Despite its exposure to various risks and uncertainties, such as rough diamond prices, political instability and liquidity challenges – which could have a material impact on its long-term development – diamond miner Petra Diamonds has said it remains resilient.

The company reported on February 20 that continued softer prices resulting from elevated inventory levels in the midstream; prolonged weakness in the Chinese market; lab-grown diamond sales in the bridal jewellery segment; and higher interest rates impacting on the midstream, had resulted in its like-for-like prices decreasing by 13.3% year-on-year in the first half of the 2024 financial year.

Actions taken by major producers to curb supply and a two-month Indian diamond import moratorium, which came to an end on December 15, 2023, together with strengthened retail sales in the US, had contributed to improved market conditions as inventory levels across the pipeline have started to rebalance.

Hence, the company said it continues to adopt a cautious approach to the market in the near term, as prices were likely to remain volatile. It also called for ongoing discipline by major producers to provide some price stability for the 2024 calendar year.

“While demand from both the US and Indian consumer markets remains healthy, China is still lacklustre. Given ongoing global economic uncertainty, it remains important for the major producers to continue to exercise discipline to ensure that inventory levels remain balanced across the value chain,” CEO Richard Duffy said during a presentation of the company’s financial results.

Additionally, in December 2023, Group of Seven (G7) members announced import restrictions on non-industrial diamonds mined, processed or produced in Russia, effective from January 1, this year, and to be followed by further phased restrictions on the import of Russian diamonds processed in third countries.

Petra said it remained to be seen what impact these restrictions may have on pricing.

“Petra has reacted swiftly to diamond market uncertainty, taking steps to improve resilience through ongoing cost and capital optimisation. While we believe that prices have now bottomed, we expect pricing to recover more slowly than initially thought. We continue to see a supportive market in the medium- to longer-term,” added Duffy.

Moreover, the risk of political instability in South Africa, where Petra’s Cullinan and Finsch mines are located, is expected to increase with the general elections this year.

Country and political risk in Tanzania, where its Williamson mine is located, remains lower, however, owing to the positive economic and structural changes implemented by the government which were well received by the international community.

Internationally, increased geopolitical risks resulting from the Middle East conflict and the continuing war in Ukraine are impacting on other principal risks, in particular rough diamond prices, currency and group liquidity.

Softening rough diamond prices adversely impacted on Petra’s liquidity position in the first half of the 2024 financial year.

This resulted in the company announcing in November 2023 certain amendments and deferrals to capital projects and operating and group cost savings which are aimed at achieving aggregate cash savings of up to $75-million by June.

The replanning and value-engineering work associated with the deferred capital projects continues and, once completed, the company will inform the market of the expected impact on forward-looking guidance.

“We are on track to deliver the $75-million cash savings announced in November 2023, with cost savings expected to contribute about $10-million. We are replanning the resumption of our capital projects to deliver a smoothed capital and growth profile, with a commensurately lower cost structure to be sustainably net cash generative from the 2025 financial year,” said Duffy.

MINE UPDATES

Following the operational challenges experienced at the Cullinan, Finsch and Williamson mines during the 2023 financial year, and the impact this had on Petra’s liquidity, production in the first half of the current financial year had largely stabilised.

However, underground mechanical issues were experienced at Finsch post period-end, which has prompted Petra to lower its group production guidance for the 2024 financial year to between 2.75-million and 2.85-million carats, compared with prior guidance of 2.9-million to 3.2-million carats.

Underground mechanical issues arose as a result of the protracted replacement of a winder rope and accelerated wear on the chute feeding the material sizer on 78 level.

Nevertheless, Duffy said production at the Cullinan mine had largely stabilised and the ramp-up at Williamson was complete, while the mechanical issues at Finsch had been remediated.

Steady production was delivered by the Cullinan and Finsch mines during the first half of the 2024 financial year, with a successful, faster-than-anticipated ramp-up at Williamson, which is now close to its annual steady-state production run-rate. The deferral of portions of the capital projects at the Cullinan and Finsch mines currently stand deferred.

Ore processed increased by 8% to 5.8-million tonnes, largely owing to the successful ramp-up of production at Williamson. Total diamond production increased by 2% to 1.43-million carats, mainly owing to resuming operations at Williamson and increased run-of-mine contribution at Finsch, but partially offset by slightly lower grades at the Cullinan mine.

At Finsch, the 78-level project continues as planned to bring these production areas online during the 2024 financial year to supplement production from the existing sublevel cave, which is nearing its end of life and therefore experiencing increased production volatility.

Williamson resumed production ahead of schedule at the start of the first half of the 2024 financial year and continues its ramp-up to full production.

Meanwhile, consolidated net debt increased to $212.3-million as at December 31 2023 – compared with $176.8-million as at June 30, 2023 – owing to the timing of closing the company's sales tenders, the continued lower diamond pricing environment, working capital funding for the resumption of mining at Williamson and the increasing capital expenditure spend profile to extend the life of its operations at the Cullinan and Finsch mines.

Financial services provider Absa Bank has approved a R750-million increase in commitments under Petra’s revolving credit facility which, once completed, will improve Petra’s liquidity position and its operational and sales flexibility in the event of a weaker-for-longer diamond market.

Petra’s revenue for the first half of the 2024 financial year amounted to $187.8-million – compared with $208.5-million in the prior comparable period – comprising revenue from rough diamond sales of $187.8-million and no revenue from profit share agreements.

MOVING FORWARD

Further, the company noted that traceability of natural diamonds was a priority and that the group continues to monitor consumer requirements for greater transparency around provenance.

The G7 requirement for certification of origin, expected to be phased in by September this year, further supports the need for traceability and verification.

Petra is trialling technologies to enable tracing of its diamonds from mine-to-finger, which will enhance its product offering by giving consumers confidence in the provenance of its diamonds.

“We believe that offering verifiable origin and provenance has potential to significantly enhance the purchase experience, highlighting the inherent rarity and uniqueness of natural diamonds to consumers,” said Duffy.

Petra, meanwhile, recorded a 29% year-on-year decrease in lost-time injuries and it continues to strive towards a zero-harm environment in focusing on behaviour-based intervention programmes across its operations.

“Petra continues to focus on ongoing stabilisation and optimisation of our operations. Given where we are in the cycle, we are proactively building greater business resilience. Our target is to consistently generate net cash from financial year 2025 through addressing our cost structures and delivering a more smoothed capital profile.

“We will communicate the resultant impact on our outlook once we have completed this re-planning work and expect this to occur before the end of this financial year 2024,” Duffy added.