Petra Diamonds Regulatory News (PDL)

19 Dec 2008 07:00

Petra Diamonds Limited

("Petra Diamonds" or "the Company" or "the Group")

Trading and exploration update

Strong trading underpins strategic move to focus on cash-generative production

Petra Diamonds, the international diamond mining group, announces the following pre-close trading update (unaudited) for the six months to December 2008 ("the Period"), as well as the results of a strategic review of its exploration activities.

Johan Dippenaar, Chief Executive Officer, comments:

"These strong trading results are as a result of the production and revenue contributions from the Cullinan and Koffiefontein mines. The Company has been transformed by the acquisition of these mines and with the Kimberley Underground and Williamson mines adding further production in the next six months we are comfortable in deciding to relinquish the capital intensive exploration projects that have historically been Petra Diamonds' focus. 

"The global financial environment requires a change in commercial approach, and that has been recognised and acted upon by the Petra Diamonds' Board. Our focus now is to continue to build cash-positive production, whilst maintaining rigorous cost control. 

"Although the diamond mining industry faces difficult times, given the current weakness in the financial and diamond markets, we believe we enter 2009 in a strong position."

Highlights

Trading update*

Gross revenue from rough diamond sales for the Period: US$48.1million, a 52% increase on the six months to 31 December 2007: US$31.7 million 

Substantial gross revenue growth mainly due to the Cullinan mine coming on stream from 16 July 2008, offset by weaker diamond prices in the latter half of the Period and reduced sales at Koffiefontein due to the release of diamond inventory in the comparable period 

A second exceptional blue stone, of 26.58 carats, has recently been recovered at Cullinan; early indications are that it is an extremely rare stone, of even better colour and clarity than the remarkable 39.19 carat blue diamond recovered at Cullinan earlier in the Period, which sold for US$8.8 million

Gross production of 528,636 carats for the Period (estimate for balance of December), a 422% increase on the six months to 31 December 2007: 101,213 carats

Group revenue** (as adjusted for Petra Diamonds' 37% interest in Cullinan) from rough diamond sales for the Period: US$31.1 million (31 December 2007: US$31.7 million) 

  Exploration

Petra Diamonds has carried out a strategic review of its exploration activities, taking into account the global weakness in financial markets and the production and revenue growth that can be achieved by investment into the Group's world class production portfolio, as compared to continued spend on exploration

Angola - Petra Diamonds has decided to withdraw from the Alto Cuilo project (effective end December 2008) and is reviewing its options with regards to the Luangue project, with the focus at Luangue being on a substantially reduced exploration spend and a highly targeted work programme

Botswana - Petra Diamonds has reviewed the exploration programme and has decided to substantially reduce both the level of activity and commensurate spend, but will not relinquish any of the licence areas of interest 

Sierra Leone - Petra Diamonds is discussing options regarding the Kono project with its joint venture partner, Stellar Diamonds Limited, the focus being on substantially reducing Petra's monthly cash spend on this advanced exploration project

This change in focus will reduce Petra's early stage exploration (Angola, Botswana) and advanced exploration (Sierra Leone) spend from approximately US$25 million per annum to approximately US$5 million per annum (effective January 2009), with the potential to reduce this by US$4 million further depending on the results of the Luangue and Kono reviews 

* The Company has completed all tenders for the Period, and therefore revenue to end December can now be reported

** Revenue as will be reflected as Petra's interim results revenue in accordance with IFRS

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About Petra Diamonds

Petra Diamonds is a rapidly growing diamond mining group, focused on the African continent. A number of recent acquisitions have established Petra Diamonds as one of the world's largest independent diamond groups by resources, with a total resource base of 265 million carats, worth US$27.3 billion (September 2008 Resource Statement). The Company's objective is to continue to grow production, developing its stature as a leading diamond producer in all of the countries in which it operates.

In South Africa, Petra Diamonds has five producing mines - Cullinan, Koffiefontein, Helam, Sedibeng and Star - and has also reached agreement to acquire, from De Beers, the Kimberley Underground mines. In Tanzania, Petra has entered into an agreement with De Beers to acquire a 75% interest in the Williamson mine. Petra Diamonds is on track to increase its annual production from 200,000 carats in the year to June 2008 to over 1 million carats in the year to June 2009. 

Petra Diamonds will only commit to working in countries which are members of the Kimberley Process and shareholders can remain assured that the Company's diamonds will only ever be 100% conflict free. Petra Diamonds is listed in London under the share code PDL and is AIM's largest diamond group by market capitalisation.

Trading update

Petra Diamonds is now the operator of five diamond mines, namely Cullinan, Koffiefontein, and the three fissure mines, Helam, Sedibeng and Star (the "Fissure Mines"). The trading update for the Period comprises results from Cullinan, Koffiefontein and the Fissure Mines.

In response to the global weakening of rough diamond prices, Petra has over recent weeks undertaken operational reviews at all of its mines, focusing on operating costs and efficiencies and capital expenditure ("Capex"). Capex plans have been adjusted appropriately, and the Company is confident that (other than Star and Helam, which may need to be placed onto care and maintenance), the mines will be cash flow positive at current rough diamond prices.

Cullinan

The Cullinan mine is one of the world's most celebrated diamond mines, having produced some of the most spectacular diamonds ever seen, including the Cullinan, the largest ever gem diamond at 3,106 carats. It is also renowned as the world's only significant source of very valuable blue diamonds. Petra Diamonds took over management of the mine in July 2008 and operational results to date are highly encouraging.

In addition to the normal run of mine ("ROM") white diamonds, the Company previously announced the recovery of a remarkable 39.19 carat blue stone, which Petra Diamonds sold for US$8.8 million in October 2008, boding well for the future production of 'Cullinan blues'.

Petra Diamonds is now pleased to announce the recent recovery of a second exceptional blue stone at Cullinan. Early indications are that the 26.58 carat stone is an extremely rare discovery, of even better colour and clarity than the 39.19 carat blue stone. Petra Diamonds will announce how and where the stone is to be sold in 2009.

The handover of operations from De Beers to Petra Diamonds ran smoothly, with no unforeseen issues. Ore delivery is running ahead of expectation and production is therefore ahead of schedule, with 450,129 carats produced for the Period (estimate to end December) and 950,000 carats targeted for the financial year to June 2009. The total number of diamonds sold for the Period was 294,030 carats, giving US$26.9 million in revenue. A significant level of closing stock (156,000 carats) was built up from production after the commencement of the last tender cycle for the Period, and is not due to the Company withholding diamonds for sale in the weak diamond market.

Planning for mining of the BA West block (traditionally the producer of blues and large D flawless diamonds) is well advanced. Petra Diamonds is in the process of making major changes to the processing of ore at Cullinan, with the emphasis on the recovery of larger, 'special' diamonds. In the main plant, many alterations have already been effected and these changes have resulted in maintaining the ROM grade at 40.5 carats per hundred tones ("cpht"). The Company has also achieved an average value per carat for the Period of US$91, a significant improvement on original expectations for the mine in the region of US$75 per carat.

One of the key changes will be to move away from using grease as the sole recovery technique, and the first two Flow Sort diamond recovery machines (from a total 17) will be commissioned shortly. The next six months are expected to see the installation of the remaining 15, as well as the commissioning of the Large Diamond Recovery plant. These changes should further enhance the value of diamonds recovered. Alterations in the main plant will be ongoing for at least another two years.

Alterations in the optical sorting plant ("OSP") have resulted in the increase of the recovered grade from the pre-Petra era of 29 cpht to in excess of 70 cpht. Further alterations are now envisaged to increase the OSP feed rate significantly.

Koffiefontein

At Koffiefontein, 37,962 carats were produced for the Period at an average price of US$342. This price is considerably lower than the US$408 achieved for the corresponding period to 31 December 2007 and reflects the weakening in diamond prices experienced over the last three months. However it still compares very favourably against a world average in the region of US$90 per carat.

The number of carats sold for the Period was reduced to 33,804 (from 46,937 carats for the corresponding period to 31 December 2007) giving US$11.6 million in revenue. This decrease was due to the release of diamond inventory in the comparable period which had been built up when Petra Diamonds was operating the mine under care and maintenance before the acquisition completed.

Petra Diamonds has made a number of changes within the plant at Koffiefontein and is now in a position to start increasing the amount of ore which can be processed. This is significant as the Company can now explore options for augmenting production, such as the potential to increase tonnages from underground or to extract ore from the satellite Ebenheazer pipe. In addition, the sampling plant at Koffiefontein is now being commissioned and tailings production will commence next year.

The Fissure Mines

Petra Diamonds produced 37,622 carats at the Fissure Mines for the Period and sold 39,398 carats, generating revenue of US$9.5 million. These mines regularly produce diamonds of exceptional quality and during the Period a 126.69 carat diamond sold for US$5.25 million.

The average value per carat achieved for the Period was US$240, in comparison to US$182 in the correspondent period to 31 December 2007. This reflects the Company's decision to refocus attention at the Fissure Mines from volume of carats to optimisation of revenues by effecting improvements to grade and the final recovery, combined with the lower amount of low value Helam diamonds (approximately US$ 80 goods) sold in the Period.

Production was lower than the corresponding period to 31 December 2007, primarily due to a strike at the Helam mine, as well as a restructuring programme. This production shortfall has therefore affected carat sales and revenue, although the Helam goods are the least valuable of Petra's production, so the effect is largely mitigated in terms of overall revenues.

Cost overview - South African operations

Operating costs were maintained at acceptable levels across the mining operations. Although above inflation increases were experienced in electricity, fuel and steel, these increases were largely offset by savings in other areas due to cost and production efficiencies identified and implemented. Further cost efficiency improvements are continuously being investigated.

Kimberley Underground 

The Company expects the acquisition of the Kimberley Underground mines to complete early in 2009. Petra Diamonds has been operating this mine under care and maintenance since September 2007, with ore being stockpiled for processing once the acquisition is finalised and plant construction completed. Whilst completion of this acquisition has taken longer than anticipated, shareholders should not be concerned. It has been a complicated transaction to complete due to the specifics of the mining right conversions and related matters, but the care and maintenance period is allowing Petra (as it did at Koffiefontein) to be fully prepared to ramp up production from the point of completion. 

Williamson

The acquisition of a 75% interest in the Williamson mine is expected to complete shortly. The Williamson acquisition marks Petra's entry into stable and investor-friendly Tanzania, further diversifying the Group's geographical spread across Africa.

The Period totals and breakdown per mine is given below.

Combined - Cullinan (37% interest only consolidated), Koffiefontein, Fissure mines and Kono 

*** Gross revenue, 100% Cullinan, US$48.14 million

Cullinan (100% numbers) - South Africa

Koffiefontein - South Africa

Fissure mines - South Africa

  Kono (advanced exploration project in Sierra Leone)

Exploration update

Petra Diamonds is a rapidly growing diamond mining group. Recent acquisitions have established Petra Diamonds as one of the world's largest independent diamond groups, with a total resource base of 265 million carats, worth some US$27.3 billion (September 2008 Resource Statement). The Company's objective is to bring this world-class resource base to account and the Group is on track to produce over 1 million carats in the full year to June 2009.

Having established Petra Diamonds as a diamond group of global significance, the Board has carried out a strategic review of the Group's exploration activities, taking into account the global weakness in financial markets, the appropriate risk-weighted allocation of capital across Petra's assets, and the production and revenue growth that can be achieved by investment into the Group's world class production portfolio, as compared to continued spend on early stage exploration. 

Alto Cuilo

The Group's highest area of exploration spend is Angola, where the Company had previously budgeted an annual spend in the region of US$20 million for the Alto Cuilo and Luangue projects.

Petra Diamonds has been sole funding exploration at Alto Cuilo since 1 April 2008, following BHP Billiton's decision to withdraw from the Alto Cuilo Joint Venture. The Company decided at the time of BHP Billiton's withdrawal to continue at Alto Cuilo, as Petra was of the opinion that Alto Cuilo has the potential to host one or more diamond deposits that would add substantial value to Petra Diamonds' portfolio. The Company has focused since May on specific areas of interest, being the near-surface crater rim resedimented volcaniclastic kimberlite ("RVK") deposits where highly encouraging exploration results had been recorded. 

Petra Diamonds announced at the time of BHP Billiton's withdrawal that it would monitor the ongoing exploration results with regards to further investment, and has now decided, based on the ongoing exploration results and global weakness in financial markets, to withdraw from the Alto Cuilo project. Care and maintenance is not an option that is permissible under the Angolan contractual conditions, so Petra Diamonds has therefore decided that it should withdraw completely and its interest in Alto Cuilo will now revert (at no cost) to Endiama.

As all exploration costs related to Alto Cuilo have previously been expensed as incurred, the Company does not expect any significant net withdrawal costs at Alto Cuilo post 31 December. 

Luangue

Petra Diamonds is reviewing the options with regards to the Luangue project, which lies contiguous to the north of Alto Cuilo. If the Company retains its exposure to Luangue, the focus will be on a substantially reduced exploration spend and a highly targeted work programme.

With effect from 1 May 2008, following BHP Billiton's decision to withdraw from the Luangue Joint Venture, Petra Diamonds has been operating and funding the development of Luangue. The work programme has since been focused on specific areas of interest highlighted by the results of the low-level aeromagnetic survey, where 138 targets had been identified.

A number of the targets are in the north of the Luangue project area, including target L120 at 215 hectares (geophysically estimated surface area). This target lies in the north east corner of the Luangue concession, being just 35 kilometres to the west of the major Catoca diamond mine, which reported revenue of US$451.4 million for 2007. As at Alto Cuilo, the work programme at Luangue is focused on proving up the potential of enriched near-surface RVK deposits, which have been shown by exploration at Alto Cuilo to be the areas most likely to host economic mineralisation. 

Should Petra Diamonds decide to withdraw from Luangue, the Company will bear a substantial write-down on its investment in Frannor Investments and Finance Limited, the company it purchased in March 2007 and whose sole interest was its interest in the Luangue project. Petra Diamonds will provide more information once the review is complete and an appropriate decision made. 

Botswana

In Botswana, Petra Diamonds has reduced the level of exploration activity and commensurate spend, but the Company will not relinquish any licence areas of interest and remains committed to operation in the country. Botswana offers an exceptional basis for exploration in that it ranks highly with regards to diamond prospectivity, yet it ranks very low with regards to operating costs.

Kono project

In Sierra Leone, Petra Diamonds is discussing options regarding the Kono project with its joint venture partner, Stellar Diamonds Limited, the focus again being on substantially reducing Petra's monthly cash spend on this project. The Company has already put one shaft on care and maintenance in order to significantly scale down activity.

This change in exploration focus will reduce Petra Diamonds' exploration spend from approximately US$25 million per annum to approximately US$5 million per annum, effective from January 2009. There is also the potential to reduce this spend still further by some US$4 million depending on the results of the Luangue and Kono reviews.

~ Ends ~