Petra says independent De Beers will be good for diamonds

Richard Duffy, CEO, Petra Diamonds

THE proposed sale of Anglo American’s 85% stake in De Beers would lead to greater market visibility and focus, said Richard Duffy, CEO of Petra Diamonds.

“I’m not saying De Beers isn’t focused, but there will be greater focus on what needs to be done,” Duffy said. De Beers would spend more on marketing were it independent, he added. Anglo American said on May 14 it would sell De Beers in terms of a group-wide restructuring in which it will also unbundle its shares in Anglo American Platinum.

Duffy was commenting during an investor day on Thursday in which his company outlined new life of mine and capital spending plans primarily for Petra’s Finsch and Cullinan mines in South Africa.

Having cut costs by $30m a year, Duffy forecast free cash flow (after capital and debt servicing) of $180m over the next five years assuming the low end of its diamond price forecasts. The company assumed 2025 prices of $125 to $135 per carat at Cullinan and $98 to $105m for Finsch.

The improved cash flow would enable the company to tackle pressure on its balance sheet where net debt to Ebitda increased to 3.2x as of end-December (end-December 2022: 1.6x).

Of concern to the market is $257m in loan notes that matures in 2026. The company would opportunistically repurchase the notes (it recently bought $5m in the open market). Asked if Petra would take “a haircut” on the notes, or issue shares, Duffy bluntly responded: “Absolutely not”.

The diamond market is under major pressure at the moment as demonstrated in another decline in sales for De Beers recently. A report by Morgan Stanley said there was “a downward spiral” in polished diamond sales, adding there were no signs of a turnaround in demand this year.

Duffy agreed, saying prices were likely to be “flat” this year but improving in 2025. Petra’s head of sales, Greg Stephenson said Indian demand “was definitely coming” and would help offset at least some of the lower demand from the key Chinese market.

While a standalone De Beers would be an important market fillip, increased marketing spend from one of the world’s largest producers would not be at the expense of production capital. “I don’t want to be the De Beers spokesperson, but given the projected decline in supply [in diamonds] … I’d be surprised if we saw a deliberate reduction in any production going forward,” he said.

The ‘GNU’

Asked about South Africa’s government of national unity following shock election results last month in which the ANC only polled 41% of total votes, Duffy said the current composition of the GNU was “the best outcome we could have hoped for”.

“We are stuttering towards forming a cabinet. I don’t underestimate the challenge of working together but the GNU is the best option”. He forecast improved oversight of government functions and looked foward to “an improved regulatory framework” for investors.

“South Africa needs foreign direct investment but I don’t expect smooth sailing, at least not initially,” he said. “But there is a lot of interest in terms of the ministries.” GNU partners are expected to receive key ministerial representation, possibly over mines and energy and, potentially, the much contested trade and industry departments.

Commenting on the rand/dollar exchange rate, Duffy said it was unlikely to strengthen significantly as there were still “fundamental problems” that the announcement of the GNU would not overcome. Every R1.00 change to the dollar equates to $12m to $15m in Ebitda and operational free cash flow.