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RBC reiterates 'outperform' rating on Petra Diamonds, but drops target price to 85p
Analysts at RBC Capital Markets took a look at Petra Diamonds on Monday morning, saying that despite the waiver to its December covenant test - together with the revisions to its June and December 2018 tests - had improved its outlook, the company was still slightly offside the revised covenants, and that significant general ramp-up risks still remained at Cullinan "in what remains a volatile wider market".
Hence, while RBC reiterated its 'outperform' recommendation on Petra shares, it dropped its target price from 100p to 85p.
In a Monday morning research note, Tyler Broda and Barbora Baluskova of RBC said Petra, which was set to reduce non-essential capex by $10m throughout 2018, and by as much as $30m by 2020, would be able to allot more funds to the Cullinan ramp-up as a result.
The analysts noted that while the diamond market seemed to be strengthening, so too did the South African rand, which might negatively impact Petra's bottom line, although over the longer term the outfit retained good exposure to the former.
"At spot diamond prices and ZAR 11.60, we calculate the company is slightly offside the revised covenants (so close that there is potential this would be waived too) especially if the company had sufficient liquidity at the test dates. The diamond market appears to be turning the corner with prices up 3-4%," they said.
"We believe the diamond sector has sound long-term fundamentals, and Petra should have a growing production profile. In addition, the Cullinan mine holds the prospect of increased production of special stones. Petra is completing an extended capex programme, which should deliver significantly higher margins per tonne of ore processed. Risks include near-term rough prices, finishing the last of the capex projects and South African labour instability."
As of 1500 GMT, shares had jumped 7.86% to 74.10p.