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Is penny stock Petra Diamonds a top buy?

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The Petra Diamonds (LSE: PDL) share price has been on a tear in recent sessions. The penny stock hit it most expensive since December, near 2p, before settling lower at around 1.75p. Appetite for the diamonds miner jumped after a rare impressive financial update which has raised hopes that the battered business could finally be turning the corner.

Late July’s release showed revenues at the penny stock jump 38% year-on-year during the 12 months to June, to $406.9m. This was helped by a sharp uptick in realised diamond prices during the final quarter. These rose around 5.7% from the prior three months.

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Petra’s sales were also helped by strong sales of ‘exceptional stones’ in 2021. These precious rocks (which are valued at $5m, or above, apiece) accounted for $60.2m of total turnover last year, the highest annual contribution on record.

Petra production tipped to rise

Promising news on the production front also lifted the PDL share price higher in late July. Petra Diamonds hauled 3.24m carats of diamonds out of African soil in fiscal 2021. This was down from the 3.59m carats produced in the prior 12 months. Lower production at its Finsch and Koffiefontein assets, and care and maintenance work at Williamson, more than offset record production of 1.94m carats at its flagship Cullinan project.

However, Petra has said full-year output will likely rise to between 3.3m and 3.6m carats in financial 2022. This is thanks, in part, to plans to restart Williamson again this quarter.

Time to buy this penny stock?

There’s no doubt that Petra Diamonds is in much better shape than it was at the turn of the year. Massive debt restructuring in March has given it some much-needed breathing space after its battered balance sheet forced it to (albeit temporarily) put itself up for sale last summer.

As I also said, the diamond market is also showing much-needed green shoots of recovery. And finally, penny stock Petra continues to pull those exceptional stones out of the ground. The firm sold a 39.34-carat blue diamond for a cool $40.2m in the middle of July. And in recent days, it’s hauled a 342.92-carat white diamond from the bowels of Cullinan.

All that being said, I still won’t be buying Petra shares for my own stocks portfolio just yet. As a long-term UK share investor, I worry about the threat posed to the company by lab-grown diamonds. Not only do these synthetic stones continue to improve in quality and fall in price. But rising ethical concerns from consumers (as illustrated by Pandora’s decision to stop selling natural stones) also pose a growing problem.

I’m also concerned about the penny stock’s balance sheet should it encounter more profits-crushing production problems. The mining industry is plagued with danger but Petra has particularly worrying form in this arena in recent years.

I’ll be keeping an eye on the company, sure. But, for the time being, I’d rather buy other lower-risk stocks for my shares portfolio.

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Royston Wild has no position in any of the shares mentioned. The Motley Fool UK has no position in any of the shares mentioned. Views expressed on the companies mentioned in this article are those of the writer and therefore may differ from the official recommendations we make in our subscription services such as Share Advisor, Hidden Winners and Pro. Here at The Motley Fool we believe that considering a diverse range of insights makes us better investors.

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