Member Info for Splendor

Excuse spelling mistakes. Writing on a small screen.

Thanks for input sr123, I guess I am basically looking for a basis to balance my expectations here.
In a simple way, the question of PDL credit worthiness sums up to: When will the accumulated net income equal net debt (currently 290m) ?
Is 80m usd a fair guess for net income for FY21 ? Further upside depends on number of new high quality gems (10-50m), increased production levels at Finch (10-20m), Tanzania VAT and packet solved (20-40m), williamson case dismissed or settled (rusk management). All of which seem realistic to me.
If next year is similar to FY21, the balanced state I am looking forward to might materialise as soon as 2024...
I hope this development will enable PDL sp to correct itself fully to benchmark level, as an unleveraged company based on ebitda projections similar to what you mention maling a future sp of 8-10p as fair a guess as any...

Hi Holygrail
My purpose is not to 'knock the price down', nor am I averse to looking at PDL financials and critical succes factors.
I am trying to contribute to an informed market discussion to create a sustainable share price development, and have done so ever since I started as a member here a few weeks ago.
So, if you do not want awareness about PDL risk factors, my posts might not be relevant to you.
"The only way is up" is a nice pop song, but I do not find such assertions credible without qualifying information.
In this market it pays to be diligent and aware of both pros and cons.
As stated before, I am long, with a reasonable exposure to PDL myself.

Hi Holygrail
My purpose is not to 'knock the price down', nor am I averse to looking at PDL financials and critical succes factors.
I am trying to contribute to an informed market discussion to create a sustainable share price development, and have done so ever since I started as a member here a few weeks ago.
So, if you do not want awareness about PDL risk factors, my posts might not be relevant to you.
As stated before, I am long, with a reasonable exposure to PDL myself.

I have one public source at simplywall.st projecting these numbers for the Present Value of the future free cashflow (Discounted @ 12.92%)
2021: 85,02
2022: 57,56
2023: 60,22
2024: 59,19
2025: 56,62
2026: 53,1
2027: 49,11
2028: 44,97
2029: 40,89
2030: 37

With a total gross debt around 450 M USD (net 290) at about 12% interest gives an annual interest payment of about 50M USD (even though most of these interest payments are not payable until two years from now due to the new covenants, they are still to be paid).

So, in this picture, PDL walks the line and just about keeps the balance intact. It would be nice with a better credit profile!

To conclude, it all comes down to growing revenue by meeting production targets and enjoy the improving market conditions, SO THAT PDL can repay its debts within the next 2-3 years in order to reduce interest payments to a level where the EBIT/interest ratio is sustainably above 1.5

A brief note on credit ratings and ratios:
According to Moodys, PDL is currently "of poor standing and are subject to very high credit risk". This is mostly based on the low EBIT/interest ratio in previous years, when PDL had unsustainably large amount of debts. Looking ahead, Moodys finds PDL to have a positive outlook though.

But, in the years to come, what do we know about the development of the EBIT/interest ratio of PDL?
Answering this question is important, since a sustainable ratio of at least 1.5 is the main factor for Moodys decision to upgrade PDL credit rating to investment grade (to B3 from Caa1). Obviously, the demand would get going for real once PDL is seen as an investment grade paper, with high FCF vs. high credit risk... (The other factors are "meaningful recovery in diamond prices and on-target production levels such that Petra is able to fund its medium-term investment plans through operational cash flows").

Now, I know some will say PDL will be debt free in two years, and I believe as much - but do we have numbers to corroborate that?

Please excuse these long reads...
But I cannot help thinking: Imagine we get past the short term resistance at 1.6, the mid term at 1.8, and get to the 3.4p level - what then?
Like all other resistance levels it is a matter of perspective whether they hold or break: Long term vs. short term. Risk vs. reward. etc. Whose perspective of PDLs future gets to decide the way forward?
The primary share holders obviously. The 91%ers who swapped a large part of their notes for equity might be selling at the 3.4 level IF they hold the perspective: I can now get all my money back with no loss, no risk, free to invest somewhere else...

HOWEVER, such financial institutions deal in debt (remember the 2009 crisis was all about junk bonds being sold and packaged with higher grade debts). You can buy debt in the form of junk bonds at 10% the original loan amount, or sometimes pay more than 100% for the bond holder rights like e.g. Danish state bonds currently. Therefore, the 100% safe return of capital may not play such a large part in the 91% ers perspective as they are "dealers in debt".
My guess is that some will sell at 3.4, but most will either gradually ease out before then or hold longer term, thereby shifting perspective from a loan-business to an equity investment business. One could argue that this shift of perspective has already happened for most, since very few shares were sold after 10th March i.e. less than 10% of the shares were sold right after the 9 B new shares were released... If you do not believe PDL will make a turn araound, it makes sense to sell your debt at 50% value around SP 1.5p - but 90% did NOT do it. So, if they believe in the PDL turn-around, it would make since to hold on to their shares all the way to the 5-8 p level as a minimum. That is what I would do anyway,-) errata: will do.

Thinking this through, we are in new territory after 10th March. Equity value was all but wiped out. The new capital came from the bond holders, and their shift of perspective signals a completely new framework for PDL financial analysis.
It is like PDL was reborn as a new company with a significant, but not unreasonable, amount of debt. And these institutional shareholders work together on their long term interest, with a shared rep on the board, which happen to be in the best interests of the company as well.
As a (relatively) small stakes private investor, this is like having a sponsor for your investment. In this light, I would expect to see a slow steady rise (or fall) based on the actual numbers, with much less volatility than previously.
Reiterating what someone wrote previously: Have a good one Petrarians.

Jmidland: it looks like it.
Last I checked the mid-tier in India it was running low on inventory and the glut was over.
Effect seen here : http://www.paulzimnisky.com/roughdiamondindex

Agree with SR123 and FireAnt, the 3,4 level is of interest once we get there; and the 200day MA, which is hovering just above the current resistance level at 1,6p, will be an important line to cross...
I currently assume that 1) there is no interest payments on the notes until after two years 2) net debt sits at 290M$ 3) Earnings seem to be adding about 50 M$ to cash holdings every three months 4) plenty of good news in the pipeline with the parcel, VAT, Finsch productivity normalised, price levels and demand increasing etc.
So, unless PDL is hit by extraordinary events, nothing is holding PDL back from paying its debts with interest within the next two years. Furthermore, in a simple cashflow analysis to determine the companys worth, the enterprise value would then increase to around 1-1.5B$, which with no debt would equal SP 6-10p in my analysis.
Agreed, it seems too good to be true.
So, what am I missing?

Yes, it's good news too.
Though Q3 production is down about 20% on a group level, Q3 revenue is still up 16% due to much better prices.
So, when they get the waste cleared in Finsch etc. and production increases again, together with the VAT and the diamond parcel in Tanzania getting cleared, I would expect to see further momentum on the positive numbers just reported here.

Consequently, the current consolidated net debt (of 290M$) does not look like much of a problem for the balance sheet anymore. I also note, that the CEO used a stronger language about the financially "solid platform" for growth this time, "Post completion of the capital restructuring, Petra is in a far stronger position, with a solid platform for future growth and development. Production during the period reflected continued out-performance from Cullinan, with remedial action to address waste ingress at Finsch delayed as a result of excessive rainfall levels, which also negatively impacted Koffiefontein, whilst the Williamson mine remains on care and maintenance. We expect to see improved performance from Finsch as underground water ingress reduces and the remediation steps are implemented".

Bottom line: PDL looks increasingly likely to fulfil the projection of a FY results 2023 being net cash positive. However, I would like to see the other mines back in full production mode soon...

"Highlights
Q3 revenue up 16% to US$106.0m (Q3 FY 2020: US$91.3m), as prices recovered to pre-COVID-19 levels 9M revenue of US$284.2m, in-line with prior year (9M FY 2020: US$285.2m) Operations: Q3 production of 704,498 carats (Q3 2020: 932,456 carats) and 9M production of 2,445,360 carats (9M FY 2020: 3,002,697 carats) Post period end an exceptional 11.82 carat blue stone was sold for US$9.5m and an exceptional 39.34 carat blue stone was recovered, to be sold via special tender…

Diamond Sales
Q3 revenue increased 16% to US$106.0m (Q3 FY 2020: US$91.3m). This increase was driven by improved pricing, the sale of a 299.3 carat exceptional diamond in February for US$12.2m and the carryover of 382 Kcts, of mostly lower value stock from H1 FY 2021, sold during January 2021. On a like for like basis, realised diamond prices increased ca.12% from those achieved in H1 FY 2021.
Post the period end, an exceptional 11.82 carat blue stone, recovered during the period from the Cullinan mine, was sold for US$9.5m. The Company also announced the recovery of an exceptional 39.34 carat blue stone, also from the Cullinan mine, which will be sold via a special tender….

Corporate and Financial
The recapitalisation of the Group was completed during the period, significantly strengthening the balance sheet, with consolidated net debt reducing to US$290.7m, from US$700.4m at the end of December 2020.
Petra Diamonds had unrestricted cash of US$139.8m, available undrawn banking facilities of US$10.8m and diamond inventory valued at US$75.5m as at 31 March 2021. At 31 December 2020, unrestricted cash was US$92.4m, the Company had fully drawn bank facilities and the diamond inventory was valued at US$105.0m. "

@Scoobydoo321: I do not have special insights, but just read a few news items... So far, I guess this is a case of bad press... about a legal case and criticism from the UK watchdog RAID about PDLs hired guards shooting with metal ammo, which under the cirumstances would be excessive use of force and a violation of international rights. PDL say they take the claims seriously, and have started a serious investigation. The guards in question have been removed, and a new guard company hired in. I guess the case will be settled outside court, if it does not disappear by itself, since it is not PDL that has violated rules but the independent guard company. The trespassers who were digging diamonds from the PDL mine area also have rights e.g. not to be shot that should be respected, but PDL also has a duty to protect its property. The question is whether the removals were done with excessive use of force or not? and if so, who is to blame? PDL management say they have given clear instructions to only use legal and proper means to remove unwanted trespassers, and therefore the guards must answer for themselves, but if it turns out that PDL has actually given misleading information about the way management instructed the guard company, it could become a more serious problem for PDL... We will have to wait and see.

SR123: Well, I do not follow them to get the truth about the company numbers, since I expect to get that information from the PDL itself. I assume they get their numbers from other sourcees e.g. different analysts... and then use standard cashflow analysis to calculate NPVs and fair share value etc.
I interpret the dramatic back and forth as a sign that a large movement in public perception might be underway.
The very different perspectives seem to be based on either the past years' performance or analysts projected future scenarios. If PDL is about to do a full turn-around of this magnitude this controversy is actually to be expected, so I am not worried by it.
Fair enough if you take your point of departure in Peel Hunt, but currently, I am interested in signs of WHEN the wider recognition of the assumptions we (including Peel) build our opinion on will gain traction in the market. Therefore, I made a brief note about it here.
Have a nice weekend all - maybe even 'cautiously but irreversibly raising a pint of beer to your lips' .-)

Today Simplywall.st changed their estimate of fair value back to 2p from 8p.
Hence my "for what it is worth", since they do not know how to make up their minds about this question...
Therefore, we will have to wait for the company reports to set the record straight: Q3 sales status coming up on Tuesday 20th April, and then FY21 results expected in november.

Agreed, it is just a nice little confirmation, to see our assumptions gain traction in the wider market community...

I like building SCENARIOS, and see a possible three stage rally for PDL coming up:
1) The market realises that PDL is no longer in crisis mode financially after the restructuring and, furthermore, that the diamond market is functioning after the covid shock - this will get us past the initial blocking levels at 2-3p
2) The market realises that PDL will have very good cashflow coming in for the next ten years (assuming we get back to business as usual) - this will get us up to 5-8p
3) The market realises that PDL has paid off all debts, and is net cash positive. With a realistic 250M GBP EBITDA and a market cap of say 1,5 B GBP and no leverage - this will get us past the 10p per share level

Now, the analytical follow-up question is: WHAT needs to happen for this scenario to play out?
I think step 1 is already underway, and step 2 needs confirmation from the sales results and FY reports 2021 and maybe also 2022. Step three is of another magnitude and will as a minimum need good investment grade credit ratings on top of the other requirements mentioned.

Unfortunately, I do not know WHEN this will all happen... However, I find it safe to assume that the market will change its perception in the order of the three steps mentioned. So, when step one is done, we can move to step two, and from there to step three. I hope it will all happen sooner rather than later ,-)

PS. To be a prudent invrstor also requires building a worst case scenario. Here goes.
If all of the above goes haywire I see this scenario before me:
0) PDL just about manages to stay operational for the coming 3-5 years, at which time it will need to refinance its debt with new bonds - and the share price stays as depressed as it is now... My previous worst case, that the debtors take full control of the company, seems too far fetched now that they have become 91% shareholders themselves.

I might add, that the scenarios express my personal opinion built on public available information only - for better and worse. So, do your own research, and I will be happy for anyone to prove me wrong, since I would like to test the hypotheses presented here...

For what it is worth, this website just upgraded fair value for PDL from 1.8p to 8p yesterday based on an upgraded 10y projection of their cashflow analysis: https://simplywall.st/stocks/gb/materials/lse-pdl/petra-diamonds-shares
They have not yet changed the executive summary, but in chapter 3 about valuation, you can see what I mean.
I read that as a sign that the market is increasingly becoming of aware of PDLs potential to become a great business...
What is your opinion on this?

Let me be more precise: It is enough for the market to believe that the best case scenario will become true for the share price to react correspondingly - then reality can catch-up later...

SR123: same good wishes to you.

As a best case scenario 2024+, of course I have also done the numbers for a best of breed diamond miner with 500-700 M GBP sales and the associated 250-350M GBP and zero debt leverage - the market cap and dividend for such a player look absolutely phenomenal! A market cap of 1 - 1,5 B GBP would not surprise me at all and it would be without breaking sweat over the benchmark numbers... if PDL becomes such a company, the share price will correspondingly explode with factor 5-10 from curent levels. Also, if we then get a dividend of say 15% of market cap, which is not that unusual, it will be time for my pension ;-)

For now, it is up to the market to prove this scenario wrong or right. Until then, I will hold my shares in cautious optimistic anticipation...

@SR123: of course I hope you are right. But I need market confirmation to cash in, and that will only happen full steam once the credit rating is again officially investment grade, the debts are repaid and the net cash position achieved. But by then there is not much to talk about, since the value will be evident to everybody;-)

It is always prudent to test your assumptions with others when investing, since I have burned myself a few times when getting too optimistic or stubborn...

Right now, there seems to be a market hesitancy based on the unknowns like 1) what is the trigger level for the major institutional 91% stakeholders to sell? 3,4 is reasonable guess, but they might also be ready to accept less if their rationale for the restructuring was that the alternative was zero. Naturally, if there are further large sell-offs like to 750 million shares sold in a few days just after the restructuring this might impact sharevalue downwards depending on the market demand. I am encouraged by the fact that the market as managed to absorb the immediate sell-off fast, which I read as a sign that other institutional investors (apart from little me) are ready to pick up, where others leave PDL shares behind... now the volumes are much much smaller, and I am waiting for new PDL signals to the market - next milestone 20th april coming up!

Stay agile and take care.