Prospects for Petra Diamonds (PDL) look bright after the diamond miner's share price broke through a major resistance level last week. In intraday trading, Petra's price passed 130p; the two previous times it did this - in 2010 and 2012 - the shares went on to post gains of nearly 40 per cent over the coming months. And with good results expected in September, the possible trading profits are too tempting to ignore - we therefore upgrade the shares to 'buy' and set a 180p target price.
- Major chartist breakout
- Production rising
- Sparking results likely next month
- Positive outlook for diamond market
- Tough for miners in South Africa
- Mining is inherently risky
Admittedly, calling Petra's recent share price movement a major chart breakout might be a tad premature. Since closing at 132p on 14 August, the price has slipped back to 126p. But, having traded between 100p and 130p for the past year and with investor sentiment improving towards the mining sector, we favour the next significant price move being upwards.
That's because Petra's eight producing diamond mines - seven in South Africa and one in Tanzania - put in a robust performance in the year ended 30 June 2013. Diamond production increased by 21 per cent to 2.67m carats, slightly ahead of guidance and helped by the first full year of operations at the Finsch mine. Meanwhile, full-year revenues climbed 27 per cent to $403m (£262m), helped up by the $17m sale of a brilliant 25.5-carat blue diamond from the Cullinan mine in May.
This should yield a sparkling set of results next month, assuming there are no nasty surprises. Moreover, Petra has guided towards an even more promising 2013-14. Production is expected to rise a further 12 per cent in the current year to around 3m carats, and the company remains on track to hit the longer-term production target of 5m carats by 2019.
PETRA DIAMONDS (PDL) | ||||
|---|---|---|---|---|
| ORD PRICE: | 126p | MARKET VALUE: | £642m | |
| TOUCH: | 125-126p | 12-MONTH HIGH/LOW: | 135p | 96p |
| FWD DIVIDEND YIELD: | NIL | FWD PE RATIO: | 9 | |
| NET ASSET VALUE: | 77p | NET DEBT: | 14% | |
| Year to 30 Jun | Turnover ($m) | Pre-tax profit ($m) | Earnings per share (¢) | Dividend per share (¢) |
|---|---|---|---|---|
| 2010 | 164 | 69.0 | 22.7 | nil |
| 2011 | 221 | 64.4 | 12.8 | nil |
| 2012 | 317 | 8.40 | -0.5 | nil |
| 2013* | 403 | 95.1 | 13.0 | nil |
| 2014* | 483 | 187.9 | 21.6 | nil |
| % change | +20 | +98 | +66 | – |
Normal market size: 10,000 Matched bargain trading Beta: 1.3 £1=$1.56 *FinnCap forecasts | ||||
Rough diamond prices are equally important to performance. While they're difficult to track, analyst Kieron Hodgson from broker Charles Stanley Securities forecasts a price rise of between 5 per cent and 10 per cent in 2013. Encouragingly, he anticipates only a mild slowdown in the third quarter followed by a strong end to the year driven by an improving US economy. The US is still the world's biggest market for polished diamonds, but continued growth in China should help.
Against that, operating in South Africa always poses challenges, with repeated calls for higher wages. And mining is always high-risk so, with eight producing mines, chances are that something will go wrong for Petra somewhere. Despite that, on the bear side, 100p is a major support level that has held firm several times in the past three years, so the downside is probably 21 per cent.
