Petra Diamonds must restructure debt despite strong recovery
Hefty shareholder dilution is still on the cards despite SA mines returning to normal production and improved rough diamond prices
SA’s second-largest diamond producer has noted a one-fifth increase in rough diamond prices as its three SA mines recovered from the lockdown, but it’s not enough to stave off a massively dilutive debt restructuring plan.
London-listed Petra Diamonds, which is engaged in a plan to address a $650m bond that falls due in 2022 and which would dilute existing shareholders to a mere 9% stake in the miner, reported a decline in production in the quarter to end-September, the first of its financial year.
Consolidated debt was $688m at the end of September. Petra has reached an agreement in principle with the bond holders — who will take a 91% stake in the enlarged equity of Petra in exchange for $400m of their bonds — and a consortium of SA banks. The debt deal, which is subject to a shareholder vote, is expected to be finalised early in 2021.
Petra has cash of $49m, down from $54m at the end of June. All its debt facilities are fully drawn.
Petra has warned shareholders that if they don’t back the restructuring plan that will dilute their holdings to 9% they could lose their total holdings. The restructuring would “provide us with a considerably more manageable level of debt and marks a significant milestone in putting the company on a viable footing,” said CEO Richard Duffy.
Petra’s output fell by a 10th to 974,346 carats because its Williamson mine in Tanzania remained in care and maintenance, but the firm’s three SA mines recovered from the government-ordered hard lockdown in March. Mines were allowed to restart in phases to return to full capacity from late in May into June.
The Venetia mine, owned by De Beers in SA, generated 1.18-million carats in the September quarter. Petra is the second biggest source of SA diamonds.
The Cullinan mine near Pretoria is the largest source of diamonds in Petra and had a record production performance in August and September, said Duffy.
Petra’s first-quarter revenue jumped by a third compared to the same three months a year earlier, reporting income of $82m on the back of released inventory and improved rough diamond prices.
Petra held diamonds back from the market in the June quarter as governments around the world enacted restrictions on international travel, economic and social activity to slow the spread of the Covid-19 pandemic.
Rough diamond prices improve
The price for rough diamonds were still about a 10th below the level before March, despite the improvement in prices during the September quarter and a tender sale in October.
“The diamond market has shown some modest improvement in financial year 2021 but there is still uncertainty around further disruption due to coronavirus- related restrictions,” Petra said.
“Risks to tender timing remain as a result of possible restrictions that may be re-imposed following a second wave of Covid-19 infections in a number of countries, including Belgium,” it said.
Belgium is a major centre for rough diamond sales and trading.
Petra noted improved diamond market conditions as jewellery retail shops are reopened. The efforts by the two biggest producers, De Beers and Russia’s Alrosa, to withhold diamonds in weak market conditions had “allowed for a better equilibrium in the market and there is now improved demand from the downstream as retailers look to put orders in place in time for the festive retail season”, Petra said.
“The cutting and polishing factories of India have ramped up to about 60% capacity under Covid-19 guidelines, but are looking at how to maximise working hours to meet demand, including observing a much shorter holiday period for Diwali than usual.”
India hosts the world’s largest rough diamond cutting and polishing industry, specialising in small diamonds.
Petra will hold a special tender in November of five high-quality blue diamonds from its Cullinan mine near Pretoria. These five diamonds will boost sales revenue, said Duffy.
Petra refrained from advising investors on production for its full 2021 financial year because of uncertainties around the pandemic. “While the mines are generally operating at planned levels, there remain risks to production relating to the impact of the stringent Covid-19 measures in place,” it said.
The government allowed the mining industry an early restart under strict conditions to ensure workers’ health and safety. Despite these measures, Petra noted 199 of its employees tested positive for the virus with 186 recovered. Two employees died of Covid-19.
Petra has put together an independent board committee to investigate claims of human rights abuses at its Williamson mine. The investigation, which includes specialist external advisers and the company’s lawyers, is due for completion before December.
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