PRG Paragon Diamnd

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 Letšeng 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:

*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/higher-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 £10.3 million during the year (2013: loss of £1.3 million). In order to ensure as much funds as possible are invested in the ground, administration costs continue to be tightly controlled and totalled £0.8 million during the year (2013: £0.7 million). There is a non cash impairment charge of £9.2 million (2013: £nil) 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 £1.3 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 £0.1 million as at 31 December 2014 (2013: £0.2 million).

The Group had net assets of £24.5 million as at 31 December 2014, (2013: £30.9 million) and intangible exploration assets are carried at £33.4 million (2013: £40.6 million).

Group borrowings totalled £2.5 million at 31 December 2014 (2013: £2.6million) principally comprising the convertible loans held by Titanium Capital Investments. After the year end the Group obtained an additional loan of £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

There is no tax effect on currency translation differences in other comprehensive income

Consolidated statement of changes in equity

Consolidated statement of financial position

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