Petra Diamonds Limited (PDL) Earnings Call Transcript

Good morning, and welcome to the Petra Diamonds Limited Investor Presentation. [Operator Instructions] Before we begin, I would like to submit the following poll. And I would now like to hand you over to the management team of Petra Diamonds Limited. Vivek, good morning to you.

Good morning, operator, and good morning to everyone that are joining us today. I've got with me our joint Interim CEO of Operations, Juan Kemp; and to my right is our Chief Financial Officer, Johan Snyman, and we'll be talking through the first quarter operating update of financial year 2026. After taking you through the short presentation, we'll open up to Q&A. And I would also like to note that this presentation will be available on our website later on today. With that, moderator, if we can please move to Slide 3. Thank you. I think I'd like to start by just reflecting a little bit on the past 12 to 15 months for Petra as a business before we get into the operating update. It's clear to see that we've made significant strides in transforming ourselves into a much simpler and a much more streamlined business with 2 clear, compelling world-class assets that are poised to deliver value in the medium to long term. Changes in the milestones that we've been achieving over the last 12 months have been articulated through our financial year end results as well as in our annual report that was recently published on our website. We're also pleased to have delivered against FY 2025 guidance that we had put out at our Investor Day in June 2024. With regards to the refinancing, we are pleased to report that we are progressing well, and we are on track to finish our refinancing before the end of the calendar year. This will obviously significantly improve our balance sheet and give us the flexibility and the headroom to continue with our critical capital projects that unlock sustainable value generation in the medium to long term. We're happy to take questions on the refinancing as part of the Q&A. And then quickly turning our focus into the operating update. I think quarter 1 performance has been positive. We've had better product mix coming out of our mines, specifically at Cullinan Mine as we opened up new areas, and Juan obviously will unpack that in a bit more detail. And we've seen improved tenders as a result of that product mix. We did have some challenges at Cullinan as we transition from continuous ops to a new shift configuration. But again, Juan will unpack a bit more of that as we move forward. With that, if we can move to the next slide, and I'll hand over to Juan.

Thank you, Vivek, and good morning, everybody, and from my side also, thank you for joining us. I will start with safety, which is our #1 priority as we strive to deliver a zero harm workplace. Petra recorded 8.5 years fatality-free by the end of Q1 FY 2026, representing 8.5 million fatality-free shifts with the lost time injury frequency rate improving to 0.27 from 0.58 in Q4 of FY 2025. This represents 1 lost time injury each at CDM and FDM. We are quite proud of this performance, taking into consideration the significant number of changes the company went through over the last few months, including a shift from continuous to a 3-shift operation at Cullinan Diamond Mine. Our key focus has been on reinstating a sense of stability for our employees following this time of significant internal change at the company and have implemented several initiatives to ensure we address this. We are pleased to see that it had a positive impact, and we'll continue to focus on driving this together with other internal initiatives and campaigns that drive awareness for our employees, including increased visible felt leadership. I will now step over and take you through the unpacking of our operations during Q1. In terms of production, the teams are adequately -- sorry, are adapting well to the successful transition from continuous to the 2-shift structure at Finsch Mine with this having been completed in the first half of financial year 2025. Transition from continuous operation to a 3-shift structure at Cullinan took effect in quarter 1 of FY 2026 and teams are getting used to the new structure. As expected and planned, this resulted in a throughput reduction of 6% and 5% when compared to Q1 and Q4 of FY 2025, respectively. With Finsch Mine adapting well to the 2-shift structure they transitioned to in Q1 of FY 2025, the mine's throughput increased by 32% if compared to Q1 and 5% compared to Q4 of FY 2025. We have been very pleased with the improved product mix at Cullinan Mine. This is as a result of the fresher ore encountered as we continue to ramp up tonnage from the eastern side of the C-Cut block, which includes Tunnel 41 and the CC1-East block, where we use the sublevel caving and mining method. The CC1-East block is known for higher quality non-Type II diamonds through all the size ranges, while the eastern side of the C-Cut block is known for large white Type-II and very rare and special blue diamonds. With the 2-shift operation now well established at Finsch, we are seeing a stronger product mix as we open new parts of the ore body on 81-Level and on 86-Level in the lower Block 5. Despite the increase in fresh ore, the bulk of the ore in Q1 at Cullinan was mined from the C-Cut block, of which the grade is reducing as it is getting more mature and hence, a slightly higher reduction in carats produced when compared to the throughput reduction. As we ramp up tonnes from the higher-grade CC1-East block, the recovered grade and hence, carat recovery will increase going forward. At Finsch, the carats produced is 37% higher compared to Q1 of FY 2025 and 5% higher compared to Q4 as the grade improved with reduced tonnes mined as planned at Finsch, resulting in reduced waste dilution. That's a summary of the safety and ops update, and I hand over to Vivek.

Thanks, Juan. If we can please move to the next slide. Maybe just to spend a couple of minutes on a short market update. By and large, the diamond market still remains largely subdued and it hasn't been helped by the uncertainty caused due to the implementation of the U.S. tariffs as well as continued subdued demand from China. Reflecting on our own results. However, diamond sales for quarter 1 FY 2026 were at $52 million from approximately 470,000 carats sold. Encouragingly, average prices realized were 53% higher compared to quarter 4 of FY 2025, with product mix contributing about 61% increase, partially offset by an 8% decrease on a like-for-like basis across all product categories. At this point in time, we'd like to reiterate our pricing assumptions for FY 2026 that we announced as part of the operating update in August 2025. I think moving forward, we do expect to continue to see this improved product mix as we ramp up production from new areas that are being opened up through the capital projects execution. On the market side, there have been some positive news that suggests that consumers are seemingly now switching back to natural diamonds. And that should also be further helped by the renewed marketing push that some of the major retailers and producers and the Natural Diamond Council is beginning to now undertake. From a U.S. tariffs perspective, again, an encouraging piece of news about Antwerp getting exemption from exporting diamonds to the U.S. if they were cut and polished in Antwerp is a promising and a good start. We're already seeing some initial elements of some of the Indian cutters and polishers adapting to that and potentially moving some of their activities to Antwerp. But more encouragingly, we hope that other diamond cutting centers like Dubai and Israel and India having a trade to the U.S. will also follow suit in exempting natural diamonds from tariffs as they enter the U.S. If I now would hand over to Johan, who will take us through the financial highlights for the quarter.

Thank you, Vivek, and good morning, everybody. As Vivek mentioned, revenue for the quarter came in at $52 million, up slightly from $50 million in the previous quarter. This improvement came despite selling 218,000 fewer carats, thanks to a strong increase in our average price, up $110 per carat compared to $72 per carat in the prior quarter. Consolidated net debt increased by $23 million to $287 million. The main driver was the timing of our diamond tenders, which led to $14 million buildup in inventory. We also saw an impact from exchange rate movements and the accrual of coupon interest during the quarter. Our revolving credit facility remains fully drawn. It is rand-based and the reported balance increased by $3 million to $102 million, largely due to exchange rate revaluations. The balance on our loan notes also rose by $7 million, reflecting accrued coupon interest and the unwinding of deferred loan fees. At the end of the quarter, our total cash cost stood at $46 million, which includes the $19 million of restricted cash. And I just want to correct that, not cash cost, but our total cash balances stood at $46 million. The South African rand strengthened from ZAR 17.75 to the U.S. dollar at 30 June to ZAR 17.25 at 30 September. That's been driven by stronger local fundamentals as well as a weaker dollar. We've actively managed our foreign exchange exposure through our hedging program, and we'll continue to execute this strategy through to year-end. Turning briefly to our full year results released a few weeks ago, they clearly demonstrate the benefits of our cost discipline. Total on-mine cash cost dropped to $158 million in FY 2025, down from $173 million in FY 2024 despite wage, electricity and other inflationary pressures and a stronger rand. Group technical, support and marketing costs also came down to $17 million from $20 million last year, a 15% reduction. These savings came from our company-wide restructuring, which included the sale of noncore assets, a labor restructure and decentralizing certain functions to the operations. I will hand back to Vivek for concluding remarks.

Thank you, Johan. We move to the next. Thank you. As we conclude, I think we'd like to reiterate that our focus for FY 2026 remains on delivering safe and reliable operations while we continue to look for optimizing Cullinan Mine and Finsch and progressing our capital projects in line with our smooth life of mine plans. We expect to deliver on our guidance that we shared with the market in August 2025. The diamond market remains challenging and is out of our control, but we believe we have repositioned the business to ensure that Petra is well positioned to navigate the current market conditions and actually benefit from any market improvement. In closing, I'd like to thank all our stakeholders for their continued support of the business and supporting the refinancing exercise that the company has been busy with over the last few months. We're nearly there with the refinancing, which will secure the long-term future of the business. With that, we conclude the presentation and are now open for Q&A.

That's great. Juan, Vivek, Johan, thank you very much indeed for your presentation. [Operator Instructions] I would like to remind you that recording of this presentation along with a copy of the slides and the published Q&A can be accessed via investor dashboard. And team, as you can see, we have received a number of questions throughout today's presentation. And Julia, if I may now hand back to you and kindly ask you to read out the questions where appropriate to do so, and I'll pick up from you at the end. Thank you.

Thanks, Alex. We've got a question in from [ Andrew B ] regarding to the average diamond prices. The average diamond price rose 53% quarter-on-quarter, mainly due to product mix improvements. Could you elaborate on the sustainability of this improved product mix at Cullinan Mine? Is this expected to continue in upcoming tenders? Juan, I'd say that's for you.

Thank you for the question. I think if one look at the reason for the significant increase in price in Q1, there were some significant stones that we recover as part of the parcel. We did up the tonnage from the eastern side of the Tunnel 41 where we know these diamonds originate from. So as we ramp up the production in that area, we will see more large white and blue stones being recovered. And we expect that the diamond prices will increase going forward to our guidance of $100 per carat and remain there. I think the one in Q1 is part of an exceptional stone, but it will remain on a high level as we ramp up Q4 -- as we ramp up Tunnel 41.

Just would like to add, just for clarity, that it was not an exceptional stone. Our definition of exceptional is $15 million, but we did have some high-value stones. I think there's another element to this question. We're comparing our prices from Q4 of FY 2025. And FY 2025 was truly an anomalous year from -- with regards to product mix from the Cullinan Mine because we were mining in a depleted part of the C-Cut block. So we do expect product mix to hold steady as we had experienced in quarter 1, as Juan said, because we're mining in fresher ore and newer areas. But I think the reference needs to be taken into context because second half of FY '25 was particularly weak because we didn't have access to fresh ore.