Petra Diamonds fails to sparkle as tender prices fall

Shares in Petra Diamonds continued to lose their lustre after the release of a first-quarter trading update, as a 1% increase in production was coupled with a 9% decline in selling prices at its initial diamond tender auction.

Production for the period from 1 July to 30 September increased to 842,796 carats, a new record, up from 833,744 carats in the same period last year, and more than half of the first-half guidance issued by management of 1.5m carats (Mcts).

Although still early days, the company said Petra remained on track for its production guidance of 3.3-3.4Mcts for the full year.

No revenue was made during the quarter due to the first tender of the financial year was held in October.

The tender yielded US$68.9m, with diamond prices on a like-for-like basis falling 8.8% versus the fourth quarter of the last financial year in US dollar terms, although this was largely expected as a reflection of recent De Beers' 10% price cut in August.

Petra, which said the significant weakening of the South African rand in recent months had mitigated the cashflow impact of lower US dollar prices, added that its expansion programmes, including the Cullinan plant project, remained on track.

Spending on these projects and other costs, in a period of no revenue saw cash at bank dwindle to $57.2m from $166.6m three months before and net debt nearly double to $306.2m at period end from $171.7m at the end of the last period, with undrawn bank facilities of $208.4m.

Analysts at Shore Capital said: "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."

Investec said it saw the results as "positive" for Petra and foresaw the share price decline as a buying opportunity "since PDL remains a growth story".

"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% qoq is a reflection of developments well known to the market from updates on De Beers auctions. Furthermore, operational guidance is unchanged and ZAR weakness is helping to offset weaker revenues."

Shares in Petra were down 6.8% by 1030 on Wednesday to 74.97p.