Stellar Diamonds Regulatory News (STEL)

NOT FOR DISTRIBUTION IN THE UNITED STATES OR FOR DISSEMINATION TO US NEWS WIRE SERVICES.

2 November 2015

AIM: STEL

Stellar Diamonds plc

("Stellar" of the "Company")

Capital Reorganisation

Issue of convertible loan notes and warrants

Cancellation of existing convertible loan note and warrant

Conditional subscription of 7,594,692 Subscription Shares

Approval of a waiver of Rule 9 of the City Code on Takeovers and Mergers

and

Notice of General Meeting

Highlights

· Proposed capital reorganisation: every 50 existing ordinary shares of 1 pence each to be consolidated into 1 consolidated share of 50.0 pence and each consolidated share will then be sub-divided into 1 new ordinary share of 1 pence ("New Ordinary Share") and 1 new deferred share of 49 pence;

· Convertible loan note to raise US$1.65 million (approximately £1.06 million). Conversion at an effective price of 0.56 pence per existing ordinary share (28.18 pence per New Ordinary Share);

· Issue of warrants with aggregate exercise price of US$1.65 million. Effective exercise price of 0.35 per existing ordinary share (17.61 pence per New Ordinary Share);

· Subscription to raise £497k at an effective price per existing ordinary share of 0.131 pence (6.55 pence per New Ordinary Share);

· Use of Proceeds to enable Stellar to apply for the Tongo mining licence, resume trial mining at Baoulé and for general working capital needs.

Stellar Diamonds plc, the London listed (AIM: STEL) diamond development company focused on West Africa, announces that it has entered into a conditional convertible loan agreement with Deutsche Balaton AG ("Deutsche Balaton") to raise US$1.65 million (approximately £1.06 million) by way of the issue of new convertible loan notes ("New CLNS"). Additionally the Company has granted Deutsche Balaton warrants to subscribe for new ordinary shares for an aggregate subscription price of US$1.65 million (approximately £1.06 million) ("New Warrants").

The Company has also entered into conditional agreements to raise approximately £497,452 by way of a subscription through the issue of 7,594,692 New Ordinary Shares ("Subscription Shares") (being those ordinary shares in issue following the capital reorganisation, details of which are set out below) in aggregate at 6.55 pence per New Ordinary Share ("Subscription").

As part of the Subscription, the Company has entered into a conditional subscription agreement with Deutsche Balaton, which has agreed, pursuant to the terms of the Subscription, to subscribe for 6,912,692 Subscription Shares at the Subscription Price. Following completion of the Subscription, Deutsche Balaton will be interested in 29.00 per cent. of the so enlarged issued share capital of the Company.

The weighted average price of the New CLN conversion price, New Warrant exercise price and Subscription Price in respect of Deutsche Balaton's investment in Stellar is approximately 0.31 pence per Existing Ordinary Share for a total investment of US$4 million or approximately £2.6 million, should the New Warrant be exercised in full. The New Warrants are exercisable following conversion or repayment of the New CLN.

Subject to completion of the New CLNs, it intended that the initial convertible loan notes for US$0.33 million granted to Deutsche Balaton ("Initial CLN") and the initial warrants granted to Deutsche Balaton, as announced on 14 August 2015, be cancelled and be replaced by the New CLNs and the New Warrants respectively.

Subject to completion of the New CLNs ("CLN Completion"), the proceeds intended to be received from the issue of the New CLNs would be approximately US$1.2 million (approximately £0.77 million) ("CLN Net Proceeds"), being US$1.65 million less US$0.33 million already received by the Company pursuant to the Initial CLN less corporate finance and legal expenses in connection with the New CLNs.

The net proceeds of the CLN ("CLN Net Proceeds") and the net proceeds of the Subscription of approximately £1.26 million in aggregate will be used to provide ongoing working capital for the Group as it seeks to complete the Tongo mining licence application and resume the trial mining of the diamondiferous Baoulé kimberlite pipe which has to date yielded over 6,400 carats with two diamond sales being completed realising over US$700,000. The application for the Tongo mining licence will be formally submitted in the near future and the approval process is anticipated to be completed later in 2015 or in early 2016 (although there is no guarantee in respect of the timing of receipt of the mining licence application or its approval).

The terms of the New CLNs are such that Deutsche Balaton may elect for the New CLNs to be converted into up to 3,747,368 New Ordinary Shares in the Company ("PLC Conversion") at a conversion price of 44.03 cents (approximately 28.18 pence based on the current exchange rate) per New Ordinary Share (for illustrative purposes only, this is equivalent to a price of approximately 0.56 pence per existing ordinary shares prior to the proposed capital reorganisation). However, this is subject to Deutsche Balaton having a maximum interest in the enlarged share capital of the Company of 37.5 per cent. Alternatively Deutsche Balaton may elect to become a joint venture partner and convert the New CLN into shares in one or more of the Group's projects ("Subsidiary Conversion"). They may also elect for a combination of PLC Conversion and a Subsidiary Conversion ("Mixed Conversion").

Similarly, upon exercise of the New Warrants, Deutsche Balaton may elect to subscribe for up to 5,995,789 New Ordinary Shares ("PLC Exercise"), subject to Deutsche Balaton having a maximum interest in the New Ordinary Share Capital of 37.5 per cent. A PLC Exercise would be at an exercise price of 27.52 cents (approximately 17.61 pence based on the current exchange rate) per New Ordinary Share (for illustrative purposes only, this is equivalent to a price of approximately 0.35 pence per existing ordinary share prior to the capital reorganisation). Alternatively Deutsche Balaton may elect to subscribe for shares in one of the Group's subsidiaries ("Subsidiary Exercise") or elect for a combination of both PLC Exercise and Subsidiary Exercise ("Mixed Exercise").

Further details of the New CLNs and the New Warrants are set out below.

WAIVER OF RULE 9 OF THE TAKEOVER CODE

Without a waiver of the obligations under Rule 9 of the City Code, PLC Conversion of the New CLNs and PLC Exercise of the New Warrants would require the Concert Party (comprising Deutsche Balaton and Wilhelm K. Thomas Zours, the majority shareholder of Deutsche Balaton and the Chairman of the Supervisory board of Deutsche Balaton (the "Concert Party")), to make a general offer for the entire issued and to be issued share capital of the Company not already held by the Concert Party. The Panel has agreed with the Company to grant such a waiver ("Waiver"), to allow Deutsche Balaton to hold up to a maximum of 37.5 per cent. of the enlarged share capital of the Company, subject to the passing at the General Meeting by independent Shareholders (being Shareholders other than the members of the Concert Party) of the Whitewash Resolution, to be taken on a poll. Accordingly, the issue of the New CLNs and the New Warrants is conditional on the Waiver being approved by the Independent Shareholders at a general meeting to be held on 19 November 2015.

PLC Conversion in full would result in Deutsche Balaton owning greater than 37.5 per cent of the so enlarged issued share capital of the Company (assuming no other Ordinary Shares were issued other than in respect of the Subscription Shares), accordingly PLC Conversion in full and PLC Exercise would not be possible for so long as they would result in Deutsche Balaton being interested in greater than 37.5 per cent of the so enlarged share capital of the Company unless a new waiver of Rule 9 of the Takeover Code was obtained.

Deutsche Balaton and parties acting in concert with it currently own 100,000 Existing Ordinary Shares, which represents 0.01 per cent. of the existing ordinary share capital. Subject to completion of the Subscription and CLN Completion, if partial PLC Conversion were to occur, being the issue of 3,239,658 New Ordinary Shares ("Partial PLC Conversion"), Deutsche Balaton and parties acting in concert with it would be interested in 10,154,350 New Ordinary Shares (subject to the pre-emption rights and anti-dilution provisions set out below), representing a maximum of 37.51 per cent. of the so enlarged share capital assuming that no other Ordinary Shares are issued other than the Subscription Shares.

The issue of the New CLNs and grant of the New Warrants is also conditional on, inter alia, the Capital Reorganisation.

Subject to CLN Completion, it is intended that Hansjörg Plaggemars, a director of Deutsche Balaton, will be appointed to the Board of the Company. An announcement will be made at the relevant time to confirm that such an appointment has been made. Following CLN Completion and the intended subsequent appointment of Mr. Plaggemars to the Board, the Directors will consider the appropriateness of the size of the Board and whether there is any requirement to rationalise the Board going forwards.

Further details on the proposals (comprising the Subscription, capital reorganisation, issue of the New CLNs and the New Warrants, cancellation of the Initial CLN and Initial Warrant and Waiver) (together the "Proposals") together with the Notice of General Meeting are contained in the circular being posted to Shareholders (the "Document"). The Document will only be posted to those Shareholders who have not previously elected to receive Shareholder communications electronically. This announcement will be available on the Company's website at www.stellar-diamonds.com shortly. 

USE OF PROCEEDS OF THE NEW CLN AND THE SUBSCRIPTION

The CLN Net Proceeds and the net proceeds from the Subscription ("Subscription Net Proceeds") will provide ongoing working capital for the Group and funding for exploration activities. The application for the mining licence at Tongo will be formally submitted in the near future and the approval process is anticipated to be completed later in 2015 or early 2016. Although there is no guarantee of this timing the licence approval is subject to the regulations of the Mines Act (2009) of Sierra Leone, which allows for conversion of an exploration licence to a mining licence on completion of an economic study, mine plan, financial model, environmental and social impact study ("ESIA") and the subsequent award of an environmental licence. The economic study and financial model are now complete and were announced on 24 August 2015. The ESIA process is ongoing though well advanced and the full report is expected to be submitted to the Environmental Protection Agency ("EPA") in the near future. Subject to the EPA approving the report, the environmental licence is expected to be issued. The Company intends to formally submit its documents to apply for the mining licence before its environmental licence has been issued in order to accelerate the process. The final ratification of the mining licence will be subject to the granting of an environmental licence.

Subject to CLN Completion, the CLN Net Proceeds will be used to repay any amounts drawn by the Company pursuant to the Director's Loan and to repay the outstanding amount of US$225,000 under the agreement between YA Global Master SPV Ltd and the Company ("Yorkville Agreement"). Furthermore the CLN Net Proceeds and the Subscription Net Proceeds will be used for the ongoing process in relation to the Tongo mining licence application, continuation of the trial mining at Baoulé and for general working capital purposes.

In addition to the CLN Net Proceeds and the Subscription Net Proceeds, in the event of Exercise of the New Warrants, the Company will receive up to US$1.65 million, being the aggregate subscription price.

CURRENT TRADING, STRATEGY AND PROSPECTS

The strategy of Stellar is to become a diversified hard rock diamond producer in West Africa. The Company is focussed on two projects namely, Tongo in Sierra Leone and Baoulé in Guinea.

In Sierra Leone extensive exploration and evaluation of the Tongo project has led to the development of a 1.45 million carat resource at Tongo which has formed the basis of the recent Preliminary Economic Assessment ("PEA"). The results of this study indicate the Tongo project has economic potential and a significant pre-tax net present value (of US$53 million) to Stellar. The Company has prioritised and accelerated the application for a mining licence at Tongo such that the resource can be advanced to the development phase.

The capital cost to develop the Tongo mine is estimated to be approximately US$24.8 million (as stated in the PEA). Stellar intends to seek this funding primarily via sources of debt. If successful, the funding will enable the surface and underground mine at Tongo to be developed with initial production estimated within 12 months of commencing the mine development. As stated in the PEA, a summary of which was announced on 24 August 2015, the Tongo mine is expected to yield robust cash flow of US$28 million from surface mining production during the first four years of the life of mine, after which underground mining will continue to year 18 under the current mine plan and yield an estimated US$358 million in revenues. In total, the PEA estimated that the mine is expected to produce 956,000 carats with 117,000 carats from surface mining and 838,000 carats from underground mining, with total gross revenues of US$387 million. The Directors and independent consultants of the Company believe that there is significant scope to increase and enhance both the life of mine and revenues through development of additional resources at the project.

Trial mining evaluation of the 5 hectare kimberlite pipe at Baoulé is approximately half completed with almost 50,000 tonnes having been processed and over 6,400 carats recovered at a +1.25mm grade of 13.5cpht. The objective remains to process 100,000 tonnes of kimberlite from the pipe to determine with confidence the grade and value of the kimberlite and to justify the next stages of the project development. Diamond sales from this trial mining evaluation have to date realised over US$700,000 with the latest sale in May 2015 achieving an average price of US$156 per carat. Further diamond sales are expected during the course of this trial mining and are expected to yield further revenues to the Company. Due to current weak rough diamond market conditions, the Company expects the next diamond sale to be pushed back to the first quarter of 2016.

The rainy season in Guinea commenced in July which led to a hiatus in the trial mining activity at Baoulé during the height of the rains. It is expected that trial mining will recommence in November 2015 which the Directors believe should result in an increase in diamond inventory for the next export and planned sale.

The Baoulé semi-industrial mining licence was transferred into the joint venture company, Resources Tassiliman Baoulé ("RTB"), on the 27th October 2015 and was effectively renewed for a period of five years. Stellar holds 75% of the shares of RTB under the joint venture agreement with local Guinean partner company Tassiliman SARL holding the remaining 25%.

Stellar also holds a number of other projects in its portfolio that are currently on care and maintenance whilst the Company focusses on Tongo and Baoulé. The Droujba exploration licence was renewed on the 27th October 2015 for a further two years. Stellar has defined a 3 million carat resource at Droujba which can be further increased through additional drilling and bulk sampling work, particularly along the Katcha Dyke.

The Company has accrued net Non-Executive Director fees of approximately £53,000 in order to conserve cash. Once the Company is no longer in a close period under the AIM Rules, the fees will be converted into New Ordinary Shares of the Company at a price to be determined, in order to further conserve cash for the Company. Conversion of these fees into New Ordinary Shares is expected to occur following publication of the Company's annual results for the year ended 30 June 2015 when the Company is no longer in a close period under the AIM Rules. In addition, the Company has accrued net salary of approximately £53,000 in relation to the Chief Executive Officer, approximately £25,000 of which is expected to be converted into New Ordinary Shares of the Company once the Company is no longer in a close period under the AIM Rules at a price to be determined, with the remainder paid following CLN Completion.

GENERAL MEETING AND ADMISSION TO AIM

Subject to passing of the necessary resolutions at the General Meeting to be held at 10.00 a.m. on 19 November 2015 at the offices of Daniel Stewart at 33 Creechurch Lane, London, EC3A 5EB, (further details of which are set out below), Admission to trading on AIM is expected to occur on 20 November 2015. A further announcement will be made in due course following the General Meeting.

THE NEW CONVERTIBLE LOAN NOTES

The New CLNs are secured convertible loan notes each with a nominal amount of US$330,000 (and an aggregate nominal amount of US$1,650,000). The Initial Note of US$330,000 issued to Deutsche Balaton in August 2015 will be cancelled upon issuance of the New CLNs and the proceeds received by the Company from the Initial Note shall be deemed to have been drawn down under the New CLNs such that the net proceeds received by the Company on the CLN Issue Date will be US$1,320,000 (before expenses).

Issue of the New CLNs is conditional on, inter alia:

· Approval by Shareholders of a resolution in respect of the Waiver;

· Approval by Shareholders of resolutions in respect of the relevant authorities to issue the PLC Conversion Shares and PLC Exercise Shares for the purposes of Companies Act 2006 in the event of PLC Conversion and PLC Exercise in full;

· Approval by Shareholders of a resolution in respect of the capital reorganisation, further details of which are set out below;

· The Company undertaking to repay all monies due under the Yorkville Agreement; and

· Deutsche Balaton entering into a relationship agreement, further details of which are set out below.

Subject to CLN Completion and the terms and conditions set out below, the New CLNs may be converted into either New Ordinary Shares in the Company and/or shares in one or more of the Group's subsidiaries. Completion of the Subscription will result in the issue of 6,912,692 New Ordinary Shares to Deutsche Balaton and would result in Deutsche Balaton owning 29.00 per cent. of the so enlarged issued share capital of the Company. Subsequent PLC conversion in full would result in Deutsche Balaton owning 38.7 per cent. of the so enlarged issued share capital of the Company (assuming no other ordinary shares were issued). Accordingly, PLC conversion in full is not possible for so long as it would result in Deutsche Balaton holding greater than 37.5 per cent. of the issued share capital of the Company unless a new waiver of Rule 9 of the Takeover Code is sought.

Key terms of the New CLNs

The maturity date of the New CLNs is 31 October 2017 unless redemption of the New CLNs or conversion into shares ("Conversion") has occurred prior to this date ("Maturity Date"). The Maturity Date may be extended by a maximum of six months in the event that Conversion or Exercise is not possible at the Maturity Date as a result of, inter alia, Deutsche Balaton being in possession of unpublished price sensitive information. Interest is payable on the New CLNs at 6% per annum to be paid in cash in arrears, with the first instalment to be paid on the first anniversary of the CLN Issue Date and thereafter every six months. On Conversion, any outstanding interest will become payable.

The New CLNs may be converted into up to 3,747,368 New Ordinary Shares pursuant to a PLC Conversion, which is further described below. Four New CLNs are convertible into 749,473 New Ordinary Shares each and one of the New CLNs is convertible into 749,476 New Ordinary Shares. Alternatively, Deutsche Balaton may elect to convert each New CLN into shares in one or more of the Group's subsidiaries pursuant to a Subsidiary Conversion, which is described below, or may elect to carry out a combination of PLC Conversion and Subsidiary Conversion. Each of the New CLNs may be converted in whole only.

The New CLNs may be redeemed in cash at any time at the Directors' discretion, providing that 10 weeks' notice is given to Deutsche Balaton. Deutsche Balaton may, at its sole discretion, require that the New CLNs be converted rather than redeemed. The New CLNs may also be redeemed early in certain circumstances, including customary events of default.

Until the Maturity Date, or at any time when it holds 18.75 per cent. or more of the Company's Ordinary Shares, Deutsche Balaton has the right to appoint one person to the Board as a non-executive director.

The terms of the New CLNs include certain rights of consent of Deutsche Balaton. From the CLN Issue Date until repayment and/or Conversion of the New CLNs in full, Deutsche Balaton is required to give consent, such consent not to be unreasonably withheld or delayed, in the event that: i) any Subsidiary enters into any third party contracts where the aggregate liability under all contracts with that third party exceeds US$100,000 per annum; and ii) any Subsidiary intends to dispose of or pledge any of its assets (provided that this restriction shall not apply to any inventory of diamonds held by the Company). In the event that the Directors consider that Deutsche Balaton has unreasonably withheld or delayed its consent, the parties agree that the nominated adviser shall appoint an independent third party as soon as practicable to determine whether such consent has been unreasonably withheld or delayed.

Additionally the Company has agreed, inter alia, to ensure that any Subsidiary will be free of debt other than inter-company loans and any non-recourse project finance (meaning any finance without recourse to the Company's guarantee for the project finance repayment) that may have been obtained by the Subsidiary for the development of any project and has also agreed to offer any assets that it may consider disposing of to Deutsche Balaton to allow them the opportunity to match any third party offers.

Pursuant to the terms of the New CLNs Agreement, Deutsche Balaton shall also have the right (but not the obligation) to match any offer and terms from a debt provider for up to 37.5 per cent. of the debt issuance. For the avoidance of doubt, unless Deutsche Balaton validly elects to participate in the debt issuance, the Company shall be free to create any security that may be required by a third party debt provider to secure the debt (including creating security over any of the Subsidiaries and/or projects) without recourse to Deutsche Balaton.

Subject to any restrictions under the Takeover Code and the consent of the Company, the New CLNs are transferable. The New CLNs are subject to standard anti-dilution provisions and protections including, inter alia, in the event of further capital reorganisations in addition to the Capital Reorganisation.

Security

The Company has agreed to procure that Stellar Diamonds Guernsey will negotiate in good faith with Deutsche Balaton to enter into an agreement granting security for repayment of the New CLNs in favour of Deutsche Balaton, by no later than 31 December 2015. The security shall be granted by Stellar Diamonds Guernsey over all fully paid shares, and free from third party rights, in Sierra Diamonds Limited which owns the Tongo mining licence. Deutsche Balaton agrees that such security shall be unconditionally released prior to the date of any financing arrangements to be put in place in connection with the development of the Tongo mine if this is requested by the party(ies) providing such financing.

Conversion

As noted above, New CLNs may be converted into New Ordinary Shares via a PLC Conversion or shares in one or more Subsidiaries via Subsidiary Conversion or a mixture of the two (Mixed Conversion).

PLC Conversion

In the event of PLC Conversion, the aggregate nominal amount of the New CLNs, being US$1.65 million, may be converted into up to 3,747,368 New Ordinary Shares at an effective price of 44.03 cents (approximately 28.18 pence based on the current exchange rate) per New Ordinary Share (for illustrative purposes only, this is equivalent to a price of approximately 0.56 pence per Existing Ordinary Share prior to the Capital Reorganisation).

As noted above, PLC conversion in full is only possible for so long as it would not result in Deutsche Balaton holding greater than 37.5 per cent of the issued share capital of the Company unless a new waiver of Rule 9 of the Takeover Code is sought.

The PLC Conversion Shares issued following PLC Conversion shall be credited as fully paid and rank pari passu with the New Ordinary Shares in issue.

Subsidiary Conversion and Mixed Conversion

In the event of a Subsidiary Conversion, Deutsche Balaton will (subject to any joint venture partner, governmental, regulatory and other approvals or third party consents required) be obliged to participate as a joint venture partner in any project owned and/or operated by the relevant subsidiary and will contribute to the development of such project at least pro rata to its shareholding (or suffer dilution). Accordingly, Deutsche Balaton and the Company would enter into an appropriate joint venture agreement or (where applicable) join into any existing joint venture arrangement by way of a deed of adherence to the terms thereof.

The number of shares to be issued in a subsidiary pursuant to a Subsidiary Conversion or Mixed Conversion would be based on a set formula. The Company will submit to Deutsche Balaton a schedule of the Company's allocation of value (net of project finance) amongst the Group's subsidiaries and projects, relative to each other, such allocation being at the discretion of the Company. The outcome of this valuation exercise is that a number of "points" (Subsidiary Valuation Percentage Points "SVPP") are available for conversion into shares in one or more subsidiaries. This is described further in the Document.

Shareholders should note that it may be possible that Subsidiary Conversion (and /or Subsidiary Exercise) could result in the complete disposal of one or more of the Group's projects. However such disposals would be subject to any applicable AIM Rules. For example a disposal which was deemed to result in a fundamental change of business under the AIM Rules would be subject to Shareholder approval at that time. The Directors however consider this unlikely since such a disposal could only be a result of the Company applying no, or a low, value to a Subsidiary and Deutsche Balaton opting to acquire that Subsidiary through a Subsidiary Conversion (and/or Subsidiary Exercise). Furthermore, Deutsche Balaton is an investment company and not a mining company and has stated to the Directors that its preference is a PLC Conversion to gain exposure to the portfolio of assets owned by the Company. There can however be no guarantee that Deutsche Balaton will elect to pursue a PLC Conversion (and/or PLC Exercise) rather than a Subsidiary Conversion or Mixed Conversion (or Subsidiary Exercise or Mixed Exercise).

THE NEW WARRANTS

Subject to CLN Completion, the Company will grant Deutsche Balaton the New Warrants. The New Warrants may be exercised via a PLC Exercise, resulting in Deutsche Balaton subscribing for up to 5,995,789 New Ordinary Shares if exercised in full (being an exercise price of 27.52 cents, or approximately 17.61 pence based on the current exchange rate) per New Ordinary Share and equivalent to approximately 0.35 pence per existing ordinary share in issue prior to the Capital Reorganisation), or via a Subsidiary Exercise, resulting in Deutsche Balaton subscribing for shares in one or more of the Group's subsidiaries, or a Mixed Exercise being a combination of subscribing for both New Ordinary Shares in the Company and shares in one or more subsidiaries as a result of Exercise. The aggregate subscription price for the New Warrants is US$1.65 million (four New Warrants being exercisable into 1,199,157 New Ordinary Shares and another one into 1,199,161 New Ordinary Shares).

The New Warrants are exercisable at any time during the period commencing on the earlier of Conversion or Repayment and ending two business days after the Maturity Date. The Maturity Date may be extended by a maximum of six months in the event that Conversion or Exercise is not possible at the Maturity Date as a result of, inter alia, Deutsche Balaton being in possession of unpublished price sensitive information.

Each of the New Warrants may only be exercised in whole and not in part unless Exercise in full is not possible pursuant to the AIM Rules or the Takeover Code. In particular, under the proposed Waiver of Rule 9 of the Takeover Code, Deutsche Balaton may hold no more than 37.5 per cent of the issued share capital of the Company ("Maximum Percentage Holding") unless a new waiver of Rule 9 of the Takeover Code is obtained. Accordingly, following the issue of the Subscription Shares and following Partial PLC Conversion, assuming that no other new ordinary shares were issued and there was no reduction in Deutsche Balaton's shareholding, then PLC Exercise would not be possible since this would result in Deutsche Balaton being interested in greater than 37.5 per cent of the so enlarged share capital of the Company.

The New Warrants are subject to standard anti-dilution provisions, in the event of further capital re-organisations in addition to the Capital Reorganisation.

In the event of Subsidiary Exercise, the principles set out above in relation to Subsidiary Conversion will be used to determine the percentage holding in a subsidiary that Deutsche Balaton would obtain.

Subject to any restrictions under the Takeover Code and the consent of the Company, the New Warrants are transferable.

PRE-EMPTION RIGHTS AND ANTI-DILUTION PROVISIONS OF THE NEW CLNS AND NEW WARRANTS

The terms of the New CLNs and the New Warrants include certain clauses which allow Deutsche Balaton to maintain a maximum percentage holding of 37.5 per cent. in the New Ordinary Share Capital in the event of there being additional share issuances following the issue of the New CLNs and until the Maturity Date, which would otherwise dilute Deutsche Balaton's maximum potential holding in the New Ordinary Shares.

If at any time following the CLN Issue Date and until the Maturity Date, the Company intends to issue any New Ordinary Shares on a non pre-emptive basis, for cash and/or non-cash consideration (the "Relevant Issuance"), including on the exercise or conversion of rights to subscribe for Ordinary Shares or securities convertible into Ordinary Shares, subject to consultation with the Panel, Deutsche Balaton may elect to participate in such Relevant Issuance for such amount of New Ordinary Shares (the "Pre-Emptive Amount") so as to maintain its percentage shareholding that it had (or would have assuming PLC Conversion and PLC Exercise in full) immediately prior to the Relevant Issuance, being a maximum percentage holding of 37.5 per cent.

In the event that Deutsche Balaton has not already carried out a PLC Conversion and PLC Exercise upon being provided with advance notice of a Relevant Issuance by the Company, in order to achieve its maximum percentage holding of 37.5 per cent., Deutsche Balaton would need to carry out PLC Conversion and PLC Exercise of any unconverted amounts of the New CLNs and any unexercised amount of the New Warrants simultaneously with participation in a Relevant Issuance for the Pre-Emptive Amount.

If Deutsche Balaton has not carried out a PLC Conversion and/or PLC Exercise in accordance with the paragraphs above, but wishes to participate in a Relevant Issuance (as defined above), it may only participate in the Relevant Issuance so that it holds less than 30 per cent. of the issued share capital of the Company unless a new waiver of Deutsche Balaton's obligations under Rule 9 of the Takeover Code is obtained ("New Waiver").

Following completion of the Subscription, Deutsche Balaton will be interested in 6,912,692 New Ordinary Shares, being 29.00 per. cent. of the enlarged share capital. Subsequent PLC Conversion and PLC Exercise in full would result in Deutsche Balaton holding 49.6 per cent. of the so enlarged share capital of the Company which would be in excess of the Maximum Percentage Holding. Accordingly PLC Conversion and PLC Exercise in full would not be possible for so long as it would result in Deutsche Balaton being interested in greater than 37.5 per cent of the so enlarged share capital of the Company unless a new waiver of Deutsche Balaton's obligations under Rule 9 of the Takeover Code is obtained. If subsequent to the Subscription Deutsche Balaton participates in a Relevant Issuance which increases Deutsche Balaton's percentage holding in the Company (but such holding still being less than 30 per cent. of the issued share capital of the Company unless a New Waiver is sought), then PLC Conversion and/or PLC Exercise subsequent to this would continue to be restricted to the extent that Deutsche Balaton may hold no more than 37.5 per cent of the ‎ issued share capital unless a New Waiver of Deutsche Balaton's obligations under Rule 9 of the Takeover Code is obtained‎ (i.e only partial PLC Conversion and/or PLC Exercise may be possible). 

RELATIONSHIP AGREEMENT

The Company, Cairn and Deutsche Balaton have entered into the Relationship Agreement dated 30 October 2015 which will govern the relationship between the Company and Deutsche Balaton following CLN Completion to ensure that the Group and its business shall be managed independently for the benefit of shareholders as a whole.

THE SUBSCRIPTION

The Subscription will raise approximately £497k before expenses through the issue of 7,594,692 Subscription Shares at the Subscription Price.

Details of the Subscription

Completion of the Subscription is conditional inter alia upon:

a) Admission of the Subscription Shares to trading on AIM occurring by on or around 20 November 2015;

b) The proposed Capital Reorganisation being completed;

c) Resolutions 4, 5, 6, 7, 8 and 9 being passed at the General Meeting, further details of which are set out below.

The Subscription Shares will, when issued and fully paid, rank in all other respects pari passu with the New Ordinary Shares in issue including the right to receive all dividends and other distributions declared, made or paid after the date of their issue.

The Subscription is not conditional on completion of the new CLNs and New Warrants but conditional on certain events occurring as set out above, including completion of the Capital Reorganisation.

CAPITAL REORGANISATION

The Companies Act prohibits companies from issuing shares at a price below their nominal value. The terms of the New CLNs and the New Warrants are such that the effective issue price of Existing Ordinary Shares to Deutsche Balaton, were PLC Conversion or PLC Exercise to occur, would be below the current nominal value of 1 pence per existing ordinary share ("Existing Ordinary Share"). Similarly the effective issue price in respect of the Subscription would be below the nominal value were it to occur today.

In order to comply with the Companies Act and to allow PLC Conversion, PLC Exercise and the issue of the Subscription Shares and to allow the Company to raise additional funds in the future, the Board proposes to carry out a consolidation and sub-division of the Existing Ordinary Shares as described below.

The rights attaching to the New Ordinary Shares and the entitlement of Shareholders in respect of a return of capital or other distributions arising therefrom, will be identical in all respects to those of the Existing Ordinary Shares.

The Capital Reorganisation will consist of two elements:

· every 50 Existing Ordinary Shares of 1 pence each held at the Record Date will be consolidated into 1 Consolidated Share of 50.0 pence ("Consolidation"); and

· immediately following the Consolidation, each Consolidated Share will then be sub-divided into 1 New Ordinary Share of 1 pence and 1 New Deferred Share of 49 pence ("Sub-Division").

In the event of implementation of the Capital Reorganisation, Shareholders would own 1 New Ordinary Share of 1 pence nominal value and 1 New Deferred Share for every 50 Existing Ordinary Shares that they own prior to the Capital Reorganisation. It is not expected that the percentage holding of individual shareholders in the Company would change as a result of the Capital Reorganisation (subject to fractional entitlements). 

The result of the Capital Reorganisation, if approved by shareholders, would be to reduce the number of Ordinary Shares in issue by approximately 50 times and, accordingly, assuming normal market conditions, to increase the price at which the Company's Ordinary Shares would trade to approximately 50 times the value at which the Existing Ordinary Shares traded prior to completion of the Capital Reorganisation. The nominal value of 1 pence each per Existing Ordinary Share would remain unchanged at 1 pence per New Ordinary Share under these proposals.

Assuming Shareholder approval of the Capital Reorganisation:

· The Subscription, if completed, would result in the issue of 7,594,692 New Ordinary Shares (being 379,734,635 Existing Ordinary Shares divided by 50 times) issued at an effective share price of approximately 6.6 pence per New Ordinary Share;

· PLC Conversion, if it occurred in full, would result in the issue of 3,747,368 New Ordinary Shares (being 187,368,400 Existing Ordinary Shares divided by 50 times) issued at an effective share price of approximately 28.2 pence per New Ordinary Share (based on the current exchange rate); and

· PLC Exercise, if it occurred in full, would result in the issue of up to 5,995,789 New Ordinary Shares (being 299,789,450 Existing Ordinary Shares divided by 50 times) issued at an effective share price of approximately 17.6 pence per New Ordinary Share (based on the current exchange rate).

Since PLC Conversion of the New CLNs and PLC Exercise of the New Warrants is conditional on the Capital Reorganisation being implemented, the number of Existing Ordinary Shares referred to above following PLC Conversion or PLC Exercise is for illustrative purposes only.

The New Deferred Shares will not entitle their holders (a) to receive notice of or attend and vote at any general meeting of the Company (b) to receive any dividend or other distribution; or (c) to participate in any return on capital on a winding up other than the nominal amount paid on such shares following a substantial distribution to holders of ordinary shares in the Company. The rights attaching to the New Deferred Shares will be as currently set out in the Company's existing articles of association in relation to the Existing Deferred Shares. The New Deferred Shares will be effectively valueless, non-transferable and have no effect on the economic interest of the Shareholders. Share certificates will not be issued in respect of the New Deferred Shares nor will CREST accounts of Shareholders be credited in respect of any entitlement to New Deferred Shares.

No application will be made to the London Stock Exchange for admission of the New Deferred Shares to trading on AIM nor will any such application by made to any other exchange.

Dealings in the Existing Ordinary Shares will cease at the close of business on the date of the General Meeting and dealings in the New Ordinary Shares are expected to commence on the following day pursuant to the Admission.

Any share certificates for the Existing Ordinary Shares will remain valid for the New Ordinary Shares. No Shareholder will be entitled to a fraction of a New Ordinary Share and where, as a result of the Share Consolidation, any Shareholder would otherwise be entitled to a fraction only of a New Ordinary Share in respect of their holding of Existing Ordinary Shares on the date of the General Meeting (a fractional shareholder), such fractions will, in so far as possible, be aggregated with the fractions of New Ordinary Shares to which other fractional shareholders would be entitled so as to form full New Ordinary Shares (Fractional Entitlement Shares). These Fractional Entitlement Shares shall be sold for the benefit of the Company.

INTENTIONS OF THE CONCERT PARTY

The Concert Party has confirmed to the Company that it is not proposing, following any increase in its percentage interest in the New Ordinary Shares or voting rights as a result of the issue of certain Subscription Shares to Deutsche Balaton and following any PLC Conversion of the New CLNs or PLC Exercise of the New Warrants to seek any change in the general nature of the Company's business.

GENERAL MEETING

The Document contains the Notice of General Meeting to be held at 10.00 a.m. on 19 November 2015 at the offices of Daniel Stewart at 33 Creechurch Lane, London, EC3A 5EB, at which the following resolutions will be proposed (the "Resolutions"):

a) Resolution 1, which will be proposed as an ordinary resolution and which will be taken on a poll of Independent Shareholders voting in person or by proxy, to approve the Waiver ("Whitewash Resolution").

b) Resolution 2, which will be proposed as an ordinary resolution, to authorise the Directors to allot new shares up to an aggregate amount of £97,431.57. The Company does not have sufficient authority to issue the PLC Conversion Shares and PLC Exercise Shares arising from PLC Conversion and PLC Exercise of the New CLNs and the New Warrants respectively, assuming that the Whitewash Resolution is passed, and therefore Resolutions 2 and 3 are proposed to grant the authority to the Board to make such issues.

c) Resolution 3, which will be proposed as a special resolution, to authorise the Directors to allot equity securities as if Sections 570(1) and 573 of the Act did not apply to any such allotment;

d) Resolutions 4, 5 and 6, which will be proposed as ordinary resolutions to implement the Consolidation and Subdivision, and permit the Company to sell any Ordinary shares held in fractions as a result of the Consolidation;

e) Resolution 7, which will be proposed as a special resolution, to amend the Company's articles of association to insert the rights of and the creation of the New Deferred Shares;

f) Resolution 8, which will be proposed as an ordinary resolution, to authorise the Directors to allot new Ordinary Shares up to an aggregate nominal amount of £75,946.93, pursuant to the Subscription. This authority would be in addition to the existing authority in place for the current year for the Directors to allot new Ordinary Shares up to an aggregate nominal amount of £33,825.28, meaning that if the resolution is passed the Directors will have authority to allot New Ordinary Shares up to a total nominal amount of £75,946.93, pursuant to the Subscription until the Company's next annual general meeting. The Company is requesting this additional authority for the purposes of carrying out the Subscription.

g) Resolution 9, which will be proposed as a special resolution, to authorise the Directors to allot the New Ordinary Shares under Resolution 8 on a non pre-emptive basis.

RECOMMENDATION

Shareholders are advised that in the event that the Resolutions are not passed, it is possible that the Company may not be able to secure sufficient amounts of funding from alternative sources to enable the Company to pursue a mining licence for its Tongo Dyke-1 project in Sierra Leone and to provide working capital to the Company for the short term while the Company seeks to carry out a large project financing for the Tongo project.

The Directors therefore, having been so advised by Cairn, consider the Proposals, including the Waiver, are fair and reasonable and in the best interests of the Independent Shareholders and the Company as a whole. In giving its advice, Cairn has taken account of the commercial assessments of the Directors.

Accordingly, the Directors unanimously recommend the Independent Shareholders to vote in favour of the Proposals and the Whitewash Resolution to be proposed on a poll at the General Meeting. The Directors intend to vote in favour of the Resolutions in respect of their own beneficial shareholdings, which together with those Shareholders who have provided irrevocable commitments to vote in favour of the Resolutions represents 223,406,987 Existing Ordinary Shares representing approximately 27.5 per cent. of the Company's Existing Ordinary Share Capital.

About Deutsche Balaton

Deutsche Balaton AG  ("Deutsche Balaton") is a German investment company founded in 1991 whose shares are traded on the Frankfurt Stock Exchange (Regulated Unofficial Market, Open Market, Entry Standard). Deutsche Balaton invests in both public and private companies across a range of sectors and geographies in addition to investing in other areas such as fixed-interest securities and alternative asset classes. Investments are typically held over the long term with a view to creating an attractive return for its shareholders. Deutsche Balaton first listed on the Regulated Market of the Frankfurt Stock Exchange on 13 June 2000 before moving to the Regulated Unofficial Market of the Frankfurt Stock Exchange on 2 January 2015 (Bloomberg ticker FRA: BBH GR). Deutsche Balaton is not a regulated investment company and makes investments using its equity capital paid in by its shareholders and from returns generated from its investments and bonds from time to time. It does not manage funds on behalf of third parties.

Deutsche Balaton typically makes investments which result in it holding between 25 per cent. and 100 per cent. of a company although it also has a number of investments in large corporations where it holds below 15 per cent. of the voting rights of those companies.

As at 30 June 2015, Deutsche Balaton had equity investments in 114 companies (excluding subsidiaries of investee holding companies). There is no specific investment timeline for the investments held by Deutsche Balaton with returns on investments being generated primarily through valuation increases of its investments at time of sale. In the year ended 31 December 2014, Deutsche Balaton generated consolidated group revenue of approximately €105 million revenue and other income of approximately €37 million. Group profit after tax for the year was approximately nil. As at 31 December 2014, Deutsche Balaton had consolidated net assets of €233 million (Eigenkapital) of which cash and cash equivalents was approximately €34 million. In the first half of 2015, Deutsche Balaton group realized profit of €2.6 million.

About Stellar Diamonds plc

Stellar is an AIM quoted (AIM: STEL) West African focused diamond development company which is continuing trial mine evaluation of its Baoulé kimberlite in Guinea, and is progressing the 1.45 million carat Tongo Dyke-1 resource through the mining licence application process. In addition, Stellar holds the 3 million carat Droujba project in Guinea and continues to pursue channels to ensure the proper reinstatement of its Kono licences in Sierra Leone.

For further information contact the following or visit the Company's website at www.stellar-diamonds.com.

APPENDIX

SHARE CAPITAL, LOAN NOTE, WARRANT AND SUBSCRIPTION STATISTICS

Notes

1 Pursuant to the proposed Capital Reorganisation.

2 Based on the register of members of the Company as at close of business on 29 October 2015. To facilitate the Capital Reorganisation, immediately prior to the Record Date, a further 26 new Ordinary Shares will be issued to the Company Secretary.

3 This number does not include any New Ordinary Shares arising from exercise of the Initial Warrant since this would be cancelled on CLN Completion. See paragraph 2.4 of Part V of this Document for further detail.

4 Issue of the maximum number of PLC Conversion Shares would result in Deutsche Balaton owning greater than 37.5 per cent of the so enlarged issued share capital of the Company (assuming no other Ordinary Shares were issued other than the PLC Conversion Shares and the Subscription Shares), accordingly PLC Conversion in full and PLC Exercise would not be possible for so long as they would result in Deutsche Balaton being interested in greater than 37.5 per cent of the so enlarged share capital of the Company unless a new waiver of Rule 9 of the Takeover Code was obtained;

5 Comprising the Enlarged New Ordinary Share Capital and the Partial PLC Conversion Shares. This assumes that no other Ordinary Shares are issued, i.e. the outstanding Options and Warrants over Existing Ordinary Shares as at the date of this Document are not exercised.

6 The new ISIN shall become effective only if the Resolutions are passed at the General Meeting.

EXPECTED TIMETABLE OF PRINCIPAL EVENTS