The path to construction at the Liqhobong Diamond Mine is now clear after Firestone Diamonds (LON:FDI) signed a revised mining lease agreement with the authorities in Lesotho.
The revised deal runs until 30 June 2021 and can be renewed for two further periods of 10 years.
The changes mean concessions regarding the exemption from paying withholding tax on interest and dividends contained in the previous agreement will no longer be available.
The company, which owns 75% of the mine, will incur withholding tax on services rendered. It will increase the cash outflow during the two-year construction period of the main treatment plant.
To compensate for this, the government in Lesotho has agreed to cut the royalty rate on diamond sales from 8% to 4% until the group has benefited to the tune of US$20mln from the royalty rate reduction. After that point, the rate will rise to 8%.
“While the board believes that the overall impact on the group will be broadly cash neutral, the obligation to pay withholding tax may result in an increase in the company's peak funding requirement of approximately US$12.0 million during the construction phase of the Main Treatment Plant in late 2015/early 2106, when the majority of the withholding tax will be payable and before the commencement of full-scale production at the Liqhobong Diamond Mine and the resultant revenue generation,” Firestone said in a statement.
A further US$8mln in tax is expected to be paid over the debt repayment period upon the start of full production.
It may need to raise funds of up to US$12mln to cover the new tax arrangements, but said additional equity financing should not be required.
A placing extension has been provided to allow enough time for the agreements in respect of the fundraising and Absa debt facility, meaning both sets of shares will be admitted to the market no later than 30 May.
In January, the group revealed it had tied up the funds needed to build Liqhobong.
It secured US$82.4mln through a debt facility and raised US$60mln at 3p a share via the equity markets.
The general meeting to approve the issue of new shares went ahead as planned today, unaffected by the placing extension.
The open offer to shareholders has now closed, with 41% of the shares on offer snapped up, raising £1.7mln.
Chief executive Stuart Brown said the negotiations were extensive, adding that the agreement is positive for all concerned.
He said: “Importantly, the revised mining lease agreement enables the company to proceed with its fundraising, a considerable private investment in Lesotho, and commence construction of the main treatment plant and supporting infrastructure at Liqhobong.”