City broker Canaccord Genuity says strong production growth is at the centre of its ‘buy’ recommendation for Petra Diamonds (LON:PDL).
Analyst Jeremy Dibb says Petra is the largest pure-play listed diamond producer globally. And he believes it is well leveraged to the expected increase in long term demand in the diamond market.
That said, Dibb cut his price target to 183p from 255p because of more conservative pricing assumptions for rough diamond prices in the shorter term - prices have recently slipped back after a strong start to the year.
His ‘bull case’ however gives a valuation of 304p a share, while the ‘bear case’ comes in at 127p.
“We forecast production to grow from 1.1m carats in FY11 to c.5m carats in FY19 via organic growth.
“To support this growth, we expect Petra to spend US$631m, based on our FX forecasts, on capital investment in FY12-15, which we believe can be funded by operating cash flow and debt.”
Dibb says the four main risks to Petra are diamond prices remaining flat, exposure to the South African Rand, financing risks and development risks.