December 22, 2016

Final Results

22 December 2016

AIM: STEL

Stellar Diamonds plc (“Stellar” or the “Company”)

Final Results

Stellar Diamonds plc, the London listed (AIM: STEL) diamond development company focused on West Africa, announces its final results for the period ended 30 June 2016.

Operational Highlights:

Tongo 1.45 million carat (“Mcts”) Kimberlite Dyke-1 Project, Sierra Leone:

  • Mining licence application submitted and pending approval subject to environmental licence
  • Environmental impact assessment submitted and approved
  • Potential acquisition of adjacent 3.45Mcts Tonguma mining licence in process
  • Preliminary economic assessment delivered for the proposed combined Tongo-Tonguma project shows robust returns with pre-tax NPV (10) of US$172 million and IRR of 49%

Baoulé Project, Guinea:

  • Trial mining has yielded a total of 11,564 carats to date
  • Diamond sale revenues from trial mining have totalled US$1.1 million
  • Largest stone of 55cts (low quality) with high value gems up to 12cts in size
  • Target resource remains 3.3Mcts based on historical drilling and current grades
  • Joint venture signed with Citigate Commodities Trading (post year-end)

Liberia Licences:

  • Two exploration licences granted which cover historical positive exploration results in a known kimberlite and diamond province of west Liberia
  • Joint venture signed with Citigate Commodities Trading (post year-end)

Financial Highlights:

  • US$3.6 million cash raised in the financial year through a combination of equity and debt funding to complete the Baoulé trial mining exercise and advance the Tongo project and proposed Tonguma acquisition
  • New significant shareholder, Deutsche Balaton, brought in through a combination of equity and convertible loan
  • Cost savings made in previous years maintained with Group administrative costs static at approximately US$1.4 million for the year

Stellar Diamonds Chief Executive Karl Smithson commented:

“During the past year we have pursued the key strategy of consolidating our Tongo kimberlite dyke licence with the adjacent Tonguma kimberlite dyke mining licence in order to create an enlarged hard rock mining operation that can offer long-term and sustainable production and revenues. In the event of completion of the acquisition of Tonguma, the combined mine would have an initial inferred +1.18mm diamond resource of 4.5 million carats, with diamond values ranging from US$209/ct to US$310/ct, from just three (of eight) kimberlite dykes in the licence areas, all of high grade and high diamond values. The PEA demonstrates a life of mine of 20 years with production estimated to be over 200,000 carats per year for the most part.

“The acquisition process is ongoing and remains the focus of Stellar (albeit there is no guarantee that it will be completed). In order to focus on the acquisition we undertook to joint venture our Baoulé kimberlite pipe project in Guinea and our Liberian licences to Citigate whilst retaining a free-carried interest in these projects. The earn-in allows for Citigate to fully fund both projects but Stellar’s existing teams on the ground will manage the projects for the first phase of work and will also receive a management fee for doing so.

“We look forward to the next year with considerable excitement as we pursue a transformational acquisition whilst at the same time maintain exposure to our quality portfolio of diamond assets in West Africa.”

For further information contact the following or visit the Company’s website at www.stellar-diamonds.com.

Karl Smithson, CEO

Philip Knowles, CFO

Stellar Diamonds plc

Stellar Diamonds plc

Tel: +44 (0) 20 7010 7686

Tel: +44 (0) 20 7010 7686

Jon Belliss Beaufort Securities Limited (Joint Broker) Tel: +44 (0) 20 7382 8300
Emma Earl

Sandy Jamieson

Cairn Financial Advisers (Nominated Advisor) Tel: +44 (0) 20 7213 0880
Lottie Brocklehurst

Charlotte Page

St Brides Partners Ltd Tel: +44 (0) 20 7236 1177

About Stellar Diamonds plc

Stellar is an AIM quoted (AIM: STEL) West African focused diamond company with projects at the trial mining and mine development stages in Guinea and Sierra Leone.

Chairman’s Statement

Although the past year has yet again been very challenging for junior resource companies, it could prove to be a year of inflection for Stellar Diamonds.

Stellar Diamonds is on the point of advancing from its exploration and development stage to the commercial mining stage through its proposed acquisition of the Tonguma diamond mining licence and project currently held by Octea Mining Limited (“Octea”), which is adjacent to Stellar’s Tongo licence in eastern Sierra Leone, as announced in August 2016.

Tongo Project

During the year Paradigm Project Management (“PPM”) completed an independent Preliminary Economic Assessment (“PEA”) for the development of the JORC compliant 1.45 million carat Dyke-1 resource at Tongo (at a +1.0mm cut-off). This indicated positive economics and on the basis of this an application for a mining licence was submitted and is currently being progressed by the Ministry of Mines in Sierra Leone. The Environmental Impact Assessment has been completed and approved, and the Company is now negotiating the fee for an Environmental Licence.

Tonguma Acquisition

Although only announced after the year end, during the financial year Stellar has been negotiating with Octea for the acquisition of the Tonguma mine lease, which neighbours our Tongo exploration licence. Tonguma holds a JORC compliant 3.45 million carat inferred kimberlite dyke resource (+1.18mm Cut off), which when combined with the Tongo kimberlite dyke resource, would offer the potential of an enlarged inferred diamond resource of 4.5 million carats (all at a +1.18mm cut-off).

Terms have been largely agreed and the acquisition, if completed, would constitute a reverse takeover under the AIM Rules. The acquisition remains subject to completion of inter alia, due diligence, finalisation of agreements, completion of a substantial fundraise, publication of an AIM admission document and shareholder approval. There is no up-front acquisition cost associated with the proposed acquisition but there would be a requirement for Stellar to commit a minimum of US$25 million for the development of the Tongo-Tonguma combined project. As part of the proposed acquisition Stellar would also acquire Octea’s 50tph production plant which is located approximately 60km north of Tongo-Tonguma, at Octea’s Koidu project. The plant, once relocated, is expected to materially reduce the time required to get Tongo-Tonguma into commercial production. From the first positive cash flows Stellar would recoup its mine development costs and thereafter Octea would recoup an amount of US$5 million for the production plant. Stellar would then pay Octea a 10% revenue royalty for 10 years and 5% thereafter. Any free cash flow from the project would be split 75% to Stellar and 25% to Octea. Stellar would however have full legal ownership of the Tongo-Tonguma asset and operational, management and voting control of the new mine.

As part of the proposed transaction, PPM and SRK Consulting have completed an independent PEA on the combined Tongo-Tonguma project. This study estimated the capital requirement in years 1 and 2 to be US$31 million, with first production expected to commence within 12 months of completion of the transaction, ramping up to 200,000 carats per year for an initial 21 year mine life. A total of 3.9 million carats are forecast to be recovered at grades ranging from 100cpht to 260cpht and diamond values of US$209/ct to US$310/ct (all at a +1.18m cut-off).

The PEA for both licences shows a pre-tax NPV (10) of US$172 million and an IRR of 49%. Furthermore, there is strong evidence of an additional 8 million carats in “geological potential” which can be converted into resource and can offer material upside to the economics of the project and provide for a significantly longer mine life. A full competent person’s report has also been produced on the Tongo-Tonguma project which independently reports on the findings from the PEA and the viability of the project and includes an outline of the key risks associated with the project.

Stellar have appointed Mirabaud Securities to lead the fundraising for the proposed acquisition and development of the Tongo-Tonguma project into commercial production.

Baoulé Project

During the year, Stellar completed a 101,263 tonne bulk sample of the 5 hectare diamondiferous Baoulé kimberlite pipe, as planned. It yielded 11,564 carats, with the largest stone of 55 carats (low quality), but also many high value gems up to 12 carats were recovered. The highest value was a 10.04 carat fancy yellow high quality stone, which sold for an impressive US$6,788 per carat. Diamond sales from the trial mining exercise were over US$1.1 million.

In order that Stellar can focus its management and financial resources on the exciting project at Tongo-Tonguma, the Company has agreed terms, subsequent to the year end, to joint venture the Baoulé project with Citigate Commodities Trading (“Citigate”), a Dubai based group. This earn-in agreement was entered into in November 2016. Citigate is expected to invest US$1.5 million during the first phase of bulk sampling work in order to earn a 25% interest in the project. Stellar will receive a 56% revenue share of any diamond sales during this phase. Citigate has the right to earn a further 25% interest in the Baoulé Project by completing a resource statement during Phase-2 for US$2 million expenditure and a further 25% interest in the project by completing a pre-feasibility study. During the earn-in period Citigate will be granted offtake rights to any diamonds produced.

Liberia

In 2014 Stellar applied for two exploration licences in the west of Liberia that cover an area of high interest, which Stellar partly explored in 2008/9 before the financial crisis led to Stellar ceasing operations in Liberia. These licences were granted to Stellar in February 2016. Since the focus of the company is now on the Tongo-Tonguma transaction and mine development it was decided to also joint venture these two Liberia licences to Citigate. Citigate is required to invest a total of US$6.25 million over three phases of work to earn an 85% interest in the licences and during this earn-in has offtake rights for any diamonds produced. Stellar will not be required to contribute any funds to the project during the Citigate earn-in period. This transaction was completed in November 2016.

Corporate and other activities

In November 2015 Stellar brought in a new significant strategic investor in Deutsche Balaton, through a combination of an equity investment and a convertible loan. Deutsche Balaton have also provided additional interim funding since the year end, alongside one of our Directors, Steven Poulton and Creditforce Limited, and this is a strong signal of support of Stellar’s strategy to enter into production through the completion of the proposed Tonguma acquisition. As a result of the announcement of the potential Tonguma acquisition in August 2016 the Company’s shares were suspended from trading on AIM as is required following the announcement of a transaction, which is classed as a Reverse Take Over under AIM rules pending publication of an AIM Admission Document.

With the Company now focussed on completing the Tonguma acquisition and the subsequent mine construction planned for 2017, subject to the completion of the transaction and raising the estimated US$45 million to bring the combined project into production, the Directors have again reviewed the carrying value of the Kono project in the accounts. Given the focus on Tongo-Tonguma and the passage of time with no additional progress being made on the reinstatement of the Kono licence, the Directors consider that the carrying value of project should be fully impaired at this time and accordingly an impairment charge of US$4.3 million was made during the year.

Finally, the Directors have considered the disconnect between the value of the Group’s equity of US$13 million and the market capitalisation of the Company at the time of the shares being suspended of approximately US$3 million. The Directors do not consider the market capitalisation of the Company to be a true reflection of its value and also note that the share price at suspension does not take into account the value of the potential transformational transaction being contemplated, and it is the Directors’ view that the undervalued market capitalisation does not represent an indication of impairment of the assets of the Group but a reflection of the poor market that junior resource companies currently operate in.

Diamond Market

Rough diamond prices declined by around 25% in 2015 however, prices rebound strongly in the first half of 2016. Demand in the second half of 2016 has remained quite robust thus supporting prices. Polished prices, however, remain sluggish or slightly down on the year so this could restrain rough price growth in the short term. The outlook for rough supply and demand can best be summarised by the 2015 Bain Report, which concludes:

  • “The world rough-diamond demand in the next 15 years is forecasted to grow at an average annual rate of about 3% to 4%, and the supply is projected to decline by 1% to 2%, causing the gap between supply and demand to widen starting in 2019. The forecast reflects fundamental supply and demand factors rather than short-term fluctuations or unforeseeable long-term macroeconomic shifts”.
  • “Our forecast of the rough-diamond supply is based on the analysis of existing mines, publicly announced plans and anticipated production at every expected new mine. We foresee the global supply of rough declining on average by 1% to 2% per year from 2015 to 2030 because of the aging and depletion of existing mines and relatively little new supply coming online.”

It is also noteworthy that Rio Tinto plc has recently indicated their intention to materially grow their diamond business due to the looming supply and demand deficit, as identified by the 2015 Bain Report.

Outlook

All the hard work during 2016 should ensure that 2017 is a very exciting year for the Company. Subject to completion occurring, Tongo-Tonguma has the necessary characteristics to transform Stellar into a mid-tier diamond mining company.

I would like to thank our shareholders for their continued support during very difficult market conditions and I would particularly like to thank Deutsche Balaton and Altus. Their recent support has enabled our excellent team to move our key projects forward and negotiate a transformational transaction which gives Stellar Diamonds a bright outlook.

Lord Daresbury

Non-Executive Chairman

21 December 2016

Stellar Diamonds plc
Consolidated statement of comprehensive income
For the year ended 30 June 2016
(Stated in U.S. dollars)      
       
  Notes Year ended

30 June 2016

Year ended 30 June 2015
       
Revenue 2 499,725 614,228
Cost of sales   (1,545,769) (1,047,608)
Gross loss   (1,046,044) (433,380)
       
Depreciation of plant and equipment 5 (621,629) (499,807)
Impairment of intangibles 4 (4,300,528) (605,728)
Administrative expenses   (1,461,418) (1,437,838)
Loss on disposal of tangible fixed assets   (98,956)
Remeasurement of derivatives 6 877,993 36,173
Finance costs   (407,418) (75,102)
    (7,058,000) (3,015,682)
Loss before tax   (7,058,000) (3,015,682)
Income tax expense  
Loss after tax attributable to equity holders of the parent   (7,058,000) (3,015,682)
Total comprehensive expense for the year attributable to equity holders of the parent   (7,058,000) (3,015,682)
Basic and diluted loss per share   (0.300) (0.200)
       
Stellar Diamonds plc    
Consolidated and company statement of financial position    
As at 30 June 2016          
(Stated in U.S. dollars)     Consolidated   Company
  Notes 30 June 2016 30 June 2015 30 June 2016 30 June 2015
Assets          
Non-current assets          
Intangible Assets 4 13,139,699 16,700,417 1,302,561
Property, plant and equipment 5 1,439,124 2,192,719
Investment in Subsidiary   4,157,484 4,157,484
Total non-current assets   14,578,823 18,893,136 4,157,484 5,460,045
Current assets          
Inventories   26,934 154,170
Trade and other receivables   296,284 166,750 10,529,217 13,241,868
Cash and cash equivalents   268,330 94,624 447 524
Total current assets   591,548 415,544 10,529,664 13,242,392
Total assets   15,170,371 19,308,680 14,687,148 18,702,437
           
Equity and liabilities          
Capital and reserves          
Share capital   26,887,434 26,655,961 26,887,434 26,655,961
Share premium   30,449,207 29,000,173 30,449,207 29,000,173
Reverse acquisition reserve   17,073,279 17,073,279
Share option reserve   918,279 4,286,666 918,279 1,952,748
Foreign currency translation reserve   (773,363) (773,363)
Accumulated loss   (62,410,109) (58,720,496) (44,563,467) (38,539,936)
Total equity   12,918,090 18,295,583 12,918,090 18,295,583
Non-current liabilities          
Convertible loan 6 953,625 953,625
Derivative financial liabilities 6 12,504 12,504
Provision   104,369 104,369
Total non-current liabilities   1,070,498 104,369 966,129
Current liabilities          
Trade and other payables   413,840 780,974 134,976 379,100
Loans   767,943 100,000 667,953
Derivative financial liabilities 6 27,754 27,754
Total current liabilities   1,181,783 908,728 802,929 406,854
Total liabilities   2,252,281 1,013,097 1,769,058 406,854
Total equity and liabilities   15,170,371 19,308,680 14,687,148 18,702,437


Stellar Diamonds plc        
Consolidated statement of changes in equity        
For the year ended 30 June 2016        
(Stated in U.S. dollars)              
  Share Share Warrant Share option Reverse acquisition    
  capital premium reserve reserve reserve Accumulated loss Total equity
Balance at 30 June 2014 24,906,611 28,609,454 27,643 5,008,756 17,073,279 (56,491,193) 19,134,550
Total comprehensive loss for the year (3,015,682) (3,015,682)
Issue of placing shares 1,749,350 440,607 2,189,957
Share issue costs (13,242) (13,242)
Warrants issued (36,646) 36,646
Transfer to accumulated loss (64,289) 64,289
Share options expired (722,090) 722,090
Balance at 30 June 2015 26,655,961 29,000,173 4,286,666 17,073,279 (58,720,496) 18,295,583
Total comprehensive loss for the year (7,058,000) (7,058,000)
Issue of placing shares 231,473 1,575,358 1,806,831
Share issue costs   (126,324) (126,324)
Share options expired (3,368,387) 3,368,387
Balance as at 30 June 2016 26,887,434 30,449,207 918,279 17,073,279 (62,410,109) 12,918,090


  Stellar Diamonds plc  
Consolidated and company statement of cash flows  
For the year ended 30 June 2016  
(Stated in U.S. dollars)      
  Consolidated   Company  
  June 2016 June 2015 June 2016 June 2015
Cash flows from operating activities:      
Net loss for the year (7,058,000) (3,015,682) (7,058,000) (3,015,682)
Adjustments for:        
Depreciation of property, plant and equipment 621,629 499,807
Impairment of intangibles 4,300,528 605,728 1,302,561
Loss on disposal of fixed assets 98,956
Remeasurement of derivatives (877,993) (36,173) (877,993) (36,173)
Shares issued to Directors and officers in lieu of d fees 192,343 55,115
Net foreign exchange (gain) (226,447) (31,770) (11,983) (5,198)
Interest payable 407,418 378,341  
Change in working capital items:        
Decrease/(Increase) in receivables (129,534) 1,012 2,906,806 514,478
Decrease/(Increase) in inventories 127,236 (154,170)
(Decrease)/Increase in trade and other payables (93,677) 578,954 29,347 393,492
Net cash used in operations (2,637,541) (1,497,179) (3,330,921) (2,149,083)
Cash flows from investing activities        
Purchases of property, plant and equipment (713,028)
Payments to acquire intangible assets (706,801) (1,207,209)
Net cash used in investing activities (706,801) (1,920,237)
Cash flows from financing activities        
Proceeds of Convertible Loan 1,551,407 1,551,407
Proceeds of other loans 662,397 662,397
Repayment of other loans (337,500) (337,500)
Interest Paid (72,867) (45,625)
Proceeds from issue of share capital, net of costs 1,488,164 2,121,599 1,488,164 2,121,599
Net cash generated by financing activities 3,291,601 2,121,599 3,318,843 2,121,599
Net (decrease) in cash and cash equivalents (52,741) (1,295,817) (12,078) (27,484)
Cash and cash equivalents, beginning of year 94,624 1,358,671 542 22,810
Effect of foreign exchange rate changes 226,447 31,770 11,983 5,198
Cash and cash equivalents, end of year 268,330 94,624 447 524

1. Basis of preparation

1.1 Basis of accounting

Stellar Diamonds plc is presenting audited financial statements as of and for the year ended 30 June 2016. The comparative period presented is audited financial statements as of and for the year ended 30 June 2015.

The financial statements have been prepared in accordance with International Financial Reporting Standards (“IFRSs”) as published by the IASB. The financial statements have also been prepared in accordance with IFRSs as adopted by the European Union and in accordance with the Companies Act, 2006. The consolidated financial statements have been prepared on an historical cost basis, as adjusted for certain financial instruments carried at fair value.

1.2 Going concern

The Group incurred a loss of $7,058,000 during the year ended 30 June 2016 (2015: $3,015,682), and at that date had net current liabilities of $590,235 (2015: net current liabilities of $493,184) which included cash and cash equivalents of $268,330 (2015: $94,624) and stock of diamonds of $26,934 (2015: $154,170).

During the year the Group raised $1.8m through placings and entered into a convertible loan note for $1.65m with an additional $1.65m warrant attached and also entered into a $0.66m 6 month loan agreement. Subsequent to the Balance Sheet date the Group replaced the $0.66 million short term loan with a $1.2 million convertible loan, details of which can be found in note 21. At the date of this report the Group is in the process of acquiring the Tonguma project and as part of this process is looking to raise approximately $45 million through a combination of debt and equity to develop the Tongo/Tonguma combined project and subject to actual capital and ongoing costs not being significantly greater than expected, should provide working capital to the Group until commercial scale production is reached. The acquisition of Tonguma and the funding for the Tongo/Tonguma project remains subject to inter alia, completion of due diligence, entering into final binding legal agreements, publication of an admission document, shareholder approval and re-admission of Stellar to trading on AIM. Should the acquisition and funding not take place as planned the Group will require additional working capital funding to continue as a going concern. The Group has continued to undertake cost reduction initiatives both at a Corporate and Project level.

Given the positive evaluation studies concluded on the Tongo project to date, the stage of development of the project, the positive progress in obtaining the relevant Mining and Environmental Licences required to take the project into production, and the advanced nature of the transformational Tonguma acquisition the Directors believe that the Company will have the ability to access sufficient levels of finance to fund the capital expenditure requirements at Tongo, and to meet essential administrative expenses and continue the Group’s other projects for the foreseeable future. The directors have reviewed the projected cash flows for the Group and on the basis of the projected cash flow information and the prospects for raising additional equity as required, they consider it appropriate to prepare the financial statements on a going concern basis.

The going concern of the Group is dependent on obtaining additional finance in order to meet its working capital needs for a period of not less than twelve months from the date of approval of the financial statements and to continue to fund development of exploration projects. This indicates the existence of material uncertainties which may cast significant doubt on the ability of the Company and the Group to continue as a going concern, and hence may be unable to realise its assets and discharge its liabilities in the normal course of business.

The Directors are confident that they can fulfil the funding requirements of the Group through attracting funding through diamond sales, joint ventures, sale of assets, reducing overheads, obtaining debt funding for Tongo or the issue of further shares by way of private placement. On this basis, the Directors are satisfied that it is appropriate to prepare the financial statements of the Group on a going concern basis. The financial statements do not include any adjustment to the carrying amount or classification of assets and liabilities that would occur if the Company was unable to continue as a going concern.

1.3 Audit Report

Deloitte & Touche, the Group’s auditors, have not qualified their audit opinion, however they have included an emphasis of matter in relation to the realisation of intangible assets, property, plant and equipment, and the recoverability of investments in and amounts due from subsidiaries, all of which are dependent on the discovery and successful development of economic mineral reserves, the group’s ability to raise sufficient finance to develop the mineral exploration projects and on the future profitable production or proceeds from the resource properties. The emphasis of matter also includes reference to the group’s ability to continue as a going concern.

2. Segments

The Company is engaged in the acquisition, exploration, development and production of diamond properties in the West African countries of Sierra Leone and Guinea. Information presented to the Chief Executive Officer for the purposes of resource allocation and assessment of segment performance is focused on the individual projects in geographical locations. The reportable segments under IFRS 8 are therefore as follows:

  • Mandala/Bomboko (Guinea);
  • Kono (Sierra Leone);
  • Tongo (Sierra Leone);
  • Droujba (Guinea);
  • Baoulé (Guinea);
  • Corporate and other activities.

Following is an analysis of the Group’s revenue, results, assets and liabilities by reportable segment for the year ended 30 June 2016:

  Mandala/ Bomboko Baoulé Kono Tongo Droujba Corporate and other Total
  $ $ $ $ $ $ $
               
Revenue – sale of diamonds 499,725 499,725
               
Segment result (132,890) (1,046,044) (4,364,833) 121,090* (2,612) (2,103,286) (7,528,575)
Finance costs             (407,418)
Remeasurement of derivatives             877,993
Loss before tax             (7,058,000)
Income tax expense            
Loss after tax             (7,058,000)
               
Segment assets 25,415 3,087,944 3,012 7,231,945 4,256,910 565,145 15,170,371
Segment liabilities (104,369) (36,920) (2,684) (2,108,308 (2,252,281)
Carrying value of intangible assets 1,708,472 7,128,759 4,256,910 45,558 13,139,699
Net book value of property, plant and equipment 1,352,537 2,819 72,637 11,131 1,439,124
Capital additions

– intangible assets

721,518 18,293 739,811
Depreciation of property, plant and equipment 621,021 1,208 32,180 230 654,639
Impairment of intangibles 4,300,528 4,300,528

*The profit shown for Tongo relates entirely to foreign currency gains recognised on transfers of US Dollars in Sierra Leonian Leones in the year.

Following is an analysis of the Group’s revenue, results, assets and liabilities by reportable segment for the year ended 30 June 2015:

  Mandala/ Bomboko Baoulé Kono Tongo Droujba Corporate and other Total
  $ $ $ $ $ $ $
               
Revenue – sale of diamonds 614,228 614,228
               
Segment result (178,302) (930,814) (129,678) (1,701,786) (2,940,580)
               
Finance costs (75,102)
Loss before tax (3,015,682)
Income tax expense
Loss after tax (3,015,682)
               
Segment assets 23,054 3,954,171 4,304,755 6,540,190 4,238,618 293,608 19,354,396
Segment liabilities (150,086) (76,458) (2,684) (829,592) (1,058,820)
Carrying value of intangible assets 1,708,472 4,300,528 6,407,240 4,238,618 45,558 16,700,416
Net book value of property, plant and equipment 2,069,997 4,027 107,334 11,361 2,192,719
Capital additions

– property, plant and equipment

– intangible assets

713,028

1,024,764

562,932

(36,346)

713,028

1,551,350

Depreciation of property, plant and equipment 795,894 1,726 46,000 329 843,949
Impairment of intangibles 605,728 605,728

3. Loss for the year

Loss for the year has been arrived at after charging/(crediting):

  Year ended

30 June

2016

Year ended

30 June 2015

  $ $
Fees payable to the company’s auditors for the

audit of the group’s accounts:

   
– audit services 30,718 29,874
– non-audit services
Net foreign exchange (gain) (226,447) (31,770)
Depreciation of property, plant and equipment 621,629 499,807
Impairment of Intangibles 4,300,528 605,728

$33,010 of depreciation charges were capitalised as exploration and evaluation expenditure during the year and consequently are not included in the Statement of Comprehensive Income (2015: $344,142).

4. Intangible assets

Consolidated Company

  30 June

2016

30 June

2015

30 June

2016

30 June

2015

  $ $ $ $
Exploration and evaluation expenditure:        
Cost        
Opening balance 34,989,394 33,438,044 4,408,327 4,408,327
Additions 739,811 1,551,350
Closing balance 35,729,205 34,989,394 4,408,327 4,408,327
         
Impairment        
Opening balance 18,288,978 17,683,250 3,105,766 3,105,766
Charge for the year 4,300,528 605,728 1,302,561
Closing balance 22,589,506 18,288,978 4,408,327 3,105,766
         
Carrying value 13,139,699 16,700,416 1,302,561

At 30 June 2016, the Group did not have any contractual commitments for the acquisition of intangible assets.

The impairment charge of $4,300,528 in the year related to the impairment of the carrying value of the Kono intangible assets as detailed below. The impairment charge of $605,728 in the previous year relates to other exploration projects that are no longer being pursued.

The realisation of the net carrying value of intangible assets of $13,139,699 is dependent on the discovery and successful development of economic mineral reserves including the Group’s ability to raise sufficient finance to develop the exploration and evaluation projects and other factors, as discussed in note 2.14.

In the year ended 30 June 2012 a dispute emerged in relation to the two exploration licenses held for the Kono project. The group received a letter from the Ministry of Mines of Sierra Leone (“The Ministry”) which asserts that the Ministry ought not to have granted the renewals of the Company’s licences in 2010 under the Mines and Minerals Act of 2009 and that as a result the Company no longer has mineral rights over the licences. The Company disputes the assertions and has continued to pursue the available political, diplomatic and legal routes available. During the year no further progress was made in relation to the reinstatement of the Kono licence and the Company has taken the decision to focus its efforts in Sierra Leone on the completion of the Tonguma acquisition and subsequent development of the Tongo-Tonguma commercial mine. The Directors therefore believe that the reinstatement of the Kono licence is unlikely in the foreseeable future and have taken the decision to impair the value of the intangible assets relating to that licence which at the time of the impairment had a carrying value of $4,300,528 in the Consolidated Statement of Financial Position and a carrying value of $1,302,561 in the Company Statement of Financial Position.

The Directors have considered the potential impairment of the other intangible assets carried in the books at the year end, being those relating to the Tongo, Droujba and Baoulé licences and the Directors have considered various factors including the stage of development of the assets in question and the planned future work to be carried out on them and any discounted cash flow models or other valuations of the assets produced. The Directors have concluded that no impairment is required on those assets at the balance sheet date. Cash flows were estimated based on the following assumptions:

  • economically recoverable reserves and resources are based on management’s expectations based on availability of reserves at mine sites and technical studies undertaken internally and by a Competent Person, where available;
  • diamond prices are based on independent valuations and models and an annual increase of 4.5% thereafter;
  • discount rate of 10%;
  • inflation rate of 4.5%;and
  • the remaining useful life.

5. Property, plant and equipment

    Mining assets Machinery and equipment Total
    $ $ $
Cost:        
At 30 June 2014   11,079,305 9,778,339 20,857,644
Additions   713,028 713,028
At 30 June 2015   11,079,305 10,491,367 21,570,672
Disposals   (898,032) (898,032)
At 30 June 2016   11,079,305 9,593,335 20,672,640
         
Depreciation:        
At 30 June 2014   11,079,305 7,454,699 18,534,004
Charge for the year   843,949 843,949
At 30 June 2015   11,079,305 8,298,648 19,377,953
Charge for the year   654,639 654,639
Depreciation on disposals   (799,076) (799,076)
At 30 June 2016   11,079,305 8,154,211 19,233,516
         
Carrying value:        
At 30 June 2016   1,439,124 1,439,124
At 30 June 2015   2,192,719 2,192,719

In accordance with the accounting policy stated in note 2.5, the Group tests property, plant and equipment for impairment when an indication of impairment exists. The recoverable amount of cash generating units is determined based on value-in-use calculations, which require the use of estimates. The estimated cash flows from the exploration projects produced net present values well in excess of their carrying values and are based on the following assumptions:

  • economically recoverable reserves and resources are based on management’s expectations based on availability of reserves at mine sites and technical studies undertaken internally and by a Competent Person, where available;
  • diamond prices are based on independent valuations and models and an annual increase of 4.5% thereafter;
  • discount rate of 10%;
  • inflation rate of 4.5%;and
  • the remaining useful life.

The Group did not have any further contractually committed costs for the acquisition of property, plant and equipment at 30 June 2016.

The realisation of the property, plant and equipment of $1,439,124 is dependent on the discovery and successful development of economic mineral reserves including the group’s ability to raise sufficient finance to develop the exploration projects and other factors, as discussed in the notes.

6. Convertible loan

On 19 November 2015 the company issued a secured convertible loan note (CLN) of $1,650,000, split into 5 equal amounts of $330,000, net of corporate finance and legal issuance costs of $98,599, to Deutsche Balaton. The CLN has a 2 year term and is repayable by 19 November 2017 and carries interest at 6% p.a. payable on the 12, 18 and 24 month anniversary of the issue date. The CLN is secured on the shares of Sierra Diamonds Limited, a wholly owned subsidiary of the Group which holds the Tongo exploration licence and related assets. The CLN is convertible into 3,747,368 ordinary 1p shares of the Company and can also be converted into shares in subsidiaries of the Company based on a set formula. The Company also granted warrants over 5,995,789 shares to Deutsche Balaton with an aggregate subscription value of $1,650,000. The warrants can only be exercised following conversion or repayment of the corresponding proportion of the CLN and have an expiry date of 21 November 2017.

The conversion feature of the CLN and the related warrants represents an embedded derivative for accounting purposes and is separated from the host contract at fair value on the date of issue and presented as a Derivative Financial Instrument liability. This is revalued at each balance sheet date with the movement recorded through the income statement.

In order to determine the fair value of the embedded derivate the Directors have considered a number of applicable valuation techniques. As the warrants and conversion feature can be exercised or converted at either the Stellar Diamonds Plc or at individual subsidiary level a Monte-Carlo simulation method would usually be used. The Directors have considered the requirements of such a valuation and do not believe that it would be possible to accurately derive a fair value in this way due to the lack of accurate available cash flow projections for certain assets and the difficulty in assigning probabilities to potential outcomes around the potential subsidiary level conversion. As a result the Directors consider that the most appropriate valuation method is to use a Black-Scholes option pricing model using the value of the ability to convert and exercise at the Stellar Diamonds plc level as a proxy. The Directors have considered the potential effect of using this technique, which is simplistic, and are of the opinion that it would not have a material effect on the valuations produced. The warrants cannot be exercised until the underlying CLN has been converted and therefore they have been valued and treated using the same inputs. The table below outlines the fair value inputs used in the embedded derivative valuation:

  30 June

2016

19 November 2015
Expected life 1.39 years 2 years
Expected Dividend Yield 0% 0%
Risk Free Interest Rate 0.396% 0.856%
Share Price Volatility 69.17% 89.36%
Share Price at Time of Valuation 5.75p 17.5p
Exchange rate $1.3390/£ $1.5273/£

As a result of the above fair value methodology and the underlying terms of the loan and warrants the following movements were recorded in the period for the convertible loan and the derivative financial liability.

  30 June 2016
Convertible loan: $
Proceeds from issuance 1,650,000
Issuance costs (98,599)
Embedded derivate element relating to conversion option (331,824)
Embedded derivate element relating to warrant (530,919)
Effective interest charged in the period 264,967
Presented as non-current loans and borrowings 953,625
   
Embedded derivatives:  
Fair value of derivate financial instrument at inception of convertible loan 862,743
Gain recognised on revaluation at 30 June 2016 (850,240)
Presented as non-current Derivative Financial Liability 12,504

The decrease in value of the derivative since inception is as a result in the fall in the share price of Stellar Diamonds Plc between the date of the issue of the CLN and the balance sheet date. This fall in share price has resulted in a fall in the value of the underlying derivative as calculated using the Black-Scholes Model and the inputs detailed above, and is recognised as a gain in the Statement of Comprehensive Income.

As a result of the accounting treatment of the convertible loan and the movement on share price between the inception of the loan and the balance sheet date, the Company has recognised a significant gain on revaluation of derivatives in the financial year of $850,240. The accounting treatment also results in a significant finance cost relating to the loan element which will be charged to the income statement over the term of the loan, being 24 months from inception and 17 months from the balance sheet date.

In addition to the gain of $850,240 recognised in relation to the convertible loan above during the financial year, an additional $27,754 was written off to the income statement relating to derivatives on the balance sheet at 30 June 2015.

The convertible loan and embedded derivatives have been classified as a Level 3 financial instrument under the fair value hierarchy as described in the notes.

Sensitivity Analysis

The Directors have undertaken a sensitivity analysis on the key inputs to the Black-Scholes model used to value the convertible loan and embedded derivatives. The table below details the sensitivities of changes in the share price and annualised volatility inputs used in the model for the valuation at 30 June 2016. A positive number represents a potential increase in the gain on revaluation of derivatives and a negative number represents a potential decrease in the gain on revaluation of derivatives. The Directors consider the sensitivity levels used for each input to be suitable.

  Value used at 30 June 2016 Lower sensitivity level Effect on Remeasurement gain Upper sensitivity level Effect on Remeasurement gain
      $   $
Share price 5.75p 2.875p (-50%) 4,542 8.625p (+50%) (15,055)
Annualised volatility 69.17% 49.17% 4,470 89.17% (12,662)

7. Subsequent events

On 5 October 2016 the Company entered into a $1.24 million convertible loan agreement. Under this agreement the existing $0.66 million loan outstanding at 30 June 2016 was repaid in full (refer to note 17 for details of this loan). The new convertible loan carries a coupon of 18% for 10 months and 24% for the remainder of the term. Interest is payable monthly and the loan has a term of 20 months. The outstanding principal can be converted into ordinary shares of the Company at any time after the completion of the proposed acquisition of the Tonguma project (“The Transaction”) or after confirmation that the Transaction is no longer expected to complete. The conversion price will be 70% of the subscription price for equity raised to complete the Transaction. In the event that the Potential Transaction does not complete, the conversion price will be based on 70 percent of historical Volume Weighted Average Price (“VWAP”) of Stellar Diamonds Plc shares for a fixed period prior to notice of exercise.

In conjunction with the convertible loan and subject to obtaining shareholder authorities in relation to the Company’s ability to issue new Ordinary Shares at a general meeting, the Company shall issue the Noteholders with warrants which are equivalent to three times the principal amount of the CLN (i.e. warrants with a total subscription price of US$3.72 million) exercisable at a premium of 5 percent to the Issue Price (per Ordinary Share) in the event of Completion occurring. The premium will increase at a rate of 1 percentage point per month from Completion up to a maximum premium of 17 percent to the Issue Price. In the event that the Transaction does not complete, the exercise price in respect of the convertible loan Warrants will be based on historical VWAP. The warrants are exercisable for a period of 18 months following completion of the Transaction or announcement that the Transaction will not occur, or 31 March 2017 if earlier. Should the warrants be exercised then the resulting Ordinary Shares issued to the warrant holder shall be subject to a lock-in period of six months from the date of exercise.

Also on 5 October 2016 the Company entered into an agreement to amend certain terms of the existing $1.65 million convertible loan with Deutsche Balaton. Under the terms of the amendment the Company has agreed to issue Deutsche Balaton with $1 million of new ordinary shares at the date of completion of the Tonguma Transaction at the subscription price for equity issued on the Transaction in return for Deutsche Balaton waiving its rights to convert the loan or exercise the attached warrants into subsidiaries of Stellar. Additionally the conversion price and warrant exercise price will be amended to the Transaction equity subscription price and an additional $0.83 million of warrants will be issued to Deutsche Balaton. Deutsche Balaton will also waive any interest payable on the loan. All of these amendments are subject to the successful completion of the Transaction.

In October 2016 the Company entered into Joint Venture Agreements over its Liberia and Baoulé (Guinea) projects with Citigate Commodities Trading (“Citigate”). Under the terms of Baoulé agreement Citigate will invest $1.5 million in return for 25% of the shares of Ressource Tassiliman Baoulé SA, a further $2 million for a further 25% shareholding and will complete a Pre-Feasibility Study on the project for an additional 25% shareholding. Under the terms of the Liberia agreement Citigate will invest $0.25 million in return for 25% of the shares of Stellar Diamonds (Liberia) Incorporated, a further $2 million for a further 25% shareholding and a final $4 million for a further 35% shareholding. Stellar will receive a management fee of $25,000 relating to the Liberia joint venture and $150,000 in relation to the Baoulé joint venture agreement for the first year of the joint ventures.

On 19 August 2016 the Company announced that it was in discussions to acquire the Tonguma kimberlite dyke project in Sierra Leone from Octea Mining Limited. The Tonguma licence is located adjacent to the Company’s Tongo licence and, if successful in its acquisition and raising approximately $45 million to fund the development of the combined project, the Company plans to bring the project into production in 2017. As the transaction is considered to be a Reverse Take Over under AIM rules, following the announcement of the proposed transaction the Company’s shares were suspended from trading on AIM. The shares will remain suspended until the completion of the transaction or confirmation by the Company that the transaction is no longer being pursued. The Company has 6 months from the date of suspension to complete the transaction, after which the Company will be delisted from AIM.

8. Related parties

  Year ended

30 June

2016

Year ended

30 June 2015

Directors: $ $
– shares issued in lieu of accrued Directors’ fees 192,343 55,155
– amounts owed to Directors at 30 June 105,378 45,638

The Directors are considered the Company’s key management personnel. The remuneration earned in respect of the financial year by each Director is as follows:

  Salary or

fees

Bonus

paid in cash

Bonus

paid in shares

Year ended

30 June

2016

Year ended

30 June

2015

  $ $ $ $ $
Lord Daresbury 85,149 85,149 91,934
N. Karl Smithson 220,394 66,617* 287,011 234,355
Luis da Silva 23,091 23,091 24,931
Steven Poulton 36,080 36,080 38,955
Dr Markus Elsasser 16,721 16,721 24,931
Liviu Meran 16,721 16,721 18,435
Hansjörg Plaggemars 13,871 13,871
  412,027 66,617 478,644 433,541

*Bonus relates to the 12 months to 31 December 2014 and reflects the Group ongoing operations in Guinea and Sierra Leone during the Ebola crisis.

The Directors who held office at 30 June 2016 had the following interests in the ordinary shares of the Company as of 30 June 2016:

  30 June 2016* 30 June 2015
  Ordinary shares Share options Ordinary shares Share options
Lord Daresbury 538,936 102,000 10,432,824 6,802,000
N. Karl Smithson 625,019 220,000 7,267,371 15,006,500
Luis da Silva 161,598 74,000 3,265,674 5,053,000
Steven J. Poulton 317,342 90,000 7,470,145 5,952,000
Hansjörg Plaggemars
  1,642,895 486,000 28,436,014 32,813,500

* Figures at 30 June 2016 are following the 50:1 share consolidation as detailed in the notes.

The number of Directors to whom retirement benefits are accruing is Nil (2015: Nil).

All remuneration in the current year related to short term employee benefits.

On 11 March 2016 a Director of the Company, Hansjörg Plaggemars, purchased a diamond from Stellar through its sales agent. The diamond was purchased on commercial, arms-length terms following an independent assessment of its value by the sales agent. The diamond was purchased in cash for $8,473, being the value calculated independently by Stellar’s sales agent (“Diamond Acquisition”). There were no such transactions in the previous year. The Diamond Acquisition constituted a related party transaction pursuant to AIM Rule 13. The Directors who are independent of the transaction, consider, having consulted with the Company’s nominated adviser, that the terms of the transaction are fair and reasonable insofar as the Company’s shareholders are concerned.

9. Dividends

No dividends have been paid nor are proposed for the period (2015: nil).