A Diamond in the Rough

04/28/2010 12:01 am EST


John Snowden

Contributor, The IRS Report

London-listed gem miner Petra has scored a coup by unearthing a record rock, writes John Snowden in The IRS Report.

Petra (London: PDL) is a leading supplier of rough diamonds, with production of over one million carats in the year to June 2009. The group has a current resource base of 262 million carats and is aiming to join the world's top producers with a production target of three million carats per annum by 2019.

According to chief executive John Dippenaar, demand for stones is being driven by the emerging markets, especially India and China. The new middle classes in these countries have started collecting manufactured consumer goods, but have not lost their parents' desire to store some of their wealth in commodities. China has recently overtaken Japan as the second largest market for diamonds in a world where supplies are beginning to dwindle, as many of the world's top-producing mines have passed their peak production.

This year, Petra hopes to produce 1.3 million carats. The company has a diversified portfolio of six diamond mines—five in South Africa and one in Tanzania. There is always the hope of finding “a big one.” In May last year, one such diamond, a 7.03 carat cut from the 26.6 carat rough stone, broke the world record at auction. Found in 1998 in Petra's flagship Cullinan mine, Sotheby's sold this fancy vivid blue, internally flawless, cushion-shaped diamond for $9.49 million or $1.35 million per carat.

On September 24th 2009, a giant white gemstone was recovered at Cullinan, which weighed in at 509 carats. The Cullinan mine has produced the majority of the world's famous diamonds. [The latest] is among the 20 largest high-quality diamonds ever discovered. It was sold for $35.3 million to the Chow Tai Fook Jewellery Company Limited in Hong Kong, the highest sale price on record ever achieved for a rough diamond, and a major boost to the company's cash.

At the start of this year, Petra had managed to overcome the downturn in rough diamond prices, improve its cash position due to the strength of the [South African] rand, and build up the company profile as an attractive proposition for investors who believe that the diamond industry will recover and emerge stronger than before.

The company reports steady progress with the production ramp-up on schedule and a good recovery in average diamond values. In the future, costs should decrease in real terms as production rises.

At the interim stage to December 31st, group mine revenue was up 43% to $48.4 million against $33.8 million in the first half of 2008. Profits from mining operations before depreciation eased back to $8 million from $10.2 million.

Following the sales of the large diamonds, the group cash position has been transformed. Cash at the bank was $65million with diamond inventories of $34.8 million.

The imminent World Cup football event in South Africa may well be the catalyst for an influx of investment into southern Africa as analysts lower their assessments of political risk.

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