This AIM-traded miner has a surprisingly large resource base, according to Tony reading writing at www.fool.co.uk, a British investment portal.
Following completion of its most recent acquisition, Petra Diamonds (LSE: PDL) now controls the third-largest diamond resource base in the world, after DeBeers and Alrosa, the Russian state-owned mining giant.
That's a remarkable boast for a company that's still on AIM and what is London's largest-traded pure-play diamond miner. With the long-term fundamentals of the diamond market looking very attractive, Petra's diamond resource looks to be a highly desirable asset to own. Based on recent diamond prices, the company values it at $56bn, of which its own share is around $40bn.
A planned step-up to the main market by the end of the year should bring Petra to greater prominence. It is targeting entry into the FTSE250, where its £650m market cap would put it near the middle by size.
As it is noted by www.fool.co.uk, the newly acquired mine, Finsch, is expected to more than double Petra's production after a three-month bedding-in period, and should immediately improve earnings. So Petra's historic PE of 16 drops to a much cheaper 11 based on forecast earnings, with the price-to-sales ratio potentially halving from 4.6 to 2.7 times. If the company delivers on the increased production, then I feel the share price should respond.
Partners
Finsch is the latest in a string of acquisitions that takes Petra's tally of producing mines to eight. Seven of the mines are located in South Africa, where the company has a share of between 70% and 74% of each mine, with various Black Empowerment partners holding the rest. Petra's eighth mine is in Tanzania, where it has a 75% interest in partnership with the government.
The gross resource base including the partners' share is just over 300m carats, including 34m carats of proven and probable reserves. That underpins Petra's ambitious development plans, to increase production from 1.1m carats per year to 4m carats by 2013/14 and beyond 5m carats by 2014/15.
Results
The company's preliminary results for the twelve months to June 2011 showed how diamond prices have strengthened. Total sales of diamonds, measured by carats, were up just 4%, but revenues were up 24% to $220m. Prices have fallen back since June, but the company is confident of them remaining strong in the long term.
Production declined by 4%, as the company focussed more on value than volume and suffered from some commissioning difficulties and unseasonable heavy rain.
Adjusted EBITDA fell from $71m to $67m, but the 2010 results included an exceptional $35m gain from the sale of a single 500-carat diamond, the Cullen Heritage.
Petra has a strong balance sheet. After settling the Finsch acquisition, it has around $80m of free cash left following an earlier $325m share placement, which at 150p per share was executed significantly above the current price. There is debt of $90m.
Capex
But production growth has to be fed with capital expenditure, and cash flow from operations last year only financed half of the $105m spent. Petra has said that it can finance the development of Finsch from cash flow, but the group is projecting total expansion capex of more than $500m during the next three years that I think will result in some significant 'gearing up' of the balance sheet, especially if dividends start to be paid.
Costs are more of an issue. Mining and processing expenses have risen by a quarter in Rand terms, with energy prices and labour costs driving the increase. Both look set to continue upwards at above South African inflation, which is running at 5%. And last year, the effect was exacerbated by an 8% appreciation of the Rand against the US dollar. That said, higher production volumes should mitigate the cost per carat impact to some extent.
Nationalisation
While costs are a threat to Petra's profit margins, there does remain a remote but catastrophic risk in the form of unresolved debates about the nationalisation of South Africa's mines. These discussions have been led by the leader of the ANC's radical youth wing, Julius Malema.
Though the debates have rumbled on for years, any proposal does not seem to have gained much mainstream traction, but the subject is now slated for formal discussion at the ANC's conference next July. Petra hopes the issue will be put to bed and therefore encourage greater investment in the mining sector, but clearly there is an element of political risk that is unquantifiable.
So Petra is not a share to bet the house on. But with a credible plan to ramp up production of an increasingly scare global commodity, and the resource base to back it up, I see the shares having substantial upside, which, to my mind, makes them worth a punt.
