Stock market darling Petra Diamonds (PDL) has shocked investors with a profit warning, sending its share price crashing down 11% to 164.3p. Third quarter production misses expectations, so do sales volumes. Diamond grades are lower than anticipated, forcing Petra to downgrade its June 2015 production guidance to 3.2 million carats from 3.3 million carats and it says full-year results will come in below market consensus.

While this barrage of bad news leaves a sour taste in the mouths of shareholders, it shouldn't be an entire shock for anyone who closely follows the story. Petra is going through a transitional phase with several of its mines where it is moving from mature areas underground to fresh ore where it is expects much higher grades of diamonds. That development is still ongoing, so mining results are presently being diluted by having to recover diamonds from more mature, lower grade sections.

If you look at the bigger picture, the diamond market has very attractive fundamentals where a lack of new discoveries means supplies are likely to lag demand in the mid to long term. Petra has an excellent operational track record and investors shouldn't panic over one quarter's trading blip.

PDL - Comparison Line Chart (Actual Values)

Panmure Gordon analyst Alison Turner has been the lone bearish voice on the stock, saying there's operational risk as the company transitions to new deeper areas of production. She's proved right by today's announcement, but we wouldn't be surprised to see the share price bounce back given the large number of institutional fans who may be tempted to buy on price weakness.

We've long been fans of the stock and have flagged the operational risks many times in Shares. Our preferred diamond plays at present are Gem Diamonds (GEMD), as we discuss in this article, and lesser-known Diamondcorp (DCP:AIM).

Issue Date: 16 Apr 2015