Mining Weekly

JOHANNESBURG (miningweekly.com) – Petra Diamonds’ share price on the LSE fell by more than 20% on Thursday after it announced plans to raise $178-milion, or about £133-million, through a fully underwritten 5 for 8 rights issue.

The diamond miner, which has operations in South Africa and Tanzania, said its cash flow generation over the last two years has been impaired by a combination of operational delays in the 2017 financial year and a number of business challenges experienced in the first half of the 2018 financial year.

“These factors, in conjunction with the impact of a much stronger rand versus the dollar, have led to the company's debt levels being higher than anticipated and have impacted its ability to deleverage in line with expectations,” Petra CE Johan Dippenaar said.

As a result of higher than anticipated debt levels, Petra has had to seek waivers from its South African lender group on three separate occasions in order to avoid expected breaches of the earnings before interest, taxes, depreciation and amortisation covenants related to its existing senior facilities.

The rights issue, the company stated, will accelerate a reduction in leverage to a more sustainable level, will allow management to focus on ongoing operational delivery and optimisation and will assist in mitigating short-term issues relating to currency volatility and the other ongoing business challenges.

Up to $120-million of the net proceeds of the proposed rights issue will be used to fully pay down outstanding drawn indebtedness with the company's South African lending group, including about $80-million drawn under the revolving credit facility and up to about $40-million outstanding under the working capital facility.

The balance of the net proceeds will provide additional working capital in relation to operating expenses in light of the prevailing volatility of the rand on the dollar exchange rate, the company noted.

Chairperson Adonis Pouroulis stated that the board had identified the proposed rights issue as the “best way of accelerating a reduction in leverage to a more sustainable level, thereby enabling management to focus on ongoing operational delivery and optimisation”.

This will include assistance in mitigating short-term issues relating to currency volatility and other ongoing business challenges.

“By improving the group's financial and operational flexibility, the board believes this rights issue is in the best interest of its shareholders, positioning Petra to reap the benefits of this capital intensive phase by moving the focus to cost efficient production from the new undiluted mining blocks, with a reduced capital spend profile,” Dippenaar said on Thursday.

Petra warned that, should shareholders not approve the proposed rights issue and it not go ahead, the company may not have sufficient working capital.

Shareholders will vote on the proposed rights issue on June 13.

OPERATIONAL ISSUES
Expanding on the factors that had contributed to the company’s financial position, Petra said the two main operational issues impacted on its results for the 2017 financial year were the delay in bringing the new plant at Cullinan on stream, with the knock-on impact this had on the ability to ramp up production from the new C-Cut Block Cave, and a slower-than-anticipated ramp up of the new sub-level cave at Finsch.

These delays resulted in a deficit in operating cash flow of about $130-million.

While these issues were being resolved and the run-rates increased, the delivery to plan was delayed and at a lower level than anticipated and has, therefore, impacted on the company's financial position, Petra stated.

Additionally, the business challenges experienced in the first half of the 2018 financial year relate to the now-resolved strikes in South Africa and the parcel of 71 654.45 ct of diamonds that was recovered from the Williamson mine, in Tanzania, but blocked for export.

While there has been a resumption in exports of subsequent parcels of rough diamonds from the Williamson mine, the inability to sell the blocked parcel continues to impact on revenues for the group.

In addition, the company is experiencing delays in the recouping of historical value-added tax (VAT) receivables carried at $14.5-million in respect of the Williamson mine and costs incurred in relation to a number of legislative changes in Tanzania.

The combined effect of the blocked Williamson parcel, the delay in recouping the VAT receivables and additional costs incurred related to the legislative changes is estimated to be in the region of between $35-million and $40-million on the company's liquidity.

FOURTH-QUARTER UPDATE
Meanwhile, Petra reported that its production in the fourth quarter of the 2018 financial year, to date, has been broadly in line with expectations and the company is on track to achieve full-year production of between 4.6-million carats and 4.7-million-carats.

The run-of-mine grade achieved at Cullinan continued its improving trend, achieving 39.9 carats per hundred tonnes (cpht) for April, which is in line with the guidance for the second half of the 2018 financial year at between 37 cpht and 42 cpht.