NEWSFLOW

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Petra Diamonds (PDL) is one of those mining companies which is drowning in debt and could very easily have gone bust, had it not recently announced a restructuring with its lenders.

NEWSFLOW

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Yesterday, Petra Diamonds (PDL) issued an RNS which sounded like good news: “Recovery of Five High Quality Blue Diamonds”. Feck FYB thought the morons and the shares jumped by 10%...but this was dissembling. For beneath the bullish headline was not such good news: 

NEWSFLOW

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Buying bombed-out shares in companies that have previously run as successful businesses can be very lucrative if they somehow manage to turn things around, but it also offers a very high chance of losing all your money if you are proven wrong and hold to the bitter end. There are plenty of companies on the stockmarket that have been at death’s door but have managed to survive and have subsequently gone on to do quite well, but there are also a large number of others that went bust and where investors lost all their money, and there is a very fine line between the two if you do decide to take a risk on a company that finds itself in this situation.

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I have repeatedly warned you on this website that Petra Diamonds (PDL) is an accident waiting to happen. It is happening and this is one where the shares have a clear end game of 0p. Let’s start with the three top golden rules of investing in mining companies…

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Whenever you buy a share which you view as a potential recovery play, you have to accept the risk that of them will do everything but actually recover, and if the situation worsens then it is time to cut your losses and sell.

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As at June 30 2019 Petra (PDL) had net debt of of $541 million. The shares, 45p a year ago are now 8.735p valuing the company at just £75.6 million. The question is: will Petra go bust?

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When a share keeps on falling you have to decide whether the decline is terminal or how good the chances are of a recovery at some point. In some cases you will just be throwing good money after bad, and just because the shares have traded at a higher level in the past doesn’t mean that they will necessarily do so again if the fundamental changes to the business are terminal. But we also see cases where there is a temporary decline followed by quite a strong recovery, especially where the business is reliant on factors that are cyclical – such as in the natural resources sector as commodity prices fluctuate – or where it has suffered from shorting or a persistent seller, or even a combination of all of these...