RBC Capital Markets said yesterday it is upgrading its buy recommendation on Petra Diamonds and raising its target price as it believes the bottom had been passed for rough diamond prices.



RBC raised its recommendation for Petra to ‘Outperform Speculative Risk’ and lifted its target price to £1.05/share.



“Our forecasts anticipate rough diamond prices rising 10% - 15% a year for the next two years and then rising by 3.5% real a year thereafter. The reality is that a potential shortage in rough diamond supply could see prices in some categories rise even faster.”



“Attributable rough diamond production is expected to increase from ~400,000ct in FY09 to over 1m ct/year in 2013,” RBC said.



“Key risks in the share price are rough diamond prices and Petra's needs for funds to reduce debt and complete its capex programs. Management is reluctant to tap equity markets, but we believe if it was part of a program to increase the holding in the Cullinan diamond mine and relocate in the LSE Main List investors would be more welcoming.”



RBC said another key investment risk, other than diamond prices, is the fate of the 44% of Petra owned by Saudi investor Saad. “It is not clear what Saad intends for its holding in the company,” it said.



“Petra offers real potential for production growth alongside funding/structure risks. We believe the growth profile in a sector which is likely to see scarcity of rough diamonds offers real attraction."