Petra Diamonds halts share price fall by clarifying capex plans

Petra Diamonds updated the market in response to its recent negative share price performance on Tuesday, which came after the release of its full-year trading update gGuidance on 22 July.

The London-listed firm said the update highlighted that it had delivered a “solid set” of operational results for the 2019 financial year, with improved safety, production of 3.87 Mcts - in line with guidance - and lower capital expenditure of $81.7m, down from $129.6m year-on-year - below its guidance for $100m.

It generated $17m of free cash flow, after adjusting for diamond debtors, in the second half of the financial year, after paying the interest on the bond of $23.6m, and repaying $20m against the BEE loan.

“In other words, operating free cash flow for the second half of the 2019 financial year was over $60m,” the board said in its statement.

“This is a significant achievement given the current challenging market conditions in rough diamonds.”

The trading update also introduced ‘Project 2022’, which the company described as an initiative that would identify and drive efficiencies and improvements across all aspects of its business, to enable it to deliver an initial target of between $150m and $200m of free cash flow over a three-year period.

Project 2022 would focus on enhancing cash flow generation and reducing net debt, to provide optionality to address the refinancing of the bond, the firm explained.

The company said it was not considering raising equity to refinance the bond.

Project 2022 was a “bottom up assessment” of the business, it explained, and was based on a number of prudent assumptions, including a flat nominal diamond prices over the three-year period.

It also assumed the exclusion of any “exceptional” stones, defined as having a value of $5m or greater, from its Cullinan Diamond Mine, and an exchange rate of ZAR14 to $1 in the 2020 financial year, devaluing at 3.5% annually to ZAR14.49 in the 2021 financial year and to ZAR14.99 in the 2022 period.

As a result, the initial target of between $150m and $200 million of net free cash flows in 2020-2022 period had potential upside in additional cash generation from improved rough diamond prices, a weakening in the rand beyond its assumptions, and the continued recovery of “exceptional” diamonds from Cullinan.

“Some third party commentary in relation to the capex guidance published in the 2019 trading update has raised concerns around potential increases in capital expenditure spend beyond the 2020 financial year,” the Petra board noted.

“We have been able to lower our capex budget for the 2020 financial year by bringing forward some spend to the 2019 period, as well as re-prioritising all projects across the group's operations.

“The reduction in the 2020 capex guidance nevertheless provides for the ongoing sustainability of the business.”

The board also said that, now that the company had “effectively completed” its significant capital expenditure programme across its portfolio, there was no requirement to invest any significant expansionary capital between the 2020 and 2022 financial years.

“We are in the process of updating our life of ine plans taking into account current diamond prices, which will be presented to the board in September, and will publish capex guidance for the 2021 and 2022 financial years with our preliminary results on 16 September.”

Petra said the business remained “robust”, pointing to its 2019 results as evidence of that.

It had cash resources of $90m, and a ZAR 1bn revolving credit facility as well as ZAR 0.5bn in working capital facilities.

Additionally, it said it had the third largest global diamond resource - in excess of 250 Mcts as at 30 June last year - which the board claimed provided organic growth opportunities well beyond 2030.

“We are executing our plans and delivering to budget as we launch Project 2022,” said chief executive officer Richard Duffy.

“We expect that this will deliver significant incremental cash flow over the next three years, further improve our net debt position and provide us with future growth options.”

Investors appeared pleased with the clarification from Petra Diamonds, with its share price rising 23.9% to 12.7p as at 1205 BST.