US Edition Petra Diamonds
68¼p -1¾
Questor says BUY
Many people would regard the performance of gold since the start of the year as being impressive. However, diamond prices have increased by about the same amount and are now close to levels last seen in June 2008.
The long-term fundamentals of the diamond industry look sound from an investment point of view. No major new mines have been discovered in decades and there is likely to be a shortfall in output in the next three to five years that will fail to meet rising demand in China and India.
Yesterday's full-year results from Petra Diamonds underscored that the recovery in its markets was real.
In the year to June 30, pre-tax profits jumped to $69m (£44m) from a pre-tax loss of $95m in the previous year on revenues that rose to $163.7m from $69.3m. The results were ahead of consensus and Questor expects that forecasts for the current year will now have to rise.
Traditionally the US has been the "price-driving" market for diamonds, as most of the world's diamond sales take place there. Asia is taking up some of the slack, but a recovery in the US would be a real positive for the market as a whole. A double-dip recession would therefore be negative for the industry.
Over the year, gross diamond production rose 6pc to 1.16bn carats. Petra confirmed that it was on track to more than double diamond production to 2.5m carats by 2014 – and triple production to more than 3m carats by 2019. The company expects diamond prices will continue to firm in 2011.
Management has upgraded its expectations for the long-term potential at its Cullinan, Williamson, Kimberley Underground and Koffiefontein mines in southern Africa, both in regards to production and prices.
The company's increased its stake in the flagship Cullinan mine in South Africa to 74pc from 37pc last year and Petra also recovered a 507 carat stone – the Cullinan Heritage – over the year, which sold for $35.3m. This is the highest price on record for a rough diamond.
There could be headwinds from cost pressures in the near term and some analysts believe that the release of stockpiles of diamonds from Russia or Zimbabwe may temper prices. There is also a currency issue as the South African rand remains strong. However, there is no doubt that the diamond market is recovering.
The shares are trading on June 2011 earnings multiple of 17.3, falling to 10.5 next year. The company does not pay a dividend.
Questor has tipped the shares at 68¾p and 63p, so they are now at about the same price that the initial tip was made. The market is up 8pc since the original recommendation on October 20 last year. Questor likes the diamond market because there are only 20 or so large diamond mines in the world and they are all past their peak, something that should support prices over the medium term. Also, rising interest in diamonds coupled with rising wealth in Asia is positive for future demand growth.
As shown by the recent find of the massive Cullinan Heritage, the size of stones found at the Cullinan mine is exceptional. Buy.