MOSCOW — As diamond trading has been a traditionally Jewish business, a Yiddish word is required to capture the essential quality required by whoever thought of trying to sell $800 million in unsecured Eurobonds for Russia’s diamond mining company Alrosa. That word is chutzpah.

Not that the heavily indebted Alrosa doesn’t need the cash, nor that the lucrative outlook for global diamond prices does not assure a stable $2 billion, or thereabouts, in annual diamond sales revenues, out of which the company ought to be able to comfortably service its debts. Alrosa cannot be blamed for following the advice of ING and JP Morgan, the two banks which acted as Alrosa’s advisors and underwriters for the bond. At the very least, the bankers wanted to raise the funds to repay credits they have already extended to Alrosa. But that is small beer, compared to the mountain of other debt the Eurobond placement was intended, at least initially, to cover. And if it was ING and JP Morgan who told Alrosa at the last minute to lower its target, did they realize the damage they would do to their client, once the outcome became known?

Alrosa is Russia's dominant diamond miner, and second only to De Beers in global production. This month it has been forced to cut its Eurobond fund-raising from $800 million to $300 million, sources close to the company have told me. Sources inside Alrosa will not explain the reason. But it appears to have reflected growing concern in the international diamond market that, as Alrosa cuts deliveries to De Beers, once its exclusive export partner, the Russian company is viewed as less creditworthy.

In its prospectus to investors, issued on October 25 by ING and JP Morgan, Alrosa had left blank the amount of Eurobonds it has been hoping to issue to investors this month. However, Alrosa has confirmed that its target, ahead of its roadshow for investors, was $800 million for a 10-year term. Alrosa has confirmed that the target was cut by two-thirds, once the roadshow began. The interest rate has also been raised.

This is the second Eurobond Alrosa has placed in the past year and a half. The first, for $300 million for 5 years, was of interest largely to Russian institutions. This time around the company's management had said it was keen to convert its short-term debt, and use this year's diamond market boom to persuade bond buyers to take the punt on a much bigger sum, for a much longer term. According to the company's prospectus, Alrosa is carrying a total of $1.793 billion in debt; of which $867 million is short-term, and $926 million long-term. Raising just $300 million, 35% of the short-term aggregate, is scarcely any achievement. As a bet on the Eurobond market, it is an embarrassment that calls into question the value of ING and JP Morgan as advisors.

Their failure to capitalize on the still unpublicized, but positive fundamentals of the European Commission ruling on the Alrosa-De Beers diamond trade deal remains for the bankers to explain to their client, and to the market.

There has been industry speculation that, in its final stage of reviewing the Alrosa-De Beers trade agreement, the European Commission in Brussels would decide to fix a limit of $500 million in annual deliveries by Alrosa. If true, that would be $300 million below the annual target agreed by the two companies in December 2001. It would also represent a cut of $135 million, or 21%, below last year's value.

In sales data revealed in the prospectus, Alrosa exports of rough diamonds to De Beers fell from $868 million in 2001 to $635 million last year, a decline of 27 percent. In the first half of 2004, Alrosa says its exports to De Beers fell another 7 percent to $279 million, compared with $300 million in the corresponding period of 2003. Much of the difference has flowed to Antwerp and other international diamond markets where Alrosa sold $165 million in rough in H1 2004, compared to $32 million a year ago, and zero in 2002.

But Alrosa says in its prospectus that a delay to September by the government in issuing an export quota for rough diamonds produced at the new Nyurba mine forced the company to cut back on exports in the first half that will follow in the second half. Alrosa's deliveries to De Beers are now accelerating to make up for lost time, and the final total should be around $650 million.

Alrosa also warned that it did not favour a dramatic cut by the European Commission in Brussels. "A final decision or settlement requiring an overly rapid or extensive reduction or a termination of our sales to De Beers could have an adverse impact on our sales, operating results and financial condition," the prospectus says. Alrosa also admitted that its strategy is to withhold supplies of diamonds from domestic Russian cutters so as to "manage domestic demand to achieve prices for our diamonds that are comparable to, or higher than, the prices established under the De Beers Trade Agreement." This has never been publicly conceded by Alrosa before, but it is has long been a bone of contention for the domestic manufacturers, who have accused Alrosa of discriminating against them.

After the last round of negotiations with European Commission officials in Brussels in October, De Beers signaled that it was satisfied with the direction of the terms of agreement that are now being finalized. These involve eventual agreement on deeper cuts in delivery value, but a timetable for phasing them in that would extend the original five-year term of the trade agreement.

A key concession, which the Commission has told Alrosa it is ready to accept, is that for next year, the first official year of the authorized trade agreement, Alrosa may deliver to De Beers about $700 million in rough. This is an improvement over the value for 2002, 2003, 0r 2004, and much better than the pessimists in Antwerp have been forecasting. It ought to have been a feather in Alrosa's cap during the Eurobond roadshow. But what the investors got instead was a limp sock of a circular, filled with dramatically accurate portrayals of the company's vulnerability on all financial fronts.

Since 2000 Alrosa has been producing annually at a near constant value of about $1.6 billion, except for 2002 when output fell to $1.4 billion. Carat production data remain a state secret, although they were to have been disclosed by a presidential decree in October. The decree has not yet been signed.

The company says the value target for production this year is $1.9 billion. The variations in production have reflected the falloff in production from the lynchpin of the company’s mining operations, Udachny mine, and the slowness to open the underground mine at Mirny. Offsetting these developments , the new Nyurba mine has grown much faster than anticipated, while the relatively new Jubilee mine (at the Aikhal processing complex) has also been growing fast. Net profit claimed by Alrosa has seesawed between $200 million and $350 million. Peak profit was $355.3 million in 2003. But according to the latest figures issued by the company, this year will be even better. In the nine months to September 30, profit calculated according to Russian accounting standards was $330.3 million.

To sustain profits like these for the long term, however, will require considerable new investment in costly underground mining. At least, a billion dollars is the price tag western diamond analysts place on Alrosa's future mine development plan. But the Eurobond exercise this month makes that figure look decidedly like a mirage.