Petra Diamonds shares lose sparkle after profit forecasts slashed
The company laid bare the impacts of the recent appreciation of the South African rand, which it said would affect its cost base in US dollar terms.
Petra Diamonds shares lost their sparkle after lowering production forecasts and confirming that the stronger South African currency would knock annual profits.
The company laid bare the impact of the recent appreciation of the rand, which it said would affect its cost base in US dollar terms and result in a 10%-15% hit to 2018 underlying profits, based on current consensus forecast.
The firm, which runs diamond mines in Tanzania and South Africa, also said its full year production forecasts had dropped to between 4.6 million and 4.7 million carats, “mostly due to lower grade guidance” at its South African Cullinan operations as well as worker strikes in the first quarter.
That compares with previous forecasts of around 4.8 million to 5 million carats.
Petra Diamonds said it could attempt to mine larger quantities of small, low-value diamonds to maintain a “steady state higher grade”, but stressed it would be “uneconomic” to do so and would be out of line with the company’s focus on value over volumes.
Petra Diamonds also reported a 1% drop in revenues to $225.2 million in the six months to December 31, but chief executive Johan Dippenaar tried to turn attention to the 10% jump in production to 2.2 million carats over the first half of the year, which represented a new six-month record for the firm.
“Petra’s stated strategy is to focus on value as opposed to volume production, which is particularly pertinent to diamond operations, as not all carats are of equal value,” he said.
He also noted that lower production forecasts would not affect revenues, thanks in part to the “positive uplift in Cullinan’s average value per carat”.
But the double-whammy cut to profits and production sent shares in the London-listed precious gems firm down more than 17% in morning trading to around 65.5p.
Russ Mould, investment director at AJ Bell, said: “Petra has been dealt a number of blows over the past few years, including the blocking of a consignment of diamonds by the Tanzanian government and lacklustre diamond prices.
“It has also had to endure additional pressure on earnings by having to extract lots of waste material pending a move to fresh sections of ore at several of its mines.”
“All of these issues have forced Petra to be in regular contact with its lenders as it tests debt covenants. This has been going on for a long time, so it begs the question of how long its shareholders will stay supportive.”