Positive Modelling Report - Lemphane Diamond Lesotho

Paragon Diamonds Limited / Index: AIM / Epic: PRG / Sector: Resources 5 June 2014 Paragon Diamonds Limited (`Paragon Diamonds' or the `Company') Positive Results of Independent Modelling Report at the Lemphane Kimberlite Pipe Project, Lesotho Paragon Diamonds Limited, the AIM quoted diamond development and productioncompany in Africa, is pleased to announce positive results of an independentsize frequency and revenue modelling report based on 300 carats of diamondsrecovered during the 2012/3 bulk sampling programme at its Lemphane KimberlitePipe Project (`Lemphane' or `the Project') in Lesotho. These results supportenhanced economics of the Project ahead of the commencement of Stage 1Production in the near to mid-term. * A +100 carat diamond expected per million tonnes processed * Anticipated diamond values projected between US$930/carat and US$1,025/ carat, to be verified during Stage 1 production * Size frequency indicates 12% of carats as diamonds exceeding 9 carats * Conservative overall grade of 2cpht used for basis of modelling Ahead of commencement of planned Stage 1 Production, the Company commissionedThe MSA Group, and Dr. Johannes Ferreira to undertake a size frequency andrevenue modelling report to independently verify the Company's in-houseestimates. Dr Ferreira is an internationally recognised authority in this fieldand has previously studied other large diamond size, exceptional value but lowgrade diamond deposits, including the Mothae kimberlite in Lesotho, LucaraDiamond Corp's Karowe Mine in Botswana, and DeBeers' Victor Mine in Canada. Circa 300 carats of diamonds were recovered from a bulk sampling programme ofover 15,000 tonnes of kimberlite at Lemphane, which was concluded in June 2013.The majority of these diamonds were subsequently independently valued by WWWInternational Diamond Consultants in September 2013. It should be notedhowever, that the values obtained relate only to the actual diamonds recovered.Diamonds exceeding 9 carats were not recovered due to limited sample size,although their occurrence can be statistically predicted with confidence. Largediamonds carry exceptional value (over 80% of the total value at the nearby Letšeng Mine) and modelling seeks to address this by applying appropriate valuesto large diamonds anticipated to be recovered during mining operations. Sizefrequency and value modelling are standard statistical techniques to determinethe anticipated diamond sizes and values that would be expected in the muchlarger diamond populations recovered during production operations. Diamond Size Frequency For the diamonds exceeding +7DTC (≡2.46mm Ø or nominally greater than 0.15carats, representing 74.3% of total carats) expected to be recovered duringplanned production operations, the relative percentages of large diamonds areshown in the table below: 51.3 % of carats are in diamonds exceeding 1 carat in size (≈4 grainers) 12.3 % of carats are in diamonds exceeding 9 carats in size 6.0 % of carats are in diamonds exceeding 20 carats in size 2.3 % of carats are in diamonds exceeding 50 carats in size 0.96 % of carats are in diamonds exceeding 100 carats in size 0.14 % of carats are in diamonds exceeding 300 carats in size The results are based on the northern and southern domains of the 6 hectareLemphane Kimberlite as delineated and sampled to date. The southern domain,which represents circa 60% of the kimberlite, also produced better results interms of grade, diamond size and value, than the average across the pipereflected in this study. Dr Ferreira also commented: "the size component in this exercise is morereliable than the value component, and is very likely to change when morediamonds are recovered and added to the modelling procedure" Based on these results, Stage 1 production can be expected to recover in excessof 100 diamonds larger than 9 carats, including diamonds up to 100 carats insize. Over the entire 48.6Mt of kimberlite delineated by drilling to date, theexpectation would be for some 50 diamonds in excess of 100 carats and 175diamonds in excess of 50 carats (i.e. two to three a year and one a monthrespectively if mined at 3Mt/yr), including diamonds of over 300 carats insize, being recovered. Diamond Values Diamond value is modelled by applying known and anticipated values to theexpected diamond sizes to be recovered. Within the sample, no diamondsexceeding 9 carats were recovered; however, large Lesotho diamonds regularlyfetch exceptional prices. It is therefore necessary to apply anticipated largediamond values to the diamonds which may be forthcoming during Lemphaneproduction operations. To this end, two models were generated, at the high and low end of the observedvalue data. Based on values modelled on diamonds up to 9 carats, the +7DTC(+2.4mm) diamonds achieved values of US$505-US$625 per carat. However, theanticipated production of diamonds based on the planned 1Mt of kimberlite fromStage 1 Mining will include larger diamonds up to 100ct. By applying largediamond values reported from the nearby Mothae Project to the +15ct diamonds,average diamond values of between US$930 per carat and US$1,025 per carat wereestimated, compared to the previous in-house assumption of US$750 per caratused for planning to date. In Stage 2 Mining, with the increased recovery oflarger diamonds, potentially including +300ct stones, even higher values couldbe realised, however, these will be modelled on the basis of Stage 1 Miningresults. The report noted: "Both models fall within the range of sample values but inview of knowledge of other pipes in Lesotho these values may all beconservative"... "[at] an average diamond value of US$7,196 observed for +19ctstones at Mothae a series of average values up to US$7,000 per carat [were]assumed for +15ct stones at Lemphane to examine potential average revenue" Processing plant Further to the MOU announced in December 2013 in respect of the 75tphprocessing plant on 17 December 2013, this agreement has been formallyterminated and revised plant options, including the availability of part or allof the Mothae plant are being evaluated and will be implemented upon completionof financing. Paragon's Managing Director, Dr Stephen Grimmer commented: "We are delightedthat this independent report confirms the exciting economic potential of ourflagship Lemphane projectin Lesotho as we move towards Stage 1 production. Thereport highlights that our in-house calculations of preliminary diamond valuescomfortablyexceeding US$750/carat and predicts the recovery of diamonds up to100 carats in size even in the early stages of production.In stage 2, with theanticipated frequent recovery of large stones we would expect that the valuewould increase further, certainly in the realms of $1,500/carat envisaged inthe published scoping study. Lemphane has always shown potential to producelarge, exceptional diamonds, and we feel the comparison with other high-valueLesotho kimberlites, made in this study, is fair and offers further upside,given recentremarkable diamond values achieved at neighbouring mines†". † Recent historical production from the neighbouring Letšeng and Kao Mines hasyielded large diamonds of exceptional value. At Letšeng, a 162.0ct type IIadiamond fetched US$68,687 per carat (US$11.13M) and a 161.3ct type I diamondfetched US$14,636 per carat (US$2.26M); at Kao two white gems of 53.7ct and32.6ct fetched US$46,896 (US$2.52M) and US$38,392 (US$1.25M) per caratrespectively. [Source: Gem Diamonds 5th March 2014; Fusion Alternatives' Kao Rough DiamondTender, March 2014] In accordance with the AIM Rules for Companies, the information in thisannouncement has been reviewed by Stephen Grimmer PhD., MSc., a qualifiedgeologist with over 25 years diamond exploration experience. **ENDS** For further information please visit www.paragondiamonds.com or contact: Martin Doyle Paragon Diamonds Limited +44 (0) 20 7099 1940 Simon Retter Paragon Diamonds Limited +44 (0) 20 7099 1940 Lindsay Mair Sanlam Securities UK +44 (0) 20 7628 2200 Catherine Miles Sanlam Securities UK +44 (0) 20 7628 2200 Felicity Edwards St Brides Media and Finance Ltd +44 (0) 20 7236 1177 Frank Buhagiar St Brides Media and Finance Ltd +44 (0) 20 7236 1177 Notes Paragon Diamonds has a pipeline of projects in Lesotho, Botswana and Zambia,the most advanced of which is its Lemphane Kimberlite Pipe Project in Lesotho,located close to the world class Letšeng mine, Lesotho's largest diamond mine.Lemphane is the last known world-class sized kimberlite to be developed inLesotho. Among the stones recovered in the Company's 2013 bulk samplingprogramme were several large high value stones of up 8.9 carats in size andindividual diamond values in excess of US$2,400/ct have been achieved,demonstrating the potential for Lemphane to hold large and valuable diamonds.The first of a two stage production programme is currently expected to commencelate 2014 (subject to financing) which will further define the resource atLemphane. As increased tonnages of kimberlite are processed the proportion oflarger diamonds recovered will improve, increasing the average value ofdiamonds recovered at the project, as was the case at Letšeng. Stage 1 production will cover a two year period during which approximately 1 Mtof kimberlite will be mined and processed out of the currently estimated 48.6Mtof kimberlite (to 350m depth) at the site, using a 75 tonne per hour processingplant. The Company is targeting 20,000 carats during Stage 1 production with anestimated minimum value of US$750 per carat that is expected to generaterevenues in excess of US$8m per annum. Cash flow will be reinvested to furtherdevelop Lemphane and complete a bankable feasibility study, a 3D geologicalmodel and a substantial inferred resource ahead of commencing the Stage 2production phase. Stage 2 will see production ramped up to 3Mt/year with peakproduction expected to hit 65,000 carats per year of high value diamonds.