Petra Diamonds' (PDMDF) CEO Johan Dippenaar on Q1 2017 Trading Update Call (Transcript)

| About: Petra Diamonds (PDMDF)

Petra Diamonds Hmltn (OTC:PDMDF) Q1 2017 Trading Update Conference Call October 24, 2016 4:30 AM ET

Executives

Johan Dippenaar - Chief Executive Officer

Jacques Breytenbach - Chief Financial Officer

Analysts

Danielle Chigumira - UBS

Richard Hatch - RBC

Edward Sterck - BMAO

Patrick Morton - Macquarie

Ian Rossouw - Barclays

Operator

Welcome to the Petra Diamonds’ Q1 Fiscal Year 2017 Trading Update Conference Call. On the call today from Petra Diamonds, we have Johan Dippenaar, Chief Executive; and Jacques Breytenbach, CFO.

I would now like to hand over the call to Johan. Johan, please begin.

Johan Dippenaar

Thank you. Good morning, ladies and gentlemen and welcome. We will be discussing our trading update announcement, providing production and sales figures for quarter-one financial year 2017 being our first quarter. All the numbers will be for information up to the 30th of September 2016.

As mentioned, with me on the call is Johan Dippenaar, the CFO of Petra. I will discuss operations, sales and the diamond market before handing the call over to Johan to discuss the Petra’s financial position.

So before we start with the production and sales results for the quarter, I’m glad to mentioned safety first. So following, the disappointing quarter on this front. So four employees were slightly injured during the period. Three employees passed away following two separate incident at Williamson, while another employee was slightly injured at Cullinan. Our condolences are to the families and friends of these fellow employees of ours.

Across the Group, we have increased our safety initiatives involving all levels of employees, serving to reiterate our zero-tolerance approach to unsafe acts and unsafe working conditions and to reinforce safety as a single most important personal and organization value. So we remain committed to prevent such incidence from happening in the future and to create a zero harm working environment for all our employees.

We continued improvement of our LTIFR frequency rate to 0.28 from 0.29 in full year 2016 against a backdrop of high levels of construction and project related activities support our efforts in achieving our zero harm goal.

So now turning to the results, during the quarter, production increased 30% over the same period last year, producing 1.1 million carats for the three months ended 30 September, 2016. This performance was driving by initial production from undiluted areas as the new underground blocks are starting to come into production as well as increase tailings production from the Kimberley Ekapa joint venture that we have.

Petra held one tender in quarter-one generating revenue of $94.7 million, selling 745,000 carats for the period. This tender included the sale of 138 carat white stone from Cullinan and 10.64 carat pink stone from Williamson which sold for $6.5 million and $5.2 million respectively.

In addition, the second tender of financial year 2017 closed after the quarter period end and it yielded $66.4 million from 574,000 carats sold. Prices realized during these two tenders remained flat on the like-for-like basis in comparison to H2 financial year 2016 and third and final tender of H1 is scheduled for early December 2016. So very pleasing to note the stable market that we are currently experiencing.

Expansion programs remained on track and in line with expectations. The new block and sub level cave which are being installed at Cullinan and Finsch are delivering initial production, resulting an improved run-of-mine grades at these operations for the quarter. Production from these areas will continue to ramp up and will lead to a continuing improvement in run-of-mine grades in line with guidance.

Looking at the operational performance, Finsch recorded strong results for the period with run-of-mine production increasing 9%, contributing close to 460,000 carats with improved run-of-mine grades of over 52 carats per 100 tonne, which is a 12% increase over the run-of-mine grade over the same period last year. Overall production remained relatively flat as the increase in run-of-mine carats was offset by the plant decrease in tailings production.

The increase contribution from undiluted ore and underground carats will improve - will further improve overall product mix.

At Cullinan, production increased 44% to around 209,000 carats from with a run-of-mine grade of 33.2 carats per 100 tonne, representing a 41% improvement over the same period last year with a run-of-mine grade of 23.6 carats per 100 tonne was recorded.

As the underground expansion project start delivering, the run-of-mine grade achieved remains in line with H1 2017 guidance of between 33 and 35 carats per 100 tonne.

As mentioned in our 25 July trading update in market guidance, plant production at Cullinan is weighted towards H2 financial year 2017 following the commissioning of the new plant. Construction of the plant is on schedule and we are pleased with the progress to date. The commissioning of the plant is planned to commence during quarter-three FY ‘17 and is expected to be completed and fully operational during quarter four.

Koffiefontein production increased 8% to 15,400 carats during quarter one with a run-of-mine grade of 6.8. That’s below 2017 guidance of 38 carats per 100 tonne. The run-of-mine grade was negatively impacted by a production from the level grade 52 level area during the period and SLC production shortfalls. This was because we experience unplanned downtime of the underground ore handling infrastructure, due of excess of groundwater increase.

Directing and containing groundwater along the ramp and conveyor route will be addressed during quarter two. And so this will impact on Koffiefontein production volumes for the second quarter, but we expect that product will reach designed rates during our H2. Overall group production and sale forecast will even not be effected by any effected Koffiefontein production.

Petra’s attributable production from Kimberley copper mining increased to 237,900 carats during quarter one. And as planned, run-of-mine treatment was restricted during this period. A crusher was installed to treat underground tonnes from Wesselton and Joint Shaft through the CTP plant and 150,000 tonnes of run-of-mine period was built-up since June ‘16 and this will be treated during the remainder of financial year 2017. This will then obviously have a very positive impact on the average value per carat that we will be achieving for the remainder of this financial year.

Tailings grades of 12.4 carats per 100 tonne for the period exceeded full year top guidance of 9 to 10 carats per 100 tonne. The current lower dollar per carat prices realize for the KEM [ph] is within expectations given the type of ore being treated.

Finally at Williamson, production increased to 53,000 carats in quarter-one and the capital program at Williamson to expand production to 5 million tonnes by financial year 2018 remains on track. With the construction of the new mill section nearly completed and commissioning due to commence in quarter two of this financial year.

Upon commissioning, both throughput and grades will improve, so through that improvement, we will achieve guided levels of production for 2017.

The diamond market, with regards to the rough diamond market, we are seeing strong attendance at our tenders and are generally witnessing a stable market. As mentioned previously, rough diamond prices for both the sales concluded to date remain in line with prices achieved in the six month period January to June 2016.

When comparing prices realized that the first two tenders to guided prices it's important to note that guidance is based on yearly weighted averages. We expect further price improvements on the back of improved product mix given the gradual increase in production from the new areas and as we are accessing the undiluted ore.

Petra will have one more tender in H1 closing early December followed by the usual four tenders during the second half of this financial year.

So I will now pass over to our CFO, Jacques Breytenbach to cover the financial and corporate points.

Jacques Breytenbach

Thank you, Johan, and good morning everybody. As you can see from the table provided net debt as of 30, September 2016 was $463.9 million and Petra has bank facilities undrawn available of $70 million and an additional $30 million restricted cash also available. These balances exclude cash from the October tender are some $66 million which in part relates to the increase level of diamond inventories as at the period end.

Diamond debtors were significantly lower than FY’16 year end as all diamond sales are occurring during our first quarter was settled during the period and the first tender closed well in advance of the period end.

As we have stated before, we are currently in a period of peak debt levels due to the capital spend profile for FY 2017 weighted towards our first half. Capital expenditure during Q1 included finalizing all major equipment purchases associated with the new Cullinan plant to meet the Q3 commissioning targets. We expect an improved debt profile in H2 FY’17 in line with the increased operating cash flows and decreasing capital spend.

We also expect to still maintain a healthy minimum headroom during this time of peak date in the region of ZAR1 billion and therefore remain well funded to the completion of our expansion programs. Current forecast indicated we will be within our banking debt maintenance covenants for the measurement period to December 2016.

This concludes our coverage of the trading update, and we will now take questions.

Question-and-Answer Session

Operator

[Operator Instructions] Our first question comes from Danielle Chigumira from UBS. Please go ahead. Your line is open.

Danielle Chigumira

Hi there, good morning. A couple of questions from me. And firstly on Cullinan, I remember at the full year 2016 results, you guided that production would increase sequentially within every quarter in fiscal ‘17, are you still comfortable with that guidance given you delivered such a strong Q1?

And the second question is on Finsch, so the realize prices they were below guidance and despite you delivering production from the Block 4 pillars and on Block 5, are you comfortable with that you're going to sufficiently high grade areas to get the Finsch and realize price in line with your fiscal ‘17 guidance?

Johan Dippenaar

Thank you, Danielle. So the first one on the grades at Cullinan, yes, our guidance are the great in H1, they are 33 to 35 and then moving into the early 40's to average around 37 to 38 for the full year. So we are on confident that this is playing out like that and as the volumes of all from the new C-Cut phase 1 continues to increase. We can see that in our day-to-day recovery profile.

On Finsch, you’ll see our price achieved was well above what we received for the full year fiscal 2016, we achieved 89 then we are up at 95. I know that’s still below guidance, but this will gradually as the increased tonnages from Block 5, they are Block 5 SLC, it only really started during this quarter. So as that picks up during the year, we’re confident that average price will be made.

Danielle Chigumira

Great, that’s very clear. Thank you.

Operator

Our next question comes from the line of Richard Hatch from RBC. Please go ahead, your line is open.

Richard Hatch

Thank you. And morning, thanks for the call. Just a couple from me. I just firstly just on Cullinan, I wonder whether you're able just to give any early stage sort of interpretations of how the second quarter is going, are you continuing to see an uptick in grades and once again are you comfortable with your guidance there?

And then secondly on the balance sheet, I know sort of covenants are being talking point for the stock while and I mean what sort of sensitivity analysis do we have to see for the covenants to be a challenge and are you able - are you comfortable with where your balance sheet is in order to meet your debt covenants? Thanks.

Johan Dippenaar

Okay. So I’ll answer the first part on the Cullinan and Jacques will handle the balance sheet one. So Cullinan, yes Richard, as confirmed to Danielle just now, we are confident. We can see week-by-week and slowly but surely the increased tons come from these new areas we see the great edging up. And keep in mind that the improvements as we expect when we commission the new plant which we say commissioning will start during our quarter three and be operational during quarter four.

So all along the not only a profile of improved sources of all from the undiluted areas, but also be able to step away from this old fifty old plant that we get going up to now so that will bring further improvements as we placed out. Okay, so Jacques will deal with you the comfort that we have around the meeting the covenants.

Jacques Breytenbach

Richard, yes on the covenants, with two tenders and as we said we've seen very, very stable prices in these first two tenders. In terms of the sensitivity to our covenants for measurement period December, purchase will have to come down quite really 13% to by 15% and more before covenants may become an issue. So at this point in time, we anticipate that we'll quite comfortably meet the maintenance covenants.

Richard Hatch

Excellent. Thank you very much gents.

Operator

Thank you. [Operator Instructions] Our next question comes from Edward Sterck from BMAO. Please go ahead your line is open.

Edward Sterck

Good morning, thank you. Just a couple of questions from me. Firstly, talking about the increasing production from the new levels at Cullinan and Finsch with the improving grade, is there any change or improvements in the size frequency distribution that is observable as that production increases?

And then secondly, just going back to covenants kind of thinking about the distribution covenants for the second half of this year, are we seeing - is there any change in expectations there or is any improvements in the outlook concerns of how those are expect to be measured?

Johan Dippenaar

Okay, so the first part, yes, it like I say, when we started this first quarter, the ore from these new areas make up like 10%,12% slowly but truly building up to 15% to 20%. And first indications are there that we will experience see the improve size frequency in these parcels hence our contention that prices will improve even in a flat market because of these improved parcel of diamonds that we will see.

Jacques Breytenbach

In terms of your distribution covenant and question for H2 again at current forecast and given current market conditions, there is no reason to anticipate that we will not meet the distribution covenants as of the end of June for 12 months period.

And as indicated earlier, we will also look exactly where we stand end of December and we’ll give some further guidance on the - attribute with our H1 announcement in February.

Edward Sterck

Okay, thank you. And just one follow-up question just on the Cullinan plant, what are the remaining critical path items that need to be checked off for commissioning in Q1 - I’m sorry in Q3?

Johan Dippenaar

Yeah, so we have as we’ve indicated in the financial section all the big ticket items have been audit and have been delivered to plant. So all that remains now on the critical path is that we’ve also cutting over to a new power distribution, more efficient power distribution from the main incoming from Escom, so all the cabling and the final planning of the buildings that sort of like to work that is ongoing now.

And then of course the only part of the, it’s cutting over to a brand new area of final recovery, so I would say that that final recovery is critical part, but just to make sure again that everybody understands, it’s not a - we can go on with - we can go on to the new plant, and still do the final recovery of diamonds maybe not in the most ideal circumstances as designed in the new plant, but we will be able to go on. And if anything happens now with the delivery of the new plant which that would seems everything is going really well, we can just keep on going with our plant. So we’ve got flexibility, but the day we’ve decided to cut over of course they knew, you can only run one at a time. So we will be giving guidance to the market as this plays out towards end of quarter two.

Edward Sterck

Thank you. And actually the one last follow-up question. On the new plant of Cullinan that’s obviously expected to help improved the recovered grades. Is that across the size frequency distribution or is it going to be passed more towards the final size categories?

Johan Dippenaar

Yeah, we - it will obviously be weighted towards the final initially because of the better liberation. But you might recall that we have say that it will be because of the screening we’ll be using at the bottom cut, we won’t be screening at one millimeter but at something like 1.2 something with our guidance for the full year, so that will be tempered somewhat. But - and we do expect that across the size ranges, we’ll see better recovery.

Edward Sterck

Excellent. Thank you very much.

Operator

Our next question comes from [indiscernible]. Please go ahead. Your line is now open.

Unidentified Analyst

Should you spent in this quarter.

Johan Dippenaar

Please repeat the question.

Unidentified Analyst

Yeah, yeah, my question is on capital expenditure. How much capital expenditure did you spend in quarter one?

Jacques Breytenbach

We have not been illustrating update given any capital numbers and we will have it in our H1 numbers for the full six month period as the usual. So unfortunately, we will not be able to comment on capital as yet.

Unidentified Analyst

Sure. Thank you. Thanks.

Operator

Our next question comes from Patrick Morton from Macquarie. Please go ahead. Your line is now open.

Patrick Morton

Hi team thanks for the question. The wage agreement I believe expires in the next 12 months. What is the timing of negotiations or other announcements around that?

Johan Dippenaar

Patrick, sorry we missed the first part, you said something about the agreement that expires in the next 12 months.

Patrick Morton

The labor and wage agreement.

Johan Dippenaar

Okay. Yeah, yeah sure Patrick. Yes, we will negotiate a new labor and wage agreement that will be effective from 1st, July 2017. So that will start during the latter part of quarter four. Yeah, so it’s too early to comment on that now. But as the usual, we would like to point out Petra is very stable labor relations that we’ve enjoyed over many, many years now. And the working of our employee say trust is working very well with the workers receiving now, in December they will receive the third payout. So that’s working well. So we are confident that we are that these good relationships that we have at the moment that will continue throughout these negotiations for a new agreement from 1st, July 2017.

Patrick Morton

Thanks, guys.

Operator

[Operator Instructions] Our next question comes from Ian Rossouw from Barclays. Please go ahead. Your line is now open.

Ian Rossouw

Thanks, morning, guys. Just have a quick follow-up on Danielle’s question about the realize prices at Finsch and Cullinan, excluding the special that Cullinan, if you do actually expect the final quarter in 2017 to be above the top end of guidance as you said the weighted average will be within the guidance, but do expect to be above the top end for the last quarter?

Jacques Breytenbach

So if you look at Cullinan, Ian we’re ready at 108 or something like you know so for the - yeah, at 108 without specials. And if you take our full year guidance, the 105 to 115 plus $20 million of specials, overall the pricing should average about 130 to 135 and you see we are at 165. So Cullinan is already well within the target. But definitely at Finsch, we’ll see this gradual increase over the crop as they plays out because the SLC there has like to say just started commencing in the quarter-one and the improved size frequency distributions that we will experience as the place out will like I said our expectations is to run well within those guided prices.

Ian Rossouw

But do you expect Finsch to be above 105 in the final quarter, I just wanted to get a sense of the actual ranges of the quarterly numbers?

Johan Dippenaar

Yeah, yes of course it has to start achieving around at 105 and above that for the average, yeah.

Ian Rossouw

Okay. Thanks. And just to follow-up on Richard’s question on the sensitivities Jacques, you gave some sensitivities for the December period, if you can just to likewise for the June next year the 12 months just expectations of and obviously that the diamond prices will be more sensitive given that there’s a few more quarters to go?

Jacques Breytenbach

Yeah, Ian we do it at the sensitivities that we’ve ran going forward it reminds around 15% mark on rough diamond prices from levels that we currently see. And as we start banking the tenders and prices holding firm is actually some slightly more scope for a decline in future tenders before any covenants for instance will be treated. But 15% on the low side on current prices should see as crucial.

Ian Rossouw

Okay. That’s all from my side. Thank you.

Operator

That was our final question. Now back to Johan for his closing comments.

Johan Dippenaar

Yeah, thank you everybody for making the time to join the call. And with that will conclude the call. Thank you.

Operator

This now concludes our conference call. Thank you all for attending. You may now disconnect your lines.

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