Pe­tra Di­a­monds pre­pares for a new era

Af­ter 12 years with Pe­tra Di­a­monds, CEO Jo­han Dip­pe­naar is step­ping down. As his ten­ure comes to an end, what does the fu­ture hold for the di­a­mond miner?

Finweek English Edition - - Contents - By David McKay

pe­tra Di­a­monds CEO Jo­han Dip­pe­naar waxes philo­soph­i­cal about mis­takes com­mit­ted dur­ing his 12 years at the com­pany – a ten­ure near­ing its end fol­low­ing an an­nounce­ment at the firm’s full-year re­sults pre­sen­ta­tion ear­lier this month that the board had set about find­ing a suc­ces­sor.

“Maybe you could look back and say that it was too much to take on, but then, you don’t have many op­por­tu­ni­ties in this busi­ness,” he said in an in­ter­view with fin­week. The ref­er­ence is to the firm’s multi-year growth strat­egy aimed at achiev­ing some 5m carats a year in pro­duc­tion – a num­ber that would make the firm one of the world’s largest in­de­pen­dent di­a­mond min­ers.

It’s worth not­ing that when Dip­pe­naar be­came CEO in 2006, Pe­tra Di­a­monds was pro­duc­ing about 176 000 carats an­nu­ally and had been ex­plor­ing for di­a­monds, mostly in An­gola, with­out suc­cess. Given that his­tor­i­cally there’s less than a 1% hit rate in terms of con­vert­ing di­a­mond ex­plo­ration to a mine, it was a mat­ter of time be­fore Dip­pe­naar looked to ac­qui­si­tions.

En­ter De Beers, which was, at that time, in the throes of his­toric soul-search­ing. What fol­lowed be­tween 2007 and 2016 was a stream of six ma­jor ac­qui­si­tions of De Beers mines by Pe­tra, and nearly all of them suc­cess­ful ex­cept for the last. That was the pur­chase of the his­toric Kim­ber­ley Mines from which Pe­tra fash­ioned Kim­ber­ley Ekapa Mines (KEM JV), a joint ven­ture with an em­pow­er­ment part­ner, with the aim of siev­ing through sur­face tail­ings for di­a­monds.

De­spite hav­ing in­vested or com­mit­ted $1.4bn in the var­i­ous De Beers mines over 14 years, it was KEM JV that blot­ted the copy-book for Dip­pe­naar, his very last deal. At the same year-end pre­sen­ta­tion at which Dip­pe­naar an­nounced his loom­ing de­par­ture, the KEM JV was writ­ten off for about $66m. It came at a time when Pe­tra could least af­ford it. Pe­tra’s debt had al­ready peaked at $634m at the firm’s in­terim stage in De­cem­ber and given the strength­en­ing of the rand against the dol­lar, the com­pany was forced into a net $170m rights is­sue in or­der to stave off the banks, some of which had waived their debt covenants. Pro­duc­tion for the 2019 fi­nan­cial year is ex­pected to come in at be­tween 3.8m to 4m carats – far off the 5m carats tar­geted by Dip­pe­naar – while KEM is to be sold to the BEE part­ner. In ad­di­tion, some $83m in debt guar­an­tees still has to be supplied by Pe­tra, al­though the com­pany is hop­ing this can be dis­counted from the covenant cal­cu­la­tions ap­plied by the banks once the as­set is fi­nally out of the group.

“One al­ways talks one’s book,” says Dip­pe­naar. “But with di­a­mond min­ing it’s not like in lead or gold where each tonne is like the other. We did six ac­qui­si­tions, each re­quir­ing ex­ten­sive re­build­ing (of the as­set) and

cap­i­tal­is­ing all at the same time. Look­ing at KEM, it is prob­a­bly best run by a smaller com­pany with real Kim­ber­ley peo­ple, but we’ve still had a good out­come,” he says. The di­a­monds KEM was look­ing for are small, at­tract­ing low pric­ing. Set against the debt pile, and with share­hold­ers be­gin­ning to look for­ward to a time of div­i­dends, KEM quite sim­ply had to go.

“We’ve shown a strong turn­around and now we need to get that con­sis­tent de­liv­ery go­ing, get the right cap­i­tal spend and re­duce our debt,” says Dip­pe­naar. Pe­tra has tar­geted net debt to pre-tax earn­ings (ebitda) of 2 times – ex­pected in the 2020 fi­nan­cial year – which com­pares to the cur­rent ra­tio of 2.7 times.

For the first time, free cash flow from Pe­tra’s mines – which has es­sen­tially been in ag­gres­sive, high-growth mode ever since Dip­pe­naar took over – helped re­duce net debt, and more is ex­pected in the cur­rent year. Dip­pe­naar is hope­ful.

RBC Cap­i­tal Mar­kets said in a re­port that the 3.8m to 4m carat tar­get was “un­der­stand­ably con­ser­va­tive” given the un­der­per­for­mance of pre­vi­ous years. It added, how­ever, that: “The com­pany has dis­closed July and Au­gust pro­duc­tion at 718 000 carats which we cal­cu­late to be at 4.3m carats an­nu­alised and 10% ahead of ex­pec­ta­tions.”

Dip­pe­naar won’t say where he’s head­ing next: “I haven’t thought about that yet. We have a board process to find a new CEO. So, we’ll have to see who ap­plies and then do both an in­ter­nal and ex­ter­nal process. I’ll do a proper han­dover,” he says.

The Cul­li­nan Dream - CEO Jo­han Dip­pe­naar hold­ing the ex­cep­tional 122.52 carat blue di­a­mond.

Jo­han Dip­pe­naar CEO of Pe­tra Di­a­monds

Bruce Cleaver CEO of De Beers

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