Brokers today hailed the award of a mining lease for Paragon Diamonds’ (LON:PRG) Lemphane prject, which heralds the start of trial mining at the kimberlite pipe in Lesotho.
House broker Sanlam said the new lease was “excellent” news and would enable development of Stage 1 mining which, all being well, would result in the development of a larger scale Stage 2 mine.
The first stage will be a 500,000 tonne per annum operation targeting 10,000 carats per year production. Paragon is aiming for an average carat value of US$750/ct which should be enough to generate a positive feasibility study and the confidence to construct a large scale mine.
Sanlam adds that the greatest challenge for a junior such as Paragon is funding this stage to prove the resource is economic.
Lesotho kimberlites such as Paragon's Lemphane, or at Gem Diamonds' nearby Letseng mine, need to be mined before the grade and value characteristics are fully understood, it added.
“The award of the mining lease and low cost acquisition of a processing plant puts Paragon very close to achieving this goal.”
According to the broker, Paragon now expects to conclude "advance stage negotiations on the financing of Stage 1.“
“As the processing plant was acquired from Lucara Diamonds for only $1.15m of which just $250k was cash, Paragon is developing Stage 1 for very modest capital cost”.
Northland, meanwhile, added the company expects Stage 1 production to commence this year and last for two years.
This shoud generate revenues of US$8mln from the 10,000cts per annum production.
The next share price catalyst is likely to be the completion of the financing for Stage 1, which Northland suggests will be US$7.5mlm plus working capital.
Earlier, Paragon said the mining lease has been granted for an initial ten years, renewable for three consecutive ten year periods.
Martin Doyle, Paragon’s chairman, said he was delighted that the terms of the mining lease had been finalised.
“Having previously recovered stones of up to 8.9 carats with values in excess of US$2,400/ct, we have already demonstrated Lemphane's potential to yield large high-value diamonds.
“As well as generating significant revenues, Stage 1 production is expected to increase the average value per carat (a consequence of the higher amount of tonnage mined), build on the robust economics already identified and also provide a bankable Mineral Resource.“
The mining lease for Lemphane will be held by Meso Diamonds, which is currently 85% owned by Paragon and 15% owned by local Basotho shareholders.
The new lease will see the Lesotho government also take 20% in the project, of which 10% will be free carried with the other 10% to be funded through project dividends.
The mining lease also includes provisions to maintain a 15% local Basotho shareholding.
An initial royalty of 4% will be payable to the government on production and is subject to review within five years.
Shares rose 2% to 3p.