PARAGON DIAMONDS LTD - Positive Technical Study for Mothae Kimberlite Project

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

15 September 2015

Paragon Diamonds Limited (‘Paragon’ or the ‘Company’)

 Positive Technical Study for Mothae Kimberlite Project 

Paragon Diamonds Limited, the AIM quoted diamond development company, is pleased to announce the results of two independent studies carried out by The MSA Group on the Mothae Kimberlite Project (‘Mothae’), located in Lesotho, that Paragon is in the process of acquiring.

The conclusions exceed management’s initial expectations, as detailed in the announcement of 5 May 2015, that Mothae represents a low cost opportunity for Paragon to generate significant value for shareholders through the potential recovery of large high value diamonds.  Mothae is only 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’).

These technical reports are intended as components of a future Preliminary Economic Assessment (PEA) and Pre-feasibility Study (PFS) and review multiple mining scenarios and simulated progressive cutting of processing costs, which will now be explored during final plant and open pit design work.

Highlights of the studies include:

• Potential to significantly increase Mothae’s NPV from management’s original estimates.
• Improved strip ratio has been identified at <1:1 compared to <1.5:1 previously assumed.
• Potential for average diamond values up to US$2,000/ct..
• Several Mining Scenarios exceeding 20Mt at US$40+/t ore value in a low operating cost mine exceeding 2Mt and 40,000 carats per year.

These studies focussed on determining both the trade-off between maximum diamond value recovery against processing costs (using a range of bottom cut-off screen sizes-BCOS), as well as  optimum opencast mining scenarios at the Mothae Kimberlite based on the mining of the Main Pipe only, which comprises the South-West (SW), South-East (SE) and South-Central (SC) domains of the kimberlite.  The basis for both studies was the NI 43-101 Technical Report completed by Lucara Diamond Corporation in February 2013.

Mothae Revised Diamond Revenue Models

The revenue scenarios compiled by The MSA Group come from a sample of 23,738 cts that were used to model the average diamond value per size class for each of the four kimberlite domains.  Average diamond values were calculated for three bottom cut-off screens (+2 mm; +3 mm; +4 mm) using three revenue models.  Key findings are summarised below:

• The resource of Main Pipe (Southern Lobe) comprising SW+SC+SE Domains is estimated at 32.41 million tonnes at  an average diamond value of  US$1,352/ct and a grade of 2.2 cpht at a 3 mm bottom cut-off screen (BCOS).  The +20 ct diamond values were capped at US$6,492/ct for study purposes.
• Upside potential of the planned mining area, SW+SC+SE Domains at US$1,971 per carat and a grade of 2.2 cpht at 3 mm BCOS with +20 ct diamond value capped at US$11,057/ct, has been estimated.
• A worst-case “Downside” model, which is based on modelled revenue of US$1,024/ct at 3 mm BCOS for SW+SC+SE, still yields US$22.53/t ore value, i.e. above anticipated break-even.  The “Downside” model at 3 mm BCOS also assumes overall diamond values circa 20% lower than those achieved in the actual 2012/13 valuation and sale of diamonds recovered during trial mining.
• Modelled ore values at 3 mm BCOS of between US$29.75 and US$43.36/t would increase to US$32.77/t and US$48.07/t respectively by excluding the 6.8 Mt SE Domain.

Summary of Indicated/Inferred Resource Tonnes and Average Grades & Values

Bottom Cut-off	Domain	Ind & Inf.		Cumulative
		Mt	cpht	Mt	cpht	US$/ct High	US$/ct Med.	US$/ct Low
@ +2mm	SW	21.18	2.5	21.18	2.5	$1,887	$1,185	$895
	+SE	4.44	4.4	25.62	2.8	$1,777	$1,142	$864
	+SC	6.79	2.6	32.41	2.8	$1,640	$1,069	$812
	+N	6.55	2.4	38.96	2.7	$1,638	$1,076	$817
	Total	38.96	2.7
@ +3mm	SW	21.18	2.0	21.18	2.0	$2,162	$1,469	$1,106
	+SE	4.44	3.5	25.62	2.3	$2,090	$1,425	$1,075
	+SC	6.79	1.9	32.41	2.2	$1,971	$1,352	$1,024
	+N	6.55	1.9	38.96	2.1	$1,991	$1,359	$1,028
	Total	38.96	2.1
@ +4mm	SW	21.18	1.4	21.18	1.4	$3,016	$2,033	$1,519
	+SE	4.44	2.3	25.62	1.6	$2,946	$1,991	$1,490
	+SC	6.79	1.2	32.41	1.5	$2,833	$1,924	$1,443
	+N	6.55	1.3	38.96	1.5	$2,850	$1,932	$1,450
	Totals	38.96	1.5

Source:  The MSA Group J3105 report

Mothae Opencast Mining Scenario Conclusions

A sequence of eleven Whittle pit optimization scenarios were undertaken by The MSA Group, using 2 mm, 3 mm & 4 mm BCOS?with plant operating costs reduced by -5% to -20% in some scenarios (to reflect the coarser BCOS) and to include various elements of the geological domains.  Highlights are:

• Optimum scenarios for mining the combined SW+SC+SE domains at a waste:ore ratio of 1:1 and either 3 mm or 4 mm BCOS yield a 12 year initial open pit life.
• A typical scenario (SW+SC+SE @ 3 mm BCOS and -5% on processing costs) yields a provisional discounted pit value based on industry standard assumptions for Lesotho mining costs of US$ 190M at 10% discount on a resource of 22.6 Mt producing ~42,000 carats per annum over a 12 year open pit life.  Capital expenditure, financing, taxation etc. were not included in the analysis.
• The possibility to increase pit depth to in excess of 300 m at a waste:ore ratio of under 1.5:1 and to incorporate additional kimberlite domains into the mine plan subject to ongoing resource development work.
• Note, the potential differences in processing related to different amounts of plant throughput due to increased bottom cut-off screen sizes were simulated by progressively cutting processing costs.  This expediency is broadly indicative of the expected cost-savings (both capital and operating) that would be associated with the different plant configurations.  Paragon will conduct a PEA or a PFS to more accurately quantify the potential cost savings associated with larger bottom screen cut-off sizes and to determine overall longer-term project viability.

Dr Stephen Grimmer, Managing Director, said:

“The reports compiled by The MSA Group confirm and exceed Paragon Diamonds’ initial internal projections of the resource being acquired at Mothae.  It is clear that the combined SW+SC domains in particular represent a higher-value, relatively higher-grade resource, exceeding 25 Mt in total, with the potential for a significant percentage of carats present in large diamonds.  At 3 mm the grade is 2.3 cpht and US$1,425/ct (“Best Estimate”) with potential upside for US$2,090/ct (the “Upside”).

“It is important to note that in the “Best Estimate” case, the report caps all diamonds above 20 cts at US$6,492/ct value – even in the “Upside Scenario” all diamonds above 20 cts are still capped at US$11,057/ct.  Large Lesotho diamonds range up to US$70,000/ct and Mothae itself has historically achieved US$50,000+/ct for a large diamond in December 2011.  At a 4 mm BCOS the entire ~5 Ha and 32 Mt Southern Lobe (SW+SC+SE) has a grade of 1.5 cpht and a “Best Estimate” of US$1,924/ct (~US$2,800/ct with “Upside”).  This is comparable in potential grade and average diamond value to the ~4 Ha Letšeng Satellite pipe, only 5 km distant, and the mainstay of production at that mine.

“The favorable ~1:1 waste:ore ratio (compared to initial in-house estimates as high as 1.5:1) should result in operating cost savings of up to US$1-2/t based on industry-standard mining contractor costs of  ZAR25-30/t plus fuel and as provided in the MSA Report.  Further cost reductions could result from using extensive X-ray transmission recovery (XRT) technology to reduce water and power consumption and waste generation and at the same time more reliable recovery of large diamonds with reduced breakage.”

Funding Update

The Company is in advanced negotiations with several funding providers as it looks to complete the acquisition of a 75% interest in, and operatorship of, Mothae from Lucara Diamond Corporation (‘Lucara’), a TSX quoted mining company (the ‘Acquisition”).  Subsequent to the conclusion of these negotiations, the Board will select and announce what it deems to be the best funding package available.  The proposed funding package from International Triangle General Trading LLC (‘ITGT’) for the Company’s existing Lemphane Project, as set out in the announcements dated 28 January 2015 and 5 May 2015 respectively, also remains subject to final negotiation and contract.  As such, the Board may agree a funding package for both Mothae, and the Lemphane project with a party other than ITGT and on terms that differ from those which have previously been announced, but which may prove to be more commercially attractive to shareholders overall.

The Board remains confident that the selected funding package for both Mothae and Lemphane will be agreed in order to meet the terms of the Acquisition or any revisions thereto.

Mr. Simon Retter, Finance Director said:

“Subsequent to the new and positive confirmations provided by The MSA Group reports on Mothae, the Board has been intensively and positively refining the Company’s funding options with potential financing partners from an enhanced commercial position.  Several funding options are in advanced stage negotiations, with due diligence now complete, and as previously announced it is possible that the Company may seek ITGT to fund the downstream diamond operations in Dubai, with an alternative funder providing capital to initiate and accelerate mining at both Mothae and Lemphane.  We look forward to updating shareholders further later this month.”

**ENDS**

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

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

Notes

Paragon Diamonds has an 80% interest in the Lemphane Kimberlite Pipe project in Lesotho, located close to the world class Letšeng mine, Lesotho’s largest diamond mine.  Lemphane is the last known kimberlite to be developed in Lesotho.  The first of a two stage production programme is expected to commence in 2015 which will further define the resource at Lemphane. As increased tonnages of kimberlite are processed the proportion of larger diamonds recovered will improve, increasing the average value of diamonds recovered at the project, as was the case at Letšeng. In addition to Lemphane, Paragon Diamonds has signed a Memorandum of Understanding with Lucara Diamond Corporation, a TSX quoted mining company, to acquire a 75% interest in and operate the defined Mothae Kimberlite Resource, which is located only 5 km from the world class Let?eng le Terai diamond mine in Lesotho.

In accordance with the AIM Rules for Companies, the information in this announcement has been reviewed by Dr Stephen Grimmer PhD., Msc., a qualified geologist with over 25 years diamond exploration experience.

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