Miner is Confident as Production Increases
Author: Avi Krawitz
Demand for small diamonds has remained robust through the past few months and is expected to provide long term support for the industry, according to Johan Dippenaar, the chief executive of Petra Diamonds.
China's rising middle class and changing fashion trends lend favorably to the small, better-quality segment of the rough market, Dippenaar (pictured) told Rapaport News.
"We have experienced very firm pricing in the smalls," he said. "People say that the bigger stones are less affected by market uncertainty but that has not been the case more recently."
Dippenaar stressed that these goods were significantly cheaper a few years ago and that there is still "room for growth," as scores of new Chinese consumers enter the market. "Diamonds are a late cycle product and China's urbanization is bringing more and more diamond customers to the market," he explained. "This hasn’t even happened in a big way yet, but they will start by buying moderately priced goods and create a larger market for smaller stones."
Dippenaar added that changing fashion trends is also buoying the small diamond segment as watch makers increasingly use diamonds in their designs and jewelers compliment center stone engagement rings with clusters of diamonds.
Petra has recently increased its exposure to this sector of the market with its acquisition of the Finsch mine from De Beers in September 2011, which Dippenaar explained has proven to produce very high-quality small diamonds. These helped to lift revenue in the company’s first fiscal-half year that ended on December 31, 2011.
Stronger Half Year
Petra reported that revenues grew 13 percent year on year to $101.4 million from three sales during the period, but posted a net loss of $26.7 million mainly due to unrealized foreign exchange losses.
Diamond prices softened in the half year after a buoyant start to 2011 as tight liquidity in the cutting centers and economic uncertainty brought caution to the diamond market. The RapNet Diamond Index (RAPI) for 1 carat diamonds fell 11 percent from July to December 2011.
Petra expects a stronger performance in the current half and has already sold 306,149 carats for $44.4 million, or $145 per carat, at its January–February tender. Dippenaar noted that prices and demand continued to strengthen at the company’s most recent March tender.
"We're seeing more people at our tenders and people are asking for more time to view the goods. These factors, as well as the price stability we are seeing, all point to a substantially different second fiscal half year," he said.
Petra is scheduled to hold five tenders during the second fiscal-half and has significantly larger quantities of diamonds to sell than it had a year ago, with output from the Finsch mine coming on-stream. Petra’s inventory rose 64 percent to $63.6 million at December 31 due mainly to the additional Finsch production, Dippenaar explained.
Des Kilalea, an analyst with RBC capital Markets, which serves as a broker to Petra, maintained his target price of 205 pence and "outperform" recommendation for the company in a research note, saying that Petra should benefit from higher inventory and expected rough price stability during the current fiscal-half. "Longer-term, Petra views the market underpinning a rising diamond price trend, as we do," Kilalea wrote.
Dippenaar dismissed comments that the influx of a large quantity of new rough goods out of Zimbabwe's Marange mines would significantly impact the market, especially in the long term. He reasoned that these mines supply the lower-quality segment of the market where other resources have diminished in the past few years. "Initially the lower-quality goods could be affected but I don’t feel that Zimbabwe will be a permanent feature in the market," Dippenaar said. "I think they will compensate for lower production at mines like [Rio Tinto’s] Argyle operation, which supported that lower segment over the years."
While Petra does not compete significantly in that space, the company is invested in raising its own production levels. The Finsch acquisition has helped Petra ramp up production to an expected 2 million carats during the current fiscal year ending on June 30, 2012 and the company forecast reaching 4 million carats per year by 2015 and 2016 and 5 million carats by 2018.
The increase will come from Petra’s current portfolio of mines, which includes the South Africa-based Finsch, Cullinan, Koffiefontein, Kimberley Underground, and three Fissure mines, as well as the Williamson mine in Tanzania. Petra also has exploration activities in Botswana. Dippenaar said the company is not looking for further acquisitions or to expand its operations downstream.
"Our focus is on mining our current portfolio and we will not do anything to deviate from that," he explained.
Petra had $45.1 million cash on hand at December 31, despite having a negative cash flow during the preceding six months, and recently secured $48 million debt facility with Rand Merchant Bank. Dippenaar explained that the funding will be used to finance expansion projects at its mines, particularly at Cullinan, Finsch and Williamson.
The expansion projects are aimed at increasing volume of production and the grade of output by reaching undiluted ore bodies. The Cullinan C-Cut development is expected to raise the mine's grade profile from 35 carats per hundred tonnes (cpht) to 50 cpht. Expansion at Finsch aims at raising the grade from 33 cpht to 47 cpht.
Kilalea noted that the significant capital expenditure programs will likely keep Petra with a negative free cash flow through 2014 until the benefits of higher grades at Cullinan and Finsch will be apparent.
Dippenaar therefore stressed that the company is focused on maintaining liquidity so that the capital programs can move ahead and he is confident that current market conditions will support that strategy. "We don't try to over analyze the market. People are cautious but the general mood is positive," he explained. "Our aim is simply to grow production and move to higher grades from the same effort. That's key to our story."