RBC Capital upgrades Petra Diamonds after rights issue

RBC said the rights issue has provided a crucial derisking for the balance sheet and given the company a clearer path through the key ramp-up phase.

The bank's forecast suggests net debt/EBITDA will now be below 2x through calendar 2019. However, the biggest improvement is the step change in the equity story that comes from bringing the balance sheet forward by nearly three years.

"This relief allows Petra to focus on operations, and to finally move the Cullinan cave toward planned volumes and cash flow. This reduction of balance sheet risk sees our target multiple move to 0.9x NAV from 0.8x. The improved balance sheet should also increase long-term diamond price optionality attributed by investors now that financial risk has been reduced."

In addition, RBC argued that diamond market exposure over the next 12-24 months is compelling due to strong exposure to the US versus other commodities, both from better growth and domestic tax cuts and supply growth moderating with De Beers and Alrosa pulling back on volumes in 2019.

"We believe the diamond sector has sound long-term fundamentals, and Petra should have a growing production profile. In addition, the Cullinan mine holds the prospect of increased production of special stones.

"Petra is completing an extended capex programme, which should deliver significantly higher margins per tonne of ore processed."

RBC cut its price target on the stock to 65p from 80p.