Shine comes off Petra as it warns on earnings

Shares in Petra Diamonds tumbled on Monday morning after the South African gems producer warned on profits and said it expects to be in breach of its banking terms.

London-listed Petra told the City that it would miss analyst expectations for its core full-year earnings by between 10% and 15%.

Petra owns mines in South Africa and Tanzania, and provides diamonds for the British crown jewels. But it said that a stronger South African rand had increased its US dollar costs and earnings would suffer as a result. With net debt rising to $645m management has begun talks with lenders as it is likely to breach its debt-to-EBITDA banking covenants, though leverage is expected to fall to $560-600m by end-June.

The company also cut its forecast for diamond production for 2018, primarily because of the lower grade diamonds recovered from its core Cullinan mine in South Africa. Petra said it now expects to produce between 4.6m and 4.7m carats this year, against its previous forecast of between 4.8m and 5m carats.

Diamonds have been one of the worst performing commodities recently, as demand from younger generations slips.

Petra’s warning also follows a three-week strike at its South African operations and the Tanzanian government blocking of a consignment of diamonds in a dispute over their value.

Petra's shares fell following Monday's update, losing as much as 18% at one point in morning trading.

Analysts at Canaccord Genuity noted that end-December net debt was $645m against its $555m forecast largely because revenue of $225m was below its $268m forecast and the ZAR was stronger than anticipated.

"This is not a surprise, we think, as management had cautioned this was a possibility even before the strength of the ZAR. The company has started discussions with its banks, which are likely, we think, to see deferral of covenants."