--ADDS MANAGEMENT COMMENT--
Paragon Diamonds (LON:PRG) has struck a deal to acquire a processing plant to increase the production capacity at its 85%-owned Lemphane kimberlite mine in Lesotho.
The AIM-listed company has signed a memorandum of understanding (MOU) to buy the Mothae processing plant from Lucara Diamond Corp for stage 1 production, expected to start by the third quarter of 2014.
It is paying $1.15mln for the plant, which will be paid by issuing 9.98mln new shares at 5.5p each and $250,000 in cash.
The company hopes the new plant will help it reach its target of half a million tonnes a year to produce around 10,000 carats per annum.
The plant, which is currently around 60 kilometres away from Lemphane, is expected to be relocated in the first quarter of 2014, with mining and plant operations contracts under negotiation.
The company says it is highly effective in the recovery of large diamonds using coarse x-ray sorting technology with minimal diamond damage.
Dr. Stephen Grimmer said: “Not only is it [the plant] perfect for our needs but it is also in close proximity leading to much reduced costs for the company, with further cost savings and support coming through the acquisition being mostly satisfied in Paragon Diamonds shares.”
He added: “Together with the existing infrastructure at Lemphane and a very experienced team of contractors with whom we have long-term working relationships, this should allow us to deliver a robust and low-cost mining program in the shortest possible time.”
Grimmer explained that the company’s current estimates are very conservative and do not take into account stones of above 10 carats.
“We feel that a $750 per carat projection for stage 1 is very conservative,” he told Proactive Investors.
“It was mainly put in there as that is more or less our breakeven figure. But that value doesn’t include any stones over 10 carats and already the projections indicate that we will be getting about 10% of carats in stones of 10 carats or above.
“So those effectively are not figured into the calculation because we have only statistical basis for those.”
He added that the company expects to recover stones up to 100 carats during the two-year stage 1 period.
“We will cover the costs of the operation purely on the stones less than 10 carats and stones above 10 carats will be an added bonus and will generate the profit margin.”
Broker Sanlam Securities believes the key to unlocking the value in Paragon’s share price is finding large stones above 100 carats, which are not factored into its current estimates.
“This could include the highest value Type IIa stones where a single stone has the potential to make the operation profitable,” the broker said.
Paragon shares fell 7.3% to 3.5p each.