Issue of Convertible Loan Note & Grant of Warrants

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

14 August 2015 

AIM: STEL

Stellar Diamonds plc

("Stellar" or the "Company")

Issue of Convertible Loan Note and Grant of Warrants

Proposed capital re-organisation

Director's loan

Stellar Diamonds Plc (the "Company" or the "Group"), the London listed (AIM: STEL) diamond development company focused on West Africa, announces that it has today raised US$330,000 (approximately £211,200) by way of the issue of a new unsecured convertible loan note ("Note") to Deutsche Balaton AG ("Deutsche Balaton").

Additionally the Company has granted Deutsche Balaton a warrant to subscribe for new ordinary shares for an aggregate subscription price of US$330,000 (£211,200) as further detailed below ("Warrant"). The net proceeds of the Note will be used for the near term working capital requirements of the Group.

CEO Karl Smithson commented:

"Deutsche Balaton share our vision for the development of a significant hard rock diamond mine from our portfolio of advanced projects in West Africa. In what remains a challenging market for the natural resource sector we welcome and value the support and credentials of Deutsche Balaton who we believe will be a long term strategic investor in the Company. It is necessary for Stellar to undertake a capital reorganisation in order to amend the nominal value of our shares relative to the price at which we are currently able to issue new shares. As such, it is intended that the Company's shares will be consolidated and sub-divided. The Directors consider that the participation of Deutsche Balaton and the proposed share re-organisation are important developments in the transformation of Stellar from a junior explorer in to an established diamond producer."

Further Information

Deutsche Balaton AG is a German private equity investment company founded in 1991 and based in Heidelberg. Its shares are traded on the Frankfurt Stock Exchange (Regulated Unofficial Market, Open Market, Entry Standard) and it is an investor in public and private companies across a range of sectors, in addition to investing in other areas such as fixed-interest securities. Investments are typically held over the long term with a view to creating an attractive return for its shareholders.

The terms of the Note and the Warrants are set out below.

Conversion of the Note into ordinary shares in the Company ("Conversion") and exercise of the Warrant ("Exercise") is conditional on, inter alia, approval by an appropriate resolution of the shareholders of the Company of a share reorganisation ("Proposed Capital Re-organisation"), further details of which are set out below. The Proposed Capital Re-organisation, if implemented, would result in the number of ordinary shares in issue being reduced by a factor of 50 times. Shareholders should take particular note of references to "Existing Shares", which refers to the existing ordinary shares of 1 pence each (there are currently 811,929,724 Existing Shares in issue) and references to "Proposed New Shares", being those ordinary shares of 1 pence each in issue following completion of the Proposed Capital Re-organisation (expected to be approximately 16,238,595 Proposed New Shares in issue immediately following the Proposed Capital Re-organisation).

Key terms of the Note

The maturity date of the Note is 7 August 2017 ("Maturity Date") unless redeemed ("Redemption") or converted into ordinary shares in the Company prior to this date. The Maturity Date may be extended by a maximum of six months in the event that Conversion or Exercise is not possible at the Maturity Date (to the extent that the Note has not already been redeemed or converted or the Warrant has not already been exercised) as a result of, inter alia, Deutsch Balaton being in possession of unpublished price sensitive information. Interest is payable on the Note at 6% per annum to be paid in cash in arrears, with the first instalment to be paid on 7 August 2016 and thereafter every six months. On Conversion, any outstanding interest will become payable.

The Note may be converted into 37,473,600 Existing Shares at an effective price of 0.56 pence per Existing Share. The Note may be converted into ordinary shares in whole, but not in part.

The Note may be redeemed in cash at any time at the Company's discretion providing that 10 weeks' notice is given to Deutsche Balaton. Deutsche Balaton may, at its sole discretion, require that the Note be converted into ordinary shares rather than redeemed. The Note may also be redeemed early in certain circumstances, including customary events of default.

Following Conversion and assuming that no other shares are issued by the Company between now and Conversion, Deutsche Balaton would be interested in 4.4 percent. of the Company's so enlarged issued share capital.

The Note is subject to standard anti-dilution provisions and protections in the event of further capital re-organisations in addition to the Proposed Capital Re-organisation (including in the event of an issue of new ordinary shares pursuant to the exercise of options held by employees or directors of the Company).

Details on the effect of the Proposed Capital Re-organisation on the number of shares to be issued pursuant to Conversation are set out below.

Key terms of the Warrant

The Company has granted Deutsche Balaton a warrant to subscribe for a total number of 59,957,900 Existing Shares for an aggregate subscription price of US$330,000, equivalent to an exercise price of approximately 0.35 pence per Existing Share, in order that assuming Conversion and Exercise in full, Deutsche Balaton may own in total up to 10.7 percent. of the Company's so enlarged share capital.

The Warrant is only exercisable following conversion of the Note and may be exercised at any time commencing from the date of Conversion and ending on the Maturity Date of the Note. The Warrant is only exercisable in the event that the Proposed Capital Re-organisation has occurred and may only be exercised in whole and not in part.

The Warrants are subject to standard anti-dilution provisions and protections, in the event of further capital re-organisations in addition to the Proposed Capital Re-organisation.

Proposed Capital Re-organisation

The Companies Act prohibits companies from issuing shares at a price below their nominal value. The terms of the Note and the Warrants are such that the effective issue price of Existing Shares to Deutsche Balaton, were Conversion or Exercise to occur, would be below the current nominal value of 1 pence per Existing Share.

Accordingly, it is the Directors' intention that a capital re-organisation be carried out in due course to allow Conversion and Exercise to occur.

Subject to publication of a shareholder circular and passing of resolutions by shareholders at a general meeting, it is intended that the Proposed Capital Re-organisation will consist of two elements:

· every 50 Existing Shares of 1 pence each will be consolidated into 1 consolidated share of 50.0 pence ("Consolidated Shares") ("Consolidation"); and

· immediately following the Consolidation, it is intended that each Consolidated Share will then be sub-divided into 1 new ordinary share of 1 pence ("Proposed New Share") and 1 new deferred share of 49 pence ("New Deferred Share") ("Sub-Division").

In the event of implementation of the Proposed Capital Re-organisation, shareholders would own 1 Proposed New Share of 1 pence nominal value and 1 New Deferred Share for every 50 Existing Shares that they own prior to the Proposed Capital Re-organisation. It is not expected that the percentage holding of individual shareholders in the Company would change as a result of the Proposed Capital Re-organisation. The rights attaching to the Proposed New Shares would be identical in all respects to those of the Existing Shares and the deferred shares would have carry no voting rights or be admitted to trading on AIM. Full details of the Proposed Capital Re-organisation will be set out in a shareholder circular and notice of general meeting.

Expected effects of the Proposed Capital Re-organisation on Conversion and Exercise

The result of the Proposed Capital Re-organisation (being the Consolidation and the Sub-Division), if approved by shareholders, would be to reduce the number of ordinary shares in issue by approximately 50 times and, accordingly, assuming normal market conditions, to increase the price at which the Company's ordinary shares would trade to approximately 50 times the value at which the Existing Shares currently trade. The nominal value of 1 pence each per Existing Share would remain unchanged at 1 pence per Proposed New Share under these proposals.

Assuming shareholder approval of the Proposed Capital Re-organisation:

· Conversion, if it occurred would result in the issue of 749,472 Proposed New Shares (being 37,473,600 Existing Shares divided by 50 times) issued at an effective share price of approximately 28.2 pence per Proposed New Share;

· Exercise, if it occurred in full would result in the issue of up to 1,199,158 Proposed New Shares (being 59,957,900 Existing Shares divided by 50 times) issued at an effective share price of approximately 17.6 pence per Proposed New Share.

In the event that Conversion and Exercise occurs, Deutsche Balaton will be interested in approximately 10.7 percent. of the so enlarged share capital (assuming no other issue of shares occurs between now and Exercise).

Since conversion of the Note and exercise of the Warrant is conditional on the Proposed Capital Re-organisation being implemented, the number of Existing Shares referred to above following Conversion or Exercise is for illustrative purposes only.

It is expected that a further announcement on the Proposed Capital Re-organisation will be made in due course together with publication of a circular and notice of general meeting to effect the Proposed Capital Reorganisation. In the event that the Proposed Capital Re-Organisation does not occur, Deutsche Balaton will be unable convert the Note into Existing Shares or exercise its Warrant.

Potential further issue of convertible notes

The Company is currently in advanced discussions with Deutsche Balaton with regards to securing a larger convertible loan note (and associated warrants) over and above the Note ("Additional Note") to provide sufficient working capital for the Group for the period through to expected completion of the Tongo mining licence approval process. This approval process is expected to be completed later in 2015, although there is no guarantee of this timing and is subject to regulations the Mines Act (2009) of Sierra Leone, which allows for conversion of an exploration licence to a mining licence on completion of a mine plan, financial model, environmental impact study and environmental licence. Stellar is well advanced on all of these aspects of the mining licence approval process and a more comprehensive update will be issued in the near future. Whilst discussions with Deutsche Balaton are at an advanced stage, there is no guarantee that the Company will enter into definitive agreements in respect of the Additional Note.

Director's loan

The Company has received an unsecured loan of US$45,000 ("Loan") from Peter Daresbury, Non-Executive Chairman of the Company, in order to contribute to the Company's working capital position during the course of its negotiations with Deutsche Balaton. There is no interest payable on the Loan and the Loan does not have a fixed repayment term. It is anticipated that the Loan will be repaid in the event that further funds are raised from Deutsche Balaton or another investor. The Loan constitutes a related party transaction under the AIM Rules for Companies. The Directors who are independent of the Loan consider, having consulted with the Company's nominated adviser, believe that the terms of the Loan are fair and reasonable in so far as the Company's shareholders are concerned.

Exchange rate

An exchange rate £0.64: US$1.00 has been assumed for the purpose of this announcement.

About Stellar Diamonds plc

Stellar is an AIM quoted (AIM: STEL) West African focused diamond development company which is continuing trial mine evaluation of its Baoulé kimberlite in Guinea, and is progressing the 1.45 million carat Tongo Dyke-1 resource through the mining licence application process. In addition, Stellar holds the 3 million carat Droujba project in Guinea and continues to pursue channels to ensure the proper reinstatement of its Kono licences in Sierra Leone.

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For further information contact the following or visit the Company's website at www.stellar-diamonds.com.