Diamonds might be a girl’s best friend, but Petra Diamonds (LSE: PDL) has proved an investor’s worst nightmare of late. Down 75% over the past 12 months, the stones producer’s share price slumped again following news of more trading woes this week.
Okay, pre-tax losses narrowed to $13.2m in the first fiscal half from $20.7m a year earlier. But this was the only bright spot in an otherwise terrible release. Production edged 3% higher in the six months to December, to 2.07m carats. But this was worse than expected, due to production problems at its flagship Cullinan mine and Williamson asset.
Troubles at its South African and Tanzanian complexes weren’t the main focus of investor concern, however. News of persisting pressure on diamond prices sent Petra’s share value into a fresh tailspin. Rough diamond prices toppled around 10% year-on-year between July and December, it said. And, consequently, revenues at the digger slipped 6% to $193.9m.
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Debt problems
The trading environment has been under pressure of late because of abundant supply and faltering demand, exacerbated by a slowing global economy and trade wars between the world’s largest two stones markets, the US and China.
The outbreak of the coronavirus in Asia has given Petra even more to worry about. It’s a development that the mining play can ill afford given the havoc that a weak diamond market is already wreaking on its balance sheet. Net debt at the small-cap keeps on ballooning and rose to $596.4m as of December. This was up 7% from the end of 2018.
Indeed, this fresh problem has left the business scrambling to plug holes. It said that “in light of the impact of the weakness in the diamond market on the group’s operating results and cash flow position, the group will continue closely monitoring and managing its liquidity risk and will have further discussions with its lender group regarding further covenant resets and/or waiver.”
It added: “Additional waivers are likely to be required for the June and December 2020 measurement periods” based on its current forecasts. Petra also “continues to assess its strategic options in relation to the maturity of its $650m loan notes in May 2022.”
To buy or not to buy
It’s no shock that City analysts expect revenues and losses at Petra to both worsen in the current fiscal year to June. But could the digger prove a decent turnaround prospect?
The number crunchers expect the company to bounce back into the black in fiscal 2021. And, at current prices, Petra changes hands on an undemanding P/E ratio of 13.2 times for that year.
I’m certainly not tempted to buy shares in the company. Not for a second. It might not be expensive, but Petra isn’t exactly cheap. I’d expect it to be trading for next-to-nothing given the precarious state of its balance sheet and the added pressure that the coronavirus has exerted onto an already-battered diamonds market.
It’s a share that should be avoided at all costs right now.
