Stellar Diamonds Regulatory News (STEL)

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14 December 2010

AIM: STEL

Stellar Diamonds plc

("Stellar" or the "Company")

Final Results to 30 June 2010

Stellar Diamonds plc, the London listed (AIM:STEL) diamond mining and exploration company focused on West Africa, announces its final results to 30 June 2010 (nine month period for consolidated accounts and 14 month period for Company accounts).

Corporate Highlights

·; Reverse takeover of AIM-listed West African Diamonds plc completed in February 2010

·; Acquired a 100% interest in the Kono kimberlite project in Sierra Leone in May 2010

Financial Highlights

·; £5 million of new funds raised in February 2010 to increase production and advance kimberlite portfolio

·; Cash position at 30 June 2010 of US$0.7 million, US$1.4 million as at 1 December 2010 (unaudited)

·; Net assets increased by US$10 million or 77% from US$13.1 to US$23.1 million

·; Loss per share reduced to US$0.09 from US$0.19

·; Raised £1.9 million post period to bulk sample Tongo kimberlite dyke and drill Droujba kimberlite pipe

Operational Highlights

·; Increased production and revenue at Mandala (48,052 carats vs 34,990 carats and US$1.8m vs US$0.5m)

·; Increased production and revenue at Bomboko (3,920 carats vs 620 carats and US$356k vs US$50k)

·; Bulk sampling at Tongo kimberlite project in progress in eastern Sierra Leone

·; 3,000m drilling programme at Droujba kimberlite commenced in southeastern Guinea

Karl Smithson, Chief Executive Officer, commented:

"In a further challenging year for the diamond sector, Stellar has successfully evolved from a privately owned exploration and development company to a quoted diamond producer which is delivering cash flow while advancing a portfolio of high grade kimberlites at various stages of development in Guinea and Sierra Leone. I look forward to keeping shareholders advised of our progress and to the continued improvement in the diamond market, which should lead to wider recognition of the quality of Stellar's projects and to the Company's strong growth potential." 

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

Stellar Diamonds plc

Karl Smithson, Chief Executive Tel: +44 (0) 7783 707 971

Angus Ogilvie, Finance Director Tel: +44 (0) 7885 201 903

RBC Capital Markets

Martin Eales / Daniel Conti Tel: +44 (0) 20 7653 4000

Northland Capital Partners Limited

Charles Vaughan / Gavin Burnell Tel: +44 (0) 20 7492 4763

Pelham Bell Pottinger

Charles Vivian / James MacFarlane Tel: +44 (0) 20 7861 3232

About Stellar Diamonds plc

Stellar is a London (AIM: STEL) listed diamond mining and exploration company that has a portfolio of projects in West Africa. Two projects in Guinea, Mandala and Bomboko, are undergoing mining and trial mining respectively, which provide cash flow to the Company.

Stellar also owns full rights over four high-grade kimberlites that are to be the focus of future development. In Sierra Leone at the Tongo project a bulk sampling programme is currently underway on one key kimberlite to assess the diamond grade and value, where previous results yielded grades of 100 carats per hundred tonnes with diamond values of $144 per carat. At the Kono underground trial mine previous bulk sampling has produced 4,200 carats as part of an economic evaluation exercise. In Guinea drilling has commenced on the Droujba kimberlite pipe and at Bouro bulk sampling of a high grade kimberlite dyke adjacent to the Company's Mandala mine is also planned.

CHAIRMAN'S STATEMENT

The period under review has seen considerable change for Stellar. Stellar has evolved from a pure exploration company to one that has a diversified asset base with both producing assets and attractive exploration / development assets. Furthermore, we have taken the significant step of obtaining a listing on London's AIM market by virtue of a reverse takeover of West African Diamonds plc.

This listing had long been planned by Stellar, but was historically denied to us due to adverse market conditions. However, in mid-2009 when market conditions were more favourable, we decided to pursue a strategy of consolidation to achieve the listing. After considering various options, we approached the Board of West African Diamonds plc, an AIM listed junior diamond company that was, like Stellar, exploring and developing diamond assets in Sierra Leone and Guinea. In a fragmented and undervalued sector, the similarities of the two companies made a compelling case for the takeover. The deal was eventually agreed on a 75:25 valuation basis in favour of Stellar and Royal Bank of Canada Europe Limited was appointed as Nominated Advisor and Broker to the company, with Astaire Securities (now known as Northland Capital Partners Limited) acting as co-broker. The reverse takeover was completed in February 2010 and accompanied by a £5 million equity fund raising.

The creation of an enlarged and better financed Stellar Diamonds plc has enabled the Company to focus on increasing production. To this end, some of the IPO proceeds were channelled towards increasing production capacities at our Mandala mine and Bomboko trial mine; this was achieved by July 2010. Although, these two alluvial mines are expected to deliver reasonable cash flow, we believe that the future growth of Stellar will be driven by the further development of our four key kimberlite projects, Kono and Tongo in Sierra Leone, and Droujba and Bouro in Guinea.

We are very excited about the potential of each one of these kimberlites which all demonstrate very high diamond grades. This is not only based on historical information but also on the large amount of work already undertaken by Stellar over the past few years. During the next twelve months Stellar will be embarking on a series of drilling programmes to evaluate these projects, better define the diamond grades and values and to take them to the next level of their development.

Creating a new diamond mine is never easy, even more so in remote areas of Africa. However, the management team of Stellar has demonstrated that this can be done in bringing Mandala into production in mid-2009. We are hopeful that Bomboko can be moved into full commercial production in early 2011, even though it is essentially fully capitalised already. In Kono, Tongo, Droujba and Bouro we potentially have another four mines to build, should the economics of them be proven.

Like most diamond sector analysts we believe that there will be a diamond supply deficit in the medium term that will, through time, become greater. Existing large mines are not going to produce at their historic levels as they go deeper and there are no new mines of significant "world class" size on the horizon. Exploration risk capital dried up in the credit crunch and this is unlikely to ease for the foreseeable future. In short, diamonds are going to become a rarer commodity and with increasing demand, particularly driven by China, India and the Middle East in the short term and an eventual recovery in the US economy, the forecasts are for a strongly appreciating diamond price in the medium to longer term.

So a key strategic focus of Stellar is to position the Company as a larger producer of diamonds, not only from our existing alluvial mines, but also from our kimberlite portfolio. A first step in this strategy was to acquire full ownership of the Kono trial mine from Petra Diamonds Limited ("Petra"). This was achieved in May 2010 and I would like to thank Petra for its previous contribution to the development of Kono and its support for Stellar in taking shares instead of cash for their stake in the asset. Petra is now a key, supportive shareholder of Stellar and through our "cooperation agreement" with Petra we know that we have a potential future partner in the development of any of our kimberlite projects should we decide to go the joint venture route.

As I write this Chairman's statement, Stellar has just completed a £1.9 million financing. The reasons for this were two fold. Firstly, to raise sufficient capital to advance the kimberlite portfolio by completing the Tongo bulk sampling evaluation exercise and to drill and bulk sample the Droujba pipe. Secondly, to bring in a new and significant institutional shareholder, Richmond Capital, essentially in place of Altima Partners. I welcome Richmond Capital and thank Altima for their past support.

I would also like to take this opportunity to thank you, our shareholders, for your continued support. Your Board, management and the staff of Stellar will continue to work as hard as ever to deliver on our promises. I also thank everyone in the Stellar team, the Directors, the management and the staff for their past and future endeavours. I know that the circumstances have often been challenging and I am personally proud of the achievements you have made on the ground.

The next year is going to be an exciting one for Stellar. The solid foundations are in place for the significant growth of the Company and I look forward to the various developments throughout the year.

Lord Daresbury

Non-Executive Chairman

Significant non-cash transactions relate to the issue of shares on reverse acquisition of West African Diamonds, conversion of debt to shares in Stellar Diamonds Limited, issue of share warrants and issue of other shares during the period.

Notes:

1. Basis of preparation

Stellar Diamonds plc is presenting information extracted from the audited financial statements as of and for the nine months ended 30 June 2010. The comparative period presented is extracted from audited financial statements as of and for the nine months ended 30 September 2009 of Stellar Diamonds Limited.

On 22 February 2010, Stellar Diamonds Limited completed its reverse acquisition of West African Diamonds plc (WAD) in a share for share exchange. WAD changed its name to Stellar Diamonds plc (the "Company" or on a consolidated basis the "Group") and was re-admitted to AIM.

The financial statements have been prepared in accordance with International Financial Reporting Standards ("IFRS"). The financial statements have also been prepared in accordance with IFRSs as adopted by the European Union. They also have been prepared in accordance with the Companies Act 2006. The consolidated financial statements have been prepared on an historical cost basis, as adjusted for certain financial instruments carried at fair value.

Under the terms of the reverse acquisition agreement, WAD agreed to acquire the entire issued share capital of Stellar Diamonds Limited for a consideration equating to approximately three times the value of WAD, represented by an approximate 75:25 split of the share capital in the enlarged group prior to the issue of Placing shares - 75 per cent being attributable to consideration shares to be allotted to Stellar Diamonds Limited shareholders and 25 per cent being attributable to ordinary shares held by WAD shareholders.

A total of 53,248,164 consideration shares were issued and allotted to the shareholders of Stellar Diamonds Limited on the basis of 1.005 new ordinary shares in Stellar Diamonds plc for each Stellar Diamonds Limited share. The fair value attributed to the consideration shares is $16.6 million based on the market price of the Placing shares of 20p per share converted to 31 cents per share (at a rate of 1.56155).

On 22 February 2010 the enlarged group raised $7,356,873, net of share issue costs of $380,023, in new funds (the "Placing").

Basis of accounting

The combination has been accounted for as a reverse acquisition as if Stellar Diamonds Limited had issued new shares in exchange for WAD's net assets. Although these consolidated financial statements have been issued in the name of Stellar Diamonds plc, the legal parent, the Group's activity is in substance a continuation of that of the legal subsidiary, Stellar Diamonds Limited, because after the transaction the former Board of Stellar Diamonds Limited were deemed to have control of the Group and of the legal parent.

Going concern

The Company's business activities, together with the factors likely to affect its future development, and performance are set out in the Chairman's Statement.

As discussed in the Chairman's Statement, both the Mandala and Bomboko mining operations are being upgraded in terms of mining and processing capacity such that they would be able to deliver modest cash flow. The £1.9 million ($3.0 million) financing in October 2010 and the anticipated receipt of the amount receivable from African Aura Mining Inc. (note 12) will enable the Company to meet its working capital and contractual commitments, as disclosed in notes 9 and 10, specifically to accelerate exploration and drilling work at the Droujba kimberlite pipe in Guinea and to complete the Tongo kimberlite dyke bulk sampling programme in Sierra Leone.

The Company's forecasts and projections, taking account of reasonably possible changes in trading performance, show that the Company should be able to operate within the resources available following the October 2010 financing. As a result, the directors have formed a judgment at the time of approving the consolidated financial statements, that there is reasonable expectation that the Group has adequate resources to continue in operational existence for the foreseeable future. For this reason the directors continue to adopt the going concern basis in preparing these financial statements.

2. Reverse acquisition of Stellar Diamonds Limited

On 22 February 2010, Stellar Diamonds Limited completed its reverse acquisition of West African Diamonds plc (WAD) in a share for share exchange

The directors of the Company recognise that the enlarged group will have a number of opportunities to harness corporate and operational synergies, thus allowing the operational cost base per carat to be reduced. Revenue streams from two producing alluvial mines will also reduce financial risk, increase cashflow and will enhance growth possibilities. The enlarged group will have four high grade kimberlite projects at various stages of development. The new Board has significant experience in the West African mining industry and a proven track record of developing mines.

The combination has been accounted for as a reverse acquisition as if Stellar Diamonds Limited had issued new shares in exchange for WAD's net assets. Although these consolidated financial statements have been issued in the name of Stellar Diamonds plc, the legal parent, the Group's activity is in substance a continuation of that of the legal subsidiary, Stellar Diamonds Limited because after the transaction the former Board of Stellar Diamonds Limited were deemed to have control of the Group and of the legal parent.

The following accounting treatment has been applied in respect of the transaction:-

The accumulated loss and other equity balances recognised in the consolidated financial statements reflect the consolidated accumulated loss and other equity balances of Stellar Diamonds Limited immediately before the transaction, and the consolidated loss for the period from 1 October 2009 to the date of the transaction are those of Stellar Diamonds Limited. However, the equity structure appearing in the consolidated financial statements reflects the equity structure of the legal parent, including the equity instruments issued under the share for share exchange to effect the transaction. The effect of using the equity structure of the legal parent gives rise to an adjustment to the Group's issued equity capital ("the reverse acquisition reserve").

Comparative numbers presented in the consolidated financial statements are those reported in the consolidate financial statements of the legal subsidiary, Stellar Diamonds Limited, for the nine months ended 30 September 2009.

The substance of the transaction is that Stellar Diamonds Limited received net assets of $5,725,663 representing 100 per cent of the value of the net assets of WAD. This is based on the fair value of the shares acquired from the shareholders of WAD being 18,333,268 shares at a fair value of 20p, converted to 31 cents per share (at a rate of 1.56155).

The consolidated financial statements and related notes are for the legal subsidiary (treated as the accounting acquirer) for the period from 1 October 2009 to 30 June 2010 and include the results of WAD from the date of acquisition at 22 February 2010.

Refer also to note 13 for the details of the movements in share capital.

At the date of acquisition, WAD had 1,420,000 outstanding share options issued in prior periods to employees and consultants in exchange for services provided. They vested immediately on issue. There were no changes to the terms and conditions of these options under the terms of the acquisition. The outstanding share options had an IFRS 2 measured value on date of issue of $639,292 which was assumed by the Group on reverse acquisition of Stellar Diamonds Limited.

The following table summarises the fair values of the assets acquired and liabilities assumed on 22 February 2010.

The results of WAD have been included in the consolidated financial statements from 22 February 2010. WAD generated a net loss of $15,071,446 since the date of acquisition. If WAD had been a member of the Group from 1 October 2009 it would have not contributed any material revenues or profits and losses.

The net cash inflow as a result of the acquisition is $11,384.

3. Loss per share

Basic and diluted loss per share are the same as the effect of the outstanding share options and warrants is anti-dilutive and is therefore excluded. Outstanding share options and warrants are detailed in notes 13 and 14.

4. Intangible assets

Included in additions during the period are shares to the value of $1,302,561 issued to Petra Diamonds Limited to acquire the remaining share in the Kono project and shares issued to the value of $33,466 to acquire the remaining share in Friendship Diamonds Guinee SA.

As a result of impairment reviews carried out in the prior period an impairment of $6,946,107 was recorded. Due to weak diamond prices in the rough diamond market, management made the decision during the prior period to suspend operations and place the Kono project under temporary care and maintenance until diamond prices recover. In line with the strategy to maintain Kono on care and maintenance, the directors assessed the recoverable amount of the exploration costs and resource properties relating to the asset and determined that it was impaired by $7,000,000. The recoverable amount was calculated by reference to the asset's value in use using a discount rate of 12%.

At 30 June 2010, the Group did not have any contractual commitments for the acquisition of intangible assets. In October 2010, the Group contractually committed to spend approximately $500,000 for the drilling programme and microdiamond analysis at the Droujba kimberlite pipe in Guinea.

The realisation of intangible assets of $4,943,544 is dependent on the discovery and successful development of economic mineral reserves among other factors.

5. Property, plant and equipment

Transfers during the period from 1 January to 30 September 2009 relate to the Mandala mine assets in Guinea which was commissioned in April 2009.

Included within mining assets is the rehabilitation provision for Mandala of $54,369 (30 September 2009: $54,369).

Depreciation of mining assets of $978,010 (30 September 2009: $524,776) has been charged to cost of sales whilst depreciation of machinery and equipment of $585,834 (30 September 2009: $205,230) has been charged to administrative expense.

In accordance with the accounting policy stated in note 2.3, the Group tests annually to see whether property, plant and equipment have suffered any impairment. The recoverable amount of cash generating units is determined based on value-in-use calculations, which require the use of estimates. The estimated cash flows from the mining assets and the adjacent exploration projects produced net present values well in excess of their carrying values and are based on the following assumptions:

economically recoverable reserves and resources are based on management's expectations based on availability of reserves at mine sites and technical studies undertaken internally and by a Competent Person, where available;

diamond prices for the remainder of 2010 are based on the average realised prices from January to June 2010 and an annual increase of 7% thereafter;

discount rate of 8%; and

inflation rate of 2.2%.

Following the acquisition of additional earth moving machinery at the Mandala mine and a second plant at the Bomboko mine during the period, the Group did not have any further contractually committed costs for the acquisition of property, plant and equipment at 30 June 2010.

The realisation of tangible assets of $17,057,939 is dependent on the discovery and successful development of economic mineral reserves among other factors.

6. Convertible loan

On 21 September 2009, the Company issued convertible loans (secured on Mandala mining assets) and raised £300,000 ($478,170). The notes are repayable on 21 September 2011 and bear interest of 16.5% per annum. The principal amount is convertible by the holders into common shares of Stellar at a conversion price of £0.20 per share at any time prior to maturity. The holder will be issued one share purchase warrant for each ordinary share issued pursuant to the conversion which shall be exercisable at £0.25 per share.

7. Share capital, share premium and warrant reserve

Share capital

During the prior period, the Company issued 665,500 shares to directors ($205,323), 84,000 shares ($28,032) to a key management personnel and 150,000 shares ($44,027) in exchange for professional services provided by a third party.

As part of the reverse acquisition, Stellar Diamonds plc, the legal parent, performed a 5 for 1 share consolidation. The number of shares stated above has been restated for the 5 for 1 share consolidation.

Prior to the completion of the reverse acquisition, convertible loans and accrued interest of $546,241, unpaid directors' fees from 1 January 2009 of $208,676 and African Aura Mining Inc.'s management fee charge for 2009 to Stellar Diamonds Limited of $150,000 were converted into new Stellar Diamonds Limited shares.

The equity structure appearing in the consolidated financial statements reflects the equity structure of the legal parent, including the equity instruments issued under the share for share exchange to effect the transaction. The effect of using the equity structure of the legal parent gives rise to an adjustment to the Group's issued equity capital in the form of a reverse acquisition reserve.

On 23 February 2010, a total of 112,500 ordinary shares of 5p each ("bonus shares") were allotted and issued to Karl Smithson, Chief Executive Officer, and Angus Ogilvie, Finance Director. These allotments are in satisfaction of half of their respective listing bonuses of £30,000 and £15,000 following the successful admission of the Company on AIM (as set out in the Company's Admission Document).

On 24 May 2010, the Company announced the completion of the share purchase agreement with Petra Diamonds Limited in respect of the acquisition of the remaining 51% of the Kono kimberlite project in Sierra Leone in exchange for the issuance of 4,500,000 new ordinary shares to Petra Diamonds Limited as consideration for the agreed purchase price of £900,000, at a price of 20 pence per share.

Share warrants

The warrants reserve represents the value of the warrants issued by the Company to subscribe for shares in the Company.

Pursuant to the terms of the reverse acquisition agreement with Stellar Diamonds Limited, 18,679,451 warrants dated 19 December 2008 and 3,500 warrants dated 31 March 2008 originally issued by Stellar Diamonds Limited and exercisable at £0.25 and £1.00 per share, respectively were cancelled. 18,772,846 and 3,517 new warrants to subscribe for shares in the Company were granted exercisable at £0.251 and £1.005 per share, respectively. These warrants expired on 31 March 2010 and 30 June 2010, respectively.

The replacement of the share warrants in Stellar Diamonds Limited has been treated as a modification of the existing share warrants. The difference between the fair value of the replacement share warrants and the net fair value of the cancelled share warrants immediately before cancellation on 22 February 2010 is a decline in value by $4,267 which is not recognised in the financial statements in accordance with IFRS 2. The fair value of the replacement options was calculated using the Black-Scholes option pricing model and the following assumptions: nil dividend yield, a weighted average expected volatility of the Company's share price of 67%, a weighted average annual risk free rate of 2.76% and a weighted average expected life of three months.

The Company granted 1,190,125 warrants to the Company's broker for the Placing to subscribe for up to 1,190,125 ordinary shares of 5p each in the Company exercisable for a price of 20p per share warrant. The warrants issued have resulted in a charge to the share premium of $143,024 using the Black-Scholes option pricing model and the following assumptions: nil dividend yield, a weighted average expected volatility of the Company's share price of 67%, a weighted average annual risk free rate of 2.76% and an expected life of two years.

8. Subsequent events

On 10 August 2010, the Company granted a total of 2,950,000 share options to directors and employees at an exercise price of 11p per ordinary share exercisable for a period of 5 years from the date of grant. On the same date, the Company issued 72,727 newly-issued ordinary shares of 5p each to the Company's Chief Operating Officer as a performance related payment.

On 12 October 2010, the Company placed 38 million new ordinary shares of 5 pence each (the "Placing Shares") with institutional and other investors at par value to raise gross proceeds of £1.9 million (the "Placing"). The funds will be used to accelerate exploration at the Droujba Kimberlite pipe in Guinea. The Company also agreed to grant warrants to each placee on the basis of one warrant for every two Placing Shares subscribed (the "Placing Warrants"). Each Placing Warrant will entitle the holder to subscribe for one new ordinary share at a price of 12 pence each for a period of 18 months from the date of admission of the Placing Shares to trading on AIM.

Following the Placing the enlarged issued share capital will be 139,266,659 ordinary shares and the Placing Shares will represent approximately 27.3 per cent of the enlarged issued share capital. The total number of Placing Warrants, together with those issued in lieu of fees, will be 23,064,383.

9. Annual Report and Financial Statements

The Company's Annual Report and audited Financial Statements for the periods ended 30 June 2010 have been posted to shareholders and are available for download on the Company's website at www.stellar-diamonds.com

10. Dividends

No dividends have been paid nor are proposed for the period (2009: nil).

11. Annual General Meeting

The Annual General Meeting will be held on 16th December 2010 at 12 noon at RBC Capital Markets, 71 Queen Victoria Street, London, EC4V 4DE. The Notice and Form of Proxy have been posted to shareholders and are available for download on the Company's website at www.stellar-diamonds.com