It was as inevitable as it is painful: shareholders in Petra Diamonds Ltd (LON:PDL) are facing a near total wipeout as bondholders take over the running and ownership of the company, following a disastrous few years at what was once the world’s fourth largest diamond company.
For so long, it looked so good.
The company built a business model out of picking up assets that were past their prime, yes, but which still had plenty to give.
Thus, some of the world’s most famous mines passed into its hands – the Cullinan and Finsch mines in particular – and continued to produce some fabulous stones.
Finsch remains the second largest diamond producing mine in South Africa, which is saying something in the world’s most diamond-rich country.
But beneath all this glitter there were also cracks, or fissures.
While diamond prices were on the up-and-up, and in particular during the mining boom of the first decade of the current century, Petra’s expansion plans could be easily funded.
The debt was piled on as the asset base grew.
But then the diamond industry took a turn for the worse.
Oversupply began to weigh on prices, and although supermajors like Alrosa (MCX:ALRS) and De Beers could offset this demand weakness by pumping out more supply to keep their top lines steady, such a dynamic was less than helpful to the likes of Petra, which had less room for manoeuvre in terms of output.
To be sure, Petra wasn’t the only company to suffer. All the mid-tier companies, from Gem Diamonds (LON:GEMD), Lucara (TSE:LUC) and Firestone Diamonds suffered. Firestone Diamonds has all but disappeared from view, while Lucara and Gem continue to punch under their weight.
Petra too limps on. But it’s a shadow of its former self.
The ebullience and optimism that underlay its foundation and expansion, from its false starts in Angola, through to exploration plays in Botswana and the eventual accumulation of some of the world’s banner diamond assets, is now gone.
The shares, which at their height in 2014 traded at just over 126p, are now priced at a dismal 1.64p, and the market capitalization has slumped to just GBP14mln, significantly less than many companies in the wider mining sector, like Alien Metals (LON:UFO), which have no production of any kind at all.
The bondholders are pumping in some money to keep the company afloat, since Petra can no longer pay the coupon, let alone the principal of the US$650mln debt it owes. But even after the moneylenders have bitten their own bullet and converted a portion of their debt into that new chunky 91% equity stake, there’ll still be a significant amount of debt on the books.
The real problem is: how much are the assets worth? And the answer seems to be, inclusive of future cashflows, probably less than the overall debt and even the debt that will remain after the debt-for-equity swap.
That unfortunate state of affairs has logically meant that the bondholders who are now calling the shots have said that the company is no longer up for sale. How could it be when if they sell it, they’ll realise less than they leant it?
Far better to install operational management to keep the assets and wait for the diamond market to recover, if it ever does, and for asset prices to rise. Only then do the bondholders stand any chance of recovering their principal, and only then will Petra regain its independence as a true force in the diamond mining world.