Petra Diamonds (LON: PDL) (OTCPK: PDLMF) is an interesting share for us as we contemplate the economic future. The really top end of the diamond market isn’t, not really, affected by macroeconomic conditions. Truly amazing gemstones come to market and they will have buyers - rich men always do have women to impress. That might sound a bit patriarchal but that top end of the diamond market is one for Veblen Goods.
The performance of a diamond miner though depends more upon the mid-market. Not just engagement rings - although that’s where De Beers made a lot of their money. There are still many who will buy a natural gemstone simply as a present, or a badge of having arrived and so on. Yes, there’s the structural weakness in the market for two reasons. One is that killing off of the De Beers monopoly. The other is that artificial, manufactured, stones get ever cheaper and ever better. So, miners of the real thing face some headwinds. But they are only headwinds, they’re also things that work against the mining business over decades, not quarters.
Petra Diamonds share price from Google Finance
The next information release from Petra is in September: “12 September 2023 Petra announces preliminary results for the year ended 30 June 2023.” It’s worth having a think about what might be in them. We can do this by looking at the last results and projecting of course.
“Due to the deferred sales, diamond inventory increased to 715.2 kcts (valued at US$65.9 million) at period end, compared to 381.7 kcts (US$40.2 million) at 30 June 2022”
That’s the bit that worries us. They held back the Tender 6 sale because prices were looking pretty soft. But also insisted that was going to be entirely temporary. Well, yes - but will it be temporary? We remain unconvinced shall we say.
Our reasoning is exactly that macroeconomic background. No, we don’t think the world’s about to tip into recession. However, we do think something else is going on. Consumer discretionary cash ballooned massively over the past few years - lockdown payments and so on and nothing much to spend it all upon. Consumer savings roared up. That’s all now returning to normal. Consumers are dissaving back to more regular levels that is. While we don’t expect GDP to fall to any great extent, therefore neither consumer incomes, the spend down of those extra savings seems to have run its course.
We therefore expect min-market discretionary spending to be weak, even though formal recession is unlikely. Well, we’ll see with those results in September. But we’d be surprised if either Petra’s sales prices haven’t fallen, or the diamond stock risen, one or both of the two.