Petra: A Long-Term Way To Play Diamonds You Might Not Know

• In a report issued Thursday, Canaccord analyst Nick Hatch explains why he trimmed his price target for Petra Diamonds Limited PDL from 170 pounds to 150 pounds.
• Despite the reduction in the price target, the firm maintains a Buy rating on the stock, and recommends buying it for the long term.
• Shares of Petra Diamonds lost 11.87 percent on Thursday trading

In early September, Canaccord reduced its fiscal 2015 and fiscal 2016 forecasts to account for their estimate of higher central costs. In addition, they lowered their estimate of realised diamond prices by 10 percent from management’s guidance for 2016, to better reflect “growing evidence from De Beers and Alrosa sales programmes that the rough diamond market remained problematic.”

However, the company’s full fiscal 2015 results beat the firm’s expectations. Adjusted EBITDA came in at $139 million, $10 million above the analysts’ estimate. EPS of $0.10 also came in ahead of the $0.07 forecast.

However, management did recognize there is some volatility in the rough diamond market and warned investors may see "deviations" from its projections for fiscal 2016 rough diamond prices.

This, the experts believe, contributed to the steep decline in the stock price that Petra experienced since early August – although the “generally negative sentiment towards mining shares” probably weighed in as well.

The Long-Term Thesis

While Petra’s stock might not be a great short-term bet, the experts recommend buying the stock below 100 pounds. However, over the longer term, they expect rising consumer demand for jewellery in China and India to supplement demand in the US, while they “see only limited potential to supply more diamonds given the lack of sufficient discoveries over the last 20 years. This should lead to market deficits from c.2019 onwards, particularly of higher value stones, since ore grades are expected to decline,” the experts expound. Thus, they recommend that “investors start accumulating a position around current share price levels.”

Disclosure: Javier Hasse holds no positions in any of the securities mentioned above.