The influx of illegal miners in Kimberley is not affecting Petra Diamonds’ Kimberley Ekapa Mining (KEM) joint venture, Petra CEO Johan Dippenaar says.
Up to 1,000 illegal miners are reported to be operating on parts of the KEM property, which consists of both surface tailings and underground mining.
Recently, illegal mining was highlighted when three people were killed in a fire at disused gold mine shafts at Langlaagte, near Johannesburg.
Dippenaar says there were illegal miners around Kimberley Mines before Petra bought the operations from De Beers. They are not in the area where KEM operates. He expects government will support KEM, because it is extending the life of the operations and retaining jobs, and government has a new focus on tackling illegal mining after the Langlaagte events.
The combined Kimberley operations contributed 14% of the group’s production in the year to June, against 60% from the Finsch mine and 18% from Cullinan. Dippenaar says in the coming year, as Cullinan’s C-Cut depth extension and mill start ramping up, production and revenue will be better balanced between Finsch and Cullinan.
By 2019, Petra will be mining 41% of its product from new underground areas, compared with only 16% in the past year.
This will deliver higher-carat diamonds than it is now getting from the older, depleted underground areas and surface tailings. It will also be mining fewer sections, which will reduce costs.
Since 2009, Petra has been spending heavily on a new sub-level cave at Finsch and a new block cave and mill at Cullinan.
Capex peaked at US$295.8m in the past financial year and is now falling at the same time as grades and costs are improving. Dippenaar says that Petra expects to be free cash flow positive by the second half of its current financial year.
"Petra Diamonds expects production and cash flow to pick up as it reaps the benefits of its capital expansion programme. In the short term, however, pressure on the balance sheet and applications of its loan covenants has caused the company to pass on payment of a dividend," John Meyer, analyst at SP Angel, says in a note.
Net debt was $348.8m at the end of June, including $63.4m of diamond debtors that were collected immediately after the year end. Petra remains well within the limits of its renegotiated bank covenants, with net debt at 2.8 times earnings before interest, tax, depreciation and amortisation (Ebitda) against a covenant of 3.1 times.
Once the net debt:Ebitda ratio is at two, the covenants allow for distributions to resume.
Dippenaar says Petra will be in a strong position by the end of the first half of the next financial year to discuss this with its banking consortium.
The weakness in diamond prices over the past three years, largely in response to the strengthening of the dollar against all major currencies, has raised concern that Petra will be delivering its increased production into a softer market.
Dippenaar says the diamond market stabilised in the first half of this year and Petra’s latest diamond sale showed demand was better than most people had expected.
Petra’s shares added 0.63% to 114p in London after the results. Two years ago they were at 211p, suggesting there is still plenty of room for appreciation if diamond markets remain stable or gain momentum.