Moneyweek16 Aug 2022 11:49
Petra Diamonds could prove a major moneymaker
Petra Diamonds (LSE: PDL) is a London-listed independent diamond miner. It holds 74% stakes in four production operations (three underground kimberlite mines in South Africa and a large high-volume opencast kimberlite mine in Tanzania).
These sites include the Cullinan Mine in South Africa, which was the source – in 1905 – of the world-famous Cullinan diamond. At 3,106 carats, this was the largest rough gem diamond ever found. It was cut to form the two most important gemstones in the UK’s Crown Jewels. As at 30 June 2021, Cullinan’s gross resource was 150 million carats, meaning that its life could be much longer than the current target of 2030.
Last year Petra undertook a restructuring which, along with the sale of several exceptional blue and white diamonds from Cullinan, cut net debt by around two-thirds to $228m (despite its London listing, the group reports in US dollars). The Tanzanian operation (Williamson) was temporarily closed owing to Covid-19. Meanwhile, Petra is planning to sell one of its South African sites (Koffiefontein) and has received expressions of interest from several interested parties. If a buyer is not found, the group will continue to operate the mine before starting a decommissioning and closure programme. In total, Petra’s resource base is 230 million carats.
In its trading update last month, Petra says that it “continued to deliver safe, robust operating performance into the fourth quarter… total revenue increased to $585m [amid] supportive diamond market fundamentals and a 41.5% increase in like-for-like diamond prices year-on-year... Strong free cash flow generated in [the
year to the end of June 2022]… has delivered an 82% reduction in consolidated net debt to $40.6m.”
The board is unfazed by inflation. It reckons that “relatively low fuel consumption, disciplined cost management, three-year labour agreements to June 2024 and exposure to a weaker South African rand will assist us in better absorbing these cost pressures.”
Petra is confident enough to provide forward guidance for its potential production on a mine-by-mine basis until 2025. Although there may be some volatility in the short to medium term, the company says that “structural changes to the supply and demand fundamentals in the diamond market remain unchanged”, and it expects more of the same in the future.
Petra’s market value is £196m. By contrast, sterling-equivalent sales for the year to 30 June 2022 were around £480m. On a price-to-earnings (p/e) ratio of just over six for the year to 30 June 2023, according to analysts’ forecasts compiled by the Financial Times, this little-known stock looks cheap. Against the backdrop of a fast-improving diamond market, it could prove to be a major moneymaker.
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