Petra Diamonds: Record Production & Sales in 2017 Amid Rising Debt & Costs

Mining and Exploration
24/07/2017 15:40

As anticipated, while Petra Diamonds achieved record levels of production and sales in FY 2017, with production up 8% to 4.0 Mcts (FY 2016: 3.7 Mcts) and revenue up 11% to US$477.0 million (FY 2016: US$430.9 million), investors remain worried as the company missed its production and revenue guidance by 8-9% due to the slower than anticipated build-up of its expansion programs across its operations. Furthermore, the company pushed back its production guidance and unveiled higher than expected spending and debt, causing its share price to tumble. Petra’s net debt stood at $554.4m (£425m) at the end of June, against $382.8m a year ago, with the company promising it will begin to fall from the start of 2018. CEO Johan Dippenaar said Petra was in talks with its lenders. “We’ve signalled this early to the market and we’re in discussions with bankers and very confident it won’t be a problem,” he said. Their preliminary results for the year will be released on 18 September 2017.

Better diamond mix on the way

Petra's production guidance for FY 2018 is expected to rise approximately 23% to 4.8 - 5.0 Mcts, while they advance a guidance of 5.0 - 5.3 Mcts for FY 2019. The mine planning process is focused on maximising overall value, as opposed to maximising production volumes. They add that FY 2018 production is expected to have a notable increase in the proportion of higher value run of mine (ROM) carat production (ca. 85%) (FY 2017: 71%), as opposed to lower value tailings carat production. This is expected to lead to an improved product mix resulting in a higher average value per carat. The company notes the diamond market remained stable throughout FY 2017, with rough diamond prices on a like for like basis up ca. 2% for the year, compared to FY 2016. However, the strengthening in the South African rand for the year had a negative impact on dollar reported operating costs; additionally, unit cost per ton has been adversely affected by the high fixed cost base and below plan throughput. 

Operational costs heading down

FY 2017 Operational capital expenditure (capex), excluding capitalised borrowing costs, fell to US$255.1 million (FY 2016: US$295.8 million). Still, despite the declining capex trend, Petra saw its net debt rise to $554.4m as of June 30, up from $382.8m recorded on June 30 in 2016. But, they state, “With capex now on a declining trend, debt levels will start to fall in FY 2018 and the company expects to become free cashflow positive during FY 2018.” 

Johan Dippenaar, CEO of Petra Diamonds, commented: "Record levels of production and revenue have been reached in FY 2017 and, whilst certain expansion programmes have taken longer than expected to ramp up, we have now attained the required production levels which will see production rise again substantially in FY 2018. The improvement in ROM (run of mine) grades across our operations demonstrates the increasing contribution of undiluted ore from the new production areas. FY 2018 will mark the first year where Petra will source the majority of its underground tonnages from undiluted ore, leading to a further improvement in grades, product mix and consequent higher average value per carat, without the need for improved market conditions. The Company has a strong balance sheet in place to deliver on the final stages of its expansion programmes."

Miningmx writes, "Petra Diamonds is nearing the end of a profound and aggressive growth plan which is expected to take production to at as much as 5.3 million carats in the firm’s 2019 financial year. However, this has required heavy capital expenditure, but Dippenaar said in a trading statement today that capex, estimated to be $168m in the 2018 financial year, was now formally on a declining trend." They add, however, that BMO Capital Markets said in a note that capex for 2018 had come in $44m more than forecast while 2019 capex would also be higher than previous guidance. Dippenaar dismissedthe criticism: “In a capital programme of $1.45bn, it now becomes $1.5bn because of the change in the value of the rand. It could be lower again in another year. I think once people see how we’ve done over the years, once the mines are producing to capacity, they will probably conclude that we haven’t done a bad job,” he said.