Petra Diamonds' FY 2019 Profits Disappoint, Focus on Debt Reduction

Mining and Exploration
16/09/2019 14:37

Despite a comparatively modest decline in revenue in fiscal year 2019 (ended 30 June 2019), Petra Diamonds saw its profits decline by 22% this past year, falling short of industry estimates and sparking a downturn in the company's shares, which hit their lowest level ever. The stock is down about 80% this year as the miner is focusing on reducing its sizeable debt incurred by investments in its flagship Cullinan mine in South Africa. Revenue for the year fell 6% to $463.6 million from $495.3 million, with their average diamond prices achieved falling approximately 5%, which is slightly better than the global market. Petra's net losses after tax hit $258 million once a non-cash impairment charge of $246.6m is factored in - a result of weak rough diamond prices.

Petra's adjusted core profit fell to $153 million in FY 2019 from $195.4 million a year earlier, compared with analysts' average expectations of $172 million, viewable here. However, the miner said on Monday it had generated positive cash flow for the first time since embarking on its major expansion plan in 2011 and recently implemented a program (Project 2022) to improve efficiency and cut debt. The miner's operational cash flow in 2019 was positive at $70.5 million compared with last year's $61.3 million, which the miner refers to as "an important milestone for the Company and reflecting the strong grip on factors under Petra's control (production, costs and capex)." Launched in July, Project 2022 aims to reduce debt by delivering $150 million to $200 million in cumulative free cash flow through efficiencies and improvement across the business. The success of this program is going to be critical for the miner going forward.

CEO Richard Duffy, who took over in April, said he expected the market to remain under pressure, while demand remained solid across all assortments but was weaker for larger white stones. In the longer term, actions to restrict supply by the major producers should help stabilize the market. "Petra achieved a solid operational performance in FY 2019, generating operating free cash flow of US$70.5 million, despite a weaker market, and during the Company's transition from its expansionary capital expenditure phase towards steady-state production," Duffy said. "In the short term, we remain firmly focused on the rigorous execution of Project 2022, which is expected to reduce the Company's high net debt levels, against this backdrop of a challenging diamond market. Addressing this leverage will enable us to capture future organic growth opportunities and reposition Petra as the leading mid-tier diamond producer."

Whilst noting that seasonal weakness is typically experienced in pricing at the first tender of FY 2020, the company expects the diamond market to remain challenging in the near-term. Petra said they are on track to achieve FY 2020 production guidance of ca. 3.8 Mcts. The company also said on Monday that non-executive Chairman Adonis Pouroulis would leave the board by the end of the third quarter 2020, once a successor had been appointed. Duffy said it was a natural moment in the company’s plans for Pouroulis to step down.

Image: Petra Diamonds, the new Cullinan plant