Petra facing squeeze on cash flow as Williamson cost adds to dampened consumer demand

Rough diamonds sit on a sorting table during the grading process.

PETRA Diamonds was facing a significant reduction in free cash flow in 2023 owing to an increase in capital expenditure and the cost of suspending production at Williamson mine in Tanzania where there was a breach in a tailings dam.

Free cash flow was forecast to be $12m next year compared to $213m in Petra’s 2022 financial year, said BMO Capital Markets analyst Raj Ray in a report this month.

Ray was also cautious regarding recent Petra auction sales which showed a marginal 2.2% lift in the average realised price to $138 per carat. Petra said this reversed “the downward trend observed in the previous two tenders”, but Ray said the outlook for 2023 would be shaped by the impact of inflation on consumers.

The possible reopening of China following hardline Covid-19 shutdowns might be a mitigating factor to dampened consumer appetite, especially in the US which comprises about half of global diamond jewellery sales.

Petra announced on November 30 that Williamson would not return to production before the middle of 2023 following the partial collapse of a tailings dam in November. The company has previously said the mine would be suspended for three months.

Williamson produced 228,000 carats of diamonds in Petra’s 2022 financial year ended September 30, equal to about 7% of total production for the year. The mine was reopened during the last financial year following an improvement in diamond prices.

The company was investigating whether it could sell a previously impounded parcel of diamonds in order to finance the mine whilst operations were suspended.

The parcel of diamonds, which Petra had valued at $14.8m, was seized by the Tanzanian government in 2017. The government claimed the true value of the parcel was $27m. It alleged Petra had “cheated” the government by declaring a lower valuation.

The Tanzanian government subsequently agreed to allocate the parcel to Petra following the Framework Agreement with Williamson.

Bank of America recently moderated its diamond sales outlook for the year.

It has now forecast a 10% correction in rough diamond prices. “Globally, we consider recession risks and continued Covid headwinds in Asia,” it said.

“The sequentially lower sales should not come as a surprise, given the usual seasonality for midstream demand as polishing factories are reopening in India following the Diwali holidays,” said analysts at Morgan Stanley.

Google Trends indicated that searches for “diamond jewellery” and “diamonds” are at a five-year low, potentially pointing to softening buying intentions amid high inflation and economic uncertainty. MasterCard spending on jewellery in October turned negative for the first time since December 2020 and came in at -3.8% compared to +7% in September.