PRG.L Regulatory News (PRG)

Paragon Diamonds Limited / Index: AIM / Epic: PRG / Sector: Resources 5 May 2015 Paragon Diamonds Limited (`Paragon' or the `Company') MOU to acquire Mothae Kimberlite Diamond Project in Lesotho from Lucara Paragon Diamonds Limited, the AIM quoted diamond development company, announcesthat it has signed a Memorandum of Understanding (`MOU') with Lucara DiamondCorporation (`Lucara'), a TSX quoted mining company, to acquire a 75% interestin and operate the defined Mothae Kimberlite Resource (`Mothae'), which islocated only 5 km from the world class Letŝeng le Terai diamond mine in Lesotho(the `Acquisition'). The Acquisition is subject to approval from the Governmentof Lesotho, a binding share purchase agreement, contracted albeit agreedfunding and certain other regulatory approvals. Mothae represents a low costopportunity for Paragon to generate significant value for shareholders throughthe recovery of additional large high value diamonds in tandem with thecommencement of Stage 1 production at Paragon's nearby Lemphane Kimberlite PipeProject (`Lemphane'). As a result of this exciting acquisition, the Companybelieves that it is wholly appropriate to ensure that both Lemphane and Mothaeare constructed simultaneously and thus at the lowest possible cost to benefitfrom economies of scale whilst adjusting the timescale for commencement ofproduction of the enlarged asset portfolio to Q3 2015. Overview * Transforms Paragon into aleadingdiamond development companywith near term revenue * + Expected combined revenues of approximately US$36 million in the first year of full production based on current resource estimates. + Mothae adds indicated/inferred resources of 39Mt at 2.7 cpht at US$1,060/ct to Lemphane's 48Mt of kimberlite under evaluation and development. + Resource contains large, high value diamonds with 14 diamonds recovered between 10.6cts and 56.5cts with an average per carat value of between US$5,482 and US$41,869 following an extensive sampling programme - 21,700cts recovered from circa 0.6Mt, at sampled grades of between 2.1-5.1cpht. + Developing Mothae and Lemphane concurrently will allow Paragon to benefit from significant economies of scale resulting in cost savings for equipment, management and services. * Acquisition and development capital securedat no dilution toshareholders * + Acquisition at a cash cost of US$8.5 million (0.8% of in-situ resource value). + An existing processing plant and infrastructure at Mothae is part of the acquisition cost and will be upgraded at a cost of approximately US$5 million which will allow initial mining of 0.75Mt/yr. rising to 2Mt/yr. within two years. Upgrade works are due to commence as soon as the Acquisition is closed which is expected to be in Q2 or early Q3 2015. + The acquisition cost of US$8.5 million and the additional US$5 million development capital and US$3 million opex provision required to bring Mothae into production will be financed in the form of a loan note from International Triangle General Trading LLC (`ITGT'), the terms of which have been agreed subject to contract, and similar to the funding for Lemphane. Such funding is in addition to the planned US$12 million debt and equity package from ITGT which was announced on 28 January 2015 to bring Paragon's Lemphane kimberlite project into production in 2015. * Attractive economics of producing large high value stonesat Mothae * + Net Present Value of US$115 million (discounted at 12%) over 13 years' Life Of Mine (LOM), and an IRR of 116% for an initial 0.75Mt/yr. mine, rising to 2Mt/yr. within two years based on a total investment of US$50 million based on management's preliminary internal model. + Development plan focussed on a higher grade, higher value apportionment of the kimberlite at circa 20Mt. As a result the plant size would be smaller leading to a lower capex over the LOM. * Building a leading vertically integrated diamond company * + The Acquisition is in line with Paragon's strategy to secure exceptional and reliable sources of large valuable diamonds, and build a leading integrated diamond house with significant interests across the investment grade diamond value chain from production all the way to the final investor and the end consumer. + Management expect that production generated from Mothae will be combined with production from Lemphane to be distributed via a sales company specifically established by Philip Falzon Sant Manduca, Executive Chairman of Paragon to enhance Paragon's revenues from the production. + Paragon has signed an MOU with Northern Fissures Limited (`NFL') to dispose of its interest in the Motete Dyke Project ("the Project"). NFL has undertaken to invest approximately US$1.5 million into definitive evaluation work on the Project over the next two years and Botle, a subsidiary of Paragon, shall retain the right to a free earn-in of up to 10% of the equity of NFL, in recognition of work undertaken to date valued at US$1 million, subject to NFL taking the project to feasibility status and being awarded a mining lease. Neither Botle nor Paragon shall be responsible for any future costs or liabilities incurred in achieving this objective. This agreement is consistent with Paragon's focus of all its energies and capital on the development of the Lemphane and Mothae kimberlite projects. Paragon's Executive Chairman, Philip Falzon Sant Manduca said, "This is atremendous opportunity, a major coup for Paragon, one which we had toprioritise the acquisition of, once Lucara announced their intention to disposeof the asset at the end of last year, and wholly justifies, in my opinion,minimally re-scheduling our intended production timetable by a matter of a fewweeks for Lemphane from Q2 to Q3 2015 to benefit from joint production savingsand production efficiencies from both assets. "This hugely important acquisition re-rates and simultaneously de-risksParagon's business model, and elevates us overnight into an important andsizeable diamond company. Our Dubai based partners, ITGT, have agreed toprovide the entire funding, for both Lemphane and Mothae, of approximatelyUS$28 million, to allow us to accelerate the combined production schedules ofboth assets. I do not expect any undue delay in signing the acquisitioncontract, as the Lesotho Government has been informed of the intendedacquisition at every step of the process, intensively so in the last two weeks,and is encouraging a rapid commencement of the production schedule, which suitsall of us. "Paragon's diamond production plans have thus increased significantly for 2015/2016 and this production of both Lemphane and Mothae can commence promptly andsimultaneously, which means greater economies of scale in overall costs,management efficiencies and production economies, with greater volumes beingsupplied by us to specific sales points including Dubai, which can onlyincrease the revenue efficiency of our entire sales strategy, as buyers fromaround the world are attracted to come to us (rather than us to them) for highquality, higher volume investment grade diamonds which are in diminishingsupply and increasing demand. "We are rapidly and successfully repositioning Paragon from having been amining company with some exploratory assets into a global top tier diamondhouse which has control of its own supply lines and distribution channels andwill enhance and optimise its revenues at every step of the diamond productionand sales chain. The acquisition of Mothae is a significant step up in thistransformation as it will deliver a further and sizeable stream of large highvalue stones when production commences contemporaneously with Lemphane in Q32015. This security of supply of investment grade diamonds and theestablishment of distribution channels all the way to the end consumer allowsus to capture as much of the revenue margin as is available, sets us apart fromour current peers and will translate into enhanced revenue and improvedshareholder returns. "Not least, the geopolitical and macroeconomic landscapes continue to promotethe attraction of mobile hard asset currencies, such as diamonds, over cash.What I love so much about Lesotho's higher valued diamonds is that they providethe optimal investment grade asset to the vast quantity of more mobile wealththat has been generated globally in the last thirty or so years, wealth thatwishes to be free of foreign exchange controls and political interference, notsubject to banking system risk and that requires a proven store of long termvalue. Even better, diamonds have an attractive inelasticity to price - as theprice appreciates, production can't increase very much, the reverse of which ishappening of course to paper money at present, where demand (velocity) hasdeclined, whilst supply (QE) is increasing resulting in competitive currencydepreciation policies and extended currency debasement, which seems to have noend in sight. "Paragon, with its intense focus on production cost controls, a bias towardsmining the investment grade diamonds, and the possession of high qualityproprietary pathways to the distribution of our production represents, in myview, an attractive and cost efficient way to invest in diamonds through apublic company. "Mothae is the perfect fit for Paragon at this stage of our growth and businessdevelopment. We have agreed to incorporate the entire Mothae senior andmid-level Lesotho based management teams into Paragon within our Lesothosubsidiary, Meso Diamonds. This should ensure continuity along with theefficient recruitment of experienced and proficient professionals, and addsimmense depth to our local capabilities both with the relationship with theGovernment of Lesotho, as well as in all the critical administrative andbudgetary matters with mining. "Since joining the board of Paragon late in August 2014, I have statedfrequently that the company was significantly undervalued by the market andthat I could not have been more optimistic about the business prospects for theCompany. Today goes some way to validating those recent sentiments, and indeedenhancing them. Upon the successful completion of the Acquisition we will havewhat we believe are two major and high class diamond deposits. "I believe increasingly that the Company remains extremely cheap relative towhat the executive believes are the value of the underlying assets of theCompany, which we expect to evidence to shareholders and prospective investorsin production within a few months' time. We have strong executive, senior andmid-level management teams. We have a top quality shareholder base in placenow. We are protecting our existing shareholders from equity dilution via debtfinancing for the Acquisition as we have previously detailed would be the case. "I look forward to providing further updates on our rapid progress as we focuson generating tremendous value for our shareholders from our enlarged assetbase, our intense focus on cost controls and net revenue maximisation." The Mothae Resource has been developed from an extensive bulk sampling andtrial mining programme and has been independently verified and signed off in2013 by The MSA Group, to Canadian Institute of Mining (CIM) standards inaccordance with NI43-101 requirements. At a bottom size cut-off of 2mm, thedeposit hosts some 39Mt of kimberlite containing 1.06M carats with an in-situvalue (per The MSA Group's report of 2013) of US$1,097 million. Mothae Resource Estimate to NI43-101 @ 2mm bco (CIM 2010; MSA Ferreira & Lynn,28 February 2013) Unit Tonnes (M) cpht US$/ct cts Description SW-WX* 0.75 2.6 $1,310 19,500 Indicated: Southwest; Weathered SW-50* 1.08 2.5 $1,364 27,000 Indicated: Southwest; to -50m SC-WX* 0.23 4.6 $695 10,580 Indicated: Southcentral; Weathered SC-50* 0.33 4.4 $737 14,520 Indicated: Southcentral; to -50m SW-300* 19.35 2.5 $1,364 483,750 Inferred: Southwest; to -300m SC-300* 3.88 4.4 $737 170,720 Inferred: Southcentral; to -300m SE-WX 0.29 2.8 $578 8,120 Inferred: Southeast; Weathered SE-50 0.56 2.6 $615 14,560 Inferred: Southeast; to -50m SE-300 5.94 2.6 $615 154,440 Inferred: Southeast; to -300m N-WX 0.59 2.5 $737 14,750 Inferred: North; Weathered N-300 5.96 2.4 $780 143,040 Inferred: North; to -300m Ind. 2.39 3.0 $1,123 71,600 Indicated Resource Inf. 36.57 2.7 $1,028 989,380 Inferred Resource Total 38.96 2.7 $1,034 1,060,980 Mine Plan* 25.62 2.8 $1,193 726,070 Southwest & Southcentral It is Paragons' intention to fast-track Mothae into substantial production byusing and upgrading the existing 75 tonne per hour trial mining plant, which islocated on site under care and maintenance, and forms a part of theAcquisition. Production can be re-established at minimal cost within a fourmonth period, at a rate exceeding 100tph and once established, development willcommence on a full-scale 250tph+ long-term main production facility which isearmarked to be operational in producing within 18 months of initiation.Production will initially be concentrated on the high-grade/high-valueSouthwest/Southcentral resource, which has been shown from previous drillingprogrammes to exceed 25Mt and over 0.7Mcts with an in-situ value of US$867million. This high value kimberlite can sustain full production, as planned,for a minimum of 12 years, yielding annual revenue in excess of US$60 million. Furthermore, this sub-resource has been shown to host circa 15% of carats asdiamonds in excess of 10cts, and 2% of carats in diamonds in excess of 100cts,with significant potential for large, high value diamonds. The highest valuediamond recovered from Mothae to date was a 56.5 carat diamond valued at overUS$31,000 per carat in December 2011, and the single highest diamond valueachieved was US$42,000 per carat for a 28.9 carat stone also in December 2011. Paragon'sDr Stephen Grimmer said "The proposed acquisition of the 75% equity inthe Mothae Mine brings both major synergies and a resource status addition toour asset base to Paragon, significantly increasing the size of the Company'sproject portfolio overnight. I look forward to integrating the two projects,working with the existing and experienced Mothae management team on the groundto fast-track the Mothae Mine back into production, and continuing ourcomprehensive development of the Lemphane Project, which is currently underway.Working together, I believe both projects can achieve significant reductions inoverheads and operating costs, and with both projects at full capacity, within3 years, Paragon has the potential to be a 5Mt/yr producer of in excess of100,000 exceptional carats with average values exceeding US$1,500/carat (atcurrent prices), placing Paragon amongst the front-runners of independentdiamond producers. Our local experience and operation familiarity in Lesothoand close relationships with contractors, stakeholders and Government partnersbode well for this development." Further information on the Mothae Project The Mothae Project consists of a complex, circa 8 hectare kimberlite with astated resource (indicated/inferred) per the independent 28 February 2013,NI43-101 compliant Technical Report and Mineral Resource Estimate* (@-2mmbottom cut) of: Tonnes (M) Grade (cpht) US$/ct Cts contained Value - US$ (M) (M) 38.96 2.7 1,034 1.060 1,097 *in accordance with Canadian Institute of Mining (CIM) standards for reportingof resources and reserves (2010) The Mothae Mining Lease covers 24.7km² including the kimberlite, and wasgranted by the Government of Lesotho in September 2009 for a period of 10years, extendable by a further 10 years to 2029; it envisages full-scaleproduction in the region of 2-3Mt/yr. The Mothae Mine lies only 5km from theworld-class Letšeng Diamond Mine, renowned for the highest value diamondproduction in the world, and less than 4km from a main power line and recentlyconstructed all-weather asphalt highway, linking to the South African border amere 100km away. Mothae Diamonds is owned 25% by the Government of Lesotho and 75% by LucaraDiamond Corp (Lucara); this latter equity being the subject of the Acquisitionby Paragon. Lucara has previously funded an extensive trial mining programme,processing in excess of 0.6Mt of kimberlite and recovering over 20,000 carats,as well as undertaking detailed geological modelling, which goes to therobustness of the stated resource. An extensive infrastructure, including anominal 75tph (0.5Mt/yr) process plant, workshops, diesel-generated powersupply, accommodation camp, offices, water dams and tailings storage facility(TSF) exists on site and is part of the Acquisition. Paragon has identified an optimum operating strategy for the Mothae kimberlite,which involves establishing and maintaining robust project economics.Operations will thus commence, and concentrate on the circa 4.5 hectaresouthern lobe of the kimberlite, which hosts a minimum of 20Mt kimberlite to adepth of circa 200m, at grades of between 2.5-4.6cpht and US$737-US$1,364/ctachieved for diamonds from +3DTC (~0.04cts stn-1) to 82cts stn-1. Paragon will engage independent consultants to re-calculate the reserve andresource status for the southern lobe, confirming the current in-houseestimates. Paragon already has extensive knowledge of the lay-out and internalstructure of the existing process plant, and is working with its plantdesigners and manufacturers to rationalise the design, upgrade the capacity andinstall the latest X-ray Transmission Technology (XTR) in order to increasecapacity to in excess of 100tph (0.75Mt/yr) and recover diamonds in excess of200 carats at high efficiencies and with minimized likelihood of breakage. TheCompany's civil engineering contractors have also previously worked on designupgrades for the TSF for Mothae Diamonds, and these designs are available forrapid implementation. The Mothae kimberlite targeted for mining has an exceedingly coarse, high valuediamond population - modelled to exceed 15% of carats above 10 carats and 2% ofcarats above 100 carats in the 20+Mt SW facies. The 14 largest (from 10.6-56.5carats) high value diamonds previously recovered achieved values (September2012 adjusted price book) ranging from US$5,482-US$41,869 per carat, a weightedaverage of US$21,286/carat at an average size of 22.2 carats, values not fullyreflected in the modelled US$7,900-US$18,000/carat assigned to the 10-200+carat diamonds. Subject to independent competent persons' verification, in-house calculationsby Paragon have identified a 20+Mt portion of the resource, which can be minedat an open pit waste: ore ratio ≤1.5:1 and, at a provisional -3.5mm bottom cut,can yield in excess of 2.2cpht at in excess of US$1,600/ct, or in excess ofUS$35/t ore value on projected mining costs of under US$15/t. Provisional mine planning is based on a rapid upgrade and re-commissioning ofthe existing plant, with capacity production predicted within approximately 6months. During this phase of production it is intended to process in excess of1.5Mt of primarily soft kimberlite, utilising the existing TSF which isupgradable to meet this requirement. During this interim period a new,stand-alone diamond process plant, designed for the optimum recovery of largeand ultra large diamonds (10-500+ carats) and intended to minimize water andenergy consumption, will be constructed; the general back-stripping and pitopening will be undertaken; construction of a new dedicated TSF to accommodate(principally) coarse process plant tailings will also be implemented.Infrastructure augmentation will also take place, including, if possible, theprovision of grid-electrical power from adjacent national power grid linescurrently undergoing upgrade and/or installation - use of grid power equates toa provisional saving of up to US$2/t on process costs. It is envisaged that theplant will have a capacity of at least 250tph (1.75Mt/yr) capable of producing35,000+ carats per annum at a revenue exceeding US$55 million on currentprojections. The mine plan will be premised on the immediate commencement of operationsusing existing facilities (subject to the time constraints to re-furbish/upgrade the present plant) and the implementation of full production at theearliest opportunity, subject to the design, construction and commissioning ofthe new process plant, and a subsequent mine life exceeding 10 years. Details of the Acquisition Paragon has signed an MOU which grants the Company exclusivity until 30September 2015 to acquire a 75% interest in the share capital of MothaeDiamonds Pty Ltd a company incorporated in Lesotho, from Lucara Diamond Corp,the remaining 25% will still be held by the Government of Lesotho. Theconsideration is US$8.5 million and is to be satisfied by way of additionaldebt funding which is to be procured from ITGT, the terms of which have beenagreed, subject to contract. A break fee of US$250,000 is payable if theCompany terminates the MOU or fails through its fault to complete thetransaction by 30 September 2015. If the production from Mothae is not passed through the sales company notedabove then a mine gate royalty of 5% will be payable to Lucara on the first6.75Mt of ore processed at Mothae. The net book value of Mothae included within Lucara's statutory financialstatements for the year ended 31 December 2013, was US$15.8 million and Lucararecorded a loss before tax of US$0.8 million on Mothae over the twelve monthperiod. Following Lucara's decision to divest Mothae because it no longerfitted Lucara's investment criteria, which was announced on 22 December 2014,Mothae's carrying value was written off in Lucara's financial statements forthe year ended 31 December 2014. Completion is subject to obtaining approval from the Government of Lesotho, abinding share purchase agreement, funding subject to contract and certain otherregulatory approvals. Further announcements regarding the Acquisition will be made as soon aspracticable. **ENDS** For further information please visit www.paragondiamonds.com or contact: Philip Falzon Sant Paragon Diamonds Limited +44 (0) 20 7182 1920Manduca Simon Retter Paragon Diamonds Limited +44 (0) 20 7182 1920 David Hignell Northland Capital Partners +44 (0) 20 7382 1100 LimitedGerry Beaney (Nominated Adviser) John Howes Northland Capital Partners +44 (0) 20 7382 1100 LimitedMark Treharne (Sales and broking) Felicity Winkles St Brides Partners Limited +44 (0) 20 7236 1177 Frank Buhagiar St Brides Partners Limited +44 (0) 20 7236 1177 Notes Paragon Diamonds, in addition to the above Acquisition, has a project inLesotho, the Lemphane Kimberlite Pipe Project, located close to the world classLetšeng mine, Lesotho's largest diamond mine. Lemphane is the last knownkimberlite to be developed in Lesotho. The first of a two stage productionprogramme is expected to commence in 2015 which will further define theresource at Lemphane. As increased tonnages of kimberlite are processed theproportion of larger diamonds recovered will improve, increasing the averagevalue of diamonds recovered at the project, as was the case at Letšeng. In accordance with the AIM Rules for Companies, the information in thisannouncement has been reviewed by Stephen Grimmer PhD., Msc., a qualifiedgeologist with over 25 years diamond exploration experience. The MSA Group haveprovided an opinion which verifies and confirms the in-house estimates perStudy J3105.