Petra retains Rothschild & Co to assess “strategic options” as COVID-19 deals bitter blows

THESE are unpleasant times for most mining shares, but perhaps more so for Petra Diamonds which has seen plans to climb out of its debt pit scrambled by the onset of the COVID-19 pandemic.

The UK-listed firm said today it had suspended its full-year production guidance after complying with South African government directive to suspend or slow mining operations for 21-days in an effort to stem the spread of the virus.

It would also pursue “strategic options”, to which it alluded in February, regarding the payment of $650m in loan notes which fall due in May 2022. The company had retained the services of Rothschild & Co and Ashurst as its financial and legal advisers respectively.

Potential asset sales may become Petra’s last resort although it may first seek to restructure the bond repayment conditions – though none of these options was expressed by the company.¬†Shares in the company, which fell to record lows earlier this week, recovered about 3% in London even after the release of today’s operational update.

COVID-19

The South African mines were operating at “a minimum level” for the 21-day lockdown in line with the flexibility offered by the country’s government. It said this week it would allow for mining companies to avoid a complete shutdown of operations.

In Tanzania, Petra’s Williamson mine slid into a precarious position. Whilst the mine remained open owing to the low level of COVID-19 infections in Tanzania, and Williamson’s relative remoteness, its liquidity position was being “closely monitored”.

Petra said: “… constraints may impact its ability to operate” whilst discussions aimed at approving a VAT refund and releasing the export of a diamond parcel blocked two years ago by the government had been interrupted by the COVID-19 crisis.

COVID-19 fears had also dented demand for diamonds which had been reflected in a recent sales tender described by the company as “opportunistic” in its buying behaviour.

Richard Duffy, CEO of Petra Diamonds, said the company retained the faith of its lender group, but he acknowledged the negative impact of weaker market conditions for diamonds and the scaled back operations in South Africa.

Said Duffy: “While Petra has been running well operationally, with production ahead of guidance, the scaled down mining operations and sales disruptions will cause a negative impact in the short term”.

Petra had guided to full-year production of 3.8 million carats.

On February 17, Petra said at its interim results presentation that it would “consider its options” as a bond repayment worth $650m advanced upon it, and cash fluttered slightly above the “absolute minimum” level of $40m.

Petra reported an interim net loss after tax of $10m (2019: +57.9m) and a basic loss per share of 1.01 cents. Net debt climbed year-on-year to $596.4m from $559.3m despite generating positive cash flow.

SALES

Having brought forward the closure of its fifth sales tenders in South Africa and Antwerp three days earlier than the planned March 26, Petra found “depressed and opportunistic” bidding for its goods, particularly in the larger size and higher quality, greater categories.

As a result, Petra chose to sell a portion of its South African goods, representing approximately 75% by volume and about 50% by value. Price decreases of these goods were 24% on a like-for-like basis compared to the February sales cycle.

The remaining goods were exported to Antwerp and will be offered for sale when market conditions allow, the company said. Pricing of certain goods during the Antwerp leg of the tender were similar priced to those in South Africa.

Two more sales tenders are due in May and June before the close of the financial year, but Petra said the outlook for both was “highly uncertain”, turning on travel and export conditions at the time as well as activity levels in India, Israel, China – and the US, described by the World Health Organisation as the next potential epicentre of the COVID-19 virus.

LIQUIDITY

Petra said the impact of weaker pricing had been partially offset by the dramatic slide in the value of the rand against most leading currencies.

But the pressure of weaker diamond pricing – which have upended hopes for the market recovery suggested at the end of 2020 – is particularly bad news for Petra.

It had just over $170m in cash, diamond debtors and access to debt, but it was nonetheless ”¬†… in active discussions with its South African lender group”. Lenders were supportive of providing near-term liquidity, it said.