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Welcome to the Petra Diamonds Q3 Fiscal Year 2021 Trading Update Conference Call, hosted by Richard Duffy, CEO; and Jacques Breytenbach, Finance Director. [Operator Instructions] Richard, you may now begin the call.
Thank you very much, and welcome to you all. We will be discussing our production and sales performance for our Q3 financial year 2021. I will start with an overview of our operations as well as the diamond market and sales during the period before handing across to Jacques, who will cover our financial performance. At the end of that, we will be open for questions from all attendees. So turning first to the highlights. This was a significant quarter for Petra as we completed our capital restructuring, bringing our net debt down to below $300 million. The diamond market is more buoyant than we have seen for some time, with prices back at and above pre-COVID levels. The Cullinan mine has again outperformed during the quarter, and we continue to see the benefits of our Project 2022. I'm also pleased to report that we have recovered a number of exceptional stones from Cullinan, including an exceptional 11.82-carat blue diamond that we sold for $9.5 million to start the quarter end, an impressive $805,000 a carat. And an exceptional 39.3-carat blue diamond that we recovered at the mine this month that will be sold via a special tender. Operationally, we experienced a number of challenges during the quarter, mostly at our Finsch mine, which I will cover in more detail later. Project 2022 is continuing to deliver value. However, our throughput targets for the group as a whole have been negatively impacted by operational challenges while Williamson remains on care and maintenance. Turning to our operations. Safety remains our foremost priority. Our lost time injury frequency rate of 0.47 for the first 9 months of financial year 2021 improved from 0.5 in the first half and 0.65 in quarter 1. Even though we are placing great emphasis on our ongoing behavior-based intervention campaign, which focuses on reinforcing safe behavior and continuous improvements in order to achieve our aim of a zero-harm working environment, the majority of accidents continue to be behavioral in nature. The total number of injuries, which includes lost time injuries, decreased to 30 for the 9-month period to 31 March, down from 37 in the same period of last year. COVID continues to pose a significant risk to the health and safety of our workforce. We have implemented robust systems and strategies to prevent and contain the spread of the virus at our operations. We noted in our release today that 340 of our employees have been confirmed COVID-19 positive at the South African operations as at 16 April of this year. And of these, 332 have fully recovered. Although the majority of those affected are only experiencing mild symptoms, we have tragically lost 6 colleagues as a result of COVID. I would like to offer my sincere condolences to their families and friends. Looking at our production numbers, our Q3 production decreased to around 704,000 carats. The strong performance of Cullinan was offset by production shortfalls at Finsch following the ongoing measures we introduced towards the end of the first half of financial year of 2021 to curtail waste ingress. This was further impacted by excessive rainfall during the quarter, and as mentioned, Williamson remains in care and maintenance. Our production for the first 9 months of financial year 2021 decreased 2.44 million carats with run-of-mine carats contributing just over 2.3 million. Cullinan's increased production partially offset lower recoveries at Finsch and Koffiefontein with no contribution from Williamson. Turning to the individual operations, Cullinan's Q3 production was 9% up to over 436,000 carats. Run-of-mine carats were supplemented by focused tailings treatment, targeting higher grade recovery tailings resulting in an overall increase in carat production. As I mentioned earlier, Cullinan continued to recover some exceptional blue and large white diamonds for which the ore body is renowned. Finsch's Q3 production decreased to around 233,600 carats, following the introduction of the draw control strategy we put in place in order to mitigate the impact of waste ingress in a number of the upper levels of the Block 5 sublevel cave. Production performance was further exacerbated by extremely high levels of rainfall, with very wet underground conditions leading to further production disruptions during this quarter. In addition, the excessive amount of rainfall with the resulting influx of water into the pit led to some scaling on the northern side of the pit. This impacted on the stability of the decline from surface, which also serves as the second escape route from the underground operations. We have put measures in place to mitigate the waste -- we have put measures in place to mitigate the impact on the secondary escape route, which includes the recommissioning of a temporary hoisting facility from surface down to the 35 level. As part of the draw control strategy to mitigate the waste ingress, we limited the tonnes drawn during the quarter, while building up inventory [ rings ] to allow for increased blasting from this quarter. We also made a change to the drilling blast designs in order to optimize ore extraction. In the longer term, we will further refine these draw control programs to better assist with the prediction of waste ingress. Koffiefontein's quarter 3 production decreased to around 14,000 carats mainly due to the excess of rainfall during the quarter, similar to that experienced at Finsch. As previously mentioned, Williamson remained in care and maintenance, and as has been the case since April 2020, we continue to review this on an ongoing basis. Discussions with the Government of Tanzania in relation to various issues, including the overdue VAT receivables and blocked diamond parcel are ongoing, and we hope to conclude these discussions during this fourth quarter of this financial year. The company is currently considering 4 alternatives in an attempt to address the challenging liquidity situation at the mine. As we recently announced, the company intends to provide its feedback on the company's conclusions and next steps following the investigation into allegations of human rights of uses at the Williamson mine around the end of April, in other words, this month. The investigation is being undertaken by an external independent adviser in conjunction with the company's legal advisers. Looking at our production outlook for the full year, due to the ongoing uncertainty around the impact of COVID-19, our production guidance for this financial year remains suspended. We are aiming to reinstate guidance towards the beginning of our next financial year, which starts at the beginning of July 2021.Moving now to the diamond market. It is encouraging to see that improved demand for rough diamonds continued in the quarter, thanks to robust consumer demand for diamond jewelry and continued purchasing by the midstream, following strong retail sales over the preceding holiday season. Chinese New Year -- which included Chinese New Year and Valentine's Day. Our expectation is that retail demand will remain positive as economies reopen. However, the industry has now entered its period of typically lower demand, and the current resurgence of COVID-19 in some countries including India, poses some risk to the logistics and timing of sales for the remainder of this financial year and possibly going into our financial year 2022. Supply discipline by the diamond -- major diamond producers in 2020 played an important role in moving towards more balance between supply and demand in the midstream and remains a key factor in terms of the health of the market going forward. In terms of what Petra experienced during the quarter, our sales saw pricing on a like-for-like basis returning to pre-COVID-19 levels, increasing approximately 12% from the tender prices we achieved in the first half of financial year 2021. We are closely monitoring the impact of COVID-19 on our clients' ability to attend tenders, and we'll continue our flexible approach in planning our upcoming sales events. We are currently planning to hold 2 more tenders in the remaining quarter of this financial year 2021, which will bring the total number of tenders to 6 for this financial year. Project 2022 is embedding a culture of continuous improvement as part of our operating model. During the quarter, we began implementing our organizational design project with the adoption of a top-down phased approach, starting with group functions, through to the roles at all the operations. In addition, a short-term production bonus scheme to support and reward the delivery of our Project 2022 targets was implemented across all of our South African operations. Although Cullinan remains on track to deliver its throughput stretch target for financial year 2021, the very significant rainfall extension Koffiefontein in December through to February 2021 and the extended care and maintenance period at Williamson have negatively impacted our overall throughput targets. As a result of this, we have lowered As a result of this, we have lowered the annualized contribution from throughput initiatives from some $70 million by the end of financial year 2021 as previously disclosed to around $50 million. Project 2022 cost-saving initiatives are expected to deliver an annualized run rate of $20 million going into financial year 2022. As we said in this morning's announcement, the decrease of $2 million in cost efficiencies over our previous guidance relates to higher-than-anticipated electricity pricing in South Africa combined with the postponement of some movable asset sales into financial year 2022. I will now hand over to Jacques.
Thank you, Richard, and good morning, everyone. Our revenue for the quarter was up 16% to $106 million, driven by the improved prices and the sale of a 299-carat exceptional diamond in February for a price of $12.2 million. Our revenue for the first 9 months totaled $284.2 million, in line with the comparative period, with the sale of exceptional [indiscernible] stone at $52.6 million for the 9-month period this year, which includes $40.4 million from the sale of the Letlapa Tala Collection during H1 of our fiscal year '21, offsetting most of the price weakness we've seen since the outbreak of COVID-19. As Richard has already mentioned, in March, we completed our capital restructuring. As a result, we have significantly strengthened our balance sheet, reducing consolidated net debt to around $291 million as at the end of March compared to $700 million at the start of the quarter. Gross debt of $447 million, comprising loan notes of $339 million and bank debt of $108.4 million compared to gross debt of over [ $815 million ] at the end of December, including some $47 million of BEE partner bank facilities, subsequently refinanced as part of the group's capital restructuring completed this past quarter. As we have recently announced the -- apologies. We have reported diamond inventory of 1.02 million carats, valued at $75.5 million at period end, down from 1.38 million carats at the end of December. We have 2 further tenders planned for Q4. As Richard also mentioned, we should see a further decline in diamond inventory towards our year end. But this is dependent on our ability to successfully host these sales events, given the possible impact of COVID-related disruptions. At our March quarter end, unrestricted cash balances of $139.8 million was recorded, up from $92.4 million at the end of December with banking facilities undrawn and available of $10.8 million, representing ZAR 160 million undrawn balances from the group's revised ZAR 560 million revolving credit facilities that is [ with ] our lenders.On the FX side, exchange rate volatility continued during the quarter, averaging ZAR 14.96 to the dollar and closing the period at ZAR 14.77 per U.S. dollar compared to the ZAR 14.69 as at the end of December. More recently, we saw further rand strengthening trading at levels around ZAR 14.20 to the dollar. That concludes, and I will now hand back to the operator for the Q&A session.
[Operator Instructions] It looks like our first question today is from Richard Hatch at Berenberg.
Yes. A few questions. Just on Finsch, 2 here. Firstly, can you just give us some guidance as to what kind of run rate we should be expecting for the fourth quarter? And what kind of -- when we expect to see normal operations resume? And then just secondly on the price. Realized price of $80 a carat was a bit below what I was looking for. I just wonder whether there was any kind of mix impact there or whether that was in line with your expectation. I suppose, kind of go back over history, we've sort of bounced that around anywhere between sort of -- into the 70s up to sort of into the 100s. So I just wonder whether you can just give us a steer as to what kind of -- what's a good kind of run-of-mine number for Finsch, in terms of realized price as we stand today.
Thanks, Richard. I'll take the first part of the question, and Jacques will pick up the product mix price input. Yes, I think with Finsch, it's -- we -- as I mentioned, we had implemented this remediation strategy to deliberately lower the volumes and boost grade, and we have seen the early impact of that. We did see an uptick in the grade and the process we were going through was to kind of iterate to find the right balance between volume and grade. And that has been set back by the excessive water underground following the heavy rains. So we're not where we had planned to be in terms of the remediation strategy as a result of that. So we're still busy addressing the underground water. It certainly improved quite a bit, and it's difficult for me to give you a steer in terms of this quarter other than to say, we expect to see an improvement in quarter 4. Now what we'll do, going into the next financial year, is to reinstate guidance and then be able to provide you with a better steer going forward. But for the moment, the best I can do is to say that we expect to see improved production through quarter 4, and we'll pick up guidance going into '22. Let me hand across to Jacques for the second part of that.
Richard, in terms of price at Finsch at $80 a carat, it was impacted. So was some of the other operations -- all of the other operations. With the sale of some 380,000 carats effectively rolled forward from December, it so happened that the [ goods ] were on the lower end of the value spectrum. The normal run-of-mine price with Finsch is some 10% to 12% up on the average price we have realized for this tender. So that is just basically a mix representation impacted by that roll forward from December sales.
All right. Helpful. And just another couple, while I've got you. Just Cullinan grades, so bounced a little bit below 40 carats per 100 tonne level. Is there anything going on there that we should be aware of? Is that kind of in line with expectation? And should we see Cullinan grade pick up? And then just to -- just on a follow-up on Finsch. You say -- I mean is a run rate of 3 million to 3.1 million tonnes sort of still the target for this one? Or to your point, you run the mine a bit easier, but you get better grade and recovery, is that kind of the thinking around it? Can you just sort of clarify where your head is at in terms of what kind of run rate we should be thinking about Finsch kind of long term?
Sure. So on the grade, Richard, we did get just over 40 carats per 100 right tonne in our first quarter, but second quarter is kind of around 38, and this quarter was around 37. So that's a little bit on the low side. But I think your 40 is certainly on the high side. Cullinan typically is in the late 30s, around 38. So we haven't kind of consistently delivered it at 40 for some time. So as I said, high 30s, sort of 38, maybe a bit more. But 40 is, I think, a little bit [ top-ish ]. On Finsch itself, the -- your question is a difficult one to answer because we haven't yet completed the remediation process to understand the right balance between tonnes and grade. And certainly, we need to factor that into the life-of-mine plan and the longer-term run rate to be able to properly answer your question. So I'm hopeful, I know. But my suggestion is that we pick this up when we reinstate guidance in FY 2022. And I think as I've mentioned before, the intention is to have a Capital Markets Day towards the end of the calendar year to talk to life-of-mine plan and help you get a better handle on models and the life, because I know we haven't provided an update for a while. So the -- Finsch, yes, there could be an impact on the tonnes going forward, but it's just -- it's just too early for us to be able to give you a helpful steer on it.
Okay. Understandable. Okay. And then just -- I mean just to take the rule scaling that you talked to I mean -- and the remediation work, is that kind of material CapEx? I imagine not, but can you clarify? And then just on the 2022 -- the Project 22 reduction from that $70 million to $50 million, is the expectation that you try and claw some of that back into the medium term? Or again, is that something that we have -- we kind of -- we have to wait until you've got a clear handle on kind of the longer-term strategy, and we can discuss it in Q4 when you have your Capital Markets Day?
Yes. So the scaling and the impact on the secondary escape way does require some CapEx, but it's relatively minor. We had a winder on-site, which will serve as the secondary escapeway in bypassing the impacted ramp and decline as a result of the scaling. So relatively minor CapEx associated with that. On Project 2022, certainly, the intention is to claw back the $20 million in the medium-term. We haven't precisely identified the projects that would do that. We have some. So there is a bit of work to be done, but I can confirm that the intention is to close that gap.
And our next question is from the line of Peter Mallin-Jones at Peel Hunt.
Just following up on the Finsch questions. I was wondering, obviously, volumes were down in the March quarter on the December quarter with the way you stand the water. I was wondering if you could give us an idea of how much the water impacted in the quarter so we can get a sense of what the sort of -- the basic start mining rates are for the sort of unadjusted remediation that we could use as a baseline to then escalate forward as the iterations come through and you're able to plug the data into mine planning. Just helping us sort of for the next couple of quarters, perhaps.
Thanks, Pete. It's a tricky one to answer because what the water -- the underground water does is it just slows down your mining. It makes it more difficult to move equipment around, you have some of your chutes clogging. So that's -- it's actually very difficult to ascribe a certain amount of percentage to water versus the waste ingress. So again, all I can do is to try and provide a steer which would be to say that I would expect to see an improvement of the Q3 levels. Now we would certainly be looking to move back towards Q2 levels and better. But it depends on how quickly we see that -- the underground dry up. And it's not -- unfortunately, it's not a precise science because although as you would know, the heavy rainfall may have stopped, but the water still takes a while to work its way through the fissures and faults into the underground working. So I would say, move back towards the quarter 2 levels and hopefully better. But will we get them in Q4? It's difficult to make that call because the underground workings are still being impacted by excess water. Obviously, a lot of steps have been taken to remediate that, and we are seeing improvement. But that's probably the best I can do at this stage.
Before we go to the next question, which is from Izak Rossouw at Barclays, [Operator Instructions].
I had a few questions. Just on -- firstly, on the balance sheet, Jacques, can you maybe give us a sense of what's the intention of sort of what a comfortable cash balance you are looking at sort of going forward, when -- I guess when things sort of, I guess get a little bit more to normalized levels? And then just around excess cash, I mean, is their intention to pay some of the bank facilities down? Maybe just give us an idea on that? Should I just ask one by one? Or should I give you all of them?
Yes. I can quickly answer those, Ian. Yes, I think given all the uncertainty, possible further disruptions around COVID, et cetera, we would definitely prefer to hold on to our cash balances as a buffer through this uncertain period. So I'm comfortable with all the cash balances. I don't think I'm in a position yet to call a number. Excess cash against facilities, it's definitely possible. We do have the revolving credit facility, in total ZAR 560 million. We can pay that down, and it will remain available. And obviously, the main aim really would be to optimize on our interest expenses. So yes, it's definitely possible. We will be looking at how to optimize our cash and bank facility usage. And if anything, it's likely to this is seen to be taken probably in this quarter. So yes, that's the answer on the cash.
And then just on the 380,000 carat sort of inventories you brought over from the previous quarter and sold down, can you give us a sense what -- or give us the revenue number for that just so that we can strip it out to get a sense of the like-for-like we can expect going forward? Or for Q4 at least?
Yes, sure. So the 380,000 carats, I think we mentioned in our January trading update, that's -- the yield of that is just over [ $30 million ] in revenue.
And then just a question on your inventories, you mentioned with 2 more tenders in Q4, you do expect that to decline further. But if you look at the absolute quarters, and I understand, obviously, I mean due to tender timing, sometimes there's earlier production cutoff dates. But I mean given your lower production levels, you're carrying more than 4 months of inventory at the moment. So what is a sensible level of inventories you can expect to have by the end of June, do you think? I mean could it be as low as sort of 600,000, 700,000 carats? Or -- it just seems like that you're struggling to sell the inventories at your tenders.
Yes. There's a couple of things there. One, there is a base load of inventory, which includes the 70,000 carats from Williamson, which is -- which we still recognize as inventory, which obviously has not come to the market just yet. So that's one of the numbers that's included in our overall inventory number. Secondly, the timing of our tenders and the lead time to sell has increased quite significantly with -- since the COVID pandemic and the steps we had to take. So typically, from production cut off to sale, where in the past, we try to limit that to around 6 to 8 weeks, we're probably now closer to around 12 weeks into it, given that we have to sell both in South Africa. As a regulatory requirement, we have to offer the goods on sale here and then have a second tender, effectively, in [indiscernible], which has obviously been the open tender for all clients. But even there, we do -- we've extended the period for previewing and the like as well quite significantly to allow social distancing and the like and other measures to be implemented. So unfortunately, our payment cycles have increased in time. And as a result, our inventory holding is up to around a 12-week level. So yes, that's more or less what we've been looking at.
Okay. And that -- should I expect that, that shouldn't change anytime soon, right? So that's something I should expect to continue at least for the next sort of 3, 4 quarters?
Yes. We would expect that, at least, I would say, for this calendar year, and hopefully, by this time next year, in our last quarter, FY '22, we may be able to claw back a couple of weeks. But for the foreseeable future, that's probably the picture now.
Okay. No, that's clear. And then just a question on Williamson. Could you give us a sense what the current cash burn is? And then assuming you can come to an acceptable agreement with the government, I guess about restarting the mine and presumably the blocked parcel and VAT rebates will be part of that discussion. Are diamond prices, I guess, at sort of sufficient levels at the moment to justify restarting the operation? And just to get a sense, how much would it actually cost to restart the operations, including rebuilding some of that working capital you've presumably you have wound down?
Yes, sure. It's current cash blended on care and maintenance is around $800,000 to $850,000 a month at Williamson. Assuming an agreement with government is reached, the mobilization then of workforce contractors and the like is likely to take 30 to 45 days to bring them back on sites, conducted medical testing and all of the requirements and retrained, whereafter a ramp-up of production can commence. So it's likely to take up to 3 months roughly to get back to, I would say, normalized or expected levels of production. During that period, we'll obviously try -- well, we'll have to see how it -- how it may fits our tender cycles, and that will really dictate then the working capital requirement for the mine. With ramping up 2 production at full stops, we're running at around about $5 million a month and -- from an operating expense point of view. So that's just the working capital requirement. It would probably be between $15 million to $20 million given a 3-month turnaround to get goods to the market and cash brought in.
Okay. All right. That's clear. And then just -- I mean what diamond price would you sort of need to see to restart Williamson? And are we already at that level?
Yes. I think we -- looking at the like-for-like prices that we achieved -- achieving currently across the SA operations, we are confident that what Williamson would be cash generating at the current price levels. Obviously, the ore mix and available material at Williamson will initially dictate, and we can expect some volatility in prices until the footprints across the ore bodies is reestablished for mining. But I would say, as a general rule, prices are back at a level where we can restart assuming we can finalize the agreements with government.
Okay. And would you then -- I mean what is the cash level currently at Williamson? And how many months liquidity do you have? I'm just thinking -- I mean if you do come to an agreement, presumably, you're not going to inject more money into the assets. So where are you going to get that money to restart the operation? Will that come from local facilities?
So yes, the first port of call is local facilities. We have, as you know, and we've mentioned in the past, we have had discussions to put in place local facilities. Most of the order banks that we have had discussions with are looking at us and government to conclude these agreements before the facilities can be developed. So yes, that's absolutely the first port of call. Williamson's liquidity balances or cash balances are at an extremely low level. And that's also the one reason why we're pushing to complete these agreements in this quarter. So not to -- or to avoid putting in any further cash into Williamson. And if we do have to fund, we'll do it on a basis of a shareholder loan with very specific repayment terms. But that decision has not been taken as said.
Is it -- I mean nothing from the restructuring agreement precludes you from lending money to Williamson. You'll be able to...
There is provision made for some funding towards Williamson with certain approvals required, internal approvals, through Board, committees and the like. But they are our provisions to advance funding to Williamson during this period of restart and as a funding mechanism. So yes, we do have the ability to do that.
Now a question from [ Ian Silver ] at the Bank of America.
Can you just give a little bit more clarity on the potential impact of Tanzania resolution that you expect to be by the end of the year?
Sorry, won't just repeat the question? Are you talking about the -- in Tanzania?
Yes, the Tanzania, sorry. You mentioned...
Are you referring...
What is your expected impact in terms of cash? Or is there positive, negative for the balance sheet? What do you see as a potential impact of the resolution?
Thanks. I just want to clarify that I answer the correct question. Are you referring to finalizing the negotiations with the government in terms of the regulatory framework?
That's correct. Yes. Discussion with the Government of Tanzania in relation to the various issues at Williamson. Right. Yes.
Yes. So look, we would expect that we would address the outstanding issues relating to how we deal with the seized parcel and how we deal with the arrear [ battery ] funds and we would hope then to also have some certainty around the regulatory framework going forward that prevents sort of cash lockup to the extent we've seen historically. So resolution would certainly be positive in that sense that we would not see cash lockup as we have historically. But obviously, in terms of reaching that agreement, we -- it will probably take some time before those benefits flow through. So it's not going to have an immediate impact, but what it will do is provide more certainty for us going forward. Does that help?
It looks like we might have just momentarily lost Louie's line. While we get him back, just to check that, that question was answered, could we go on to the next question, which is from [ Dmitry Ivanov ] at Jefferies International.
Just maybe a quick question on your cash balance. So I understand that you have -- your cash balance is approximately USD 154 million as of end of March. If my understanding correct, that this cash balance includes new money component as part of your restructuring. So I understand that you have received like something like USD 30 million in new money as a part of restructuring. So my first question is that does this cash balance already incorporates new money component? And the second question is that, should we expect any restructuring fees to be paid after March 2021? Or already -- you already paid everything to lawyers, advisers and we shouldn't expect any outflows?
Yes. Thank you, [ Dmitry ]. So you're right, the $153 million does include $30 million of new money. In terms of the fees paid, the 99% of all fees were settled in March from the new money, the $30 million new money from the bondholders and with only really a small amount still left to be paid for and just a bit of ongoing work to wrap up all the loose matters. But the bulk of the fees, by and large, have been settled in full during the March quarter. And the cash balances reflect that outflow as well.
Understood. One clarification, if I may. If I understand correctly that according to your restructuring with bank lenders, you have a repayment schedule starting from the second half of the 2021. So just correct me if I'm wrong, so that you have a principal repayment of your bank activities starting from the second half of the year 2021.
Yes, that is correct. Our first payments will become due at the end of this quarter, and we have an agreed amortization schedule as we've published as part of the debt restructuring documents. So yes, that first payment will become due by June of 2021.
We now have a follow-up question from Ian Rossouw of Barclays.
Just to follow up on that question, how much was the fees paid in the March quarter?
Yes, Ian, it's a total amount of around $15 million, which was settled during this quarter as part of the proceeds that came in, and that's on top of [ fees ] that's already cash settled in the previous periods .
Okay, and can you remember how much that was as well?
In H1, we paid around $15.5 million in 1 period.
Okay. So essentially, the new money raised was for the -- essentially went to repaying all the fees -- or to pay for the fees of the restructuring?
Yes, quite right.
And Ian, just as well, following up on that. To clarify as well obviously, Petra is required to pay all of the fees, not just its own fees, but those of its -- those of the fund holders and the bank's advisers. So that's why it is a large number.
I think that was our final question. So I would now like to hand back to Richard for his closing comments.
Thanks very much to all of you for participating in our trading update call, and we look forward to catching up in a quarter's time. Thanks, all.
Thank you. This now concludes today's call. You may now disconnect your lines.