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Rating Action:

Moody's confirms Petra Diamonds' B1 ratings; stable outlook

04 May 2016

London, 04 May 2016 -- Moody's Investors Service, has today confirmed the corporate family rating (CFR) and probability of default rating (PDR) of predominantly South African diamond producer, Petra Diamonds Limited (Petra), at B1 and B1-PD, respectively. The outlook on all the ratings is stable.

This concludes the review for downgrade initiated by Moody's on 22 January 2016, following its review of the global mining sector, whose operating environment has undergone a fundamental shift.

"Our decision to confirm Petra's B1 ratings takes into account the company's success in renegotiating its bank facility covenants to increase their cushioning to more easily accommodate additional debt for funding its Cullinan mine mill extension project," said Douglas Rowlings, a Moody's Assistant Vice President.

"It also recognises Petra's ability to significantly reduce leverage in the next 12 months, even with Moody's conservative diamond price assumptions, as it expands into new areas that are planned to produce higher volumes and higher value diamonds at its Cullinan and Finsch mines at a lower cost from new higher grade ore bodies generating increasing EBITDA at higher margins," adds Mr Rowlings.

Concurrently, Moody's confirmed the B2 rating assigned to the $300 million senior secured notes due 31 May 2020 issued by Petra Diamonds US$ Treasury Plc and guaranteed by Petra and certain of its subsidiaries. The outlook is stable.

While diamonds have not experienced the same magnitude of recent price reductions seen in base metals, it is nevertheless a volatile commodity, the price of which is very hard to predict as it is not driven by normal industrial supply and demand factors.

Moody's however does recognise the track record of supply intervention to support prices by the diamond industry's two largest producers, De Beers (unrated), a subsidiary of Anglo American plc (Ba3 positive), and ALROSA PJSC (Ba1 negative). Moody's expects Petra's diamond price risk will be mitigated by focusing on cost efficiencies and prudent project development, as well as financial risk reduction (i.e. reducing leverage, increasing interest coverage and bolstering liquidity).

RATINGS RATIONALE

Today's confirmation primarily considers the track record of support that Petra's lenders continue to demonstrate with their agreement to renegotiate bank facility covenant levels, as well as sustained improvement in diamond prices over the course of 2016. Petra's lenders waived their 31 December 2015 covenant test last year and on 25 April 2016 they agreed to reset covenants to less restrictive levels running to 31 December 2017.

Furthermore, Moody's sees limited execution risk for Petra in terms of delivering undiluted ore from new mining areas at its Cullinan and Finsch mines, and developing its mill extension at the Cullinan mine. This is supported by observed progress to date and an independent technical assessment of the projects plans. Together, these operations are planned to deliver higher volumes and higher value diamonds at lower cost with better recovery rates (especially of larger diamonds), as well as significantly increasing EBITDA and free cashflow generation allowing for accelerated deleveraging.

Petra's B1 CFR reflects (1) the strong medium- to long-term fundamental forecasts for the diamond market, in which demand is expected to outstrip supply, supporting long-term diamond prices; (2) its competitive cost positioning with predominantly long-life, well-prospected underground mines producing diamonds at costs on a par with cheaper open-pit mines; and (3) conservative financial policies and a strong financial profile, which will improve as undiluted ore contributes more significantly to the production of high-value diamonds with low execution risks.

The ratings are constrained by (1) Petra's scale as a mid-tier diamond producer (revenues of $364 million for the last twelve months ended 31 December 2015) with four mines in South Africa (Baa2 under review for downgrade) including extensive tailings operations in Kimberley (via its 49.9% interest in the Kimberley Mines), one mine in Tanzania (unrated) and exploratory land in Botswana (A2 stable); (2) elevated operational risk as more than 90% of its EBITDA comes from the Cullinan and Finsch mines in South Africa; and (3) a single commodity producer business profile with full exposure to volatility in diamond prices and ZAR/USD exchange rate, noting however the favourable interplay on credit metrics of these two drivers to date.

LIQUIDITY

Moody's sees Petra's liquidity as being adequate over the next year and able to meet forecast capital expenditures of around $200 million. At 31 March 2016, Petra had unrestricted cash balances totalling $26.7 million and undrawn committed bank facility availability of around $114.2 million.

The rating agency recognises that in spite of covenant levels being repositioned, the next testing period at 30 June 2016 will have limited headroom. The ability to ensure prospective compliance however is supported by (1) operating performance to date with only two months remaining in the test period ensuring greater visibility around the ability to achieve the remaining EBITDA hurdle; (2) cautious optimism for 2016 diamond prices, although Moody's assumes prices of 9% below company guidance which is equivalent to the average dollar per carat prices realised over the first half of Petra's financial year ending 30 June 2016; and (3) mine profiling which together with higher production will see an increasing shift in the mix to undiluted ore being processed which yields a higher EBITDA margin and overall EBITDA generation.

Notwithstanding these considerations Petra's consortium of banks have a demonstrated track record of affording Petra flexibility with regards to its covenant tests. Furthermore, the requirement for debt facilities is attributed to an extension of the mill at Petra's Cullinan mine. This is not seen as critical to deleveraging, which is more a factor of undiluted ore contribution as opposed to milling efficiency and recovery improvement. The mill extension will further reduce processing costs and improve recoveries, especially of larger high value stones. Therefore the company, could, if needed, defer the mill extension, although this is not the current intention given that the banking consortium are supportive.

The majority of capex associated with Petra's Cullinan mine expansion is denominated in depreciated South African rand with prices locked in, which mitigates against potential overspending.

RATIONALE FOR STABLE OUTLOOK

The stable outlook reflects Moody's view that Petra will be able to deliver on its capex programme and undiluted mining production areas with debt/EBITDA falling below 2.5x and EBIT/interest expense trending above 4x. The rating agency also expects that Petra, at all times, will maintain a liquidity profile that provides sufficient cash sources against forecasts cash uses.

This stable outlook also factors an expectation that the company will remain in compliance with its bank covenants at all times.

WHAT COULD CHANGE THE RATING UP/DOWN

Downward pressure on the rating could result if it does not become apparent that debt/EBITDA is trending below 2.5x and EBIT/interest expense is trending above 4x. Similar downward pressure could result if Petra were to face (1) long-term challenges in accessing undiluted ore at its Cullinan and Finsch mines; or (2) a deterioration of Petra's liquidity profile.

PRINCIPAL METHODOLOGY

The principal methodology used in these ratings was Global Mining Industry published in August 2014. Please see the Ratings Methodologies page on www.moodys.com for a copy of this methodology.

The Local Market analyst for this rating is Douglas Rowlings, 971-4-237-9543.

Petra Diamonds Limited (Petra) is a rough diamond producer listed on the Main Market of the London Stock Exchange, registered in Bermuda and domiciled in Jersey. The company has controlling interests in five mines (four in South Africa and one in Tanzania), extensive tailings operations in Kimberley (via its 49.9% interest in the Kimberley Mines), and an exploration programme in Botswana. For financial year ended 30 June 2015, Petra produced 3.2 million carats (Mcts) of diamonds, accounting for ca. 2.6% of the world's production by volume and 2.7% by value.

Petra generated $364 million in revenues and a Moody's adjusted EBITDA of $83.4 million for the last twelve months ended 31 December 2015 Petra. As of 4 May 2016, the company had a market cap of GBP596 million ($873 million).

REGULATORY DISCLOSURES

For ratings issued on a program, series or category/class of debt, this announcement provides certain regulatory disclosures in relation to each rating of a subsequently issued bond or note of the same series or category/class of debt or pursuant to a program for which the ratings are derived exclusively from existing ratings in accordance with Moody's rating practices. For ratings issued on a support provider, this announcement provides certain regulatory disclosures in relation to the credit rating action on the support provider and in relation to each particular credit rating action for securities that derive their credit ratings from the support provider's credit rating. For provisional ratings, this announcement provides certain regulatory disclosures in relation to the provisional rating assigned, and in relation to a definitive rating that may be assigned subsequent to the final issuance of the debt, in each case where the transaction structure and terms have not changed prior to the assignment of the definitive rating in a manner that would have affected the rating. For further information please see the ratings tab on the issuer/entity page for the respective issuer on www.moodys.com.

For any affected securities or rated entities receiving direct credit support from the primary entity(ies) of this credit rating action, and whose ratings may change as a result of this credit rating action, the associated regulatory disclosures will be those of the guarantor entity. Exceptions to this approach exist for the following disclosures, if applicable to jurisdiction: Ancillary Services, Disclosure to rated entity, Disclosure from rated entity.

Regulatory disclosures contained in this press release apply to the credit rating and, if applicable, the related rating outlook or rating review.

Please see www.moodys.com for any updates on changes to the lead rating analyst and to the Moody's legal entity that has issued the rating.

Please see the ratings tab on the issuer/entity page on www.moodys.com for additional regulatory disclosures for each credit rating.

Gianmarco Migliavacca
VP - Senior Credit Officer
Corporate Finance Group
Moody's Investors Service Ltd.
One Canada Square
Canary Wharf
London E14 5FA
United Kingdom
JOURNALISTS: 44 20 7772 5456
SUBSCRIBERS: 44 20 7772 5454

David G. Staples
MD - Corporate Finance
Corporate Finance Group
Telephone: 00971 4237 9536

Releasing Office:
Moody's Investors Service Ltd.
One Canada Square
Canary Wharf
London E14 5FA
United Kingdom
JOURNALISTS: 44 20 7772 5456
SUBSCRIBERS: 44 20 7772 5454

Moody's confirms Petra Diamonds' B1 ratings; stable outlook
No Related Data.
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