Petra to post strong free cash in 2022 following resurgence in rough diamond prices

Truck transporting ore at Petra's Williamson mine. Source: Petra Diamonds

A 41.5% improvement in rough diamond prices drove Petra Diamond’s revenue to $584.1m for the year ended June and helped transform the once stricken group’s fortunes.

“This year’s performance completes the successful turnaround of Petra,” said Richard Duffy, CEO of Petra in a production update ahead of its results presentation in September.

In mid-2020, Petra put its assets on the block as it was swamped by $650m in debt. In the absence of buyers, it was forced to issue about 95% of its share capital in order to stay afloat. Covid-19 lockdowns and related travel restrictions also disrupted the company’s ability to generate revenue. It survived, however.

It today closed the 12 month period with net debt of $40.6m which compares to $228.2m at the close of the previous financial year and $107m end-March.

A total of 3.35 million carats were recovered for the year, in line with guidance. In addition to the higher sales price in like-for-like diamonds, Petra also benefited from the reopening of the Williamson mine in Tanzanian and the sale of $89.1m in of exceptional stones.

Commenting on industry-wide inflationary pressure, Duffy said Petra’s “relatively low fuel consumption” as well as three-year labour agreements and exposure to the weaker South African rand would insulate it to some extent against cost increases.

Duffy also reiterated the group’s three year production plan, announced in February, in which diamond output would be between 3.3 and 3.6 million carats for the 2023 and 2024 financial years before increasing to between 3.6 to 3.9 million carats in 2025.

While cash flow generation is expected to be strong for the year under review, Petra was heading into a more capital intensive period. This was a result of two life extension projects Duffy announced in February – at Cullinan ($173m) and Finsch ($216m). Total capex for the current financial year was expecte to be between $148m and $161m.

“We forecast free cashs flow to reduce significantly in 2023 given increased capital expenditure and our expectation for lower diamond prices,” said BMO Capital Markets analyst, Raj Ray.

Assuming a 13% decline in diamond prices – due to the potential for an inflation driven impact on demand – added to higher capex could result in in free cash flow at breakeven, said Ray. “Continued diamond market resilience and higher contribution from exceptional diamond recovery could however prove us wrong,” he added.

In April, Petra announced it was looking for a buyer for its Koffiefontein mine in South Africa’s Free State province, or shut the operation by 2025. It earlier said it would partially divest of its Williamson mine in Tanzania which had been in mothballs.