Diamonds Are An Analyst’s Best Friend

Petra Diamonds Limited (LSE: PDL), the independent diamond mining company and a supplier of rough diamonds to the international market, today announced another spectacular find in the form of an exceptional and rare 122.52-carat blue diamond.

 This recovery from Petra’s Cullinan mine in South Africa comes in short succession of the 29.6-carat blue diamond discovered in January and which sold for US$25.6 million.

Prior to this recent discovery, London’s largest quoted diamond mining group and member of the FTSE 250 was rated a buy by eleven out of the fifteen ratings firms that are presently covering the stock. The average price target ranged from £1.78.46 with Investec indicating a £1.94 price target and Numis Securities Ltd a £2.00 target. Today, the share price is up more than 6% but is still only trading at £1.77.

The company has grown rapidly in recent years, acquiring five important diamond operations since 2007. It has ambitions to increase double its production 2019 and in its recent interim report, which covers the six months to December 2013, it boasts: revenue up 19% to US$185.5 million, profit from mining activity up 115% to US$73.4 and adjusted EBITDA up 157%.

Operating cash flow was up 249% to US$91.9 million and this was before the US$25.6 million sale proceeds from the 29.6-carat diamond sold on 14 February 2014. The company has reached a point where its extensive growth and capital expenditure plan is entirely funded by operating cash-flow.

Mining investments are considered to be risky investments due to the high capital investment required, usually meaning large debt facilities and no guarantees to discovery. Petra’s risk has now been further reduced on news of this latest gem.


Jewel In The Crown

 Both of the recent recoveries have hailed from Cullinan, the famed South African diamond mine, which it bought in 2008. This mine is acclaimed for relinquishing the world’s biggest certified diamond in 1905. The 3,106-carat stone was cut to form the Great Star of Africa and the Lesser Star of Africa, which are now set in the Crown Jewels of Britain. Cullinan is also renowned as the world’s most important source of blue diamonds, which are so rare that there are no official statistics on their recovery.

In addition to this mine, Petra has interests in five other producing mines in South Africa (Finsch, Koffiefontein, Kimberley Underground and Helam) and one in Tanzania (Williamson). 

The outlook for diamond demand is forecast to outpace supply, resulting in a significant rough diamond supply deficit. Demand growth is driven by the rise of the growing middle class of consumers in countries such as China and India.

These market dynamics can only lead to increased inventory valuations. The usual high risks associated with this sector are somewhat mitigated by this companies cash reserve. If you would like to know what other gems could make you rich get this free report. The Motley Fool analysts are constantly reviewing the markets to see where the smart money is heading and you can read their analysis here.

Lisa Walls-Hester does not own shares in Petra.