Stellar Diamonds PLC Tongo-Tonguma Update (2469X)

TIDMSTEL

RNS Number : 2469X

Stellar Diamonds PLC

20 February 2017

NOT FOR DISTRIBUTION IN THE UNITED STATES OR FOR DISSEMINATION TO US NEWS WIRE SERVICES.

20 February 2017

AIM: STEL

Stellar Diamonds plc

("Stellar" or the "Company")

Tongo-Tonguma Update

Proposed Tribute Mining Agreement

Update on Joint Venture projects

Suspension Update

Stellar Diamonds plc, the London listed diamond development company focused on West Africa, announces an update in respect of the proposed acquisition by Stellar of Tonguma Ltd, the owner of a mining licence over the Tonguma kimberlite diamond project in eastern Sierra Leone ("the Acquisition"). The Acquisition was deemed to be a Reverse Takeover under the AIM Rules for companies and accordingly trading in the Company's shares on AIM was suspended pending publication of an Admission Document.

Stellar announces that discussions with the owner of Tonguma Ltd, Octea Mining Ltd ("Octea"), relating to the Acquisition have terminated and as a result Stellar no longer intends to acquire Tonguma Ltd or its mining licence from Octea. Instead, Stellar and Octea intend to enter into a tribute mining agreement ("Tribute Agreement") which would allow Stellar to mine the Tonguma licence area alongside Stellar's own Tongo project and process and sell any diamonds mined from these concessions whilst paying a proportion of the sale proceeds to Octea. Whilst the proposals remain subject to a legally binding agreement being entered into, Stellar and Octea have agreed exclusive Heads of Terms, pursuant to which key terms of the proposed Tribute Agreement have been agreed.

The Tribute Agreement would be a sub-contract arrangement between Octea and Stellar, entered into in the ordinary course of business. Entering into the Tribute Agreement is not deemed to constitute a Reverse Takeover under the AIM Rules, however trading in the Company's shares on AIM currently remains suspended pending completion of a fundraise.

The Tribute Agreement, if finalised, would allow Stellar to simultaneously mine both its wholly owned Tongo project and the adjacent Tonguma project, with Stellar being the operator of the combined mine. The technical information in relation to the proposed combined Tongo-Tonguma mine plan previously reported in announcements dated 5 October 2016, in respect of the preliminary economic assessment ("PEA"), and 31 October 2016, in respect of the Competent Persons Reports ("CPR"), remains unchanged and the proposed economic terms of the Tribute Agreement are set out below.

To date Stellar has invested in excess of US$7.2 million at Tongo alone representing approximately 18p per existing ordinary share in issue.

Proposed Tribute Agreement

The Company has agreed exclusive heads of terms ("Tribute Heads of Terms") with Octea in contemplation of the parties entering into a tribute mining agreement for Stellar to mine the Tonguma concession area alongside Stellar's wholly owned Tongo project. The material terms of the Tribute Agreement are expected to be as follows:

   --      Stellar will fund and operate the enlarged mine development 
   --      Stellar will be responsible for processing and marketing diamonds recovered 

-- 10% share of gross revenues (after deduction of any Government royalty) is payable to Octea on diamond and other minerals recovered and sold, but only after Stellar has recouped an amount equal to its development capital and Octea has received an initial revenue share payment of US$5m

-- Stellar to make a one-off payment to Octea of US$5m five years after mine development commences

-- Agreed economics to include reimbursement to Octea of certain costs (including an amount equal to the annual Tonguma mining licence fee)

-- Certain assets of Tonguma, including the 50tph processing plant at Octea's Koidu Mine, will be acquired by Stellar for a nominal amount. Stellar intends to relocate and upgrade the plant which will then become the processing facility for the combined mining operation

The final Tribute Agreement is expected to include a timeframe within which implementation of the mine plan will be expected, however this timeframe has yet to be negotiated.

The Heads of Terms of the Tribute Agreement are non-binding save for in respect of certain clauses, including inter alia, exclusivity provisions. The exclusivity period extends to 30 April 2017. Entering into the Tribute Agreement remains subject to inter alia, legal contract; finalisation of legal due diligence work, valid licence opinions being obtained for the Tonguma licence and the acknowledgement of the Government of Sierra Leone.

Due to the nature of the combined mine plan that is intended to be implemented, (i.e. mining both the Tongo and Tonguma project), any revenue share payments payable to Octea will be in respect of diamond revenues from both the Tongo and Tonguma licences. The revenue share economics that have been agreed reflect this. Under the envisaged Tribute Agreement, Octea would continue to hold the Tonguma mining licence through its subsidiary company Tonguma Ltd and Stellar will continue to wholly own its adjacent Tongo licence and subsidiary company Sierra Diamonds Limited. Stellar would also own all infrastructure and capital items procured and utilised for the mine development on both licences.

Octea has agreed that for so long as the Tribute Agreement is in place, it will not sell Tonguma Ltd or the Tonguma licence to a third party. The Tribute Agreement will however include termination clauses whereby the agreement can be terminated by either party for breach of the agreement. Shareholders should note that in the event of termination, Stellar would have no rights over Tonguma Ltd or the Tonguma Licence save for any contractual rights accrued.

Whilst negotiations and legal drafting with Octea are at an advanced stage, and the Company has entered into a technical due diligence exercise with a potential strategic investor, there is no guarantee that the Company will enter into the Tribute Agreement or raise the necessary funds to implement the mine plan in order to discharge Stellar's obligations under the terms of the Tribute Agreement. The Company will make further announcements as and when appropriate.

Chief Executive Karl Smithson commented:

"Although Stellar no longer intends to acquire the Tonguma licence, both Stellar and Octea continue to work towards finalisation of an agreement that will bring together, for commercial production, their combined diamond properties that cover the whole of the high value Tongo diamond fields. The structure of the agreement would allow Stellar to be operator and marketer of diamonds produced, with a simplified revenue share arrangement payable to Octea in return. The Directors believe the economics of the proposed Tribute Agreement are very attractive to Stellar; subject to the terms of the Tribute Agreement remaining in force over the life of the mine, Stellar has estimated its post-tax NPV(8) arising from the Tongo-Tonguma mine could be approximately US$104 million. Furthermore, there remains considerable potential upside beyond the 4.5 million carats resource (across Tongo and Tonguma) through bringing into resource and the future mine plan additional high grade kimberlites on both properties.

"We hope to be able to bring the formal agreement and due diligence process to a conclusion in the near future and will continue to engage with potential strategic investors. We will update shareholders as we progress towards completion of this agreement."

PEA and Mine Plan

The mine plan detailed in the Tongo-Tonguma PEA remains unchanged and demonstrates a financially robust and high margin 21 year life of mine over an initial inferred diamond resource (across Tongo and Tonguma) of 4.5 million carats. Shareholders should however note that the economics of the Tongo-Tonguma mine modelled in the PEA assumes that the Tribute Agreement would remain valid and in place for the forecast life of mine. The PEA and CPR also recognise that there is considerable potential upside from additional high-grade kimberlite dykes on the properties, which are not yet categorised into resource.

Key PEA Highlights:

   --      Estimated pre-tax Project NPV(10) and IRR of US$172 million and 49% respectively 

-- Projected life of mine Project revenues of US$1,518 million with operating costs of US$847 million

   --      Estimated operating margin of 50% over the life of mine 

-- First production expected within 12 months of funding and development commencing increasing to over 200,000 carats per annum in the 4th year

   --      Expected Capex of US$31.8 million in first two years (including 15% contingency) 

-- Estimated 3.96 million carats recoverable from the initial 4.5 million carats resource at a +1.18mm cut-off

   --      Recoverable diamond grades and values for first three kimberlites to be mined of: 

o Kundu: 260cpht and $209 per carat ($543 per tonne)

o Lando: 220cpht and $209 per carat ($440 per tonne)

o Tongo: 100cpht and $310 per carat ($310 per tonne)

   --      Exploration target of up to 8 million carats in addition to existing resource 

Financial Model

Stellar has prepared an internal financial model based on the mine plan produced by independent consultants Paradigm Project Management and SRK Consulting and is adjusting it to reflect the proposed revenue share arrangements. The model assumes mining some 3.90mcts of the 3.96mcts recoverable resource at the Tongo, Kundu and Lando dykes and does not include any of the 7.96mcts "exploration target" carats which may be brought into a future resource estimation.

The initial two year capital requirement to bring the Tongo-Tonguma mine into production is currently estimated to be approximately US$31.8 million (including a 15% contingency). Based on the projected life of mine project costs (US$847 million), revenues (US$1,518 million) and after revenue-share payments to Octea, the financial model demonstrates the potential for an after tax NPV of approximately US$104 million and IRR of 31% to Stellar.

Mining Licence

The Company's application for a mining licence in respect of its Tongo project was approved by the Minerals Advisory Board in May 2016 but remained subject to the receipt of the Environmental Licence, in accordance with the Environmental Protection Agency ("EPA") Act 2008. The EPA has now calculated the fee for the Environmental Licence at US$150,000. Subject to Stellar paying the environmental licence fee, it is expected that the National Minerals Agency will issue the mining licence documents for the consideration and signature of the Minister of Mines.

Working Capital Position and Fundraise

The Company currently has very limited working capital. The Company's shares will remain suspended pending completion of a fundraise, which is expected to be announced in the near future. Shareholders should note however, that if a fundraise is not concluded in the short term, and/or the Company does not receive the management fees due from Citigate under the Company's joint venture proposals (see below) the Company may not be able to meet its liabilities as they fall due and the admission of the Company's shares to trading on AIM may be cancelled.

The Directors continue to monitor and manage the Company's working capital very carefully. In order to preserve cash, the Directors of Stellar intend to convert a net total of approximately GBP75,400 (in accrued fees, salary and benefits up to the 31 March 2017), into ordinary shares of the Company in due course. In the event of this conversion occurring, which would constitute a related party transaction, a separate announcement will be made.

Citigate Joint Ventures over Baoulé (Guinea) and Liberia Licences

Further to the announcement dated 9 November 2016 regarding the joint venture agreements entered into with Citigate Commodities Trading ("Citigate"), Stellar reports that Citigate has yet to commence funding of the Baoulé or Liberia projects or to pay Stellar its up-front management fee of US$175,000. Citigate report that they are completing the necessary compliance requirements in Dubai for the release of funds to its subsidiary company SAFA Africa from funds raised by Citigate for its portfolio of diamond and gold assets in Africa. Whilst Stellar has been re-assured that the funds will be sent to Stellar shortly, the timing remains uncertain.

Glossary& definitions

   cpht:                                         carats per hundred tonnes 
   t:                                              tonnes 
   tph:                                           tonnes per hour 

Tribute mining agreement: entitlement to work a mine or a portion of a mine under an agreement with the lessee claimholder or proprietor to pay or receive from such titleholder a proportion or percentage of the produce of the mine or of the value of such produce

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 28 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 identi ed 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 re ect 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,        Stellar Diamonds plc        Tel: +44 (0) 20 
  CEO                   Stellar Diamonds plc             7010 7686 
  Philip Knowles,                                  Tel: +44 (0) 20 
  CFO                                                    7010 7686 
 Emma Earl             Cairn Financial Advisers    Tel: +44 (0) 20 
  Sandy Jamieson        (Nominated Adviser)              7213 0880 
 Jon Bellis            Beaufort Securities         Tel: +44 (0) 20 
                        Limited (Broker)                 7382 8300 
 Rory Scott            Mirabaud Securities         Tel: +44 (0) 20 
                        (Financial Advisers)             7878 3360 
 Lottie Brocklehurst   St Brides Partners          Tel: +44 (0) 20 
  Charlotte             Ltd                              7236 1177 
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This information is provided by RNS

The company news service from the London Stock Exchange

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February 20, 2017 02:00 ET (07:00 GMT)