Diamond miners have performed very poorly of late, but that doesn’t mean that trend will continue indefinitely - and now could be a good time to buy with a longer term view. Petra Diamonds (PDL) is definitely one in this sector which has caught my eye lately, and is one of several diamond miners which I have kept an eye on over the years...
It has four underground mines, an open cast mine, plus tailings retreatment programmes, with its operations focussed on South Africa and Tanzania, where it has successfully been producing diamonds for a number of years. Its mines include well-known operations such as Cullinan and Kimberley, amongst others, and despite recent reductions in its reserves, the gross overall figure still stands at nearly 43 million carats, and with over 290 million carats in resources (mostly in the indicated category), as at June 30 2018. It is also well known for producing some of the largest diamonds in the world, both historically and also in current times, with a 100 carat white gem-quality diamond being recovered from Cullinan at the start of March, along with a blue diamond of just over six carats, amongst other smaller stones. The fact that it has consistently produced gems of this size and quality suggests that it will continue to do so in the future as well.
In recent years its operations have been capital intensive, and that has meant that it has built up a fair bit of debt, but it is now reaching a stage where that should reduce and it will begin to reap the rewards. Since 2006 it has spent $330 million acquiring its operations, plus a further $1.7 billion to develop them, and at the last set of accounts, the interims up to December 31 2018, net debt stood at nearly $560 million, but with undrawn facilities of more than $181 million. The debt is going to take time to reduce, although it is expecting full year production in the 3.8 to 4 million carat range. On paper it doesn’t immediately look attractive as it has been making fairly hefty losses for a company of this size (taking into account losses from discontinued operations) – and given a market cap of £157 million, but finance costs have played a part in that, and if it can start to reduce overall debt then it can start to turn that around. Operating profit for the last six months stood at over $80 million and net cash generated from operations was nearly $39 million, but losses from continuing operations came in at around $18 million. Net asset value on paper stood at nearly $520 million, and current asset liquidity is reasonable as well at around $124 million, so I wouldn’t have too many concerns on that front.
Future success of the company, in terms of the market valuation, is largely going to come down to whether or not it can reduce its debts to a more manageable level. Net debt to EBITDA needs to remain at below 2.5x as per the covenants from June 30 2019 onwards – it was 3.3x at the end of 2018 so that is a bit of a concern, but it is targeting a level of below 2x for FY2020. The future diamond price is going to play a big part in all of this, as will the ability of the company to continue to find these very large stones, along with all the smaller ones that make up the remainder of production. Petra certainly isn’t without risk, and I would class it as a speculative investment and size your position accordingly – it wouldn’t take a lot of bad news operationally to tip things in the wrong direction but I do believe it has the potential to turn things around. As such, I can see value in buying around current levels – despite the chart resembling a downhill ski slope since the start of 2019.
Filed under: Petra Diamonds, Bearcast, Neil Woodford, Mobile Streams, James Halstead, Inspirit, gold price
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