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Petra Diamonds sees unusual market conditions

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Petra Diamonds LSE:PDL, the Jersey-based, Africa-focussed diamond mining company published its operating results for the first quarter of FY23 earlier this week.

The company, with operations in South Africa and Tanzania, said that ore processed increased 22% year-on-year due to the resumption of mining at Williamson in Tanzania and in line with 4Q22. However, production was down 13% year-on-year to 763,220 carats (ct) due to lower grades at Cullinan Mine and Finsch but 2% higher than 4Q22.

Richard Duffy, Petra’s chief executive said in a call today (25th October): “The reduction [in production] from last year reflects lower grade from Cullinan as well as lower-than-expected tonnes mined at Finsch. At Cullinan, we experienced a reduction in grade recovered as a result of a change in the make-up of the orebody and we anticipate production from Cullinan being at the lower end of our guidance between 1.6 million carats (mct) and 1.8mct.”

The company reported revenues of USD104.3m (GBP90.1m), down from USD179.8m in 4Q22. This included USD1.4m from Petra’s 50% share in the profit from the sale of polished stones cut from the 342.92ct rough white diamond sold into a partnership for USD10m in August 2021. The company also said it had an additional partnership stone, a 134ct blue diamond, which was sold for USD5.7m in April 2022, with the process still ongoing.

Duffy said: “Volumes were down 10% compared to the same period last year, and we sold no exceptional stones this period, compared to the USD50m in sales proceeds for two exceptional stones in the previous comparative period.”

He continued: “Pricing improved over the period with a strong product mix from Cullinan, which largely negated the impact of the drop in revenues from exceptional stones during the period.”

Petra Diamonds debt repurchase

Petra reduced its gross debt by USD143.6m during the quarter, with a further USD1m bought back after the end of the period. Jacques Breytenbach, the company’s chief financial officer said on the call: “The repurchase [of debt] saw our cash balance reduce from USD288m to USD154m in the period. The buyback will save Petra USD14m in interest charges a year […] the ZAR1bn (GBP47.8m) revolving credit facility from Absa bank in South Africa remains undrawn and was worth USD55.1m at the quarter’s end.”

Breytenbach added: “The rand continues to decline against the dollar, but with 80% to 90% of Petra’s opex, and 90% to 95% of the company’s capex denominated in rand, the strengthening of the dollar is mitigating cost inflation we and the mining industry are experiencing [due to macroeconomic conditions].”

As previously reported Petra’s Koffiefontein mine in South Africa has a 140-year history and is coming to the end of its life. Petra has been trying to dispose of the mine with little luck. “We have been unsuccessful in finding a buyer for Koffiefontein despite our best efforts […] we’re now planning a responsible exit as the facility comes to the end of the mine plan […] Petra is now exploring alternative options in close consultation with our stakeholders and our workforce.”

Softening diamond market

The company closed trading yesterday at 117p. It has offered a one-year return of 39.4% with a year-to-date return of 60.12% with its shares ranging from 45p to 139p over a 52-week period. The company has a market capitalisation GBP227.2m.

Duffy said: “The diamond market has softened from the highs seen earlier this year, which is largely related to the Covid-19 in China in particular, and this has led to subdued demand and relative pricing pressure.”

He continued “there have been some unusual market conditions, with a build-up in inventory [across the market] pre-Diwali.”

The company agreed a dividend policy this year and will consider whether to pay out dividends in line with that policy, following the publication of its interim results in February 2023. Breytenbach added that there were no plans to initiate a share buy-back scheme any time in the near future.

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