Petra Diamonds (PDL) has today announced that key lenders have agreed to waive the measurement of two covenant tests related to its consolidated EBITDA for the period to 31 December 2015. The waiving of the covenants will ensure that Petra can complete its stated expansion objectives of producing 5 million carats per annum by 2019. Given that the majority of the expansion work has already been completed, Petra shares should respond positively to the waiving of the December 2015 covenants, and trend higher. Accordingly we rate the shares a buy at 64p.
Having graduated from AIM to the Main Market of the LSE in 2011, Petra has firmly established itself as the UK’s largest quoted diamond mining group. The Group owns 74% stakes in four of its South African mines, Finsch, Cullinan, Koffiefontein, and Kimberley Underground, and a 75% holding in the Williamson mine in Tanzania.
Q1 Trading Update
The Company’s first quarter trading update in October informed that production had increased at three of its five mines to 842,796 carats. At Petra’s most important mine, Finsch, production was up 14% to 590,799 carats, whilst at Koffiefontein production had increased by 35% to 14,350 carats, and at Kimberley Underground production was up by 36% to 49,107 carats. Production decreased at both Cullinan and Williamson, which produced 145,385 carats and 43,155 carats respectively.
No revenue was recorded in the first quarter, as Petra operates via a tender process, with two tenders in the first half of its financial year and up to four in its second half. Tenders last between four to six working days, during which time, participants view the assortment of stones, and place a confidential electronic bid on their parcel of choice. Tenders are timed to maximize participation from the Group’s international client base, and take into account various secular and religious holiday periods, which would likely be quieter times for the rough diamond market.
Accordingly, the first tender of the financial year was held during its second quarter in October, and yielded $68.9 million, a decline on a like-for-like basis of 8.8% on Q4 2015. Petra attributed the decline to a combination of a slowdown in demand - particularly from China, which represents 16% of the consumer market – and a lower value product mix from Finsch, Koffiefontein, and Kimberley Underground. Petra does anticipate a better product mix in the second half of its financial year.
The Company stated that expectations of a positive longer-term outlook for the rough diamond market are underpinned by the continued growth in demand from developed and emerging markets, set against constrained supply due to the limited number of significant diamond mines worldwide.
Importantly, Petra confirmed that it remains on track to meet its full year production guidance of 3.3 – 3.4 million carats for the full 2016 financial year, rising to 5 million carats for 2019.
Financials And Forecasts
Petra’s Q1 update showed that at 30 September 2015 it had cash of $57.2 million, down from $166.6 million at 30 June 2015, whilst net debt stood at $306.2 million, up from $171.7 million at 30 June 2015. Undrawn bank facilities stood at $208.4 million.
The Company’s net debt increased markedly in the three months to 30 September as a result of there being no tender proceeds to book, coupled with the ongoing expansion program to enable increased production.
For the current financial year, brokers are forecasting revenue of £277.11 million, with pre-tax profits of £57.41 million, giving earnings per share of 6.09p. The current earnings multiple is therefore 10.5. A dividend payment of 2.16p is also forecast, equivalent to a yield of 3.3%.
The waiving of key covenant tests demonstrates that Petra’s bankers are firmly supportive of its strategy, which we believe will lead to the share price increasing both on a short-term basis and also over the long-term, as its expansion program is completed and the company moves ahead with increased production in its current financial year and beyond to target 5 million carats per annum by 2019.
The share price has declined significantly over the course of the year, and clearly prices in a lot of negative sentiment. However, with the positive announcement regarding the waiving of its key covenant tests, increased production, and an established presence in what remains an oligopolistic market, Petra shares are both a short-term and long-term buy.
Share Price: 64p
Shares In Issue: 522,795,562
Market Cap: £334.5 million
Market: Main Market(London Stock Exchange)
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