Petra borrows US$78M

Leading rough diamond Petra Diamonds (PDL-L) hopes to treble annual diamond production to 3 million carats by 2019 with the help of a US$78 million loan from the International Finance Corp. (IFC) and Rand Merchant Bank.

Petra has signed 5.5-year term debt facilities of US$40 million with the IFC, an arm of the World Bank, and US$38.7 million with Rand Merchant Bank, a division of First Rand Bank, that will be used to expand its Williamson diamond mine in Tanzania, its Cullinan diamond mine in South Africa, and pay off a short-term loan of US$31 million from Al Rajhi Holdings.

“Diamonds are not an industry that is financed often by banks,” David Abery, Petra’s financial director, told analysts and investors on a conference call. “The involvement of these two banks endorses the quality of our asset base and the management. Funding of this scale is not common in the diamond industry.”

Petra plans to increase throughput at its Williamson mine from an average 2 million tonnes per year to 10 million tonnes per year, which at an average grade of 6 carats per hundred tonnes would yield annual production of about 600,000 carats.

The expansion plan is estimated to take up to three years and additional capex for the expansion is expected to come in at about US$50 million. IFC’s US$40-million loan will be applied to the US$50-million development program, with the balance coming from Petra’s own treasury.

At the Cullinan mine, meanwhile, in which Petra holds a 74% stake, the company is planning to access the C-Cut resource (133 million carats) and anticipates an underground mining throughput target by 2019 of 4 million tonnes per year at an anticipated grade of 55 carats per hundred tonnes. If this is successful, annual production will grow from 1 million carats in 2014 to about 2.2 million carats by 2019. (Currently, the mine is producing about 2 million tonnes per year and in the 2009 financial year produced just under 900,000 carats.)

The expansion also calls for a large tailings operation to process an additional 4 million tonnes a year, yielding 400,000 carats a year starting from the 2014 financial year and rising to 2.6 million carats by the 2019 financial year.

The Cullinan kimberlite pipe is the world’s second-largest diamond resource by in-situ value, with a total of 204 million carats, the vast majority of which is made up by the C-Cut resource.

In September 2009, Petra recovered from the Cullinan mine a 507- carat, high-quality white diamond, which was sold in February 2010 for US$35.3 million, the highest price on record paid for a rough diamond, the company says. The mine is also a source of rare blue diamonds. Since taking over the mine in July 2008, Petra has sold two blue diamonds for US$18 million.

Overall capex for the Cullinan expansion is forecast to be US$357 million in 2009 dollars, to be spent over the 10-year life of the program until 2019. Roughly US$30 million of capex will be required during the period to 2012, after which it is expected that the mine will generate enough cash flow to fund the remaining capex program.

The US$38.57-million loan from the Rand Merchant Bank will be used to pay for the Cullinan program.

The loans carry a two-year capital repayment holiday, after which Petra must start to pay eight semiannual payments. The terms of the debt facilities are very flexible, Abery maintains, including making earlier repayments and a two-year period in which to draw down the loans. “We can draw it down in pieces,” Abery adds. “It’s very, very, very flexible behind the scenes, which is exactly what we wanted.”

The IFC loan carries an interest rate of six-month London interbank offered rate plus 4.5% for a total of 5% and the Rand Merchant Bank loan carries a six-month Johannesburg interbank agreed rate plus 4.5% for a total of just over 11%.

In addition, each lender will be given 6.3 million warrants over Petra shares. The warrants vest on grant and the warrant expiry dates will be in equal tranches at the end of years two, three and four, from the warrant grant date. (The warrant exercise prices for each tranche will be 90 pence, 95 pence and 100 pence, respectively.)

As far as the diamond market is concerned, Petra’s chief executive Johan Dippenaar argued that current trading remains strong.

“We are cautiously optimistic that we have seen the worst and it’s definitely behind us and perhaps some sideways movement in prices may not be a bad thing,” he said. “I would say over 80% of our goods are being sold to people who have been attending our tenders over the last twenty years. These aren’t new guys speculating blindly. We are seeing the same quality guys who survived previous downturns being the main buyers still at our tenders so our position remains the same.”

Added Abery: “Because of last year’s credit crunch, diamonds still have a risk profile, which we would argue lags behind reality.”

Petra has majority interests in seven producing mines: the Williamson mine in Tanzania and six others in South Africa including Cullinan, Koffiefontein, Kimberley Underground, Helam, Sedibeng and Star.