2019 has proved to be another difficult year for Petra Diamonds (LSE: PDL). Its share price has tanked 77% in the year to date as doubts over diamond demand have worsened, the perceived threat from the ‘artificial’ stone segment has grown, and fears have escalated over the health of the mining play’s balance sheet and huge operational problems.
Investors have been desperate for something to cheer and while they’ve had to wait for it, some auction news from one of its competitors is something that warrants no little end-of-year celebration. According to Anglo American rough diamond sales at its De Beers unit’s 10th sales cycle of 2019 rose to $425m from $400m in the previous auction, proving that the substantial increase in November wasn’t an anomaly.
More market struggles in 2020?
But don’t get too excited, I say. In that 10th cycle, sales were still down significantly from the $544m that De Beers had raised a year earlier. And many market commentators expect trading to remain a struggle next year.
The boffins over at Bain & Company, for example, reckon that although some of the inventory backlog should start to be cleared in the new year, “the industry is not likely to fully recover in 2020 because of ongoing supply-demand inequality and limited growth of financing options for midstream players.”
It adds that “major diamond producers have not announced substantial mining plan cuts, and we do not expect significant retail growth in 2020, as consumers brace for a global recession.”
Too much trouble
The body expects rough diamond sales to have sunk 25% in 2019 due to weak consumer confidence and geopolitical uncertainty whacking sales in the critical US and Chinese markets. And reflecting these difficulties in the market, City analysts expect losses to swell at Petra in the current year (to June 2020). And it’ll take a braver man than me to predict that any improvement in the bottom line could be in the offing.
Even though Bain & Company says that “the industry will have a stronger chance to rebalance and grow in 2021,” buying Petra shares is not a chance I’m willing to take. Don’t forget about the massive production problems the firm has been experiencing of late, not to mention the eye-popping amount of debt the firm has to wrestle with before that hoped-for upswing in the market comes alone.
The business had to halt production across its South African assets earlier this month, reflecting a request by power supplier Eskom for the digger to reduce its electricity load, in the latest misfortune to hit its operations. Production is once again running at normal levels, but the episode underlines the risky nature of investing in commodities producers. All things considered, I think that Petra carries far too much risk today, and I for one would much rather use my hard-earned pennies to invest elsewhere.
