Is This Battered Stock Now A Brilliant Buy? Or Is It Still An Investment Trap?

As I’ve noted in recent articles, there are plenty of top UK shares that would make brilliant buys this February.

I won’t be investing in Petra Diamonds this month though. The precious stones digger is set to reveal half-year financials on Tuesday, February 16. I fear news that the recent uptick in diamonds demand has petered out upon rising Covid-19 infection rates and fresh lockdowns across the globe.

Diamond Prices Slip Again

Petra Diamonds operates a cluster of assets across South Africa and Tanzania. And it’s been smacked on a number of fronts in recent times. Weaker diamonds prices and sale deferrals forced revenues 8% lower in the six months to December. Production suspensions at its Williamson asset in Tanzania in the wake of the the coronavirus outbreak pushed first-half stones production 16% lower, meanwhile.

Recent data from Rapaport shows how diamond prices have begun trending lower again in recent weeks. According to the RapNet Diamond Index for one-carat polished diamonds fell 0.6% in January as inventory levels rose. And things are expected to get even worse, Rapaport commenting that “the polished market is expected to cool in the coming months once the China and US holiday seasons are over and large volumes of new goods become available.”

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Risks Ahead

Petra Diamonds has recently drawn up plans in debt-for-equity restructuring programme to safeguard its near-term financial future. It follows the company’s decision to put itself up for sale in June before backtracking on the idea four months later. The move to repair its debt-heavy balance sheet is currently scheduled to complete by the end of this month. But don’t think that the African digger will be out of the woods even when refinancing gets over the line.

It’s not just the prospect of more Covid-19-related sales and production disruptions that the business faces. The UK share’s Project 2022 output and cashflow-improvement scheme is already being blown off course because of higher waste ingress at its Finsch complex in South Africa. This is damaging ore grades and volumes at the country’s second-biggest-producing diamond mine.

The ongoing threat of nationalisation is another issue for Petra Diamonds investors to digest. The Tanzanian government blocked the export of 71,654 carats of diamonds from Williamson in late 2017. And in recent weeks the mining company has been forced to write to the country’s Minister of Minerals following reports that the parcel has been nationalised.

Losses To Roll On?

There are other long-term problems that loom over Petra Diamonds too. For example, the growing popularity in synthetic diamonds threatens to derail demand for natural stones in the years ahead. A recent report by Bain Capital suggests that sales of lab-produced diamonds grew by as much as 20% in 2019.

It’s no surprising that City analysts reckon Petra Diamonds will remain loss-making for some time yet. Current estimates suggest that it’ll remain in the red through to the end of the fiscal year concluding June 2022 at least. This is one UK share I think should be avoided at all costs.

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