US Edition Petra Diamonds
125½ +1¼
Questor says BUY
Although prices are likely to be volatile, given the uncertain market backdrop, new markets in Asia should support demand over the medium term. Petra is also focusing on organic growth after completing a major acquisition.
In the year to June, the group produced 1,117,795 carats, slightly below last year's 1,164,856 carats, as it focused on "value production".
However, its plans for growth at its mines – Petra has seven producing mines in South Africa and one in Tanzania – will mean output is expected to increase sharply.
In the current year, the group expects to see production of 2.1m to 2.3m carats after its acquisition of a 74pc stake in South Africa's Finsch mine, which completed after the period end. Finsch is Africa's second-largest mine by output.
Production is then targeted to rise to 4m carats by 2014 and 5m-plus by 2019. In the year to June, revenues rose to $220m (£140m) from $163.7m, with pre-tax profits edging down to $64.4m from $69m. The company does not currently pay a dividend.
Profits edged lower, but last year's results included the sale of an exceptional 507 carat stone called the Cullinan Heritage, for $35.3m. However, rising costs remain an issue for the whole sector.
One interesting point for investors from a technical point of view is that Petra plans to move from Aim to the main board of the London Stock Exchange before the end of the year. This means the shares are highly likely to be included in the FTSE 250 mid-cap index.
This means that tracker funds will then have to automatically purchase the shares, providing support to the price.
There have been comments about recent softness in the diamond price – but prices are likely to move higher over time. Firestone Diamonds recently noted a fall in selling prices, but this was put down to "caution" by its chief executive rather than a panic in the market.
The US has been traditionally the largest market for diamond sales, but the credit crunch has hit consumers there very hard. However, China and India are rapidly growing markets which are expected to more than take up the slack.
Indeed, so confident are sector players that the supply and demand dynamics mean prices will rise over the medium term that they have launched diamond-backed funds in the US. Harry Winston and Diamond Asset Advisors launched a fund in May – and another one is expected to be launched next year.
Following the acquisition, Petra is the third-largest diamond producer in the world after
De Beers and Russian state-owned group Alrosa.
The shares are now trading on a June 2012 earnings multiple of 12.1 times, falling to just 9.3 next year.
The shares were first tipped on October 20, 2009 at 68p. The shares are now 84pc ahead compared with a flat FTSE 100.
Petra remains Questor's favoured play on diamonds and the shares are rated as a buy.