Stellar Diamonds plc Navigates Strategic Shift with Focus on West African Diamond Potential

Stellar Diamonds plc, a burgeoning player in the mineral exploration and development sector, meticulously reported its final results for the period ending June 30, 2017, outlining a pivotal year marked by strategic financing and a sharpened focus on its flagship Tongo-Tonguma diamond project in Sierra Leone. The company successfully augmented its financial reserves, raising a commendable US$1.2 million in cash through a strategic blend of equity and debt initiatives within the financial year. This infusion of capital underscores Stellar’s persistent efforts to bolster its balance sheet amidst challenging market conditions for junior resource companies.

In a further move to streamline its asset portfolio and enhance liquidity, Stellar Diamonds received an additional US$0.25 million during the reporting period. This sum represented an advance payment tied to the strategic disposal of the Group’s Guinea assets, forming an integral part of a broader US$1.25 million transaction aimed at divesting its interests in the region. The financial discipline exhibited by the company was also evident in its operational performance, with the reported loss before impairments and discontinued activities witnessing a significant reduction from US$2.75 million to a more manageable US$2.25 million. This improvement reflects a concerted effort by management to optimize costs and focus resources on core, high-potential assets.

The Tongo-Tonguma Project: A Cornerstone of Future Growth

At the heart of Stellar Diamonds’ future strategy lies the ambitious and highly prospective Tongo-Tonguma diamond project in Sierra Leone. This combined venture, poised to become a transformational asset, holds immense promise not only for Stellar but also for the broader diamond mining landscape in West Africa. Karl Smithson, Chief Executive of Stellar Diamonds, articulated the project’s profound potential, stating, “The combined Tongo-Tonguma project has the potential to be an exceptional mine.” He further elaborated on the robust economic indicators supporting this vision, highlighting a projected 21-year life of mine targeting the extraction of an initial 4.5 million carats.

The economic modelling for Tongo-Tonguma paints a compelling picture. Forecast production targets are set to exceed 200,000 carats per annum, a significant volume expected to generate substantial estimated annual cash flows of US$45 million. Crucially, the project boasts an after-tax Net Present Value (NPV) attributable to Stellar of an impressive US$109 million. This figure, as Smithson rightly pointed out, “is far in excess of the Company’s current market capitalisation and therefore rightly deserves our exclusive strategic focus.” This stark contrast between the project’s intrinsic value and the company’s market valuation presents a strong case for investors and underpins Stellar’s unwavering commitment to its development.

Strategic Restructuring and Development Pathway

The path to realizing Tongo-Tonguma’s full potential involved a strategic restructuring of the proposed acquisition of the Tonguma diamond project. During the year, this was intelligently renegotiated into a tribute mining and revenue share agreement. Under the revised terms, Stellar Diamonds undertakes the crucial role of funding the capital development required for the integrated Tongo-Tonguma mining operation. In return for this significant investment and operational expertise, Stellar stands to gain a de-facto 90% revenue share of future project revenues, commencing once the company has fully recouped its initial capital outlay. This innovative agreement structure with Octea demonstrates a pragmatic approach to project financing and risk management, allowing Stellar to leverage its capabilities while aligning interests with its partners.

Despite the inherent challenges in securing funding for junior resource companies, Smithson reiterated the firm’s optimism. “Stellar continues to carefully manage its day-to-day working capital and alongside our loan note holders, who remain fully supportive, we are working on, and remain optimistic of securing, the required project funding to develop the Tongo-Tonguma project,” he stressed. The project’s immense scale and potential are key drivers for this confidence, with Smithson envisioning the mine becoming “the second largest kimberlite diamond mine in West Africa and transform Stellar from a small cap explorer into a mid-tier diamond mining company.” The initial capital requirement for this ambitious undertaking is estimated at US$32 million, a sum that, once secured, will unlock significant value.

Operational Readiness and Licensing Milestones

Stellar Diamonds also provided crucial operational updates for its various project sites, specifically detailing the advancement of the Tongo Project, which is 100% owned by the company in Sierra Leone. Revised resource statements underscore the project’s richness, demonstrating a combined 4.5 million carats (+1.18mm) at robust recovered mining grades ranging from 100 carats per hundred tonnes (cpht) to 260 cpht. The quality of these diamonds is equally impressive, with estimated values between US$209/ct to US$310/ct. Beyond the immediately exploitable resources, the company has identified a further eight million carats as a compelling future exploration target, indicating significant long-term growth potential.

The comprehensive Revised Preliminary Economic Assessment (PEA), along with a detailed mine plan and financial model, was independently prepared by esteemed consultants PPM and SRK Consulting. Their findings corroborate the project’s viability and economic attractiveness, solidifying the strategic direction Stellar is pursuing. In terms of project timelines, the company targets initial production within 12 months of securing the necessary funding. A systematic ramp-up of production is envisioned, aiming for over 200,000 carats per year by the end of Year 3 of operations, which will subsequently drive the projected annualised cash flows of US$45 million per annum.

Crucial regulatory milestones have also been achieved. The Government of Sierra Leone issued the Environmental Licence subsequent to the end of the reporting period, a vital permit that demonstrates compliance with environmental standards and paves the way for further development. The issuance of the overarching Mining Licence is now keenly awaited, representing the final key regulatory approval required to commence full-scale mining operations. Concurrently, the longstop date for the tribute mining agreement has been extended to January 31, 2018, providing the necessary flexibility for Stellar to finalize its funding arrangements and logistical preparations.

Sierra Leone: A Proven Diamond Hotspot

Beyond the specific merits of the Tongo-Tonguma project, Karl Smithson emphasized the broader appeal of Sierra Leone as a premier destination for diamond miners. “Furthermore, Sierra Leone has demonstrated twice this year why it should be the target of diamond miners,” Smithson highlighted, referencing recent spectacular discoveries by third parties. These include gem-quality diamonds of an astonishing 709 carats and another significant find weighing 478 carats. Such discoveries reinforce the country’s exceptional geological potential for hosting world-class diamonds.

Sierra Leone’s rich history in yielding extraordinary stones provides a strong foundation for this modern exploration and mining thrust. The legendary 970-carat ‘Star of Sierra Leone,’ one of the largest gem-quality diamonds ever found, serves as a powerful testament to the country’s unparalleled geological endowment. These historical and recent successes collectively underscore the strategic advantage Stellar Diamonds holds by focusing its primary efforts in this prolific diamond-producing region, aligning its corporate strategy with an area of proven and ongoing discovery.

Guinea Asset Disposal: Strengthening the Balance Sheet

In a decisive move to optimize its asset base and improve financial flexibility, Stellar Diamonds progressed significantly with the disposal of its Guinea assets. Following the period end, Share Purchase Agreements were formally signed with BDG Capital for the sale of all Stellar’s Guinea assets, encompassing its three subsidiary companies in the region, for a total consideration of US$1.25 million. This divestment represents a strategic exit from non-core operations, allowing the company to concentrate its resources and management attention squarely on the high-value Tongo-Tonguma project.

The financial mechanics of the Guinea asset disposal were detailed by the company. An initial US$250,000 exclusivity fee advance was received during the financial year, providing an early cash injection. A further US$250,000 was received subsequent to the period end, demonstrating the ongoing progress of the transaction. The final balance, amounting to US$366,000, was received upon the closing of the transaction post-period, after accounting for certain exit costs including in-country taxes and staff retrenchments. In total, this brought the aggregate cash received from the Guinea asset sale to US$866,000, after the payment of taxes, retrenchments, settlement of certain creditors, and other exit-related expenditures. This strategic exit is projected to introduce a significant monthly saving of US$70,000, further enhancing Stellar’s operational efficiency and cash flow management moving forward.

Other Ventures and Forward Outlook

Beyond its primary focus in Sierra Leone and the strategic exit from Guinea, Stellar Diamonds also provided an update on its 90% owned Kumgbo Project in Liberia. The company reported that the licences for the Kumgbo project remain “on care and maintenance,” indicating a holding pattern for this asset. Concurrently, Stellar is actively seeking a joint venture partner for the project, reflecting its strategy to de-risk and potentially monetize non-core assets through partnerships that bring capital and expertise. This approach allows Stellar to maintain optionality over its exploration portfolio while prioritizing resources for its most promising ventures.

Smithson candidly acknowledged the prevailing challenges faced by junior resource companies in accessing capital markets, describing them as “challenging,” and the company’s current financial position as “weak.” However, he balanced this assessment with a strong affirmation of shareholder confidence. He noted that Stellar had received “strong support from its shareholders in recent open offer financings,” underscoring a continued belief in the company’s long-term vision and the intrinsic value of its assets. This unwavering support from key stakeholders, combined with prudent financial management and a laser-like focus on the transformative Tongo-Tonguma project, positions Stellar Diamonds plc to potentially transition from a small-cap explorer to a significant mid-tier diamond producer, unlocking substantial value for its shareholders in the process.

News Source: gjepc.org