Petra Diamonds may need to raise fresh equity, Investec says

Analysts at Investec marked down their target price for Petra Diamonds following the company's warning the day before on its full-year guidance and that it would seek to renegotiate the covenants attached to its debt.

The broker's Marc Elliot cut his target price on Petra Diamonds's shares from 110.0p to 87.0p and reiterated his recommendation to 'sell'.

Elliot now saw increased risks around the firm's asset base and pointed out the challenges which Petra was facing in South Africa on account of the proposed mining charter.

Ahead of the company's 24 July update, the analyst also cautioned he would not be surprised to see higher capital and operating expenditures in comparison to previous guidance.

In time, the company's multi-year efforts to revamp its portfolio of historical mines should deliver "considerable" value, he added.

However, it rarely hit its operational targets and volume targets were "assisted by lower value tailings activities".

Furthermore, Investec estimated the ratio between Petra's net debt and operating profits stood at 3.2, in comparison to a threshold in its covenants of 2.8.

The analysts conceded he might be too cautious but nevertheless added: "there is a clear need to renegotiate covenants once again. Given high gearing, we believe fresh equity may be a possibility should any material mishap occur which would leave the company exposed."