Diamond seizure threatens Petra
• Crackdown by Dodoma government threatens miner’s debt covenants
Difficulties at Petra’s Williamson diamond mine, stemming from a crackdown by the Tanzanian government and the seizure of a parcel of diamonds, could force the London-listed miner to breach two debt covenants, leading to a decision to put the mine into care and maintenance.
Difficulties at Petra’s Williamson diamond mine stemming from a crackdown by the Tanzanian government and the seizure of a parcel of diamonds could force the London-listed miner to breach two debt covenants and lead to a decision to put the mine into care and maintenance.
Petra missed its full-year target of between 4.4-million and 4.6-million carats, generating 4-million carats because of labour difficulties at its new Cullinan processing plant near Pretoria, which delayed commissioning. The lower production hit profitability hard because about 70% of Petra’s costs are fixed, needing high production to offset them, while the firmer rand also played havoc with the bottom line.
Net taxed profit was $21m, down from $67m the year before. Mining profit fell to $169m from $176m.
While the missed production target was important, more pressing for analysts was how Petra was managing the fallout from the government crackdown on its Williamson mine in Tanzania, which made up about 6% of operating profit.
“Should Petra be unable to resume sales from Williamson during the first half of the financial year, the company may breach the two ebitda-related covenant measurements related to its banking facilities,” the company said.
The measurement of the covenants would be at the end of December 2017. Ebitda is earnings before interest, tax, depreciation and amortisation.
Petra would start early talks with its lenders to find a resolution to any difficulties it incurred with those covenants. “Given our past history around covenants and the good relationship we have with our lenders, we are confident this is something we can cross”, said Jacques Breytenbach, Petra’s chief financial officer.
“The recovery, even without Williamson, in our second half to levels well below our covenants from June onwards does put us in a position to curtail this to a short-term impact.”
Petra is forecast to become cash-flow positive in the second half of its financial year as its large South African mines ramp up to full production and the Cullinan plant is commissioned.
Analysts point out that the mine is relatively small in the group and Petra could walk away from it if difficulties in the country persisted.
Petra CEO Johan Dippenaar said he preferred the option of “quiet diplomacy” to resolve the impasse with the Tanzania authorities, who seized a parcel of 71,654 carats of diamonds on September 11, accusing the firm of underreporting the value of the parcel. They also questioned key personnel, prompting the mine to close for four days.
Petra pointed out the parcel had official valuation documents from the state valuator, estimating the diamonds to be worth $14m. The diamonds have not been returned.
Asked whether Petra would mothball the mine, Dippenaar said: “It’s a situation we are watching on a week-by-week basis.… We are trying to find solutions for the parcel that is held up and clear the way for future production.
“But obviously, if you can see you are not getting anywhere in generating cash, that will impact your decision on spending money. Full care and maintenance will be [in the region of] $500,000 a month, which will substantially bring down the amount of cash we spend.”