WITH the loan restructuring completed – which reduces Petra’s debt to manageable levels – and a sustainable recovery hopefully underway in the global diamond market, CEO Richard Duffy is hoping the worst is over for the embattled diamond miner.
An added bonus would be a successful outcome to the discussions currently underway between Petra and the Tanzanian government over a revised regulatory framework which would lead to the re-opening of the mothballed Williamson mine.
A key issue in those discussions concerns a parcel of 71,654 carats of diamonds effectively placed in limbo after they were blocked for export in 2017 by the government under then hard-line president John Magufuli, who died in March.
He was replaced by President Samia Suluhu Hassan, who Duffy says has made “very encouraging comments around a more investment friendly environment”.
“I would probably be fairly pessimistic in the climate prevailing under the late President Magufuli but we are seeing a shift. I am confident we will get the discussions finalised.”
In terms of the restructuring completed in March, Petra’s holders of $650m in notes due to be repaid in May 2022 have swapped those for new notes worth $337m – including a $30m cash injection – and equity in Petra such that they now own 91% of the company.
The principal benefit is that Petra’s net debt dropped to $290.7m at end-March from $700m at end-December 2020.
The impact on the Petra share price from the past few years of tough times and now the expanded equity base has been extreme, with the share plunging 99% from an all-time high of 164p in July 2014 to trade around 1.4p in early June this year.
“The restructuring has effectively been a reset for us from a balance sheet point of view. On the marketing side it is probably a little early to be definitive but it is certainly encouraging to see the recent improvement in diamond prices and demand in our sales as well as that reported by De Beers and Alrosa.
“Key fundamentals are coming together, which would suggest at least consolidation of the market and my view is that we are through the worst of the impact of Covid-19 on the diamond business.”
The process of getting Petra back on its feet started dramatically in June 2020, when Petra announced the entire group – or parts of it – was up for sale.
“In terms of the scheme of arrangement, which had to be sanctioned by the UK courts, we had to demonstrate we had done all we could to realise value for our bondholders.
“So we had to test the market for interest in our assets. We got some offers but the view of the advisers, the board and the creditors was that their interests would be better served from a value point of view by completing the restructure.”
Duffy declines to identify those diamond companies that came to “kick the tyres” at Petra.
Petra ran up the debt that led to its restructuring through incurring major capital expenditure on two projects simultaneously at the Cullinan and Finsch mines in South Africa.
Duffy – who was appointed in April 2019 and therefore after the expansion decisions were taken – says those investment decisions were made “at a very different time in the market.
“At that time the outlook supported the proposed plan. Projections of where we would be in the market today were very different to where we have ended up.”
Asked – given his experience as former CFO at major mining group AngloGold Ashanti – why he had not foreseen the looming financial catastrophe when considering taking up the Petra job, Duffy said: “It was very clear that Petra was carrying too much debt and there were questions around the Cullinan plant operations.
“Going in, I had eyes wide open to the challenges represented by the balance sheet but, at the time, the view was that the diamond market would see some consolidation in 2019. I thought we could generate enough cash to buy ourselves some time.
“I thought we were close to the bottom but the events of 2019 surprised all of us. Then the market looked like it was starting to recover, with prices picking up in January and February of 2020 but, just as it was showing some green shoots, Covid-19 happened.”
Illegal mining scourge
All going to plan the next big step in Petra’s future will be reopening the Williamson mine, where the group has just settled – on a “no admission of liability basis” – claims brought against it in London over “alleged breaches of human rights associated with third-part security operations at the Williamson Mine”. The cost is £4.3m, of which more than £1m is to be spent on projects that will directly benefit the communities near the mine.
That all has to do with the complex issue of illegal mining, which is a growing trend in many African countries and is clearly not going to go away at Williamson.
Duffy says the settlement is separate from the decision to reopen the mine, which will be based on economic fundamentals.
“The biggest challenge with illegal mining involves not the individuals or small groups coming onto the property but dealing with larger groups sponsored by illegal diamond syndicates.
“We are dealing with this through the government and formal channels because that’s part of the problem. It’s not something we can resolve on our own. It has to be done in conjunction with the government and the community.”
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