Petra on knife edge as Covid-19 second wave threatens diamond price recovery

PETRA Diamonds reported a taxed loss of $223m, including $91.9m in impairments, for the 12 months ended June, and warned the market its viability turned on the conclusion of a recapitalisation that requires bondholders agreeing to hold the firm’s shares.

The company also said the diamond market was vulnerable as a second wave of Covid-19 disease swept through buying centres, including Europe. According to a report by Bank of America Securities, recent rough diamond price increases did not imply a recovery in the long-term health of the market.

Petra was “reliant on the successful conclusion of the current restructuring which is dependent on execution of the lock-up agreement and subsequent approval by the company’s shareholders, to continue as a going concern,” it said.

In October, the company announced plans to recapitalise its heavily indebted balance sheet through a share issue to bondholders. Bondholders, representing debt of $650m, would be given up to 91% of the firm’s entire issued share capital.

A condition of the recapitalisation is that bondholders agree not to sell their shares for an unspecified period, known as a lock-up.

As of end-June, net debt totalled $696.6m, a $100m increase year-on-year, owing to lower sales and the capitalisation of interest on the $650m bonds.

In May, Petra said it could not meet the bond’s coupon precipitating its current debt crisis. As part of its recapitalisation plans Petra considered selling the company’s assets.

Adverse market conditions posed a threat. Whilst its recapitalisation proposal took in the possibility of depressed market conditions, its forecasts “remain sensitive” and might have an impact on its ability to operate within its lender covenants.

It added that “continued South African lender group support may be required and, if unavailable, additional funding may be required”.

The diamond market recovered strongly in September with rough prices increasing between 19% and 118% compared to the lowest prices in the 2020 trough, said Bank of America Securities in its report.

The bank said, however, that the improvement might be a “bounce back” from the 10-year low achieved in the first half of last year and might not be “a reflection of the long-term attractiveness of the diamond industry”. It added, however, that it expected a 10% year-on-year increase in the rough price index of 2021″.

“The underlying demand for polished diamonds should rebound as economies reopen, but midstream structural challenges could offset the positive impact for miners,” it said. “Diamond inventories, midstream financing, and margins remain key concerns.”

Commenting on the 12-month period, Petra CEO Richard Duffy, focused on the positives. The company’s operations had performed well in the period (to end-September) whilst a business optimisation programme would deliver an annualised contribution of $101m by the end of its 2021 financial year and an annualised increase in operating free cashflow of about $123m.

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