Petra Diamonds (LSE:PDL) — Interim Results

0:00 Good afternoon and welcome to the PETRA DIAMONDS LIMITED Interim Results Investor Presentation. Throughout this recorded presentation, investors will be in listen only mode. Questions are encouraged and can be submitted at any time by the Q and A tab situated in the right corner of your screen. Just simply type in your questions and press send. The company may not be in a position to answer every question received in the meeting itself. However, the company can review all the questions submitted today and publish responses where it is appropriate to do so. Before we begin, I'd like to submit the following poll. I'd now like to hand you over to Richard Duffy, CEO. Good afternoon to you, sir.

0:31 Good afternoon, everyone, and thank you for joining us today for our unaudited financial year 2024 interim results for the six months ended 12/31/2023. With me today is Jacques Breitenbach, our CFO and Patrick Pitoway, Head of Investor Relations. Please turn to Slide four. 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 managing market cycles, particularly in response to the recent lower for longer diamond pricing environment. We are replanning the resumption of our capital projects to deliver a smooth capital and growth profile with commensurately lower cost structures to be sustainably net cash generative from financial year 2025.

1:24 We continue to focus on embedding our sustainability framework and apply a disciplined capital 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 our value. We are on track to deliver $75,000,000 FY 2024 cash savings announced in November last year with cost savings expected to contribute around $10,000,000 of this. As part of our value driven growth strategy, we are at an advanced stage in the implementation of technologies that will allow our guidance to be traceable from mind to finger. Could you please turn to Slide five? Safety remains our number one priority and a renewed focus has led to a reduction in both lost time injury frequency rates and lost time injuries year to date in financial year 2024.

2:21 There were five lost time injuries recorded, a twenty nine percent decrease on the prior year period, which translated to a lost time injury frequency rate of zero point one five per two hundred thousand hours worked, down from zero point one nine in H1 of FY 2023 and zero point two four for the full year 2023. Can you please turn to Slide six? Turning now to our operational and financial highlights, we show our H1 FY 2024 results against the same period last year as well as against the second half of FY 2023 to illustrate the progress we have made with certain strategic initiatives including CapEx deferrals and cost optimization. Ore processed increased year on year to 5,800,000 tons leading to an increase in diamonds produced.

3:11 Average rough diamond prices remained in line with H2 FY 2023, which is an indication that the markets have stabilized and we will touch upon this and pricing a little later in our 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 FY twenty twenty three. CapEx has reduced to $50,500,000 down from $65,200,000 in H2 FY twenty twenty three, largely as a result of the deferral of certain capital projects in response to market conditions. Operational free cash outflow came in at 21,100,000 improving from the $79,000,000 in the six months to June 2023, partly due to the deferral of sales from the second half of financial year 2023.

4:06 Please turn to Slide seven. 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 four pillars. In terms of our people, alongside our efforts in striving for a zero harm environment, 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're developing a renewable strategy that aligns with our climate change ambitions and delivers on our target of reducing our Scope one and two GHG emissions by 2,030. The key focus of our partnership has been responsible exit from Kofie Fontaine.

4:55 During the period, we announced that we had signed a non binding term sheet for the potential sale of the mine. With regard to our production, ensuring operational stability and the smoothing of our capital profile together with rigorous cost control to reliably generate sustainable free cash flow remains a key and ongoing focus. Would you please turn to Slide eight?

5:19 Our recent tenders support our view that the market has bottomed, although we expect the pricing recovery to take longer than previously anticipated. As a consequence, we have slightly lowered our pricing assumptions for financial year 2024 to reflect that view, as set out in our announcement that we released earlier today. Whilst demand from both The U. S. And Indian consumer markets is healthy, China remains 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 2024 were announced last week with like for like pricing up 4% on the December tender.

6:07 This cycle also includes an exceptional color and quality blue diamond of 14.76 carats, which is expected to be sold at the end of this month. Please turn to Slide nine. Notwithstanding the current somewhat muted environment, we continue to highlight the structural supply deficit with largely flat production against the backdrop of a great middle class and a higher number of high net worth individuals. In a recent note by DIAMONDS commentator Paul Zamiski, he states that supply is expected to halve by around 2045 due to aging mines. At that time, he expects only fifteen minutees will continue to be in operation, including our three minutees. 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.

7:02 Please turn to Slide 10. Improved provenance and traceability will have a positive impact for the natural diamond market and is aligned with our growing requirement from the growing requirement from consumers for transparency around the origin of diamonds and their social and environmental impact. We have always provided confirmation of origin of our diamonds at the time of sale given we only deal with goods from our own mines, but the technologies

7:29 today will ensure further levels of traceability and provenance that will extend through the value chain from mine to finger. We are currently trialing these technologies with the aim of rolling this out before the end of our financial year, which we believe will also meet expected G7 requirements. We see this as benefiting the marketability and attractiveness of our PETRA DIAMONDS.

7:54 If we could go to the next slide please. Lab grown diamonds have continued to diverge as a separate product category from natural diamonds with prices and now also margins continuing to decouple from natural diamonds, particularly in the larger size ranges. 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. Please turn to Slide 13.

8:26 Cullinan and Finch mines continue to be the largest contributors to revenue and adjusted profit with operations having mostly stabilized in this first half of financial year 2024. This was supported by the continued ramp up at Williamson, which is now at full production. As announced previously, volatility at Finch has been expected owing to the maturation of the upper Block V sublevel cave. Post period end Finsch encountered two mechanical challenges, which have since been remediated but are likely to result in group production for financial year 2024 coming in slightly below our previous guidance of 2,900,000 to 3,200,000 carats at 2,750,000 to 2,850,000 carats for the full financial year 2024.

9:16 If we could turn to the next slide please.

9:20 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.

9:35 Once this work is complete, we will provide revised production and cost guidance. At Coffey Fontaine, 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. Thank you, Richard. And moderator, if you can move to Slide 16.

10:01 Thank you. So revenue totaled $187,800,000 for the six months, a 9% decrease on first half fiscal year twenty twenty three, but significantly up on the $116,800,000 realized in the second half of fiscal year twenty twenty three. This was the result of like for like prices being down some 13.3% compared to the first half sales with the balance of revenue movements attributable to sales volumes and product mix.

10:28 Adjusted EBITDA in profit from mining activities less adjusted corporate average decreased by some 55% from H1 FY twenty twenty three to $38,900,000 Although the EBITDA margin reduced from 41% in the first half of the previous year down to 21% in this period, the margin was largely flat when compared to our second half of fiscal 2023.

10:54 Operational free cash flow was negative $21,100,000 compared to $12,500,000 inflow in H1 FY twenty twenty three, but significantly up on the $79,000,000 outflows in the directly preceding six month period, partly attributed to the deferral of sales from that six month period. Moderate, if you can move to Slide 17,

11:20 Cash online costs for the period remained largely in line with expectations. Online cash costs increased by around 3% year on year mainly ascribed to the increased production volumes as well as inflation which includes some above inflation increases for labor and electricity adding some 5.7% in total. This was offset by weaker rand leading to an associated reduction in USD reported cost and further supported by cost reduction efforts during this period. If you can move to Slide 18 please. Cash balances during the period were supported by million or some $46,000,000 drawdown from our revolving credit facility. Diamond inventories reduced from the June 2023 levels after the decision to defer certain sales from our H2 FY 2023 to this period.

12:13 Gross debt increased to $295,000,000 up from $247,000,000 at the end of June, reflecting the drawdown of the company's revolving credit facility. Consolidated net debt increased to $212,000,000 due to negative operational free cash flow, cash coupon settlement on the loan notes as well as working capital funding for the resumption of mining at our Webster operation.

12:36 During December 23, we also announced the Absa Bank's approval to increase PETRA's ZAR1 billion revolving credit facility to ZAR1.75 billion providing an additional $40,000,000 of liquidity headroom. This increase in the facility is now fully available following the completion of the associated amendment agreements. I will hand back to Richard and moderator if you can move to Slide 20 please. Thanks, Jacques. In concluding our presentation today, PETRA continues to focus on the ongoing stabilization and optimization of its operations. Given where we are in the cycle, we are proactively building greater business resilience. And as mentioned, our target is to consistently generate net cash from financial year twenty twenty five through addressing our cost structures and delivering a smooth capital profile.

13:26 We will communicate the resultant impact on our outlook once we have completed the replanning work and expect this to occur before the end of financial 2024. Finally, in line with addressing increasing consumer requirements and expected tougher G7 sanctions, we are implementing technologies to provide traceability from mine to finger. I'll now hand over for questions that will be led by Patrick, our Head of Investor Relations. Perfect. Richard, Jacques, thank you very much for your presentation. What I'll do is I'll just bring your cameras back up now. Ladies and gentlemen, please do continue to submit your questions just by using the Q and A tab, which is situated on the top right hand corner of your screen. But just while the company take a few moments for you those questions submitted today, I'd like to remind you that recording of this presentation along with a copy of the slides and

14:20 the published Q and A can be accessed via your investor dashboard. As you can see, we have received questions throughout today's presentation. And Patrick, at this point, if I could just hand over to you just to read out the questions, I'll pick up from you at the end. Thank you, moderator, and good afternoon, everybody. Thank you for joining. What key strategic initiatives is PETRA considering to enhance value for shareholders? I think if you look at our strategy around traceability, we believe that there is an opportunity to enhance margins of our finished product through being able to physically verify the provenance of our goods and part of that will be associating the benefit or good that our diamonds do in terms of employment, in terms of the community supported education and other community initiatives and also linking all of that to a carbon footprint.

15:26 So I think that presents an opportunity to provide a lot more information around the purchase experience for consumers to ensure and to verify that our goods are indeed sustainable. I think the other key thing that you would have seen through this presentation is we are looking at optimizing our cost base and that's not surprising in light of where the market is currently but also in terms of us effectively running two operations with coffee fountain in care and maintenance and a potential sale pending with our reduced shareholding in Williamson. And so it makes sense for us to reset that cost base to align with our current position and we have also adopted a set of internal planning assumptions that are a little more conservative to ensure that we are resilient through the pricing cycle.

16:29 And the intention is is through a smooth capital profile and a a reset cost base to be able to provide insight into more predictable production and and cash flows, which we intend to come to market with as we indicated before the end of our financial year. Thank you, Richard. I have a question from Ian. How sustainable are your cost optimization strategies in the face of ongoing market uncertainties and what impact might this have on the company's longer term growth prospects? And I partially addressed that in my earlier answer, but I think just to supplement that, know, we are looking to take cost out of the business rather than to defer costs.

17:20 So those cost that cost reduction will be sustainable. We are smoothing our capital profile rather than continuing to defer capital And so the intention around that is to ensure that we don't have the historical peaks and troughs associated with our capital spend that make it quite difficult to not only plan the business but for investors to understand it. And we also recognize the need to continue to invest in our assets. We have world class resources that have long lives ahead of them and we are through our value engineering optimizing how we extract that resource and so it's a combination of addressing short term market pressures around adjusting our cost base with ensuring we're able to optimize the value in our resources but with a more smooth capital approach around how we develop the projects and exploit the resources.

18:29 Thank you, Richard. I have a follow-up question on that from Fernando. You seem to be hoping for a better future but not showing any numbers on this, which I assume refers to the guidance that we see Absolutely. From the And the only reason for that is we in the process of replanning. There's quite a significant amount of replanning to develop our new life of mine plans and that's why we have indicated that we will come to the market with visibility around medium and longer term outlooks for the business. We we're just not able to do it sooner because, as I said, this is a work in process and there's quite a significant replanning underway. So we will share those numbers as soon as we can before the end of this financial year.

19:16 Thank you, Richard. And somewhat related, a question from Vladimir. Given the company's history of not meeting or reducing guidance, including the recent adjustment of FY 2024 group production due to the mechanical issues at Finch, how does management plan to restore investor confidence and ensure more reliable guidance in the future? Specifically, measures have been taken to mitigate the impact of the operational challenges on the company and the impact that, that's having on the share price? And what indicators should investors be monitoring to monitor that progress going forward? Yeah, that's always the key question in mining generally but specifically related to our performance. I think, you know, if you look at the challenges at Finch, they they were obviously not planned. They have been addressed and mitigated, but they have had a short term impact.

20:14 Our revised guidance is below where we were in terms of the bottom end, but but not significantly so. And I guess the only answer which is, you know, to to to give in response to this question is we will have to deliver against what we say we will, and it's building that credibility that will shift the the perception of investors and potential investors. So we always try to engage frankly and openly in terms of where the business is, and, you know, we we just need to ensure that through our operating model, is designed to provide more stable operations that we eliminate unexpected challenges like the ones we saw at Finch and that our risk and assurance is is better at ensuring that we we have more stable performance.

21:11 So I guess it's really just watching the space and we will have to deliver against our guidance in order to to build the confidence from investors and credibility of our plans through executing. Thank you, Richard. And a second question from Ian. The share price seems seriously undervalued. What are your major shareholders saying? And are you seeing new institutional shareholders? Yeah. Look, I think the, you know, share price is probably taking a backseat to where the bond is priced at the moment and I think there's, you know, a focus on the bond maturing in March 2026.

22:01 Obviously, the steps we're taking around getting to net cash generation will address some potential concerns around that and our view is that once we do that and and perhaps even have some discretionary cash on the back of some wonderful earnings, we may be in a position to to buy some bonds in in the market. We would begin to see the bond move back towards par from current levels of around $0.80 $0.81 and I think that equity would then move in response to that. We've got a number of newer shareholders in that have come in and taken up shares as former bondholder shareholders have exited. We do still have some overhang in terms of former bondholder shareholders, probably 20% to 25.

23:03 But I think it's much more around providing assurance to the market debt and equity that we are able to and will generate cash and in so doing, you know, address any potential concerns around the refinancing of our bond. Thank you, Richard. There are no further questions. I will now hand back to the moderator to close the call. Thank Richard, Pat, thank you very for answering those questions for investors. And of course, the company can review all those questions submitted today and we'll publish those responses on the Investor Meet company platform. But just before redirecting investors to provide you with their feedback, which you know is particularly important to the company, Richard, could I just ask you for a few closing comments?

23:52 Sure. Thanks. Really just to again thank all of you for joining our call, for your questions and if you do have any other questions to please direct them through to Patrick and we'll revert to you as soon as possible. So until next time, thanks very much. Perfect. Richard, Jack, Patrick, thank you once again for updating investors today. Could I please ask investors not to close the session As you now be automatically redirected to provide your feedback in order that the management team can better understand your views and expectations. This will only take a few moments to complete, presumption will be greatly valued by the company. On behalf of the management team of PETRA DIAMONDS LIMITED, we'd like to thank you for attending today's presentation, and good afternoon to you all.