Petra’s 425 carat Cullinan recovery a ray of light, sparks share price rally

THE discovery of a large 425 carat diamond at Petra Diamonds’ Cullinan mine in South Africa was today described as a positive financial boost for the UK listed firm, and that it would help offset the impact of poor pricing for low quality diamonds.

Petra Diamonds announced the recovery of a D colour type II gem quality diamond which it said: “… further demonstrates the prevalence of these types of stones in the Cullinan orebody as well as the ability of the mine’s plant to recover the full spectrum of diamonds”. The stone would be sold in the fourth quarter of Petra’s 2019 financial year, it added.

Shares in the company gained 8% on the London Stock Exchange which helped to offset at least some of the losses the stock has sustained since January. Petra’s valuation has more than halved in that period starting with a report of lower-than-expected revenue of $207.1m, largely related to underwhelming recoveries at Cullinan part of which is being ramped up.

Rough diamond prices had reduced 4% at the interim stage compared to the second half of the firm’s 2018 financial year due to “… usual seasonal weakness”, Petra said at the time. The product mix during the first half of its 2019 financial year, especially at Cullinan, yielded prices at “… the lowest end of historical ranges”.

The company is due to report production and sales results for the quarter ending March 31 on April 15. In the meantime, RBC Capital Markets said the discovery of the large diamond, following an earlier recovery 101 carat stone on March 8, provided evidence that Cullinan could produce higher quality stones.

It estimated the 425-carat diamond could fetch between $25m and $35m based on the sale in 2009 of a 507 carat diamond from Cullinan of a similar type which sold for $35m. Any additional dollars from its sale would feed directly to Petra’s bottom line, the bank said in a note.

“This is encouraging as it comes after a 101 carat type II stone on March 8. These stones reaffirm management’s message on the prevalence of these higher value stone types at Cullinan and that the mine’s plant is successfully recovering them.

“Any higher value stones will undoubtedly help to offset ongoing challenging price trends in lower value stones as was recently highlighted by a recent weak second straight sight (sales cycle) from De Beers,” the bank said. “To us, today marks another important step in the right direction and should provide a boost for financial and operational perceptions around the company.”

De Beers said on March 8 that its second cycle of the 2019 financial year was 13% weaker year-on-year at some $490m. Some $500m worth of diamonds had been sold in the first sales cycle of the year, it said.

“Demand for rough diamonds remained consistent during the second sales cycle of 2019. While overall demand for lower value rough diamonds remain subdued we did see an increase in demand from India as factories begin to restock,” said Bruce Cleaver, CEO of De Beers.

RBC Capital Markets said it remained sceptical regarding the low end of the diamond market where headwinds persisted.

It added, however, that the market might be bottoming: “We are of the view that market pricing is nearing the lows and today’s stone continues to justify our cautiously optimistic stance that a recovery in Cullinan pricing comes in time as the block cave (at Cullinan) continues to ramp up.”