Petra Diamonds sparkles despite murky outlook

Clarity in Tanzania

Petra Diamonds shares have extended gains this week to almost 20% after it got more clarity about authorisation to export from its troubled Williamson mine in Tanzania. The country recently cracked down on mining firms by increasing export taxes, demanding higher stakes in some mining operations and forcing miners to build more smelters in the country aiming to own a larger part of the value chain.

Whilst the Williamson mine is Petra’s only pit outside of South Africa, it is the country’s most promising diamond prospect and relatively unexcavated, despite having been in operation for almost 80 years. It is also known to have a relatively large deposit and produce diamonds of higher than average value. Hopes for a complete and speedy resolution have seen Petra’s stock race 12% higher off two-year lows on Wednesday on news of the reauthorisation, and as much as 18% more on Thursday.

Still, the Tanzanian setback is the latest for Petra, shares of which have fallen more than 77% since peaking in 2014. The miner’s troubled recent history has been exacerbated by the concentration of its assets in South Africa, with its variable level of economic stability, coupled with high regulatory costs that can be onerous for small miners like Petra. The group’s revenues in 2016 were $430m, compared to $23.8bn at Anglo American.

Colourful history

Whilst news of the re-authorisation removes a major uncertainty after Petra warned in June that it might breach debt covenants, the risk of a ‘false dawn’ is not insignificant. For one thing, there has been no resolution yet over the 71,654.45 carat shipment from the Williamson mine that was blocked for export this month. We expect Tanzania to extract further concessions during ongoing negotiations before allowing shipment to Petra’s Antwerp office.

Relations have clearly improved somewhat since the government confiscated a consignment from a majority-owned Petra mine early this month, accusing it of undervaluing the diamonds. But the one-party government has taken an increasingly aggressive stance of late with foreign partners in the minerals industry. Petra denied the charge.

The group undertook a string of acquisitions in recent years of mines formerly owned by Anglo’s De Beers unit. Those investments, coinciding with a downturn in prices across the industry contributed to the group’s heavy leverage burden. Petra’s net debt would wipe out annual core earnings (EBITDA) more than three and half times if the group had to redeem it immediately. Even a crystal clear outlook would be challenging under such conditions, but Petra has nowhere near the luxury of that yet.