Petra Diamonds Limited (PDL) Earnings Call Transcript

Good afternoon, and welcome to the Petra Diamonds Limited Interim Results 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 joint CEO, Vivek Gadodia. Good afternoon to you, sir.

Good afternoon, operator, and thank you, everyone, for joining us today as we discuss the half year results for the period ending 31st December 2025. I'm joined by my counterpart, Juan Kemp, who is the joint CEO responsible for operations. And together with himself, who will provide an update on the corporate and operational matters of the business. We're also joined by Johan Snyman, our CFO, who will cover the key financial metrics as transpired during the first half of the year. After taking you through a brief presentation, we will open up for Q&A. And please note that we will be recording this webcast that will be available on our website later today. Moderator, if we can please move to Slide 5. Thank you, moderator. I think to start off with, if we can just do a quick reflection on the last 6 months. Following really significant changes that we affected in the business in FY '24 and FY '25, we really started FY '26 as a much leaner business post the disposal of Williamson and Koffiefontein. Now we have two capital optimized assets that have a world-class resource base as we also launched the refinancing for the group's debt that were maturing -- that were due to mature in early 2026. We believe that our capital -- our approved capital programs are set up to unlock operational leverage for the business on the back of both improved product mix, as well as higher grades that will result in an increased carat production going forward. This, we believe, positions the business well and maintain resilience even in a continued suppressed diamond market. If we quickly glance on the highlights during the period. Obviously, the main one being in November, we announced the successful completion of the group's refinancing, which provided the company with extensions to both its first lien and second lien debt facilities, as well as a successful $25 million rights issue, which was necessary for the continued development of our capital projects. In addition, we introduced an innovative price mechanism or payment in cash or equity, which allows us future flexibility to manage liquidity in the event that the business requires to protect liquidity where we would settle second lien bond coupons and shares instead of cash. Alongside this, it is pleasing to report that we are seeing steady operational delivery in both mines now settled into their new shift configurations. Our capital projects, which are the genesis of the medium-term value creation that we shared with the market last year are largely on track. We have been -- we have started mining in fresh or especially at the Cullinan mine that has resulted in an improved product mix as we anticipated, and this is particularly exemplified by the recovery of the 41.82 carat Blue Type II diamond, which is of exceptional color and clarity. We maintained our focus on containing costs and CapEx and have performed well against our internal plans in rand terms, with the USD numbers impacted due to the stronger rand. So I think overall, if I had to sum up the past 6 months, we believe we've controlled the controllables well. We have continue to see a weaker market. We have obviously seen a stronger rand, but our product mix has definitely improved as anticipated. If I just reflect briefly on the results and financial highlights, which both Juan and Johan will unpack in greater detail through their sections. But as I just said, steady operational performance has continued into FY '26, but the teams now settled into new shift patterns at both operations and delivering on higher tonnes and carats despite adverse weather-related disruptions that have been experienced at both the mines over the rainy season in South Africa. Johan will unpack the operational performance in a little bit more detail later on, but we are pleased with the increase in tariffs recovered as rates continue to increase on the back of opening new mining areas. The continued pressure on the diamond market and despite a dip-in like-for-like pricing of 20% between Q1 and Q2, our half year average realized price has held up well and recovered sharply compared to the previous half, again, on the back of the improved product mix, especially at Cullinan, and this is in line with our expectations as we open up new parts of the ore body. Revenue was down to $100 million in comparison to $115 million in the corresponding period last year, but that is really down to the timings of the tenders that we carried out between December and Jan, and this is also reflected in the higher inventory buildup, which Johan unpack. As I've mentioned, we manage our costs, both OpEx and CapEx, well in rands in line with our focus on cost discipline, and we will continue to focus on further cost optimization opportunities going forward. We closed the half year with an operational free cash outflow of $6 million, again, a significant improvement on the minus $43 million in the previous half and the minus $6million for this period was largely due to the buildup of the diamond inventory during the period and the timing of the tenders. Moderator, if we move to the next slide, please. Taking stock of Petra's tender results specifically and some market-related commentary on during the first half. What we are seeing in the diamond market is ongoing weakness with particular pressure on the smaller size segments of the market, so some smaller sized stones where we believe lab-grown diamonds have now manifested as a separate proposition in this part of the market. It is, however, pleasing to see the robustness of our average price. If you compare our average prices in the Blue bars against the rough diamond index just directly above it, while the index has continued to decline from its peak of FY 2022, our realized average prices are seemingly plateaued, which is largely because of the product mix that we produce specifically from the Cullinan mine, given that it produces regularly course material and high-value gemstones, including Type II white and blue diamonds. As I mentioned, diamond sales for H1, revenue for H1 was $100 million from the sale of approximately 964,000 carats compared to $115 million that resulted from the sale of 1.1 million carats in the same period last year. We were obviously very excited to recover the Exceptional Blue in December, which is currently being marketed, and we expect the proceeds from this stone to be realized during this half of this financial year -- during the second half of this financial year. Finally, we also appointed Owners Group to provide diamond sales and marketing services to Petra. This will provide the company with flexibility to market our diamonds not only in Johannesburg and Antwerp, but also in Dubai, which has emerged as a major diamond trading hub in recent years. If we move to the next slide, please, moderator. I think looking outside in at the broader picture, while it is very difficult to predict when the market will recover sustainably, we do note some potential tailwinds that could help the market. We include continued Indian demand from the -- they were growing emerging middle class. So India continues to shine. From a Chinese demand perspective, which has been muted really on the back of coming out of COVID we are seeing, according to some studies, some signs of recovery, which could be a positive thing. More recently, the implementation of the Luanda Accord, which is aimed at increasing marketing spend for natural diamonds through the Natural Diamond Council should help reinvigorate marketing for natural diamonds alongside major players who have also stepped up marketing for natural diamonds. And finally, the one big factor that has been playing on the market is the uncertainty around U.S. tariffs. Now in early Feb, India and the U.S. did announce a trade deal framework, which created the path to potentially 0% duty on Indian diamonds. And while the Supreme Court has ruled against the previous frameworks, and that uncertainty still exists, I think there is some potential positive given that there is a pause for duty on Indian diamonds to the U.S. producing. Just as a reminder for the best part of last year, Indian diamonds were taxed at 25% and then 50% from about July onwards, which even in the current regime should be 10% or 15%, but once the play deal is implemented, that should hopefully get down to 0% and that hopefully will reinvigorate some of the market. There have been some studies that suggested last year that the U.S. probably imported more lab-grown diamonds and natural diamonds is a 50% duty of a much lower pace was much easier to absorb and that might have also impacted the market in the second half of last year. Despite these tailwinds, we do see a likelihood that the smaller size diamonds could remain suppressed as lab-grown diamonds have created a separate purchase proposition in this category. On the flip side, what we are seeing is demand for coarser material and high-value diamonds has seemingly turned the corner, which positions us well, like I said, given our product mix and especially Cullinan and producing some really nice high-value stones on a regular basis. I'll now pass over to Juan to talk about our operations. moderator, if you can move to Slide 10.

Thank you, Vivek. Good afternoon, everyone, and thank you for joining us. I will start with safety. The safety of our people remains our highest priority. At Petra, we are committed to ensuring that every employee returns home -- on home at the end of each day. Our strong safety performance of more than 8 years fatality-free and the lost time injury frequency rate consistently below 0.3 since 2014, including the first half of FY 2026 demonstrates the effectiveness of this commitment and a reflection of the teams settling into the new roles and shift patterns at each operation following last year's internal restructuring. Recognition of the team's safety achievement was granted in November where Cullinan mine won several awards, including Best Safety Performance in Class at the Mine Safe 2025 Awards and Finsch achieved second position for safety in the underground mines category at the Northern Cape Mine Managers Association Awards. Our own achievements, together with the external recognition we have received reinforce our determination to continue striving towards our zero harm goal. If you can please move to Slide 11. In terms of production, as mentioned by Vivek, we are proud of the steady operating performance demonstrated at both mines during the period. At Cullinan, carats recovered in the first half of FY 2026 were lower year-on-year, largely due to the transition from a continuous operation model to a 3-shift structure. While ROM tonnes declined in line with the updated life of mine plan, this was partially offset by an improvement in the recovered grade driven by the increasing contribution of fresh ore from the CC1 East block, a trend we expect to continue. Tailings treatment performed in line with guidance as mining activity shifts further towards the eastern side of the cut, which includes the Eastern draw point in Tunnel 41, the product mix continued to improve as evidenced by the recovery of several high-value stones, including the 2 and the 41.82 carat blue diamond as mentioned by Vivek. Our expansion projects at Cullinan Mine have continued on track and in line with our CapEx guidance as we continue to focus on our efficiencies. At Finsch, carat production is trending upward with both tonnes stripped and recovered grade higher than in the comparable period last year. The mine has now stabilized within the two shift structure and is extracting greater volumes of fresh ore from 81 level and 86 level, which is contributing to the ongoing improvement in recode -- with the ramping up of the production in the five project areas, we expect the product mix to improve as we anticipate a mix of diamonds recover due to the mining of the ore from these new areas while also benefiting from a higher grade leading to a higher carat production. In terms of expansion projects, Finsch did experience a shortfall in development meters to the 3-level SLC project that has resulted in a delayed handover of some of the production tunnels largely due to unforeseen ground conditions. This has been mitigated somewhat by enhanced carat contribution from 78 level and 81 level with plans underway to catch up the development meters shortfall to date. Capital expenditure that both Cullinan and Finsch is higher compared to the previous period, in line with the requirements of our life of mine plants. At the same time, our deliberate and disciplined focus on reducing operating expenditure across the group is reflected in lower adjusted mining and processing costs. I will now hand over to Johan, who will run through some of the key financial metrics. Moderator, can I ask if you please move to Slide 30.

Thank you, Juan, and good afternoon, everybody. I will cover four areas. First, the drivers of our first half earnings. Second, cash flow third, the balance sheet and liquidity. And finally, the main sentivities we are managing in the second half. As mentioned by Vivek, revenue for the 6 months ended 31 December 2025 was USD 100 million versus $115 million in H1 FY 2025. The main driver was tender timing with the December 2025 tender largely moving into January 2026. That is visible in closing diamond inventories, which were 608,000 carats valued at approximately $46 million at cost as at 31 December 2025. compared with 385,000 carats and approximately $40 million at cost price as at the previous half year. For the income statement, the key point to separate is adjusted EBITDA versus IFRS statutory earnings. Statutory net loss after tax was $90 million, primarily driven by impairment charges recognized in the period. Due to the combination of a strong rand and weaker dollar, we revised our impairment models for Cullinan Mine and Finsch. This resulted in impairment losses for Cullinan Mine of $106,000 and for Finsch $51 million. Operational cash flow was an outflow of $6 million compared with an inflow of $16 million in H1 FY 2025. The main drivers were, first, the buildup in diamond inventory due to tender timing and second, a nonrecurring release of diamond debtors in the prior period, which did not repeat this year. Capital expenditure was $34 million versus $30 million and we continue to expect FY 2026 capital expenditure to be weighted to the second half. A simple way to think about the second half cash is that we are focused on converting the on-hand inventory into cash through tender sales and maintaining strict discipline on operating costs and capital sequencing within the parameters of the refinancing and our covenant framework. Moderator, please move to the next slide. Adjusted mining and processing costs were $72 million, down from $98 million and adjusted EBITDA increased to $26 million from $15 million. The year-on-year cost reduction was driven by diamond inventory movements of $25 million and reductions in online cash costs of $7 million, partly offset by the impact of the U.S. dollar on the cost base of around $3 million and inflation of about $5 million. On FX, the average exchange rate for the 6 months was ZAR 17.38 to the dollar compared with ZAR 18.15 in the prior period, and the closing rate at 31 December 2025 was ZAR 16.5 to the dollar. In the first half of the year, we were able to offset some of the foreign exchange impacts through our hedging program, delivering $6 million in realized foreign exchange profit. This is not expected to repeat in the second half. Moderator, if you can move to the next slide. Consolidated net debt at 31 December 2025 was $284 million compared with $261 million at 30 June 2025 and $215 million at 31 December 2024. Two points matter for how we interpret that number. First, consolidated net debt includes fair value adjustments on the 2030 loan notes and other items. The reported note carrying value at period end includes a fair value adjustment recognized at the refinancing modification date and transaction costs capitalized to the senior secured debt. Second, from a liquidity standpoint, unrestricted cash was $36 million at period end with additional restricted cash prices. On the revolving credit facility, $11 million remained available for drawdown as of 31 December 2025. As a reminder on covenants under the Absa facility, the package includes net debt on the senior debt only to adjusted EBITDA and senior interest cover on this tested semiannually plus a minimum 12-month forward-looking liquidity requirement of $20 million and a CapEx variance limit versus the base case and budgets. There were no covenant breaches as at the reporting date. The refinancing introduced a payment in cash for equity mechanism on the 2030 loan notes under this structure, interest can be settled in cash or in shares at the issuers election, and the terms include defined share price mechanics for year 1 and subsequent years. From an accounting perspective, that price feature is treated as an embedded derivative that is bifurcated and measured at fair value through profit and loss. At period end, the derivative financial assets related to interest settlement on the 2030 loan notes was recognized at $17 million, split between current and noncurrent. The point for today's call is that these are valuation movements and classification effects that do not change our operational focus, which remains liquidity management and delivery on the mine plans. Moderator, if you can move on, please. Foreign exchange risk remains a first order sensitivity for the group, given the rand cost base and to U.S. dollar revenues. As we set out in the presentation, a ZAR 1 movement in the exchange rate equates to approximately $8 million to $10 million on EBITDA and $12 million to $13 million on operational free cash flows on an unmitigated annual basis. We will continue to enforce cost control, prioritize cash generations and sequence capital to protect liquidity. Then the timing and the conversion of inventory into cash is also a key focus into the second half given the elevated inventory position at 31 December. o close, the first half showed improved adjusted earnings performance driven by cost actions and product mix, while cash flow was impacted by tender timing and inventory build. We ended December with $36 million in unrestricted cash and $11 million in revolving credit facility availability and no covenant breaches at the reporting date. I will now hand back to Vivek to provide the company's concluding remarks. Moderator, you can please turn to Slide 18.

Thank you, Johan, and thank you, moderator. I think as we conclude, we'd just like to reiterate that what we focus on F1 is really the continued focus in the second half of the financial year, which is to continue to deliver on safe and reliable operations, continue to progress our expansion projects, both at the Cullinan Mine and Finsch which will continue to improve our product mix and grade and, therefore, help with earnings going forward. We expect to deliver on the production guidance that we shared with the market in August 2025. The diamond market does remain challenging and is out of our control, but we continue to make all the choices that we can to ensure we can navigate the current market conditions. These include, for example, ongoing focus on cost efficiencies, business optimization, total sequencing and margin initiatives, improving -- improvement margin initiatives that will allow us to mitigate the stronger brand as well as the weaker market in the malls. In closing, I'd like to thank all our stakeholders for their continued support of the business. And with that, we conclude the presentation and now open for Q&A.

Our first question comes from Peter H. If we mark to market to today's like-for-like diamond prices and FX, what additional earnings headwind would we have to offset with self-help?

Thanks, Peter. I think to start off with, we obviously don't guide on earnings, but I appreciate the question. And in the context of our guidance, it's probably fairly easy to work out given that our guidance was based on ZAR 19. And as Johannes said, an unmitigated ZAR 1 movement over the full year results in $8 million to $10 million of EBITDA impact. So that is probably the best way I can say in terms of characterizing the impact of the rand if left unmitigated. Obviously, as what Johan has said, we do have hedges in place, and we did get the benefit of hedging in the first half we may not get the same benefit in the second half, but we'll continue to look for hedging opportunities. And the other mitigation that has been helping us is a much improved product mix where we tracking ahead of our price assumptions, for example, that should help us mitigate or absorb some of the impact of the rent.