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Petra's diamond strategy takes shape
Allan Seccombe
Posted: Mon, 27 Nov 2006

[miningmx.com] -- PETRA DIAMONDS will cut and polish its own diamonds in South Africa as part of a drive to push up revenue at a time when African governments are pushing for more value to be added to raw materials produced in their countries.

Petra, listed on London’s AIM and the Australian stock exchange, has bought Calibrated Diamonds Investment Holdings (CDIH) for $2.3m funded out of cash holdings. It will invest a further $4m over the next two years to build up production capacity.

“CDIH is a very small business that has developed a good idea and we are now going to put in money and develop it,” Petra CEO Johan Dippenaar told Miningmx.
a lot more flexibility to beneficiate diamonds
“It’s not like it’s a cutting factory that is doing thousands of carats. It’s just a concept that was developed and that we are now going to put capital into to expand,” he said.

As CDIH reaches certain consistent production targets, Petra will issue warrants over 750,000 Petra shares at an exercise price of 114.5 pence each or an equivalent amount in cash by way of further payment.

Dippenaar was reluctant to discuss throughput, production targets and costs, saying he was wary of raising expectations too high and it is still early in setting the process up to reach commercial production.

Dippenaar was very clear on the strategy behind the purchase, saying the technology would be rolled out in the other African countries – Angola, Botswana and Sierra Leone -- where Petra is looking to establish diamond mines.

Enormous value is added to rough diamonds by cutting them and polishing them ahead of putting them into jewellery.

South Africa has been leading the charge of African countries demanding that producers of raw minerals add value to those products in the country they were mined so as to create extra revenue by exporting higher value products, and to create jobs in the downstream processes.

South Africa unveiled a proposed Diamond Export Levy Bill in October designed to keep diamonds in the country and encourage a beneficiation industry.

The Bill proposes a 5% levy on all the value of all rough diamond exports. Importing diamonds will bring credits to a producer that can be offset against the export duty.

Petra is not alone in adopting the strategy to beneficiate diamonds.

Namakwa Diamonds, which will be listed soon, possibly in London, is also wanting to be a more vertically integrated diamond producer than just a traditional diamond mining company, said Nico Kruger.

The global rough diamond market is worth roughly $13bn, but his value increases by some 50% to $19bn in the wholesale polished market. Other estimates put the rough wholesale market at $14bn, the polished sales market at $17bn, rising dramatically to $63bn at the polished dealers level.

Kruger won't reveal Namakwa Diamonds' annual production ahead of the IPO, which is being banked by CitiGroup. But he says the company also has Angolan concessions it hopes to build into a mine.
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Petra produced 175,000 carats in the financial year to end-June 2006 in South Africa and will grow this to 300,000 carats by the start of financial year 2009. Part of this growth will come from an empowerment transaction that will give Petra the majority stake in processing De Beers’ Koffiefontein tailings.

The steady production of rough diamonds of a certain quality means Petra will more easily be able enter into supply agreements, Dippenaar said.

Petra would be amenable to cutting other companies’ rough diamonds if there is spare capacity, he said.

The “technology assisted” process that CDIH has developed ensures a steady, high-quality finish. “I can’t make claims about where it will fit in the cost profile, but I know it is not out of the park. It will be comparable to other conventional cost profiles.”

Petra will have “flexibility” when it comes to the size of diamonds that it can cut, he said.

One of the arguments raised in discussions of the difficulty to grow the South African diamond and cutting industry is that it is cheaper to cut and polish smaller rough diamonds in centres like India.

“I don’t want to say it will for sure solve this argument about small diamonds, but it will suffice to say at the moment we will have a lot more flexibility to beneficiate diamonds in the smaller size ranges,” Dippenaar said.