PETRA Diamonds forecast production in its 2018 financial year of between 4.8 to five million carats despite under shooting in the year under review – a turn of events that has raised concerns about the UK-listed firm’s liquidity.
Johan Dippenaar, CEO of Petra, told Miningmx in June that the group’s lenders had been reassured that a convenant related to production ratio levels would not be triggered by the slower-than-guided production build-up. Production in 2017 was four million carats, an 8% year-on-year improvement.
“Ours is not a liquidity related covenant and it only triggers in September. We are flagging it now because we didn’t want any speculations about it,” said Dippenaar in an interview today. “We are confident lenders will be comforted.”
Petra Diamonds is nearing the end of a profound and aggressive growth plan which is expected to take production to at as much as 5.3 million carats in the firm’s 2019 financial year. However, this has required heavy capital expenditure, but Dippenaar said in a trading statement today that capex, estimated to be $168m in the 2018 financial year, was now formally on a declining trend.
‘Operational capex’ in the 2017 financial year, which the trading update glosses, totalled $255.1m which was, in turn, lower than the $295.8m spend incurred in the 2016 financial year.
Despite the declining capex trend, it all gets real for Petra Diamonds in terms of net debt which stood at $554.4m as of June 30 up from $382.8m recorded on June 30 in 2016. “With capex now on a declining trend, debt levels will start to fall in FY 2018 and the company expects to become free cashflow positive during FY 2018,” it said.
BMO Capital Markets said in a note, however, that capex for 2018 had come in $44m more than forecast while 2019 capex would also be higher than previous guidance. Dippenaar laughed off the criticism: “In a capital programme of $1.45bn, it now becomes $1.5bn because of the change in the value of the rand. It could be lower again in another year.
“I think once people see how we’ve done over the years, once the mines are producing to capacity, they will probably conclude that we haven’t done a bad job,” he said.
Petra said it would eat into net debt by improving the value of its goods, especially as it mined production from a ramp-up project at Cullinan mine, near Pretoria. “FY 2018 production is expected to have a marked increase in the proportion of higher value ROM carat production (ca. 85%) (FY 2017: 71%), as opposed to lower value tailings carat production. This is expected to lead to an improved product mix resulting in a higher average value per carat,” it said.
Petra has said in the past that it was hoping to become a dividend payer. Asked when a policy might be declared in the medium-term, Dippenaar was reticent: “I think I’ll keep my trap shut about that one,” he said.
All of Petra’s diamond mines are located in South Africa except for its Williamson mine which is in Tanzania, a country whose mining industry was subject to quick-fire regulatory change earlier this month. The government has, for instance, lifted royalties on revenues to 6% from 4% and imposed a 1% clearing fee on mineral exports. It has also called for a free-carry 16% stake in certain companies with the right to buy beyond that up to a threshold of 50% of the asset.
Said Dippenaar: “The way I understand the regulatory changes in Tanzania is that the government wants to tackle those mining firms that had a special dispensation before they became producers. On that front, we inherited a mine that already had government as a 25% partner. We also inherited a mine where we paid tax and export duty”.
