3% in compari- son with the 2005 and 2004 levels, respectively. The existing programme for development of the industrial infrastructure provides the required support Dear Shareholders, for maintenance of the existing capacities and creation of new mining production capabilities. ALROSA is one of the world’s largest diamond min- The capital investments of ALROSA amounted in ing companies involved in diamond exploration, mining 2006 to 13,087.1 million Rubles, including 6,807.6 mil- production, manufacture and sales of rough and pol- lion Rubles spent on construction of mining facilities. ished diamonds. The ALROSA Group represented by The Company invested 2,354.4 million Rubles for ALROSA Co. Ltd. and ALROSA-Nyurba accounts for replacement of main production machinery and equip- approximately 90% of the diamond production in the ment and introduction of advanced technologies. Russian Federation and for about 20% of the diamond The Company’s policy with respect to salaries and world market in terms of caratage and 25% in terms of wages is directly dependent on improvement of the value. In 2006, the overall diamond production amount- labour productivity. During the reporting year, a new ed to US $2,332.2 million, and about US $141.1 million regulation “System of Remuneration of ALROSA worth of polished diamonds was manufactured Employees” was adopted. An integrated use of the existing regulatory framework and introduction of an The current positions of ALROSA have been efficient system of incentives for motivation of the ensured due to its high scientific and technical poten- employees permitted the Company to optimize the num- tial, its high-skilled personnel, well established partner- ber of personnel and reduce the workforce by 1,193 per- ships with suppliers, and high reputation in the world sons as compared with 2005. At the same time, the pro- market. According to RF President’s Decree of January ductivity in terms of commercial products had increased 13, 2007 “On Improvement of Governmental Regulation in 2006 by 8.7% in comparison with the previous year. of Imports to the Russian Federation and Exports from Based on the Company’s commitment to the princi- the Russian Federation of Precious Metals and Precious ples of social responsibility, ALROSA complies with the Stones”, the quotas for exports of gem stones, pre- objectives laid down in the Collective Employment cious metals and minerals containing them have been Agreement and in the purpose-oriented programmes cancelled. The decision taken by the government opens aimed at developing social support for the Company’s for ALROSA favourable prospects for improving the employees. efficiency of its sales policy and expansion of the clien- Expenditures for medical treatment services at telle. resorts, recreational facilities, and prevention of dis- Currently, the state, represented by the RF Govern- eases within the framework of the “Healthy Lifestyle ment, the Government of the Republic of Sakha (Yaku- and Recreation” Programme amounted to 406.8 million tia), and administrations of eight municipal districts Rubles. (uluses) in the Republic of Sakha (Yakutia) own 77% of The Company had changed over since 2002 to a sys- interest in ALROSA. tem of medical services for its employees provided The RF Supreme Arbitration Court approved on under the “Health” Programme on the basis of a collec- tive insurance system. In 2006 financing was provided for this Programme in an amount of 121.1 million Rubles. Cultural and sports activities in the Company’s divi- sions are carried out within the framework of the “Cul- ture and Sports” Programme. An integrated programme “Material Assistance and In order to ensure expansion of its mineral resources Sponsorship” developed and implemented by ALROSA the Company plans to increase financing of geological is an effective tool of social partnership with the com- prospecting and exploration as its top priority up to munities in the areas where the Company carries out its 2,650.3 million Rubles (i.e. by 19.5% as compared with operations. ALROSA provides support to the local dis- the reporting year). tricts (uluses) for development of agriculture and tradi- The current strategy of development of the Compa- tional crafts within the framework of the “Investment ny’s production potential, transport, research and Programme for Regional Development”. development facilities, social aspects and ancillary Under the “Corporate Pension Programme” the operations, as well as ALROSA’s investment pro- Company provides additional pensions for over 12,000 grammes, taking into account the overall tendency retired employees. ALROSA’s corporate pensions are toward strengthening of the Russian currency, permit among the highest non-governmental pensions in Rus- the Company to plan its net profit at the end of 2007 sia. In 2004 the Company’s pension fund “Diamond exceeding 13 billion Rubles. Autumn” began its activities in the field of governmen- Among the most important objectives for 2007 tal pension insurance providing an accumulating part of there is: the pension. In 2006 the Company’s deductions to the Development of ALROSA’s geological prospecting corporate pension fund “Diamond Autumn” amounted and exploration complex, concentration of prospecting to 899 million Rubles. in the areas of operations of the Aikhal Mining Division In order to promote its Housing Programme, the and Nyurba Mining Division and in those promising areas ALROSA Board adopted on 06.04.2006 a “Concept of where discovery of new diamond pipes is probable; Housing Policy of ALROSA for 2006-2010”. Implemen- Development of an efficient sales strategy by the tation of that programme resulted in 2006 in construc- Company; tion of 132 apartments and a dormitory for 108 per- Approval of the ore reserves in the Botuobinskaya sons, as well as improvement of the housing conditions and Verkhnyaya Muna deposits by the State Committee for employees’ families. for Mineral Resources and their putting on ALROSA’s ALROSA, operating in one of the key sectors of the balance sheet; economy of the Republic of Sakha (Yakutia), pursues a Implementation of the programme for construction long-term policy aimed at improving the living condi- of underground mines at Udachny, Mir and Aikhal oper- tions and ensuring socio-economic development of the ations within the framework of the Company’s overall entire region. The “Social Infrastructure Development strategy for the mineral base development; Programme” provides for further realization of the Acquisition of licenses for development of the allu- Company’s “Concept for Reforming of the Housing and vial deposits on the Ebelyakh River and the Gusinyi Communal Services”. In 2006, the Company spent Creek; 2,296.6 million Rubles for maintenance of the housing Commencement of exploitation of the alluvial and communal facilities. deposit of “Creek No.53”; The personnel management policy aimed at efficient Expansion and modernization of Ore Treatment and rational use of human resources is an essential inte- Plants No.3 and No.13 to fulfil the production pro- gral part of the Company’s development. During the gramme for 2007-2009; reporting