LONDON (ResourceInvestor.com) -- In these gloomy times it is refreshing to attend an upbeat company presentation. And there was good news aplenty at the Petra Diamonds' [PDL] event in London: about the company's four diamond mine acquisitions since July 2007 (which increase its net resource base to 121 million carats worth $13.7 billion), about its results for the year ending 30 June 2008 (when the company posted its first profit), about the buoyant prospects for FY 2009, (a five fold increase in production is forecast), and about the robust longer term prospects for the diamond market and for Petra itself.
Four Diamond Mine Acquisitions July 07 - December 08
Significant hard-rock diamond mines are few and far between. The primary sources for diamonds are kimberlite pipes (which have been likened to the elevators which brought diamonds from the earth's mantle to the surface in a series of volcanic eruptions). While there are several thousand kimberlites in the world only a small percentage of these contain diamonds, and only a small percentage of the diamondiferous pipes contain diamonds in viable quantities.
So for Petra to acquire four hard rock diamond mines in less than two years from the thirty or so known mines worldwide is an impressive achievement. The acquisitions of two of the South African mines, Koffiefontein and , were completed in July 2007 and July 2008 respectively, while agreements have been signed about the acquisition of Kimberley Underground Mines in South Africa and the Williamson mine in Tanzania; both should be complete by the end of the year.
All four mines have been acquired from industry giant De Beers, and all have long operating histories. The Cullinan mine is particularly renowned for producing many of the world's most spectacular stones including a quarter of all diamonds which are larger than 400 carats, most of the world's rare but prized blue diamonds, and "the Cullinan diamond" itself, which at 3,106 carats is the largest gem-quality diamond ever found.
These acquisitions have enabled Petra to increase its gross resource base from 11.4 million carats worth $1.9 billion in October 2007 to today's 265 million carats worth $27.3 billion of which the net attributable to Petra is 121 million carats worth $13.7 billion.
Key results for FY 2008 and Prospects for FY 2009
While the contribution to Petra's results from Kimberley, Williamson and Cullinan will only come onstream in the current financial year Koffiefontein contributed significantly to the results for the year ending 30 June 2008 (FY 2008) enabling the company to post positive results including:
- A 352% increase in Group revenue to $76.9 million (up from $17 million in FY07)
- Its first year of profits. EBITDA for the year was $25.5 million after a prior year loss of $5.2 million. The net profit, after tax, was $1.9 million, up from a previous loss of $20.9 million.
The company is now generating cash even after capital spending and exploration. Cash at the bank at the end of June stood at $37.4 million.
Operational results from Koffiefontein were also encouraging with a recovered grade of 9.1 cpht (carats per hundred tonnes) compared to the grade modelled in the business plan of 7.4cpht. The average value per carat achieved was $484 compared to an industry average closer to $90/ct. On the downside production at Petra's Fissure mines in South Africa fell largely because of the power interruptions in the country.
The year was thus quite a watershed for the company with Chairman Adonis Pouroulis commenting that it had "completed Petra's transition from a junior mining company into a diamond producer of global significance".
The current financial year (FY 2009) is also on schedule for positive results; the company are expecting to it be a tipping point in production and revenue as the three new acquisitions come on stream, with gross production expected to exceed 1 million carats by June 2009, up from 200,000 carats in FY 2008. Petra's focus however remains not just on throughput but on costs, recoveries and achieved prices.
Longer Term Outlook
In the short term Petra expect the current market turmoil to have an effect on both industry demand and prices, particularly as the U.S. accounts for around 50% of global diamond demand. The company notes however that since every diamond is unique there is a diamond to suit every budget.
Petra's view about the long term outlook for the diamond market is one shared by many industry commentators. The company expects on the one hand that world diamond supply will remain broadly flat at best, as there have been no major new discoveries while the major existing mines are maturing and having to dig deeper or go underground. On the other hand demand is set to increase, especially from India, China, Russia and the Gulf States, with 550 million Chinese expected to enter the 'middle class' in the next 10 years. Prices are therefore expected to rise in the medium to long term as Petra's expected production grows.
Petra is also looking to drive growth from its exploration portfolio with advanced stage projects in Angola and Sierra Leone and early stage projects in Botswana and Angola.
The company faces a number of challenges particularly from rising costs, the power shortages which have hit South Africa and from the skills shortage. It is taking steps to address these by installing diesel powered standby electricity at each of its operations and by recruiting and developing from the pool of local school leavers
The fly in the ointment is the share price. At today's share price of 102 pence Petra is some 40% off its March 2007 high of 166 pence. Its market cap now stands at lb188 million ($350 million).
While the immediate prospects for Petra's share price will depend very much on prevailing market conditions its impressive portfolio of mines and exploration projects, its proven track record in operating mines, its healthy cash balance, and the longer term prospects for the diamond market all augur well for the future.