Paragon Diamonds Ltd $15 million Debt and Revenue Sharing Facility

 
TIDMPRG 
 
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 Letseng 
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 GBP500,000 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 

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October 02, 2015 02:00 ET (06:00 GMT)