Petra Diamonds by CMB Media Group

PETRA DIAMONDS

Long-Term Plan

Shines Through for Petra PRODUCTION: David Napier

Currently navigating a complicated period in its history, Petra Diamonds continues to increase the life of its mines and prepare for long-term success across all of its southern African operations.

Petra Diamonds, the Londonlisted diamond miner that operates a number of old De Beers mines in South Africa, recently released its results for the six-month period ending 31 December 2017. Following a tough period dogged by strikes, challenges in

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Tanzania, and currency pricing – Petra’s results came out mixed, with a varied response from investors. Diamonds sold (carats) and revenue (US$m) were both down by 5% and 1% respectively yet total number of diamonds produced, ROM tonnes and total tonnes treated were

up (10%, 28% and 1% respectively). Big investments are underway across the company’s mine portfolio to extend life and improve efficiencies and, with the expected sale of the blocked Williamson parcel in Tanzania to go through this year, 2018 is expected to be a stronger one for this expert company.

ÂŠ Petra Diamonds

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INDUSTRY FOCUS: MINING

“H1 saw further growth in production to 2.2 million carats,” detailed Petra Diamonds CEO, Johan Dippenaar. “Our focus now is to keep on delivering from the new production blocks, particularly at Finsch and Cullinan where the expansion programmes continue to ramp up, and to further optimise the new Cullinan plant. The challenge of the strong Rand has also sharpened focus on our operating and capital expenses.” Currently, a large portion of Petra Diamonds stock is sourced from South Africa and its four key mines – Finsch, Cullinan, Koffiefontein and the Kimberley Ekapa Mining joint venture. The company also runs the Williamson open pit operation in Tanzania and maintains an exploration programme in Botswana. The Williamson mine has produced a number of exceptional pink diamonds in the past few years, the Cullinan mine is famous for its major discoveries, and Finsch and Koffiefontein both chip in high-quality large stones.

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ROUGH TIMES However, despite the historic success of its mines, Petra has suffered recently because of challenging operational factors. In February, the company said that the combination of a strong Rand, labour unrest, slow demand, and the problems in Tanzania had effected business so much so that the company could breach one of its loan covenants. But the company responded by renegotiating with its lenders and revising down its forecasts. Ultimately, these problems were demonstrated when the H1 FY 2018 report detailed revenue down to US$m 225.5 from US$m 228.5 and adjusted EBITDA down to US$m 80.1 from US$m 87.1. This came after a share price slide in 2017’s fourth quarter, and the announcement in February that $60 million worth of planned capital expenditure over the next three years would now be shelved while the company services its debts. “The company has been reviewing

its capital requirements for FY 2018 to FY 2020, with a view to deferring nonessential projects that will not impact on short to medium term production plans,” said Dippenaar. But, while the current situation makes some stakeholders uneasy, the company remained confident. Driving value is the key focus going forward as Petra looks to maximise free cash flow rather than volume targets. FORWARD FOCUS Since the release of the H1 FY 2018 report, demand in the market has strengthened slightly, the labour situation in South Africa has been resolved, and the company has started to make progress with the blocked parcel in Tanzania. “While the diamond market experienced weakness from July to October 2017, which is seasonally the slowest time for the rough diamond market, it started to strengthen before the calendar year end further to positive momentum around the festive selling season. Results relating to Christmas

PETRA DIAMONDS

// WE SEE SAFETY AS THE SINGLE MOST IMPORTANT PERSONAL AND ORGANISATIONAL VALUE AND WE CONTINUE TO PLACE GREAT EMPHASIS ON THIS AREA // sales are generally positive, further to buoyant sales in the US and continued strong growth in the Chinese and Hong Kong markets,” said Dippenaar. “Increased production was also achieved despite the labour disruption experienced in Q1 at our South African operations (with the exception of Cullinan) prior to the signing of a new three-year wage agreement,” he added. “Fortunately the disruption was contained to a period of less than two weeks due to the concerted effort of Petra’s management to engage with all levels of the National Union of Mineworkers (NUM) in order to find a resolution. I am pleased to say that labour relations are currently stable and the new three-year agreement bodes well for the labour relations environment during this period.” The strengthening of the Rand, and an improved business outlook in South Africa, has been tied to the appointment of Cyril Ramaphosa as the Republic’s new President. The former-leader of the NUM is described as a skilled negotiator and an astute businessman. Now that he holds the top job, the general feeling is that business will be encouraged to thrive, with corruption being targeted and rooted out. And while this may impact on the company from a financial standpoint regarding currency exchange, the feeling is positive. “People still believe in mining,” said Koffiefontein mine manager, Lino Nkuna. “There’s nothing more

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INDUSTRY FOCUS: MINING

encouraging for the people than hearing that the mine life will be extended. “If we can sustain production, even through instability in the economy, there will be a time where we can sell at a higher price. The more precious minerals you have, the better position you are in to negotiate.” Mine manager at Finsch, Luctor Roode said that current expansion at the mine was already showing positive results. “We are at a point now where a lot of the hard work is done. We are in the process of ramping up the project to full production and accessing fresh, undiluted and high-grade kimberlite. The improvements are already evident with run of mine grades increasing as the new ore source starts ramping up.” And Dippenaar said that safety in particular, a cornerstone of Petra’s strategy, was being aided by the implementation of new technology

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// EACH MONTH PETRA GROWS THE FOOTPRINT OF THE EXISTING MINING AREAS AND OPENS UP MORE ACCESS TO THE RESPECTIVE OREBODIES // and mining methods. “The improving production performance is pleasing because it was set against a solid safety performance, with our lost time injury frequency rate decreasing to 0.24. This is very important to us because we see safety as the single most important personal and organisational value and we continue to place great emphasis on this area. However, we will continue to strive to do better, with our aim being a zero harm workplace.” At Finsch, after recent success in exposing new pipe, another programme is in place to take mining deeper than ever; a new Block 5 Cave will be installed at 900 mL from FY 2023/FY

2024. At Koffiefontein, the company is hoping to increase production from 50,500 ctpa in FY 2017 to ca. 85,000 ctpa by FY 2019, taking the life of the mine well beyond the current 2025 expectancy. At Cullinan, a new processing plant was completed in September 2017 and an expansion programme is under way to take annual production to 2.2 mcts by FY 2019. Petra is also hoping to extend life at Williamson and Kimberley Ekapa JV through modernising and upgrading. “Petra’s main underground expansion projects remain on track, with both Finsch’s Block 5 SLC and Cullinan’s C-Cut Phase 1 continuing to ramp up during the Period,” said

PETRA DIAMONDS

Dippenaar when delivering the company’s H1 FY 2018 trading update. “Finsch’s ROM carat production rose 14% to 931,859 carats and Cullinan’s ROM carat production rose 68% to 602,594, demonstrating the significant progress made at both assets. Due to the nature of sub level caving and block caving, each month Petra grows the footprint of the existing mining areas and opens up more access to the respective orebodies. These expanding footprints deliver higher production volumes each month, thereby growing access to undiluted ore.” SHINY NEW HORIZONS Moving through 2018, Petra will have to get used to life without Technical Director, Jim Davidson who recently announced his retirement after more than four decades in the industry. The company moved CFO Jacques Breytenbach to its Board of Directors

and is planning for a long future in Southern Africa. Ongoing expansion work across the existing portfolio, completely resolving issues in Tanzania, and staying up to date with the country’s ever-changing economy and mining charter will be key in the company’s continued development. Of course, the growth of the wider economy will play a part, but Petra has already secured programmes that will help it grow as strong demand returns to the industry. “In Botswana, Petra’s focus has been on the evaluation of the KX36 deposit, which was discovered by the company and where a Resource of 8.7 Mct (contained in 24.6 Mt at an average grade of 35 cpht) has been identified, with an estimated average diamond value of US$65 per carat. “In South Africa, Petra’s focus remains the investigation of the Reivilo project, which is situated approximately

110 kilometres north-east of the Finsch mine and where the company has delineated a cluster of three kimberlite bodies within a 250m radius with estimated sizes of 3.1 Ha, 1.7 Ha and 0.9 Ha respectively. “A prospecting right adjacent to the Sedibeng mine (one of the ‘Fissure Mines’ formerly operated by Petra) in the Northern Cape was awarded to Petra in June 2017. An airborne geophysical survey will be the next step to evaluate this property,” said Dippenaar. Petra’s short-term challenges are dwarfed by the major long-term potential. This is a ‘leading independent diamond miner with a diversified portfolio and high quality team’ and its history is proof enough that it knows how to extract value.

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