PRG Paragon Diamnd

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: