PETRA Diamonds CEO, Johan Dippenaar, kept his cards close to his chest regarding his firm’s intentions on the resumption of the dividend, saying it would be considered at the year-end. “As we have stated several times, it is management’s focus is to resume dividend payments and that will be under consideration with full year results,” he said.
He was responding to an analyst question during the diamond firm’s half-year results presentation in which the company reported positive share earnings of 5.27 US cents (2016: -0.72c).
Although he declined to comment on the dividend, Dippenaar raised the prospect the company would produce free cash flow in the fourth quarter of its financial year. “The company has reached an important flexion point,” he said referring to peak debt which was likely to be reached in the next few months followed by rapidly declining capex and increasing production.
Petra has guided to 5.3 million carats in diamond production by its 2019 financial year whilst output in the current financial year would be between 4.4 to 4.6 million carats. Output was 24% higher at 2 million carats for the half-year.
“The declining capex trend is firmly in place,” said Dippenaar. For the 2017 financial year, capex would be between $230m to $240m compared to $295.8m in the 2016 financial year. At $468m, net debt was due to level off. “It will peak in March and thereafter start declining as production rises and cash flow improves,” he said.
Undrawn debt facilities were unlikely to be tapped in this period. In fact, there would have to be a 15% to 20% weakening in the margin before the company would be forced to drawn down funds.
Nonetheless, this did not stop analysts from questioning whether Petra would fall foul of its debt covenants with lenders. “We are concerned that the company may be running close to covenant limits,” said Investec Securities. It flagged the strengthening rand against the dollar as “… a challenge for the group which has limited capacity to absorb any further unexpected disruptions”.
Petra reported in its earlier trading update that construction work on the new plant at its Cullinan mine in South Africa had been disrupted by contract labour stoppages.
“These issues have since been resolved and construction work resumed at the end of January 2017,” said Petra in notes to its figures today. Commissioning was expected to start towards the end of March 2017, roughly eight weeks later than planned, while ramp-up to full production would be in the fourth quarter of this year.
“It has been possible in the past to renegotiate covenants and may therefore be necessary to do so again,” added Investec.
But Dippenaar said the company would be assisted by a stronger market performance in the second half where it has four ‘sales events’ with customers compared to three in the first half. While diamond prices were guided to be flat, Dippenaar said the market “was very definitely steady” and that the company had seen “very encouraging conditions in the last tender in February”.
“We continue to forecast Petra to move into positive free cash flow territory in H2, and appears well placed to recommence dividends with its year end results,” said Edward Sterck, an analyst for BMO Capital Markets.
