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Diamond struggles in Tanzania

MINE CARE AND MAINTENANCE 
Petra Diamonds’ Williamson mine, in Tanzania, may be put on care and maintenance

MINE CARE AND MAINTENANCE Petra Diamonds’ Williamson mine, in Tanzania, may be put on care and maintenance

Photo by Duane Daws

13th October 2017

     

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Owing to the possible loss of revenue at London-listed Petra Diamonds’ operation in Tanzania, it is likely that the mining company will have to seek a waiver from its banking consortium, as it has in the past, for its December 2017 bank covenant test.

This is according to credit ratings firm Moody’s, which explained on September 14 that Petra Diamonds’ putting the Williamson mine, in Tanzania, on care and maintenance could slow the company’s deleveraging momentum, although not materially.

On September 11, Petra Diamonds, which currently has a B1 stable rating, announced that it had temporarily suspended operations at Williamson after government seized a consignment of diamonds from the mine on September 9.

Government indicated its intent to nationalise the diamonds, which the Tanzanian government’s Diamonds and Gemstones valuation agency estimated were worth $14.7-million. Tanzania’s Finance and Planning Ministry disputes that valuation, saying the diamonds are worth $29.5-million.

In a statement on September 7, the Finance and Planning Ministry said it would launch a probe into irregularities around the valuation of Petra’s diamond exports. These developments are credit negative for Petra and will dent group profitability and adversely affect the company’s ability to meet its December 2017 bank covenant test, says Moody’s.

Moody’s points out that, although Williamson contributes less than 5% to Petra’s earnings before interest, taxes, depreciation and amortisation, and there are key personnel in discussions with government to resolve the matter, the company may be forced to put the mine on care and maintenance until it finds a suitable solution.

“The Tanzanian government’s Diamonds and Gemstones valuation agency, not Petra, make the provisional valuation of diamond parcels from Williamson before they are exported to Antwerp, in Belgium,” Moody’s explains.

The ratings agency says the Tanzanian government also has full oversight of the diamonds produced at the mine and physical controls by several different government representatives in conjunction with Petra from the point of recovery until the point of sale.

Government intends to double the mining sector’s contribution to gross domestic product (GDP) to 10% by 2025. In July, Tanzania increased royalty rates on diamonds to 6%. The Williamson mine was previously subject to a 5% royalty. All final royalty payments to the Tanzanian government are based on the diamonds’ actual sales results in Antwerp, with the sales process monitored by Tanzania’s Diamonds and Gemstones agency.

Moody’s points out that the Tanzanian government also added a 1% levy on all mineral exports from the country in July. Simultaneously, it introduced new laws allowing government to renegotiate previously agreed mining contracts.

Tanzania President John Magufuli in a television broadcast on September 7 announced a review of Petra’s diamond mining contract, which could have far-reaching implications for the company. Magufuli also alleged widespread irregularities leading to unfavourable contracts and the loss of government revenue across the entire gem industry.

Williamson is 75%-owned by Petra and 25%-owned by the Tanzanian government, which has also alluded to gross irregularities over the dilution of its original 50% stake in the mine.

“We expect that Petra will continue to engage constructively with the Tanzanian authorities, but cannot predict how long the valuation dispute around the diamond exports will take to resolve. It is too early to assess the consequences of the government investigations into other irregularities,” states Moody’s.

Edited by Tracy Hancock
Creamer Media Contributing Editor

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