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Petra seeking SA cash flow
Brendan Ryan
Posted: Wed, 06 Jul 2005
[miningmx.com] -- The drawback to investing in South Africa’s mining sector is not black economic empowerment (BEE) but rather negative investor perceptions over the delays in getting going on the ground.
That’s the view of Adonis Pouroulis - CEO of AIM-listed Petra Diamonds - which has just become one of South Africa’s largest diamond producers through the merger with ASX-listed Crown Diamonds.
Crown owned the Helam and Star diamond mines as well as 74,5% of the Messina/Dancar joint venture which are expected to produce 167,000 carats this year.
By comparison, Trans Hex produced 137,100 carats from its South African land operations in the year to end-March plus a further 113,700 carats from its two mines in Angola.
Referring to recent reports that some diamond operators have had to wait for up to 18 months for prospecting permits to be granted, Pouroulis
comments: "People will simply not invest here if they have to face those kind of delays."
Which immediately begs the question why has Petra itself invested in South Africa? Until now Petra has focussed its main efforts on Angola while the current view in London financial circles on South Africa is somewhat jaundiced.
"Cash flow," replies Pouroulis.
He explains that: "Petra was a pure exploration company. Investor sentiment in London this year has shifted away from pure exploration plays and investors are looking for companies that are actually in production. Crown’s mines are solid, cash generating assets, but Crown lacked the exploration exposure in Africa that Petra has. It’s a good fit."
Pouroulis plans to increase Petra’s South African production organically to 250,000 carats by 2008, but he makes it clear Petra’s real growth prospects lie elsewhere in Africa; specifically Angola and Sierra Leone.
"The next world-class diamond
mine like Jwaneng or Venetia will be found in the north-east of Angola. That’s why BHP Billiton is in Angola and why De Beers has returned to the country," he says.
Pouroulis is, of course, hoping that major discovery will be Petra’s Alto Cuilo project in which BHP Billiton is now Petra’s joint venture partner with the right to buy up to 75% of Petra’s stake.
He has strong support from UK-broker WH Ireland analyst James Picton who was previously a top-rated diamond analyst in South Africa before he emigrated.
Picton told last year’s Louthean Media Diamond Conference in Perth that the next major diamond mine to be developed will be Alto Cuilo.
Pouroulis has "paid his dues" in Angola. Petra started exploration work at Alto Cuilo in 1998 but was forced to curtail it when the Angolan civil war flared up again. Pouroulis maintained a presence in the country and got back in on the ground immediately the war finally ended in 2002 with the death
of former Unita leader Jonas Savimbi.
But the troubles experienced by Lev Leviev, De Beers, Trans Hex and Southern Era show that operating in Angola brings its own challenges.
The government largely dictates the terms of business and the foreign partner is restricted to a minority stake in any mine although it frequently has to put up most of the development capital.
Diamond production has to be sold through state agency Sodiam with the result that the producer can receive up to 20% less in revenues than selling the rough stones directly itself.
Petra holds only a 36% interest in the Alto Cuilo kimberlite concession and a 38% interest in the Alto Cuilo alluvial concession.
Pouroulis is guarded in his responses on these issues commenting that: "It’s difficult but it’s getting better all the time."
It seems likely Sodiam will market Alto Cuilo’s production unless BHP Billiton can convince the Angolan government that it
should do the job through its own marketing division in Antwerp.
Industry executives believe the Angolan government is changing its views on diamond marketing.
Trans Hex CEO Llewellyn Delport recently pointed to the new marketing agreement being negotiated between De Beers and the Angolan government as an example of the liberalisation of Angola’s marketing channels.
Pouroulis’ investment strategy is to make Petra the "go to" diamond play for investors in this booming sector by highlighting the limited choice of "pure" diamond plays.
He lumps diamond junior Aber with parent Rio Tinto and views his main opposition for investment dollars as consisting of Trans Hex and ASX-listed Kimberley Diamond Company (KDC). Other market commentators would add Toronto-listed Southern Era Diamonds to that list.
All these companies are tiny compared to the "gang of four" which dominate the international diamond industry controlling more than 80% of
world rough production.
These are De Beers, Rio Tinto, BHP Billiton and Alrosa. In the case of the first three the diamond earnings are heavily diluted by the other business sectors of these huge, diversified resource groups while Alrosa is owned mainly by the Russian Federation and the Republic of Sakha.
Pouroulis’ aim is to get Petra to a position where it produces 500,000 carats annually on its own account outside of the BHP Billiton JV on Alto Cuilo. He believes much of this growth will come from developments in Sierra Leone although he indicates Petra is looking at moving into other African countries as well which he will not specify at this stage.
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