---ADDS CEO & BROKER COMMENTS---
Shares in Paragon Diamonds (LON:PRG) rose 10% after it unveiled plans to acquire a diamond mine close to its flagship Lemphane project in Lesotho.
The US$8.5mln deal was described by Paragon’s chairman as re-rating and de-risking the company’s business model.
The AIM-listed explorer and developer has signed a memorandum of understanding to acquire the Mothae kimberlite, which is also just five kilometres from Gem Diamonds' (LON:GEM) world-class Letseng operation.
Lemphane and Mothae will be constructed in tandem “at the lowest possible cost to benefit from economies of scale” and will go into production in the third quarter of the year.
Expected revenues from the first full year of production are put at US$36mln, while the cost of bringing Mothae online is put at US$8mln.
This sum, as well as the acquisition cost, will be financed by Paragon’s Dubai backer, International Triangle General Trading (ITGT), which has already committed to a US$12mln debt and equity package to start up Letŝeng.
It means the development capital has been secured at no additional dilution to existing investors.
Paragon is acquiring an exciting asset in Mothae, which contains an indicated and inferred 39mln tonnes of ore at 2.7 carats per hundred tonnes.
These are large, high value diamonds with 14 recovered in excess of 10.6 carats and one touching almost 57 carats. The asking prices of these rough diamonds were anywhere between US$5,482 and US$41,869.
Stones of this quality are known as “investment grade diamonds that are used as a surrogate for cash”, according to Paragon's chairman, Philip Falzon Sant Manduca.
The mine economics, meanwhile, are attractive. Mothae’s net present value is estimated to be US$115mln – discounted at 12% over 13 years - while the internal rate of return is put at 116% for an initial 750,000 tonnes a year operation, rising to 2mln.
The operation comes with a processing plant, which will be upgraded, and the seller, Lucara Diamond Corp, has developed some of the mine infrastructure already.
Chairman Manduca told Proactive Investors: “It [this deal] is so important, particularly in an environment where it is well known that no new kimberlite diamond mine for over 20 years.
“So to be able to acquire one and effectively double our production is not only against the scientific trend in the industry, but is incredibly important for Paragon in terms of its size.
“It re-rates Paragon, it de-risks Paragon and it establishes Paragon as a mid-size, excellent prospect diamond company.”
In the same announcement Paragon revealed plans to offload its Motete dyke project, also in Lesotho, to a company called NFL, which will invest around US$1.5mln developing it.
The shares rose 0.53p to 5.75p. Broker Northland Capital believes the stock is worth 12.9p, but this is based solely on Letseng.
“While developing two operations simultaneously presents logistical challenges, the synergistic benefits and cost savings would far outweigh the risk of any potential development issues,” said analyst Ryan Long in a note to clients.
“Paragon’s retention of the management team in Lesotho provides not only continuity benefits for Mothae but also the efficient use of quality personnel for Lemphane.”