Trading Update

RNS Number : 5866P

Petra Diamonds Ld

20 July 2010

 



 

 

Immediate Release

20 July 2010

Petra Diamonds Limited

("Petra" or "the Company" or "the Group")

Trading Update - Year ended 30 June 2010

Gross revenue up 88% after a further year of growth

Petra Diamonds Limited announces the following sales and production trading update (unaudited) for the year ended 30 June 2010 (the "Period").

This has been a highly progressive year for the Company, during which Petra has:

·   increased its ownership of the Cullinan mine to 74%, thereby doubling Cullinan's attributable production and increasing Petra's attributable resource base from all operations to 195 million carats (gross: 262 million carats);

·   completed the acquisition of a further important producing diamond mine - Kimberley Underground;

·   sold the remarkable 507 carat Cullinan Heritage diamond for US$35.3 million;

·   raised US$120 million in an equity financing; and

·   agreed terms for debt facilities totalling US$78 million with IFC and Rand Merchant Bank ("RMB").

Petra is now fully financed to roll out its planned capital expansions to treble annual output to over three million carats, by increasing production from its world-class resource base.

The Company looks forward to announcing its full financial results for the Period in September. The Petra operations are, on the back of the revenue growth in this trading update, expected to report strong earnings and operating cashflows.

Highlights

Sales

·   Gross mine revenue up 88% to US$177.7 million (FY 2009: US$94.4 million) due to:

·     continuation of the recovery  in rough diamond prices for the Period

·     sale of notable 'specials'

·     increased Group production

·   Gross carats sold up 11% to 1,125,098 (FY 2009: 1,011,707)

·   Group (consolidated) mine revenue¹ up 136% to US$163.3 million (FY 2009: US$69.1 million); growth accentuated due to 100% consolidation of Cullinan from November 2009

Production

·   Gross production up 6% to 1,164,856 carats (FY2009: 1,099,367 carats)

Johan Dippenaar, Chief Executive Officer, said:

"These results signify a further step change for Petra, with substantially higher revenues reflecting our continued production growth and a strong recovery in rough diamond prices. We have recently taken steps to significantly strengthen our balance sheet and are now fully financed to ensure the capital roll-out which will deliver further growth and returns to our shareholders."

Analyst presentation and webcast

A presentation for analysts will be held at 9:00am BST on Tuesday 20 July 2010 at the offices of Buchanan Communications, 45 Moorfields, London EC2Y 9AE.

A live webcast of the analyst presentation will be available on Petra's website at www.petradiamonds.com and on the link below:

http://mediaserve.buchanan.uk.com/2010/petra200710/registration.asp 

A recording of this will be available from 10:30am on Tuesday 20 July 2010 on the website and on the same link.

Notes:

1.   With effect from 16 November 2009, Petra increased its stake in the Cullinan mine from 37% to 74%. For the Period 1 July to 16 November 2009, Petra accounted for its interest in Cullinan under the gross method of proportional consolidation, recognising 50% of revenue and 13% minority interests. With effect from 17 November 2009, the effective date of control for accounting purposes that Petra acquired the remaining 50% interest in Cullinan Investment Holdings Limited ("CIHL", the Cullinan holding company) from Al Rajhi Holdings W.L.L., Petra now consolidates 100% of revenue and 26% minority interests (in line with IFRS).

2.   The acquisition of the second 50% of CIHL was treated as a stepped acquisition under IFRS3 (revised). A total fair value gain of US$31 million was reported in Petra's interim results to 31 December 2009, which reflected the difference between the book value of the original 50% CIHL interest and the fair value (as determined by the price paid for the second CIHL 50%). A significant component of this gain related to the difference between the production cost and management's estimated accounting valuation of the Cullinan Heritage and the 168 carat stone recovered alongside the Cullinan Heritage. In assessing the fair values of the second 50% of CIHL net assets acquired, the premium of consideration over net assets was allocated to mineral rights and diamond inventories.  

3.  On 26 February 2010 the Group sold the 507 carat Cullinan Heritage for US$35.3 million. At mine level this realised a profit of US$35.3 million, as the production cost for this stone was not material. Management's  estimate as at 16 November 2009 for the value for this stone for accounting (not sale) purposes was US$15 million, so a further earnings effect from the sale of the Cullinan Heritage of US$20.3 million (US$35.3 million - US$15 million) will be recorded in Petra's full year results.

4.   On 25 November 2009 the Group sold a 168 carat stone for US$6.28 million. At mine level this realised a profit of US$6.28 million, as the production cost for this stone was not material. Management's estimate as at 16 November 2009 for the value for this stone for accounting (not sale) purposes was US$4 million, so a further earnings effect from the sale of this stone of US$2.28 million (US$6.28 million - US$4 million) will be recorded in Petra's full year results.

Diamond market update

The diamond market has recovered strongly from the downturn, driven by the global economic revival and a slow but steady improvement in the important US market.  By Period end, rough diamond prices had returned to the levels experienced in June/July 2008 and whilst we are now anticipating some consolidation in the market, there are expectations of a significantly improved year end, driven by the traditionally strong festive buying season (Thanksgiving and Christmas).

Exciting demand growth continues at double digit pace from China and India, with market commentators predicting that China could grow to equal the US diamond market within the next decade. The market for high end, 'exceptional' diamonds also remains strong, with positive jewellery sales reported by both Sotheby's and Christie's.

Global rough diamond supply will be higher this year than in 2009, due to increased sales from De Beers and Alrosa. However it is still anticipated that supply constraints will result in a significant shortfall to the market, which will emerge in the next three to five years.  New sources of production coming on stream in this time-frame will only serve to temporarily counteract the depletion of the world's largest diamond mines, which are all past their peak and can no longer be operated at previous higher levels of production.

At the Petra tenders, we have witnessed increased numbers of international companies in attendance, with a particularly marked rise in the number of Indian manufacturers from Surat/Mumbai.  We attribute this to Petra's growing stature within the industry, and our attractive production profile, which is becoming increasingly important in terms of both quantity and the wide range of goods available.

Production and sales

The Period totals and breakdown per mine are below and are all given on a gross basis.

Combined operations:

(Cullinan, Koffiefontein, Kimberley Underground, Fissures, Williamson)

	Unit	Year ended 30 June 2010	Year ended 30 June 2009	Variance
Production
Diamonds produced	Carats	1,164,856	1,099,367	+6%
Sales
Revenue	US$M	177.7	94.4	+88%
Diamonds sold	Carats	1,125,098	1,011,707	+11%

Gross revenue was up 88% for the year due to the strong recovery in rough diamond prices for the Period, increased Group production, and the sale of notable 'specials', which are listed below:

·      507 carat white Cullinan Heritage diamond (Cullinan): US$35.3 million

·      168 carat white diamond (Cullinan): US$6.3 million

·      64 carat white diamond (Cullinan): US$3.7 million

·      two 50+ carat white diamonds (Cullinan): US$2.8 million

·      104 carat white diamond (Cullinan): US$2.0 million

·      37 carat white diamond (Cullinan): US$1.1 million

·      70 carat white diamond (Koffiefontein): US$1.1 million

·      34 carat white diamond (Koffiefontein): US$1 million

·      Cullinan's rare blue diamonds continue to command very high prices per carat (a 6.7 carat blue sold for US$510,000, and a 6.5 carat blue manufactured to a 2.8 carat polished diamond sold for US$250,000)

Cullinan - South Africa

	Unit	Year ended 30 June 2010	Year ended 30 June 2009	Variance
Production
Diamonds produced	Carats	927,931	888,595	+4%
Grade	Cpht	38.5	41.0	-6%
Sales
Revenue	US$M	127.0	51.2	+148%
Diamonds sold	Carats	903,861	780,663	+16%
Average price per carat	US$	141	66	+114%

Note: Petra has a 74% interest in Cullinan; BEE partners 26%

During the Period, Petra doubled its interest in the Cullinan mine to 74% by acquiring the 37% interest held by Al Rajhi Holdings W.L.L. ("Al Rajhi"). Cullinan is Petra's flagship asset and a substantial diamond producer, with a distinguished history as the source of many of the world's most famous and beautiful diamonds.

In February 2010, Petra sold the 507 carat Cullinan Heritage diamond for US$35.3 million, the highest price on record for a rough diamond and a reflection of the incredible rarity of the stone, which combines its remarkable size with exceptional colour and clarity. The Cullinan Heritage joins an historic list of famous and important diamonds which have been recovered from the celebrated Cullinan mine.

The sale of the Cullinan Heritage served to significantly increase the average value per carat achieved at Cullinan for the Period, but even without including this exceptional sale, the average value per carat would have been US$101, still up 53% on the previous year.

During the Period, overall grade at Cullinan decreased by approximately 6%, further to:

·      an increase of the bottom cut for slimes discard from 0.8mm to 1.3mm (although the effect on total revenue is not significant due to the increased average value per carat achieved);

·      higher than average rainfall in South Africa in the months to April 2010 resulting in wet ore having to be pulled from many of the mature crosscuts. This diluted 'muddy' ore affects grade due to the significantly increased moisture content. The increased moisture content accounted for approximately 4% of hoisted tonnes and resulted in an approximate 1.5 carats per hundred tones ("cpht") reduction of grade; and

·      the depletion of the higher grade OSP tailings, with the lower grade run of mine ("ROM") tailings now being treated.

Petra is currently implementing an expansion plan at Cullinan which will take production to 2.6 million carats by 2019.  This expansion plan will allow Petra access to the first portions of the major C-Cut resource, which has a world-class resource of some 133 million carats. 

Koffiefontein - South Africa

	Unit	Year ended 30 June 2010	Year ended 30 June 2009	Variance
Production
Diamonds produced	Carats	60,260	52,089	+16%
Grade	Cpht	6.0	6.6	-9%
Sales
Revenue	US$M	22.8	18.3	+25%
Diamonds sold	Carats	56,707	72,809	-22%
Average price per carat	US$	402	252	+60%

Note: Petra has a 70% interest in Koffiefontein; BEE partners 30%

Prices for Koffiefontein's high value output recovered strongly in the Period, with the average value per carat now back around the US$400 mark.

The lower grade of 6 cpht is the result of significant amounts of diluted front cave material being drawn from the main cave on the 480 level, whilst allowing the East cave, the West cave and the recovery level cave to reach maturity by pulling lower tonnages from these areas.  Over the coming year it is anticipated that there will be a systematic decrease in reliance on the main cave material and underground ROM grade will improve.

Excess capacity created in the plant is being utilised by feeding material from the Eskom dump tailings, which is now fully operational and supplying significant ore to the main plant.

Kimberley Underground - South Africa

	Unit	Year ended 30 June 2010	Year ended 30 June 2009	Variance
Production
Diamonds produced	Carats	1,362	n/a	n/a
Grade	Cpht	14.9	n/a	n/a
Sales
Revenue	US$M	n/a	n/a	n/a
Diamonds sold	Carats	n/a	n/a	n/a
Average price per carat	US$	n/a	n/a	n/a

Note: Petra has a 74% interest in Kimberley Underground; BEE partners 26%

In May 2010, Petra completed the acquisition of Kimberley Underground and thereby introduced a seventh producing diamond operation to the Group portfolio. The Company had anticipated this acquisition to complete sooner, but the process was delayed due to the complexity of the New Order Mining Right conversion. Petra had previously expected some contribution of production from Kimberley Underground in the 2010 financial year, but the delay means that it will instead first add meaningful production in the 2011 financial year. 

Kimberley Underground is expected to produce 100,000 carats in its first full year of production, rising to 180,000 carats per year thereafter, following commissioning of a second production plant by June 2011. Further to the plant start-up, production did not meaningfully commence until mid June 2010.

During the start-up and commissioning in May of the Joint Shaft plant, bottom cut was run at 2mm for this phase. 1,362 carats were produced for the short period from start-up to end June, resulting in a grade of 14.9 cpht. Now that commissioning has been completed, the discard size has been reduced to the required operational 1.4mm and the grade is expected to increase to a forecast average of 18 cpht.

Fissure mines - South Africa

	Unit	Year ended 30 June 2010	Year ended 30 June 2009	Variance
Production
Diamonds produced	Carats	74,232	71,274	+4%
Grade	Cpht	37.2	37.7	-1%
Sales
Revenue	US$M	13.5	15.3	-12%
Diamonds sold	Carats	72,629	82,126	-12%
Average price per carat	US$	185	186	-1%

Note: Petra has a 100% interest in Helam, a 74% interest in Star; BEE partners 26%, and a 74.5% interest in Sedibeng; BEE partners 25.5%

Output from the three fissure mines - Helam, Sedibeng and Star - was significantly affected by lower production from Star and Helam, with the effects of the reorganisation at both mines, where retrenchment programmes in the previous financial period had reduced staff levels by around 50%, still being felt in this financial year. In addition, a two week strike at the Sedibeng mine further impacted production.

The lower grade encountered at the fissure mines related primarily to the Star mine where production is now transitioning to the 16 level. Bifurcating fissures had to be mined on the 15 level before the transition occurred.

The average price per carat reduced from the previous year due to a stone from Sedibeng, which sold for US$5.2 million in the year to June 2009. Without this stone, the year-on-year price per carat increase would have been approximately 52%.

During the Period, Petra received a New Order Mining Right for Star. The issue of the New Order Mining Right required that Petra introduce a black economic empowerment ("BEE") partner to the mine. Sedibeng Mining (Pty) Limited ("Sedibeng Mining"), which is a Petra BEE partner in both Cullinan, Kimberley Underground and the Sedibeng fissure mine, now holds a 26% interest in Star.  Application is currently underway for Helam's New Order Mining Right and it is expected that Sedibeng Mining will also be Petra's BEE partner in respect of that mine.

Costs - South Africa

As previously reported in the interim results for the Period, increases in the cost of electricity in South Africa have adversely impacted the unit cost performance at the mines, as have above-inflation wage demands.  Management continue to control costs across all operations - improved unit costs are foreseen once the expansion plans already announced start yielding additional production.

Williamson - Tanzania

	Unit	Year ended 30 June 2010	Year ended 30 June 2009	Variance
Production
Diamonds produced	Carats	101,071	84,486	+20%
Grade	Cpht	5.8	5.7	+2%
Sales
Revenue	US$M	14.4	9.4	+53%
Diamonds sold	Carats	91,901	75,045	+22%
Average price per carat	US$	157	126	+25%

* Petra has a 75% interest in Williamson; Government of the United Republic of Tanzania 25%

The results for Williamson listed above reflect only nine months' production as bulk sampling production operations were effectively stopped on 1 April 2010 and the last tender of diamonds held in May 2010, further to the commencement of Petra's expansion plan.  The development programme at Williamson is expected to increase throughput from an average two million tonnes per annum ("mtpa") to 10 mtpa which, at an average grade of 6 cpht, would yield an estimated annual production of approximately 600,000 carats. The expansion plan is estimated to take up to three years to complete and will cost approximately US$50 million. The IFC debt financing of US$40 million will be applied to this programme, with the balance being contributed from Petra's own treasury.

During this time, the Company may undertake low volume production following the refurbishment of the current production plant; further information will follow in this regard when the Company's plans are developed. However, meaningful revenues from Williamson are not likely to recommence until fiscal 2013/2014.

An average sales value of US$157 per carat was achieved for the Period, but Petra expects that the new plant and processing techniques to be introduced at the mine will bring about substantial improvements to diamond values in the future, and that values of around US$200 per carat will be achievable over the medium term.

Diamond sales were less than production for the Period, due to the previously reported theft at O.R. Tambo International airport in October 2009 of a Williamson diamond parcel of 14,931 carats, valued at approximately US$3 million.  The Company had previously reported that it expected the insurance claim to be settled satisfactorily; however, underwriters have recently rejected Petra's claim on technical grounds and Petra is currently assessing its options with regards to the loss. Further information will be provided as and when appropriate.

Corporate

Placing raised US$120 million:

In December 2009, Petra completed a successful placing to raise gross proceeds of US$120 million (£72.7 million). The funds raised have been applied to:

·     strengthen the Company's balance sheet by paying down debt; 

·     acquire a further 37% interest in Cullinan; and

·     bolster the Company's treasury, to assist with the capital expenditure as required to further increase Group production.

Al Rajhi Loan

As part of the transaction to acquire Al Rajhi's additional 37% interest in Cullinan, Petra also took over responsibility for the US$80 million loan due to Al Rajhi in respect to the original acquisition and financing of the mine. Petra reported in its interim results in February 2010 that the principal loan balance had since been reduced to US$43.2 million. In March 2010 a further US$12.5 million was paid to Al Rajhi from Petra's treasury, further reducing the principal loan balance to US$30.7 million.

Facilities to fund Williamson and Cullinan expansion:

In June 2010, Petra agreed terms with IFC (a member of the World Bank Group) and RMB, a division of FirstRand Bank Limited, with regards to new debt facilities of approximately US$78 million.  The facilities will be applied to:

·     primarily finance the expansions of Williamson and Cullinan (together with contributions from Petra's own treasury); and

·     general Petra working capital needs, giving the Group flexibility to settle the outstanding loan due to Al Rajhi and remove this short term debt obligation from Petra's balance sheet.

On completion of this debt transaction, the expansion plans for Williamson and Cullinan will be fully financed, assuring the capital roll-out required to take Group annual production to over three million carats.

~ Ends ~

For further information, please contact:

Cathy Roberts	Telephone: [phone]
Petra Diamonds, London	[e-mail]

Bobby Morse / Katharine Sutton	Telephone: [phone]
Buchanan Communications	[e-mail] [e-mail]

Nicola Taylor	Telephone: [phone]
Russell & Associates	[e-mail]

Ryan Gaffney / Andrew Chubb	Telephone: [phone]
Canaccord Genuity Limited (NOMAD and Joint Broker)	[e-mail] [e-mail]

Joshua Critchley / Martin Eales	Telephone: [phone]
RBC Capital Markets (Joint Broker)	[e-mail] [e-mail]

About Petra Diamonds

Petra Diamonds is a leading supplier of rough diamonds, with a gross resource base of 262 million carats. The Company offers a unique growth profile within the diamond sector, increasing its annual production fivefold in the year to June 2009 to over one million carats, and with firm plans in place to grow production to over three million carats per annum.

Petra has a well-diversified portfolio, with majority interests in seven producing mines: six in South Africa (Cullinan, Koffiefontein, Kimberley Underground, Helam, Sedibeng and Star) and one in Tanzania (Williamson).

Petra conducts all its operations according to the highest ethical standards, and will only work in countries which are members of the Kimberley Process.  The Company is quoted on the AIM market of the London Stock Exchange (AIM: PDL). For more information, visit www.petradiamonds.com.

 

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