A second profit warning in three months sends South Africa-focused Petra Diamonds (PDL) down 10% to 153.4p, but we doubt it will stay down for long. The diamond producer has a big following among institutional investors who have their sights on potentially large amounts of cash generation in a few years' time. The shares have historically been quick to bounce back after disappointing news and we see no reason for that trend not to be repeated again.
Petra has downgraded its full-year revenue guidance to $430 million (versus prior consensus of $458.9 million), thereby forcing analysts to reduce their profit forecasts. Production guidance is unchanged at 3.2 million carats; it's the shift in product mix towards higher volumes of smaller diamonds that has forced the miner to lower earnings expectations. You have to consider that two smaller diamonds don't sell for the same combined price as one larger diamond; they sell for far less.
The problem with the product mix is caused by a transitional period at several of Petra's mines. It is moving from mature mining sections to new areas where there's fresh ore and higher grades. At present, there's a lot of waste material going through the processing plant which is diluting overall production.
The transitional phase has been flagged on numerous occasions by Petra, so investors shouldn't think two profit warnings in quick succession are red flags. Shareholders will simply have to accept lumpy earnings streams in the near term.
Numis notes that the development hurdles will be 'less of an issue' into the next financial year, but says today's news requires a 10% reduction in its $49 million post-tax profit forecast.
Sanlam Securities was below-consensus with its $433 million revenue and $151 million EBITDA (earnings before interest, depreciation and amortisation) estimates. It maintains the revenue figure but lowers EBITDA to $137 million. Analyst Charlie Long comments: 'We like Petra Diamonds due to long life nature of its assets and their high margins, particularly once run of mine production is dominated by fresh mining areas. Any weakness this morning should be regarded as a buying opportunity.'