TIDMPRG
Paragon Diamonds Limited / Index: AIM / Epic: PRG / Sector: Resources
26 June
2015
Paragon Diamonds Limited
("Paragon", the "Group" or the "Company")
Audited Final Results
Paragon Diamonds Limited, the AIM quoted vertically integrated diamond
development company in Lesotho, Africa, is pleased to announce its audit final
results for the year ended 31 December 2014. The annual report will be posted
to shareholders shortly and will be available on the company's website http://
www.paragondiamonds.com/
Overview
* Substantial progress made towards building a leading vertically integrated
diamond company - retaining ownership of the journey of a stone from the
ground to the high street to ensure value is retained for shareholders
* Secured a 10 year Mining Lease at the 48Mt Lemphane kimberlite project in
Lesotho which is renewable for a further three consecutive 10 year periods
* Positive independent modelling report strongly points to Lemphane being a
similar large high value deposit as Gem Diamond's nearby Letseng mine
+ +100 carat diamond expected per million tonnes processed
+ 12% of carats exceeding 9 carats
+ Conservative grade of 2cpht used as modelling basis
+ Grade and value to rise as tonnages processed increased
* Values as high as US$2,500 per carat achieved in test sale, in November
2014, of diamonds taken from Lemphane during the 2012/2013 bulk sample
programme
* Lemphane has been increased to a minimum of 48Mt of kimberlite following an
additional 9 hole drilling programme, which significantly increases the
project's economic potential.
* Strengthened the Board with the appointment of Philip Sant Falzon Manduca,
pioneer in the European hedge fund industry, to lead Paragon's development
into a vertically integrated diamond company
Post Period
* MOU signed to acquire the 39Mt large/high value diamond Mothae Kimberlite
mine ('Mothae') in Lesotho from Lucara Diamond Corporation for US$8.5M
* Mothae has the potential to hold 100+ carat stones - to date a 56.5 carat
diamond has been valued at over US$31,000 per carat and a 28.9 carat stone
has achieved US$42,000 per carat in December 2011
* Initial 25Mt mine plan at Mothae with a minimum in-situ value of US$867m,
an NPV of US$115m (discounted at 12%) and is forecast to generate US$60m+
annual revenues over a minimum 12 years of full production
* US$26M of non-dilutive debt and equity based funding agreed with
International Triangle General Trading LLC ('ITGT'), a global investment
group based in Dubai, subject to contract and the conclusion of the
acquisition of Mothae
* Targeting first production at Lemphane and Mothae in 2015, which is
anticipated to generate combined revenues of approximately US$36 million in
the first full 12 months of both mines being in production
Chairman's statement
The past year has been a transformational time for our Company as your Board
has made significant strides towards achieving our strategy of developing a
vertically integrated diamond company with material interests at all stages of
a diamond's journey from the ground to the consumer and investor. 2014 saw a
number of strategic initiatives implemented, including my appointment as
Executive Chairman and Titanium Capital Investments' investment in Paragon in
August 2014, which have laid the foundations for significant growth as we look
to move our impressive kimberlite asset base in Lesotho, Africa into diamond
production later in 2015.
We will shortly have two flagship diamond assets within our portfolio, the 48Mt
Lemphane kimberlite project ('Lemphane') alongside signed contracts to acquire
the 39Mt Mothae Kimberlite mine ('Mothae') in Lesotho from Lucara Diamond
Corporation ("Lucara") for US$8.5 million, which as I write this, remains
subject to Government approval following a constructive meeting with the
Lesotho Minister of Mining on 22 June 2015. Both of these projects are located
in a diamondiferous region in Lesotho, a Kingdom renowned for large diamond
discoveries and high value kimberlite pipes. Notably both Lemphane and Mothae
are located near to the renowned Letseng mine, 27km and 5km away respectively
and have the potential to produce exceptionally large sized diamonds of over
100+ carats. With US$26 million of non-dilutive debt and equity based funding
committed from International Triangle General Trading LLC ('ITGT'), a global
investment group based in Dubai, subject to the completion of our acquisition
of Mothae, we should see one or both of these assets move into first production
in 2015, targeting combined revenues of approximately US$36 million in the
first full year of having both mines in production.
Whilst we are looking to diamond production later this year, our vision expands
far beyond solely building a typical mining company where diamonds are
recovered and sold at the first opportunity. This will not be how Paragon
operates. Our mission is to build Paragon into a leading international diamond
company, which retains ownership of a diamond from the mine (source) through
the manufacturing phase all the way to the sale of diamonds downstream to the
consumer and investment markets to ensure as much value as possible is retained
for Paragon and its shareholders. It is no different to a typical equity
portfolio with each stone and parcel being optimised for the duration of
ownership prior to sale.
This holistic business model clearly differentiates us from almost all other
diamond mining companies currently listed on the global equity markets. The
rationale for our vertically integrated business model is supported by our
belief in diamonds as the optimal monetary investment choice and portable store
of wealth, whilst exploiting an ongoing secular shift within the diamond sector
which is changing the distribution and retail landscape along with the
geography of diamond sales.
Diamonds are a proven store of value. Investment grade diamonds are
increasingly replacing gold and silver as the monetary commodity asset and
store of value in financial portfolios, providing a haven against the risks
associated with geopolitical crises, accelerating paper currency debasement in
most countries, deteriorating global government fiscal balances, rising wealth
taxes and negative bond yields. Critically, diamonds are portable outside of
the banking system, and are internationally tradable in any currency with a
market price. Importantly, they have a price inelasticity where price strength
does not cause higher production and this can only be exacerbated as widespread
and respected forecasts predict that the market will move into a deficit
situation by 2019.
Interestingly, in their 2013 report on the global diamond industry, Bain & Co.
agrees with our stance and states 'The diamond investment market retains its
allure. Investors continue searching for the best way to capitalise on the
growth in diamond prices, expecting that diamonds, just like gold and platinum,
are destined to become the next big alternative investment.'
At the same time, the diamond sales market is undergoing substantial structural
change, creating in our opinion a huge opportunity for a vertically integrated
company. Globally, wholesalers and retailers are ceding control and price
margin to producers as the supply of investment grade diamonds contracts whilst
demand continues to grow. Price transparency is forcing transactions to
migrate away from Antwerp as a result of wider electronic transmission and the
use of tenders, auctions and private placement as sales points become more
widely available. As Paragon controls more of its own distribution more
efficiently, wholesalers are under threat of being squeezed into a marginal
position in the industry, as investors and buyers come direct to us at the mine
gate. As part of our strategy, we will be spearheading this trend in Lesotho
and from other global distribution points including Dubai.
After achieving so much in the last 12 months, thereby increasing the
enterprise value of the company significantly, what are Paragon's next steps?
Once the acquisition of Mothae has completed and we successfully move into
production at both Mothae and Lemphane, the Board of Paragon will look to
cement its vertically integrated business model by the use of vehicles such as
JVs, SPVs and offtake agreements with suitable partners. In addition to
integrating vertically, there also exist a number of potentially lucrative
lateral opportunities for Paragon which we are keen to explore, such as the
establishment of diamond investment vehicles for investors specifically looking
for exposure to hard assets and commodity currencies. Lastly, should another
exciting non-exploration status asset become available, we could add further to
our existing asset base.
Operations
Lemphane
During the period under review, we have made progress in advancing our Lemphane
kimberlite deposit, in which we hold an 80% interest in the project with the
Government of Lesotho holding the remaining 20%, towards first production.
In February 2014, we were delighted to secure a Mining Lease extendable up to
40 years at Lemphane. Under the terms of the Lease, the approved programme for
our current 48Mt kimberlite deposit would be split over two Stages. Stage 1
being a two-year mine plan processing 1Mt of kimberlite targeting 20,000 carats
(2,500 carats per quarter) with an average value forecast to be US$930-US$1,025
per carat, generating annual revenues of approximately US$9m-US$10m. This would
be followed by an eight year Stage 2 mine plan of approximately 3,000,000
tonnes per annum for an initial open pit life of fifteen years with peak
production of 65,000 carats per year.
Our work conducted since February 2014 strongly points to Lemphane being a
similar large high value deposit as Gem Diamond's Letseng mine. In June 2014 an
independent size frequency and revenue modelling report was commissioned to
verify the Company's in-house estimates of diamond values. The report was
based on the 2012/3 bulk sampling programme at Lemphane which recovered stones
of up to 8.9 carats valued in excess of US$2,400/ct, and states that there is
the potential for at least one +100 carat diamond to be discovered per 1Mt of
kimberlite processed with forecast diamond values of between US$930/carat and
US$1,025/carat, the results are highly encouraging. Size frequency indicates
12% of carats as diamonds could potentially exceed 9 carats. Based on these
results, Stage 1 production is currently forecast to recover in excess of 100
diamonds larger than 9 carats, including some stones up to 100 carats in size.
Over the entire 48.6Mt of kimberlite delineated by drilling to date, our
forecasts predict approximately 50 diamonds in excess of 100 carats and 175
diamonds in excess of 50 carats (i.e. two to three a year and one a month
respectively if mined at 3Mt/yr), including diamonds of over 300 carats in
size, being recovered.
Notably in November 2014, a sale of diamonds taken from the 2012/2013 bulk
sample programme was undertaken as an exercise to test market demand for
diamonds recovered at Lemphane, ahead of Stage 1 production. The diamonds sold
include fancy yellow stones which achieved values as high as US$2,500 per
carat.
Further work was also conducted in November 2014 including drilling and
finalisation of the plant design at Lemphane.
The drilling programme consisted of nine holes totalling 1,248m which
demonstrated the potential for a further increase in Lemphane's present tonnage
estimate of 48Mt of kimberlite at depth which would have positive implications
for the overall tonnage and the economics of Lemphane.
Additionally we were pleased to announce the finalisation of the design of and
order plans for a state of the art 75 tonne per hour (0.5Mt/yr.) processing
plant at Lemphane. The plant's modular design and use of the latest X-Ray
Transmission (XRT) diamond recovery technology will reduce both capital and
operating costs at Lemphane, improve diamond recovery, and as a result
significantly enhance the project's economics. Metallurgical test work has
been concluded, and long-lead-time item procurement has been undertaken ahead
of fabrication of the main plant components. Long lead-time items include
scrubbers, crushers, x-ray transmission recovery machines and water recovery
thickeners. We have also finalised provisional tailings storage facilities
(TSF) designs with its civil engineers, and the terms for contract mining for
Stage 1. Site clearance for the new plant has been undertaken, and civil
construction activities are planned to commence upon receipt of funding.
Discussions have also been held with the national power company's main
contractor, for access to the privately funded open-access power line
(presently nearing completion) for electrical supply to the mine and with the
providers of camp accommodation and services, and security.
Originally Stage 1 production had been planned to commence in H1 2015, however
following the announcement of the proposed Mothae acquisition we have held back
the start of production to allow development of Mothae and Lemphane
concurrently to benefit from significant economies of scale, resulting in cost
savings for equipment, management and services.
Mothae
In May 2015, we signed a Memorandum Of Understanding "MOU" with diamond major
Lucara to acquire a 75% equity stake in the Mothae Kimberlite mine. This MOU
was a transformational move for us, which on completion should re-rates
Paragon's business model.
Mothae consists of a circa 8 hectare kimberlite with a stated 39Mt resource
(indicated/inferred) per the independent 28 February 2013, NI 43-101 compliant
Technical Report and Mineral Resource Estimate* (@-1.5 mm bottom cut) of:
Tonnes (M) Grade (cpht) US$/ct Cts contained (M) Value - US$ (M)
38.96 2.72 1,062 1.060 1,125
*in accordance with Canadian Institute of Mining (CIM) standards for reporting
of resources and reserves (2010)
Mothae, has the potential to hold 100+ carat stones, and our current mine plan
for an initial 25 million tonne mine includes a minimum in-situ value of
US$867m from the potential US$1,125m available; an NPV of US$115m (discounted
at 12%) and is forecast to generate US$60+million annual revenues over a
minimum 12 years of full production, based on management's preliminary internal
model. The project has extensive infrastructure, including a nominal 75tph
(0.5Mt/yr) processing plant, workshops, diesel-generated power supply,
accommodation camp, offices, water dams and TSF exists on site and forms part
of the acquisition.
It is our intention to fast-track Mothae into substantial production by using
and upgrading the existing 75 tonne per hour trial mining plant. Production can
be re-established at minimal cost within a four to six month period, at a rate
exceeding 100tph and once established, development will commence on a
full-scale 300tph+ 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 most economic higher-grade/high-value, low
waste: ore ratio Southwest/Southcentral resource, which is believed to exceed
25Mt and over 0.7Mcts.
Furthermore, this sub-resource follows a large diamond/high grade mine model
and has the potential to host circa 15% of carats as diamonds in excess of 10
carats, and 2% of carats in diamonds in excess of 100 carats. The highest
value diamond recovered from Mothae to date has been 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.
It is also our intention once the acquisition has been completed to engage
independent mining consultants to re-calculate the resource status for the
southern lobe, confirming the current in-house estimates.
Financial Results
The Group generated a loss after tax of GBP10.3 million during the year (2013:
loss of GBP1.3 million). In order to ensure as much funds as possible are
invested in the ground, administration costs continue to be tightly controlled
and totalled GBP0.8 million during the year (2013: GBP0.7 million). There is a non
cash impairment charge of GBP9.2 million (2013: GBPnil) recognised during the year
as a result of divesting of the majority of the Group's interest in the Motete
dyke project, a non-core asset.
During the year the group increased its borrowings by GBP1.3 million by way of a
loan from Titanium Capital Investments Limited (an investment vehicle
controlled by Philip Falzon Sant Manduca). The proceeds of this loan were
utilised by the company to buy back and cancel 63 million shares in the Company
from Lanstead Capital Partners and close down the associated equity swap
facility.
After the year end the Group secured an MOU with a Dubai based investment
group, International Triangle General Trading Limited to provide financing for
the development of both Lemphane and Mothae, which will ensure a swift path to
production for both of the assets.
The Group held cash of GBP0.1 million as at 31 December 2014 (2013: GBP0.2
million).
The Group had net assets of GBP24.5 million as at 31 December 2014, (2013: GBP30.9
million) and intangible exploration assets are carried at GBP33.4 million (2013:
GBP40.6 million).
Group borrowings totalled GBP2.5 million at 31 December 2014 (2013: GBP2.6million)
principally comprising the convertible loans held by Titanium Capital
Investments. After the year end the Group obtained an additional loan of GBP
500,000 bridge finance repayable on 30 September 2015.
Overview
Our business model is to recover large highly sought after investment grade
diamonds from our mines and then tailor each stone's distribution path to its
individual characteristics so as to maximise margins. With supply struggling
to keep up with rising demand, securing a source of large investment grade
stones is key, as it provides the foundation from which we can roll out our
strategy. Thanks to the progress made during both the year under review and
post period end, we have what we believe are two impressive development
projects located in a renowned diamondiferous region of Lesotho. Once both
Lemphane and Mothae reach full operational capacity within the next three
years, we anticipate that Paragon will be a 5Mt/yr producer of in excess of
100,000 exceptional carats with average values exceeding US$1,500/carat (at
current prices), which management anticipate could generate combined annual
revenue of approximately US$160 million and combined profit of approximately
US$97 million.
We aim to fast track both Lemphane and Mothae towards production in 2015. Once
this milestone has been achieved, Paragon will have a first class platform from
which to operate and build a fully vertically integrated diamond company.
Paragon is undergoing a rapid transformation, one which promises to generate
substantial value for our shareholders and I look forward to providing further
updates on our progress in due course.
Philip Falzon Sant Manduca
Executive Chairman
25 June 2015
Consolidated statement of comprehensive income
Notes 2014 2013
Continuing operations GBP000 GBP000
Administration costs (760) (706)
Fair value loss in remeasuring derivative 11 (252) (558)
financial instrument
Finance costs 5 (30) (57)
Impairment of intangible assets 9 (12,310) -
LOSS BEFORE TAXATION (13,352) (1,321)
Taxation 6 3,077 -
LOSS FOR THE year (10,275) (1,321)
Attributable to:
Owners of the parent (8,893) (1,321)
Non-controlling interests 23 (1,382) -
(10,275) (1,321)
Items that may be subsequently be reclassified
to profit or loss:
Currency translation differences 1,161 (1,555)
TOTAL COMPREHENSIVE INCOME FOR THE YEAR (9,114) (2,876)
Attributable to:
Owners of the parent (7,645) (2,918)
Non-controlling interests 23 (1,469) 42
(9,114) (2,876)
LOSS PER SHARE
From continuing operations
Basic and diluted (pence) 7 (3.29) (0.60)
There is no tax effect on currency translation differences in other
comprehensive income
Consolidated statement of changes in equity
Share Share Convertible Foreign Share Retained Total
capital premium loan exchange based deficit attributable
reserve reserve payment to owners of
reserve parent
Non-controlling
interests
Total
GBP000 GBP000 GBP000 GBP000 GBP000 GBP000 GBP000 GBP000 GBP000
At 1 January 2013 1,951 44,882 - (231) 484 (19,875) 27,211 3,177 30,388
Loss for the year - - - - - (1,321) (1,321) - (1,321)
Exchange differences - - (1,597) (1,555)
on translation of
foreign operations - - - (1,597) 42
Total comprehensive - - (1,597) (2,876)
income for the year - - (1,321) (2,918) 42
Issue of shares 935 2,352 - - - - 3,287 - 3,287
Expenses on issue of - (66) - - - - (66) - (66)
shares
Share based payment - - - - 180 - 180 - 180
At 31 December 2013 2,886 47,168 - (1,828) 664 (21,196) 27,694 3,219 30,913
Loss for the year - - - - - (8,893) (8,893) (1,382) (10,275)
Exchange differences - - 1,248 1,161
on translation of
foreign operations - - - 1,248 (87)
Total comprehensive - - 1,248 (9,114)
income for the year - - (8,893) (1,469)
(7,645)
Issue of shares (131) 1,163 - - - - 1,032 - 1,032
Acquisition of - - - (848)
Non-controlling - - 1,187 1,187 (1,655)
interests
Issue of shares to - - - 2,846
Non-controlling - - - - 2,466
interests
Expenses on issue of - (65) - - - (65) - (65)
shares
Convertible loans - - 858 - - - 858 - 858
issued
Cancellation of - - - - - (1,260) (1,260) - (1,260)
shares
Share based payment - - - - 105 - 105 - 105
At 31 December 2014 2,755 48,266 858 (580) 769 (30,162) 21,906 2,561 24,467
Consolidated statement of financial position
2014 2013
Notes GBP000 GBP000
ASSETS
Non-current assets
Intangible exploration and evaluation 9 33,438 40,635
assets
Derivative financial instrument 11 - 607
Property, plant and equipment 10 221 422
Total non-current assets 33,659 41,664
Current assets
Trade and other receivables 12 115 131
Inventory 13 11 38
Derivative financial instrument 11 - 751
Cash and cash equivalents 15 92 226
Total current assets 218 1,146
TOTAL ASSETS 33,877 42,810
LIABILITIES
Current liabilities
Trade and other payables 16 (326) (230)
TOTAL CURRENT LIABILITIES (326) (230)
NON-CURRENT LIABILITIES
Site restoration provision 18 (113) (118)
Borrowings 17 (2,547) (2,600)
Deferred tax liability 6 (6,424) (8,949)
Total non-current liabilities (9,084) (11,667)
TOTAL LIABILITIES (9,410) (11,897)
NET ASSETS 24,467 30,913
EQUITY
attributable to owners of the parent
Share capital 19 2,755 2,886
Share premium 21 48,266 47,168
Foreign exchange reserve (580) (1,828)
Share based payment reserve 769 664
Convertible loan reserve 22 858 -
Retained deficit (30,162) (21,196)
Equity attributable to the owners of the 21,906 27,694
parent
Non-controlling interests 23 2,561 3,219
TOTAL EQUITY 24,467 30,913
Approved by the board and authorised for issue on 25 June 2015
Philip Falzon Sant Manduca
Simon Retter
Executive
Chairman
Finance Director
Consolidated statement of cash flows
2014 2013
Notes GBP000 GBP000
OPERATING ACTIVITIES
Loss before taxation (10,275) (1,321)
Adjustment for:
Interest expense 5 30 57
Foreign exchange losses 174 8
Share based payment charge 105 180
Decrease/(increase) in trade and other 16 46
receivables
Decrease/(increase) in inventory 27 (38)
(Decrease)/increase in trade and other 96 (80)
payables
Impairment of intangible assets 9,232 -
Fair value loss on remeasuring derivative 11 252 558
financial instrument
NET CASH OUTFLOW FROM OPERATIONS (343) (590)
INVESTING ACTIVITIES
Purchases of property, plant and equipment 10 - (94)
Expenditure on exploration licences 9 (259) (975)
Net cash outflow from investing activities (259) (1,069)
FINANCING ACTIVITIES
Proceeds from issue of share capital 19 - 1,150
Purchase of own share capital (1,890) -
Proceeds from derivative financial instrument 11 1,106 221
Expenses of issue of share capital 21 (65) (66)
Proceeds from loans 17 1,317 88
Net cash inflow from financing activities 468 1,393
DECREASE IN CASH AND CASH EQUIVALENTS (134) (266)
Cash and cash equivalents at beginning of year 226 492
Effects of foreign exchange - -
CASH AND CASH EQUIVALENTS AT end of YEAR 16 92 226
END
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