PARAGON DIAMONDS : $15 million Debt and Revenue Sharing Facility

         Paragon Diamonds Limited / Index: AIM / Epic: PRG / Sector: Resources     

     2 October 2015

                 Paragon Diamonds Limited ('Paragon' or the 'Company')             

     Term sheet signed re $15 million debt and revenue sharing facility to develop 
              Mothae and Lemphane kimberlite diamond Projects in Lesotho           

    Paragon Diamonds Limited, the AIM quoted diamond development company, announces
    that it has signed a non-binding term sheet, to secure a US$15 million funding
    package with Acrux Resources Proprietary Limited, a private South Africa based
    company. Extensive due diligence has been undertaken and all that remains prior
    to release of funds is to complete legal due diligence and contracts.  The
    funds when released will be used to acquire and bring the defined Mothae
    Kimberlite Resource ('Mothae'), which is only 5 km from the world class Letšeng
    le Terai Diamond Mine in Lesotho, and the Company's nearby Lemphane Kimberlite
    Pipe Project ('Lemphane') into first production of potentially large high value
    diamonds. This will target combined revenues of approximately US$36 million
    during the first full year of production at both mines, and is in line with
    Paragon's strategy to build a leading vertically integrated diamond house.

    The term sheet is for a US$15 million combined convertible debt and revenue
    sharing facility which introduces a leading diamond investor as a shareholder.
    The funding would comprise the following principal elements:-

      * US$8 million payment in return for 7% revenue share of Mothae and Lemphane
        revenues for first three years, reducing thereafter to 4% at Mothae and
        zero at Lemphane
      * US$7 million loan convertible at a 5.5 pence per share carrying an interest
        rate of 10% per annum
      * the funding to be secured over the Company's shares in Mothae Diamonds and
        Meso Diamonds (the Company's 80 per cent. subsidiary)
      * As announced previously, we have a formal letter of commitment received for
        the majority of Stage 2 funding from a separate investor. In addition
        Paragon will seek ITGT to finance the distribution and manufacturing of the
        production to ensure maximum value is generated for shareholders

    Revised operational strategy

      * US$15 million will enable the Company to acquire and bring Mothae into
        production and develop Lemphane

      * Capital expenditure and working capital efficiencies identified to reduce
        the overall funding requirement significantly
      * Mothae purchase price reduced to US$6.5 million from US$8.5 million, with
        US$2 million initial payment to Lucara upon completion of initial financing
        and further payment schedule agreed
      * Extension of the £500,000 loan facility due on 30 September until 14
        October to ensure that financing contracts can be properly concluded
      * Initial production anticipated at both Mothae and Lemphane scheduled for 1Q
        2016.

    On course to build a leading diamond house with interests across the investment
    grade diamond value chain from the mine to the investor and consumer

      * Well placed to deliver operational and corporate objectives in line with
        strategy:
          + Achieve first production at Mothae and Lemphane in 1Q 2016
          + Establish comprehensive distribution infrastructure and network to
            ensure the value of each large diamond recovered is optimised
          + Within two years, bring Mothae and Lemphane into full capacity to
            transform Paragon into a 5Mt/yr producer of in excess of 100,000 carats
            with average values exceeding US$1,500/carat

    Paragon Diamonds Executive Chairman Philip Falzon Sant Manduca said: "This term
    sheet sets out an important investment and funding agreement, which I expect to
    be concluded promptly and which will be coincident with the separate execution
    of the purchase of Mothae from Lucara, and thus validates what the Board of
    Paragon have believed for some time: that we are a company with exceptional
    assets poised to produce high quality, investment grade diamonds, which,
    through our vertically integrated model, distributing diamonds to investors and
    consumers, is positioned in the right space at the right time to generate a
    highly positive earnings pathway in the long term for all stakeholders.

    "Firstly, the terms set out reduce equity dilution over the short term as we
    have not even had to re-issue the former Lanstead owned shares which Paragon
    re-purchased and then cancelled earlier late last year (see release 12 December
    2014).  When as anticipated we complete on the agreement envisaged by the term
    sheet in the next few weeks, I believe it will clearly confirm that Paragon's
    Board have delivered on its promise of respecting existing shareholders and
    working exceptionally hard to deliver the highest possible value to the early
    stage shareholders for the journey to date and beyond.  In addition, we feel we
    would have a strong and committed shareholder base for both the long term and
    for the successful expansion of the business, with no discernible share
    overhang in the market.  We were determined in discussions and negotiations
    with interested investors to achieve at the very least the correct minimum
    valuation, despite immensely difficult market conditions, for the Company
    subsequent to the agreement to acquire Mothae to add to Lemphane.

    "Secondly, the Board considers the proposed terms to be very strong and in
    direct contradiction to the market consensus that told us we would be unable to
    do so at this stage of Lemphane's development and would need to issue a
    sizeable quantity of new shares at a significant discount to the market price
    to raise new money. I believe that this proposed new investment confirms that a
    diamond mining company with a strong resource potential in what I believe to be
    the optimal asset class, can attract significant investment without having to
    give the company away cheaply, whatever the stage of their development, and
    regardless of sentiment elsewhere both in the mining and diamond sectors.

    "Thirdly, and most importantly, we look forward to welcoming a significant
    cornerstone shareholder, which is both a highly respectable and supportive
    investment group, and importantly is experienced in the mining and business
    management sectors. Acrux can, and I have no doubt will, significantly help us
    to deliver on our ambition to vertically integrate the business production and
    sales reach from diamond mining in Lesotho all the way downstream to both
    consumers and investors in Dubai and globally.  The Company has replaced ITGT
    as principal investors, yet ITGT discussions are still ongoing which may see
    ITGT involved either in the purchase of our production or in second stage
    financing as we move to full production in 2017. In addition, I am already in
    extended discussions with an investment group about securing second stage
    production funding to enable production in approximately 24 months' time, and I
    am confident that we will not be exposed to any public market volatility in
    securing additional capital when the time comes to move to full stage
    production at that time.

    "In my view, it's the right time for investors to move into mobile currency
    assets; Lesotho is a country that has proven it contains large and high quality
    diamonds; and diamonds are undoubtedly in my view the optimal place for
    strategic investment as paper money continues to be globally debased, the
    European Union remains fragile and other safe haven assets become more
    expensive to hold as taxation becomes more regressive, bank scrutiny increases,
    and gold continues to diminish as an alternative currency to paper because of
    its density to value.

    "These factors are coupled with an era when investment grade diamonds become
    more and more desirable as a store of wealth and value to investors. Globally,
    confidence is diminishing in central banks and governments to engineer a
    sufficient level of economic growth to sustain expanding social welfare
    policies, without continuing to have to resort to more and more irresponsible
    monetary policies and regressive levels of taxation and some form of currency
    controls.

    "Over the next few years, I expect Paragon to become an important player in the
    diamond world. To all our existing shareholders, thank you for your support and
    enthusiasm you share with me in regard to our prospects. They couldn't look
    better right now and we look forward to moving into mine development at both
    Mothae and Lemphane with a view of first production in 1Q 2016."

    Geoff Linnell, from Acrux Resources commented: "We are pleased to have agreed
    terms with Paragon for an investment that will bring both the Mothae and
    Lemphane kimberlite projects into production. We see significant value in these
    projects, especially with regards to the potential for generating the large,
    special stones for which Lesotho is renowned.  We look forward to completing
    the due diligence and legal work as soon as practicable, and seeing first
    production in the very near future."

    Funding Agreement Term Sheet

    The Term Sheet provides for the Company to issue a senior secured convertible
    loan of US$7 million to Acrux Resources Proprietary Limited carrying an
    interest rate of 10% and convertible at the option of Acrux into shares in the
    Company at a price of 5.5 pence per share. In addition the funding package
    would include a US$8 million upfront revenue sharing agreement whereby interest
    is calculated a fixed 7% of revenues from Mothae and Meso Diamonds for the
    first 3 years of production, reducing to 4% thereafter for Mothae and zero for
    Lemphane. The total funding package is secured over the Company's shares in
    Mothae Diamonds and Meso Diamonds (the Company's 80 per cent. subsidiary).
    Should the Company raise financing to increase the production at Mothae to 2Mt
    per annum within 3 years then the revenue sharing rate will reduce to 4%.   The
    revenue sharing proceeds can be convertible into equity at the election of
    Acrux with the first US$5 million convertible at a price of 5.5 pence per
    share, the next US$5 million convertible at 10 pence per share and the
    remainder (if any) convertible at a price of 15 pence per share.

    Acrux would have the right to appoint two Directors to the Board of Paragon
    Diamonds. In addition, Acrux would agree to abide by orderly market principles
    and would intend to be a long term strategic shareholder of the Company.

                                       **ENDS**                                    

    For further information please visit www.paragondiamonds.com or contact:

    Philip Falzon Sant           Paragon Diamonds          [phone]    
    Manduca                Limited                                                 
                                                                                   
    Simon Retter                 Paragon Diamonds          [phone]    
                           Limited                                                 
                                                                                   
    David Hignell                Northland Capital         [phone]    
    Gerry Beaney           Partners Limited                                        
                                 (Nominated Adviser)                               
                                                                                   
    John Howes                   Northland Capital         [phone]    
    Mark Treharne          Partners Limited                                        
                                 (Sales and broking)                               
                                                                                   
    Felicity Winkles             St Brides Partners        [phone]    
                           Limited                                                 
                                                                                   
    Frank Buhagiar               St Brides Partners        [phone]    
                           Limited