Investec sees risk Petra Diamonds might be forced to raise fresh equity

Investec took an axe to its target price for PetraDiamonds, telling clients the possibility existed the outfit might be forced to go cap in hand to shareholders.

"Developing mines is tough, and clearly the task Petra is undertaking has proved more challenging than expected," analyst Marc Elliot said in a research note sent to clients.

In particular, with debt levels already high Elliot was concerned the company was poorly placed to "absorb" any unexpected disruptions that might arise or that it might fall short of its own guidance.

Linked to the former, the analyst noted the company's troubled history when it came to meeting its own targets. In itself, that led Elliot to be cautious and take the lower-end of guided ranges where provided - putting his estimates below consensus.

Then there was the recent guidance for higher costs to contend with.

Against that backdrop, management's intention to invest steadily in order to avoid 'capex spikes' was "considerably less value-accretive" than previous guidance, he said.

On the back of all of the above, the analyst cut his 2017 EBITDA estimate by 12% to $168m and that for 2018 by 24% to $253m alongside downgrades of between 1% to 15% thereafter.

In parallel, he bumped up his capex assumptions for the next two years by between 5% and 15% and by as much as 49% for the longer-term.

That meant the company's net debt to EBITDA ratio was set to rise to 3.9 in 2017, versus Petra's guidance for a ratio of 3.5 at year-end 2017 and a debt covenant ceiling of 2.8.

Elliott cut his target price on the stock from 87p to 55p and reiterated his 'sell' recommendation.

"Whilst there is considerable growth and value potential, our key issue is that the company is over-geared, with debt and associated costs soaking up an excessive proportion of shareholder value."