Analysts at Canadian bank RBC have upgraded Petra Diamonds Limited (LON:PDL) to ‘outperform’ from ‘sector perform’ after a rights issue provided “crucial derisking” to its balance sheet ahead of a key ramp-up phase.
The bank said a US$178mln cash injection from a rights issue in May meant the diamond miner's balance sheet no longer “carries the high cost S.A. debt, improving cash flow by an estimated US$6mln per year”, adding that “the biggest improvement is the step change in the equity story that comes from bringing the balance sheet forward by nearly 3 years”.
READ: Petra Diamonds launches deeply discounted US$178mln rights issue
RBC’s analysts said these developments allowed Petra to move forward operations at its Cullinan cave mine in South Africa, with the improved balance sheet also increasing “long-term diamond price optionality attributed by investors now that financial risk has been reduced”.
However, the bank also said that risks remained for the firm, particularly concerning pressure on diamond prices in the global markets as a result of synthetics alternatives and a growing supply.
RBC said: “This dynamic will be important to track over the coming quarters, especially as Cullinan prices have lagged in recent tenders.”
Despite this, analysts saw exposure to the diamond market as compelling over the next 12-24 months due to strong US exposure, a moderation in supply growth as other diamond miners De Beers and Alrosa pulled back on volumes in 2019, and relative price protection “should a stagflationary wider economic environment develop”.
Following the rights issue, the bank cut its target price for Petra to 65p from 80p but implied a 20% upside to the new target.
In mid-morning trading Wednesday, Petra shares were down 0.6% at 53.1p.