Petra Diamonds (LSE:PDL) — Preliminary Results

0:01 Good morning, ladies and gentlemen, and welcome to the PETRA DIAMONDS LIMITED full year results investor presentation. Throughout this recorded presentation, investors will be in listen only mode. Questions are encouraged and can be submit at any time via the q and a tab that's just situated on the top right hand corner of your screen. Please just simply type in your questions at any time and press send. The company may not be in a position to answer every question it receives during the meeting itself. However, all questions submitted today will be reviewed with responses published on the investor meet company platform where it is appropriate to

0:33 do so. Before we begin, I would like to submit the following poll. And if you could give that your kind attention, I'm sure the company would be most grateful. I'd now like to hand you over to CEO, Richard Duffy. Good morning, sir. Good morning, all, and welcome to the presentation of our financial year 2022 results. I'm joined today by my CFO, Jacques Breitenbach. I think the last three years have been a tumultuous journey for us at PETRA as we've navigated through COVID-nineteen along with the rest of the world and have also successfully navigated through a capital restructure, which has taken us to where we stand at PETRA today. The focus of the presentation is on our financial results for financial year 2022, and I'm very pleased to announce record results across a number of different metrics.

1:30 Firstly, I would like to highlight our improved safety performance with a 48% improvement in our lost time injury frequency rate. And then turning to our record results where we have delivered an increase of 103% on our adjusted EBITDA, 91% on our operational free cash flow and our adjusted earnings per share up 290%. And this affirms the quality of the diamonds in our resource where we also saw contribution of $89,000,000 from exceptional sales. And by exceptional, we mean stones that realized the price of $5,000,000 per stone or higher. I think this is all culminated in strong cash generation where the group has generated $265,000,000 of net free cash flow from our Project twenty twenty two, which was a project that we launched towards the end of twenty nineteen.

2:32 And that project targeted the delivery of $150,000,000 to $200,000,000 of net free cash flow from the business over a three year period. And as you can see, we have generated well in excess of that at $265,000,000 net free cash over the three year period. Williamson mine in Tanzania has now fully ramped up following a seventeen month period in care and maintenance, and we are busy developing our self funded mine expansion projects at both Cullinan and Finch mines. We're continuing to drive a culture change through the business in implementing a culture refresh program, which we've captioned PETRA formula for success.

3:22 We've embedded our new operating model with continuous improvement at its center and we are also implementing our new sustainability framework across the business. We have a considerably strengthened balance sheet with our consolidated net debt to EBITDA now down at 0.15x, and we have today announced a tender offer to purchase $150,000,000 of our second lien notes, which we'll talk to in a little more detail. And then finally, we also I'm also very pleased to announce that the Board has approved a new dividend policy for PETRA. If I now turn to the highlights of the 2022 financial year, I'm not going to step through all of these, but you can see that all of those metrics are up and in some cases significantly up.

4:22 One comment just to notice that the significant increase in our ore process is really as a result of Williamson mine recommencing its operations on the back of it being in care and maintenance. And this really just is intended to highlight the extent of the improvement in our record results.

4:44 Turning now briefly to the reduction in our gross debt and our new dividend policy, and Jacques will take you through the tender offer in a little more detail shortly. But essentially, tender offer is intended to reduce our gross debt by 150,000,000 to $226,000,000 and further strengthen our capital structure. And if successful, it will reduce our interest payments by around $15,000,000 annually. Our new dividend policy is targeting a payout of 15% to 35% of adjusted free cash flow, adjusted for tax and interest payments and also having made any adjustments for windfall earnings.

5:30 We intend paying the dividend as an interim dividend at a third and a final dividend of two thirds relating to the full year's

5:38 performance. In the event of any windfall earnings, the Board has indicated it would consider a payment of any special dividend. And at the bottom of that slide, we've just reiterated our capital allocation policy and really that is just to reinforce our very disciplined approach to how we allocate our capital across different orders of priority to ensure that capital discipline is maintained in the business. I will now hand across to Jacques to take you through our financial performance. Thank you, Richard, and good morning all. So looking at bit more detail on the FY 2022 financial highlights.

6:24 Our revenue increased by some 44%, resulting in a record revenue of CAD $585,000,000 for the year. This was on the back of a 41.5% increase in like for like diamond prices as well as the contribution of exceptional stones as also mentioned by Richard. Adjusted EBITDA doubled to $265,000,000 resulting in a record EBITDA performance for the group, while online cost and CapEx remained largely within line of in line with guidance. Our operational free cash flow of $230,000,000 also significantly up compared to last year's $120,000,000 resulting then in consolidated net debt of just over $40,000,000 at the end of the year.

7:16 Looking at our mining and processing cost for FY 2022, online cash cost did increase by some 30%. That's really on the back of Williamson restarting operations, largely contributing to that increase, while inflationary increases and some above inflation increases was observed and is highlighted on the slide. Royalties increased by to $14,600,000 for the full year And that's really, again, relates to Williamson recommencing operations, while increased profits across the SA operations resulting in a slightly higher royalty percentage based on the profit based regime in SA.

7:59 Some of our key balance sheet numbers. Cash at bank increased to $288,000,000 up from last year's $173,000,000 and that's also after settling our first lien bank loans and borrowings, which had a balance of $103,000,000 at the end of last year. Debtors and inventories largely normalized after some disruptions observed in the earlier year in the previous year, I should say, while our loan notes, second year loan notes increased to $366,000,000 on the back of interest being capitalized through our PIK or payment in client structure. As mentioned, consolidated net debt now down to just over $40,000,000 while we still have $61,000,000 of available and undrawn facilities through a R1 billion RCF facility put in place during the year.

8:58 The consolidated net debt movement, major items contributing to the reduction from $228,000,000 last year, its operational free cash flow $230,000,000 and that's after $54,000,000 of CapEx as well as the interest charges, both cash and capitalized, as set out on the chart, just over $43,000,000 Some realized FX gains observed during the year, dollars 12,000,000 of that, while cash taxes amounted to $7,800,000 for the full year, resulting then in the stated net debt of $40,000,000 Our guidance for the years FY 2023 to 2025 remains unchanged. I'm not going through any detail here other than to mention we'll obviously update the market on a quarterly basis as we progress throughout this year.

9:51 The tender offer for our second lien loan notes that we launched today targets $150,000,000 of notes to be purchased by the company. The interest saving is expected to yield some $50,000,000 of savings per annum and the transaction is obviously fully funded by internal cash resources. Our tender offer will be carried out through a modified Dutch auction process with an early bird mechanism. The timelines are set out on the slide with early participation deadline September 26 and the expiration deadline being of October 11, settlement shortly thereafter. We have included the details of the dealer managers as well as the website address where interested parties could find the tender offer memorandum for this transaction.

10:46 The results, I should well, the evolution of our gross debt rather, dialing back the clock for by some eighteen months, we had gross debt in the business of $814,000,000 $7.00 $5,000,000 associated with our second lien debt at the time and just over $100,000,000 related to our first lien debt. Through the capital restructure which we underwent last year coupled with settlement of our first lien debt, we've now reduced our gross debt down to $366,000,000 at the end of June, while we would expect our debt now to reduce further assuming the tender offer is successful to some $226,000,000 Again, the $61,000,000 at first lien facilities remains available and is expected to remain largely undrawn.

11:38 I'll hand back to Richard.

11:43 Thank you, Jacques. I'll now take you through an overview of results starting with our focus on safety as our number one priority. We continue to strive to deliver zero harm workplace, and we are focusing on our behavior based interventions to help address and reduce our LTIs, which are largely behavioral in nature. On COVID-nineteen, although the impact of COVID has certainly reduced significantly, we continue to offer vaccinations for all of our employees and to date have sixty four percent of our South African workforce vaccinated and fifteen percent of our Tanzanian workforce.

12:29 Turning to some of our ESG metrics, which are up on the screen, perhaps just noting that water energy and carbon intensity measures for financial year 2021 are impacted by Williamson having been in care and maintenance. So the FY 2021 ESG results are slightly distorted as a result of that. Just to note that we are implementing our sustainability framework as mentioned and we will detail all of our ESG metrics in our sustainability report to be published with our annual report next month.

13:09 Looking at the market, we continue to see a supply deficit in the market on the back of projected flat supply for the next ten years. We haven't seen much investment in global diamond exploration and so expect this flat profile to continue. On the demand side, we've continued to see strong demand for colored and large white stones and we've seen an uptick in the prices around the smaller size categories largely on the back of some deficits in the market on the back of constraints on Alorossa. We have seen some subdued demand coming out of China on the back of ongoing COVID lockdowns, which has put some pressure on the 0.75 to five carat size ranges.

14:05 Financial year 2022 also saw a record for exceptional stones recovery at $89,000,000 and perhaps just highlighting two of those exceptional stones, the first, the 39.34 carat blue from Cullinan Mine, which was sold for just over $40,000,000 And as far as we know, that represents the highest U. S. Dollar per carat value for a diamond sold in the rough at $1,000,000 a carat. And at Williamson, just highlighting the sale of the 32.32 carat pink diamond, which we sold for $13,800,000 Just drawing your attention to the graph on the top right of that slide, you can see the $89,000,000 for FY 2022.

14:50 And then we've also shown averages for exceptional stone contributions over a three year average and a five year average. For our internal planning purposes, we use a five year average to ensure that we are able to smooth some of the fluctuations around the recovery of these exceptional stones. Turning now to the prices we've realized on our own sales. The graph you see represents the sales from our last tenders, our most recent tenders. For the full year, financial year 2022, we saw a 41.5% increase in our like for like pricing over financial year 2021. And in calculating our like for like pricing, we exclude all exceptional stones and our single stones to provide a fair comparison in terms of the underlying movement on a period by period basis.

15:50 What has been very pleasing in this first tender of financial year 2023 and we have put out a separate RNS providing more detail on this is we saw the strong sales continue into this financial year with just under $103,000,000 of revenue from our first sale, which is 21% up on tender six, which was our last sale of financial year 2022. This is really driven by a high proportion of high value gem quality stones, particularly from our Cullinan mine, which has more than offset the 4.5% decrease on a like for like basis as compared to Tender six of last year.

16:39 Turning to our operations now. The slide just sets out the mine contribution split between our four operations and it's clear to see that Cullen and Finch remain the engine rooms of the business, but pleasing to see Williamson's contribution stepping up on the back of it ramping up to full production with Coffey Fontaine remaining a marginal operation. Looking at Cullinan first, we saw substantial revenue growth of 29% on the back of a 52% increase in the average price received per carat, which is more than offset the 16% reduction in volumes.

17:28 The exceptional stones that we referred to earlier, the $89,000,000 $75,200,000 came from exceptional stones produced at Cullinan mine. Cullinan's segment operating profit doubled to $154,000,000 And in terms of performance against guidance, although production was down 7%, this was within our guidance range. We've previously reported on Tunnel 41 that we have closed as a result of convergence and we are monitoring the stability around the tunnel to re access that part of the ore body in the C cut. Grades down at Cullinan, but also within guidance and that is partially attributable to the fact that we are mining a higher proportion of our run of mine ore from the more mature areas of the block cave.

18:30 Our costs are up at Cullinan around 20, and that's driven both by the lower production, so that's on a unit cost basis, but also on the back of inflationary pressures, an increase in our social spend, but also a higher allocation of our direct costs that were previously included in our group costs on the back of our more centralized operating model that we've adopted. The CapEx of $35,000,000 largely relates to our expansion project, CC1 East, which is a three level sublevel cave project. Turning to Finch. Revenue also grown quite considerably at Finch by 34%, also supported by higher average prices.

19:19 From a segment operating profit perspective, increased to 30 just under $35,000,000 and production was slightly up on financial year 2021, but marginally below our guidance. And similarly so on our grade with regard to guidance. Costs are down at Finch by eight percent. The main reason for that is we have implemented the recommendations of our business reengineering project, which really was directed at rightsizing the cost base to better match a reduced production profile that we have shared with the market previously. CapEx at Finch at $12,000,000 is slightly behind the Covenant project, but also in the case of Finch relates to our expansion of a new three level sublevel cave and that capital will ramp up in line with the project timeline and project plan.

20:25 Williamson, as I said, ramped up to full production and good performance since we recommenced after the care and maintenance. We've made very good progress on implementing our independent grievance mechanism, which was part and parcel of the settlement we agreed in relation to human rights allegations in Tanzania. And also as part of that, we're progressing our restorative justice projects, in particular, the medical assistance where we've increased our budget and also around sexual and gender based violence. And then two projects that are potentially income generating, we're finalizing feasibility studies for both an artisanal mining project and an agribusiness development.

21:19 And total funding of GBP 1,000,000 has been set aside to fund these projects and initiatives. And then finally, on Coffey Fontaine, Coffey Fontaine has performed below guidance. We have restructured our shift configuration, which has reduced our costs, but unfortunately, we haven't yet reached our planned production levels on the revised plan for Coffey Fontaine. We have indicated previously that we are looking at options for a responsible exit which includes the evaluation of non binding expressions of interest received by the group. So in switching now to our focus for this year, we obviously are looking to continue to embed our operating model across all of our operations to ensure more predictable operating performance.

22:16 We're busy implementing and integrating our sustainability framework that we've reported on previously and continuous improvement remains at the center of our operating model. So at Cullinan, we're continuing to mine in the C Cut, the block cave in the C Cut. We are continuing to evaluate the ore composition as we move into the more mature areas of the C Cut. We're, as I said earlier, assessing the reopening of Tunnel 41 and we are busy with the development of the expansion project on which we've called CC1 East. We're also importantly completing a study for two new tunnels to the east of Tunnel 41, which is in the C Cut and that will provide additional flexibility at Cullinan and will also provide access to additional ore and carrots at the mine.

23:08 At Finch, we're focusing on monitoring and mitigating the waste ingress that we have previously reported on and we're completing the implementation of the business reengineering project recommendations together with ongoing development of our three level sublevel cave project expansion project at Finch. Williamson is stabilizing our operations on the back of the ramp up and completing the execution of our IGM and restorative justice projects. And as I've just mentioned for coffee from Tein, we are looking at responsible exit at that operation. And then moving to finally to our outlook, I think where we are on the back of our financial results is we have a considerably stronger operating platform with sustainability at the core of our business, and that is supported by a diamond market with strong underlying fundamentals.

24:10 Our guidance three year guidance, as we've said, remains unchanged, and we expect strong cash generation to continue. On this On the balance sheet side and the cash generation side, we expect to continue to self fund our expansion projects at Cullinan and Finch. Tender offer has been announced today. And as we've mentioned, that targets $150,000,000 of our second year notes, which will reduce gross debt and save on our interest spend. And then finally, we've announced the dividend policy as outlined. And with that, I would like to open for Q and A. Thank you. Richard, that's great. And Jacques as well, thank you very much indeed for your presentation today. Ladies and gentlemen, please do continue to submit your questions just by using the Q and A tab that's situated on the right hand corner of your screen.

25:10 Just while the team take a few moments to review those questions that were submitted already, I would like to remind you that recording of this presentation along with a copy of the slides and the published q and a can be accessed via your investor dashboard. Richard, as you can see, we have received

25:23 a number of questions throughout today's presentation, so thank you to all of those on the call for taking the time to submit their questions. And if I could just hand back to you just to run through that q and a tab and where appropriate to do so if you could please just read out the questions and give your response and then I'll pick up from you at the end. Thank you. Certainly. So our first question is from Jake who had pre submitted his question really asking about the situation around the bonds June 26 and highlighting our healthy cash balance and the question around whether we would consider buying back bonds in the open market or restructuring the bonds. And really, I think if if if we we look at the the results as we presented them now, we have issued or or launched a tender offer for a $150,000,000 of our notes. So we are applying some of our excess cash towards that.

26:20 And we also announced our dividend policy, which will hopefully see some return to our shareholders in the near future. So that was the first question. We have another question from Sam. The question is, with a strong performance, including reducing debt, do you anticipate special dividends if this trend continues? I think the answer to that is we have in our just announced dividend policy indicated the basis on which we will look to declare and pay ordinary dividends, which is 15% to 35% of our operating free cash flow after interest and tax adjusting for any windfall earnings. And windfall earnings would be additional earnings as a result of proceeds of exceptional stones or a high number of individual stones, so with some adjustment for product mix.

27:16 If we do enjoy windfall earnings, then certainly the Board would consider paying a special dividend for that. So it is possible, yes, but that would be in the context of us generating windfall earnings. Then

27:38 there's a question from Ryan about whether we will expand operations to other areas of Africa. Yes, I think on that one, we certainly are an African focused business. We have indicated that we have a number of organic growth opportunities within the business besides the two projects we're currently executing at both Cullinan and Finch. So Cullinan certainly has the potential to continue mining well beyond its current mine life of 2031. And Finch similarly has some opportunities to exploit in terms of further organic growth and the same is true at Williamson. So we do have some opportunities within the current portfolio, but given where the business is currently and the cash we're generating, we would certainly be looking at growing the business through potential inorganic opportunities as well. So the short answer is for the right opportunity

28:41 that would add value to the business, we would look at opportunities outside of the current asset portfolio. Another question I think from Sam. Plant efficiencies, can these be optimized for greater production and how much CapEx do you expect to maintain growth? I'll take the first part and Jacques will talk to the sustaining CapEx. So we do have a very strong focus on our plant and recovery. We do have a technical lead who looks after processing for us. And so we're continually looking at optimizing our recoveries. I think we perform very well in that regard, but we, of course, always looking to see

29:30 how we might improve on that. But there already has been quite a bit of work done in that regard. Jacques, do want to talk to Sure. In terms of the CapEx to maintain growth, firstly, sustaining CapEx is in the region of some $30,000,000 per annum across the portfolio. That is included in our detailed guidance available on our website. And we have some expansion CapEx to continue to extend the life of mines, as Richard also referred to, both specifically at Cullinan And Finch mine, and those CapEx numbers ranges from around 115,000,000 to $130,000,000 per annum over the next few years as well.

30:18 So yes, that's the CapEx question. Thanks, Shah. And then we have a question from Claus. When is the dividend expected to be paid? In answering that, obviously, the Board has announced a dividend policy, which guides the Board in terms of considering any dividend. Obviously, the fact that we have announced a dividend policy is on the back of our recent strong performance and the very

30:48 strong set of results that we've just presented. So I think it would be fair to say that the Board would consider a dividend in this financial year, but that will be discussed as part of the Board's consideration at our two main reporting periods around our interims and prelims. I don't know if you wanna add to that, Sean. No. I think that's covers that. I think that's the last question. Think that is our last question for for now. Absolutely. Richard, Jacques, if I may just jump back in there and thank you very much indeed for taking the time to address all of those questions that came in from investors today. And of course, if there are any further questions that are submitted today, we'll make these available to you immediately after the presentation has ended for you to review and then add any additional responses where it's appropriate to do so. Richard, perhaps before redirecting those on the call to provide you with their feedback, which I know is particularly important to yourself and the company, if I could please just ask you for a few closing comments to wrap up with, that'd be great.

31:53 Thank you very much. Yeah. Really, just from my side on behalf of the PETRA team, just to say to you, we appreciate your attendance. And if you do have any questions that haven't been addressed, please forward them, and we will pick them up on our side. So thank you very much, and we look forward to talking to you again in the near future. Richard, that's great. And, Jacques, once again, thank you very much indeed for updating investors today. Could I please ask investors not to close this session as you'll now be automatically redirected for the opportunity 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, but I'm sure it'll be greatly valued by the company. On behalf of the management team of PETRA DIAMONDS LIMITED, we would like to thank you for attending today's presentation. That now concludes today's session. So good afternoon to you all.