Petra soothes debt fears as firm moves into peak funding

PETRA Diamonds reassured analysts that even in the event of a 15% weakening in the price of rough diamonds, the company would not fall foul of its debt covenants.

“On the covenants, we have banked two tenders and seen stable prices,” said Jacques Breytenbach, CFO for Petra Diamonds in a first quarter conference call today. “Prices would have to come down 15% or more before threatening the maintenance covenants at year-end,” he added.

Petra reported a 30% increase in diamond production for the first quarter, which ended on September 30, of the 2017 financial year to just under 1.1 million carats. This was owing to higher output at its Cullinan and Koffiefontein mines as well as a contribution from its Kimberley Ekapa operations.

However, net debt increased to $464m up from $384.8m in the previous June quarter. Although the company has unrestricted cash of $30m and undrawn banking facilities of $70m, this represents a high watermark in terms of indebtedness.

“We are in a period of peak funding levels,” said Breytenbach. “But we remain well funded to complete all our projects. We are comfortable,” he added.

Petra Diamonds has been engaged in a long-term expansion programme to reach five million carats in production a year with output of between 4.4 and 4.7 million carats forecast for the current year. It was on course to meet that target.

Perhaps more importantly, the company expects to be cash flow positive in the second half of the financial year. “We expect an improved debt profile in line with improved operational cash flows and decreased capital spend,” said Breytenbach.

“The build-up of production as a result of the investment programme at Cullinan and Finsch is expected to make Petra cash-flow positive from H2 of the 2017 financial year,” said SP Angel in a note. “Meanwhile the diamond market appears to be stabilising,” it added.

Said Johan Dippenaar, CEO of Petra Diamonds: “We earned $66.4m from 574,000 carats sold in second tender after close of first quarter. Prices were flat on like-for-like basis on the second half of the 2016 financial year. The final tender for the first half is scheduled for December; we are pleased to note the stable market at the moment”.

“Liquidity is reasonable but debt levels are still high and we hope to start to see this come down from Q3,” said Investec Securities which added that it expected net debt to conclude at $445m.

Operationally, Petra was edging towards the completion of a new plant at Cullinan which would enable it to retire the current facility that it had “kept going” into 50 years of operation.

Undiluted ore following new cave developments at its Cullinan and Finsch mines would also improve the run of mine grades derived from the operations and increase the average selling prices of goods.

The only major drawback for the company was the fundamental setback of mine fatalities. Four miners lost their lives on Petra mines – three at Williamson and one at Cullinan – during the period. Dippenaar said that the company would relook at its safety protocols across the entire group.

“Petra’s focus remains on the health and safety of our workforce, maintenance of a healthy balance sheet, the tight control of costs and the successful roll-out of our expansion plans, which will continue to deliver increased contributions from higher quality production areas,” said Dippenaar in an earlier statement.