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The Petra Diamonds (LSE:PDL) share price tumbled by 2.5 pence today to 111.70, a 2.2% drop, proving once again that diamond mining is not for the faint of heart investor. It is believed that the decline is a result of the company’s first quarter 2014 production and sales report. Apparently, there is a new corollary to the old axiom that “No news is good news.” It seems, especially in the mining sector, that “Almost any news is bad news, unless it is very good news.”
The mining sector is fraught with risk from an investment perspective. Come to think of it, it is pretty much risk-weighted for the miners themselves. For diamonds and other high-cost, mined commodities, however, not all the risks are in the mining operation itself. Changes in the market can be volatile and, as an integral part of the equation, turn a glowing report into a worrisome one.
Production
Petra’s first quarter production of 816,375 carats is an early indication that the company is well on its way to achieving it 2014 goal of 3 million carats, even providing a bit of wiggle room for any challenges that may crop up during the year. Production increased by 162,045 carats over the same period in FY 2013, a 25% increase on 654,694.
Revenue
Petra’s revenue in Q1 2013 was $51.1 million. 2014 has started with Q1 revenues of $65.1 million. That is a healthy 27% increase. CEO Johan Dippenaar was pleased with the results. He said, “These results demonstrate the continued delivery of growth in accordance with our stated expansion plans. Having a well-diversified portfolio is important in terms of our ability to manage production risk across the Group and this, combined with the quality and tenacity of our team, places us in a strong position to meet our targets.”
The Flaw in the Diamond
The flaw in the diamond, visible, but carefully underplayed in the report, is at the purchase price level. In order to gain the commendable 27% increase in revenue for the period, Petra had to tender 589,233 carats. During the previous year-on-year period, Petra’s revenue was gained on sales of 318,700 carats. In other words, Petra had to sell 85% more product by weight to gain a 27% increase in revenue. Without a significant increase in demand for diamonds – and a handful of other market factors, Petra is going to have to continue to produce at greater volumes just to maintain healthy revenues. I’m not saying that they can’t, nor am I saying that diamond prices will not rise. I am, however, saying that investors may not be keen on the concept of the ratio of weight sold to the revenues obtained.
It is, simply put, one of the inherent risks of mining investment. It is not a good thing, nor is it a bad thing. But if you are prone to being faint of heart and you are keen on investing in diamond mining in particular, you might want to keep a defibrillator close at hand.
