Petra confident of medium-, long-term lift in market

Petra confident of medium-, long-term lift in market

In a diamond market that is softer than anticipated, London-listed Petra Diamonds is moving ahead with confidence despite a downturn in its financial performance for the year ended June 30, 2023.

While the industry faces short-term challenges, including ongoing global economic uncertainty, Petra CEO Richard Duffy maintains confidence in the medium- to long-term outlook for the company amid a long-term structural deficit, the resilience of the high-end luxury goods segment and the rarity and finiteness of natural diamonds.

The diamond mining group on Friday posted a 59% decrease in adjusted earnings before interest, taxes, depreciation and amortisation to $113.1-million, with a margin of 35% in the 12 months ended June 30, 2023, driven by lower production, the Williamson operation, in Tanzania, being on care and maintenance for seven months of the year under review following a tailings storage facility (TSF) failure, and the reduced contribution from exceptional stones.

The company’s adjusted mining and processing costs declined 26% from $272.5-million in 2022 to $202.1-million in 2023, benefitting from a weaker rand to the dollar, lower production volumes and royalties, cost savings and diamond inventory movement, partially offset by cost inflation and the care-and-maintenance costs at Williamson.

The group’s results, which excluded its Koffiefontein asset, which has been classified as a discontinued operation and is in the process of a responsible and orderly closure, also recorded an adjusted net loss of $2.3-million, down from $115.2-million profit in 2022, and an adjusted loss a share of 2.96c, down from a profit of 48.01c in 2022.

Consolidated net debt increased to $176.8-million during the year under review, from $40.6-million in the year ended June 30, 2022. In September 2022, Petra repurchased just over one-third, or $144.6-million, of the company’s 2026 loan notes during the year, which reduced the group’s loan and borrowings to $247.5-million at year-end and reduced future interest costs.

“This further strengthened our balance sheet and reduced future interest costs,” Duffy told Mining Weekly during a virtual interview on Friday, following the release of the group’s financial results for the year ended June 30, 2023.

Petra reported an operational free cash outflow of $66.5-million in 2023, compared with the $230-million inflow in 2022.

“That was on the back of reduced sales and sales deferrals, but also as a result of us increasing our capital expenditure (capex) for our [extension] projects at the Cullinan mine and Finsch, in South Africa,” he explained.

Revenue for the year under review amounted to $325.3-million, a 42% decrease from $563.7-million in 2022, as a result of deferring the sales from the last two tenders of the financial year to early in the new financial year in expectation of improved pricing.

The first tender of the 2024 financial year, however, reflected persistent softer market conditions owing to prevailing macroeconomic uncertainties around high interest and inflation rates.

During 2023, Petra sold about 2.33-million carats of rough diamonds, a 33% decline on the 3.5-million in 2022, with the average realised price decreasing 14% to $139/ct, largely the result of the product mix.

“On a like-for-like basis, prices were only down by 2%.”

While the group expects ongoing price volatility in the short term, it remains confident that the structural supply deficit will support medium- to long-term diamond prices.

Production for 2023 declined, with total diamonds down to 2.67-million carats from 3.32-million, marginally below revised guidance on the back of some operating challenges.

However, it showed an improving trend during the second half of the year under review as operating performance stabilised.

The miner experienced an operational turnaround under way at the Finsch mine, the restart of its Williamson mine in July, ramping up ahead of schedule, and the company’s capital projects, including the extension at Cullinan mine, remaining on track to ensure incremental growth.

These projects will boost Petra’s yearly production by up to one-million carats in the 2025 financial year, with an additional 300 000 ct increase in output expected for the 2026 financial year.

Capex for the year increased 127% to $117.1-million, of which $72.4-million, an increase from $34.3-million in the prior year, was spent on the life extension projects that will contribute to the increased carat production

The extension capex for Cullinan increased from $27.3-million in 2022 to $41.1-million in 2023, while the extension capex for Finsch increased from $7-million to $31.3-million.

The overall increased capex also included stay-in-business capital of $44.7-million, an increase from $17.3-million in 2022, largely owing to the replacement of underground fleet at Finsch to mitigate the machine availability challenges encountered during the year and an increase at Williamson owing to the construction of the new TSF facility.

“Actions taken to strengthen our business and improve cash flow generation, together with our capital discipline around investing in the growth and life extension of our operations, means that Petra is resilient in the short term and well placed in the medium to longer term to leverage these continued supportive diamond market fundamentals,” Duffy said in the company’s financial results statement.

Armed with a strengthened balance sheet and stabilised production – and a resilient operating model – the group believes it is positioned strongly for growth.

While there has been some stabilisation in global economies and growth outlooks for 2023, the economic outlook for 2024 is now more subdued, with expectations that the rough diamond demand will continue to be subdued in the short term on account of increased polished inventory, prolonged weakness in the Chinese market, lab-grown diamond sales in the bridal jewellery segment and higher interest rates impacting the mid-stream in particular.

“What gives us some comfort and confidence [in the future of the market] is that diamonds are in the luxury goods segment, and that end of the market has shown a lot more resilience in light of the more difficult economic circumstances. Further, natural diamonds are finite, there are only so many mines producing diamonds and there has been very little investment in exploration, for example, so the structural supply deficit is certainly going to be around for some time to come.

“We expect to see the market recover in the medium to longer term. As we see the global economies stabilise and recover and we see some retail jewellery demand pull through, particularly in the US, we believe that that will translate into stronger pricing as a result of their market support,” Duffy concluded.