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Petra Diamonds loses lustre after disappointing update

Discussion in 'Market News' started by Lily, Oct 28, 2015.

  1. Lily

    Lily Forum Member

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    Company in talks with bankers about covenants as diamond prices fall

    Petra Diamonds has lost its sparkle after the company reported falling prices and said it was in talks with its bankers about debt covenants.

    Following the news, its shares have fallen 6.65p or more than 8% to 73.8p.

    Petra has initiated discussions with its bankers to ensure than its senior lender covenants are appropriate for the business and will update shareholders in that regard in the near future.

    Although the reported weakening in diamond prices will come as no surprise to anyone, and despite that the strong production performance and that the shares have already fallen significantly this year, we expect another red day today.

    Despite the recent drop in the share price there is continued uncertainty regarding the diamond price outlook and sales. Although this morning’s announcement notes that on a like-for-like basis diamond prices were down 8.8%, sales were around 30% down, reflecting lower volume demand. We put our Petra Diamonds numbers under review when its 2015 results were published (September 18) and maintain this position given the uncertain outlook. Unfortunately the market will start looking at the debt position again (currently $306m). No recommendation and no forecasts for now.

    In early September we cut our diamond price assumptions by 10% from Petra’s July guidance levels, and while we are surprised that there is no change in price guidance in this release, we believe that guidance will need to be reduced later in the financial year. Quality of stones should improve through the year, but prices achieved in the October tender are well below full-year guidance. We see value in Petra shares at the current share price (80p) as the Cullinan and Finsch mines producer increasing volumes of higher grade ROM ore, but there is no doubting the difficult trading conditions that the company faces.

    The company has maintained its previous diamond price guidance on the basis that it is expecting an improved product mix in the second half of the year. However, we are taking a somewhat more cautious approach in view of the continuing negative comments from elsewhere in the diamond sector. We were using diamond prices of guidance minus 5% and we now move to guidance minus 10%. As a result, our target price reduces from 210p to 191p.

    Whilst news flow on diamonds is bearish, that management have not changed pricing guidance for now is a positive. Like-for-like diamond pricing down 8.8% quarter on quarter is a reflection of developments well known to the market from updates on De Beers auctions. Furthermore, operational guidance is unchanged and rand weakness is helping to offset weaker revenues.

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