PETRA Diamonds capped a dramatic three year turnaround in fortunes announcing today its intention to pay dividends, most likely in the current financial year given the firm’s cash generating potential.
The company put it assets up for sale in 2020 as it could not repay $650m in debt from its then cash flow. However, a poor diamond market, which was compounded by the effects of Covid-19, resulted in there being no buyers, leaving Petra to issue 91% of its share capital in order to cut debt and save itself.
Today, however, it announced a 219% increase in adjusted basic earnings a share to 42.93 US cents for the 12 months ended June. Assisted by production from the recently re-opened Williamson mine in Tanzania, a 41.5% increase in like-for-like diamond prices, and the recovery of exceptional stones the company felt it had enough momentum to unveil a dividend policy.
In terms of the dividend policy, Petra’s board will consider a payout to shareholders within a range of 15% to 35% of adjusted free cash flows after interest and tax and adjusting for any windfall earnings.
“We are delighted with our overall performance which caps the turnaround begun three years ago,” said Richard Duffy, CEO of Petra Diamonds. The dividend policy is effective from July with first consideration of a payout being made at the interim stage of its current 2023 financial year. It may decide to pay a special dividend “in a year where Petra generates windfall earnings”, it said.
Petra generated operational free cash flow of $230m, a year-on-year increase of 91%. It consequently ended the year with unrestricted cash of $272m, 84% higher, and consolidated net debt of $40m as of end-June.
This was despite an 11% decline in year-on-year sales which totalled 3.5 millon carats (2021: 3.9 million carats). Production, however, was up marginallly to 3.4 million carats (3.2 million carats).
Petra has maintained production guidance for the current financial year of 3.3 to 3.6 million carats for total on-mine cash costs of between $300m to $330m. This compares to costs of $307m in the year under review, an increase of 11% on the 2021 financial year.
Duffy said the company’s exposure to inflation was minimal, partly owing to its business efficiency programme, but also because it used “minimal” diesel while rand weakness could also insulate the company against dollar cost inflation.
Given its strong cash position, Petra also announced its intention to buy back $150m in bonds due to expire in 2026. If the tender offer is a success, Petra will cut its interest bill by about $15m and reduce gross debt to $220m.
Commenting on prospects, Petra said the diamond market remained supportive of the company. Duffy said in February that the diamond market had undergone structural supply and demand change that couldn’t be characterised as “a bubble or a blip”.
The company said today global supply would remain static for the next 10 years at between 115 and 125 million carats. This was owing to a decline in producing mines, long lead times on mine development and a decline in exploration. “Given that less than 1% of kimberlites discovered are economic, we do not expect this to change in the medium term,” it said.
The capital estimate at Cullinan is $173m for the ‘CC1E SLC’ project which will extend the mine plan to 2031 with an anticipated IRR greater than 30% while $216m will be spent on Finsch’s 3 level SLC to extend the mine plan to 2030 at an IRR also greater than 30%.