Petra remains focused on taking all actions necessary to support the measures to limit the outbreak of COVID-19 in the countries in which the Company operates and to decrease the threat to our employees, contractors and other local stakeholders.
On 16 April 2020 the Minister of Minerals and Energy in South Africa announced that mining companies that have been restricted to care and maintenance or scaled down activities are now able to ramp up to a 50% labour capacity during the period of the nationwide lockdown. All of the Company’s South African operations have now ramped up to this level. In addition, on 23 April 2020, President Ramaphosa announced a phased, risk-based approach to lifting restrictions.
Prior to ramping up production, companies were required to demonstrate that they have Standard Operating Procedures (“SOPs”) in place that comply with the Mineral Council South Africa’s COVID-19 guidelines. In addition, the DMRE has applied a number of conditions to the increase in capacity, relating to health screening and testing, the provision of quarantine facilities for employees who have tested positive for COVID-19, as well as arrangements for transporting employees from their homes to their respective areas of operations.
Prior to ramping up, Petra therefore adopted SOPs and measures that are in compliance with both the directive and the conditions referred to above, in consultation with the representative labour unions and mine-based DMRE officials.
As announced in the Market Update on 9 April 2020, the Williamson mine has been placed on care and maintenance, with only essential services being carried out in order to protect the mine’s assets and resources.
Group Production Guidance
FY 2020 production guidance of 3.8 million carats remains suspended until the Company is in a better position to quantify the full impact of this ongoing period of reduced production capacity.
Management Remuneration Cuts to fund Petra Hardship Fund
In support of President Ramaphosa’s request for senior executives to follow his lead in surrendering a portion of their income to assist those in need during the COVID-19 crisis, it has been agreed that over the next three months (being April to June 2020), the salaries of the Company’s Chief Executive and Finance Director will be reduced by one third, the salaries of the Company’s Non-Executive Directors and other members of the Executive Committee will be reduced by 25%, and senior managers reporting to the Executive Committee members (including the mine Operations Committees) can also participate in this initiative with a reduction of up to 20% of their salaries, at their discretion.
The funds raised from the salary reductions will be utilised for the Petra Hardship Fund, which has been newly established to provide targeted assistance to distressed communities and qualifying employees to mitigate the impact of COVID-19. A committee has been established to oversee the management and disbursement of these funds, which will be awarded on the basis of greatest need.
Liquidity and Capital Structure
As noted in its previous market updates on 27 March 2020 and 9 April 2020, the Company has been in discussions with its South African lender group (being Absa Bank Limited (acting through its Corporate and Investment Banking division), FirstRand Bank Limited (acting through its Rand Merchant Bank division) and Nedbank Limited) in relation to the likelihood that it will need to draw on its ZAR1 billion revolving credit facility (“RCF”) in order to manage near-term liquidity risks arising from the unprecedented operating and trading environment.
Petra's South African lender group remains supportive and has confirmed that, in principle and subject to certain conditions (the “RCF Drawdown Conditions”), up to ZAR400 million of the RCF will remain available for these purposes on a committed basis. These RCF Drawdown Conditions are likely to include a restriction on the Group making interest payments on the Company's outstanding US$650 million 7.25% Senior Secured Second Lien Notes due 2022 (the “Notes”) and the deferral of the May 2020 and November 2020 capital repayments on the outstanding bank financing of its Black Economic Empowerment partners (the “BEE Facilities”). The maturity of the RCF and the BEE Facilities is also likely to be reset to 31 July 2021 (from 20 October 2021 and 20 November 2021 respectively).
The Notes require interest payments, payable semi-annually, on 1 May and 1 November of each year. Under the terms of the indenture governing the Notes, it is an event of default if the Company defaults in any payment of interest when such payment becomes due and payable and such default continues beyond the allotted grace period of 30 days. Consequently, if the Company fails to make the required interest payment on or before 30 May 2020, then an event of default will arise under the Note indenture and, among other things, the Trustee or the holders of not less than 25% in aggregate principal amount of the Notes then outstanding may declare the Notes to be immediately due and payable in the principal amount of all the Notes then outstanding, plus accrued and unpaid interest to the date of acceleration.
The Company has been informed that an ad-hoc group of holders of the Notes, who together hold more than 50% of the outstanding aggregate principal amount of the Notes, has retained Houlihan Lokey EMEA LLP as financial adviser and White & Case LLP as legal adviser (the “Holder Advisers”).
Currently, the Company has sufficient cash available to make the interest payment on the Notes that is due today and the interest and capital payments on the BEE Facilities but would prefer to preserve liquidity for the business in the short term, especially given the unprecedented operating and trading environment as a result of COVID-19. Given the desire to preserve liquidity and the need to draw on the RCF (and the corresponding need to satisfy the RCF Drawdown Conditions), the Company has decided not to make the interest payment due on the Notes today and instead to utilise the 30-day grace period provided for under the Note indenture to continue active discussions with the Holder Advisers, and the South African lender group, to agree a forbearance agreement in relation to the May coupon and to finalise and document the RCF Drawdown Conditions.
The Company has also submitted a formal request to the South African BEE lender group (being Absa Corporate and Investment Banking, FirstRand Bank Limited (acting through its Rand Merchant Bank division) and Ninety One SA Proprietary Limited (acting as agent for and on behalf of its clients), (previously known as Investec Asset Management Proprietary Limited) to reschedule the capital payment under the BEE Facilities which falls due 20 May 2020. The Company has the support of its BEE partners, Kago Diamonds (Pty) Ltd and the trustees of its employee trust (the Itumeleng Petra Diamonds Employee Trust), for this request and it is expected to be approved as part of the RCF Drawdown Conditions.
Discussions with the South African lender group and the Holder Advisers are progressing well and the Board is confident that, subject to the agreement of definitive legal documents, the Company will be able to manage its near-term liquidity risks while continuing discussions with various stakeholders regarding strategic alternatives to improve the Company's long-term capital structure.
Further updates in relation to the outcome of discussions with the Group's South African lender group, the Holder Advisers and the Group's wider engagement with financial stakeholders will be provided in due course.
Richard Duffy, Chief Executive of Petra Diamonds, commented:
“Our overriding priority remains the health, safety and wellbeing of our people, and we are therefore following all relevant guidelines to ensure that we can minimise the risk to our operations and support the control of the spread of COVID-19 in our countries of operation . We are also very mindful of the huge economic toll that this pandemic will place upon our countries and local stakeholders. The reduction in management salaries provides the basis for our newly established Petra Hardship Fund, which will contribute to addressing the needs of the most distressed amongst our employees and the wider communities.
“We are also addressing the capital structure of the Group, which is necessary in order to provide a stable long-term foundation for the business, and are pleased to be having constructive discussions with both our South African lender group and the advisers to the ad-hoc group of bondholders, who represent over 50% of the Company’s US$650 million Notes by value. We will provide further information to the market on these discussions and our strategic options with regards to capitalisation of the business in due course. ”