Are Lonmin Plc & Petra Diamonds Limited On The Way Back Up?

Royston Wild considers whether the worst is over for Lonmin Plc (LON: LMI) and Petra Diamonds Limited (LON: PDL).

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Returning confidence in the commodity space has prompted all manner of resources stocks to shoot higher again in recent weeks.

Platinum producer Lonmin (LSE: LMI) has been one of the standout performers during the past month, its share price striding 218% higher since the start of February. And sparkling stones digger Petra Diamonds (LSE: PDL) has enjoyed a 31% bounce during the period.

So can investors look forward to further gains in the weeks and months ahead?

China still tanking

A surging platinum price has been key to Lonmin’s spectacular rise over the past month.

The metal surged back above the crucial $1,000 per ounce level for the first time since last October this week, meaning prices have rocketed 15% since the start of 2016. But worries persist that recent rallies have become far too heady, and that persistent demand weakness will bring values crashing down to earth again.

These fears were given further fuel on Tuesday following the latest round of disappointing trade data from China. Exports tanked by an eye-watering 25% in February from a year earlier, the biggest decline since the 2008/09 recession throttled the global economy.

An earlier Lunar New Year Holiday this February, compared with 2015’s festivities, may have exacerbated the poor result. But with other manufacturing and factory data still steadily nosediving, today’s release comes as further evidence of China’s crashing economy.

China is responsible for around a third of total platinum demand, according to the World Platinum Investment Council, and the country’s jewellery sector consumes more than double the amount of platinum than the rest of the world combined.

But Lonmin isn’t alone in suffering from toppling Chinese commodity demand. Petra Diamonds advised last month that “a slowdown in retail demand from China” drove stones values still lower between July and December, prompting group revenues to fall 28% year-on-year to $154m.

Problems set to persist

Petra Diamonds is hoping to mitigate the impact of falling diamond prices by improving production at its Cullinan, Finsch and Koffiefontein projects in South Africa, work that should also improve carat quality.

Meanwhile, Lonmin is undergoing vast restructuring to slash costs and reduce output in a desperate bid to rectify platinum’s worsening supply/demand dynamics and prop up prices.

But these measures are not expected to revamp either firms’ fortunes any time soon, as underlying demand in the metals and diamond markets remain in the doldrums. Lonmin is expected to keep on punching losses until the end of fiscal 2017 at the earliest, while Petra Diamonds is anticipated to endure a further 20% earnings slide in the current period.

Meanwhile, the large extent of frothy buying activity means that investors should be braced for much more share price volatility. Indeed, sinking trader sentiment on Tuesday has pushed Lonmin’s stock price 8% lower on the day, while Petra Diamonds is currently nursing a 4% loss from Monday’s close.

I believe the prospect of prolonged demand weakness on both Lonmin and Petra Diamonds makes the two diggers a risk too far at the present time.

Should you invest, the value of your investment may rise or fall and your capital is at risk. Before investing, your individual circumstances should be assessed. Consider taking independent financial advice.

Royston Wild has no position in any shares mentioned. The Motley Fool UK has no position in any of the shares mentioned. We Fools don't all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors.

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