ALROSA. Annual report 2013 Introduction by the President ANNUAL REPORT 2013 THE WORLD LEADER IN DIAMOND MINING ALROSA. Annual report 2013 ALROSA. Annual report 2013 2 Information about the company Information about the company 3 WHAT IS STRUCTURE ALROSA? The ALROSA Group is a Russian group of diamond companies under long-term framework agreements to Russian and ranking number one in the world as for the production of foreign companies preparing the diamonds for their further rough diamonds; its diamond reserves are the largest across use in jewelry industry. the globe. The ALROSA Group is engaged in exploration, extraction, processing and sale of rough diamonds. The Group operates mainly in two regions of Russia: Yakutia and Arkhangelsk region, as well as in two African countries: Angola and Botswana. The main revenue of the Group comes from selling gem-quality rough diamonds, most of which are sold KEY FINANCIAL AND OPERATIONAL INDICATORS OF ALROSA GROUP, 2013 Indicator Value P&P reserves to JORC Code 607.5 million carats Measured, identified and potential mineral resources to JORC Code 973 million carats 2013 2012 %Δ Diamond mining, thous. carats 36,913.9 34,420.3 7.2% Revenue, RUB million 168,505 150,880 12% Corrected EBITDA, RUB million 69,100 61,950 12% Net profit, RUB million 31,837 33,634 –5.3% CFO, RUB million 53,533 42,007 27% Fixed asset investment, RUB million 38,165 30,050 27% EPS, RUB 4.26 4.52 –5.8% ALROSA. Annual report 2013 ALROSA. Annual report 2013 4 Information about the company Information about the company 5 GEOGRAPHY Orel, Russia, Orel-ALROSA LLC Moscow, Russia, Anabar district, Russia, OJSC Almazy Anabara OJSC Almazny mir, CJSC ALROSA hotels Udachny, Russia, Udachny Mining & Processing Division OJSC SK ALROSA Insurance Company, Aikhal, Russia, Aikhal Mining & Processing Division, Saint Petersburg, Russia CB MAK-Bank LLC, Amakinskaya Exploration Expedition OJSC NPP Bourevestnik Brillianty ALROSA , The United Selling Organization ALROSA , Mirny, Russia,Mirny Mining & Processing Division, ALROSA-TRANSSNAB Mirny Exploration Expedition, Antwerp, Belgium, Arcos Belgium N.V. Botuobinskaya Exploration Expedition, Diamond Sorting Center, NIGR, Arkhangelsk, Russia, OJSC Severalmaz New York, USA, Arcos USA, Inc. London, UK, Arcos Ltd. Capital Construction Division, Supplies & Logistic Division, Mirny Aviation Division, Svetly, Russia, OJSC Vilyuiskaya HPP-3 Almazavtomatika specialized division, Yakutniproalmaz research & design institute, Nakyn, Russia, OJSC ALROSA-Nyurba Almazny Kray TV and Radio Broadcasting Company, HR Training Center, ALROSA-VGS LLC, The Cultural and Sports Complex, OJSC ALROSA-Gas, CJSC Irelyakhneft Jigansk, Russia, Arkticheskaya Exploration Expedition Yakutsk, Russia, The Yakutsk Diamond Trading Enterprise ALROSA Lensk, Russia, The Almazdortrans Production Division Barnaul, Russia, Kristall Barnaul LLC Hong Kong, China, Arcos Hong Kong Ltd. Dubai, UAE, Arcos East DMCC LEGEND KEYS Mining and Processing divisions Sales divisions, diamond production Units of production infrastructure Exploration units Luanda, Angola ALROSA-Africa Branch in Angola Nebug, Russia, Prometheus Health & Recreation Center Social facilities HIDROCHICAPA S.A.R.L. Gelendzhik, Russia, CJSC Golubaya Volna Resort Luanda Sul, Angola, Subsidiaries and associates Sociedade Mineira de Catoca Ramat-Gan, Israel, Arcos Diamonds Israel Ltd. ALROSA. Annual report 2013 ALROSA. Annual report 2013 6 Table of contents Introduction by the President 7 TABLE OF CONTENTS FROM THE SUPERVISORY BOARD CHAIR From the Supervisory Board Chair 7 Corporate governance 67 From the President of OJSC ALROSA 9 Principles of Corporate Governance 68 Supervisory board 72 Dear shareholders, 2013 Highlights 11 President and Executive Committee 82 Internal Control System and Risk Management 89 The ALROSA Group continued its steady development in The ALROSA Strategy. 2013 and remains the diamond mining company number The company on the diamond market 15 Sustainable development 95 one in the world. The group improved on all the key Market Overview 16 Commitment to sustainable development 96 indicators, both in volume and value terms. For instance, Strategy and Business Model of ALROSA 18 HR policy and labour protection 97 total volume of mined rough diamonds exceeded 36.9 Key Performance Indicators 22 Environmental protection 99 million carats, which is 7.2% higher than a year earlier. Social missions 101 The sales of rough and polished diamonds increased by Operating Activities 25 7.3% as compared with the previous year and reached again its resource base in accordance with the JORC Code. Exploration 26 Financial Performance Review under IFRS 105 $4.9 billion. Despite the fact that 2013 was difficult both The audit results show that the Group accounted for about a Diamond mining and ore-dressing 31 for the diamond market and the global mining industry in third of the world’s diamond reserves, which are sufficient to Diamond Cutting 48 Information for investors and shareholders 113 general, the financial performance of the ALROSA Group maintain current production levels for 30 years. The company Sale of diamond products 48 Share trading at the stock exchange 114 for the year evidence the stability and profitability of continues its activities to replace the reserves being mined Other activities 53 Dividend policy 115 our business. EBITDA indicator amounted to 69.1 billion out, as well as to search for new promising fields of rough Bonds 117 roubles, bettering the previous year’s value by 12%. The diamonds. This work is not limited to the territory of the Investments and innovations 55 company’s net profit totaled 31,837 million roubles. Republic of Sakha (Yakutia). In 2013, ALROSA signed important Construction 56 Appendicies 119 agreements with local companies of Botswana and Angola on Technical re-equipment 61 In 2013, ALROSA came even closer to its strategic goal: to the joint search for diamond deposits in these countries. Innovative development 63 become the largest single-product company ranking first in the world market for rough diamonds. The company, whose The ALROSA Group made great progress in the marketing earlier development was diversified, now consistently seeks to policy. Less than a decade ago, the company were selling improve its performance by focusing on production and sale almost all of its products through intermediaries, and now it of diamonds and eliminating non-core assets gradually. successfully operates in the market independently. Important to note is that the company is moving from short-term sales ALROSA implements successfully its scheduled production on the spot market to long-term contracts: the number of development projects. In the spring of 2013, the underground such contracts increased more than eightfold in recent years. mine “Aikhal” got into top gear thus contributing to the Thereby, ALROSA has developed a stable distribution system Disclaimer increase in the production of rough diamonds. In the fall and significantly reduced the dependence of its business on of 2013, ALROSA completed the construction of a second fluctuations in market prices for rough diamonds. The annual report of the ALROSA Group for 2013 (hereinafter referred to as “Annual report”) has been prepared on the basis of information available to the ALROSA Group at the time of its preparation. This Annual report contains forecasting statements in regard processing plant at the Lomonosov mine in the Arkhangelsk to business operations, economic indicators, financial status, as well as future events and/or actions, expected results of activities and region. This is one of the key investment projects that will One of the main achievements of ALROSA in 2013 was growth prospects. ensure the growth of company’s production for years to come. the successful placement of 16% of its common stock at Forecasting statements contained in this Annual report are identifiable by the presence of terms such as “expect,” “believe,” “forecast,” After the commissioning of this plant in 2014, a whole new the Moscow Stock Exchange. In preparation for this deal, a “plan,” “evaluate,” “intend,” “will [do],” “could [do]” and other similar expressions, either in the affirmative or the negative. These statements region where diamonds are commercially mined will actually lot of work has been done both by the company itself and are forecasts, and may differ from actual events or results substantially. The ALROSA Group does not undertake to update such appear on the map of Russia and the world. by its shareholders having placed some of their shares for statements with the aim of reflecting events or circumstances arising after the date of preparation of the Annual report, or to reflect sale, namely Russian Federation represented by the Federal unforeseeable events. Many factors — including, among others, the state of the economy, the competitive landscape, technological changes, and other factors — may cause substantial differences between actual results and results included in the Annual report’s The most important task for any mining company is to preserve Property Management Agency and the Republic of Sakha forecasting statements. the availability of mineral resources. ALROSA audited once (Yakutia). As a result of these activities, the ALROSA Group has ALROSA. Annual report 2013 ALROSA. Annual report 2013 8 Introduction Introduction by the President 9 become more transparent and open to investors, bringing the the ALROSA Group for their seminal work. To carry out the disclosure standards