August 22, 2016

Update on Potential Transaction

22 August 2016

AIM: STEL

Stellar Diamonds plc

(“Stellar” or the “Company”)

Update on Potential Transaction

Stellar Diamonds plc, the London listed diamond development company focused on West Africa, is pleased to announce further details in respect of the potential transaction which was announced on 19 August 2016. Stellar has agreed a proposed transaction with Octea Mining Limited (“Octea”) to combine Stellar’s Tongo kimberlite diamond project with Octea’s adjacent kimberlite diamond project, Tonguma, and to bring both assets into production under the same production infrastructure (the “Potential Transaction”) in Sierra Leone. The Potential Transaction, if completed, would be classified as a Reverse Takeover under the AIM Rules for Companies and would require the publication of an admission document and also be subject to shareholder approval. Accordingly, trading in the Company’s shares on AIM will remain suspended until either an admission document is published or the Company announces its or Octea’s withdrawal from the Potential Transaction.

Highlights

  • Combined inferred JORC diamond resource of 5 million carats brought into a single mining operation
  • Diamond grades up to 290 carats per hundred tonne (“cpht”)
  • Average diamond value of US$193 and US$270 per carat for Tonguma and Tongo respectively
  • Exploration target of up to 8 million carats
  • Opportunity presents enhanced production levels and operational margins, when compared with a stand-alone Tongo mining operation
  • No cash acquisition costs to Stellar who will fund and operate the enlarged mine development
  • Stellar to preferentially recoup repayment of development capital prior to paying a royalty and net profit interest to Octea

Stellar’s Chief Executive Karl Smithson commented:

“The Proposed Transaction, if completed, will be transformational for Stellar and its shareholders. Once in production the combined diamond mining operations will be the second largest in West Africa with an estimated maximum output at full production of approximately 250,000 carats per year of high value diamonds. The high grade and high value nature of the kimberlites to be mined are compelling and the combination of operations should provide meaningful cost synergies that will enhance Stellar’s projected operational margins. Using the available infrastructure at Tongo and Tonguma, we expect diamond mining operations to commence within the first 12 months post completion of the Proposed Transaction.”

Octea’s General Manager Christo Swanepoel commented:

“We are very excited to be combining Octea’s Tonguma project with Stellar’s Tongo project and bring the enlarged project into production under Stellar’s operational management. Stellar has long-standing expertise in Sierra Leone and the Tongo region in particular, which we believe will be of great benefit to the project. In addition, the enlarged project should significantly increase local skilled employment for many years to come which in turn will support the local economy as well as generate significant funds for the Sierra Leonean Government.”

Further Information

Stellar has conducted extensive technical due diligence on the Tonguma project and has subsequently entered into detailed, exclusive non-binding terms with Octea to acquire the Tonguma asset (the “Agreement”). The Potential Transaction remains subject to a number of conditions including further due diligence by the Company; Stellar raising a minimum of US$25 million (through a combination of equity, debt and other hybrid products) to fund the combined project into production (the “Fundraise”) and entering into final and binding transaction documentation with Octea. Both Stellar and Octea have had detailed discussions with the relevant regulatory authorities in Sierra Leone, and the parties will also seek to obtain support from the Ministry of Mines in Sierra Leone for the Potential Transaction. Accordingly, there is no guarantee that the Potential Transaction will ultimately occur or that it will complete on the terms set out in this announcement.

Stellar has engaged London based Mirabaud Securities (“Mirabaud”) as Financial Adviser for the Proposed Transaction. Mirabaud has a successful track record of raising funds in the resources capital markets.

Proposed Transaction Structure

Under the terms of the Potential Transaction as detailed in the Agreement, Stellar Diamonds Ltd, a wholly owned subsidiary of the Company, will transfer the shares of its subsidiary Sierra Diamonds Limited into a newly incorporated company (“NewCo”) which will then acquire the shares of Octea Mining Limited’s subsidiary Tonguma Limited. Stellar would be issued with 100% of the voting ‘A’ shares in NewCo while Octea would be issued with 100% of the non-voting ‘B’ shares in NewCo. Stellar’s ‘A’ shares will give the Company full legal and management control of NewCo and the mining operation. Octea’s non-voting ‘B’ shares in NewCo will entitle Octea to receive royalty payments of between 5% to 10% of the combined revenues of Tonguma and Tongo (the “Enlarged Project”) and a 25% economic interest in the net cash flows of the Enlarged Project. Furthermore, Stellar and Octea have agreed a preferential repayment structure for the initial investment amounts of both parties. Under this structure Stellar will recoup its initial investment of at least US$25 million while Octea will pro rata recoup a maximum of US$5 million during the same period, in return for Octea contributing a 50 tonne per hour production processing plant to the Enlarged Project. Any royalty payments and net profit share due to Octea under the Agreement will only commence once the total initial investment amount of both parties has been fully repaid by NewCo. There is therefore no upfront acquisition cost to Stellar in terms of the Potential Transaction.

Background

Stellar’s Tongo project has a JORC inferred resource of 1.45 million carats at a grade of 165cpht. The current mine plan for Tongo assumes a conservative lower grade of 120cpht with an average diamond value of US$270 per carat. A further three high-grade kimberlites are present in the licence area though these have not yet been drilled into resource.

The Tonguma project comprises a 25 year mining licence (granted to Octea in 2012) covering an area of 124 square kilometres in the Lower Bambara Chiefdom, Kenema District, in the Eastern Province of Sierra Leone. The Tonguma project is adjacent to and contains the on-strike continuation of the diamondiferous kimberlite dykes which are being explored by Stellar within its Tongo project. A mining licence at Tongo is in the application process with the Ministry of Mines. The two licences together cover the whole of the renowned Tongo diamond fields, which includes a number of high grade and high diamond value kimberlite dykes.

Octea has undertaken extensive exploration activities at Tonguma including over 58,000 metres of diamond drilling as well as bulk sampling which has produced approximately 7,250 carats of which over 3,500 carats has been used for diamond valuation. An independent JORC inferred resource of 3.45 million carats has been estimated at grades of up to 290cpht and average diamond values of US$193 per carat, to a maximum depth of 200 metres which has led to a total inferred carat resource of approximately 5 million carats being estimated for both projects.

The combination of very high grade and diamond value at Tongo and Tonguma yields potential in-situ ore values of up to US$560 per tonne.

Independent consultants have also estimated a significant further exploration target on the Tonguma licence, which, based on the mid-range grade and tonnage estimates, results in a potential exploration target of a further 8 million carats. It is the intention to bring the “exploration target” into the JORC resource category in due course, however, these estimates remain conceptual in nature and it is uncertain if further exploration will result in estimation of a mineral resource.

A full independent competent person’s report on the Tonguma Project and existing Stellar projects including Tongo is being prepared by Toronto based MPH Consulting and will be included in any admission document, which is published in connection with the Potential Transaction.

Future Mining Strategy

Given the close proximity of the two projects, the Potential Transaction, if completed, should allow Stellar to undertake both surface and underground mining across both licences. It is envisaged that processing would be undertaken centrally, utilising the existing 50 tonnes per hour production plant which will be relocated to the project area from Octea’s Koidu mine, approximately 60 kilometres North of Tonguma. Through mining two separate resources and centrally processing ore, the Company expects to be able to operate more efficiently thereby realising a number of cost savings, and generating significantly increased production rates. This should also have a meaningful impact on Stellar’s future revenues and margins.

The initial capital outlay for Tongo as a stand-alone project has previously been reported by Stellar at an estimated US$25 million. Independent consultants Paradigm Project Management (“PPM”), who together with SRK Consulting (“SRK”), are preparing the combined Tongo/Tonguma mine plan, estimate the initial capital requirements at approximately US$40 million (excluding working capital) to establish production for the combined project. The Enlarged Project would, however, also lead to significantly higher production levels and revenues than just the Tongo mine alone. The final Tongo/Tonguma mine plan by PPM/SRK will be received in the near future and will provide significantly more detail on the production rates, revenues and capital/operational costs.

The Company will make further announcements in due course as and when appropriate.

Review by competent person

This announcement has been reviewed by Karl Smithson, Chief Executive of Stellar, a qualified geologist and Fellow of the Institute of Materials, Metals, Mining, with 27 years’ experience.

This announcement contains inside information for the purposes of Article 7 of EU Regulation 596/2014.

Caution regarding forward looking statements

Certain statements in this announcement, are, or may be deemed to be, forward looking statements. Forward looking statements are identified by their use of terms and phrases such as ”believe”, ”could”, “should” ”envisage”, ”estimate”, ”intend”, ”may”, ”plan”, ”potentially”, ”will” or the negative of those, variations or comparable expressions, including references to assumptions. These forward looking statements are not based on historical facts but rather on the Directors’ current expectations and assumptions regarding the Company’s future growth, results of operations, performance, future capital and other expenditures (including the amount, nature and sources of funding thereof), competitive advantages, business prospects and opportunities. Such forward looking statements reflect the Directors’ current beliefs and assumptions and are based on information currently available to the Directors.

A number of factors could cause actual results to differ materially from the results discussed in the forward looking statements including risks associated with vulnerability to general economic and business conditions, competition, environmental and other regulatory changes, actions by governmental authorities, the availability of capital markets, reliance on key personnel, uninsured and underinsured losses and other factors, many of which are beyond the control of the Company. Although any forward looking statements contained in this announcement are based upon what the Directors believe to be reasonable assumptions, the Company cannot assure investors that actual results will be consistent with such forward looking statements. Accordingly, readers are cautioned not to place undue reliance on forward looking statements. Subject to any continuing obligations under applicable law or any relevant AIM Rule requirements, in providing this information the Company does not undertake any obligation to publicly update or revise any of the forward looking statements or to advise of any change in events, conditions or circumstances on which any such statement is based.

About Stellar Diamonds plc

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

** ENDS **

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 Bellis Beaufort Securities Limited (Joint Broker) Tel: +44 (0) 20 7382 8300
Rory Scott Mirabaud Securities (Financial Advisers) Tel: +44 (0) 20 7878 3360
Emma Earl

Sandy Jamieson

Cairn Financial Advisers (Nominated Adviser) Tel: +44 (0) 20 7148 7900
Lottie Brocklehurst

Hugo de Salis

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