[miningmx.com] – UK-listed Petra Diamonds is one of the few junior to mid-tier operators to have made a success of digging for diamonds.
In fact, there are many more examples of junior diamond miners that haven’t cut the mustard. It’s not an easy business in which to gain a significant presence, a view perhaps best demonstrated by the decision of both BHP Billiton and Rio Tinto to exit the industry.
Petra, however, has been a steady performer. It produced third quarter production of 647,000 carats, taking output in the year to date to 1.895 million carats – enough to put it on course for annual production of 2.65 million carats, according to Dippenaar.
Analysts are somewhat sceptical about the year-end target being met. According to UK stockbroker, Numis Securities, Petra Diamonds will need a big fourth quarter performance of some 755,000 carats to achieve that.
“We believe that it will be under pressure to meet this and continue to forecast a more conservative 2.6 million carats,’ it said in a note.
Nonetheless, Petra Diamonds has not had to surprise investors much bar, perhaps, its failure recently to sell its marginal “fissure’ mines in favour of rationalising them and downscaling.
Petra’s success is based on its relationship with De Beers which has sold most of its mature diamond mines to Petra, and given the firm a broad asset base. “With growing diversity of assets, the company is not as exposed to under-performance at any one site adding greater confidence in the business model,’ said Investec Securities.
It’s one of the reasons why Petra CEO, Johan Dippenaar, has no interest in bidding for the assets Rio Tinto and BHP Billiton has put on the block. Petra understands Africa, works in a single time zone and, anyway, has enough to be getting on with for the time being.
Turnover has grown to $400m from $17m in 2005 following a spate of acquisitions which makes Petra a highly capital hungry company.
So far investors have backed the strategy but a time will come when they want to see capital appreciation in the stock convert to profit-making and even dividends.
“While they talk a good talk, one cannot get excited until they convert increasing production into cash flow, earnings and dividends,’ said Whitman Howard, a UK stockbroker. “The Q3 numbers show little evidence of this happening, a $1.4m reduction in net debt is not a lot,’ it added.
“By the 2015 financial year we will have funded our capital programme and will have surplus cash,’ says Dippenaar. “At that time it will be appropriate to have a dividend policy in place,’ he says.
Right now, it’s all about funding the growth out of the acquisitions which include the Cullinan, Finsch, Koffiefontein and Kimberley underground operations. It all amounts to $565m in capital spend over three years.
At least it looks as if the market will support Petra. Diamond prices have been depressed recently, and given to volatile spats. But conditions are slowly improving while the long-term prognosis remains promising.
“There’s definitely a firmer trend in the market and we’re seeing it continue,’ says Dippenaar. “In the medium to long-term, the fundamentals are extremely strong. People aren’t finding new diamond sources while the markets are growing particularly strongly, especially in Asia,’ he says.
