Petra Diamonds (LSE:PDL) — Preliminary Results (unaudited) for the year ended 30 June 2021

0:00 Good afternoon, ladies and gentlemen. Welcome to PETRA DIAMONDS LIMITED Preliminary Results for the Year Ended 06/30/2021. Throughout this presentation, investors will be in listen only mode. Questions are encouraged and could be submitted at any time via the Q and A tab situated in the right hand corner of your screen. Simply click Q and A, scroll to the bottom, type your question, and press send. The company may not be in a position to answer every question received during the meeting itself. However, the company will review all questions submitted today and publish responses where appropriate to do so. These will be available via your investor.me company dashboard. We'll notify you once they're ready for your review. I'd also

0:33 like to remind you that this presentation is being recorded. Before we begin, we'd like to submit the following poll. I'd now like to hand you over to Richard Duffy, CEO and Jacques Brettenbach, finance director of PETRA DIAMONDS LIMITED. Good afternoon. And thank you, and well good afternoon, and thank you, and welcome to you all. The the format for this afternoon or this morning, depending on where you are, will be that I will take you through an overview of the business before handing across to Jacques, our CFO, who will go through a financial overview and a market update, and he'll then hand back to me to go through a summary of our operations before we conclude the presentation and take questions from yourselves.

1:21 So I'm going to go straight into the presentation. And really, when we look at financial year 2021, really was a watershed year for us at PETRA as we navigated a number of challenges, the COVID pandemic being one of them along with many, many other businesses and individuals, but we also completed a major capital restructuring. And as a result of the capital restructuring, we're in a much stronger position with a much more sustainable balance sheet for the business going forward. We also have seen support from the diamond market and have recovered a number of exceptional stones from our Cullinan mine, which has resulted in a significant improvement in our net debt position, which has reduced by roughly two thirds to $228,000,000 Our Project twenty twenty two across the business has been particularly impactful at Cullinan in driving throughput improvements there.

2:35 And I'll touch on the operations a little later, but Cullinan delivered record production results for financial year 2021. We generated $120,000,000 of operational free cash flow against a negative $12,000,000 in the prior year. Also noteworthy is the conclusion of a three year labor agreement with the National Union of Mine Workers, which provides us with stability for a period of time. COVID has continued to be a challenge, but we have managed to ensure that it has a limited impact on on our business.

3:23 And then finally, you will see we have noted that the directors have decided to review strategic options at Williamson. And as a result, for financial reporting purposes, it is reflected and disclosed as an asset held for sale, and we'll talk to that in a little more detail. Safety is and remains our first priority and focus. We did see a deterioration in our safety performance in financial year 2021 over the prior period. We are focusing very strongly on a number of behavior based campaigns to address this. And we also, in this last financial year, saw this deterioration in the context of an industry that also saw an increase in injuries and accidents.

4:21 This year has seen a much better start in terms of safety performance, and we hope to deliver better results on this front than we did in financial year 2021. Turning briefly to our a summary of our KPIs. Production was marginally down year on year as a result of some challenges at Finch with unexpected waste ingress, and we had excessive rainfall impacting both Finch and Coffey Fontaine. And Williamson remained on care and maintenance, so it didn't produce any tonnes or carats. On the revenue front, a 65% increase in our revenue year on year. Important to note that AUD 62,000,000 of that came from the contribution of exceptional stones recovered at Cullinan.

5:14 And as you can see, on a like for like basis, prices increased by around 9%. Our CapEx was lower than financial year 2020, and both of those financial years 2020 and 2021 were very tightly managed to conserve cash in a period in which we were going through this capital restructuring process. And you'll see that, that capital picks up in our financial year 2022 as per our guidance. This slide really just sets out some of the exceptional stones that Cullen has produced. I'm not going to go through them, but we started with a little of PETRA collection and in this financial year 2021 and also the two ninety nine carat white.

6:06 This year, financial year 2022 post period, we announced the recovery and sale of a 39 carat Blue Diamond for AUD 40,000,000 at a record ZAR 1,000,000 per carat. And we also announced the sale of just under ZAR three forty three carat white and 18 carat blue in a partnership arrangement, whereby we will retain a 50% interest in the profit uplift on the polished proceeds. On the EBITDA front, slightly more than doubling of our EBITDA year on year to $135,400,000 and the operational free cash flow, which I have already mentioned.

6:52 Turning to our ESG performance. I'm not going to go through the entire slide, but this provides information on our performance across a number of different metrics. We do invest funds in developing and training our employees. We have been focusing on diversity in the workplace, and we have seen an improvement in women represented in the workforce and on our board. And we've seen a reduction in our total carbon emissions, supported by lower levels of operating activity, but also the result of our focus on conserving our energy on a per tonne basis.

7:38 Turning to the human rights issues at Williamson. Just a a a quick update on the process that we followed. We have announced this previously, but we did, in May, announce that we had reached a settlement with Lee Day to to settle the claims that had been brought against both PETRA and WDL. We also advised that we had been designing an independent grievance mechanism that predated the settlement itself, but this is an independent grievance mechanism that is aimed at providing a trusted mechanism for any community members to bring any claims or allegations of human rights violation to to the panel.

8:29 We also indicated that we have provided restorative justice measures, are really projects, some support, and some, as we've indicated, artisanal mining and agribusiness feasibility studies. We have funded an escrow account with a little over £1,000,000 to support and fund this. We've also adopted a human rights defender policy, and part of the focus and funding is in around a sexual and gender based violence initiative to provide support to victims of any of this violence. We have and will be using Synergy to help us design and implement all of this.

9:17 And then very briefly on this slide is a schematic that shows the components of the independent grievance mechanism starting with the scope. Obviously, we will be prioritizing any grievances relating to Williamson since PETRA has been owner of the operation. We're ensuring that the solution is trusted and safe to use. It is a Tanzanian solution. It is not a legal process. It is sits outside of the judicial system, but it is legally compliant and individuals do have access to the Tanzanian justice system if required. Importantly, there is considerable stakeholder engagement required with surrounding communities to ensure that we get sufficient trust and buy in to this to ensure that it is trusted and is accessible to any individuals.

10:20 And I'm now going to hand across to Jacques to provide an update on the financial results. Thanks, Jacques. Thank you, Richard, and good afternoon, everyone. Before I move to a very busy slide, just want to highlight that as per Richard's earlier comment around Williamson classified as an asset out for sale, the numbers that's reflected on this slide exclude Williamson in most numbers apart from the loss on discontinued operations with the results of both FY 2021 and FY 2020 restated to reflect that position. On the revenue line, Richard already touched on that. Revenue increased to $4.00 $2,000,000 65% up year on year, and that follows an increase significant increase in volumes sold with 51% more carats sold during FY 2021 compared to our FY 2020, which was largely disrupted through COVID-nineteen in the latter part of that year. Prices increased 9% on a like for like basis and as Richard also mentioned, 62,000,000 through the sale of exceptionals contributed to our revenue with $15,000,000 of similar stones in the previous year.

11:34 Mining and processing cost increased from $169,000,000 to $261,000,000 and it's largely on the back of the inventory release accounting for some $82,000,000 in the increase year on year. Cash cost online increased by some 3.3%. We cover that a bit later. Moving to adjusted EBITDA, dollars 135,400,000 were recovered were reported for 2021, representing an EBITDA margin of 34% compared to 28% the previous year. You'll note depreciation and amortization went up year on year and that was largely driven by a slightly stronger rand period on period as well as improved production specifically at Cullinan as the bulk of our depreciation charges are recognized on a unit of production basis.

12:31 Net finance expenses of $67,000,000 were still relatively high given accrual of interest charges of over $50,000,000 for the period before the restructure took effect in March. Our cash interest costs for the same period was some $6,000,000 for FY 2021. That's left an adjusted loss before tax of $8,900,000 significantly improving on the previous year's $74,000,000 Impairment charges of $17,700,000 were recognized during this year, dollars 15,000,000 of that relates to Finch, while Coffey Fontaine mine also attracted some $2,000,000 in impairment charges. You will also note a significant gain on the extinguishment of our notes net of unamortized cost of $213,000,000 and that's from the I do apologize for the background noise, IDR birds flying over.

13:34 So the $230,000,000 gain was on the back of the $650,000,000 bond, which were restructured in March and effectively converted a portion thereof to equity.

13:49 Another big ticket item there is the cost and fees relating to the human rights settlement, which Richard mentioned $12,700,000 were accrued and settled in during this year, while our net unrealized foreign exchange gains of $77,000,000 were on the back of a significant movement in the rand closing the period at R14.72 dollars to R17.32 dollars the prior year. Profit for the continuing operations for the full year posted of $248,700,000 compared to a loss of the prior year $165,000,000 Loss on discontinued operations relates to Williamson with $52,000,000 noted for this year, comprising of $11,000,000 associated with the trading results on the back of care and maintenance period, dollars 21,000,000 in payments recognized at Williamson for this year and $19,500,000 provision raised for disputed but unsettled tax claims during 2021.

14:59 Our earnings per share basic profits per share came in at 6.6 US cents per share compared to a loss of 15.2¢ the prior year with our adjusted loss per share from continuing operations at just over $0.05 per U. S. Loss compared to $05 U. S. Prior year. Moving on to our balance sheet snapshot. We ended the year at with cash in bank, again excluding Williamson, dollars 163,800,000, while diamond inventories reduced significantly during the period down to 560,000 carats valid at $45,000,000 The 560,000 carats represents some ten weeks' worth of production, which is more or less normalized given our current sales mechanism with a dual tender system across SA and Antwerp.

15:52 Diamond debtors of $38,000,000 was on the back of a tender which closed right at year end with the sale proceeds collected shortly after year end. You will then also note the loan notes at $327,000,000 is stated net of an amortized cost which were capitalized and will be amortized over the remainder of bond period compared to last year's $676,000,000 pre restructuring, obviously. The bank loans and borrowings, 103,000,000 represents our South African banking facilities with a term loan and RCF drawn adding up to that amount, largely in line with last year's $92,000,000 barring the FX movement on the amounts drawn.

16:42 All of that resulted in consolidated net debt significantly down from $693,000,000 last year, ending this year at $228,200,000 The following chart indicates as they were waterfall or a breach from the closing net debt position six ninety three last year to a closing position this year of $228,000,000 with the bulk of the movement obviously related to the debt restructuring supported by strong cash flow generation across the operations during the period.

17:22 From a cost perspective, our FY 2021 costs remain in line with expectations. You'll note that online cash costs came in at $197,600,000 bottom table compared to $191,000,000 last year. The explanation is set out on the right hand side of the slide with a 3.3% increase year on year driven by movement in the SA Rand of some 1.7% coupled with inflation, which added some six percent in South African rand terms. These were partially offset by variable cost impact on the change in production volumes just under a 1% decrease and then importantly, some net savings, including our Project 22 initiatives, which depressed our cost by further some 3.6%.

18:11 As you can see, labor and services cost, which is effectively in sourced labor comprises some 60% of our total cost on mine. Moving to significant recovery in the diamond market since the lows of shortly after the COVID outbreak. Importantly, there's a significant contraction in the supply of diamonds coming down to just over just around 110,000,000 carats for the year 2020, down from close to 139,000,000 carats the prior year. The closure of Arbel in Australia obviously contributed quite significantly as the mine produced some 10% of the world supply during 2019 and was also the only major source of pink diamonds across the globe.

19:09 As you would know, the success in diamond exploration is estimated at less than 1%. And again, importantly, there's not there hasn't been any major new finds since the early 1990s. So again, going forward, we would expect that supply remains at roughly the 2021 type levels, fairly flat looking ahead. On the consumer front, we've definitely seen a significant rebound there, which also allowed us inventory releases in the pipeline and specifically the midstream and downstream segments of the diamond pipeline with stronger consumer demand, most notably across U. S. And China.

19:55 Capacity in the midstream manufacturing, specifically in India, has returned significantly post the disruptions that they've also witnessed with COVID-nineteen, while natural diamonds remain highly desirable as opposed to the lab grown diamonds.

20:15 Importantly, also through COVID-nineteen, some consumers do have higher disposable income due to lack of opportunity to spend on competing items like, for instance, overseas holidays, etcetera. And some of that discretionary spend is obviously finding its way into diamond jewelry. I would really encourage participants to have a look at the Natural Diamond Council, of which PETRA is a founding member. The link on our on our presentation is a really interesting campaign that they've they've recently launched and well worth a look.

20:54 With that, I'll hand over back to Richard to cover the operations. Thanks, Shah. A quick summary of the operations. You have a look at financial year 2021 on 2020, you can see that Cullinan has produced the majority of our carats and generated 62% of our revenue, which is an increase on a relative basis over last year. And that's attributed to both Cullinan's very strong performance and also in looking at Finch, some of the issues we had there around the waste ingress that we've mentioned previously. If you go to each of the operations very briefly, at Cullinan, we produced record 5,060,000 tonnes, and we sold 2,300,000 carats, generating just over $250,000,000 of revenue.

21:53 We are in the process of establishing and developing a new sublevel cave tunnels on the Eastern side, CC1 East of that schematic to which we would expect to start generating production within about twenty four months. If you look at Finch, Finch sold more carats and generated more revenue than last year, but didn't do as well as we had hoped because of the issues around the waste ingress and also significant rainfall.

22:29 At Finch II in terms of expansionary capital, we are looking to extend the sublevel cave below the existing 78 level and we have a project, a three level sublevel cave project to deliver Fincher's life of mine. Kofie is a small near end of life operation. It's marginal in the context of the broader PETRA group. And we at both Finch and Kofie Fontaine have initiated reengineering projects to address margin with a view to improving the cash generated by both of those businesses.

23:15 At Williamson, the mine has been on care and maintenance since April 2020, and that was as a result of a very weak market on the back of COVID. We have since then put plans in place and are in the process of restarting operations at Williamson, given a much more favorable market and on the back of receiving a $10,000,000 VAT refund, which has helped to finance the restart. I have already mentioned that given that the Board is considering strategic options at Williamson for reporting purposes, the asset has been classified as held for sale.

24:02 Then just touching on Project twenty twenty two. This was launched back in July 2019, and it has been an important part of driving productivity, throughput and cost optimization across the business as well as revisiting our org design and organizational structure in terms of ensuring we have the right people in the right roles. Project twenty twenty two is effectively embedded in our business now as part of our operating culture and incorporated in our operating model, and it has delivered and currently, our expectations are around $50,000,000 of annualized contribution from our throughput initiatives and around $20,000,000 per annum on the back of cost optimization.

24:51 Turning to outlook. I won't step through the outlook for each of the operations, but we have provided this guidance previously in our July trading update. And for the group as a whole, total carats produced in financial year 2022 is guided as between 3,300,000 and $3,600,000 On mine cash costs, $267,000,000 to $293,000,000 with total CapEx of between 78,000,000 and $92,000,000 The sustained the expansionary CapEx focused on the sublevel cave development at both Cullinan on CC1 East and Block 5 at Finch. And then to conclude, I think where we are at the moment is PETRA is we've stabilized our operational performance with very strong performance at Cullanan.

25:49 Project twenty twenty two is well embedded in the organization. We do have reengineering projects at Finch and Coffey Fontaine that are through the design phase, we're busy finalizing the transitional plans, and we'll be in a position to talk more to this when we come back to market in October. And we've concluded the three year labor agreement, as I mentioned, with NUM, and that is on the basis of a 6.5% annual increase over that three year period. The capital restructuring, the stronger diamond market, the increased production of exceptional stones from Cullinan have all contributed to a more stable and sustainable capital structure.

26:35 And notwithstanding that, we will, of course, continue to carefully monitor and manage liquidity and control our costs. And as I mentioned, the market remains very supportive. We've seen improved demand across the pipeline from the retail end in The U. S. And China through the midstream, and we have seen that reflecting in strong demand for rough product. We, as PETRA, still have one of the largest diamond resources at two thirty million carats, and we go into this financial year 2022 with some momentum from a strong finish to our financial year 2021.

27:23 With that, we will move into our Q and A session. Richard Jaks, thank you very much indeed for the presentation. Ladies and gentlemen, do please continue to submit your questions using the Q and A tab situated on the top right hand corner of your screen. But just while the team take a few moments to review those investor questions submitted already, I'd like to remind you the recording of the presentation along with a copy of the slides and the published Q and A can be accessed via investor dashboard on the Investor Meet company platform. I'd also like to remind you that your feedback is important to the company and immediately after the presentation has ended, you will be redirected for the opportunity to provide your feedback in order that the company can better understand your views and expectations. Richard Jax, if I may, obviously, we've had a number of questions that have come through during the meeting itself. Could I just ask you just to click on that Q and A tab, please? And where appropriate to do so, just read out the question and give your answer. That will be fantastic.

28:17 Thank you, Paul. So the first question is from Andy, who's asking, what do you expect financing cost to be post restructure going as a percentage of revenue going forward? I need to answer that. The I'm not going to state it as a percentage of revenue because we don't give revenue estimates going forward. But in terms of our cost of our debt, the bond three 100 around number $340,000,000 bond carries a coupon of 10.5% for the first two years, which is paid in kind, I. E, capitalized and not settled in cash. We're after for the last three years of the bond period carries a coupon of 9.75%. On the SA banking facilities, the circa $100,000,000 drawn currently on those facilities, interest charges there is Jaibar plus 5.25% And these facilities do amortize on a straight line basis over the three year period with our first amort already kicking in June 2021.

29:21 So we've already paid down the first capital installment there. I trust that answers your question. Moving on to the next question, can we have more regular updates on socials? Yeah, it's Richard here. Yes, we will be looking at providing regular feedback on ESG performance in in general and anything specific along the lines of what we've done with the Tanzanian human rights issues. So short answer is yes, we do intend to provide regular feedback on that. Thank you, Richard. And then the next question from Ryan. What levers do you have to drive bottom line profit? And with this, would you look at dividends in the future? Or is the plan to clear the debt?

30:12 Ryan, the answer is we in the short term, which is obviously focused on continuing to optimize our capital structure, I. E, our debt to see what opportunities we can identify there. In the medium to longer term, obviously, we would be looking at some opportunity to pay dividends. But in the interim, the focus is really pretty much still on our balance sheet. We've only recently restructured our debt and talking of dividends at this point in time would be too soon. James, hi. Firstly, thanks for hosting the presentation. Much appreciated. I have two questions regarding the mix of lower quality stock you released and sold at the end of the year. Can you estimate the dollar per carat impact of those diamonds in your overall totals?

31:07 And then secondly, regarding Williamson, is your intention to seek buyers or is the final decision based on the government discussions? If the mine is not sold, is your forecast for the mine to return more than its cost of capital? Thanks. So James, on the first part of the question, in terms of the low quality stock, Unfortunately, I don't have the numbers here with me, but we did indicate in our trading update the impact of the sales of those stock items in June. And I would suggest that we just circulate, if you don't mind, to ping over an email to our Investor Relations team and we will respond to you and more broadly as well on that.

31:56 In terms of Williamson, Richard can I So ask you to respond to as indicated the board is considering strategic options at Williamson, it includes a range of potential options? Yes, potential sale is one of them, but it goes more it's more broad than just that. The preparations and the current work being done to restart operations is independent of the discussions ongoing discussions with Government of Tanzania. And so is the decision to review strategic options that was mentioned. So we are looking at finalizing discussions with government as soon as we can.

32:52 We expect the mine to ramp up towards full production in this half of FY 2022. And obviously, as and when we have more information to share on strategic options, we'll come back to the market and do that. Thank you. Then next question from JP. If the current company progress and diamond market continue on this trajectory, would you hope to retire company debt? And if so, by when? Also, do you plan to implement the dividend policy? When could we expect to hear more from this? On the trajectory of our debt, I think just given the current amortization profile, our first gain debt in some thirty months from now, I. E, three years after being implemented in March, that date would be fully amortized and paid down.

33:48 As mentioned earlier, we would be we are considering alternatives around our first lien debt specifically at the moment, given our cash position and may do something sooner there to further optimize our debt. But for now, the focus the contractual relation is a three year amortizing profile. On the bond on the notes, we have a two year non call agreement with our bondholders. So at least for the first two years and circa eighteen months remaining in that period, we would most likely not be able to to do anything on that front. But, again, if if we do continue on this trajectory, there's there's definitely further options that may open in this regard. So another direct answer, and I do apologize for that, but I think it's the best we can do at this point.

34:41 On the dividend policy? Yeah. On on dividend policy, it is something that the board will be discussing before the end of this calendar year. We haven't paid dividends for some time, but on the back of the cash we're generating, it's a it is a good question to ask, and I can confirm that it is on the board agenda for discussion before the end of this calendar year. So hopefully, we'll be able to come back with something in our third quarter of this financial year or beginning of next calendar year. Just on that, it may be worth noting that we are planning to host a Capital Markets Day in February 2022. And in there, we will brief the market around longer term outlook for around our capital projects.

35:31 And to the extent possible, maybe give some more clarity on where the Board may have landed on a dividend policy. So hoping to inform the market more broadly by that time. That's fantastic. Richard, Jacks, thank you so much for addressing those questions from investors. And of course, if there are any further questions that come through, company will review all questions submitted today. And we'll publish responses where appropriate to do so on the Investor Meet company platform. Richard, perhaps before we redirect the investors to give you some feedback, I could just ask for a few final words, please. Thanks very much. Yes, just to thank everybody for your attendance. This is the first time we've tried this. Hopefully, it's been useful for you.

36:16 And we look forward to chatting again in the near future. So from both Jacques and myself, thank you very much. Fantastic. Richard Jacques, thank you again for updating investors. Could I please ask investors not to close this session as you'll 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 and 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. That concludes today's session. Thank you, and good afternoon. Thank you.