Petra Diamonds : Interim Results for the six months to 31 Dec 2020

February 16, 2021 at 02:02 am EST

16 February 2021

LSE: PDL

Petra Diamonds Limited

(“Petra”, “the Company” or “the Group”)

Interim results for the six months to 31 December 2020

Petra Diamonds Limited announces its interim results (unaudited) for the six months to 31 December 2020 (“the Period” or “H1 FY 2021” or “H1”).

Financial

Revenue down 8% to US$178.1 million from 1,712,797 carats sold (H1 FY 2020: US$193.9 million from 1,743,807 carats sold) with the US$40.4 million proceeds from the Letlapa Tala Collection of blue diamonds, offset by weaker prices following the COVID-19 outbreak and fewer tenders during the Period. Diamond pricing on a like-for-like basis increased by a further 8% at the Company's January 2021 tender, confirming that pricing has now returned to pre-COVID-19 levels.
Adjusted EBITDA³ up 20% to US$80.8 million (H1 FY 2020: US$67.2 million) yielding an adjusted EBITDA margin of 45%, up from 35% in H1 FY 2020 and 22% in FY 2020; driven by the sale of the Letlapa Tala Collection and reduced mining and processing costs.
Operational free cash flow¹³ of US$54.0 million before Restructuring fees (H1 FY 2020: US$13.7 million, and FY 2020 US$8.4 million negative before Restructuring fees), due to lower operational expenditure and reduced capital expenditure.
Adjusted net profit after tax: US$2.7 million (H1 FY 2020: US$10.2 million loss).
Unrestricted cash of US$92.4 million (30 June 2020: US$53.6 million), with the Company's banking facilities remaining fully drawn.
Consolidated net debt¹² of US$700.4 million (30 June 2020: US$693.2 million) including US$52.0 million (30 June 2020: US$26.9 million) of accrued interest on the Company’s existing US$650 million Notes.
ZAR:USD exchange rate volatility continued during the Period (averaging R16.27/USD1; H1 FY 2020: R14.69/USD1 and FY 2020: R15.68) and closing the Period at ZAR14.69/USD1 (30 June 2020: ZAR17.32/USD1). The continued weakness in ZAR/USD levels partially offset some of the price weakness realised through diamond sales.
Capital restructuring and associated debt for equity swap expected to be completed in early March.

Operations

Lost Time Injury Frequency Rate ("LTIFR") of 0.50 (H1 FY 2020: 0.22 and FY 2020: 0.29) improved from 0.65 during Q1 FY 2021 due to the behaviour-based intervention campaign in place to address this LTI trend and reinforce safe workplace practices. The total number of injuries during the Period, which includes LTIs, reduced to 19 (H1 FY 2020: 24).
Production down 16% to 1,740,862 carats (H1 FY 2020: 2,070,240 carats).
Absolute costs remain within expectations despite inflationary pressures.
Operational Capex down 68% to US$8.1 million (H1 FY 2020: US$25.6 million).

Outlook

Due to the ongoing uncertainty around the impact of COVID-19, production guidance for FY 2021 remains suspended. Furthermore, the Williamson mine remains on care and maintenance, as has been the case since April 2020, and this situation remains under continual review.
The Company is closely monitoring the impact of COVID-19 on its clients’ ability to attend tenders and will continue its flexible approach in planning its upcoming sales events.
The Cullinan mine produced a 299 carat Type IIa white gem-quality diamond in January 2021; this stone is expected to be sold during the Company’s tender in February / March 2021.
Project 2022 on track to deliver throughput targets for FY 2021 of ca. US$70 million. The very significant rainfall levels that continued from December through into January and February 2021 at Finsch and Koffiefontein are likely to negatively impact delivery of the throughput targets at those mines. COVID-19 and the ongoing care and maintenance at Williamson may similarly negatively impact on these targets. Petra continues to expect the Project 2022 cost saving initiatives to deliver an annualised contribution of ca. US$22 million from the end of Q3 FY 2021.
The Company announced in January that it was aware of media reports suggesting that the parcel of 71,654 carats of diamonds from the Williamson mine in Tanzania, which was blocked for export in September 2017, had been nationalised. The Company has since received communication from the Government of Tanzania that this will be dealt with as part of ongoing discussions with the Government, which are expected to resume by the end of February.
As set out in the interim update dated 9 February 2021 on the status of its work in relation to allegations of human rights abuses at the Williamson Mine in Tanzania, the Company's Tunajali Committee, comprised entirely of independent Non-Executive Directors, is undertaking a review of the output of the ongoing external investigation into these allegations and will make recommendations to address any findings. The Company intends to make a further announcement on these issues by the end of March 2021.

Richard Duffy, CEO of Petra, commented:

“I am pleased that our capital restructuring is now almost complete as we work with the South African Lender Group and the BEE Lenders towards finalising the documentation required for implementation. We expect this to be completed early in March of this year. As mentioned in our last Trading Update, this marks a significant milestone in putting the Company on a sustainable footing going forward.

The continued improvement in the diamond market, with prices now back at pre-COVID19 levels, is encouraging, and the recovery of the Letlapa Tala stones and other high value stones from Cullinan supported strong EBITDA growth over the comparative reporting period in FY2020. Challenges at Finsch relating to waste ingress, as previously reported, have been exacerbated by the impact of record rainfall in January and February that is hampering mining operations. Koffiefontein has also been impacted by significantly elevated rainfall. I am confident that the Finsch, Koffiefontein and Group Technical teams will manage these challenges to limit the impact on the operations.”

SUMMARY OF RESULTS (unaudited)



	6 months to 31 December 2020 (“H1 FY 2021”)	6 months to 31 December 2019 (“H1 FY 2020”)	Year ended 30 June 2020 (“FY 2020”)
	US$ million	US$ million	US$ million
Revenue	178.1	193.9	295.8
Adjusted mining and processing costs¹	(99.2)	(123.6)	(225.3)
Other direct income	5.1	0.3	2.0
Profit from mining activity²	84.0	70.6	72.5
Exploration expense	—	(0.2)	(0.5)
Corporate overhead	(3.2)	(3.2)	(7.2)
Adjusted EBITDA³	80.8	67.2	64.8
Depreciation	(35.9)	(47.0)	(78.3)
Amortisation of right-of-use asset	(2.3)	—	(5.2)
Share-based expense	(0.2)	(0.4)	(0.7)
Net finance expense	(35.9)	(34.1)	(71.6)
Tax (expense) / credit (excluding taxation credit / charge on impairment charge and unrealised foreign exchange gain / (loss)) ¹⁴	(3.8)	4.1	19.1
Adjusted net profit / (loss) after tax⁴	2.7	(10.2)	(71.9)
Impairment charge – operations⁵	(0.2)	(1.6)	(91.9)
Impairment of BEE loans receivable – expected credit loss release / (charge) ⁶	4.6	—	(10.9)
Profit on disposal including associated impairment, net of tax⁷	14.7	—	—
Net unrealised foreign exchange gain / (loss)	65.1	2.7	(81.5)
Taxation (charge) / credit on unrealised foreign exchange gain / (loss) ¹⁴	(19.3)	(0.9)	22.2
Taxation credit on impairment charge	—	—	11.0
Net profit / (loss) after tax	67.6	(10.0)	(223.0)
Earnings per share attributable to equity holders of the Company – US cents
Basic profit / (loss) per share – from continuing operations	6.31	(1.01)	(21.96)
Adjusted profit / (loss) per share – from continuing operations⁸	0.08	(1.09)	(6.95)

	Unit	As at 31 December 2020 (US$ million)	As at 31 December 2019 (US$ million)	As at 30 June 2020 (US$ million)
Cash at bank – (including restricted amounts)	US$m	106.3	53.6	67.6
Diamond debtors	US$m	3.7	12.8	4.8
Diamond inventories	US$m	105.0	85.2	84.1
Diamond inventories	Carats	1,385,402	992,425	1,357,584
US$650 million loan notes⁹	US$m	702.0	652.1	676.9
Bank loans and borrowings¹⁰	US$m	61.2	—	52.1
BEE partner bank facilities¹¹	US$m	47.2	49.3	40.0
Consolidated Net debt¹²	US$m	700.4	635.0	693.2
Bank facilities undrawn and available	US$m	—	107.2	—

The following exchange rates have been used for this announcement: average for H1 FY 2021 US$1:ZAR16.27 (H1 FY 2020: US$1: ZAR14.69, FY 2020: US$1:ZAR15.68); closing rate as at 31 December 2020 US$1:ZAR14.69 (31 December 2019 US$1:ZAR13.99, 30 June 2020: US$1:ZAR17.32).

Notes:

The Group uses several non-GAAP measures above and throughout this report to focus on actual trading activity by removing certain non-cash or non-recurring items. These measures include adjusted mining and processing costs, profit from mining activities, adjusted EBITDA, adjusted net profit after tax, adjusted earnings per share, adjusted US$ loan note, net debt and consolidated net debt for covenant measurement purposes. As these are non-GAAP measures, they should not be considered as replacements for IFRS measures. The Group’s definition of these non-GAAP measures may not be comparable to other similarly titled measures reported by other companies. The Board believes that such alternative measures are useful as they exclude one-off items such as the impairment charges and non-cash items to provide a clearer understanding of the underlying trading performance of the Group.

Adjusted mining and processing costs are mining and processing costs stated before depreciation and share-based expense.
Profit from mining activities is revenue less adjusted mining and processing costs plus other direct income.
Adjusted EBITDA is stated before depreciation, amortisation of right-of-use asset, share-based expense, net finance expense (excluding net unrealised foreign exchange gains and losses), tax expense (excluding taxation credit on impairment charge and unrealised foreign exchange gains/losses), profit on disposal including associated impairment, net of tax, impairment charges, expected credit release (loss) provision and net unrealised foreign exchange gains and losses.
Adjusted net profit/(loss) after tax is net profit/(loss) after tax stated before profit on disposal including associated impairment, net of tax, impairment charge, expected credit release (loss) provision, taxation credit on impairment charge and tax expense/credit on net unrealised foreign exchange gains and losses and net unrealised foreign exchange gains and losses.
Impairment charge of US$0.2 million (30 June 2020: US$91.9 million and 31 December 2019: US$1.6 million) was due to the Group’s impairment review of its operations and other receivables. Refer to note 14 for further details.
Reversal of impairment of BEE loans receivable of US$4.6 million (30 June 2020: US$10.9 million impairment charge and 31 December 2019: US$nil) is due to the Group’s expected credit loss assessment of its BEE loans receivable. Refer to note 11 for further details.
The profit on disposal including associated impairment, net of tax reflect the non-cash results of the Sekaka operation (net of tax). Refer to note 15 for further details.
Adjusted EPS from continuing operations is stated before impairment charge, reversal of impairment charge, expected credit release (loss) provision, profit on disposal including associated impairment, net of tax, excluding taxation credit on impairment charge, net unrealised foreign exchange gains and losses, and excluding taxation (charge) credit on net unrealised foreign exchange gains and losses.
The US$ loan note represents the gross capital of US$650 million (31 December 2019: US$650 million and 30 June 2020: US$650 million), plus US$52.0 million accrued interest (30 June 2020: US$26.9 million and 31 December 2019: US$2.1 million).
In March 2020, the Company drew down the full amount available (ZAR500 million / US$28.9 million) under its working capital facility and in May 2020, the Company reached agreement with the South African Lender Group to draw down ZAR400 million (US$23.1 million) under its ZAR1.0 billion revolving capital facility. The movement in the balance as at 31 December 2020 is attributable to the strengthening of the ZAR against the US Dollar.
BEE partner bank facilities represents the BEE guarantees of US$47.2 million (ZAR692.8 million) (30 June 2020: US$40.0 million (ZAR693.6 million) and 31 December 2019 (off balance sheet): US$49.3 million (ZAR689.5 million)).
Consolidated Net Debt for covenants is bank loans and borrowings plus loan notes, less cash, less diamond debtors plus BEE partner bank facilities.
Operational free cash flow is cash generated from operations less acquisition of property, plant and equipment.
Tax expense / credit is the tax (expense) / credit for the Period excluding taxation credit / charge on impairment charge and unrealised foreign exchange gain / (loss) generated during the Period, such exclusion more accurately reflects resultant Adjusted net profit /(loss).

In terms of the Amendment Agreement entered into on 29 May 2020, Petra and the South African Lender Group have agreed that covenant measurements will not be undertaken for the period ending 31 December 2020.

RESULTS WEBCAST

A live audio webcast will be held at 9:30am GMT on 16 February 2021 and will be available on Petra’s website at www.petradiamonds.com and on the following link:

https://www.investis-live.com/petra-diamonds/60102ac89a1388100079c323/pead

A conference call line will also be available to allow participants to listen to the webcast and ask questions by dialling one of the following numbers shortly before 9:30am GMT:

From the UK (toll free): 0800 640 6441
From South Africa: 080 017 2952
From the rest of the world: +44 (0)203 936 2999

Participant passcode: 017831

A recording of the webcast will be available from 1:00pm GMT on 16 February 2021 on the website and on the link above.

For further information, please contact:

Petra Diamonds, London Telephone: +44 20 7494 8203

Marianna Bowes investorrelations@petradiamonds.com

Des Kilalea

Julia Stone

About Petra Diamonds Limited

Petra Diamonds is a leading independent diamond mining group and a consistent supplier of gem quality rough diamonds to the international market. The Company has a diversified portfolio incorporating interests in three underground producing mines in South Africa (Finsch, Cullinan and Koffiefontein) and one open pit mine in Tanzania (Williamson).

Petra's strategy is to focus on value rather than volume production by optimising recoveries from its high-quality asset base in order to maximise their efficiency and profitability. The Group has a significant resource base of ca. 243 million carats, which supports the potential for long-life operations.

Petra conducts all operations according to the highest ethical standards and will only operate in countries which are members of the Kimberley Process. The Company aims to generate tangible value for each of its stakeholders, thereby contributing to the socio-economic development of its host countries and supporting long-term sustainable operations to the benefit of its employees, partners and communities.

Petra is quoted with a premium listing on the Main Market of the London Stock Exchange under the ticker 'PDL'. The Company’s US$650 million loan notes due in 2022, currently subject to restructuring, are listed on the Global Exchange market of the Irish Stock Exchange. For more information, visit www.petradiamonds.com.

CEO’S REVIEW

Despite the considerable pressures of COVID-19, our operations in South Africa, and Cullinan in particular, continued to perform well in H1 FY 2021, despite emerging operational challenges at Finsch. Furthermore, the recovery of the five blue diamonds of significant colour, clarity and size, The Letlapa Tala Collection, in September 2020 and the 299 carat white diamond in January 2021 serve as a reminder that the new block cave at Cullinan still produces rare and exceptional stones.

Measures to mitigate the impact of the waste ingress at Finsch that negatively impacted on its carat production in H1 FY 2021 have been developed and are currently being implemented to address this. Very significant rainfall in December last year through to February this year at Koffiefontein and Finsch in particular, are providing challenges that we expect will negatively impact on those operations in Q3 FY2021.

Williamson remains under care and maintenance and the Company is considering a number of options, both for the business, including resuming mining subject to clarity on the status of the blocked diamond parcel, the progress on the negotiations with the Government, and obtaining local bank financing, as well as for its own stake. Petra is not in a position to provide any financial assistance to the Williamson mine to address its liquidity shortfall unless Board and lender support is obtained.

Looking at our safety performance in H1 FY 2021, our Group LTIFR was 0.50 compared to 0.22 in H1 FY 2020, although improving from 0.65 for Q1 FY 2021. The majority of the accidents recorded continued to be behavioural in nature. Considerable focus is being placed on reinforcing safe behaviour and continuous improvement in striving for a zero harm working environment. The total number of injuries during the Period, which includes LTIs, reduced to 19 (H1 FY 2020: 24).

Our financial results for H1 FY 2021 were again impacted by the weaker diamond market, partially offset by a weaker South African Rand against the US Dollar. However, we have recently seen improved demand for rough diamonds, further to continued robust demand from the midstream thanks to positive consumer sales during the holiday retail season. The recovery in prices at our January tender to pre COVID-19 levels is very encouraging, and there are expectations that this improved demand will continue throughout Q3 FY 2021. However, the continued impact of COVID-19 in many countries poses a significant risk to the logistics and timing of sales in H2 FY 2021, and we will continue to monitor the market closely. Supply discipline by the major producers will remain a key factor in terms of maintaining supply / demand equilibrium.

The impact of lower pricing during the Period was compounded by the reduction in Group carat production resulting from the waste ingress at Finsch and the Williamson mine remaining on care and maintenance throughout H1 FY 2021.

The implementation of Project 2022 and our emphasis on cost control, as well as the proceeds from the sale of the Letlapa Tala Collection saw us deliver adjusted EBITDA of US$80.8 million, up 20% against H1 FY 2020, and positive operational free cashflow before Restructuring fees of US$54.0 million (H1 FY 2020: US$13.7 million operational free cash), reflecting our reduced mining and processing costs and reduced capital expenditure during the Period. Consolidated net debt increased to US$700.4 million (H1 FY 2019: US$635.0 million), with total cash of US$106.3 million (H1 FY 2020: US$53.6 million) which includes restricted cash of US$13.9 million (H1 FY 2020: US$13.5 million), as the Company's banking facilities remain fully drawn.

Project 2022 remains a key focus to further stabilise our operations and ensure that continuous improvement is embedded in our operating model and culture. The key drivers of Project 2022 are to identify bottlenecks and increase throughput capacity and capacity utilisation at all of Petra’s mines, while improving cost and process efficiencies. Project 2022 has been very successful in increasing throughput and throughput ideas are targeting an estimated annualised contribution of ca. US$70 million by the end of FY 2021. This may be negatively impacted by various factors including the very significant rainfall at Finsch and Koffiefontein in December through to February 2021, COVID-19 and Williamson remaining in care and maintenance.

The process of improving cost efficiencies is tracking very well and it is expected that Project 2022’s cost saving initiatives will deliver an annualised contribution of ca. US$22 million from the end of Q3 FY 2021. The key cost savings initiatives driving this saving are reduced water cost at Finsch, ventilation efficiency improvement at Cullinan and savings on electricity. The design phase of the Organisational Design Review, which forms part of Project 2022, has been completed and will provide for more focused delivery of support by the various Group functions to the operations and alignment of operational structures across the different sites. Implementation of this Organisational Design Review is on track to be completed by the end of Q3 FY 2021 and will result in updated role descriptions providing for clearer line of site and improved accountability.

The allegations of human rights abuses relating to the security operations of the Williamson mine in Tanzania are deeply concerning to the executive management team and the Board. An interim update was provided in our announcement on 9 February 2021, which outlines prevailing circumstances on the ground, reviews recent incidents, details actions already taken and sets out next steps. Information on these allegations and the actions being taken to address these allegations are set out on page 48 of our 2020 Annual Report and copies of the Company’s announcements on this topic, as well as our response letters to NGO RAID can be found on our website here: https://www.petradiamonds.com/our-operations/our-mines/williamson/allegations-of-human-rights-abuses-at-the-williamson-mine/.

The support of our noteholders, lenders and shareholders have allowed us to progress the envisaged Restructuring of the Group’s balance sheet, which is expected to be completed in early March. This is a significant milestone and has not only put Petra on a sustainable footing going forward, but it will also allow us to focus on optimising the value of our diversified asset base.

SAFETY

Group LTIFR of 0.50 (H1 FY 2020: 0.22 and FY 2020: 0.29), improving from 0.65 for Q1 FY 2021. The majority of the accidents in H1 FY 2021 continued to be behavioural in nature. Considerable focus is being placed on reinforcing safe behaviour and continuous improvement in striving for a zero harm working environment. The total number of injuries during the Period, which includes LTIs, reduced to 19 (H1 FY 2020: 24).

The COVID-19 pandemic poses a significant risk to the health and safety of the Group’s workforce. Whilst the majority of those who contract the virus may be asymptomatic or may only experience mild symptoms, a number of people (especially those with comorbidities) may become seriously ill or even succumb to the virus. Whilst Petra has implemented systems and strategies aiming to prevent and/or contain the spread of the virus at its operations, the widespread prevalence and highly infectious nature of the virus has meant that 319 employees to date have been confirmed COVID-19 positive at the South African operations as at 12 February 2021, and of these 309 have fully recovered. Although the majority of those affected are only experiencing mild symptoms, the Company has tragically lost four colleagues as a result of COVID-19.

More information about the Company’s response to the pandemic can be accessed here: https://www.petradiamonds.com/sustainability/health-and-safety/our-response-to-covid-19/.

DIAMOND MARKET

The diamond market has continued to show improved demand for rough diamonds, as evidenced by the recent strong sales from the majors De Beers and ALROSA. Midstream demand has remained robust as inventories of rough and polished diamonds remained low following strong sales of diamond jewellery over the holiday retail season. There are expectations that this improved demand will continue throughout Q1 CY 2021 as sales of rough diamonds have been sustained by demand ahead of Chinese New Year and Valentine’s Day. However, the current resurgence of COVID-19 in many countries poses a significant risk to the logistics and timing of sales in H2 FY 2021.

In the retail market, leading jewellers experienced strong sales in China over the holiday period, as the economic recovery on the mainland led to a resurgence of consumer demand for diamonds and other luxury goods. Jewellery sales in the US were also strong, led by online retailers.

Supply discipline by the major diamond producers in 2020 played an important role in moving towards more balance between supply and demand in the midstream and remains a key factor in terms of the health of the market in 2021.

Due to the impact of COVID-19 and the closure of the Argyle mine in Australia in 2020 (which accounted for ca. 13 Mcts in 2019), rough diamond production is expected to have contracted significantly in 2020 and may continue to decline.

Diamond Pricing

Like-for-like diamond prices at our most recent tender held during January 2021 have recovered to pricing levels before the COVID-19 outbreak, barring the finer (smaller) goods, which only account for a small portion of overall revenues.

The 299ct Type IIa diamond from the Cullinan mine, recovered during January 2021, is expected to be sold at the Company’s upcoming tender in February / March 2021.

Prices achieved during H1 FY 2021 are set out in the table below:

Mine	Actual H1 FY 2021 (US$/ct)	Actual H1 FY 2020 (US$/ct)	Actual FY 2020 (US$/ct)
Cullinan	120	112	98
Finsch	71	79	75
Koffiefontein	590	431	387
Williamson	150	184	177

Pricing achieved in H1 was impacted by the carry-over of certain, mostly lower-value parcels from FY 2020, which were subsequently sold during July 2020. The realised prices reflect the weaker market conditions offset by the sale of the Letlapa Tala Collection during the Period, positively impacting Cullinan’s unit price, while Koffiefontein’s price also benefited from a higher proportion of coarse material (larger diamonds) in the product mix.

Despite the Williamson mine being on care and maintenance, it was possible to include ca. 30,000 carats for sale in Q1 due to these diamonds being held in inventory at 30 June 2020.

FINANCIAL RESULTS

Revenue

H1 revenue was down 8% to US$178.1 million from 1,712,797 carats sold (H1 FY 2020: US$193.9 million from 1,743,807 carats sold), with the US$40.4 million proceeds from the Letlapa Tala Collection of blue diamonds, offset by weaker prices following the COVID-19 outbreak and the deferral of sales to January 2021 of some 382 kcts yielding around US$30.5 million through a tender which closed on 15 January 2021.

Mining and processing costs

The mining and processing costs for H1 FY 2021 are comprised of on-mine cash costs as well as other operational expenses. A breakdown of the total mining and processing costs for the Period is set out below.

	On-mine cash costs¹ US$m	Diamond royalties US$m	Diamond inventory and stockpile movement US$m	Group technical, support and marketing costs² US$m	Adjusted mining and processing costs US$m	Depreciation³ US$m	Total mining and processing costs (IFRS) US$m
H1 FY 2021	94.4	2.4	(5.9)	8.3	99.2	37.7	136.9
H1 FY 2020	135.1	4.8	(25.6)	9.3	123.6	46.6	170.2
FY 2020	235.0	5.9	(34.9)	19.3	225.3	82.6	307.9

Notes:

Includes all direct cash operating expenditure at operational level, i.e. labour, contractors, consumables, utilities and on-mine overheads.
Certain technical, support and marketing activities are conducted on a centralised basis.
Excludes exploration and corporate / administration.

Absolute on-mine cash costs in H1 FY 2021 reduced by ca. 30% compared to H1 FY 2020 and in line with expectations, due to:

offset by:

the effect of translating ZAR denominated costs at the South African operations at a weaker ZAR/USD average exchange rate (ca. 7.6% decrease);
Williamson mine being on care and maintenance throughout the period (ca. 17.3% decrease);
Other cost movements, including the impact of Project 2022 cost improvement initiatives delivered during the Period (ca. 7.8% decrease).; and
Partially offset by inflationary increases, including the impact of electricity costs (2.6% increase) while labour increases were deferred to January 2021.

Royalties decreased to US$2.4 million (H1 FY 2020: US$4.8 million) due to a reduced royalty percentage following decreased profit net of capex at Finsch, as defined in the royalty legislation of South Africa.

Profit from mining activities

Profit from mining activities increased 19% to US$84.0 million (H1 FY 2020: US$70.6 million), mainly due to the one-off sale of the Letlapa Tala Collection of blue diamonds, lower mining and processing costs offset by lower diamond pricing.

Corporate overhead – General and Administration

Corporate overhead (before depreciation and share based payments) remained flat at US$3.2 million for the Period (H1 FY 2020: US$3.2 million).

Adjusted EBITDA

Adjusted EBITDA, being profit from mining activities less exploration and corporate overhead, increased 20% to US$80.8 million (H1 FY 2020: US$67.2 million), representing an adjusted EBITDA margin of 45% (H1 FY 2020: 35%), driven by the one-off sale of the Letlapa Tala Collection of blue diamonds and lower mining and processing costs.

Depreciation

Depreciation for the Period decreased to US$35.9 million (H1 FY 2020: US$47.0 million), mainly due a lower asset base as a result of prior period impairments of operational assets.

Impairment charge

Impairment reviews carried out at Cullinan, Finsch, Koffiefontein and Williamson operational assets did not result in an impairment charge or reversal during the Period (H1 FY 2020: US$nil). An impairment review of the Group’s other receivables during the Period resulted in a net impairment charge US$0.2 million comprising of the Williamson VAT receivable (H1 FY 2019: US$1.6 million, comprising of US$1.7 million in respect of the Williamson VAT receivable and recoupment of US$0.1 million previously impaired in respect of the KEM JV receivable).

Net financial income

Net financial income of US$29.2 million (H1 FY 2020: US$31.4 million expense) comprises:

net unrealised foreign exchange gains of US$65.1 million (H1 FY 2020: US$2.7 million gains) representing (i) the unrealised foreign exchange gains on the foreign currency retranslation of cross border loans considered to be repayable in the foreseeable future, and (ii) unrealised losses on forward exchange contracts (refer to note 6 for further detail); and

interest received on bank deposits of US$0.4 million (H1 FY 2019: US$0.1 million); offset by:

interest on the Group’s debt and working capital facilities of US$27.6 million (H1 FY 2020: US$25.4 million);
net interest payable on the BEE partner loans and amortisation of lease liabilities in accordance with IFRS 16 of US$2.6 million (H1 FY 2020: US$3.2 million);
a charge for the unwinding of the present value adjustment for Group rehabilitation costs of US$2.5 million (H1 FY 2020: US$1.7 million); and
net realised foreign exchange loss on settlement of forward exchange contracts of US$3.6 million (H1 FY 2020: US$3.4 million).

Cash financial expenses settled during the Period, as reflected in the Statement of Cashflows, reduced to US$2.5 million (H1 FY 2020: US$24.5 million) following the non-settlement of coupon payments related to the Notes since May 2020.

Tax credit / charge

The tax charge of US$23.1 million (H1 FY 2020: US$3.2 million credit) comprising deferred tax charges of US$19.3 million (H1 FY 2020: US$0.9 million credit) relating to unrealised foreign exchange gains during the Period and US$3.8 million (H1 FY 2020: US$34.1 million credit) in respect of other capital allowances, with an income tax charge of US$nil for the Period (H1 FY 2020: US$nil million).

Profit on disposal including associated impairment, net of tax

The profit on disposal including associated impairment, net of tax of US$14.7 million relates to the Group’s disposal during the Period of its interests in Sekaka, its exploration operations in Botswana, and is made up of a US$0.3 million disposal consideration, net profit of US$1.3 million for the Period 1 July 2020 to the 30 November 2020 disposal date and the recycling of the foreign currency translation reserve of US$13.3 million, offset by a net asset disposal amount of US$0.2 million. Refer to Note 15 for the detailed breakdown.

Group profit / loss

The Group’s net profit after tax is US$67.6 million (H1 FY 2020: US$10.0 million loss).

Earnings per share

Basic profit per share from continuing operations of 6.31 US$ cents was recorded (H1 FY 2020: 1.01 US$ cents loss).

Adjusted profit per share from continuing operations (adjusted for impairment charges and net unrealised foreign exchange gains and losses) of 0.08 US$ cents was recorded (H1 FY 2020: 1.09 US$ cents loss (adjusted for impairment charges, taxation credit on impairment charge, net unrealised foreign exchange gains and losses)).

Operational free cash flow

During the Period and considering the weaker diamond market, generation of operational free cash flow of US$54.0 million before Restructuring fees (H1 FY 2020: US$13.7 million) reflects the impact from the sale of the Letlapa Tala Collection and the initial results from Project 2022 to optimise production and drive cost efficiencies. This positive cash flow was offset by:

US$2.1 million (H1 FY 2020: US$24.4 million) cash finance expenses net of finance income and US$3.6 million (H1 FY 2020: US$3.4 million) net realised foreign exchange losses;
Restructuring fees settled during the Period of US$15.5 million (H1 FY 2020:US$nil; FY 2020 US$ 3.9 million); and
US$5.0 million (H1 FY 2020: US$11.3 million) advances to BEE partners, largely related to servicing of BEE bank debt in line with the Group’s stated intention of reducing consolidated net debt for covenant measurement purposes (which includes BEE partner facilities), with the advances recoverable against future BEE partner distributions.

Cash and Diamond Debtors

As at 31 December 2020, Petra had cash at bank of US$106.3 million (H1 FY 2019: US$53.6 million). Of these cash balances, US$92.4 million was held as unrestricted cash (H1 FY 2020: US$40.1 million), US$12.9 million was held by Petra’s reinsurers as security deposits on the Group’s cell captive insurance structure (with regards to the Group’s environmental guarantees) (H1 FY 2020: US$12.6 million) and US$1.0 million was held by Petra’s bankers as security for other environmental rehabilitation bonds lodged with the Department of Mineral Resources and Energy in South Africa (H1 FY 2020: US$0.9 million).

Diamond debtors at 31 December 2020 were US$3.7 million (H1 FY 2020: US$12.8 million).

Loans and Borrowings

The Group had loans and borrowings (measured under IFRS) at Period end of US$810.4 million (H1 FY 2020: US$652.1 million), comprised of US$702.0 million Notes including US$52.0 million accrued interest (H1 FY 2020: US$652.1 million), bank loans and borrowings of US$61.2 million (H1 FY 2020: US$nil) and BEE partner bank facilities of US$47.2 million (H1 FY 2020: US$49.3 (off-balance sheet guarantees)); the BEE guarantees were brought onto the Groups balance sheet as at 30 June 2020, refer to ‘BEE loans receivable and payable’ below for further detail. The Group remains fully drawn down on its banking facilities with the South African Lender Group since the decision to shore up liquidity following the outbreak of the COVID-19 pandemic during H2 FY 2020. Bank debt facilities undrawn and available to the Group at 30 June 2020 were US$nil (H1 FY 2020: US$107.2 million).

Consolidated net debt at 31 December 2020 was US$700.4 million (H1 FY 2020: US$635.0 million).

Covenant Measurements attached to banking facilities

The Company’s EBITDA-related covenants associated with its banking facilities during the Period were as outlined below:

	12 months to 31 Dec 2020	12 months to 30 Jun 2021
Consolidated net debt to consolidated EBITDA:	? 3.25x	? 3.0x
Consolidated EBITDA to consolidated net finance charges:	? 3.0x	? 3.25x
Consolidated net senior debt to book equity:	?0.4x	?0.4x

In addition to its existing covenant ratios, the Group is required to maintain liquidity of the aggregate of the undrawn amounts available under the RCF and WCF and consolidated cash and cash equivalents (excluding diamond debtors) which shall not fall below ZAR200 million (US$11.6 million).

Details of the envisaged new banking facilities and the associated covenants following the completion of the Group’s capital and debt restructuring are set out in note 8.

Going concern considerations

The Group closely monitors and manages its liquidity risk, and cash forecasts are regularly produced and run for different scenarios. The forecasts assume that the envisaged Restructuring will be implemented in line with the provisions of the in-principle term sheet under the Lock-up Agreement. The Group also considered risks associated with COVID-19, which were considered to focus primarily on the potential for further production disruption, deferral of tenders due to travel restrictions and adverse impacts on diamond pricing.

In light of both normal trading risks and elevated risks associated with the potential impact of the COVID-19 pandemic, the following have been key considerations in assessing the Group’s ability to operate as a going concern at the date of this report:

an unforeseen disruption to operations at its South African mines due to either COVID-19 restrictions or otherwise;
an unforeseen deferral of a rough diamond tender due to COVID-19 restrictions, coupled with a significant price decline at an assumed subsequent private sale (in line with actual experiences during FY 2020);
a sustained 5% decrease in forecast rough diamond prices throughout the forecast period; and
an increase in forecast operating cost.

Under the base case, which itself is dependent upon the successful completion of the Restructuring and continued availability of the South African banking facilities in line with the Lock-up Agreement, the forecasts indicate that the Company will be able operate within covenants set out in the in-principle agreement and maintain sufficient liquidity.

However, the proposed first lien covenants (as more fully set out in note 8) were set with limited headroom to the base case. As such, although adequate liquidity is maintained throughout the review period under each of the individual scenarios subject to continued availability of the South African Lender Group facilities, results of the stress testing indicate that in the event of deferral to the tenders outlined above or a combination of scenarios such as sustained reduced pricing and production disruption, possible covenant breaches associated with the South African banking facilities may occur at December 2021 and June 2022. Whilst reasonably available mitigating actions, which include cost savings and capital deferrals, are foreseen to address the risk of such a covenant breach, the delivery of such mitigating actions remains uncertain. In the event of a breach of covenant, the Company would be dependent on the South African Lender Group continuing to make the facilities available and under certain of the scenarios there would be insufficient liquidity to settle the outstanding South African Lender Group facilities if required. Whilst the South African Lender Group has indicated its support in recent discussions and ongoing dialogue with the South African Lender Group will be important during this period, there can be no guarantee that the facilities would continue to remain available in the event of a covenant breach.

However, the Group is reliant on the successful conclusion of the current Restructuring to continue as a going concern, which is dependent on the finalisation of the documentation required for implementation after the requisite approval by the Company’s shareholders was obtained at a Special General Meeting held on 13 January 2021. Despite a successful Restructuring, the Group’s forecasts remain sensitive to trading conditions and the impact of COVID-19 may further have a material impact on the Group’s ability to operate within its covenants, such that continued South African Lender Group support may be required and, if unavailable, additional funding may be required.

As a result, the Board concluded that a material uncertainty exists in respect of the Company continuing as a going concern. See ‘Basis of preparation including going concern’ in the Financial Statements for further information.

BEE loans receivable and payable

BEE loans receivable of US$175.1 million (H1 FY 2020: US$125.9 million) relate to advances provided to the Group’s BEE Partners to enable them to discharge interest and capital commitments under the BEE Lender facilities, advances to the BEE Partners to enable trickle payment distributions to both Kago Diamonds (Pty) Ltd’s (“Kago Diamonds”) shareholders and to the beneficiaries of the Itumeleng Petra Diamonds Employee Trust (“IPDET”) (Petra Directors and Senior Managers do not qualify as beneficiaries under the IPDET Trust Deed), financing of their interests in the Koffiefontein mine, and an amount related to the BEE guarantees provided to the BEE Lender Group – refer below for more detail.

As detailed in the section “Impairment of BEE loans receivable – expected credit loss provision”, an IFRS 9 estimated credit loss assessment was conducted at the end of the Period which resulted in a partial reversal of the expected credit loss provision of US$4.6 million (H1 FY 2020: US$nil), following a US$10.9 million expected credit loss provision being raised against the BEE loans receivable at 30 June 2020. Refer to note 11 for further detail.

During the Period, Petra advanced US$2.9 million (H1 FY 2020: US$9.3 million) to facilitate the servicing of capital and interest payments on behalf of the BEE Partners and US$2.1 million (H1 FY 2020: US$2.0 million) for distributions to the beneficiaries of the IPDET and shareholders of Kago Diamonds.

In May 2020, as part of the Amendment Agreement, Petra reached agreement with the South African BEE Lender Group, being Absa Bank, Rand Merchant Bank and Ninety-One (previously Investec), to reschedule the capital repayments due in May 2020 and November 2020 under the Company's BEE Partners’ outstanding bank financing. In terms of the Amendment Agreement, the capital balance outstanding of US$ 47.2 million at 31 December 2020 (30 June 2020: US$40.0 million) will become payable on 31 July 2021, subject to the outcome of the Restructuring described above. However, should the Restructuring complete as planned, the Company’s new banking facilities will enable it to refinance the BEE facilities with proceeds from the new term loan – for more detail, refer to ‘The Restructuring’ below.

The aforementioned Amendment Agreement and the Forbearance Agreement entered into during May 2020 did not confer the unconditional right to the Company to defer the coupon repayment and as such triggered an event of default under the BEE Lender facility. The event of default sets out that the Company under the BEE guarantee is liable for the outstanding obligation under the BEE Lender facility. As at 31 December 2020, and consistent with the approach at 30 June 2020, the Company accrued for the outstanding obligation of US$40.0 million under current loans and borrowings (refer to note 8). The Company recognises a compensating receivable from the BEE Partners, repayable from the BEE Partners’ share of future operational cashflows.

The BEE loans payable of US$133.4 million (H1 FY 2020: US$128.1 million) relate to the initial acquisition loan funding advanced by the Group’s BEE Partners to the operations to acquire their investments in Cullinan and Finsch. The repayment of these loans by the mines to the BEE Partners will be from future free cashflows generated by the mining operations.

Refer to note 11 for further detail on BEE loans receivable and payable.

The Restructuring

In March 2020, Petra launched a strategic review, in conjunction with a set of independent advisers, in order to evaluate an optimal long-term capital structure for the Group. The key focus of this review was to bring down the Company’s leverage to a manageable level and it therefore involved extensive consultations with the AHG of the Company’s US$650 million 7.25% senior secured second lien notes due in May 2022, as well as with the South African Lender Group. The review also aimed to assess all strategic options available to maximise value to stakeholders and included a formal sale process, whereby interested parties could submit bids either for Petra or for any parts of the business or assets of the Group.

In October 2020, the Company announced that it had reached agreement in principle with the AHG and the South African Lender Group on a common set of commercial terms with respect to the Restructuring. Petra signed a Lock-Up Agreement on 17 November 2020 with the parties to the Restructuring, which binds each party into supporting the Restructuring on the proposed terms. The Company’s shareholders subsequently approved the scheme at a Special General Meeting on 13 January 2021.

The key features of the Restructuring are as follows:

1. Partial reinstatement of the Notes debt and the contribution by holders of the existing Notes of US$30.0 million in New Money, each to take the form of new senior secured second lien notes ("New Notes"). The New Notes will amount to approximately US$337.0 million (including the New Money and fees paid as part of the transaction in New Notes) and will have a maturity date of five years from completion. The New Notes will be subject to an interest rate of 10.50% Payment in Kind for the first 24 months, reverting to a cash interest rate of 9.75% thereafter. Those Noteholders that contribute to the New Money will be entitled to a greater portion of the New Notes.

2. Conversion of the remainder of the Notes debt into equity, which will result in the Noteholder group holding 91% of the enlarged share capital of Petra Diamonds Limited, with the existing shareholders holding the remaining 9%. Those Noteholders that contribute to the New Money will be entitled to a greater portion of the equity.

3. The restructuring of the first lien facilities provided by the South African Lender Group, with a new term loan of ZAR1.2 billion in order to refinance the existing drawn ZAR500 million WCF and the BEE Facilities (approximately ZAR683 million), and a new RCF of ZAR560 million, constituted by the rollover of the existing RCF but upsized by ZAR160 million. Both facilities will have a maturity date of three years from completion and a first lien debt service cover ratio of 1.3x tested semi-annually on a rolling 12-month basis which, if breached, will give rise to an event of default under the new bank facilities. Both facilities will have an interest rate of JIBAR + 5.25% per annum.

4. New governance arrangements, whereby up to four of the largest Noteholders as determined by the Restructuring Lock-Up Agreement and who individually hold at least 5% of the shares in Petra at the closing of the Restructuring shall have a ‘Nomination Right’ to nominate a person for appointment to the Board as a non-independent Non-Executive Director, as well as the right to appoint an observer to the Board (who will not have voting rights at Board meetings). Any Board appointments must comply with the UK Listing Rules and the Corporate Governance Code

5. Certain cashflow controls will be introduced.

The full terms of the Restructuring are listed in the prospectus released on 22 December 2020 and further details are provided in note 8.

The Restructuring is expected to become effective in early March 2021. Implementation of the Restructuring will occur once the Company has agreed certain documentation with its key financial stakeholders, including:

certain documents with the South African Lender Group to give effect to the restructuring of the first lien facilities;
certain documents with the Noteholders to give effect to the partial reinstatement of the Notes and the New Notes; and
certain documents with the BEE Partners in relation to the reorganisation of loans, payables, receivables and other entitlements with the Group to give effect to the Restructuring.

Other Liabilities

Other than trade and other payables of US$47.5 million (comprising US$18.2 million trade creditors, US$12.6 million employee related accruals and US$16.7 million other payables) (H1 FY 2020: US$46.3 million), the remaining liabilities on the balance sheet mainly comprise provisions for rehabilitation liabilities, post retirement employee related provisions, lease liabilities and deferred tax.

Capex

Total Group Capex for the Period reduced to US$8.6 million (H1 FY 2020: US$26.5 million), comprising:

US$6.3 million expansion Capex (H1 FY 2020: US$15.9 million); and
US$2.3 million sustaining Capex (H1 FY 2020: US$10.6 million).

Capex	Unit	H1 FY 2021	H1 FY 2020
Cullinan	US$m	5.9	12.0
Finsch	US$m	1.3	5.6
Koffiefontein	US$m	0.6	2.3
Williamson	US$m	0.3	5.7
Subtotal – Capex incurred by operations	US$m	8.1	25.6
Corporate / exploration	US$m	0.5	0.9
Total Group Capex	US$m	8.6	26.5

Dividend

Distribution covenants were not met for the measurement period to 31 December 2020 and as a result no dividend is declared for H1 FY 2021.

OPERATIONAL REVIEW

H1 FY 2021 Sales, Production and Capex – Summary

	Unit	H1 FY 2021	H1 FY 2020	Variance	FY 2020
Sales
Diamonds sold	Carats	1,712,797	1,743,807	-2%	2,895,497
Gross revenue	US$m	178.1	193.9	-8%	295.8

Production
ROM tonnes	Mt	4.2	7.0	-40%	11.5
Tailings & other¹ tonnes	Mt	0.2	0.5	-60%	0.8
Total tonnes treated	Mt	4.4	7.5	-41%	12.3

ROM diamonds	Carats	1,644,846	1,995,512	-18%	3,442,593
Tailings & other¹ diamonds	Carats	96,016	74,728	+28%	146,583
Total diamonds	Carats	1,740,862	2,070,240	-16%	3,589,176

Capex
Expansion	US$m	6.3	15.9	-60%	21.8
Sustaining	US$m	1.8	9.7	-81%	14.8
Total	US$m	8.1	25.6	-68%	36.6

Note:

‘Other’ includes alluvial diamond mining at Williamson in FY 2020.

Overall carat production decreased 16% to 1,740,862 carats (H1 FY 2020: 2,070,240 carats), with Cullinan’s outperformance offsetting lower production at Finsch, lower production from Koffiefontein and no contribution from Williamson (H1 FY 2020: 222,351 carats), which remains on care and maintenance.

Cullinan – South Africa

	Unit	H1 FY 2021	H1 FY 2020	Variance	FY 2020
Sales
Diamonds sold	Carats	894,758	730,847	+22%	1,183,745
Average price per carat	US$	120	112	+7%	98
Revenue	US$m	107.3	81.7	+31%	116.5

ROM Production
Tonnes treated	Tonnes	2,339,473	2,295,197	+2%	3,972,682
Diamonds produced	Carats	913,626	855,371	+7%	1,482,482
Grade¹	Cpht	39.1	37.3	+5%	37.3

Tailings Production
Tonnes treated	Tonnes	221,385	117,112	+89%	257,549
Diamonds produced	Carats	96,016	34,416	+179%	95,918
Grade¹	Cpht	43.4	29.4	+48%	37.2

Total Production
Tonnes treated	Tonnes	2,560,858	2,412,309	+6%	4,230,231
Diamonds produced	Carats	1,009,642	889,787	+13%	1,578,400

Costs
On-mine cash cost per total tonne treated	ZAR	239	262	-9%	270

Capex
Expansion Capex	US$m	5.2	10.0	-48%	13.0
Sustaining Capex	US$m	0.7	2.0	-65%	3.4
Total Capex	US$m	5.9	12.0	-51%	16.4

Note:

The Company is not able to precisely measure the ROM / tailings grade split because ore from both sources is processed through the same plant; the Company therefore back-calculates the grade with reference to resource grades.

Production:

Cullinan’s overall carat production increased by 13% to 1,009,642 carats (H1 FY 2020: 889,787 carats) due to ROM production increasing by 7% to 913,626 carats (H1 FY 2020: 855,371 carats) in line with Project 2022 throughput targets. Tailings production increased by 179% to 96,016 carats in line with the mine plan (H1 FY 2020: 34,416 carats). The higher ROM carat production was largely driven by an increased volume treated of 2,339,473 tonnes (H1 FY 2020: 2,295,197 tonnes) at a ROM grade of 39.1 cpht (H1 FY 2020: 37.3 cpht).

Sales:

Cullinan’s revenue increased 31% to US$107.3 million (H1 FY 2020: US$81.7 million), due to the higher sales volumes, as well as the sale of the Letlapa Tala Collection for US$40.4 million (H1 FY 2020: US$14.9 million exceptional diamond sales), offset by reduced pricing as a result of COVID-19.

Costs:

The on-mine unit cash cost per total tonne treated reduced 9% to ZAR239 (H1 FY 2019: ZAR262), mainly due to improved production efficiencies supported by Project 2022 initiatives.

Capex:

Cullinan’s Capex for FY 2021 is weighted to H1, with US$5.9 million spent (H1 FY 2020: US$12.0 million) mainly on the finalisation of the North Crusher 2 chamber, including the tip construction, development of the early access to the CC1E decline and underground workshop, and equipment for the XRL stream in the processing plant. The Company expects Cullinan’s full year Capex to remain in line with guidance.

Finsch – South Africa

	Unit	H1 FY 2021	H1 FY 2020	Variance	FY 2020
Sales
Diamonds sold	Carats	768,647	783,962	-2%	1,348,181
Average price per carat	US$	71	79	-9%	75
Revenue	US$m	54.8	61.7	-11%	101.1

ROM Production
Tonnes treated	Tonnes	1,323,000	1,534,256	-14%	2,719,389
Diamonds produced	Carats	695,308	880,707	-21%	1,603,678
Grade¹	Cpht	52.6	57.4	-8%	59.0

Tailings Production
Tonnes treated	Tonnes	0	174,167	-100%	211,541
Diamonds produced	Carats	0	32,850	-100%	39,890
Grade¹	Cpht	0	18.9	-100%	18.9

Costs
On-mine cash cost per total tonne treated	ZAR	456	405	13%	477

Total Production
Tonnes treated	Tonnes	1,323,000	1,708,423	-23%	2,930,930
Diamonds produced	Carats	695,308	913,557	-24%	1,643,568

Capex
Expansion Capex	US$m	0.8	4.2	-81%	6.1
Sustaining Capex	US$m	0.5	1.4	-64%	2.3
Total Capex	US$m	1.3	5.6	-77%	8.4

Note:

The Company is not able to precisely measure the ROM / tailings grade split because ore from both sources is processed through the same plant; the Company therefore back-calculates the grade with reference to resource grades.

Production:

Finsch’s overall carat production decreased by 24% to 695,308 carats (H1 FY 2020: 913,557 carats) due to ROM carat production decreasing by 21% to 695,308 carats (H1 FY 2020: 880,707 carats) further to a 14% decrease in the volume treated of 1,323,000 tonnes (H1 FY 2020: 1,534,256 tonnes) and an 8% decrease in the ROM grade to 52.6 cpht (H1 FY 2020: 57.4 cpht). ROM volumes mined in H1 were impacted by the expiry of the temporary continuous operations arrangement during September 2020, subsequently reinstated during October 2020 and will remain in place until June 2021.

As announced on 22 December 2020, the Finsch mine has experienced higher than expected levels of waste ingress in a number of the upper levels of the Block 5 Sub Level Cave, which has served to negatively impact the recovered grade. The Company has been going through a detailed exercise to better understand this issue and has put a plan in place to mitigate the impact. In the short term, this will include a revision to the draw strategy to limit planned draw tonnage for the next four months, a build-up of inventory rings to allow for increased blasting from March 2021, and a change to the drill and blast designs to optimise ore extraction. In the longer term, the Company will also investigate ore mixing programmes to better assist with the prediction of waste ingress. A combination of the reduced ore tonnage extraction (further to the dilution caused by the waste material ingress) and a lower grade is expected to lead to Finsch’s production for FY 2021 being ca. 15% lower in carat volumes than the Company’s internal plan.

During H1 FY 2021, the areas surrounding the Finsch mine experienced above average rainfall. Due to the excessive amount of rainfall and an influx of water into the pit, pit wall failures were experienced on the northern side of the pit. These failures have not impacted production to date, but they may have a future impact on the stability of the decline from surface which also serves as the second escape route from the underground operations. Measures to mitigate the impact on the second escape route are being put in place and include the re-commissioning of a temporary hoisting facility from surface down to the 70 level.

Sales:

Sales decreased 11% to US$54.8 million (H1 FY 2020: US$61.7 million), mainly due to the average value per carat decreasing 9% to US$71 (H1 FY 2020: US$79) reflecting the impact of COVID-19 on rough diamond prices.

Costs:

The on-mine unit cash cost per total tonne treated increased by 13% to ZAR456 (H1 FY 2020: ZAR405) due to a 23% reduction in total tonnes treated, reflecting the high fixed-cost nature of the mine.

Capex:

Capex of US$1.3 million for the Period (H1 FY 2020: US$5.6 million) lower due to reduced development activity and CAPEX purchases and availability of contractor resources being disrupted as a result of the COVID-19 restrictions.

Koffiefontein – South Africa

	Unit	H1 FY 2021	H1 FY 2020	Variance	FY 2020
Sales
Diamonds sold	Carats	18,944	34,163	-45%	66,326
Average price per carat	US$	590	431	+37%	387
Revenue	US$m	11.2	14.7	-24%	25.7

ROM Production
Tonnes treated	Tonnes	493,661	561,296	-12%	891,705
Diamonds produced	Carats	35,912	44,545	-19%	69,077
Grade	Cpht	7.3	7.9	-8%	7.7

Total Production
Tonnes treated	Tonnes	493,661	561,296	-12%	891,705
Diamonds produced	Carats	35,912	44,545	-19%	69,077

Costs
On-mine cash cost per total tonne treated	ZAR	459	419	10%	510

Capex
Expansion Capex	US$m	0.3	1.7	-82%	2.7
Sustaining Capex	US$m	0.3	0.6	-50%	1.1
Total Capex	US$m	0.6	2.3	-74%	3.8

Production:

Koffiefontein’s production decreased 19% to 35,912 carats (H1 FY 2020: 44,545 carats), following operational disruptions due to COVID-19, including challenges related to the availability of spares for underground drilling machinery; the ROM stockpile was largely depleted during H1 FY 2021.

Sales:

Koffiefontein’s revenue decreased 24% to US$11.2 million (H1 FY 2020: US$14.7 million), due to lower volumes sold coupled with the weaker diamond market, partially offset by increased proportion of coarser, more valuable rough diamonds supporting an increased price per carat.

Costs:

The unit cash cost per total tonne treated was up 10% to ZAR459 (H1 FY 2020: ZAR419), mainly due to reduced throughput during the Period.

Capex:

Capex decreased 74% to US$0.6 million (H1 FY 2020: US$2.3 million) in line with the operation approaching steady state production.

Williamson – Tanzania

	Unit	H1 FY 2021	H1 FY 2020	Variance	FY 2020
Sales
Diamonds sold	Carats	30,339	194,835	-84%	297,245
Average price per carat	US$	150	184	-18%	177
Revenue	US$m	4.6	35.9	-87%	52.5

ROM Production
Tonnes treated	Tonnes	0	2,654,906	-100%	3,980,438
Diamonds produced	Carats	0	214,888	-100%	287,356
Grade	Cpht	0	8.1	-100%	7.2

Alluvial Production
Tonnes treated	Tonnes	0	198,698	-100%	302,567
Diamonds produced	Carats	0	7,463	-100%	10,774
Grade	Cpht	0	3.8	-100%	3.6

Total Production
Tonnes treated	Tonnes	0	2,853,604	-100%	4,283,005
Diamonds produced	Carats	0	222,351	-100%	298,130

Costs
On-mine cash cost per total tonne treated	US$	n.a.	10.2	n.a.	10.2

Capex
Expansion Capex	US$m	0.0	0.0	0%	0.0
Sustaining Capex	US$m	0.3	5.7	-95%	8.0
Total Capex	US$m	0.3	5.7	-95%	8.0

Production:

The Williamson mine in Tanzania remained on care and maintenance during H1 FY 2021.

Sales:

Williamson’s revenue decreased 87% to US$4.6 million (H1 FY 2020: US$35.9 million), with sales limited to some 30kcts carried over from FY 2020, with the mine remaining on care and maintenance throughout the Period.

Costs and Capex:

On-mine cash care and maintenance costs amounted to some US$5.7 million for the six month period, while some US$0.3 million was spent on stay in business capex.

The Company remains in discussions with the Government of Tanzania and local advisers in relation to various issues, including the overdue VAT receivables and the blocked parcel, which continues to be recognised as an asset despite the recent press coverage around the nationalisation of the parcel.

Project 2022 Update

Project 2022 throughput ideas continue to remain the largest contributor towards the operational cash flow benefits and Cullinan is on track to deliver on its throughput stretch target for FY 2021, having met the H1 recovered carats stretch target of 1 million carats. However, the higher than expected levels of waste ingress at Finsch is having a detrimental impact on throughput benefits due to both lower grade and volume. The extended state of care and maintenance at Williamson is also inhibiting throughput ideas, with operations being suspended. The expected impact of the reduced throughput at Finsch and Williamson indicates a reduction in the annualised contribution of the throughput initiatives from some US$101 million by the end of FY 2021, as previously disclosed, to around US$70 million, with further risk around very significant rainfall at Finsch and Koffiefontein into Q3 FY2021, the possible impact of COVID-19 and Williamson’s extended care and maintenance.

The targeted contribution from cost efficiencies remains at an annualised US$22 million from the end of Q3 FY 2021.

The Organisational Design (“OD”) project progressed to implementation, with the adoption of a top-down phased approach starting with Group functions through to the roles at operations. Alignment of the organisational structures to support the operating model and a total review of role titles and role profiles are nearing completion. The grading committee is at an advanced stage with the grading of Group function roles and aims to have the subsequent layers completed by June 2021. There is also progress to align incentive and production bonus schemes to support and reward delivery of our Project 2022 targets across the Group.

BOARD SUCCESSION

Dr Pat Bartlett, Non-executive Director, retired from the Board after nearly nine years’ service, on 30 June 2020, and Mr Tony Lowrie, Senior Independent Director, retired from the Board in November 2020, after more than eight years’ service.

Ms Varda Shine subsequently assumed the role of Senior Independent Non-Executive Director in November 2020. Varda is also a member of the Company’s Audit and Risk, HSE (Health, Safety and Environment), Nomination and SED (Social, Ethics and Diversity) Committees, as well as chairing the Company’s Remuneration Committee. As such she has oversight of all the Company’s material risks and opportunities and will be able to apply this expertise to the benefit of shareholders and other stakeholders.

As previously indicated, Mr. Gordon Hamilton, Independent Non-executive Director, will retire from the Board and as Chair of the Audit and Risk Committee (“ARC”) at the conclusion of the FY 2021 Annual General Meeting. A search process for his successor as Chair of the ARC has commenced.

In December 2020 the Company announced the prospective appointment of Mr. Matthew Glowasky to the Board as a Non-Executive Director nominee appointed by Monarch Master Funding 2 (Luxembourg) S.à r.l., a holder of the Company’s US$650 million 7.25% senior secured second lien notes due in May 2022 that is participating in the debt for equity swap. Mr. Glowasky's prospective appointment to the Board is subject to the successful implementation of the Restructuring and a further announcement confirming the date on which he will formally assume office will be made in due course.

PRINCIPAL BUSINESS RISKS

The Group is exposed to a number of risks and uncertainties which could have a material impact on its long-term development, and performance and management of these risks is an integral part of the management of the Group.

An overview of the key risks which could affect the Group’s operational and financial performance was included in the Company’s 2020 Annual Report, which can be accessed at www.petradiamonds.com. These may impact the Group over the medium to long term; however, the following key risks have been identified which may impact the Group over the next six months.

Short term demand and prices

The stability of financial markets and the corresponding effect on consumer demand impacts the Group and the diamond industry as a whole. Whilst the medium to long term fundamentals of the diamond market remain intact, with demand forecast to outpace supply, in the short term the prevailing climate of global economic uncertainty, exacerbated by the COVID-19 outbreak, may cause some volatility in rough diamond pricing.

Although diamond prices are influenced by numerous factors beyond the Company’s control, the Group’s management closely monitors developments in the international diamond market (across the pipeline from the rough market to the retail consumer market) to be in a position to react in a timely manner to changes in rough diamond prices and demand.

Product mix variability

Some level of variability in terms of product mix is associated with large and complex orebodies like Cullinan and Williamson, where the recovery of high value stones varies on a period-to-period basis. Variability is also being experienced in the product mix at Finsch, which contains a lower than expected incidence of gem-quality coarse (larger) diamonds in comparison to historical recoveries. This risk can be addressed by maximising tonnages across the footprint of the orebodies and by optimising plant processes to capture the value within the individual kimberlite’s product profile. However, in the case of Cullinan, it is impossible to predict when exceptional diamonds (valued at +US$5 million) will be recovered as they are truly rare.

Variability in overall diamond prices realised as a result of this product mix volatility may have an impact on the Group’s financial performance.

COVID-19 pandemic

The COVID-19 pandemic took hold in early CY 2020 and caused major disruption to all aspects of the diamond pipeline. Certain Government-imposed restrictions, including varying levels of lockdown, impacted the mining operations and Petra’s ability to conduct tenders in South Africa and Belgium. Petra has put in place stringent procedures in order to prevent or mitigate the spread of the virus at our operations, some of which resulted in lost production time; the Group introduced revised shift configurations, with the support from organised labour, to offset this. Petra’s suppliers to its mines, although also impacted by the COVID-19 restrictions, continued to deliver as required and no major supply chain disruption was experienced. The Company is maintaining a flexible sales approach in order to bring goods to market at the optimal time and location based on prevailing market conditions.

Financing and liquidity

The Group closely monitors and manages its liquidity risk, and cash forecasts are regularly produced and run for different scenarios. The forecasts assume that the envisaged Restructuring will be implemented in line with the provisions of the Consensual Restructuring. The Group also considered risks associated with COVID-19, which were considered to focus primarily on the potential for further production disruption, deferral of tenders due to travel restrictions and adverse impacts on diamond pricing.

The Group’s forecast, taking into account the risks described above and the covenants as discussed in the ‘Covenant measurements attached to banking facilities’ section of the Financial Review, show that the Group will be able to operate within its restructured debt facilities and have sufficient liquidity headroom for at least the next 12 months, although headroom remains sensitive to diamond prices, foreign exchange rates and production. There remains a risk, given these factors and the impact on operating cashflows, that the Group’s liquidity position could deteriorate and the resulting lack of adequate available cashflows, potential breach of covenants and restricted access to its debt facilities could impact development work and impact the operations. The Group may therefore be required to have further discussions with its South African Lender Group regarding further covenant resets and/or waivers as required.

Petra is not in a position to provide any financial assistance to the Williamson mine. Williamson’s liquidity position is reliant on its ability to generate cash through operations (which is not possible during care and maintenance); and/or its ability to reach agreement with the Government of Tanzania allowing it to sell the blocked diamond parcel and around potential recoupment of VAT receivables; and/or its ability to procure funding via borrowings from local financial institutions. If Williamson is unable to secure additional funding it is likely to face a liquidity shortfall. Under the terms of the in-principle agreements with the South African Lender Group any additional funding by Petra would require its approval and if not provided may result in Williamson’s insolvent liquidation.

Exchange rates

With Petra’s operations mainly in South Africa, but diamond sales based in US Dollars, the volatility and movement in the Rand is a significant factor to the Group. The Group also undertakes transactions in a number of different currencies, including Tanzanian Shillings, GBP and Euro. Fluctuations in these currencies can have an impact on the Group’s performance, albeit less significant than the impact of fluctuations in the ZAR/USD exchange rate.

In order to mitigate currency risk, the Group continually monitors the movement of the Rand against the US Dollar, the maturity dates and the level of the hedge book and takes expert advice from its bankers in this regard. It is the Group’s policy to hedge, on a short term basis, linked to the tender calendar, a portion of US Dollar sales revenue when weakness in the Rand deems it appropriate.

Country and political risk

Petra’s operations are predominantly based in South Africa, with lesser exposure to Tanzania. Emerging market economies could be subject to greater risks, including legal, regulatory, taxation, economic, and political risks, and are potentially subject to rapid change.

Petra is in ongoing dialogue with the Government of Tanzania and local advisers in relation to various issues, including the overdue VAT receivables and the blocked parcel. In addition, there is no certainty with regards to the outcome for the blocked Williamson parcel, which remains in the custody of the Government of the United Republic of Tanzania. The long-term viability of the Company’s Williamson operations is dependent on the successful completion of the ongoing negotiations with the Government of Tanzania.

Labour relations

The Group’s production is dependent on a stable and productive labour workforce. The mining labour relations environment in South Africa has been notably volatile over the years, but much less so specifically in the diamond sector, where there is a higher incidence of mechanisation and skilled workers, leading to smaller and more manageable workforces which do not rely on migrant labour.

In H1 FY2021 the Company announced that it had reached agreement on a new one-year wage agreement with NUM for employees in the Paterson A and B Bands at the South African operations covering FY 2021. The Company will therefore look to continue discussions in due course with NUM on a wage agreement for FY 2022. Petra remains highly focused on managing labour relations and on maintaining open and effective communication channels with its employees and the appropriate union representatives at its operations.

Power supply

South Africa’s power issues have been well publicised. Eskom’s approach is to consult with industry participants before implementing load shedding, with advanced notice giving customers time to react appropriately. Petra is used to managing the operations optimally to maintain production levels as much as possible throughout load shedding requests. Such measures include the bringing forward of essential maintenance work and restricting load curtailment to processing plants where possible, given the Company’s operations have excess processing capacity which allows for additional throughput when full power is restored. However, the impact of load shedding on the Company will depend on the duration and level of severity of the power restriction.

Illegal mining and human rights violations

There is an ongoing risk of illegal mining taking place in areas where the Group has surface operations (as opposed to underground), namely the Williamson open pit and the tailings operations of the South African mines. Such incidents are particularly common in volatile countries where unemployment levels are high and governments have insufficient resources to address these issues.

Illegal mining is often carried out in unsafe mining conditions which could in turn cause injuries or result in fatalities. Illegal miners accessing Petra's operations present risks associated with contravening a number of regulations for which the Company is held responsible, in particular in the areas of health and safety and environmental management. In the event of non-compliance with such regulations or the occurrence of accidents or incidents causing personal injury, death or property or environmental damage at Petra's facilities or surrounding areas, there is a risk of increased operating costs, significant losses, interruptions in production, expensive litigation, imposition of penalties and sanctions or suspension or revocation of permits and licences as well as reputational damage. In addition, illegal miners may pose a risk to the safety of Group personnel as they may be armed and willing to resort to violence if challenged. This may result in confrontations between Group personnel, contractors or law enforcement personnel, resulting in claims for damages against the Group or contraventions of international protocols that apply to the Company and the businesses within the Group.

The Group has been subjected to recent allegations of human rights violations at the Williamson mine. The UK law firm Leigh Day and a UK-based NGO RAID have notified the Company and Williamson Diamonds Limited by letter concerning allegations that illegal miners suffered personal injury inflicted by the security patrol teams at the Williamson Mine, which comprise guards from Williamson Diamonds Limited's third-party security contractor and members of the Tanzanian Police. The amount of damages sought is not yet quantified and the validity of the claims is yet to be determined.

The current scale of illegal mining at Williamson is not anticipated to affect production levels in the short-to-medium term but the potential consequences associated with a major incident could adversely affect the Group's business, results of operations and financial condition.

Richard Duffy

Chief Executive Officer

16 February 2021

Notes:

The following exchange rates have been used for this announcement:
1. closing rate as at 31 December 2020 US$1:ZAR14.69 (31 December 2019 US$1:ZAR13.99 and 30 June 2020: ZAR17.32)
2. average rate H1 FY 2021 US$1:ZAR16.27 (H1 FY 2020 US$1:ZAR14.69)
The following definitions have been used in this announcement:
1. ct: carat
2. cpht: carats per hundred tonnes
3. Exceptional Diamonds: stones that sell for more than US$5 million each
4. LTIFR: lost time injury frequency rate
5. Kt: thousand tonnes
6. Mcts: million carats
7. mL: meter level
8. Mt: million tonnes
9. ROM: run-of-mine, i.e. relating to production from the primary orebody
10. SLC: sub-level cave, a variation of block caving
Diamond inventory carrying values are stated at the lower of cost of production on the weighted average basis or estimated net realisable value.

PETRA DIAMONDS LIMITED

CONDENSED CONSOLIDATED INCOME STATEMENT

FOR THE 6 MONTH PERIOD ENDED 31 DECEMBER 2020

US$ million	Notes	(Unaudited) 1 July 2020- 31 December 2020	(Unaudited) 1 July 2019- 31 December 2019	(Audited) Year ended 30 June 2020
Revenue		178.1	193.9	295.8

Mining and processing costs		(136.9)	(170.2)	(307.9)
Other direct income		5.1	0.3	2.0
Exploration expenditure	15	—	(0.3)	(0.6)
Corporate expenditure	5	(3.9)	(3.9)	(8.7)
Impairment of non-financial assets	14	(0.2)	(1.6)	(91.9)
Impairment of BEE loans receivable – expected credit loss release / (charge)	11	4.6	—	(10.9)
Total operating costs		(131.3)	(175.7)	(418.0)

Profit on disposal including associated impairment, net of tax	15	14.7	—	—
Financial income	6	69.0	7.1	7.9
Financial expense	6	(39.8)	(38.5)	(161.0)
Profit / (loss) before tax		90.7	(13.2)	(275.3)
Income tax (charge) / credit		(23.1)	3.2	52.3
Profit / (loss) for the Period		67.6	(10.0)	(223.0)

Attributable to:
Equity holders of the parent company		54.5	(8.7)	(190.0)
Non-controlling interest		13.1	(1.3)	(33.0)
		67.6	(10.0)	(223.0)

Profit / (loss) per share attributable to the equity holders of the parent during the Period:

Basic profit / (loss) per share – US cents	12	6.31	(1.01)	(21.96)
Diluted profit / (loss) per share – US cents	12	6.31	(1.01)	(21.96)

PETRA DIAMONDS LIMITED

CONDENSED CONSOLIDATED STATEMENT OF COMPREHENSIVE INCOME

FOR THE 6 MONTH PERIOD ENDED 31 DECEMBER 2020

US$ million	(Unaudited) 1 July 2020- 31 December 2020	(Unaudited) 1 July 2019- 31 December 2019	(Audited) Year ended 30 June 2020
Profit / (loss) for the Period	67.6	(10.0)	(223.0)
Exchange differences on translation of the share-based payment reserve	0.2	0.2	(0.2)
Exchange differences on translation of foreign operations¹	54.7	(0.9)	(91.3)
Exchange differences on non-controlling interest¹	(0.1)	(0.2)	(0.6)
Total comprehensive income / (expense) for the Period	122.4	(10.9)	(315.1)

Total comprehensive income and expense attributable to:
Equity holders of the parent company	109.4	(9.4)	(281.5)
Non-controlling interest	13.0	(1.5)	(33.6)
	122.4	(10.9)	(315.1)

¹ These items will be reclassified to the consolidated income statement if specific future conditions are met.

PETRA DIAMONDS LIMITED

CONDENSED CONSOLIDATED STATEMENT OF FINANCIAL POSITION

AS AT 31 DECEMBER 2020

US$ million	Notes	(Unaudited) 31 December 2020	(Unaudited) 31 December 2019	(Audited) 30 June 2020
ASSETS
Non-current assets
Property, plant and equipment	7	773.3	950.3	675.8
Right-of-use assets		3.0	6.8	4.9
BEE loans and receivables	11	175.1	125.9	137.0
Other receivables		10.6	13.5	10.3
Deferred tax assets		0.1	—	23.3
Total non-current assets		962.1	1,096.5	851.3
Current assets
Trade and other receivables		42.8	30.4	20.0
Inventories		126.4	110.6	103.5
Cash and cash equivalents (including restricted amounts)		106.3	53.6	67.6
Total current assets		275.5	194.6	191.1
Non-current assets classified as held for sale	15	—	0.6	0.3
Total assets		1,237.6	1,291.7	1,042.7
EQUITY AND LIABILITIES
Equity
Share capital		133.4	133.4	133.4
Share premium account		790.2	790.2	790.2
Foreign currency translation reserve		(411.6)	(362.6)	(453.0)
Share-based payment reserve		1.5	6.8	1.1
Other reserves		(0.8)	(0.8)	(0.8)
Accumulated losses		(385.9)	(264.3)	(440.4)
Attributable to equity holders of the parent company		126.8	302.7	30.5
Non-controlling interest		(5.8)	12.9	(18.8)
Total equity		121.0	315.6	11.7
Liabilities
Non-current liabilities
Loans and borrowings	8	—	604.8	—
Lease liabilities		1.0	2.6	1.1
BEE loans payable	11	133.4	128.1	108.6
Provisions		73.7	64.0	55.6
Deferred tax liabilities		49.3	78.5	40.5
Total non-current liabilities		257.4	878.0	205.8
Current liabilities
Loans and borrowings	8	810.4	47.3	769.0
Lease liabilities		1.3	4.5	3.6
Trade and other payables		47.5	46.3	52.5
Total current liabilities		859.2	98.1	825.1
Liabilities directly associated with non-current assets classified as held for sale	15	—	—	0.1
Total liabilities		1,116.6	976.1	1,031.0
Total equity and liabilities		1,237.6	1,291.7	1,042.7

PETRA DIAMONDS LIMITED

CONDENSED CONSOLIDATED STATEMENT OF CASH FLOWS