Shares in Petra Diamonds (LSE: PDL) nosedived after it said it had abandoned plans to sell the company or parts of its business, opting instead for a debt-for-equity restructuring.
The struggling South African miner, with operations in its home country and Tanzania, said it had received no viable offers since June, when it put up the “for sale” sign.
Petra, which piled up debt to expand its flagship Cullinan mine in South Africa, noted it has been engaged in an extended period of discussions with its South African lender as well as an ad-hoc group of noteholders (AHG) regarding the recapitalization of the group.
As a result, it has reached agreements with those stakeholders, which require a restructuring of its business.
As part of the deals, the diamond miner will partly replace its existing US$650 million note debt with new notes of around US$295 million, and debtholders will contribute US$30 million.
The remaining note debt will be converted into equity, leaving debt holders holding 91% of Petra, while diluting existing shareholders to a combined stake of only 9%.
While the arrangement is not ideal for current equity holders, it digs the company out of the bottom, BMO analyst Edward Sterck says.
“The multifaceted deal leaves current equity holders with only 9% of the expanded share register but debt holders are highly incentivized to support the company going forwards,” he said in a research note. “Petra’s debt load should be approximately halved and coupon payments pushed out by about two years. Whilst dilutive to existing equity holders, the agreement digs the company out of the quagmire and creates a pathway towards a sustainable future with a less heavily encumbered balance sheet.”
Petra said it expects to seal a “lock-up agreement” cementing the terms with the noteholder group and South African lenders in early November. It anticipates the restructuring will become effective in the first quarter of 2021.
Covid-19 and illegal miners
All of Petra’s South African mines are now back at normal operating levels, despite being subject to ongoing Covid-19 precautionary measures.
The company’s Williamson mine in Tanzania remains on care and maintenance since April, but Petra said it was continually evaluating when it would be possible to resume operations.
Petra is facing allegations of human rights abuses at the Williamson mine, resulting from the actions of its security guards.
The operation has been a target of illegal artisanal miners for years, mostly due to challenges in securing the large perimeter of the license area.
Petra has considered using a similar solution to its Koffiefontein mine in South Africa, where, last year, the company opened some of its operation’s tailings to small-scale miners. The move aimed at tackling illegal activities and solved some issues caused by artisanal miners at the asset.
It previously carried out a similar exercise at Kimberley, in Northern Cape, where small scale miners operated “the floors” of the property, an area previously worked by Kimberley’s founding miners.
Petra’s shares fell as much as 18% in London to 1.54 pence in mid-morning trading, because of the deal’s dilutive effect on existing stakeholders. The shares recovered later, trading at 1.61 pence, and leaving the miner with a 13.93 million pound market capitalization.