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Miner slumps after digging up too many cheap South African diamonds

Highlights

  • Shares of miner drop the most since May in London trading
  • Prices of stones from Cullinan mine drop 31% per carat

Petra Diamonds Ltd. fell the most in eight months in London after the South Africa-focused miner dug up gems worth significantly less than expected.

Petra has been seeking to turn around its fortunes after piling up debt to expand its flagship Cullinan mine in South Africa. It was forced to tap shareholders for funds last year to alleviate those problems, but the company’s efforts are being undermined by falling diamond prices and its recovery of too many low-quality stones.

Petra fell as much as 18 percent in London, the most since May when it announced it was raising $178 million from shareholders.

Petra is being hit on two fronts. Rough diamonds fetched 4 percent less in the company’s fiscal first half through December than in the preceding six months, as part of a wider industry squeeze. However, the bigger concern is that prices achieved at Cullinan slumped 31 percent to just $96 per carat from a year earlier. That situation may continue, according to RBC Capital Markets.

“We see concern that despite ramping volumes prices are not following, indicating the ‘base’ level of pricing may be structurally lower than previously anticipated,” the bank said.

Diamond miners are struggling across the board, especially those mining cheaper and smaller gems where there is too much supply, and the traders and manufacturers that buy them are struggling to make a profit. Last month, some of Rio Tinto Group’s customers refused to buy cheaper diamonds, while De Beers has been forced to cut prices and offer concessions to buyers.

The results on Tuesday of De Beers’s first sale of the year — traditionally one of the biggest — will be closely watched for clues about demand.

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