Petra Diamonds Ltd (PDLMF) Q2 2024 Earnings Call Transcript

Petra Diamonds Ltd (OTCPK:PDLMF) Q2 2024 Earnings Call Transcript February 20, 2024 4:30 AM ET

Company Participants

Patrick Pittaway – IR

Richard Duffy – CEO

Jacques Breytenbach – CFO

Richard Duffy

Good morning, everybody, and thank you for joining us today for our unaudited FY ’24 interim results for the 6 months ended 31 December 2024. With me today is Jacques Breytenbach, our CFO; and Patrick Pittaway, our Head of Investor Relations. Would you please take us to Slide 4, moderator?

Petra is the largest independent diamond producer with the world’s third largest diamond resource providing long-term mine life potential. Petra continues to be proactive in marketing cycles, particularly in response to the recent lower for longer diamond pricing environment. We are replanning the resumption of our projects to deliver a smooth capital and growth profile with a commensurately lower cost structure to be sustainably net cash generative from financial year 2025. We continue to focus on embedding our sustainability framework and apply a disciplined capital allocation approach with debt optimization remaining a priority.

Our operating model is focused on delivering stable and predictable operations to deliver reliable production through continuous improvement to optimize value.

We are on track to deliver the $75 million FY 2024 cash savings that we announced in November 2023, with cost savings expected to contribute around $10 million. As part of our value-driven growth strategy, we are at an advanced stage in the implementation of technologies that allow our diamonds to be traceable from mine to fingers.

Moderator, could you please turn to Slide 5. Safety remains our #1 priority, and our renewed focus has led to a reduction in both our lost time injury frequency rate and our lost time injuries year-to-date in financial year ’24. There were 5 lost time injuries recorded, a 29% decrease on the prior year period, which translated to a lost time injury frequency rate of 0.15 per 200,000 hours worked down from 0.19 in the first half of financial year ’23 and 0.24 for the full financial year 2023.

Moderator, could you please turn to Slide 6. Turning now to our operational and financial highlights. We show our H1 FY ’24 results against the same period last year as well as against H2 financial year ’23 to illustrate the progress we have made with certain strategic initiatives, including our capital deferrals and cost optimization. All processed increased year-on-year to 5.8 million tonnes, leading to an increase in diamonds produced. Average write-down prices remained in line with our second half financial year ’23, which is an indication that markets have stabilized, and we will touch on this in a little more detail further on in the presentation.

Revenues were affected by the lower pricing environment, resulting in reduced EBITDA compared to the same period last year but higher than the second half of financial year ’23. CapEx reduced to $50.5 million, down from $65 million in H2 financial year ’23, largely as a result of the deferral of certain capital projects in response to market conditions. Operational free cash outflow came in at $21.1 million, up from $79 million in the 6 months to June 2023, partly due to the deferral of sales from H2 ’23.

Moderator, can you turn to Slide 7, please. In line with our focus on continuous improvement during the first half of this financial year, we continued to implement our sustainability framework in accordance with our 4 pillars. In terms of our people, alongside our efforts in striving for a 0 harm workplace, we are also committed to training and development. We are pleased to have launched the Petra Caving School this month to develop critical underground mining skills. As part of our focus on protecting our planet, we are developing a renewable strategy that aligns with our climate change ambitions and deliver on our target of reducing our Scope 1 and 2 GHG emissions by 2030.

The key focus of our partnerships has been a responsible exit from Koffiefontein. During the period, we announced that we signed a nonbinding term sheet for the potential sale of the mine. With regard to our production, ensuring operational stability and the smoothing of our CapEx profile, together with rigorous cost control, to reliably generate sustainable free cash flow remains a key and ongoing focus.

Moderator, please turn to Slide 8. On the market, our recent tender support our view that the market has bottomed, although we expect the pricing recovery to take a bit longer than previously anticipated. As a consequence, we have slightly lowered our pricing assumptions per mine for financial year ’24 to reflect that view that are set out in our announcement released earlier today. Whilst demand from both the U.S. and Indian consumer markets remains healthy, China is still lackluster.

Given ongoing global economic uncertainty, it remains important for the major producers to continue to exercise discipline to ensure that inventory levels remain balanced across the value chain. Our results from the fourth sales cycle of financial year ’24 were announced last week with like-for-like pricing up 4% on the December tender. This cycle also includes an exceptional color and quality blue diamond of 14.76 carats, which we expect to sell by the end of this month.

Moderator, please turn to Slide 9. Notwithstanding the current somewhat muted environment, we continue to highlight the structural supply deficit with largely flat production against the backdrop of a growing class and high net worth individuals. In a recent note by Diamond commentator Paul Zimnisky, he states that supply is expected to halve by around 2045 due to aging mines. At that time, we expect only 50 mines will continue to be in operation, including Petra’s 3 mines. In the short term, we continue to see support from U.S. consumers with post-COVID relationships maturing, something that is expected to lead to an increase in bridal sales.

Moderator, if you could take us to Slide 10, please. Improved providence and traceability will have a positive impact for the natural diamond market and is aligned with the growing requirement from consumers for greater transparency around the origin of diamonds and their social and environmental impact. We have always provided confirmation of origin for our diamonds at the time of sale, given we only sell goods from our own mines, but the technologies that are emerging will further ensure traceability and provenance that will extend right through the value chain from mine to finger. We are currently trialing technologies with the aim of rolling this traceability out before the end of this financial year 2024, and we also believe that this will meet expected G7 requirements. We see enhanced traceability is benefiting the marketability and attractiveness of our diamonds.

Moderator, if you could take us to Slide 11, please. Sorry, I can’t see the next Slide 11, please. Thank you. Lab-grown diamonds have continued to diverge as a separate product category, quite apart from natural diamonds, both in terms of pricing and also increasing in our margins. While volumes continue to grow, this is coming at the expense of prices with the year-on-year revenue change from jewelry stores in the U.S. turning negative for the first time in January this year.

Moderator, can you take us to Slide 13, please. Looking at our operations. Cullinan and Finsch mines continued to be the largest contributors to revenue and adjusted profit with operations having mostly stabilized during the period. This was supported by the continued ramp-up at Williamson, which is now effectively back at full production. As announced previously, volatility at Finsch has been expected on to the maturation of the upper Block 5 sublevel cave.

Post-period end Finsch encountered 2 mechanical challenges, both of which have since been remediated, but are likely to result in group production for this financial year 2024 coming in slightly below our previous guidance of 2.9 million to 3.2 million carats, now at 2.75 million to 2.85 million carats.

Moderator, could you take us to Slide 14, please. This year’s focus remains on stabilizing our operations. We continue to assess value engineering opportunities through replanning work associated with our deferred capital projects and are targeting a more smooth capital profile going forward. Once work is complete, we will provide revised production and cost guidance. At Koffiefontein, we remain focused on progressing a responsible exit potentially through a sale and we’ll update the market with progress as appropriate.

I will now hand over to Jacques to run through the financial highlights. Thanks, Jacques.

Jacques Breytenbach

Thank you, Richard. Moderator, I ask you to refer to Slide 16. So I’ll take you through the highlights for our first half of fiscal year of 2024, revenue payment at $187.8 million, a 9% decrease on our first half of 2023, but significantly up on the [ average ] and $16.8 million realized in the second half of fiscal year ’22. This was the result of like-for-like prices being down some 13.3% compared to the similar half of ’23, with the balance of revenue movements attributable to sales volume and product mix. Adjusted EBITDA in profit from mining activities, lease adjusted corporate overheads decreased [ 55% ] from first half of ’23 to $38.9 million this period.

Although the EBITDA margin reduced from 41% to 21% in this period, the margin was largely flat when compared to H2 of 2023. Operational free cash outflow of some $21.1 million was down from a $12.5 million inflow in H1 of FY ’23, but significantly better than the $79 million outflow in the directly preceding 6-month period, partly attributed to the deferral of sales from H2 2023.

Moderator, if you can move to Slide 17. Cash on-mine cost for this period remained largely in line with the expectations. On-mine cash costs increased by around 3% year-on-year due to increased production volumes, adding some 3.4% and inflation, including [ above ] inflation labor and electricity increases, adding some 5.7%. These increases were offset by a weaker South African rand, leading to an associated reduction in USD reported costs, while further supported by cost reduction efforts during this period.

Moderator, Slide 18, please. Cash balances during the period was supported by 850 million drawdown from our revolving credit facility earlier in the year. Diamond inventories reduced from the June 2023 deals after a decision to defer certain sales from H2 fiscal year ’23 into this period. Gross debt increased to $295.8 million up from around $247 million on June, reflecting a drawdown of the company’s revolving credit facility. Our consolidated net debt increased to $212 million due to negative operational free cash flow, cash flow [ on segment ] on the loan notes and working capital funding for the assumption of mining at our Williamson mine.

During December ’23, we also announced Absa Bank’s approval to increase our ZAR 1 billion revolving credit facility, with a further ZAR 750 million or $40 million increase in [liquidity]. This increase in the facility is now fully available following completion of the associated amendment agreements.

I will now hand back to Richard to provide concluding remarks and will ask the Moderator to Slide 20.

Richard Duffy

Thank you very much, Jacques. In concluding our presentation today, Petra continues to focus on ongoing stabilization and optimization of our operations. Given where we are in the cycle, we are proactively building greater business resilience. Our target is to consistently generate net cash from financial year ’25 through addressing our cost structures and delivering a more smooth capital profile. We will communicate the resultant impact on our outlook once we have completed this replanning work and expect this to occur before the end of this financial year 2024.

Finally, in line with addressing increasing consumer requirements and expected tougher G7 sanctions, we are implementing technologies to provide for traceability of our product from mine to finger.

I will now hand back to the moderator for a question-and-answer session, which will be led by Patrick, our Head of Investor Relations. Thank you.

Question-and-Answer Session

A – Patrick Pittaway

Thank you, Richard, and good morning, everyone. We have several questions in on the chat. Please do some more of your questions. The first is from Peter Mallin-Jones of Peel Hunt. Can you give us an idea of when the value engineering work will be completed and therefore, when we can expect an update to your plans, please.

Richard Duffy

Thanks, Peter. It’s Richard. I mentioned just in closing that we are targeting to provide that update to the market before the end of this financial year, in other words, before the end of June of this year.

Patrick Pittaway

Thank you, Richard. I have 2 questions on our debt, which I’ll combine from Lorenzo Parisi of JP Morgan and [Giuseppe] of Cantor Fitzgerald. Can you please release some more details around the debt structure? And any idea around short-term actions to restructure that?

Jacques Breytenbach

Thanks, Patrick. It’s Jacques here. In terms of our debt structure, that gets well laid out. It’s our 2026 loan notes, which adds up to around $250 million. And then we have drawn debt under the RCF or revolving credit facility of some $46 million.

The loan notes matures in March 2026. So just over 2 years from today. And we are busy considering different options in terms of possible refinancing of these loan notes. Any refinancing will probably be considered depending on the markets being available later this calendar year, probably second half of calendar year 2024.

Patrick Pittaway

Thank you, Jacques. I have a question from [Luke Roberts] at Barclays. It’s in 2 parts. I was wondering if you could provide any details around the underground mechanical issues at Finsch and whether this is an ongoing issue at present. And if there is any risk of prolonged disruptions at the mine?

The second question is, is there any update on the working capital funding to restart Williamson operations? And has this now been fully phased in?

Richard Duffy

Right, so on the first part relating to Finsch, we had 2 issues. The first was with the winder rope where the — that we observed increased where on the winder rope as a result of issues with the grooving on that rope. That was part of the standard inspection. And as a result, we changed out the winder rope, which created some delay. That was in January, and that has been fully remediated and the we’re seeing normal work on the rope having installed the new one.

The second related to accelerated where on 1 of our loader shoots on our mineral size at Finsch, what we did there is we completed that shoot that was completed over this last weekend and we are back up and running. So in both instances, those issues have been remediated. We do not expect them to have an impact on the operation at Finsch going forward. The second question relating to Williamson. The mine has ramped up to full production, as I mentioned.

And the mine is funding its own business. So it’s ramped up. We’ve increased the frequency of our sales to help with our working capital management. But the plan there is for Williamson to continue to fund its own business.

Patrick Pittaway

Thank you, Richard. I have a question from Ned Dybvig of Atlas Merchant Capital. Can you please update us on what revenue you expect to realize on 15 carat blue stone you recently discovered?

Richard Duffy

Look, I think we don’t provide indications around what we expect in terms of prices for these sorts of stones, I think, for obvious reasons. What I can say though is pointing to our guidance or our definitions that we changed recently at Cullinan. We previously had defined exceptional stones as any single stone that we felt would attract a price of $5 million or higher, and we recently changed that definition on exceptional stones to stones being worth $15 million or higher. So in this instance, we — although this blue stone has exceptional color and quality, it’s not an exceptional stone as we have defined it, but it remains a high-value stone.

Patrick Pittaway

Thank you, Richard. I have a question from [Marcus Hazel of Hartree Partners]. Just a follow-up question on debt. Could we provide any color on any new ideal debt structures and potential time lines?

Jacques Breytenbach

Not at this point in time, the refinancing considerations is [ coming and going ]. As part of that, we are assessing what an optimal structure of what the group should look like given where we are heading in terms of the life of mine planning, et cetera, that’s on a go, that will further inform the optimal structure once we’ve landed on that. So in a design phase but not redesigned, I would suggest.

Patrick Pittaway

Thank you, Jacques. There appear to be no further questions. So I will hand back to the moderator to close the webcast.

Thank you, moderator. It seems we have no more Q&A.

Richard Duffy

And if there are any further questions, please forward them to Patrick, and we will get back to you as soon as possible. So thanks for your attendance, and we’ll talk again soon.