PARAGON DIAMONDS LTD
Paragon Diamonds Limited / Index: AIM / Epic: PRG / Sector: Resources
30 September
2015
Paragon Diamonds Limited ('Paragon', the 'Group' or the 'Company')
Interim Results
Paragon Diamonds Limited, the AIM quoted vertically integrated diamond
development company in Lesotho, Africa, is pleased to announce its interim
results for the six months ended 30 June 2015.
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
* MOU signed to acquire the 39Mt large/high value diamond Mothae Kimberlite
mine ('Mothae') in Lesotho from Lucara Diamond Corporation
+ 5 km from the world class Letšeng diamond mine in Lesotho which is
located within a cluster of kimberlites, including Paragon's Lemphane
Kimberlite Pipe Project ('Lemphane')
+ 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, and is forecast to generate US$60m+ annual revenues over a
minimum 12 years of full production
Post Period
* Formal approval of acquisition of Mothae received from the Government of
Lesotho
* Independent study on Mothae exceeds management's initial expectations, and
confirms that it represents a low cost opportunity to generate significant
value through the potential recovery of large high value diamonds
+ an improved strip ratio of <1:1 compared to initial estimates of <1.5:1
and the potential for average diamond values up to c. US$2,000/ct
+ several mining scenarios exceeding 20Mt at US$40+/t ore value in a low
operating cost mine
* Aiming for first production at Mothae six months after completion of the
acquisition followed by Lemphane in 1H 2016 - targeting combined revenues
of approximately US$36 million during the first full year of production
from both assets
Chairman's statement
I am delighted to report on the substantial progress we have made during 2015
as we deliver on our objective to transform Paragon into a leading vertically
integrated diamond house. We shortly expect to have two potentially large
stone and high value diamond assets located in Lesotho within our portfolio:
our existing flagship project, the 48Mt Lemphane Kimberlite Pipe Project
('Lemphane'); along with signed contracts and approval from the Government of
Lesotho to acquire the 39Mt Mothae Kimberlite Pipe Project ('Mothae') from
Lucara Diamond Corporation ('Lucara'), which we expect to complete following
finalisation of funding.'
We are not just building a diamond production company. Our vision greatly
exceeds this as we are looking to become 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. We are adopting this approach to ensure as
much value as possible is retained for Paragon and its shareholders. With this
in mind, once Paragon has moved into first production at Mothae and secondly at
Lemphane, we will move forward with our vertically integrated business model
through the use of vehicles such as JVs, SPVs and offtake agreements with
suitable partners. In addition to integrating vertically, there are also a
number of lateral opportunities which could potentially be very profitable for
Paragon in the future which we will look to explore. For example diamond
investment vehicles for investors looking for exposure to hard assets and
commodity currencies. Lastly, should another exciting near-term production
asset become available with the right large stone/high value economics, we
could add further to our existing asset base.
As I have previously cited, 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. Investment grade diamonds are
increasingly replacing gold and silver, real estate, art and cars as the
monetary commodity asset and store of value providing safety against the risks
associated with geopolitical crises, accelerating paper currency debasement,
deteriorating global government fiscal balances, rising wealth taxes and
negative bond yields. One of diamonds' USPs is that they are portable, are
outside of any banking system and are internationally tradeable with any
currency. Moreover the structural change taking place in the diamond sales
market, specifically in terms of price transparency as a result of wider
electronic transmission and the use of tenders, auctions and private placement
is forcing transactions to migrate away from centres such as Antwerp. These two
factors in my mind creates a significant opportunity for a vertically
integrated company 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.
Operations
Mothae
In May 2015, we signed a Memorandum Of Understanding ('MOU') with Lucara to
acquire a 75% equity stake in the Mothae Kimberlite mine. Mothae is only 5 km
from the world class Letšeng diamond mine in Lesotho that is located within a
cluster of kimberlites, including Paragon's Lemphane Kimberlite Pipe Project
('Lemphane'). This is a transformational deal that will increase our diamond
producing capabilities to over 100,000cts when at full production with an
average value over US$1,500/ct (at recent prices) and indeed should re-rate our
business model and valuation in the market.
We have approval from the Government of Lesotho in hand and we are just waiting
to finalise the acquisition with Lucara, which has granted an extension of
seven days on the original 30 September deadline to enable the conclusion of
the transaction.
Mothae has a NI 43-101 compliant 39Mt Indicated and Inferred Mineral Resource
Estimate with a 2.72 cpht grade and value of US$1,034/ct. The mine 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$1,097m available; an initial NPV of US$115m (discounted at 12%),
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 already has extensive infrastructure in place, 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 and 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 portion of the 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 a 56.5 carat
diamond valued at over US$37,000 per carat in December 2011, and the single
highest diamond value achieved was US$57,000 per carat for a 28.9 carat stone
also in December 2011.
In September 2015 results from technical studies undertaken on the Mothae
resource by the Company's consultants exceeded our initial expectations, and
confirm that it represents a low cost opportunity for Paragon to generate
significant value for shareholders through the potential recovery of large high
value diamonds. The reports show an improved strip ratio of <1:1 compared to
initial estimates of <1.5:1 and the potential for average diamond values up to
c. US$2,000/ct. There are several mining scenarios exceeding 20Mt at US$40+/t
ore value in a low operating cost mine.
Lemphane
As I discussed in my last Chairman's statement in June 2015, Lemphane, where we
hold an 80% interest in the project with the Government of Lesotho holding the
remaining 20% will be developed concurrently with Mothae with a view of first
production after Mothae in 2016.
The current 48Mt kimberlite deposit where we have a Mining Lease secured,
development and production will be staged in two phases. 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 individual annual revenues of approximately US$9m-US$10m for
the Company. This will then 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.
We believe Lemphane is potentially a similar large high value deposit as Gem
Diamond's Letšeng Mine with 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. Size frequency indicates 12% of
carats of 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.
We already have the design and order plans for a state of the art 75 tonne per
hour (0.5Mt/yr.) processing plant at Lemphane which will use the latest X-Ray
Transmission (XRT) diamond recovery technology. This will reduce both capital
and operating costs at Lemphane, improve diamond recovery, and as a result
significantly enhance the project's economics. During the period under review
we began to order the long-lead items such as scrubbers, crushers, x-ray
transmission recovery machines and water recovery thickeners for the plant. We
have also finalised provisional tailings storage facilities (TSF) designs with
our civil engineers, and the terms for contract mining for Stage 1. Site
clearance for the new plant has also been undertaken. 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.
We have begun sourcing and construction of primary crushers, pre-treatment
(scrubbing/screening) section, coarse diamond recovery section including XRT
and secondary crushing, DMS, Final recovery building, thickeners and we can now
commence the civil construction activities.
Funding update
The Company is concluding funding for both of the diamond projects for stage
one production, which is expected to be announced as soon as practicable. In
addition, and in a very positive statement of confidence in the value of our
assets, the Company has also received a formal letter of commitment from a
separate investment partner for the majority of the stage two financing
requirement for both projects on attractive terms. The Company will update
shareholders as appropriate.
To remove any concerns amongst shareholders, the Company has agreed an
extension of the £500,000 loan facility due on 30 September until the 7 October
(with the option to extend until 14 October) to ensure that financing contracts
can be properly concluded over the coming days, if necessary. Lucara have also
confirmed their intention to extend the exclusivity period until 7 October to
enable the successful completion of the acquisition of Mothae.
Financial Results
The group has focussed on completing funding to advance Lemphane and acquire
and advance Mothae over the period and updates will be made as soon as further
progress has been made.
The Group generated a loss after tax of £0.5 million during the first half (H1
2014: loss of £0.5 million). In order to ensure as much funds as possible are
invested in the ground, administration costs continue to be tightly controlled
and amounted to £0.3 million during the six months under review (H1 2014: £0.4
million).
The Group held cash of £0.4 million as at 30 June 2015 (H1 2014: £0.1 million).
The Group had net assets of £23.3 million as at 30 June 2015, (2014: £29.9
million) and intangible exploration assets are carried at £32.6 million (2014:
£39.6 million). Group borrowings totalled £3.2 million at 30 June 2015 (2014:
£2.1 million).
Overview
I am optimistic about the future of the investment grade diamond sector and
strongly believe that, with the addition of Mothae to our existing Lemphane
kimberlite project, we are very well positioned to benefit from all the macro
fundamentals affecting the diamond industry that are moving in our favour. This
includes the anticipated supply constraint, increase in appetite for the larger
investment grade stones, which we will be focusing predominantly on, constant
advances in technology, lower capital costs and operation synergies from being
last mover in an established diamond district, Lesotho. With near-term
production, these are exciting times ahead for the Company.
Finally I would like to thank the Board, management and staff, for their hard
work not just over the last six months but for the progress we have made in
bringing two potentially high-margin assets into production. I would also like
to thank shareholders for their patience. It has not been easy to navigate a
funding requirement in the depressed emerging market, commodity and mining
sectors. I look forward to working with the Paragon team during what promises
to be an exciting period for Paragon Diamonds, and with the Government of
Lesotho, who consistently evidence their support to us, as we look to deliver
on our objectives and generate value for all our shareholders.
Philip Falzon Sant Manduca
Executive Chairman
29 September 2015
Condensed consolidated statement of comprehensive income
Six Months Six Months Year to 31
to to December
30 June 30 June
2015 2014 2014
(Unaudited) (Unaudited) (Audited)
Continuing operations £000 £000 £000
Administration costs (328) (395) (760)
Fair value loss in remeasuring derivative - (108) (252)
instrument
Finance costs (154) (30) (30)
Impairment of intangible assets - - (12,310)
LOSS BEFORE TAXATION (482) (533) (13,352)
Taxation - - 3,077
LOSS FOR THE PERIOD (482) (533) (10,275)
Attributable to:
Owners of the parent (287) (533) (8,893)
Non-controlling interest (195) - (1,382)
(482) (533) (10,275)
Other comprehensive income:
Exchange differences on translation of 1,161
foreign operations (867) (1,107)
TOTAL COMPREHENSIVE INCOME FOR THE PERIOD (9,114)
(1,349) (1,640)
Attributable to:
Owners of the parent (1,239) (1,836) (7,645)
Non-controlling interest (110) 196 (1,469)
(1,349) (1,640) (9,114)
LOSS PER SHARE
From continuing operations
Basic and diluted (pence) (0.17) (0.18) (3.29)
The loss in the current period arises from the Group's continuing operations.
Condensed consolidated statement of changes in equity
Share Share Foreign Share Retained Total Non-controlling Total
capital premium Convertible exchange based deficit Interests equity
loan reserve payment
reserve reserve
£000 £000 £000 £000 £000 £000 £000 £000 £000
At 1 JANUARY 2014 2,886 47,168 - (1,828) 664 (21,196) 27,694 3,219 30,913
Loss for the period - - - - - (533) (533) - (533)
Exchange differences on - - (1,331) - (1,331) (1,107)
translation of foreign - - 224
operations
Total comprehensive - - (1,331) (533) (1,864) (1,640)
income for the period - - 224
Issue of shares 425 925 - - - - 1,350 - 1,350
Purchase of - - - - - (773)
non-controlling - - (773)
interest
Share based payment - - - - 77 - 77 - 77
At 30 june 2014 3,311 48,093 - (3,159) 741 (21,729) 27,257 2,670 29,927
Loss for the period - - - - (8,360) (8,360) (1,382) (9,742)
Exchange differences on - - 2,579 - 2,579 2,268
translation of foreign - - (311)
operations
Total comprehensive - - 2,579 (8,360) (5,781) (7,474)
income for the period - - (1,693)
Issue of shares (556) 303 - - - - (253) - (253)
Expenses on issue of - (65) - - - - (65) - (65)
shares
Cancelation of shares - (65) - - - (1,260) (1,325) - (1,325)
Convertible loans - - 858 - - - 858 - 858
issued
Purchase of - - - 1,187 1,187 305
non-controlling - - (882)
interest
Issue of shares to - - - - - 2,466
non-controlling - - 2,466
interest
Share based payment - - - - 28 - 28 - 28
At 31 DECEMBER 2014 2,755 48,266 858 (580) 769 (30,162) 21,906 2,561 24,467
Loss for the period - - - - - (287) (287) (195) (482)
Exchange differences on - - (952) - (952) (867)
translation of foreign - - 85
operations
Total comprehensive - - (952) (287) (1,239) (1,349)
income for the period - - (110)
Issue of shares 24 107 - - - - 131 - 131
Expenses on issue of - (3) - - - - (3) - (3)
shares
Share based payment - - - - 24 - 24 - 24
AT 30 JUNE 2015 2,779 48,370 858 (1,532) 793 (30,449) 20,819 2,451 23,270
Condensed consolidated statement of financial position
30 June 30 June 31
2015 2014 December
(Unaudited) (Unaudited) 2014
(Audited)
£000 £000 £000
ASSETS
Non-current assets
Intangible exploration and 32,602 39,546 33,438
evaluation assets
Derivative financial asset - 260 -
Property, plant and equipment 131 307 221
Total non-current assets 32,733 40,113 33,659
Current assets
Trade and other receivables 109 125 115
Inventory 11 37 11
Derivative financial asset - 687 -
Cash and cash equivalents 328 64 92
Total current assets 448 913 218
TOTAL ASSETS 33,181 41,026 33,877
LIABILITIES
Current liabilities
Trade and other payables (403) (248) (326)
TOTAL CURRENT LIABILITIES (403) (248) (326)
NON-CURRENT LIABILITIES
Site restoration provision (105) (113) (113)
Loans (3,181) (2,082) (2,547)
Deferred tax liability (6,222) (8,656) (6,424)
Total non-current liabilities (9,508) (10,851) (9,084)
TOTAL LIABILITIES (9,911) (11,099) (9,410)
NET ASSETS 23,270 29,927 24,467
EQUITY
Share capital 2,779 3,311 2,755
Share premium 48,370 48,093 48,266
Foreign exchange reserve (1,532) (3,159) (580)
Share based payment reserve 793 741 769
Convertible loan reserve 858 - 858
Retained deficit (30,449) (21,729) (30,162)
Equity attributable to the owners 20,819 27,257 21,906
of the parent
Non-controlling interests 2,451 2,670 2,561
TOTAL EQUITY 23,270 29,927 24,467
Approved by the board and authorised for issue on 28 September 2015
Philip Falzon Saint Manduca
Simon Retter
Executive
Chairman
Finance Director
Condensed consolidated statement of cash flows
Six Six Year
months to months to ended
June 2015 June 2014 December
Unaudited Unaudited 2014
£000 £000 £000
OPERATING ACTIVITIES
Loss before taxation (482) (533) (10,275)
Adjustment for:
Interest expense 139 30 30
Foreign exchange losses 54 (58) 174
Share based payment charge 24 77 105
Decrease in trade and other receivables 6 6 16
Decrease in inventory - 1 27
(Decrease)/Increase in trade and other 79 18 96
payables
Impairment of intangible assets - - 9,232
Fair value loss on remeasuring derivative - 108 252
asset
NET CASH OUTFLOW FROM OPERATIONS (180) (351) (343)
INVESTING ACTIVITIES
Purchases of property, plant and - - -
equipment
Expenditure on mining licences (211) (182) (259)
Net cash outflow from investing (211) (182) (259)
activities
FINANCING ACTIVITIES
Proceeds from issue of share capital 130 50 -
Expenses of issue of share capital (3) - (65)
Purchase of own share capital - - (1,890)
Proceeds from derivative financial - 327 1,106
instrument
Proceeds from/(repayment) of loan 500 (7) 1,317
Net cash inflow from financing activities 627 370 468
INCREASE/(DECREASE) IN CASH AND CASH 236 (163) (134)
EQUIVALENTS
Cash and cash equivalents at beginning of 92 226 2236
period
Effects of foreign exchange - 1 -
CASH AND CASH EQUIVALENTS AT end of 328 64 92
period
**ENDS**
For further information please visit www.paragondiamonds.com or contact:
Philip Falzon Sant Paragon Diamonds +44 (0) 20 7182 1920
Manduca Limited
Simon Retter Paragon Diamonds +44 (0) 20 7182 1920
Limited
David Hignell Northland Capital Partners +44 (0) 20 7382 1100
Gerry Beaney Limited
(Nominated Adviser)
John Howes Northland Capital Partners +44 (0) 20 7382 1100
Mark Treharne Limited
(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
PARAGON DIAMONDS : Interim Results
September 30, 2015 at 11:31 am IST
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