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, announces
that it has signed a Memorandum of Understanding (`MOU') with Lucara Diamond
Corporation (`Lucara'), a TSX quoted mining company, to acquire a 75% interest
in and operate the defined Mothae Kimberlite Resource (`Mothae'), which is
located only 5 km from the world class Letŝeng le Terai diamond mine in Lesotho
(the `Acquisition'). The Acquisition is subject to approval from the Government
of Lesotho, a binding share purchase agreement, contracted albeit agreed
funding and certain other regulatory approvals. Mothae represents a low cost
opportunity for Paragon to generate significant value for shareholders through
the recovery of additional large high value diamonds in tandem with the
commencement of Stage 1 production at Paragon's nearby Lemphane Kimberlite Pipe
Project (`Lemphane'). As a result of this exciting acquisition, the Company
believes that it is wholly appropriate to ensure that both Lemphane and Mothae
are constructed simultaneously and thus at the lowest possible cost to benefit
from economies of scale whilst adjusting the timescale for commencement of
production 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 a
tremendous opportunity, a major coup for Paragon, one which we had to
prioritise the acquisition of, once Lucara announced their intention to dispose
of 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 few
weeks for Lemphane from Q2 to Q3 2015 to benefit from joint production savings
and production efficiencies from both assets.
"This hugely important acquisition re-rates and simultaneously de-risks
Paragon's business model, and elevates us overnight into an important and
sizeable diamond company. Our Dubai based partners, ITGT, have agreed to
provide the entire funding, for both Lemphane and Mothae, of approximately
US$28 million, to allow us to accelerate the combined production schedules of
both assets. I do not expect any undue delay in signing the acquisition
contract, as the Lesotho Government has been informed of the intended
acquisition at every step of the process, intensively so in the last two weeks,
and is encouraging a rapid commencement of the production schedule, which suits
all 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 and
simultaneously, which means greater economies of scale in overall costs,
management efficiencies and production economies, with greater volumes being
supplied by us to specific sales points including Dubai, which can only
increase the revenue efficiency of our entire sales strategy, as buyers from
around the world are attracted to come to us (rather than us to them) for high
quality, higher volume investment grade diamonds which are in diminishing
supply and increasing demand.
"We are rapidly and successfully repositioning Paragon from having been a
mining company with some exploratory assets into a global top tier diamond
house which has control of its own supply lines and distribution channels and
will enhance and optimise its revenues at every step of the diamond production
and sales chain. The acquisition of Mothae is a significant step up in this
transformation as it will deliver a further and sizeable stream of large high
value stones when production commences contemporaneously with Lemphane in Q3
2015. This security of supply of investment grade diamonds and the
establishment of distribution channels all the way to the end consumer allows
us to capture as much of the revenue margin as is available, sets us apart from
our current peers and will translate into enhanced revenue and improved
shareholder returns.
"Not least, the geopolitical and macroeconomic landscapes continue to promote
the 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 provide
the optimal investment grade asset to the vast quantity of more mobile wealth
that has been generated globally in the last thirty or so years, wealth that
wishes to be free of foreign exchange controls and political interference, not
subject to banking system risk and that requires a proven store of long term
value. Even better, diamonds have an attractive inelasticity to price - as the
price appreciates, production can't increase very much, the reverse of which is
happening of course to paper money at present, where demand (velocity) has
declined, whilst supply (QE) is increasing resulting in competitive currency
depreciation policies and extended currency debasement, which seems to have no
end in sight.
"Paragon, with its intense focus on production cost controls, a bias towards
mining the investment grade diamonds, and the possession of high quality
proprietary pathways to the distribution of our production represents, in my
view, an attractive and cost efficient way to invest in diamonds through a
public company.
"Mothae is the perfect fit for Paragon at this stage of our growth and business
development. We have agreed to incorporate the entire Mothae senior and
mid-level Lesotho based management teams into Paragon within our Lesotho
subsidiary, Meso Diamonds. This should ensure continuity along with the
efficient recruitment of experienced and proficient professionals, and adds
immense depth to our local capabilities both with the relationship with the
Government of Lesotho, as well as in all the critical administrative and
budgetary matters with mining.
"Since joining the board of Paragon late in August 2014, I have stated
frequently that the company was significantly undervalued by the market and
that I could not have been more optimistic about the business prospects for the
Company. Today goes some way to validating those recent sentiments, and indeed
enhancing them. Upon the successful completion of the Acquisition we will have
what we believe are two major and high class diamond deposits.
"I believe increasingly that the Company remains extremely cheap relative to
what the executive believes are the value of the underlying assets of the
Company, which we expect to evidence to shareholders and prospective investors
in production within a few months' time. We have strong executive, senior and
mid-level management teams. We have a top quality shareholder base in place
now. We are protecting our existing shareholders from equity dilution via debt
financing 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 focus
on generating tremendous value for our shareholders from our enlarged asset
base, our intense focus on cost controls and net revenue maximisation."
The Mothae Resource has been developed from an extensive bulk sampling and
trial mining programme and has been independently verified and signed off in
2013 by The MSA Group, to Canadian Institute of Mining (CIM) standards in
accordance with NI43-101 requirements. At a bottom size cut-off of 2mm, the
deposit hosts some 39Mt of kimberlite containing 1.06M carats with an in-situ
value (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 by
using and upgrading the existing 75 tonne per hour trial mining plant, which is
located on site under care and maintenance, and forms a part of the
Acquisition. Production can be re-established at minimal cost within a four
month period, at a rate exceeding 100tph and once established, development will
commence on a full-scale 250tph+ long-term main production facility which is
earmarked to be operational in producing within 18 months of initiation.
Production will initially be concentrated on the high-grade/high-value
Southwest/Southcentral resource, which has been shown from previous drilling
programmes to exceed 25Mt and over 0.7Mcts with an in-situ value of US$867
million. 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 as
diamonds in excess of 10cts, and 2% of carats in diamonds in excess of 100cts,
with significant potential for large, high value diamonds. The highest value
diamond recovered from Mothae to date was a 56.5 carat diamond valued at over
US$31,000 per carat in December 2011, and the single highest diamond value
achieved 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 in
the Mothae Mine brings both major synergies and a resource status addition to
our asset base to Paragon, significantly increasing the size of the Company's
project portfolio overnight. I look forward to integrating the two projects,
working with the existing and experienced Mothae management team on the ground
to fast-track the Mothae Mine back into production, and continuing our
comprehensive development of the Lemphane Project, which is currently underway.
Working together, I believe both projects can achieve significant reductions in
overheads and operating costs, and with both projects at full capacity, within
3 years, Paragon has the potential to be a 5Mt/yr producer of in excess of
100,000 exceptional carats with average values exceeding US$1,500/carat (at
current prices), placing Paragon amongst the front-runners of independent
diamond producers. Our local experience and operation familiarity in Lesotho
and close relationships with contractors, stakeholders and Government partners
bode well for this development."
Further information on the Mothae Project
The Mothae Project consists of a complex, circa 8 hectare kimberlite with a
stated resource (indicated/inferred) per the independent 28 February 2013,
NI43-101 compliant Technical Report and Mineral Resource Estimate* (@-2mm
bottom cut) of:
Tonnes (M) Grade (cpht) US$/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 reporting
of resources and reserves (2010)
The Mothae Mining Lease covers 24.7km² including the kimberlite, and was
granted by the Government of Lesotho in September 2009 for a period of 10
years, extendable by a further 10 years to 2029; it envisages full-scale
production in the region of 2-3Mt/yr. The Mothae Mine lies only 5km from the
world-class Letšeng Diamond Mine, renowned for the highest value diamond
production in the world, and less than 4km from a main power line and recently
constructed all-weather asphalt highway, linking to the South African border a
mere 100km away.
Mothae Diamonds is owned 25% by the Government of Lesotho and 75% by Lucara
Diamond Corp (Lucara); this latter equity being the subject of the Acquisition
by 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 the
robustness of the stated resource. An extensive infrastructure, including a
nominal 75tph (0.5Mt/yr) process plant, workshops, diesel-generated power
supply, 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 hectare
southern lobe of the kimberlite, which hosts a minimum of 20Mt kimberlite to a
depth of circa 200m, at grades of between 2.5-4.6cpht and US$737-US$1,364/ct
achieved for diamonds from +3DTC (~0.04cts stn-1) to 82cts stn-1.
Paragon will engage independent consultants to re-calculate the reserve and
resource status for the southern lobe, confirming the current in-house
estimates. Paragon already has extensive knowledge of the lay-out and internal
structure of the existing process plant, and is working with its plant
designers and manufacturers to rationalise the design, upgrade the capacity and
install the latest X-ray Transmission Technology (XTR) in order to increase
capacity to in excess of 100tph (0.75Mt/yr) and recover diamonds in excess of
200 carats at high efficiencies and with minimized likelihood of breakage. The
Company's civil engineering contractors have also previously worked on design
upgrades for the TSF for Mothae Diamonds, and these designs are available for
rapid implementation.
The Mothae kimberlite targeted for mining has an exceedingly coarse, high value
diamond population - modelled to exceed 15% of carats above 10 carats and 2% of
carats above 100 carats in the 20+Mt SW facies. The 14 largest (from 10.6-56.5
carats) high value diamonds previously recovered achieved values (September
2012 adjusted price book) ranging from US$5,482-US$41,869 per carat, a weighted
average of US$21,286/carat at an average size of 22.2 carats, values not fully
reflected 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 calculations
by Paragon have identified a 20+Mt portion of the resource, which can be mined
at 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 of
US$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 of
the existing plant, with capacity production predicted within approximately 6
months. During this phase of production it is intended to process in excess of
1.5Mt of primarily soft kimberlite, utilising the existing TSF which is
upgradable to meet this requirement. During this interim period a new,
stand-alone diamond process plant, designed for the optimum recovery of large
and ultra large diamonds (10-500+ carats) and intended to minimize water and
energy consumption, will be constructed; the general back-stripping and pit
opening 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, the
provision of grid-electrical power from adjacent national power grid lines
currently undergoing upgrade and/or installation - use of grid power equates to
a provisional saving of up to US$2/t on process costs. It is envisaged that the
plant will have a capacity of at least 250tph (1.75Mt/yr) capable of producing
35,000+ carats per annum at a revenue exceeding US$55 million on current
projections.
The mine plan will be premised on the immediate commencement of operations
using existing facilities (subject to the time constraints to re-furbish/
upgrade the present plant) and the implementation of full production at the
earliest opportunity, subject to the design, construction and commissioning of
the 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 30
September 2015 to acquire a 75% interest in the share capital of Mothae
Diamonds Pty Ltd a company incorporated in Lesotho, from Lucara Diamond Corp,
the remaining 25% will still be held by the Government of Lesotho. The
consideration is US$8.5 million and is to be satisfied by way of additional
debt funding which is to be procured from ITGT, the terms of which have been
agreed, subject to contract. A break fee of US$250,000 is payable if the
Company terminates the MOU or fails through its fault to complete the
transaction by 30 September 2015.
If the production from Mothae is not passed through the sales company noted
above then a mine gate royalty of 5% will be payable to Lucara on the first
6.75Mt of ore processed at Mothae.
The net book value of Mothae included within Lucara's statutory financial
statements for the year ended 31 December 2013, was US$15.8 million and Lucara
recorded a loss before tax of US$0.8 million on Mothae over the twelve month
period. Following Lucara's decision to divest Mothae because it no longer
fitted Lucara's investment criteria, which was announced on 22 December 2014,
Mothae's carrying value was written off in Lucara's financial statements for
the year ended 31 December 2014.
Completion is subject to obtaining approval from the Government of Lesotho, a
binding share purchase agreement, funding subject to contract and certain other
regulatory approvals.
Further announcements regarding the Acquisition will be made as soon as
practicable.
**ENDS**
For further information please visit www.paragondiamonds.com or contact:
Philip Falzon Sant Paragon Diamonds Limited +44 (0) 20 7182 1920
Manduca
Simon Retter Paragon Diamonds Limited +44 (0) 20 7182 1920
David Hignell Northland Capital Partners +44 (0) 20 7382 1100
Limited
Gerry Beaney
(Nominated Adviser)
John Howes Northland Capital Partners +44 (0) 20 7382 1100
Limited
Mark 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 in
Lesotho, the Lemphane Kimberlite Pipe Project, located close to the world class
Letšeng mine, Lesotho's largest diamond mine. Lemphane is the last known
kimberlite to be developed in Lesotho. The first of a two stage production
programme is expected to commence in 2015 which will further define the
resource at Lemphane. As increased tonnages of kimberlite are processed the
proportion of larger diamonds recovered will improve, increasing the average
value of diamonds recovered at the project, as was the case at Letšeng.
In accordance with the AIM Rules for Companies, the information in this
announcement has been reviewed by Stephen Grimmer PhD., Msc., a qualified
geologist with over 25 years diamond exploration experience. The MSA Group have
provided an opinion which verifies and confirms the in-house estimates per
Study J3105.