Petra prioritises production to tackle debt load
Petra Diamonds is working to allay market worries over a $650m bond due in 2022
Petra Diamonds expects a modest increase in rough diamond prices during 2020, but it is not counting on improved revenue to dig the company out of its deep debt obligations.
Petra, which is listed in London, has four mines, three in SA and one in Tanzania. It is SA’s second-largest diamond producer behind De Beers.
Petra has poured money into developing new working areas at its underground Cullinan mine near Pretoria.
The diamond market, however, has been weak for the past two years, raising concerns about the nearly $600m (about R8.8bn) of debt in Petra — which is directing most of its free cash into servicing debt with its management pushing hard to increase diamond production to improve cash flows.
New CEO Richard Duffy, who came from AngloGold Ashanti in April 2019, has launched “project 2022”, which aims to “reduce the company’s high, net-debt levels against the backdrop of a challenging diamond market”.
The project does not rely on diamond prices to come to the company’s aid, but instead focuses heavily on operational improvements to drive up production, lower costs and boost free cash flows to bolster the balance sheet.
Petra expects diamond prices to remain subdued for another year to 18 months as major suppliers, such as Russia’s Alrosa and De Beers, curtail rough-diamond supply to cutters and polishers, which are clogged with inventory.
Macro-issues, including the US trade war with China and, more recently, the outbreak of the coronavirus, are keeping a lid on diamond jewellery sales. Diamond prices have halved since a peak in 2012.
Alrosa and De Beers have introduced unprecedented flexibility in their sales of rough diamonds to their clients to manage the weakness in the market.
Petra’s spending on projects peaked in 2016 and has fallen sharply since then to below $50m. Net debt levels increased to $596m by the end of December 2019, from $564m in June.
Petra has a bond of $650m due in May 2022 and management is working on a variety of options to handle the notes. Bondholders normally start paying attention to companies’ ability to repay bonds about 12 months before they’re due, but the difficulties at Petra, which has been hit by unexpected weakness in diamond prices, has brought that focus forward.