Petra sell-off is buying opportunity

Petra Diamonds has warned that problems at its two flagship South African mines will cut this year's sales to just $430 million (£277.35 million). However, this is a "transformational" year for the company, and with focus shifting to newer mine bodies next year, this looks to be just a short-term hiccup. One optimistic analyst reckons the shares could even be worth 80% more at 267p. If they're right, current weakness could provide an attractive entry point.

Collapsing as much as 12% to 149p, Petra briefly touched long-term technical support at around the 150p level (see chart, click to enlarge). Of course, the slip does highlight the challenges Petra faces – largely its old mines with "exhausted" infrastructure. Investec wants to wait for the full-year production and sales update to gauge the impact on Petra's development programme, but they remain upbeat on the long-term story. Others do too.

The miner is largely focused in South Africa, with controlling interests in five producing mines including the Cullinan and Finsch mines. But both face challenges. They're sourcing production from old and well-trodden areas, which has impacted the quality of production. Also, Petra had to treat high levels of project waste through the main plant as there was no separate waste handling facilities at Cullinan.

Up to 3.2 million carats are still thought to have been dug out of the ground this year, though, but the weak product mix will shrink revenue below finnCap's previous estimate of $442 million. Earlier this financial year, Petra hiked production guidance from 3.2 million carats to 3.3 million carats, but the variability in grade and product mix reversed this upgrade in April.

Petra has emphasised that the hiccup is only expected to be short term, as focus turns from the risky diluted mines to newer areas, with lower waste development. Petra still expects to produce 5 million carats by 2019, thanks to expansion programmes at its flagship operations.

"Long term we remain optimistic due to supply/demand fundamentals of diamonds and quality asset base that is being effectively re-developed but note the company has struggled to meet targets for some time," said analysts at Investec.

Although the financial year started strongly and confirmation that investors were to receive a maiden dividend of 2p for the full year underpinned February's 40p rally to 191p, the shares are little changed from this time last year. Martin Potts, an analyst at finnCap, believes Petra is worth 267p compared with 154p currently.

This article is for information and discussion purposes only and does not form a recommendation to invest or otherwise. The value of an investment may fall. The investments referred to in this article may not be suitable for all investors, and if in doubt, an investor should seek advice from a qualified investment adviser.