Stellar Diamonds Regulatory News (STEL)

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

6 October 2016

AIM: STEL

Stellar Diamonds plc

("Stellar" or the "Company")

Issue of Convertible Loan Notes and Warrants

Repayment of existing Shareholder Loan Facility

Proposed conditional amendment to existing Convertible Loan Note and Warrant Instrument

Stellar Diamonds plc, the London listed (AIM: STEL) diamond development company focused on West Africa, announces that it has entered into a convertible loan note agreement ("the CLN Agreement") with existing shareholder Deutsche Balaton AG ("Deutsche Balaton"), non-executive Director and existing shareholder Steven Poulton and a new investor Creditforce Limited (together the "Noteholders") to provide funding to the Company of US$1.24 million in aggregate (the "CLN"). The CLN will be used to repay in full the outstanding aggregate amount of approximately US$0.64 million owed under the existing shareholder loan facility to Altus Strategies Limited ("Altus") and Deutsche Balaton, details of which were announced on 13 June 2016 (the "Shareholder Loan Facility"). Steven Poulton has since acquired the loan provided by Altus at face value. The balance of US$0.60 million arising from the issue of the CLN will be used for working capital purposes in relation to the ongoing potential transaction to acquire the Tonguma project in Sierra Leone, the terms of which were announced on 22 August 2016 (the "Potential Transaction"). In connection with the CLN Agreement, the Company has agreed to issue warrants to the Noteholders ("CLN Warrants") to subscribe for new ordinary shares in the Company ("Ordinary Shares") on the basis set out in this announcement. Further details in respect of the CLN Agreement and CLN Warrants are set out below.

In order to facilitate the Potential Transaction, the Company has also entered into a conditional amendment agreement with Deutsche Balaton (the "Amendment Agreement"), to restructure the existing convertible loan notes and warrant instrument that were entered into with Deutsche Balaton as announced on 2 November 2015 ("Existing DB CLN" and "Existing DB Warrants"). In particular, conditional on completion of the Potential Transaction ("Completion"), Deutsche Balaton, has agreed to waive certain of its rights under the Existing DB CLN and Existing DB Warrant instrument relating to its ability to convert and/or exercise the Existing DB CLN and Existing DB Warrants into shares in a subsidiary of the Company. In satisfaction of agreeing to this Amendment Agreement and conditional on, inter alia, Completion, the Company has agreed to issue to Deutsche Balaton, such number of Ordinary Shares as is equal to US$1.0 million at the same price that any equity fundraise is completed simultaneous with Completion ("Issue Price") ("DB New Shares") and to grant additional warrants to Deutsche Balaton to subscribe for new Ordinary Shares at the Issue Price for an aggregate subscription of approximately US$0.83 million ("DB New Warrants"). Further details of the Amendment Agreement are set out below.

The maximum number of new Ordinary Shares which may be issued pursuant to conversion of the CLN and Existing DB CLN, exercise of the CLN Warrants, Existing DB Warrants and the DB New Warrants depends on whether Completion occurs (of which there is no guarantee) and in particular the Issue Price. Final details of such number of Ordinary Shares and the shareholdings and potential shareholdings of significant shareholders will be included in any admission document that is published in connection with the Potential Transaction. The issue of Ordinary Shares will be subject to any restrictions imposed under the Takeover Code.

Key terms of the CLN Agreement and accompanying CLN Warrants

The CLN is an unsecured transferable convertible loan with a nominal amount of US$1.24 million of which US$0.29 million is to be provided by Deutsche Balaton, US$0.40 million by Creditforce and US$0.55 million by non-executive Director Steven Poulton. The net proceeds of the CLN of approximately US$0.6 million following repayment of all amounts owed under the existing Shareholder Loan Facility are expected to be received by the Company before the close of business on 7 October 2016.

The maturity date of the CLN is 20 months after the issue of the CLN ("Maturity Date"). The CLN may be converted into new Ordinary Shares (at the election of the Noteholder) commencing on the later of i) the date of Completion (or the date on which the Company announces that the Potential Transaction will not proceed); and the date of obtaining the necessary shareholder authorisations which are needed to enable the Company to issue new Ordinary Shares pursuant to conversion of the CLN. The CLN's are convertible into Ordinary Shares at a price of 70 percent of the Issue Price per Ordinary Share ("Subscription Price"). In the event that the Potential Transaction does not complete, the conversion price will be based on 70 percent of historical VWAP for a fixed period prior to notice of exercise of the CLN Warrants ("Alternative Subscription Price").

The Company may give notice of early repayment of the CLN at any time, subject to giving 20 days' notice to the Noteholders ("Early Repayment") at which point the Noteholders may elect to convert the CLN into Ordinary Shares. Interest is payable on the CLN at 18 percent per annum for the first 10 months following issuance and 24 percent per annum thereafter payable monthly in arrears.

The CLN's are subject to standard anti-dilution provisions and protections including, inter alia, in the event of a capital reorganisation.

In conjunction with the CLN and subject to obtaining shareholder authorities in relation to the Company's ability to issue new Ordinary Shares at a general meeting, the Company shall issue the Noteholders with warrants which are equivalent to three times the principal amount of the CLN (i.e. warrants with a total subscription price of US$3.72 million) exercisable at a premium of 5 percent to the Issue Price (per Ordinary Share) in the event of Completion occurring. The premium will increase at a rate of 1 percentage point per month from Completion up to a maximum premium of 17 percent to the Issue Price. In the event that the Potential Transaction does not complete, the exercise price in respect of the CLN Warrants will be based on historical VWAP. The warrants are exercisable for a period of 18 months following Completion (or announcement that the Potential Transaction will not occur or 31 March 2017 if earlier). Should the warrants be exercised then the resulting Ordinary Shares issued to the warrant holder shall be subject to a lock-in period of six months from the date of exercise.

In the event of Early Repayment and the Noteholders not electing to convert the outstanding CLN into Ordinary Shares, the Company agrees to issue the Noteholders additional warrants ("Repayment Warrants") with an aggregate subscription price of US$1.24 million, such warrants to be exerciseable at the Subscription Price (or the Alternative Subscription Price in the event that the Potential Transaction does not complete). The Repayment Warrants are exercisable for a period of 18 months following Completion (or announcement that the Potential Transaction will not occur or 31 March 2017 if earlier).

Amendment to the existing Convertible Loan Note and Warrant Instrument with Deutsche Balaton

On the 2 November 2015 the Company announced that it had entered into agreements relating to the Existing DB CLN and Existing DB Warrants ("DB CLN Announcement"), being a convertible loan note with Deutsche Balaton to raise US$1.65 million ("Existing DB CLN") and an associated warrant instrument to subscribe for Ordinary Shares for an aggregate subscription price of US$1.65 million ("Existing DB Warrants"). The Existing DB CLN and Warrants may be converted (or "exercised" in respect of the warrants) into new Ordinary Shares in Stellar or into one or more subsidiaries of the Company (or a mixture of the two) as described in the DB CLN Announcement.

Considering the importance to the Company and its shareholders of being able to fund the Potential Transaction, the Company and Deutsche Balaton have agreed, conditional on inter alia Completion, to waive Deutsche Balaton's option to convert the Existing DB CLN and/or exercise the Existing DB Warrant at the subsidiary company level in return for issuing Deutsche Balaton US$1.0 million of new Ordinary Shares at the Issue Price ("DB New Shares"). Save in certain limited circumstances, Deutsche Balaton has agreed not to dispose of the DB New Shares for a period of six months following Completion.

Other key terms of the Amendment Agreement are as follows (all amendments being conditional on, inter alia, Completion occurring and the Company having sufficient share authorities to fulfil its obligations under the agreement in respect of the issue of Ordinary Shares):

· The maturity date of the Existing DB Warrants shall be extended to 31 October 2018 ("Maturity Date") (such date may be extended by a maximum of six months in the event that conversion or exercise is not possible at that date as a result of, inter alia, Deutsche Balaton being in possession of unpublished price sensitive information);

· The exercise price of the Existing DB Warrants shall be amended to the Issue Price (or 15 pence in the event of the fundraise for the Potential Transaction taking the form of debt funding);

· Issue of additional new warrants to subscribe for such number of Ordinary Shares at the Issue Price for a total subscription amount of US$0.83 million, exercisable until 31 October 2018; and

· No interest on the Existing DB CLN will be payable by Stellar to Deutsche Balaton.

In the event that Completion does not occur by 28 February 2017 or such later date as the Company and Deutsche Balaton may agree, the Amendment Agreement will be null and void and the original terms of the Existing DB CLN and Existing DB Warrants will remain, save that the Maturity date shall become 31 March 2017.

By virtue of Deutsche Balaton being a substantial shareholder of the Company, the Amendment Agreement and its terms constitute a related party transactions under the AIM Rules for Companies. The Directors who are independent of the Amendment Agreement consider, having consulted with the Company's Nominated Adviser, that the terms of the Amendment Agreement are fair and reasonable in so far as the Company's shareholders are concerned.

By virtue of Deutsche Balaton being a substantial shareholder of the Company and Steven Poulton being a Director of the Company, agreements relating to the CLN and the CLN Warrants constitute related party transactions under the AIM Rules for Companies. The Directors who are independent of the CLN and the CLN Warrants consider, having consulted with the Company's Nominated Adviser, that the terms of the Loan are fair and reasonable in so far as the Company's shareholders are concerned.

This announcement contains inside information for the purposes of Article 7 of Regulation (EU) 596/2014.

About Stellar Diamonds plc

Stellar is an AIM quoted (AIM: STEL) West African focused diamond company with projects at the trial mining and mine development stages in Guinea and Sierra Leone.

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