Micro cap Stellar Diamonds (STEL:AIM) has struck a deal to buy a project next door to its Tongo diamond mine in Sierra Leone which should triple the amount of diamonds it previously planned to produce each year from the region.
The acquisition - officially classed as a reverse takeover - of Octea Mining’s Tonguma project is dependent on Stellar raising $25 million (£19 million) to help bring the enlarged project into production.
The fundraise looks very ambitious given it is nearly nine times the present market valuation of Stellar (£2.2 million). Chief executive Karl Smithson says he is confident of raising the money, adding that Swiss private bank Mirabaud has been appointed to help raise the funds.
He notes Mirabaud has good form in this area, having previously helped to secure $222.4 million for Firestone Diamonds (FDI:AIM) whose market cap was also much lower than the equity it eventually raised.
SECOND TIME LUCKY
It is the second time that Stellar has tried to acquire the Tonguma project. Smithson says a previous deal agreed with Octea suffered a setback when there was a change in chief executive at the partner company. He subsequently had to renegotiate the deal on different terms with the new boss.
Rather than pay money upfront to Octea, the new deal has been structured so that Stellar pays the development costs and then recoups its investment once production starts.
Octea will recoup up to $5 million once production begins as payment for a processing plant that is already on site, waiting to be used.
The partner will subsequently receive a royalty and net profit dividends once Stellar has recouped the money used to build the mine.
Tongo was initially forecast to cost $25 million to construct as a standalone operation with an estimated 18-year mine life. The enlarged project will now cost $40 million to build and will run for the same period, albeit with three times the output level.
Smithson says Octea has undertaken substantial amounts of exploration at Tonguma but not started any development work.
‘Octea’s priority is to take its Koidu mine underground plus the business has lots of outstanding debts, so we approached the management team about putting Tonguma together with our asset next door and for us to develop it.’
Koidu’s creditors include jeweller Tiffany & Co (TIF:NYSE) which has an offtake agreement for the mine. Octea is a subsidiary of BSG Resources, the mining group founded by Israeli businessman Beny Steinmetz.
TRANSACTION TIMELINE
The Stellar CEO believes it could take three months to secure the financing to complete the Tonguma transaction.
Failure to raise more than the minimum $25 million required will result in Stellar having to come back to the market for the remaining $15 million needed to take the enlarged project into production.
‘I hope to raise money at a premium to the 7.12p price at which the shares traded before they were suspended pending details of the reverse takeover (19 August 2016),’ says Smithson. ‘The funds may not all come from equity; I will look at offtake-related debt as well.’
Once the money is secured, Smithson believes it will take nine months before first diamonds are recovered.
Stellar has already started on a new mine plan for the combined areas which it hopes to publish in a fortnight’s time.
The shares are likely to remain in suspension until an admission document has been published.
