Petra exploits its Heritage 

The diamond mining game is a law unto itself, and no-one knows this better than Adonis Pouroulis, executive chairman of Petra Diamonds. The other day in South Africa, the company sold the Cullinan Heritage, an exceptionally large 507-carat white diamond discovered on ‘Heritage Day’ (24 September 2009), one of the 20 largest high-quality rough stones ever found, for $35.3 million (£23 million) or $69,230 a carat, and transformed its current profit prospects in the process.

Diamond prices vary enormously, according to colour, quality and size, quite apart from the overall movements of the rough gem price cycle, and the Cullinan Heritage sale is only one facet, though an important one, of Petra’s recovery from a succession of setbacks. These have included the failure of one of the company’s key long-term projects, the Alto Cuilo prospect in Angola, to emerge as a viable venture and a slump in rough gem prices caused by the recession, from which the market is now emerging strongly.

When Petra floated on AIM 13 years ago at 85p, it became an instant market star before losing most of its early lustre on repeated disappointments. Now, however, the Jersey-based company, chaired by South Africa-focused entrepreneur Pouroulis, awaits the full impact of recovering rough diamond prices after turning $95 million interim losses into $34 million pre-tax profits.

‘We are a proper company now, with real diamonds,’ insists Pouroulis, whose father Lucas won a sometimes controversial reputation in southern African business circles. Petra increased diamond production nearly 12 per cent to 614,594 carats in the six months to December from five mines in South Africa and one in Tanzania and lifted sales 55 per cent to 572,227 carats.

Pouroulis says rough diamond prices have been recovering sharply, helped by Chinese interest. He claims they are on average 70 per cent up from the bottom and within 20 per cent of previous highs, helped by tight supply conditions and rallying demand.

He and Petra’s chief executive officer, Johan Dippenaar, plan to capitalise on what they see as a changed market after the severe recession and to almost treble output organically over the next decade. They want Petra, which had $65 million cash at the end of December after raising $120 million at 60p as part of a deal to raise its stake in the company’s key Cullinan mine, to increase annual production by 100,000 carats to 1.2 million carats in the year to June and to take it to more than three million carats a year by 2019.

Petra’s mining revenue rose 32 per cent to $62.4 million in the first half-year, mostly before the sharp rough price recovery’s full impact showed through, and mining costs rose 70 per cent to $40.5 million, partly reflecting a strengthening of the South African rand, rising labour costs and partly a fall in production at the Koffiefontein mine, which is expected to be reversed.

The interim results reflect a $31 million ‘fair value adjustment’ for the Cullinan mine, in which Petra doubled its stake to 74 per cent and upped its share of the mine’s resource from 76 million to 151 million carats by issuing shares to the Bahrain-based, Saudi-backed Al Rajhi group and assuming responsibility for the remaining £50 million of a loan from Al Rajhi, which funded Petra’s original Cullinan purchase in 2008.

Al Rajhi is now a major shareholder and Cullinan provided the lion’s share of group production and revenue, producing 473,406 carats and contributing revenue up 49 per cent to $40.2 million. The average selling price per carat was 5.4 per cent down at $87, but analysts expect that it is now strongly on the increase.

Claiming that its group assets of 262 million carats now make it number three in the world after South African gem giant De Beers, Petra hopes soon to complete the £6.6m purchase of De Beers’s Kimberley mine. The company has a major stake in the Williamson mine in Tanzania, which lifted interim production 260 per cent to 68,358 carats and yielded some fancy ‘pink’ stones, including one which sold for $40,000 a carat and has set in train a plan to lift annual production to 600,000 carats.

Petra has been a volatile stock market performer since its 1997 float. After drifting down to 24p, the shares have rallied to 61p and should recover further if the market continues to strengthen.