Petra Diamonds Hmltn (OTC:PDMDF) Full-year 2016 Earnings Conference Call July 25, 2016 4:30 AM ET
Johan Dippenaar - CEO
Jacques Breytenbach - CFO
Des Kilalea - RBC
Jason Fairclough - Bank of America Merrill Lynch
Edward Sterck - BMO
Luke Nelson - JP Morgan
Hello and welcome to the Petra Diamonds Conference Call to discuss the full-year 2016 trading update and full-year 2017 guidance. Our speakers today are Johan Dippenaar, CEO and Jacques Breytenbach, the Finance Director. All participants for this session will be in listen-only mode and afterwards there will be a question-and-answer session. Just to remind you this session is being recorded.
Johan, please begin.
Good morning ladies and gentlemen, and welcome to the call. We will be discussing our trading update today providing production and sales for our financial year 2016 being the year to 30 June 2016 as well as our forward-looking guidance for FY17 and high-level guidance thereafter to FY19. So as mentioned with me on the call today is Jacques Breytenbach who has recently fold the new role of CFO at Petra Diamonds further to the stepping down of David Abery at the end of the last financial year. So Jacques has been with Petra since 2006 and was previously in the role of Finance Manager Operations with responsibility for the financial management across the group’s operation. So I'm looking forward to introducing him to many of you in person when we are on our prelim results road show in September. So I will cover operations, sales and the diamond market with you before handing over to Jacques over will cover the financial and corporate aspect.
So turning to the highlights for FY16, we achieved further strong growth in production of 16% reaching record output of 3.7 million carats for the year. This came in just above our 3.60 to 3.65 million carats guidance which you may remember which we revised upwards in April from 3.3 to 3.4 million carats. The majority of this increase has come from the tailings projects which formed part of our Kimberley Ekapa Mining division as well as the first contribution of undiluted ore as new mining areas have come on stream at Finsch, Cullinan and Koffiefontein. Revenue for the year of $430.9 million was marginally above last year's level of $425 million as the increased volumes were offset by the higher contribution of lower value tailing carats from the Kimberley operations as well as the weaker market for the year with rough diamonds prices being down on average 6% for FY16 in comparison to FY15.
We noted in the announcement that operating costs for FY16 increased in rand terms mainly due to the inclusion of new Kimberley Ekapa Mining operations but that absolute cost remained in line with the expectations and were positively impacted by the weakening in the rand for the year. We will provide further detail of financials and costs in our prelim results which will be released on 19 September. Operations CapEx of $294 million for FY16 was 10% lower than guidance due to the weaker South African rand US dollar exchange rate but that was partially offset by inflationary pressures and the acceleration of plant change at Cullinan and underground developments spend at Finsch as well as some additional waste stripping done at Williamson.
So turning now to the guidance for FY17, we are forecasting further growth of between 25% and 30% to 4.62 to 4.80 million carats for the year. And we are then forecasting that we will reach our stated long-term target of circa 5 million carat a year earlier than anticipated by FY18 with production rising to circa 5.3 million carats by FY 2019. So first 2019, our emphasis will be on growing value rather than growing volume for volume sake and we will achieve this by optimizing production and thought processes, depending on the new characteristics of each mine’s orebody as well as by monitoring market demand and prices. So, however our well diversified asset base along with the quality and size of our ore bodies provide us with a lot of flexibility in how we can maximize the value of our production in the future. We have guided for on-mine cash cost in FY17 to increase by some 16% for the South African operations and around 5% for Williamson in Tanzania, due to the significantly increased tonnage throughput across the group, increasing from 19 million tonnes treated in FY16 to 24 million tonnes in FY17 as well as some inflationary increases.
FY17 CapEx us guided at $218 million, which is higher than previous guidance of some $175 million mainly due to the additional spend at Kimberley Ekapa mines of $25 million and additional spend at Cullinan of $16 million which I will explain in more detail shortly. FY17’s level of 2018 [ph] is considerably lower than last year's $294 million and CapEx is expected to fall substantially further to $130 million by 2018 and $85 million in FY 2019. While the CapEx for FY18 and 19 is higher than previously guided was mainly relates to the increased spend at Kimberley Ekapa Mining which is fully funded by its own cash flow generation and is commensurate with the higher levels of production we will now be recording in both those years. Overall, the bigger picture of for Petra hasn't changed in financial ‘16 represented our peak CapEx year which is now behind us and the group is therefore still expect to become free cash flow positive on the second half of this financial year and to be strong at cash flow generated from ‘18 onwards.
Moving now to operations, firstly I would like to cover our most important operational metric which is health and safety. Our lost time injury frequency rate remained stable at around 0.29 for the year and this is a solid achievement in the context of the higher level of construction activities currently underway and for underground operations. However, this is not in line with our end strategy to achieve zero harm at our operations and we will therefore be working overtime to improve this figure. Turning to the mine, Finsch recorded another strong year of production with output increasing 7% and contributing 2.2 million carats to the group. At the moment, just under a third of those production is coming from tailings treatment decreasing to around 25% for FY17, the last year of tailings treatment at Finsch. This is one of the reasons why we expect to see an improvement in the average value of carat at Finsch over the years to come as the run-of-mine carats are valued at roughly twice the tailings carat.
The expansion program at Finsch remains in line with the expectations with the Block 5 sub-level cave commencing production in quarter four 2016. This will now continue to ramp up during FY17 and we are therefore guiding for the run-of-mine grade to rise from 44 carats for 100 tonne in FY16 to 53 to 55 carat in FY17 and then on to between 55 and 58 carats for 2018 as we mine ever increasing quantities of undiluted ore. Note the higher run-of-mine tonnage is guided for 2017 to 2019, 3.8 million carats for both those years. Steady state run-of-mine throughput remains at 3.8 million tonnes post 2019. At Cullinan, production was down 7% to 680,000 carats further to our decision to reduce run-of-mine throughput in FY16 to focus on grade control.
As you know managing the run-of-mine grade at Cullinan has been challenging over the last couple of years for the following three reasons. So firstly, we have mostly only had access to all mainly depleted mining areas which have continued to become more and more dilutive. And secondly, we do not have a separate waste rock handling facility as we have therefore had to handle high-density metal sediment developed waste through the ore handling system in plant. And thirdly we have been using an old plant originally commissioned in 1947. So Petra manages these issues by opening up access to as many mining areas as possible at Cullinan and by contingency measures in the current plant and utilization of tailings plant capacity for run-of-mine ore that led to the great improving from low of 20 carats per 100 tonnes in quarter three FY15 to 25.7 carats per 100 tonnes in H1 FY16 and to 30.3 carats per 100 tonnes in our second half of ‘16 financial year.
So further grade improvements are expected from FY17 onwards as the C-Cut expansion program has remained on track and is expected to contribute circa 1 million tonnes of undiluted ore to total run-of-mine production profile of 2.8 million tonnes for FY17. Plus we expect the new plant to be completed and fully operational by quarter four FY17 leading to improved diamond recoveries. In terms of Cullinan’s grade profile, the increasing tonnage throughput of undiluted ore in FY17 is expected to increase the run-of-mine grade to between 33 and 35 carats per 100 tonne in H1 and 42 to 44 carats per hundred tonne in H2 resulting in a plant average run-of-mine grade of circa 39 carats per 100 tonne for the full-year 2017. Post 2017, we have guided for lower run-of-mine grades than previously in FY18 and FY19 as the plant configuration has been altered to utilize slotted screens resulting in an effective bottom cut of 1.1 to 1.2 millimeters, up from the previous guided 1 millimeter bottom cut which will lead to a reduction in the recovery of finer diamonds but it will still maintain the average value per tonne at levels commensurate to previous guidance.
An additional $16 million was allocated to Cullinan’s CapEx for this year due in large to the footprint of C-Cut Phase 1 by extending the Eastern side of the orebody. So this will enable the decommissioning of the older mining areas in the B-Cut area during FY18 two years earlier than previously planned allowing for production to be focused on just two production areas as opposed to the current five areas. This will lead to improved efficiencies allowing the company to counter ongoing inflationary pressures on operating costs. The new Cullinan plant is progressing well and therefore continues to be on track for completion and to be fully operational during the fourth quarter of this financial year. We believe that this model fit-for-purpose plant will have a really positive effect or impact on operations at Cullinan as it will help to reduce operating costs, cut energy usage, enhance diamond recoveries across the spectrum and increase the likelihood of recovering the large high quality stones for which the Cullinan mine is known.
For Koffiefontein, you will see that the underground run-of-mine production is moving strongly in the right direction being up 83% to over 50,000 carats for the year out of the total 62,000 carats produced for the full year. The mine is now expected to deliver its plans to lead throughput of 1.1 million carats during the financial year 2017. Moving to our new business division Kimberley Ekapa mine which contributed total production of 531,469 carats in FY16. The newly established KIM joint venture which became effective 1, July 2016 combines the assets of both Petra and our local partner Ekapa Mining in the Kimberley underground mine numerous tail injury treatment programs around Kimberley and the central treatment plant or CTP which is currently capable of doing around 6 million tonnes per annum. If you combine these assets will lead to a number of operational synergies which is expected to allow for a much longer mine life of circa 20 years for both Kimberley underground and the tailings programs, thereby contributing to the sustainability of diamond mining operations in Kimberley to the benefit of all stakeholders. We have set out the capital requirements for KIM in the announcement which will be entirely self-funded by the division’s own cash generation. You will see that we’re making revisions to the CTP in order to increase the throughput from 6 million tonnes to between 8.5 and 9 million tonnes per annum as well as introducing a crushing circuit to enable the processing of run-of-mine material.
And so this will also allow us to increase run-of-mine throughput at Kimberley to around 1.6 million tonnes per annum [indiscernible] above the previous guidance of 1.1 to 1.2 million tonnes per annum. So this will help to maximize production at this asset. So tailings treatment is planned at the steady state of around 7.2 million tonnes per annum. So during FY16, Petra hold a 75.9% interest in the Kimberley copper mining consortium and our results for 2016 reflect this on an attributable basis. Following the establishment of Kim joint venture on 1 July, 2016, Petra intends consolidate the results from this JV on a 100% basis from 2017 onwards with an appropriate minority interest. Finally, Williamson is performing well with production up 5% to 212,869 [ph] carats in FY16 and its expansion program to 5 million tonnes for the FY2018 year remains on track. As previously announced the mine produced two exceptional big diamonds during the year which sold for a total of $25 million which was very encouraging given that increasing our throughput will give us a better chance to recover such special stones in future.
So coming to the market now, as noted in the announcement we saw an improved market in the first half of this calendar year, but this is the seasonally stronger period for rough diamond demand and we therefore remain cautious with regards to the outlook for the reminder of the calendar year. We are currently in the [indiscernible] for rough demand. So, we generally stay out of the market in July and will only hold our next tender right at the end of August. We believe that market conditions from here will continue to depend on supply control from the major producers to the midstream and stable retail demand, particularly in the US, which is around a 45% share of world consumer demand. During FY16, rough diamond prices fell 9% to 10% in H1 before recovering around 3% in H2 due to the stabilization of the diamond market, leading to rough prices being overall down around 6% for the year.
Petra is using flat diamond pricing in its model for FY17, with some improvement in overall average prices, reflecting the improved product mix expected due to the increased contribution from run-of-mine carats. So as we have noted, there is typically price variability witnessed from tender to tender based on product mix and market conditions, which may result in deviations from these guided prices. Petra is planning to hold three tenders during H1 FY17 and four tenders during the second half of the year.
So, we’ll now pass over to our CFO Jack Breytenbach to cover the financial and corporate points.
Thank you, Johan and good morning, everybody. As you can see from the table provided, our balance sheet remains in good shape. We have cash at bank at 30 June 2016 of around $46 million, diamond inventories valued at $45.4 million in line with the increased levels of production and diamond debtors of $60.2 million. These debtors relate to diamond sales that completely directly before the period end with guest coming into your bank account shortly thereafter.
Bank loans and borrowings of $131.5 million and net debt of $387.4 million remain in line with expectations and we have around ZAR1.5 billion and $6 million of bank facility, which remain available to the group. We expect to be within the required debt facility covenant ratios for the 12 month measurement period due 30 June 2016.
As we have said before, we are forecasting to reach peak debt levels during the current period from July 2016 through March 2017, after which, our debt will start to decrease in line with a decrease in capital profile and our forecast increase in operating cash flows. We are forecast to still maintain healthy minimum [indiscernible] at the time of peak dates in the region of ZAR1 billion and therefore remain also under to the completion of our expansion programs.
We draw your attention to the group restructure, which became effective 1 July 2016. The revised group structure can be accessed via our website using the link provided in the announcement. The main aim of this restructure was to achieve a consistent job for shareholding for our employee across operations. This has had a significant positive impact on our labor force supported by our commercial BEE partners, ensuring our operating stability and long-term alignment of interest.
Ladies and gentlemen, this concludes our coverage of the FY2016 trading update and FY2017 guidance. We will now take questions.
[Operator Instructions] And our first question comes from the line of Des Kilalea of RBC. Go ahead. Your line is now open.
Thank you. Good morning, Johan. Good morning, Jack. Just a couple of questions, just for clarification on the Cullinan grade, what was the reason for lifting the bottom cut, is it a view on the smaller goods market and also the 50 carat for 100 tonne round numbers that you’re guiding for ‘18 and ‘19 for Cullinan, can we expect in years after that to see grade going up depending on which part of the ore body you’re in? Thanks.
Okay. So the first part of your question, when you get to the finer end of the diamond population of course, the values tail off very quickly. So I mean there is not so much of coal on the market as to want to in future as the new plant is commissioned to be in a position to rather have more throughput than more and more recirculating of the same material and recovering ever great population of smaller stones. So that’s a position we want to be in, with our stated goal of being able to be less focused on volumes of carats than to on value of carats that we produce.
And then the second part of your, yeah, the 50 carats for 100 tonne, we don’t want to get drawn too much on what that variability could be, but it is true that across the Cullinan ore body, we have areas ranging from 40 carats for 100 tonne through 60 carats for 100 ton, but so we’d rather stick with this guidance, longer term guidance of 50 carats for 100 tonne, but as we say, it will not lead to lower value recovered versus the 54, 55 that we previously guided on.
Our next question comes from the line of Jason Fairclough of Bank of America Merrill Lynch. Please go ahead. Your line is now open.
Good morning, gentlemen. I just wanted to clarify a little bit on the guidance for the values for carat that you’ve given for 2017. Johan, I think mentioned that you’re assuming flat diamond prices, so I guess and this guidance for 2017 is guidance assuming diamond prices are flatter, the diamond industries are flat, in particular, the one I’m looking at here is Finsch, because Finsch, if we look at the realized value per carat, this year, it was 89 and then you’re guiding to 100 to 105 and so that looks like about 12% to 17% increase in value per carat at Finsch. I’m just wondering how we should think about that on a go forward basis?
Yeah. So you’ll see that at both Finsch, Cullinan and Koffiefontein and it is because the run-of-mine carat production as a percentage of the overall is all the time increasing and these underground carats from the original ore body is of higher value than tailings and so forth. So, it is just to do with…
So it’s just mix between the two sources?
We are forecasting that Finsch and Cullinan and Koffiefontein will see improved product mix because of the higher volumes of undiluted ore that enters to production profile and the underground carats making up a bigger percentage of overall production.
Okay. But otherwise in terms of a basis, Johan, it’s just assuming a flat diamond index?
Okay. Thank you very much.
Thank you. Our next question comes from the line of Edward Sterck of BMO. Please go ahead. Your line is now open.
Thank you very much. And just sort of continuing on prices a bit, looking at Cullinan, the guidance of 105 to 115, excluding large stones, that’s obviously largely in line with the result from fiscal 2016, but with 1 million tonnes coming from the C-Cut, which should have of course size distribution, do you feel that you’re perhaps being a little bit conservative on that price guidance, is there upside potential there?
I’d say that it’s great we achieved 109 for Cullinan last year. So 115 is, seems a bit higher than 109 we achieved last year without excluding special. So, hopefully, it has some upside, but we certainly would like to keep our own expectations in that in check for now.
Okay. Fair enough. And then just staying with Cullinan, on the C-Cut development, the acceleration of that moving I think it’s further towards the eastern end of the ore body, that presumably is going to produce more development waste, is that weighing, that would be included in the grade guidance, but has that had an impact in terms of the grade guidance for fiscal ‘17?
It will not lead to an increase in development waste. So we have reached the peak development waste that we’ve had over the last year and 2 years or so before that, I mean at the rate we were going, 800 meters a month, and this will be a nice gradual development towards the eastern side of the ore body. So it will not be an increase and then also moving to the new plant with the Milling, also then with some waste inclusion with some respects in aid in the Milling process and we will be able to then strip out that waste after the Milling, but definitely overall, the volume of underground development waste will be decreasing.
Okay. Thank you. And then just a final question, turning to Kimberley, the dialog around combining the two operations, allowing for cost reductions, I was just wondering if you could quantify the impact of that over the mid-to-longer term or cost savings on a unit of production basis I suppose rather than cost reductions also.
Yeah. The longer terms forecast of Kimberley is more or less in line with FY 2017 guidance on a unit cost basis of just ZAR100 per tonne, which includes obviously a mix of cheaper to produce tailings carats and then the underground production coming in at levels around ZAR200 per tonne for the underground only. So significant cost benefits on a unit cost basis.
Yes. So during the next financial year as we tear down that operation, we’re certainly expecting this much reduced cost base to be a main driver of extending the life to 20 years and has provided us with an opportunity to hoist higher volumes of underground tonnes and treat it through the plant because of the reduced cost in the CTP plant, but again, this will more play out over the next year and we’ll refine that guidance in the coming years.
Great. Thanks very much.
Thank you. Our next question comes from the line of [indiscernible]. Please go ahead. Your line is now open.
Yeah. Hi, guys. Can you just give some indication as to what has been drawn down under your debt facilities and what remains available to draw down?
As of the end of June, we had available to draw down, ZAR1.525 billion and around $6 million with a drawdown asset base of $150 million against our bank facility and the $300 million for US facilities. I can refer you to this table included in the guidance of more detail of all these numbers stated in the table. If you look at page 8 of the announcement, you will see the table with all these exact numbers contained in that table.
Got it. Thanks.
Thank you. Our next question comes from the line of Luke Nelson of JP Morgan. Please go ahead. Your line is now open.
Good morning, everyone. Just on your CapEx guidance, could you provide the H1, H2 SKU on that spend and then secondly, you’re using a rand currency of 14, just looking at that spot of 14.3 and year-to-date of around 15.3, is there any reason or maybe just explanation of your raising so, why you’re forecasting a strengthening in that rand. And then also the sensitivity of the CapEx forecast of $218 million for FY17 to changes in that rand forecast. Thank you.
Okay. So the CapEx spend will be roughly 60% to 65% first half, so let’s say 60-40 weighted towards the first half as the plant will be completed early in the second half. Then, the sensitivity, okay, so we’re using 14, one week it’s 15.20 and another week it’s 14.20. So we believe that 14 gives us a good handle on the number that we should use. It’s extremely difficult to pen this down because of the volatility. The $218 million is of course as you pointed out, that guidance provided at 14. So we expect on the exchange rate, not to be too much affected during the coming financial year because largely prices for one year ahead would be against firm orders placed, but it is also true that during the year, because of the rand remaining weak in rand terms, we do see some inflationary pressure, so but it won’t have - should not have a huge effect one year out. It affects numbers two years out and so forth.
Okay. Thank you.
Thank you. [Operator Instructions] And it seems that that was our final question. So I’ll now go back to Johan for his closing comments.
Thank you everybody for making time to join the call today and have a good day. Thank you.
That concludes the call. Thank you for attending. Participants, you may disconnect your lines.
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