Sellar Diamonds AR 2010

A leading diamond producer in West Africa

Stellar Diamonds plcAnnual Report & Accounts 2010

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Stellar Diamonds plc41 Maiden LaneLondonWC2E 7LJ

T: +44 (0) 20 7257 2930F: +44 (0) 20 7257 2939E-mail: [email protected]

www.stellar-diamonds.com

Stellar Diamonds plc is a London (AIM:STEL) listed diamond mining and exploration company that is focused on the renowned, yet under-developed, diamond region of West Africa. The Company has two projects in production in Guinea, Mandala and Bomboko, as well as 100% rights over four high-grade kimberlite projects in Sierra Leone and Guinea that are at various stages of development from drilling through bulk sampling to trial mining. Contents

Overview01 Highlights02 At a Glance04 Chairman’s Statement

Business Review06 Chief Executive’s Statement08 Mandala10 Bomboko12 Tongo14 Kono16 Droujba17 Bouro18 Corporate Social Responsibility

Governance20 Board of Directors22 Directors’ Report24 Statement of Directors’

responsibilities

Financial Statements25 Independent Auditor’s report26 Consolidated Statement of

comprehensive income27 Consolidated statement

of financial position28 Consolidated statement

of changes in equity29 Consolidated statement of cash flow30 Notes to the consolidated

financial statements

62 Shareholder information

Pol-K Diamonds

Stellar Diamonds plc 01Annual Report and Accounts 2010

Overview

Listed inFebruary 2010 through Reverse takeover of West African Diamonds

£5 million raised as part of listing

£1.9 million raised in October 2010 to accelerate kimberlite exploration

111,000 carats produced to date

$3.8 millionin revenue to date

Developments

Production (nine months to September 2009 and June 2010)

Mandala production of 48,052 carats (2009: 34,990 carats) Bomboko production of 3,920 carats (2009: 620 carats) New plant and earth moving fleet introduced in July at both Mandala and Bomboko to increase production going forward

Revenue (nine months to September 2009 and June 2010)

Mandala revenue of $1,847,689 (2009: $563,705) Bomboko revenue of $185,073 (2009: $221,075)

Kimberlite Projects

Acquisition of Kono trial mining project from Petra Diamonds

Tongo bulk sampling project commenced Droujba drilling to commence in Q4–10

Financial (nine months to September 2009 and June 2010)

Group revenue increased 260% from $563,705 to $2,032,762

£5.0 million equity financing in February 2010 Net assets increased by $10 million or 77% from $13.1 to $23.1 million

Highlights

Stellar Diamonds plc02 Annual Report and Accounts 2010

Overview

A diversified portfolio of high quality assets

Stellar owns a portfolio of projects in Guinea and Sierra Leone that range from production to bulk sampling, bringing diversity through a combination of cash flow and future value creation through the development of key assets. The Mandala and Bomboko projects are at the mining and trial mining stage respectively and have jointly produced over 111,000 carats over the past 18 months. In addition, the portfolio includes four high-grade kimberlites; Tongo and Kono in Sierra Leone and Droujba and Bouro in Guinea. All of these kimberlites demonstrate potentially economic grades and further drilling, bulk-sampling and evaluation is planned over the next 12 months to further develop these assets.

Why West Africa?

Prolific diamond region Historic diamond production estimated at >196 million carats valued at >$15 billion

Favourable geology of the Man Craton High-grade kimberlites in the Stellar portfolio

Relatively unexplored Improved politics Favourable mining codes have resulted in significant investment in the mining sector

MandalaLocation: GuineaStatus: Production

Mining of the 790,000 carat resource (including Ouria) commenced in April 2009. Production and sales to date have exceeded 106,000 carats and $3.2 million respectively. Injection of new capital is leading to an increase in production capacity which is expected to lead to an increase in carats produced and revenue achieved. The mine is now fully capitalised and is expected to deliver reasonable cash flow to Stellar.

BombokoLocation: GuineaStatus: Trial mining

Trial mining at Bomboko has produced over 5,100 carats at an average value of $116 per carat. The current programme is designed to increase and better define the resource base as the trial mining continues. Modifications to the processing plant and recovery sections, as well as an increase to the mine fleet capacity, are expected to lead to an increase in monthly production going forward. Bomboko is fully capitalised and production is expected to increase from the end of Q4–10.

TongoLocation: Sierra LeoneStatus: Bulk sampling

Exploration by Stellar has led to the discovery of four kimberlites in the Tongo permit. Previous bulk sampling and analyses have led to diamonds grades of between 100cpht and 150cpht being defined and forecasted. Diamond values of around $150 per carat from one particular kimberlite have also been established and this kimberlite is currently the focus of further evaluation work. A bulk sampling programme is ongoing which will define with more confidence grade and value and if successful could lead to an underground trial mining exercise in 2011.


DroujbaLocation: GuineaStatus: Drilling

The Droujba kimberlite pipe was discovered and partly mined in the 1960’s by the Russian Aid Mission. The grade of the kimberlite is reported at between 80cpht and 200cpht, though the value of the diamonds is unknown. However, a 270-carat diamond is reported to have been discovered in the alluvial deposits in proximity to the pipe, suggesting the potential for large stones in the pipe itself. A 3,000m drilling programme will commence in Q4–10 to determine the size and depth extent of the pipe, as well as collect samples for diamond grade analysis.

KonoLocation: Sierra LeoneStatus: Trial mining

Stellar acquired full ownership of the Kono project in a share transaction with previous joint venture partner Petra Diamonds. Previous exploration and trial mining at depths of up to 85m below surface have identified two key kimberlites with grades ranging from 65cpht to 140cpht, and diamond values of up to $150 per carat. Some 4,200 carats were produced from this trial mining before the crash in the diamond market led to Stellar placing the project on care and maintenance. Stellar is currently considering options to resume trial mining at Kono.

BouroLocation: GuineaStatus: Bulk sampling

The Bouro licences overlie the Mandala mining permits. Previous extensive work by the Russian Aid Mission, De Beers and Stellar all suggest diamond grades of up to 500cpht for one kimberlite, designated Bouro North. This now requires bulk sampling to better define the grade and diamond value of this kimberlite, which is located a mere 1km from the Mandala processing plant.


Overview

Chairman’s Statement

This listing had long been planned by Stellar, but was historically denied to us due to adverse market conditions. However, in mid-2009 when market conditions were more favourable, we decided to pursue a strategy of consolidation to achieve the listing. After considering various options, we approached the Board of West African Diamonds plc, an AIM listed junior diamond company that was, like Stellar, exploring and developing diamond assets in Sierra Leone and Guinea. In a fragmented and undervalued sector, the similarities of the two companies made a compelling case for the takeover. The deal was eventually agreed on a 75:25 valuation basis in favour of Stellar and Royal Bank of Canada was appointed as Nominated Advisors and Brokers to the company, with Astaire Securities acting as co-brokers. The reverse takeover was completed in February 2010 and accompanied by a £5 million equity fund raising.

The creation of an enlarged and better financed Stellar Diamonds plc has enabled the Company to focus on increasing production. To this end, some of the IPO proceeds were channelled towards increasing production capacities at our Mandala mine and Bomboko trial mine; this was achieved by July 2010. Although, these two alluvial mines are expected to deliver reasonable cash flow, we believe that the future growth of Stellar will be driven by the further development of our four key kimberlite projects, Kono and Tongo in Sierra Leone, and Droujba and Bouro in Guinea.

We are very excited about the potential of each one of these kimberlites which all demonstrate very high diamond grades. This is not only based on historical information but also on the large amount of work already undertaken by Stellar over the past few years. During the next 12 months Stellar will be embarking on a series of drilling programmes to evaluate these projects, better define the diamond grades and values and to take them to the next level of their development.

Dear Shareholder,The period under review has seen considerable change for Stellar. Your company has evolved from a pure exploration company to one that has a diversified asset base with both producing assets and attractive exploration/development assets. Furthermore, we have taken the significant step of obtaining a listing on London’s AIM market by virtue of a reverse takeover of West African Diamonds plc.


Creating a new diamond mine is never easy, even more so in remote areas of Africa. However, the management team of Stellar have demonstrated that this can be done in bringing Mandala into production in mid-2009. We are hopeful that Bomboko can be moved into full commercial production in early 2011, even though it is essentially fully capitalised already. In Kono, Tongo, Droujba and Bouro we potentially have another four mines to build, should the economics of them be proven.

Like most diamond sector analysts we believe that there will be a diamond supply deficit in the medium term that will, through time, become greater. Existing large mines are not going to produce at their historic levels as they go deeper and there are no new mines of significant “world class” size on the horizon. Exploration risk capital dried up in the credit crunch and this is unlikely to ease for the foreseeable future. In short, diamonds are going to become a rarer commodity and with increasing demand, particularly driven by China, India and the Middle East in the short term and an eventual recovery in the US economy, the forecasts are for a strongly appreciating diamond price in the medium to longer term.

So a key strategic focus of Stellar is to position the Company as a larger producer of diamonds, not only from our existing alluvial mines, but also from our kimberlite portfolio. A first step in this strategy was to acquire full ownership of the Kono trial mine from Petra Diamonds Limited (“Petra”). This was achieved in May 2010 and I would like to thank Petra for their previous contribution to the development of Kono and their support for Stellar in

taking shares instead of cash for their stake in the asset. Petra is now a key, supportive shareholder of Stellar and through our “cooperation agreement” with Petra we know that we have a potential future partner in the development of any of our kimberlite projects should we decide to go the joint venture route.

As I write this Chairman’s statement, Stellar has just completed a £1.9 million financing. The reasons for this were two fold. Firstly, to raise sufficient capital to advance the kimberlite portfolio by completing the Tongo bulk sampling evaluation exercise and to drill and bulk sample the Droujba pipe. Secondly, to bring in a new and significant institutional shareholder in Richmond Capital, essentially in place of Altima Partners. I welcome Richmond Capital and thank Altima for their past support.

I would also like to take this opportunity to thank you, our shareholders, for your continued support. Your Board, management and the staff of Stellar will continue to work as hard as ever to deliver on our promises. I also thank everyone in the Stellar team, the Directors, the management and the staff for their past and future endeavours. I know that the circumstances have often been challenging and I am personally proud of the achievements you have made on the ground.

The next year is going to be an exciting one for Stellar. The solid foundations are in place for the significant growth of the Company and I look forward to the various developments throughout the year.

Peter DaresburyNon-Executive Chairman

Lord Daresbury with a Mandala Diamond

Senior Geologist Kassim Mansaray and Lord Daresbury on site at Kono


Business Review

Chief Executive’s Statement

In a very challenging year, Stellar has successfully evolved from a privately owned exploration company to a listed company that has production assets which deliver cash flow as well as a portfolio of high grade kimberlites at various stages of development.

Mandala and BombokoI am pleased at the progress made at the Mandala mine. It was quite an achievement to capitalise this mine in a period of four months in H1–09. This included totally upgrading a 60km stretch of previously inaccessible road from the nearest town, Macenta, to the mine site. Production at Mandala has so far exceeded our expectations based on the geological model. The recovered grade of the resource has consistently exceeded that of the model, probably due to better mining and processing efficiencies and tighter security than implemented by previous operators. To date over 106,000 carats at a grade of 32cpht have been produced and this has generated $3.2 million in revenue to Stellar.

As part of our RTO of West African Diamonds we acquired the Bomboko trial mine project. This project still requires further testing and development in order to better define an increased resource, but I have every hope that these results will be successful. Trial mining to date has delivered 5,145 carats which have sold for $597,000.

Both the Mandala and Bomboko mining operations are in the process of being upgraded in terms of mining and processing capacity. The rationale behind this is to increase production levels and with it reduce unit costs, thus enhancing margins. These projects should deliver modest free cash flow to Stellar once the upgrades are complete in Q4–10.

Kimberlite PortfolioI have always stated, however, that the main growth of Stellar will come from its kimberlite portfolio. In Tongo, Kono, Droujba and Bouro we have some of the highest grade kimberlites in the world. We have not been able to advance these as much as we would have liked due to financing constraints, but the recent £1.9 million financing (October 2010) gives us some capital to do further evaluation and drilling work on Tongo and Droujba initially. I am hopeful that the bulk sampling of Tongo can not only confirm but also exceed the previous results of 90cpht at $144 per carat. Furthermore, if we confirm depth extent and high potential diamond grades from drilling the Droujba pipe then this really should be a catalyst in driving Stellar’s value.

This has not been an easy corporate transformation in a financial market which in mid-2009 was very risk averse and in a commodity that was still suffering from lack of consumer demand and depressed prices. It is testament to the dedication of our management and staff, and with the support of our shareholders, that the Company has successfully undergone and survived this change through these difficult times.

We continue to operate in a challenging environment though. Our focus remains on West Africa and although we are comfortable with the inherent risks these still require careful management. Our projects are located in remote

areas meaning logistics are therefore often difficult. However, we feel that the quality of our projects far outweigh these challenges and this is why we have been able to deliver one project into production, have another two at the trial mine stage and others at the drilling and bulk sampling stages. None of these projects are what one would classify as “green-fields”, they have all been extensively explored and tested by Stellar over the years such that the early stage geological risk is largely mitigated. In other words, we feel that all of our projects have economic potential and that is why we continue to focus on their development as part of our medium-term strategy.

Angola

Australia

Botswana

Canada

DRC

Namibia

Russia

South Africa

Zimbabwe

Other Countries

200

180

160

140

120

100

80

60

40

20

2005A 2006A 2007A 2008A 2009A 2010A 2011E 2012E 2013E 2014E 2015E 2016E 2017E

World Diamond Production

Million carats

Supply

Demand

Source: All figuresRBC Capital Marketsestimates (includesRussia stockpilein supply)

Notional shortage

60,000

50,000

40,000

30,000

20,000

10,000

2008E 2010E2009E 2011E 2012E 2013E 2014E 2015E 2016E 2017E 2018E 2019E 2020E 2021E 2022E 2023E 2024E

Diamond Supply and Demand

$Million


We are currently exploring ways of recommencing the Kono underground trial mine. During the financial crisis many diamond company’s closed their operations and Stellar was no different. Kono was placed on temporary care and maintenance in mid-2009 but due to the rebound in rough diamond prices perhaps it is time to resume underground development at Kono to determine the economics of the project with more confidence. In anticipation of this Stellar acquired Petra’s interest in the Kono project for £900,000 in Stellar shares at £0.20 per share, which we consider to be at a significant discount to the project value.

It is disappointing that our share price has depreciated so much from the IPO price of 20 pence. This is no reflection of the progress made on the ground in advancing the production, acquiring Kono and continuing the exciting kimberlite work.

I sincerely believe that at the current share price Stellar is one of the most undervalued companies in the diamond sector. We have production as well as some very high grade kimberlites in our portfolio. This does differentiate us from many of our listed, and private, peer companies. We hope that through further increases in our production profile and generating exciting results from our kimberlites that the next 12 months will be one of significant growth for Stellar.

Stellar TeamFinally, I would like to extend my sincere thanks to the Stellar team and my fellow executives, Chief Operating Officer Rowan Carr and Finance Director Angus Ogilvie. They have delivered significant progress on the ground, often under the most challenging of circumstances. Their loyalty, dedication and unwavering hard work deserve special mention in this statement.

Karl SmithsonChief Executive Officer

Diamond Market Outlook The diamond industry has faced perhaps its most challenging period for the past two decades. As a direct consequence of the world financial crisis rough diamond prices literally went into freefall in October 2008. Manufacturers were sitting on large inventories that they could not sell, and liquidity dried up as banks refused to loan to an already heavily indebted sector of the diamond pipeline.

To counter these negatives De Beers and Rio Tinto significantly reduced mine output and Alrosa sold to the Russian Government and not on the open market, essentially stockpiling their goods. These actions brought about some equilibrium to the supply and demand which stabilised prices and over the subsequent 18 months there has been a strong rebound in rough diamond prices, to what some analysts consider to be pre-crash levels.

It is widely believed that rough diamond production is unlikely to recover to the 160 million carat levels seen before the crash in 2008. RBC Capital Markets forecast long-term rough diamond production to increase from the 2009/2010 levels of just over 120 million

carats to just over 140 million carats, which is still 20 million carats below the output of 2008. The fact is that existing large mines are getting deeper and in some cases like Argyle and Diavik in Australia and Canada respectively they are going underground. No new significant mines have been discovered for the past decade and with the paucity of risk finance going towards exploration this is unlikely to change in the near future. Diamonds essentially are going to become an increasingly rare commodity.

As the world eases out of recession diamond consumption will increase. This will be compounded by high growth areas such as China and India, where retail (diamond jewellery) consumption is forecast to double over the next five years. Clearly with stronger demand for diamonds not being met by increased supply, the outlook for rough diamond prices is good.

RBC Capital Markets forecast a growing supply deficit, which in monetary terms is forecast to exceed $1 billion by 2022. Such a large gap in supply can only lead to significantly increasing rough diamond prices for producers.

Bouro permits

Ouria

Mandala

0km 10kmGUINEA

Licence areaMining licenceKimberlite dykeSample/trench positionRiver

GUINEA

LIBERIA

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Business Review

Mandala

Production at Mandala has exceeded 106,000 carats and generated sales of $3.2 million since mining commenced in mid-2009. A ramp up in production is under way which should result in higher levels of production, reduced unit costs and enhanced margins.

OverviewThe Mandala mine is located in the Macenta and Kerouane districts of south east Guinea. Two adjacent licences comprise the project area, Mandala and Ouria and covers a total of 30km2 of the north flowing Mandala River and its tributaries. These two alluvial licences overlap Stellar’s Bouro kimberlite licences, which no doubt have contributed diamonds into the alluvial system that is now being mined.

Diamond Resource The Mandala mine has an independently confirmed measured and indicated diamond resource of 790,000 carats, though mining has already depleted this by 106,000 carats. The grade of the resource averages 0.41 carats per cubic metre, or 23cpht, which is considered to be a high grade for alluvial resources.

Category CaratsGrade (ct/m3)

Mandala Measured 147,000 0.69Mandala Indicated 529,000 0.37Ouria Inferred 114,000 0.69

Total 790,000 0.41

Mining and ProcessingThe Mandala mine was capitalised in four months from January to April 2009 with production commencing soon after.

The diamonds are hosted in unconsolidated gravels that are overlain by some 4m to 5m of sandy overburden. The mining procedure is simple, with the barren

37-carat fancy yellow diamond


sand being stripped and the diamond bearing gravel extracted by CAT and Volvo excavators. The gravel is then loaded onto haul trucks and carried to the processing plant where it is stockpiled.

The processing is carried out through a 100 ton per hour dense media separation plant (DMS) which has a 1.7mm bottom cut off. After the material has been fed to the plant and passed through the scrubber and prep-screens the +1.7mm to –25mm size fraction goes into the DMS, with three concentrate fractions being passed to the X-Ray flow sort for diamond recovery. The Flowsort tailings are also passed over grease to scavenge any diamonds missed by the first pass.

Diamond recovery is done under strict security conditions, with a Government mines monitor being present at all times. The diamonds are classified, weighed and placed in a safe until exported to Conakry for valuation before royalties are paid and the Kimberley Process Certificate issued prior to final export to Antwerp for sale.

Production and SalesProduction for the nine months to June 2010 was 48,052 carats at an average grade of 33cpht. This compares favourably (+37%), in terms of carats, with the nine months to September 2009 where 34,990 carats were produced at a grade of 47cpht. Production for the most recent quarter has been focused on lower grade areas of the resource due to the rains, however in the dry season the mining will return to the higher grade resource areas.

Mandala Production

Tonnes CaratsGrade (cpht)

Sept 2009 72,918 34,990 47.99June 2010 142,963 48,052 33.61Q3–10 78,202 18,291 23.39

Total 294,083 101,334 34.46

Sales completed for nine months to June 2010 totalled 62,234 carats for revenue of $1,847,689 (for nine months to September 2009 = 12,561 carats for revenue of $563,705). Including Q3–10 sales revenue has reached $2.9 million, with some 7,840 carats in stock.

Mandala Sales

Carats Sales $ $ per carat

Sept 2009 12,561 563,705 44.88June 2010 62,234 1,847,689 29.69Q3–10 18,549 510,207 27.51

Total 93,344 2,921,601 31.30

There has been an increase of 16% in the average sales value achieved between calendar year 2009 and 2010 as a result of the recovery of the rough diamond market.

The diamonds from Mandala are mostly of so-called “Indian goods”, with a relatively low average value. However, the component of quality of the gem stones is high with some good whites and fancies being valued at between $2,000 to $4,000 per carat. The largest gem so far recovered from Mandala was a 37-carat fancy yellow, valued at

$4,000 per carat, which unfortunately broke during the final stages of polishing. However, the stone was insured for its rough valuation price. Stellar will continue to consider polishing larger gem stones in order to capture some of the value add that may be realised from the process.

Increase in Mine and Plant CapacityDuring the period March to July 2010 the Company made the decision to increase the mine and plant capacity at Mandala as well as Bomboko. Equipment and machines that were purchased, shipped and transported to site included CAT and Volvo ADTs, excavators and front end loaders. These initiatives are intended to increase the mining rate, processing capacity and diamond recovery efficiency and security.

Mandala Mine Fleet Mandala Plant

0km 4km

GUINEA

Original licence areaReduced licence area

Castlebay 2 Block 1

MacGregor Crowe

Castlebay 2 Block 2

Castlebay 1

West African Diamonds

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LIBERIA

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Business Review

Bomboko

Bomboko is at the trial mining stage where over 5,100 carats have been produced and sold for approximately $600,000. Work is focused on considerably expanding the 41,000 carat resource so that production rates and revenue can be significantly increased.

OverviewThe Bomboko project is located in the Soumbaya area of south east Guinea in proximity to the Aredor region, which is probably the best known diamond area in the Country due to the recovery of large, high quality stones by previous operators.

Some six contiguous licences covering 28km2 comprise the Bomboko project, two of which are semi-industrial and four of which are exploration licences. These licences cover the upper reaches of the long, easterly flowing Bomboko River, which has been mined by local artisanal diggers in many areas.

The Bomboko project came into the Stellar portfolio through the RTO of West African Diamonds, which had established a camp and plant site and had commenced bulk sampling in March 2009.

Resource PotentialDuring the RTO process an independent geologist visited Bomboko and reviewed all historical and current data. An inferred resource of 41,000 carats was established for a small section of the Bomboko River valley. However, a much large potential resource of 750,000 carats was envisaged within the licence areas. This requires bulk sampling/trial mining in order to better define the resource in terms of grade, carats and value and this is Stellar’s current focus.

Trial Mining and Processing WAD commenced small scale bulk sampling in March 2009 but scaled this up to a trial

Bomboko Gems


mining phase with a larger plant in September of the same year. Stellar assumed operational management of the project post the RTO in late February 2010.

Mining of the Bomboko alluvial gravels essentially follows the same procedure as at Mandala, however, the processing of the gravels differs considerably at this point in time.

Whereas the processing at Mandala is by a fully automated DMS plant at Bomboko it is carried out through a 16-foot pan plant with the bottom cut-off set at 2.5mm. The gravel is loaded into the feed bin where the large boulders are scalped off. The material is then passed through a 6m long scrubber and prep-screen where the –2.5mm and +25mm fractions are sent to slimes and over-size respectively. The +2.5mm to –25mm size fraction is fed to the pan and the concentrate tapped off at regular intervals. Diamonds are recovered from this concentrate by mechanical jigs and grease tables under the observation of Government mines monitors. The diamonds recovered are classified, weighed and placed in a secure safe until exported to Conakry for valuation and final export, to either Antwerp or Johannesburg, for eventual sale once mining royalties (5% of valuation) have been paid.

Stellar is currently improving the plant and recovery components at Bomboko, particularly with the installation of an X-Ray Flow sort machine in Q4–10.

Production and SalesFor the nine month period to June 2010 3,920 carats were produced at an average grade of 3.6cpht. This compares with the nine months to September 2009 of 620 carats at a grade of 5.2cpht, though it is not a valid comparison to make due to the short period of bulk sampling in this earlier period as the project became installed.

Bomboko Production

Tonnes CaratsGrade (cpht)

Sept 2009 11,917 620 5.20June 2010 108,199 3,920 3.62Q3–10 21,227 576 2.72

Total 141,343 5,116 3.62

Sales from the RTO in February to June 2010 comprise 1,665 carats and resulted in revenue of $185,073 at an average price of $111 per carat (prior to the RTO 1,817 carats were sold at $122/ct for $221,075 but not realised as sales under RTO accounting). Since the annual report date a further 576 carats were produced, bringing the total production to date to 5,116 carats. Two sales totalling 1,664 carats were also completed in Q3–10 at an average of $115 per carat, generating revenue of $191,057. The second of these sales actually realised a higher price of $132 per carat, which the Company considers to be an encouraging sign of the diamond quality at Bomboko.

Bomboko Sales

Carats Sales $ $ per carat

Pre RTO 1,817 221,075 121.69June 2010 1,665 185,073 111.15 Q3–10 1,664 191,057 114.82

Total 5,145 597,205 116.06

The diamond product from Bomboko is approximately 50% gem quality and the average stone size around 0.5 carats. The largest diamond recovered during this financial period was a 16 carat gem of cubic shape that sold for $1,000 per carat. Smaller gem diamonds, however, did realise higher prices of up to $1,800 per carat, which demonstrates the high quality of the gem product from this project.

Future PlansGeological mapping has been undertaken over most of the Bomboko River valley and potential resource areas identified for trial mining. A series of spaced mine cuts will be opened and the gravel extracted and processed. The results of this work will provide information on the grade and diamond value distribution across the licence area and a much larger inferred resource than presently identified could then be calculated. Should the results prove encouraging then trial mining will seamlessly evolve into full scale commercial mining in early 2011.

Mining at Bomboko Bomboko Plant

Panguma

Koidu Holdings Tongo

Sierra Diamonds Tongo Licence

SIERRA LEONE

Licence areaKimberlite Dykes

GUINEA

LIBERIA

SIERRALEONE


Business Review

Tongo

The Tongo licence is host to four high grade kimberlite dykes, one of which is now the focus of a 1,000 to 2,000 carat bulk sample. Previous sampling results of this kimberlite gave diamond grades of 90cpht at a current diamond value of $144 per carat.

Summary The Tongo project is located in the east of Sierra Leone and is 100% owned by Stellar Diamonds’ subsidiary company Sierra Diamonds Limited.

The Tongo property comprises a single Exploration Licence (EXPL05/07), covering 33km2. The EXPL lies on the eastern extension of the diamondiferous Tongo dykes in the heart of the well-known Tongo Diamondfields. To the southwest, Koidu Holdings owns the adjacent property and has bulk sampled some dykes yielding grades of between 200 and 300cpht.

Until February 2008 BHP Billiton was Stellar’s funding joint venture partner on this project and earned a 51% interest through spending $3.4million. BHP Billiton decided that the tonnage potential of the Tongo property was too small and withdrew from the joint venture and returned its 51% of the project to Stellar in return for nil consideration.

Previous Exploration on TongoStellar has delineated four diamondiferous kimberlite dykes, with thicknesses up to 1m, through mapping, sampling, ground geophysical surveys and drilling. These are designated Dykes 1 to 4 going from south to north. Dyke 1 has a mapped length in excess of 2.5km and the potential for further extensions on all dykes is not unrealistic to assume.

Tongo Kimberlite Dyke

5tph Plant at Tongo


Work conducted by Stellar to date includes the collection and processing of some 24 mini-bulk samples of up to one tonne in the early exploration phase. These samples gave very encouraging results in that diamonds were present in most samples and grades of up to 385 cpht were calculated.

Following on from the encouraging grab sample results it was decided to undertake a microdiamond analysis of the kimberlite dykes and use these results to forecast the macrodiamond grade with more accuracy. Some six 200kg samples for microdiamond analysis were collected from various localities of the kimberlite. These samples were consigned to SGS Lakefield in Johannesburg for acid digestion and diamond recovery. The results of the microdiamond sampling were very encouraging, with the presence of commercial sized (+0.85mm) diamonds recovered from each sample being regarded as significant.

Grade ModellingMicrodiamond grade modelling by an independent consultant demonstrated grade potential of 500 carats per hundred tons from some samples. This encouraged

Stellar to undertake a mini-bulk sampling exercise on two dykes, designated Dyke 1 and Dyke 4.

Two surface samples from Dyke 1 and Dyke 4 were excavated by hand from depths of around 10m. Dyke 1 comprised very competent and fresh kimberlite with a width of between 70cm and 100cm. Dyke 4, however, was very decomposed and as a result was more difficult to collect. Due to the impact of the rainy season no samples were collected from Dykes 2 and 3.

Both mini-bulk samples were initially stockpiled and then trucked to the diamond processing plant at Kono where they were treated separately, giving grades of 90cpht and 100cpht for Dykes 1 and 4 respectively. Encouragingly of the 130 carats recovered from Dyke 1, some eight stones were larger than one carat, with the largest stone weighing 4.8 carats.

Diamond ValuationThe diamonds recovered from Dykes 1 and 4 were consigned to the Sierra Leone Gold and Diamond Office in Freetown (“GDDO”), where they were weighed, sorted and valued prior to the issuing of

the Kimberley Process certificate and then exported to Antwerp. All of the diamonds were graded by the GDDO as gem quality and valued at an average of $189 per carat (November 2008) prior to export to Antwerp. The Dyke 1 stones were recently revalued in Antwerp at $144 per carat.

Bulk SamplingDue to the good results previously generated Stellar has recently embarked on a 1,000 to 2,000 carat bulk sample from the central portion of Dyke 1 where previous results yielded a grade of approximately 90cpht and diamonds valued currently at $144 per carat. The objective is to obtain with more confidence the commercial diamond grade and diamond value from this high interest kimberlite.

A DMS sampling plant was purchased from former joint venture partner Trans Hex in Liberia and has been brought into the Tongo project site and is being erected to process the bulk sample.

Collection of the bulk sampling from the surface is ongoing and should be complete, with full results, by the end of Q4–10. These results will determine the next phase(s) of work which are likely to comprise shaft sinking and underground trial mining, similar to that conducted at Kono, during the course of 2011.

Kimberlite Dry TonsNo.

Diamonds CaratsGrade (cpht)

Stones >1ct

Largest stone

Dyke 1 144.45 1,455 129.70 89.79 8 4.8 ctDyke 4 53.82 883 53.71 99.80 2 1.9 ct

Tongo Diamonds Bulk Sampling at Tongo

Yengema Expl 04/05

Koidu pipe 3

283 000960 000

284 500953 284

283 700947 300

Koidu pipe 2

Koidu pipe 1

Njaiama Expl 03/05

Bardu shaft

Pol-K shaft

0km 5km

Licence areaKimberliteKimberlite dykeShafts

GUINEA

LIBERIA

SIERRALEONE


Business Review

Kono

As part of Stellar’s strategy of positioning for future production growth, the Company took the decision to purchase the 51% equity held by joint venture partner Petra Diamonds. This was completed in April 2010 by awarding Petra 4,500,000 shares in Stellar at a price of 20 pence per share, valuing the acquisition at £900,000. This represents a very good value for Stellar as the Kono project was valued at the same time by RBC at £7.7 million ($12.2 million).

The Kono trial mine was placed on care and maintenance in May 2009 as a result of the financial crisis and crash in diamond prices. Stellar is currently considering options to resume the trial mining. Although there was no development activity this past 12 months there follows a summary of work previously undertaken so shareholders have a complete review and update of the status of this key project.

Summary of Previous ProgressThe Kono properties are situated within the renowned Koidu diamond mining district in eastern Sierra Leone. Stellar commenced exploration on the 200km2 licence areas in 2002 and discovered a number of high-grade diamondiferous kimberlite dykes. Some of these dykes represent the on-strike extensions of the Koidu Holdings Mine, which hosts the largest established hard-rock diamond resources in West Africa, where an indicated and inferred diamond resource of over 2 million carats has been established. The most recent public data on production by Koidu Holdings shows that Pipe 1 grades at 45cpht with a diamond value of $231 per carat, whereas Pipe 2 grades at 26cpht with a diamond value of $187 per carat.

In 2005 Crown Diamonds joint ventured Stellar Diamonds and invested $3 million to earn a 51% stake in the project. When Petra Diamonds acquired Crown Diamonds then Petra became Stellar’s partner on the project. Petra’s 51% equity was acquired by Stellar in April 2010, so the Company now has full ownership of this advanced, development project.

Pol-K Shaft

Pol-K Mine Stope

ATLANTICOCEAN

SIERRALEONE

LIBERIA

GUINEA

Freetown

Makeni

Koidu

Tongo

Bo

Kenema

Zimmi

Sulma

Kono

Kimberlite

Development

Exploration

Tongo


Some $18 million has been spent on the project to date by the partners and is therefore well capitalised. A 75 tonne per hour DMS plant and associated surface and underground infrastructure is in place. Some six shafts have been sunk into different kimberlites where samples were recovered for diamond testing. The trial mining became focused on two of these shafts, Pol-K and Bardu where development drives and trial stope mining have been undertaken. Many more kimberlites still remain to be tested.

Pol-K ShaftAt Pol-K the first trial mining stopes have been opened at the 65m level below surface (Level 1). The shaft is currently at 85m below surface and at a depth of 95m the second level of stope faces are planned to be developed. At the 30m level an advance drive was opened up and the dyke traced for 173m in the south west direction and 94m in the north east direction. The kimberlite keeps a relatively consistent width of between 60cm and 70cm.

Based on the presence of artisanal diamond mining, surface mapping and IKONOS satellite imagery the Pol-K kimberlite is estimated to have a strike length in excess of 5km, so there is considerable scope for the sinking of additional shafts.

The in-situ grade of Pol-K has consistently been around 65cpht. Taking into consideration the mining dilution the “run of mine” grade has ranged between 30cpht and 40cpht. The largest diamonds produced from Pol-K weigh 11.95, 11.45 and 10.55 carats.

Mining of the south west stope on Level 1 has been successful in confirming the continuity of the kimberlite and its attitude in the third dimension. The kimberlite breaks cleanly from the stope face so dilution has been well controlled.

The north east stope, however, experienced stability problems due to the kimberlite being relatively more decomposed than the south west and a decision was taken to close this area for safety reasons. With depth the kimberlite and host rock will be more competent and stability should improve as a result.

The knowledge gained from this first trial stope mining has been invaluable to the future planning of the project. Information has been gained on the behaviour of the kimberlite underground, the costs of development and mining, the achievable rate of mining advance as well as health and safety issues.

Bardu ShaftThe Bardu shaft is currently at a depth of 45m. The width of the fissure is relatively consistent at 90cm to 100cm, though at 100m to the south west of the shaft the kimberlite opened to a width of 3m representing a localised swell. This narrowed to 1.5m at 115m from the shaft where the current development drive reached.

The grade of Bardu ran at approximately 65cpht to 75cpht. However, the swell has yielded significantly higher grades at 140cpht with better quality diamonds being clearly evident. This is a new kimberlite zone which requires further development to assess its

continuity. The largest diamonds from Bardu to date weigh 4.4, 2.90 and 2.65 carats.

Diamond Production to DateA total of 4,213 carats of diamonds (+1mm) have been produced (as at 30 April 2010). Of these, Pol-K has yielded 3,209 carats and Bardu 867 carats. The balance of diamonds came from other kimberlites that were tested, but have not yet been developed further.

Diamond SalesIn September 2008 the first, small parcel of 810 carats from Pol-K and 253 carats from Bardu were sold at average prices of $152 and $52 per carat respectively. Thereafter the diamond market crashed but various sales were then made before the project was placed on care and maintenance. These are summarised below:

Pol-K $152 per carat (September 2008)$92 per carat (March 2009)$66 per carat (April 2009)$88 per carat (June 2009)

Bardu $52 per carat (September 2008)$37 per carat (March 2009)$110 per carat (April 2009)$61 per carat (June 2009)

Considering the rebound in rough diamond prices since the trial mine was placed on care and maintenance, it is clear that prices are likely to be closer to the September 2008 sales figures. This justifies Stellar into considering the options to resume the underground development of Pol-K and Bardu.

Pol-K Diamonds

Kono Mine and Plant Site

ATLANTICOCEAN

SIERRALEONE

LIBERIA

GUINEA

MALI

IVORYCOAST

Conakry

KindiaMamou

Labe

Faranah

Kissidougou

Guedkedou

Nzerekore

Macenta

Kamsar

KankanBomboko

Mandala

Bouro

Droujba

Ouria

Kimberlite

Mining

Exploration


Business Review

Droujba

The Droujba pipe is an undeveloped kimberlite that has previously reported diamond grades of up to 200cpht. The pipe is scheduled to be drilled and bulk sampled by Stellar in order to define the diamond grade and value of this potential key value driver of the Company.

SummaryThe Droujba project area is located some 60kms to the south east of the Mandala mine. Through the RTO of West African Diamonds, Stellar was able to consolidate a series of licences that are located over the high-grade Droujba pipe and surrounding area.

Both Stellar and West African Diamonds have conducted considerable exploration work, including stream and soil sampling, ground geophysical surveys, limited drilling and bulk sampling. From this work it is clear that kimberlites, other than the known Droujba pipe and associated diamondiferous dyke swarm, remain to be discovered within the various licence areas.

Droujba PipeThis Droujba kimberlite pipe was discovered in the early 1960’s by the Russian Aid Mission. It was mapped and drilled and determined to be approximately 120m x 80m in size, or 1 hectare. The Russians mined the kimberlite down to a depth of 20m before the kimberlite became too hard to mine and process. Diamond grades as high as 200cpht are reported by the Russians, though there is no information on diamond quality. However, a 270-carat

stone is reported to have been discovered in the alluvial gravels near to the pipe.

Ground Geophysical SurveysA series of ground magnetic, electro-magnetic and gravity surveys have previously been undertaken by Stellar. These surveys suggest that the size of the Droujba pipe could be larger than originally mapped by the Russian explorers, with the potential for a “blind” extension to the south west of the known pipe.

Drill ProgrammeStellar is planning a 3,000m drilling programme over the Droujba pipe, scheduled to commence in Q4–10. The objective is to determine the morphology and potential tonnage to a depth of at least 150m. In addition, kimberlite drill core sample will be collected for microdiamond analysis and macrodiamond grade forecasting.

The management of Stellar considers that Droujba could be a key value driver for the Company. The pipe is clearly high grade and remains undeveloped and being at surface represents a considerable value opportunity to the Company.

Senior Geologist Abdulaye Diallo with Droujba Kimberlite Core

Drilling at Droujba

5 6 7 8 9

Bouro permit

0km 5km

Mandala licence

Buoro North Dyke

Quria licence Licence areaMining licenceKimberlite dyke


Bouro

The Bouro North is potentially one of the highest grade kimberlites in the world. Historical data suggests grades of up to 500cpht for this 5km long kimberlite dyke, which is located a mere 1km from the Mandala processing plant.

OverviewThe Bouro project comprises three licences covering 198km2 that are located over and adjacent to the Mandala Mine. These Bouro permits were awarded for primary (kimberlite) sources of diamond whereas the Mandala permits were awarded for alluvial diamonds.

Bouro Kimberlite DykesThe four known Bouro kimberlites were discovered in the 1960’s by the Russian Aid Mission. Testing by the Russians and subsequently by De Beers and Stellar

confirm the high grade nature of the Bouro North Dyke. This dyke is located approximately 1km from the Mandala plant. It has previously been mapped and drilled over a distance of 5km and sampled in numerous different areas and tested for diamond content. The kimberlite is between 30cm to 200cm in width based on observations from trenches and local artisanal diggings.

Stellar acquired the De Beers database for the Bouro permits in 2005 and has since conducted various stages of field

Bouro North Bouro Extreme North Bouro Central Bouro South

Sieve Class (mm2 mesh)Diamonds

No.

Diamonds Weight

(cts)Diamonds

No.

Diamonds Weight

(cts)Diamonds

No.

Diamonds Weight

(cts)Diamonds

No.

Diamonds Weight

(cts)

2.0 56 3.8036125 7 0.5048225 0 0 0 01.0 150 2.582460 16 0.2933995 3 0.0550290 5 0.08439000.5 379 2.1359370 47 0.2576270 1 0.0053840 4 0.02131350.3 666 1.2071495 79 0.1450245 3 0.0062305 13 0.02683350.212 824 0.4857965 107 0.0640685 10 0.0057800 32 0.01863300.150 934 0.1760155 110 0.0212700 12 0.0020915 42 0.00734800.104 842 0.0511585 88 0.0052790 5 0.0003320 51 0.00314350.074 611 0.0116660 28 0.0006140 3 0.0000460 15 0.0003410–0.074 179 0.0011280 8 0.0000540 1 0.0000010 2 0.0000180

Totals 4,641 10.4548915 490 1.2921590 38 0.0748940 164 0.1620205

Total weight processed 1,920kg 620kg 627kg 560kg

No. samples 11 3 3 3

work and analysis of the database. De Beers collected a series of samples across the lengths of the four Bouro dykes and submitted these for microdiamond analysis. The most interesting results were recovered from the 5km long Bouro North Dyke, where samples weighing a total of 1,900kg yielded over 4,600 diamonds weighing 10.43 carats.

The De Beers’ microdiamond data was reinterpreted by an independent consultant to Stellar who stated: “The conclusions that can be drawn from the micro diamond results is that there is a strong indication that Bouro North is a high grade kimberlite with a grade of 400 cpht or higher”.

Future PlansStellar has conducted only limited analysis of the Bouro permits during this past financial year as priorities were focused

on the Mandala mine. However, the Bouro North Dyke is considered by the Company to be a key asset that can deliver considerable value. The management envisages that the Bouro North Dyke can represent a long-term continuity of mining at the Mandala project area due to the proximity of the kimberlite to the alluvial resource and processing plant.

The Company will schedule a bulk sample of the Bouro North Dyke in order to test the diamond grade and value of the kimberlite. Processing via the Mandala plant will be attempted if the kimberlite is sufficiently decomposed. However, if the kimberlite is hard then it will require crushing and this could delay the processing of the sample into 2011.

20 40 60 80 100

Conakry

Droujba

Mandala

Bomboko

Tongo

Kono

Staff numbers

2010NationalsExpatriates


Business Review

Corporate Social Responsibility

Over the years of exploring and developing projects in West Africa, Stellar has carefully considered how best to contribute to the general social upliftment of its staff, local communities and other general stake holders. As an exploration company on restricted budgets one of the main challenges has been managing the expectations and demands presented to the Company, often on a daily basis. As some projects moved into production, or were awarded larger budgets, then Stellar has been able to more widely implement a number of socio-economic initiatives in its areas of work.

StaffStellar has a policy of employing and training locally as much as possible. Although expatriate workers are often an essential part of the development of a project, particularly those in production, the numbers are kept to a minimum. Skills transfer from experienced expatriates to local nationals is considered critical to the development of a competent, committed and cost effective work force. Where two geologists showed particular promise and a flair for higher education Stellar has funded their Masters Degrees in exploration geology, at Rhodes University in South Africa, and geographical information systems, in Holland.

Road and Bridge ConstructionIt has often been necessary to significantly upgrade the road and bridge infrastructure to make projects accessible. This has led to improvement of the transport network such that remote villages have become connected to national routes, access by light vehicles has become possible and trade and commerce has increased as a result. In Guinea and Sierra Leone some 120km and 25km of road, as well as numerous bridges, have been upgraded and built by Stellar.

School Construction and RefurbishmentBefore Stellar withdrew from Liberia the Weasua local community requested that the Company assist with the construction of a secondary school (the old one being destroyed in the war). Although Stellar was only at the exploration stage, the Company agreed to construct a school and utilised all local labour and materials (as far

Weasua School Opening Bridge Construction Project at Mandala


as possible) thus giving added secondary economic benefits to the community. In Sierra Leone the Company has also assisted in the rebuilding of five community based schools, as well as currently developing a pre-school and playground area.

In Guinea the NGO World Education has conducted a base line study in the educational needs in the two communities closest to the Mandala mine area, after being commissioned by the Company prior to mining commencing.

Storm ReliefOn two occasions the Company has made financial donations to the Storm Disaster Management Committee established Chiefdom authorities in

Kono, Sierra Leone, following destructive storms. These storms left thousands homeless without food and shelter and the donations went some way to alleviating the situation at the time.

Small Business Support and DevelopmentStellar recognises the fact that other than direct employment, opportunities exist whereby “secondary industry” can be supported and developed through utilising and developing small business enterprise in the communities in which the Company is present. For example, in Kono and Mandala support programmes have included:

Tyre repair and maintenance•Rewinding of electrical motors•Timber supply for the •underground mining support

Metal and Blacksmith engineering work•Support of local women agricultural •networks (supply fresh vegetables)Support (financial and structural) for •local food providers at the mine sitesDonation of redundant equipment •and scrap metal to community empowered bodies

HIV and Aids Awareness CampaignIn Kono the Company developed an HIV/AIDS awareness which involved the workforce via workshops in coordination with the Department of Health.

Water Well MaintenanceThere has been an initiative of clean water campaign in Kono whereby the Company has rehabilitation and cleaning water well points, providing clean water to over 180 persons in the environment. In Mandala a number of water wells have also been constructed for the local communities of the villages adjacent to the mines.

Football SponsorshipsStellar has sponsored numerous football games involving teams from the mines, projects and communities. Naturally these events are well attended and provide welcome relief and entertainment to many people, not only those participating in the game.

Before and After of the School Construction Project at Weasua

Road Construction at Mandala


Governance

Board of Directors

Peter DaresburyNon-Executive Chairman (57)Peter Daresbury has held numerous executive positions, including CEO from 1997 to 2000 of the Greenalls Group, which had an annual turnover of £983 million and a FTSE market capitalisation of £1.7 billion. In 2000, the company was re-named The De Vere Group plc, and Peter Daresbury became Non-Executive Chairman until he stood down in 2006. Peter Daresbury has also served as Non-Executive Chairman of Kazakhgold Group Ltd from 2005 to 2007 and Executive Chairman of Highland Gold from 2002 to 2004. Peter is currently Chairman of AIM quoted Nasstar plc, Aintree Racecourse Company Ltd, Mallett plc and North West Business Finance Ltd, a new Private Venture Capital and Loan Fund (VCLF) for the Northwest.

Current directorships include Sumatra Copper and Gold Ltd, and in addition, since 2005, Peter sits on the Fleming Family and Partners Private Equity Committee.

Karl SmithsonChief Executive Officer (44)Karl Smithson (44) was appointed as Stellar’s Chief Executive Officer with effect from 1 January 2007, having built the portfolio of Stellar’s assets within Mano River Resources since 2000. He led the listing of Stellar on AIM through a reverse takeover of West African Diamonds and has over the years successfully raised over £12million in equity funding for Stellar.

Karl has 22 years of resource sector experience gained with a number of companies in senior management positions, including De Beers (10 years), SouthernEra Diamonds (two years) and African Aura/Stellar (10 years). Karl’s working career has been focused on diamond exploration in Africa and he has been responsible for a number of new diamond discoveries in Botswana, Zimbabwe, Sierra Leone and Liberia.

Karl is a geology graduate of Kingston University in the UK. He completed his MBA in 2006 at the Graduate School of Business in Cape Town, South Africa and was awarded with the Old Mutual Gold Medal.

Angus OgilvieFinancial Director (aged 51)Angus Ogilvie is an Associate of the Chartered Institute of Management Accountants (London, UK) and has a Bachelor of Accounting Science degree (BCompt) from the University of South Africa. Angus worked in Durban, South Africa for seven years with Deloitte, Dunlop and Wilkinson Sword to the Financial Controller level. From 1987 to 1997 Angus worked in Botswana for De Beers’ Orapa & Letlhakane mines and Potash as a mine accountant. Angus emigrated to the UK in 1997 and has worked as a stockbroker for Edward Jones and in senior Financial Manager roles for companies including Elsevier, Beko and Siemens.


James AH CampbellNon-Executive Director (46)James is the Managing Director of African Diamonds plc, and a Director of Bugeco sa, Swala Resources plc, Boteti Mining Pty Ltd as well as Stellar Diamonds plc. Previously, he worked for De Beers for over 20 years, culminating in being General Manager responsible for resource delivery in the Global Mining and Exploration group.

During his career with De Beers he also led small-scale mine development as well as being involved in corporate management and being Nicky Oppenheimer’s Personal Assistant.

James holds a degree in Mining & Exploration Geology from the Royal School of Mines (Imperial College, London University) and an MBA with distinction from Durham University. James is a Fellow of the Institute of Mining, Metallurgy & Materials, Chartered Engineer (UK), Chartered Scientist (UK), a Professional Natural Scientist (RSA) and a member of the Institute of Directors of South Africa.

As part of his social commitment to South Africa, he acts as vice chairman of the South African Ballet Theatre and acting chairman of Common Purpose SA. He is also a licensed Lay Minister in the Anglican Church of South Africa and an accomplished Ballroom and Latin American dancer. James lives in Irene with his wife and two university going daughters.

Luis Guilherme Caprita da SilvaNon-Executive Director (39)Luis, took over the role of President & Chief Executive of MRRI (now African Aura) in October 2007 having joined in February of the same year as Chief Financial Officer. He gained his extensive international experience with the multinationals Lafarge S.A. and Blue Circle Industries Plc as well as Stevin Rock, formerly of the Dragomar Group. His career has taken him across the world in an operational, technical and corporate capacity. Most recently as a Director of Group Audit, Luis was heading Lafarge’s Asia Pacific internal audit department based in Malaysia having previously been posted to Paris, France, with the same company.

Luis is a graduate Mining Engineer from Camborne School of Mines and read for his MBA at the Cranfield School of Management.

Steven PoultonNon-Executive Director (35)Steven Poulton holds an honours degree in Geology from the University of Southampton (1997) and a masters degree in Mining Geology from the Camborne School of Mines (1998). In addition to Stellar, he is a director of African Aura Mining Inc (AIM: AAAM/TSX-V: AUR) a company formed in 2009 by the merger of Mano River Resources with African Aura Resources (a company he founded in 2004). He is the Chief Executive Officer and co-founder (2007) of Altus Strategies Ltd, a private natural resource investment group He is a Director of its subsidiaries ALTUS Capital Ltd, the investment manager of ALTUS Resource Capital Ltd (LSE:ARCL) and Asterion AV Ltd a special situation resource investor and new business incubator. Steven has a track record in the resource sector at identifying opportunities, negotiating agreements, raising venture finance and building talented management teams. He is a fellow of the Geological Society of London and a fellow of the Institute of Materials, Minerals and Mining.


Governance

The Directors submit their report and the consolidated financial statements for Stellar Diamonds plc (the “Company” or “Stellar” or on a consolidated basis the “Group), for the nine months ended 30 June 2010.

Principal activities, business review and future developmentsThe principal activity of the Company is that of diamond production and development.

On 22 February 2010, Stellar Diamonds Limited completed its reverse acquisition of West African Diamonds plc (WAD) in a share for share exchange. WAD changed its name to Stellar Diamonds plc and was readmitted to AIM.

Under the terms of the reverse acquisition agreement, WAD agreed to acquire the entire issued share capital of Stellar Diamonds Limited for a consideration equating to approximately three times the value of WAD, represented by an approximate 75:25 split of the share capital in the enlarged group prior to the issue of Placing shares – 75% being attributable to consideration shares to be allotted to Stellar Diamonds Limited shareholders and 25% being attributable to ordinary shares held by WAD shareholders.

A total of 53,248,164 consideration shares were issued and allotted to the shareholders of Stellar Diamonds Limited on the basis of 1.005 new ordinary shares in Stellar Diamonds plc for each Stellar Diamonds Limited share. The fair value attributed to the consideration shares is $16.6 million based on the market price of the Placing shares of 20p per share converted to 31 cents per share (at a rate of 1.56155).

The combination has been accounted for as a reverse acquisition as if Stellar Diamonds Limited had issued new shares in exchange for WAD’s net assets. Although this report and the consolidated financial statements have been issued in the name of Stellar Diamonds plc, the legal parent, the Group’s activity is in substance a continuation of that of the legal subsidiary, Stellar Diamonds Limited, because after the transaction the former Board of Stellar Diamonds Limited were deemed to have control of the Group and of the legal parent. The accounting for this transaction is disclosed in note 3 of the consolidated financial statements.

On 22 February 2010 the enlarged group raised $7,356,873, net of share issue costs of $380,023, in new funds (the “Placing”).

The Group is presenting consolidated financial statements as of and for the nine months ended 30 June 2010. The comparative period presented is audited financial statements as of and for the nine months period ended 30 September 2009. The results and net assets of WAD are consolidated from 22 February 2010.

No dividends have been paid or are proposed for the period (2009: nil).

A detailed review of the significant developments and operating results of the Group, as well as the business environment, future prospects and the main trends and factors that are likely to affect the future development, performance and position of the Group’s business are contained in the Chairman’s Statement.

Subsequent eventsOn 10 August 2010, the Company announced the grant of 2,950,000 share options at an exercise price of 11p per ordinary share exercisable for a period of five years from the date of grant. The Company also announced the issue of 72,727 new ordinary shares of 5p each issued to the Company’s Chief Operating Officer as a performance related payment.

On 12 October 2010, the Company placed 38 million new ordinary shares of 5p each with institutional and other investors at par value to raise gross proceeds of £1.9 million. Following this Placing the enlarged issued share capital is 139,266,659 ordinary shares and the Placing Shares represented approximately 27.3% of the enlarged issued share capital.

The Company also granted warrants to each placee on the basis of one warrant for every two Placing Shares subscribed. Each Placing Warrant entitles the holder to subscribe for one new Stellar ordinary share at a price of 12p each for a period of 18 months. The total number of Placing Warrants, together with those issued in lieu of fees, is 23,064,383. The Placing Warrants are not listed.

Going concernAs discussed in the Chairman’s Statement, both the Mandala and Bomboko mining operations are being upgraded in terms of mining and processing capacity such that they would be able to deliver modest cash flow. The £1.9 million ($3.0 million) financing in October 2010 and the anticipated receipt of the amount receivable from African Aura Mining Inc. (note 12) will enable the Company to meet its working capital and contractual commitments, as disclosed in notes 9 and 10, specifically to accelerate exploration and drilling work at the Droujba kimberlite pipe in Guinea and to complete the Tongo kimberlite dyke bulk sampling programme in Sierra Leone.

The Company’s forecasts and projections, taking account of reasonably possible changes in trading performance, show that the Company should be able to operate within the resources available following the October 2010 financing. As a result, the directors have formed a judgement at the time of approving the consolidated financial statements, that there is reasonable expectation that the Group has adequate resources to continue in operational existence for the foreseeable future. For this reason the Directors continue to adopt the going concern basis in preparing these financial statements.

Directors’ Report


DirectorsA General Meeting on 19 February 2010 approved the reverse acquisition and the appointment of a new Board of Directors effective from 22 February 2010. James Campbell resigned as Executive Deputy Chairman and was appointed as a Non-Executive Director in the new Board.

The Directors of WAD who resigned on 22 February 2010 were:

John Teeling Non-Executive ChairmanJames Campbell Executive Deputy Chairman Alex Van Zyl Executive Technical DirectorJames Finn Non-Executive Director and Company SecretaryPaul Nel Executive Director (appointed 7 August 2009)

The Directors of the enlarged company appointed on 22 February 2010 and thereafter, except as disclosed otherwise, are:

Lord Daresbury Non-Executive ChairmanN. Karl Smithson Chief Executive Officer Angus Ogilvie Financial Director & Company SecretaryJames Campbell Non-Executive DirectorLuis Guilherme Cabrita da Silva Non-Executive DirectorSteven J. Poulton Non-Executive DirectorPaul Rankine Non-Executive Director (resigned 12 October 2010)

Directors’ interestsThe Directors’ interests in the ordinary shares of the Company as of 30 June 2010 are disclosed in note 19 of the consolidated financial statements.

Substantial shareholdingsAt 31 October 2010, so far as the Company is aware, the only holdings of 3% or more in the issued share capital are:

Mano Diamonds Limited 22.1%Goldman Sachs Securities 16.8%Chase Nominees Limited 9.0%Lynchwood Nominees Limited 3.2%Petra Diamonds Limited 3.2%

Supplier payment policyThe Group’s policy is to settle terms of payment with suppliers when agreeing the terms of each transaction, ensure that suppliers are made aware of the terms of payment and abide by the terms of payment. Trade creditors of the Group at 30 June 2010 were equivalent to 17 (30 September 2009: 2) days purchases.

AuditorsTo the best of the Directors’ knowledge and belief, and having made appropriate enquiries of other officers of the Company, all information relevant to enable the auditors to provide their opinion on the financial statements has been provided. The Directors have taken all reasonable steps in order to ensure their awareness of any relevant audit information and to establish that the Company’s auditors are aware of any such information. This confirmation is given and should be interpreted in accordance with the provisions of s418 of the Companies Act, 2006.

A resolution to reappoint the auditors, Deloitte & Touche, will be proposed at the Annual General Meeting.

By order of the Board

N. Karl Smithson Lord Daresbury

17 November 2010


Governance

The Directors are responsible for preparing the Annual Report and the financial statements in accordance with laws and regulations.

Company law requires the Directors to prepare financial statements for each financial year. Under that law the Directors have elected to prepare the financial statements in accordance with International Financial Reporting Standards (IFRSs) as adopted by the European Union. Under company law the Directors must not approve the financial statements unless they are satisfied that they give a true and fair view of the state of affairs of the Company and of the profit or loss of the Company for that period. In preparing these financial statements, International Accounting Standard 1 requires that Directors:

properly select and apply accounting policies;•present information, including accounting policies, in a manner that provides relevant, reliable, comparable and understandable •information;provide additional disclosures when compliance with the specific requirements in IFRS’s are insufficient to enable users to understand •the impact of particular transactions, other events and conditions on the entity’s financial position and financial performance; andmake an assessment of the Company’s ability to continue as a going concern.•

The Directors are responsible for keeping adequate accounting records that are sufficient to show and explain the Company’s transactions and disclose with reasonable accuracy at any time the financial position of the Company and enable them to ensure that the financial statements comply with the Companies Act 2006. They are also responsible for safeguarding the assets of the Company and hence for taking reasonable steps for the prevention and detection of fraud and other irregularities.

The Directors are responsible for the maintenance and integrity of the corporate and financial information included on the Company website. Legislation in the United Kingdom governing the preparation and dissemination of financial statements may differ from legislation in other jurisdictions.

Statement of Directors’ responsibilities


We have audited the group financial statements of Stellar Diamonds plc for the nine month period ended 30 June 2010 which comprise the consolidated statement of comprehensive income, the consolidated statement of financial position, the consolidated statement of changes in equity, the consolidated statement of cash flows and the related notes 1 to 21 and the parent company financial statements of Stellar Diamond plc for the fourteen month period ended 30 June 2010 which comprise the company statement of financial position, the company statement of changes in equity, the company statement of cash flows and the related notes 1 to 11. The financial reporting framework that has been applied in their preparation is applicable law and International Financial Reporting Standards (IFRSs) as adopted by the European Union and as applied in accordance with the provisions of the Companies Act 2006.

This report is made solely to the company’s members, as a body, in accordance with Chapter 3 of Part 16 of the Companies Act 2006. Our audit work has been undertaken so that we might state to the company’s members those matters we are required to state to them in an auditors’ report and for no other purpose. To the fullest extent permitted by law, we do not accept or assume responsibility to anyone other than the company and the company’s members as a body, for our audit work, for this report, or for the opinions we have formed.

Respective responsibilities of directors and auditorsAs explained more fully in the Statement of Directors’ Responsibilities, the directors are responsible for the preparation of the financial statements and for being satisfied that they give a true and fair view. Our responsibility is to audit the financial statements in accordance with applicable law and International Standards on Auditing (UK and Ireland). Those standards require us to comply with the Auditing Practices Board’s (APB’s) Ethical Standards for Auditors.

Scope of the audit of the financial statementsAn audit involves obtaining evidence about the amounts and disclosures in the financial statements sufficient to give reasonable assurance that the financial statements are free from material misstatement, whether caused by fraud or error. This includes an assessment of: whether the accounting policies are appropriate to the group’s and the parent company’s circumstances and have been consistently applied and adequately disclosed; the reasonableness of significant accounting estimates made by the directors; and the overall presentation of the financial statements.

Opinion on financial statementsIn our opinion:

the financial statements give a true and fair view of the state of the group’s and the parent company’s affairs as at 30 June 2010 and •of the group’s loss for the nine months then ended;the group financial statements have been properly prepared in accordance with IFRSs as adopted by the European Union;•the parent company financial statements have been properly prepared in accordance with IFRSs as adopted by the European Union •and as applied in accordance with the provisions of the Companies Act 2006; andthe financial statements have been prepared in accordance with the requirements of the Companies Act 2006.•

Emphasis of MatterWithout qualifying our opinion, we draw your attention to notes 9 and 10 to the group financial statements and notes 3, 4 and 5 to the parent company financial statements concerning the valuation of intangible and tangible assets, the recoverability of amounts due from subsidiaries and the recoverability of investments in subsidiaries. The realisation of intangible assets of $4,943,544 and tangible assets of $17,057,939 included in the consolidated statement of financial position and intangible assets of $1,302,561, investment in subsidiaries of $4,157,484 and amounts due from subsidiaries of $7,825,153 included in the company statement of financial position are dependent on the discovery and successful development of economic mineral reserves. The financial statements do not include any adjustments relating to these uncertainties and the ultimate outcome cannot, at present, be determined.

Separate opinion in relation to IFRSs as issued by the IASBAs explained in note 1 to the financial statements, the group in addition to complying with its legal obligation to apply IFRSs as adopted by the European Union, has also applied IFRSs as issued by the International Accounting Standards Board (IASB). In our opinion the group financial statements comply with IFRSs as issued by the IASB.

Opinion on other matter prescribed by the Companies Act 2006In our opinion the information given in the Directors’ Report for the financial year for which the financial statements are prepared is consistent with the financial statements.

Matters on which we are required to report by exceptionWe have nothing to report in respect of the following matters where the Companies Act 2006 requires us to report to you if, in our opinion:

adequate accounting records have not been kept by the parent company, or returns adequate for our audit have not been received •from branches not visited by us; orthe parent company financial statements are not in agreement with the accounting records and returns; or•certain disclosures of directors’ remuneration specified by law are not made; or•we have not received all the information and explanations we require for our audit.•

Kevin Sheehan (Senior Statutory Auditor)for and on behalf of Deloitte & ToucheChartered Accountants and Statutory Auditors Dublin17 November 2010

Independent auditor’s report to the shareholders of Stellar Diamonds plc

Financial Statements



Notes

Nine months ended

30 June 2010

Nine months ended

30 September 2009

Revenue 4 2,032,762 563,705Cost of sales (4,233,730) (1,403,380)

Gross loss (2,200,968) (839,675)

Administrative expenses– Impairment of intangible assets 9 – (6,946,107)– Other administrative expenses (3,201,700) (1,757,267)

(3,201,700) (8,703,374)

Finance income 317 317Finance costs (168,080) (98,295)

Loss before tax (5,570,431) (9,641,027)Income tax expense 7 – –

Loss after tax attributable to equity holders of the parent 5 (5,570,431) (9,641,027)

Total comprehensive income for the period attributable to equity holders of the parent (5,570,431) (9,641,027)

Weighted average number of shares 64,451,236 49,761,490

Basic and diluted loss per share 8 (0.09) (0.19)

Consolidated statement of comprehensive incomeFor the nine months ended 30 June 2010(Stated in U.S. dollars)


Notes30 June

201030 September

2009

AssetsNon-current assetsIntangible assets 9 4,943,544 2,781,108Property, plant and equipment 10 17,057,939 10,973,580

Total non-current assets 22,001,483 13,754,688

Current assetsInventories 11 357,499 501,341Trade and other receivables 12 841,868 488,402Cash and cash equivalents 689,650 418,981

Total current assets 1,889,017 1,408,724

Total assets 23,890,500 15,163,412

Equity and liabilitiesCapital and reservesShare capital 13 7,875,264 956,474Share premium 13 22,023,543 31,272,947Reverse acquisition reserve 17,073,279 166,672Warrant reserve 13 143,024 269,801Share option reserve 14 3,610,185 2,709,261Convertible loan reserve 15 87,853 87,853Accumulated loss (27,712,425) (22,411,795)

Total equity 23,100,723 13,051,213

Non-current liabilitiesConvertible loan 15 397,209 390,317Provision 16 54,369 54,369

Total non-current liabilities 451,578 444,686

Current liabilitiesTrade and other payables 17 338,199 377,044Other liabilities 18 – 715,478Convertible loan 15 – 537,456Derivative financial instruments 15 – 37,535

Total current liabilities 338,199 1,667,513

Total liabilities 789,777 2,112,199

Total equity and liabilities 23,890,500 15,163,412

The financial statements of Stellar Diamonds plc, registered number: 5424214 were approved by the Board of Directors and authorised for issue on 17 November 2010. They were signed on its behalf by:


Consolidated statement of financial positionAs at 30 June 2010(Stated in U.S. dollars)



Share capital (note 13)

Share premium (note 13)

Warrant reserve

(note 13)

Share option reserve

(note 14)

Convertible loan reserve

(note 15)

Reverse acquisition

reserve (note 3)

Accumulated loss Total equity

Balance at 1 January 2009 973,908 31,134,438 1,171,714 2,333,919 – – (13,672,681) 21,941,298Total comprehensive income

for the period – – – – – – (9,641,027) (9,641,027)Expired warrants – – (901,913) – – – 901,913 –Equity component of

convertible loan – – – – 87,853 – – 87,853Issue of share capital 24,234 263,513 – – – – – 287,747Share-based compensation – – – 375,342 – – – 375,342Reverse acquisition adjustment (41,668) (125,004) – – – 166,672 – –

Balance at 30 September 2009 956,474 31,272,947 269,801 2,709,261 87,853 166,672 (22,411,795) 13,051,213Total comprehensive income

for the period – – – – – – (5,570,431) (5,570,431)Issue of shares to directors

(note 13) 335 33,131 – – – – – 33,466Conversion of debt to equity

(note 13) 9,049 895,868 – – – – – 904,917Reverse acquisition adjustment

(note 13) 4,623,043 (16,443,279) – 639,292 – 16,906,607 – 5,725,663Issue of placing shares (note 13) 1,951,938 5,784,958 – – – – – 7,736,896Share warrants issued (note 13) – (143,024) 143,024 – – – – –Share issue costs (note 13) – (380,023) – – – – – (380,023)Re-pricing of Stellar Diamonds

Limited share options (notes 3 and 13) – – – 261,632 – – – 261,632

Shares issued to directors on admission to AIM (note 13) 8,784 26,044 – – – – – 34,828

Other shares issued (note 13) 325,641 976,921 – – – – – 1,302,562Expired warrants – – (269,801) – – – 269,801 –

Balance at 30 June 2010 7,875,264 22,023,543 143,024 3,610,185 87,853 17,073,279 (27,712,425) 23,100,723

Consolidated statement of changes in equityFor the nine months ended 30 June 2010(Stated in U.S. dollars)


Nine months ended

30 June 2010

Nine months ended

30 September 2009

Cash flows from operating activities:Net loss for the period (5,570,431) (9,641,027)Adjustments for:Loss on disposal of property, plant and equipment – 28,070Depreciation of property, plant and equipment 1,563,844 730,006Impairment of intangible assets – 6,946,107Share-based payment expense 261,632 375,342Shares issued to directors on admission to AIM 34,828 287,747Interest income (317) (317)Interest expense 168,080 98,295Net foreign exchange loss 79,606 21,330Change in working capital items:(Increase)/Decrease in receivables (200,327) 705,163Decrease/(Increase) in stock 204,983 (501,341)(Decrease) in trade and other payables (203,260) (291,309)

Net cash used in operations (3,661,362) (1,241,934)

Cash flows from investing activitiesAcquisition of subsidiary 11,384 –Purchases of property, plant and equipment (2,002,708) (219,774)Payments to acquire intangible assets (460,541) (1,477,774)Interest received 317 317Repayment of other liabilities (715,478) –

Net cash used in investing activities (3,167,026) (1,697,231)

Cash flows from financing activitiesProceeds from issue of convertible loans – 1,053,161Repayment of convertible loans (100,000) –Proceeds from issue of share capital, net of costs 7,356,873 –Interest paid (52,195) (50,327)

Net cash generated by financing activities 7,204,678 1,002,834

Net increase/(decrease) in cash and cash equivalents 376,290 (1,936,331)Cash and cash equivalents, beginning of period 418,981 2,376,642Effect of foreign exchange rate changes (105,621) (21,330)

Cash and cash equivalents, end of period 689,650 418,981

Significant non-cash transactions relate to the issue of shares on reverse acquisition of WAD (note 3), conversion of debt to shares in Stellar Diamonds Limited (note 3), issue of share warrants (note 13) and issue of other shares during the period (note 13).

Consolidated statement of cash flows For the nine months ended 30 June 2010(Stated in U.S. dollars)



Notes to the consolidated financial statements For the nine months ended 30 June 2010(Stated in U.S. dollars)

1. Basis of preparation1.1 Stellar Diamonds plcOn 22 February 2010, Stellar Diamonds Limited completed its reverse acquisition of West African Diamonds plc (WAD) in a share for share exchange. WAD changed its name to Stellar Diamonds plc (the “Company” or on a consolidated basis the “Group”) and was readmitted to AIM.

Under the terms of the reverse acquisition agreement, WAD agreed to acquire the entire issued share capital of Stellar Diamonds Limited for a consideration equating to approximately three times the value of WAD, represented by an approximate 75:25 split of the share capital in the enlarged group prior to the issue of Placing shares – 75% being attributable to consideration shares to be allotted to Stellar Diamonds Limited shareholders and 25% being attributable to ordinary shares held by WAD shareholders.

A total of 53,248,164 consideration shares were issued and allotted to the shareholders of Stellar Diamonds Limited on the basis of 1.005 new ordinary shares in Stellar Diamonds plc for each Stellar Diamonds Limited share. The fair value attributed to the consideration shares is $16.6 million based on the market price of the Placing shares of 20p per share converted to 31 cents per share (at a rate of 1.56155).

On 22 February 2010 the enlarged group raised $7,356,873, net of share issue costs of $380,023, in new funds (the “Placing”).

1.2 Basis of accountingStellar Diamonds plc is presenting audited financial statements as of and for the nine months ended 30 June 2010. The comparative period presented is audited financial statements as of and for the nine months ended 30 September 2009 of Stellar Diamonds Limited.

The combination has been accounted for as a reverse acquisition as if Stellar Diamonds Limited had issued new shares in exchange for WAD’s net assets. Although these consolidated financial statements have been issued in the name of Stellar Diamonds plc, the legal parent, the Group’s activity is in substance a continuation of that of the legal subsidiary, Stellar Diamonds Limited, because after the transaction the former Board of Stellar Diamonds Limited were deemed to have control of the Group and of the legal parent.

The financial statements have been prepared in accordance with International Financial Reporting Standards (“IFRS”). The financial statements have also been prepared in accordance with IFRSs as adopted by the European Union. They also have been prepared in accordance with the Companies Act 2006. The consolidated financial statements have been prepared on an historical cost basis, as adjusted for certain financial instruments carried at fair value.

1.3 Going concernThe Company’s business activities, together with the factors likely to affect its future development, and performance are set out in the Chairman’s Statement.

As discussed in the Chairman’s Statement, both the Mandala and Bomboko mining operations are being upgraded in terms of mining and processing capacity such that they would be able to deliver modest cash flow. The £1.9 million ($3.0 million) financing in October 2010 and the anticipated receipt of the amount receivable from African Aura Mining Inc. (note 12) will enable the Company to meet its working capital and contractual commitments, as disclosed in notes 9 and 10, specifically to accelerate exploration and drilling work at the Droujba kimberlite pipe in Guinea and to complete the Tongo kimberlite dyke bulk sampling programme in Sierra Leone.

The Company’s forecasts and projections, taking account of reasonably possible changes in trading performance, show that the Company should be able to operate within the resources available following the October 2010 financing. As a result, the Directors have formed a judgment at the time of approving the consolidated financial statements, that there is reasonable expectation that the Group has adequate resources to continue in operational existence for the foreseeable future. For this reason the directors continue to adopt the going concern basis in preparing these financial statements.

1.4 Standards adopted during the periodThe Company has adopted the following standards which are effective for the first time this period.

Revised IFRS 3 Business Combinations•Amendments to IFRS 7 Improving Disclosures about Financial instruments•Amendments to IAS 27 Consolidated and Separate Financial Statements •Amendments to IAS 39 Financial Instruments: Recognition and Measurement: Eligible Hedged Items •Amendments to IFRIC 9 and IAS 39 Embedded Derivatives •IFRIC 12 Service Concession Agreements•IFRIC 15 Agreements for the Construction of Real Estate•IFRIC 16 Hedges of a Net Investment in a Foreign Operation•

The adoption of these standards and interpretations did not have a material impact to the consolidated financial statements.


1. Basis of preparation continued1.5 Standards in issue but not yet effectiveThe following standards and interpretations which have been recently issued or revised have not been adopted early.

Improvements to IFRSs 2009 (effective 1 January 2010)•Improvements to IFRSs 2010 (effective 1 January 2011)•Amendment to IAS 32 Classification of Rights Issues (effective 1 February 2010)•Amendment to IFRS 2 Group Cash-settled Share-based Payment Transactions (effective 1 January 2010)•Amendments to IFRS 1 Additional Exemptions for First-time Adopters (effective 1 January 2010)•Amendments to IFRS 7 Disclosures – Transfers of Financial Assets (effective 1 July 2011)•Amendment to IFRIC 14 Prepayments of a Minimum Funding Requirement (effective 1 January 2011) •IFRIC 17 Distributions of Non-Cash Assets to Owners Estate (effective 1 July 2010)•IFRIC 18 Transfer of Assets from Customers (effective 1 November 2009)•IFRIC 19 Extinguishing Financial Liabilities with Equity Instruments (effective 1 July 2010)•Revised IAS 24 Related Party Disclosures (effective 1 January 2011)•IFRS 9 Financial Instruments (effective 1 January 2013)•

The Directors anticipate that the adoption of these standards and interpretations in future periods will have no material impact on the financial statements.

2. Significant accounting policiesThe accounting policies set out below have been applied consistently in these financial statements, unless otherwise stated.

2.1 Basis of consolidation 2.1.1 Business combinations The acquisition of subsidiaries is accounted for using the purchase method. The cost of acquisition is measured at the aggregate of the fair values, at the date of exchange, of assets given, liabilities incurred or assumed, and equity instruments issued by the Group in exchange for control of the acquiree. The acquiree’s identifiable assets, liabilities and contingent liabilities that meet the conditions for recognition under IFRS 3 are recognised at their fair value at the acquisition date.

2.1.2 Reverse acquisition A reverse acquisition occurs when the Company that issues equity securities (the legal acquirer) is identified as the acquiree for accounting purposes. The entity whose equity interests are acquired (the legal acquiree) is treated as the acquirer for accounting purposes.

In a reverse acquisition, the accounting acquirer usually issues no consideration for the acquiree. Instead, the accounting acquiree usually issues its equity shares to the owners of the accounting acquirer. Accordingly, the acquisition-date fair value of the consideration transferred by the accounting acquirer for its interest in the accounting acquiree is based on the number of equity interests the legal subsidiary would have had to issue to give the owners of the legal parent the same percentage equity interest in the combined entity that results from the reverse acquisition.

Consolidated financial statements prepared following a reverse acquisition are issued under the name of the legal parent (accounting acquiree) but described in the notes as a continuation of the financial statements of the legal subsidiary (accounting acquirer), with one adjustment, which is to adjust retroactively the accounting acquirer’s legal capital to reflect the legal capital of the accounting acquiree. That adjustment is required to reflect the capital of the legal parent (the accounting acquiree). Comparative information presented in the consolidated financial statements also is retroactively adjusted to reflect the legal capital of the legal parent (accounting acquiree).

Because the consolidated financial statements represent the continuation of the financial statements of the legal subsidiary except for its capital structure, the consolidated financial statements on the date of acquisition reflect:(a) the assets and liabilities of the legal subsidiary (the accounting acquirer) recognised and measured at their pre-combination carrying

amounts;(b) the assets and liabilities of the legal parent (the accounting acquiree) recognised and measured in accordance with this IFRS;(c) the retained earnings and other equity balances of the legal subsidiary(accounting acquirer) before the business combination.(d) the amount recognised as issued equity interests in the consolidated financial statements determined by adding the issued equity

interest of the legal subsidiary (the accounting acquirer) outstanding immediately before the business combination to the fair value of the legal parent (accounting acquiree) determined in accordance with this IFRS. However, the equity structure (ie the number and type of equity interests issued) reflects the equity structure of the legal parent (the accounting acquiree), including the equity interests the legal parent issued to effect the combination. Accordingly, the equity structure of the legal subsidiary (the accounting acquirer) is restated using the exchange ratio established in the acquisition agreement to reflect the number of shares of the legal parent (the accounting acquiree) issued in the reverse acquisition.

2.1.3 Subsidiaries Subsidiaries are entities controlled by the Company. Control exists when the Company has the power, directly or indirectly, to govern the financial and operating policies of an entity so as to obtain benefits from its activities. In assessing control, potential voting rights that presently are exercisable or convertible are taken into account. The financial statements of subsidiaries are included in the consolidated financial statements from the date that control commences until the date that control ceases.



2. Significant accounting policies continued2.1.4 Transactions eliminated on consolidation Intra-group balances and any unrealised gains and losses or income and expenses arising from intra-group transactions, are eliminated in preparing the consolidated financial statements.

2.1.5 Joint ventures The Company has entered into certain agreements with third parties to develop exploration projects that are commonly referred to as joint ventures but do not necessarily meet the requirements to apply joint venture accounting.

These investments are dealt with by proportionate consolidation whereby the consolidated financial statements include the appropriate share of assets, liabilities and related income and expenses which are then similarly included in the consolidated financial statements of the Group. 2.2 Foreign currency translation2.2.1 Functional and presentation currencyItems included in the financial statements of each of the Group’s entities are measured using the currency of the primary economic environment in which the entity operates (“the functional currency”). The consolidated financial statements are presented in U.S. dollars (“$”), which is the functional and presentation currency for all the Group’s operations.

2.2.2 Foreign currency transactions Foreign currency transactions are translated into the functional currency using the exchange rates prevailing at the dates of the transactions. Foreign exchange gains and losses resulting from the settlement of such transactions and from the translation at period-end exchange rates of monetary assets and liabilities denominated in foreign currencies are recognised in the consolidated statement of comprehensive income.

2.3 Property, plant and equipmentAll property, plant and equipment are stated at historical cost less depreciation. Historical cost includes expenditures that are directly attributable to the acquisition of the items. Subsequent costs are included in the asset’s carrying amount or recognised as a separate asset, as appropriate, only when it is probable that future economic benefits associated with the item will flow to the Group and the cost of the item can be measured reliably. The carrying amounts of any replaced parts are derecognised. All other repairs and maintenance are charged to the consolidated statement of comprehensive income during the financial period in which they are incurred.

Mining assets are depreciated using a unit of production method based on the quantity of carats produced over the economically recoverable reserves.

Machinery and equipment, which is comprised of office furniture, automobiles and other equipment, are depreciated at 30% per annum on a reducing balance basis.

Assets in the course of construction are carried at cost less any recognised impairment loss. Depreciation of these assets commences when the assets are ready for their intended use.

The assets’ residual values and useful lives are reviewed, and adjusted if appropriate, at each balance sheet date. An asset’s carrying amount is written down immediately to its recoverable amount if the asset’s carrying amount is greater than its estimated recoverable amount. 2.4 Exploration and evaluation expenditureThe Group follows the method of accounting for its mineral properties whereby all costs related to acquisition, exploration and evaluation are capitalised by property pending determination of the feasibility of the project. These assets are not depreciated. Exploration and evaluation assets are assessed for impairment when facts and circumstances suggest that the carrying amount of an exploration and evaluation asset may exceed its recoverable amount. When facts and circumstances suggest that the carrying amount exceeds the recoverable amount, the Group measures, presents and discloses any resulting impairment loss in the consolidated statement of comprehensive income.

The facts and circumstances indicating impairment include the following:the period for which the Group has a right to explore in the specific area has expired or is expected to expire;•the exploration and evaluation has not led to the discovery of economic reserves;•the development of the reserves is not economically or commercially viable; and•the exploration is located in an area that has become politically unstable.•

2.5 Impairment At each balance sheet date, the Group reviews the carrying amounts of its non-current assets to determine whether there is any indication that those assets have suffered an impairment loss. If any such indication exists, the recoverable amount of the asset is estimated in order to determine the extent of the impairment loss (if any). Where the asset does not generate cash flows that are independent from other assets, the group estimates the recoverable amount of the cash-generating unit to which the asset belongs.

Notes to the consolidated financial statements continuedFor the nine months ended 30 June 2010(Stated in U.S. dollars)


2. Significant accounting policies continuedRecoverable amount is the higher of fair value less costs to sell and value in use. In assessing value in use, the estimated future cash flows are discounted to their present value using a pre-tax discount rate that reflects current market assessments of the time value of money and the risks specific to the asset for which the estimates of future cash flows have not been adjusted.

If the recoverable amount of an asset (or cash-generating unit) is estimated to be less than its carrying amount, the carrying amount of the asset (cash-generating unit) is reduced to its recoverable amount. An impairment loss is recognised as an expense immediately.

Where an impairment loss subsequently reverses, the carrying amount of the asset (cash-generating unit) is increased to the revised estimate of its recoverable amount, but so that the increased carrying amount does not exceed the carrying amount that would have been determined had no impairment loss been recognised for the asset (cash-generating unit) in prior periods. A reversal of an impairment loss is recognised as income immediately.

2.6 InventoriesInventories are stated at the lower of cost and net realisable value. Cost of production includes an appropriate portion of production overheads. Net realisable value represents the estimated selling price in the ordinary course of business less marketing costs.

2.7 ProvisionsProvisions are recognised when the Group has a present obligation as a result of a past event, it is probable that the Group will be required to settle the obligation and a reliable estimate can be made of the amount of obligation. Where the effect of discounting is material, provisions are discounted. The discount rate used is a pre-tax rate that reflects current market assessment of the time value of money and, where appropriate, the risks specific to the liability.

2.8 Decommissioning, mine closure and environmental rehabilitationThe estimated cost of decommissioning, mine closure and environmental rehabilitation is based on current legal requirements and existing technology. A provision is raised based on the present value of the estimated costs. These costs are included in the cost of the related asset. The capitalised assets are depreciated in accordance with the accounting policy for property, plant and equipment.

2.9 Financial instrumentsFinancial assetsAll financial assets are recognised and derecognised on trade date when the purchase or sale of a financial asset is under a contract whose terms require delivery of the financial asset within the timeframe established by the market concerned. Financial assets are initially measured at fair value, plus transaction costs, except for those financial assets classified as at fair value through profit or loss (FVTPL), which are initially measured at fair value.

Financial assets at FVTPLFinancial assets are classified as at FVTPL where the financial asset is either held for trading or it is designated as at FVTPL.

A financial asset is classified as held for trading if:it has been acquired principally for the purpose of selling in the near future; or•it is a part of an identified portfolio of financial instruments that the Group manages together and has a recent actual pattern of •short-term profit-taking; or it is a derivative that is not designated and effective as a hedging instrument.•

A financial asset other than a financial asset held for trading may be designated as at FVTPL upon initial recognition if: such designation eliminates or significantly reduces a measurement or recognition inconsistency that would otherwise arise; or •the financial asset forms part of a group of financial assets or financial liabilities or both, which is managed and its performance is •evaluated on a fair value basis, in accordance with the Group’s documented risk management or investment strategy, and information about the Group is provided internally on that basis; orit forms part of a contract containing one or more embedded derivatives, and IAS 39 Financial Instruments: Recognition and •Measurement permits the entire combined contract (asset or liability) to be designated as at FVTPL.

Financial assets at FVTPL are stated at fair value, with any resultant gain or loss recognised in consolidated statement of comprehensive income. The net gain or loss recognised in the consolidated statement of comprehensive income incorporates any dividend or interest earned on the financial asset.

Loans and receivablesTrade receivables, loans and other receivables that have fixed and determinable payments that are not quoted in an active market are classified as loans and receivables. Loans and receivables are measured at amortised cost using the effective interest method, less any impairment. Interest income is recognised by applying the effective interest rate, except for short-term receivables when the recognition of interest would be immaterial.

Impairment of financial assets at amortised costFinancial assets that are measured at amortised cost are assessed for indicators of impairment at the end of each reporting period. Financial assets are considered to be impaired when there is objective evidence that, as a result of one or more events that occurred after the initial recognition of the financial asset, the estimated future cash flows of the financial asset have been affected.



2. Significant accounting policies continuedCash and cash equivalentsCash and cash equivalents comprise cash on hand and demand deposits, and other short-term highly liquid investments that are readily convertible to a known amount of cash and are subject to an insignificant risk of changes in value.

Derecognition of financial assetsThe Group derecognises a financial asset only when the contractual rights to the cash flows from the asset expire; or it transfers the financial asset and substantially all the risks and rewards of ownership of the asset to another entity. If the Group neither transfers nor retains substantially all the risks and rewards of ownership and continues to control the transferred asset, the Group recognises its retained interest in the asset and an associated liability for amounts it may have to pay. If the Group retains substantially all the risks and rewards of ownership of a transferred financial asset, the Group continues to recognise the financial asset and also recognises a collateralised borrowing for the proceeds received.

Financial liabilities and equityFinancial liabilities and equity instruments are classified according to the substance of the contractual arrangements entered into.

Equity instrumentsAn equity instrument is any contract that evidences a residual interest in the assets of the Group after deducting all of its liabilities. Equity instruments issued by the Group are recorded at the proceeds received, net of direct issue costs.

Compound instrumentsThe component parts of compound instruments issued by the Group are classified separately as financial liabilities and equity in accordance with the substance of the contractual arrangement. At the date of issue, in the case of a convertible bond denominated in the functional currency of the issuer that may be converted into a fixed number of equity shares, the fair value of the liability component is estimated using the prevailing market interest rate for a similar non-convertible instrument. This amount is recorded as a liability on an amortised cost basis using the effective interest method until extinguished upon conversion or at the instrument’s maturity date. The equity component is determined by deducting the amount of the liability component from the fair value of the compound instrument as a whole. This is recognised and included in equity, net of income tax effects, and is not subsequently remeasured.

Issue costs are apportioned between the liability and equity components of the convertible loan notes based on their relative carrying amounts at the date of issue. The portion relating to the equity component is charged directly against equity.

Financial liabilities Financial liabilities are classified as either financial liabilities ‘at FVTPL’ or ‘other financial liabilities’.

Financial liabilities at FVTPL Financial liabilities are classified as at FVTPL where the financial liability is either held for trading or it is designated as at FVTPL.

A financial liability is classified as held for trading if:it has been incurred principally for the purpose of disposal in the near future; or•it is a part of an identified portfolio of financial instruments that the Group manages together and has a recent actual pattern of •short-term profit-taking; or it is a derivative that is not designated and effective as a hedging instrument. •

A financial liability other than a financial liability held for trading may be designated as at FVTPL upon initial recognition if:such designation eliminates or significantly reduces a measurement or recognition inconsistency that would otherwise arise; or •the financial liability forms part of a group of financial assets or financial liabilities or both, which is managed and its performance is •evaluated on a fair value basis, in accordance with the Group’s documented risk management or investment strategy, and information about the Group is provided internally on that basis; orit forms part of a contract containing one or more embedded derivatives, and IAS 39 Financial Instruments: Recognition and •Measurement permits the entire combined contract (asset or liability) to be designated as at FVTPL.

Financial liabilities at FVTPL are stated at fair value, with any resultant gain or loss recognised in the consolidated statement of comprehensive income as the Group chooses not to disclose the effective interest rate for debt instruments that are classified as at fair value through profit or loss. The net gain or loss recognised in the consolidated statement of comprehensive income incorporates any interest paid on the financial liability.

Other financial liabilities Other financial liabilities, including borrowings, are initially measured at fair value, net of transaction costs. Other financial liabilities are subsequently measured at amortised cost using the effective interest method, with interest expense recognised on an effective yield basis. The effective interest method is a method of calculating the amortised cost of a financial liability and of allocating interest expense over the relevant period. The effective interest rate is the rate that exactly discounts estimated future cash payments through the expected life of the financial liability, or, where appropriate, a shorter period.



2. Significant accounting policies continuedDerecognition of financial liabilitiesThe Group derecognises financial liabilities when, and only when, the Group’s obligations are discharged, cancelled or they expire.

Embedded derivativesDerivatives embedded in other financial instruments or other host contracts are treated as separate derivatives when their risks and characteristics are not closely related to those of the host contracts and the host contracts are not measured at fair value through profit or loss.

An embedded derivative is presented as a non-current asset or a non-current liability if the remaining maturity of the hybrid instrument to which the embedded derivatives relates to is more than 12 months and is not expected to be realised or settled within 12 months.

2.11 Income tax The current income tax charge is calculated on the basis of the tax laws enacted or substantively enacted at the balance sheet date in the countries where the Company’s subsidiaries operate and generate taxable income. Management periodically evaluate positions taken in tax returns with respect to situations in which applicable tax regulation is subject to interpretation and establishes provisions where appropriate on the basis of amounts expected to be paid to the tax authorities.

Deferred tax is provided in full, using the liability method, on temporary differences arising between the tax bases of assets and liabilities and their carrying amounts in the consolidated financial statements. However, the deferred tax is not accounted for if it arises from initial recognition of an asset or liability in a transaction other than a business combination that at the time of the transaction affects neither accounting nor taxable profit or loss. Deferred tax is determined using tax rates (and laws) that have been enacted or substantively enacted by the balance sheet date and are expected to apply when the related deferred tax asset is realised or the deferred tax liability is settled.

Deferred tax assets are recognised to the extent that it is probable that future taxable profit will be available against which the temporary differences can be utilised.

Deferred tax is provided on temporary differences arising on investments in subsidiaries and associates, except where the timing of the reversal of the temporary difference is controlled by the Company and it is probable that the temporary difference will not reverse in the foreseeable future. 2.12 Share-based paymentsEquity-settled share-based payments to employees and others providing similar services are measured at the fair value of the equity instruments at the grant date. Fair value is measured by use of a Black-Scholes model. The expected life used in the model has been adjusted, based on management’s best estimate, for the effects of non-transferability, exercise restrictions and behavioural considerations.

Equity-settled share options granted to employees vest immediately and therefore the charge is recognised in the consolidated statement of comprehensive income at the grant date.

Equity-settled share-based payment transactions with other parties are measured at the fair value of the goods and services received, except where the fair value cannot be estimated reliably, in which case they are measured at the fair value of the equity instruments granted, measured at the date the entity obtains the goods or the counterparty renders the service.

2.13 Revenue recognitionRevenue relating to sale of diamonds is measured at the fair value of the consideration received or receivable. Revenue is recognised when the following conditions are satisfied:– the Group has transferred to the buyer the significant risks and rewards of ownership of the goods;– the Group retains neither the continuing managerial involvement to the degree usually associated with ownership nor effective

control over the goods sold;– the amount of revenue can be measured reliably;– it is probable that the economic benefits associated with the transaction will flow to the Group; and– the costs incurred or to be incurred in respect of the transaction can be measured reliably. 2.14 Critical accounting judgements and sources of estimation uncertaintyIn the application of the Group’s accounting policies, the Directors are required to make judgements, estimates and assumptions about the carrying amounts of assets and liabilities that are not readily apparent from other sources. The estimates and associated assumptions are based on historical experience and other factors that are considered to be relevant. Actual results may differ from these estimates.

The estimates and underlying assumptions are reviewed on an ongoing basis. Revisions to accounting estimates are recognised in the period in which the estimate is revised if the revision affects only that period, or in the period of the revision and future periods if the revision affects both current and future periods.



2. Significant accounting policies continuedKey sources of estimation uncertainty and judgements made in applying specific accounting policies are as follows:

Share-based paymentsIn determining the fair value of share-based payments made during the period to employees and those parties providing services of a similar nature, a number of assumptions have been made by management. The details of these assumptions are reflected in note 14.

Revenue recognitionIn making its judgement, the Directors consider the Group accounting policy for the recognition of revenue from sale of diamonds.

Carrying value of non-current assetsThe continuing production from the Mandala and Bomboko mines and the outcome of ongoing exploration, and therefore whether the carrying value of the mining assets, machinery and equipment and exploration and evaluation expenditures will ultimately be recovered, is inherently uncertain.

The ability of the Company to realise the carrying values of these assets is contingent upon production or discovery of economically recoverable mineral reserves, the on-going title to the resource properties, the ability of the Company to finance the development of the properties and on the future profitable production or proceeds from the property. The success of the Company’s mineral exploration properties is also influenced by significant risks, legal and political risks and future diamond prices.

The Directors make the judgements necessary to implement the Group’s policy with respect to capitalisation of these assets and consider them for impairment at least annually with reference to indicators in IAS 36 and IFRS 6. If an indication exists, an assessment is made of the recoverable amount. The recoverable amount is the higher of value in use (being the net present value of expected future cash flows) and fair value less costs to sell. Value in use is estimated based on operational forecasts for advanced stage projects with key inputs that include diamond resources, diamond prices, production levels including grade and tonnes processed, production costs and capital expenditure. However, because of the above-mentioned uncertainties, actual future cash flows could materially differ from those estimated.

The carrying value of mining assets, resource properties and deferred exploration costs are set out in notes 9 and 10.

ProvisionsEstimates and assumptions are made in determining the amount attributable to rehabilitation provision. These deal with uncertainties such as legal and regulatory framework, timing and future costs. The carrying value of rehabilitation provision is disclosed set out in note 16.

Fair value of convertible loansThe Group uses a discounted cash flow analysis to ascertain the fair value of its convertible loans disclosed in note 15.

Depreciation of mining assetsIn order to calculate depreciation on mining assets, the Group estimates commercially recoverable reserves based on an independent report prepared by a competent person in accordance with June 2009 Note for Mining, Oil and Gas Companies issued by the London Stock Exchange plc, Alternative Investment Market.

3. Reverse acquisition of Stellar Diamonds Limited On 22 February 2010, Stellar Diamonds Limited completed its reverse acquisition of West African Diamonds plc (WAD) in a share for share exchange

The Directors of the Company recognise that the enlarged group will have a number of opportunities to harness corporate and operational synergies, thus allowing the operational cost base per carat to be reduced. Revenue streams from two producing alluvial mines will also reduce financial risk, increase cashflow and will enhance growth possibilities. The enlarged group will have four high grade kimberlite projects at various stages of development. The new Board has significant experience in the West African mining industry and a proven track record of developing mines.

The combination has been accounted for as a reverse acquisition as if Stellar Diamonds Limited had issued new shares in exchange for WAD’s net assets. Although these consolidated financial statements have been issued in the name of Stellar Diamonds plc, the legal parent, the Group’s activity is in substance a continuation of that of the legal subsidiary, Stellar Diamonds Limited because after the transaction the former Board of Stellar Diamonds Limited were deemed to have control of the Group and of the legal parent.



3. Reverse acquisition of Stellar Diamonds Limited continuedThe following accounting treatment has been applied in respect of the transaction.

The accumulated loss and other equity balances recognised in the consolidated financial statements reflect the consolidated •accumulated loss and other equity balances of Stellar Diamonds Limited immediately before the transaction, and the consolidated loss for the period from 1 October 2009 to the date of the transaction are those of Stellar Diamonds Limited. However, the equity structure appearing in the consolidated financial statements reflects the equity structure of the legal parent, including the equity instruments issued under the share for share exchange to effect the transaction. The effect of using the equity structure of the legal parent gives rise to an adjustment to the Group’s issued equity capital (“the reverse acquisition reserve”).Comparative numbers presented in the consolidated financial statements are those reported in the consolidated financial statements •of the legal subsidiary, Stellar Diamonds Limited, for the nine months ended 30 September 2009.The substance of the transaction is that Stellar Diamonds Limited received net assets of $5,725,663 representing 100% of the value of •the net assets of WAD. This is based on the fair value of the shares acquired from the shareholders of WAD being 18,333,268 shares at a fair value of 20p, converted to 31 cents per share (at a rate of 1.56155).The consolidated financial statements and related notes are for the legal subsidiary (treated as the accounting acquirer) for the •period from 1 October 2009 to 30 June 2010 and include the results of WAD from the date of acquisition at 22 February 2010.

Refer also to note 13 for the details of the movements in share capital.

At the date of acquisition, WAD had 1,420,000 outstanding share options issued in prior periods to employees and consultants in exchange for services provided. They vested immediately on issue. There were no changes to the terms and conditions of these options under the terms of the acquisition. The outstanding share options had an IFRS 2 measured value on date of issue of $639,292 which was assumed by the Group on reverse acquisition of Stellar Diamonds Limited.

The following table summarises the fair values of the assets acquired and liabilities assumed on 22 February 2010. Fair value

$

Current assetsCash and cash equivalents 11,384Accounts receivable 3,140Inventories 61,141

75,665

Non-current assetsIntangible assets (note 9) 365,867Property, plant and equipment (note 10) 5,645,495

6,011,362

Total assets acquired 6,087,027

Current liabilitiesAccounts payable and accrued liabilities 361,364

Total liabilities assumed 361,364

Net assets acquired 5,725,663

Total considerationFair value of shares issued 5,725,663

The results of WAD have been included in the consolidated financial statements from 22 February 2010. WAD generated a net loss of $15,071,446 since the date of acquisition. If WAD had been a member of the Group from 1 October 2009 it would have not contributed any material revenues or profits and losses.

The net cash inflow as a result of the acquisition is $11,384.



4. SegmentsThe Company is engaged in the acquisition, exploration, development and production of diamond properties in the West African countries of Sierra Leone, Guinea, Liberia and up to 30 September 2009, the DRC. Information presented to the Chief Executive Officer for the purposes of resource allocation and assessment of segment performance is focused on the individual projects in geographical locations. The reportable segments under IFRS 8 are therefore as follows:

Mandala (Guinea);•Bomboko (Guinea);•Kono (Sierra Leone);•Tongo (Sierra Leone);•Other exploration projects mainly Droujba and Bouro; and•Corporate activities in the United Kingdom; •

Following is an analysis of the Group’s revenue, results, assets and liabilities by reportable segment for the nine months ended 30 June 2010:

Mandala $

Bomboko $

Kono $

Tongo $

Other exploration

$Corporate

$Total

$

Revenue – sale of diamonds 1,847,689 185,073 – – – – 2,032,762

Segment result (2,283,110) (645,948) (15,818) (6,072) (2,554) (2,449,166) (5,402,668)

Finance income 317Finance costs (168,080)Loss before tax (5,570,431)Income tax expense –

Loss after tax (5,570,431)

Segment assets 11,224,021 6,330,006 3,478,508 853,665 698,105 1,306,195 23,890,500Segment liabilities (73,141) – (354) (795) – (715,487) (789,777)Share-based payment expense – – – – – (261,632) (261,632)Depreciation of property, plant and equipment 1,102,565 442,899 – 6,041 – 12,339 1,563,844Capital additions – property, plant and equipment 810,096 6,698,219 – 138,959 – 929 7,648,203– intangible assets – – 1,566,733 14,291 581,411 – 2,162,435

During the nine months ended 30 June 2010 sales made to two customers accounted for approximately 95% of total revenues (nine months ended 30 September 2009: 100%). Sales made to Customer A amounted to $1,027,008 (nine months ended 30 September 2009: $563,705). Sales made to Customer B amounted to $902,234 (nine months ended 30 September 2009: $nil). Following is an analysis of the Group’s revenue and results by reportable segment for the nine months ended 30 September 2009:

Mandala $

Bomboko $

Kono $

Tongo $

Other exploration

$Corporate

$Total

$

Revenue – sale of diamonds 563,705 – – – – – 563,705

Segment result (1,263,344) – (7,000,000) (806) – (1,278,899) (9,543,049)

Finance income 317Finance costs (98,295)

Loss before tax 9,641,027Income tax expense –

Loss after tax 9,641,027

Segment assets 11,470,351 – 1,888,108 707,590 336,984 760,389 15,163,412Segment liabilities (110,851) – (715,478) (795) – (1,285,075) (2,112,199)Share-based payment expense – – – – – 375,342 375,342Impairment of intangible assets – – (7,000,000) – 53,893 – (6,946,107)Depreciation of property, plant and equipment 729,200 – – 806 – – 730,006Capital additions – property, plant and equipment 274,143 – – – – – 274,143– intangible assets 604,380 – 927,288 19,049 (72,943) – 1,477,774



5. Loss for the periodLoss for the period has been arrived at after charging/(crediting):

Nine months ended

30 June 2010

$

Nine months ended

30 September 2009

$

Fees payable to the Company’s auditors for the audit of the Group’s accounts:– audit services current period 36,600 40,974– audit services prior period under provision – 5,030Net foreign exchange losses 79,606 21,330Depreciation of property, plant and equipment 1,563,844 730,006Loss on disposal of property, plant and equipment – 28,070Impairment of intangible assets – 6,946,107Write down of inventory – 13,697Cost of inventories recognised as an expense 210,735 (481,341)Share-based payments 261,632 375,342Impairment loss on receivables 203,506 –

6. Staff costsNine months

ended 30 June

2010 $

Nine months ended

30 September 2009

$

Wages and salaries 1,203,348 771,954Social security costs 175,193 53,881Share-based payments 261,632 375,342

1,640,173 1,201,177

The average monthly number of employees (including Executive Directors) was 331 (30 September 2009: 232). The remuneration of key management personnel is further disclosed in note 19.

7. Income tax expenseNine months

ended 30 June

2010 $

Nine months ended

30 September 2009

$

Current taxation – –Deferred taxation – –

– –

The analysis of the Group’s taxation charge for the period based on the Company’s statutory tax rate of 28% as follows:

Nine months ended

30 June 2010

$

Nine months ended

30 September 2009

$

Loss for the period (5,570,431) (9,641,027)Tax at the UK corporation tax rate of 28% (2009: 0%) (1,559,721) –Effect of different tax rates of subsidiaries operating in other jurisdictions 482,933 (2,554,843)Impairment not deductible for taxation purposes – 2,074,541Tax losses not utilised and carried forward 676,349 243,788Depreciation in excess of capital allowances 400,439 236,514

– –

A deferred taxation asset is not recognised in respect of carried forward losses due to uncertainty over the utilisation of the losses. The unrecognised deferred taxation asset is $1,662,270 (30 September 2009: $985,921) based on carried forward tax losses of $4,208,136 (30 September 2009: $2,236,943) which expire 10 years from the date these were incurred.



8. Loss per share30 June

2010 $

30 September 2009

$

Loss after tax attributable to equity holders of the parent (5,570,431) (9,641,027)Weighted average number of ordinary shares for the purposes of basic and diluted loss per share 64,451,236 49,761,490

Basic and diluted loss per share (0.09) (0.19)

Basic and diluted loss per share are the same as the effect of the outstanding share options and warrants is anti-dilutive and is therefore excluded. Outstanding share options and warrants are detailed in notes 13 and 14.

9. Intangible assets30 June

2010 $

30 September 2009

$

Exploration and evaluation expenditure:CostOpening balance 17,704,358 23,729,626Additions 1,796,569 1,477,774Transfer to mining assets – (7,503,042)Acquired as part of WAD (note 3) 365,867 –

Closing balance 19,866,794 17,704,358

ImpairmentOpening balance 14,923,250 7,977,143Charge for the period – 6,946,107

Closing balance 14,923,250 14,923,250

Carrying value 4,943,544 2,781,108

Included in additions during the period are shares to the value of $1,302,561 issued to Petra Diamonds Limited to acquire the remaining share in the Kono project and shares issued to the value of $33,466 to acquire the remaining share in Friendship Diamonds Guinee SA (note 13).

As a result of impairment reviews carried out in the prior period an impairment of $6,946,107 was recorded. Due to weak diamond prices in the rough diamond market, management made the decision during the prior period to suspend operations and place the Kono project under temporary care and maintenance until diamond prices recover. In line with the strategy to maintain Kono on care and maintenance, the Directors assessed the recoverable amount of the exploration costs and resource properties relating to the asset and determined that it was impaired by $7,000,000. The recoverable amount was calculated by reference to the asset’s value in use using a discount rate of 12%.

At 30 June 2010, the Group did not have any contractual commitments for the acquisition of intangible assets. In October 2010, the Group contractually committed to spend approximately $500,000 for the drilling programme and microdiamond analysis at the Droujba kimberlite pipe in Guinea.

As discussed in note 2.14, the realisation of intangible assets of $4,943,544 is dependent on the discovery and successful development of economic mineral reserves among other factors.



10. Property, plant and equipment

Mining assets $

Assets under construction

$

Machinery and equipment

$Total

$

CostAt 1 January 2009 – 2,257,823 2,019,024 4,276,847Additions 54,369 219,774 – 274,143Transfer from intangible assets 7,503,042 – – 7,503,042Transfer 3,134,872 (2,437,496) (697,376) – Disposal – (40,101) – (40,101)

At 30 September 2009 10,692,283 – 1,321,648 12,013,931Additions 212,845 – 1,789,863 2,002,708Acquired as part of WAD (note 3) 3,911,750 – 1,733,745 5,645,495

At 30 June 2010 14,816,878 – 4,845,256 19,662,134

DepreciationAt 1 January 2009 – – 322,376 322,376Charge for the period 524,776 – 205,230 730,006Disposal – – (12,031) (12,031)

At 30 September 2009 524,776 – 515,575 1,040,351Charge for the period 978,010 – 585,834 1,563,844

At 30 June 2010 1,502,786 – 1,101,409 2,604,195

Carrying valueAt 30 June 2010 13,314,092 – 3,743,847 17,057,939

At 30 September 2009 10,167,507 – 806,073 10,973,580

Transfers during the period from 1 January to 30 September 2009 relate to the Mandala mine assets in Guinea which was commissioned in April 2009.

Included within mining assets is the rehabilitation provision for Mandala of $54,369 (30 September 2009: $54,369).

Depreciation of mining assets of $978,010 (30 September 2009: $524,776) has been charged to cost of sales whilst depreciation of machinery and equipment of $585,834 (30 September 2009: $205,230) has been charged to administrative expense.

In accordance with the accounting policy stated in note 2.3, the Group tests annually to see whether property, plant and equipment have suffered any impairment. The recoverable amount of cash generating units is determined based on value-in-use calculations, which require the use of estimates. The estimated cash flows from the mining assets and the adjacent exploration projects produced net present values well in excess of their carrying values and are based on the following assumptions:

economically recoverable reserves and resources are based on management’s expectations based on availability of reserves at mine •sites and technical studies undertaken internally and by a Competent Person, where available;diamond prices for the remainder of 2010 are based on the average realised prices from January to June 2010 and an annual increase •of 7% thereafter;discount rate of 8%; and•inflation rate of 2.2%.•

Following the acquisition of additional earth moving machinery at the Mandala mine and a second plant at the Bomboko mine during the period, the Group did not have any further contractually committed costs for the acquisition of property, plant and equipment at 30 June 2010.

As discussed in note 2.14, the realisation of tangible assets of $17,057,939 is dependent on the discovery and successful development of economic mineral reserves among other factors.



11. Inventories30 June

2010 $

30 September 2009

$

Diamonds 331,745 495,038Write down – (13,697)

331,745 481,341Consumables 25,754 20,000

357,499 501,341

12. Trade and other receivables30 June

2010 $

30 September 2009

$

Trade receivable 103,519 –Amounts due from Non-Executive Directors (note 19) 15,275 –Amounts due from shareholder (note 19) 580,923 359,305Amounts due from associated company (note 19) – 128,841VAT 100,431 –Prepayments and other receivables 41,720 256

841,868 488,402

The amounts due from Non-Executive Directors as of 30 June 2010 have been repaid as of the date of these financial statements.

The amount due from shareholder is net of a write off of $203,506 arising from an independent review of the transactions in 2007 resulting to the reorganisation of the diamond interests of African Aura Mining Inc. (formerly Mano River Resources Inc.) and the launch of Stellar Diamonds Limited. The outstanding amount is unsecured and will be settled in cash which is expected imminently. No guarantees have been given or received. The Group has not provided any impairment loss on the other receivables as there has been no significant change in credit quality and are recoverable within three months or less.

The ageing of past due but not impaired receivables follows:30 June

2010 $

30 September 2009

$

Less than 30 days 103,519 –30-60 days 15,275 –More than 60 days 580,923 488,146

699,717 488,146

The Directors consider the carrying amount of trade and other receivables is approximately equal to their fair value. 13. Share capital, share premium and warrant reserveShare capitalAuthorised:Unlimited number of ordinary shares of 5p each.

NumberShare capital

$Share premium

$

Alloted called-up and fully paid:Balance at 1 January 2009 49,137,754 973,908 31,134,438Issue of shares 899,500 24,234 263,513Reverse acquisition adjustment – (41,668) (125,004)

Balance as at 30 September 2009 50,037,254 956,474 31,272,947Issue of shares (note 9) 167,330 335 33,131Conversion of debt to equity 2,778,678 9,049 895,868

WAD shares acquired 52,983,262 965,858 32,201,946Reverse acquisition adjustment (note 3) 18,598,170 4,623,043 (16,443,279)

Balance on completion of reverse acquisition 71,581,432 5,588,901 15,758,667Shares issued on share placing 25,000,000 1,951,938 5,784,958Share warrants issued – – (143,024)Share issue costs – – (380,023)Bonus shares issued to Directors 112,500 8,784 26,044Other shares issued (note 9) 4,500,000 325,641 976,921

101,193,932 7,875,264 22,023,543



13. Share capital, share premium and warrant reserve continuedDuring the prior period, the Company issued 665,500 shares to directors ($205,323), 84,000 shares ($28,032) to a key management personnel and 150,000 shares ($44,027) in exchange for professional services provided by a third party. As part of the reverse acquisition described in note 3, Stellar Diamonds plc, the legal parent, performed a 5 for 1 share consolidation. The number of shares stated above has been restated for the 5 for 1 share consolidation.

Prior to the completion of the reverse acquisition, convertible loans and accrued interest of $546,241 (note 15), unpaid Directors’ fees from 1 January 2009 of $208,676 (note 19) and African Aura Mining Inc.’s management fee charge for 2009 to Stellar Diamonds Limited of $150,000 (note 19) were converted into new Stellar Diamonds Limited shares.

As outlined in note 3, the equity structure appearing in the consolidated financial statements reflects the equity structure of the legal parent, including the equity instruments issued under the share for share exchange to effect the transaction. The effect of using the equity structure of the legal parent gives rise to an adjustment to the Group’s issued equity capital in the form of a reverse acquisition reserve.

On 23 February 2010, a total of 112,500 ordinary shares of 5p each (“bonus shares”) were allotted and issued to Karl Smithson, Chief Executive Officer, and Angus Ogilvie, Finance Director. These allotments are in satisfaction of half of their respective listing bonuses of £30,000 and £15,000 following the successful admission of the Company on AIM (as set out in the Company’s Admission Document).

On 24 May 2010, the Company announced the completion of the share purchase agreement with Petra Diamonds Limited in respect of the acquisition of the remaining 51% of the Kono kimberlite project in Sierra Leone in exchange for the issuance of 4,500,000 new ordinary shares to Petra Diamonds Limited as consideration for the agreed purchase price of £900,000, at a price of 20p per share.

Share warrantsThe warrants reserve represents the value of the warrants issued by the Company to subscribe for shares in the Company.

Pursuant to the terms of the reverse acquisition agreement with Stellar Diamonds Limited, 18,679,451 warrants dated 19 December 2008 and 3,500 warrants dated 31 March 2008 originally issued by Stellar Diamonds Limited and exercisable at £0.25 and £1.00 per share, respectively were cancelled. 18,772,846 and 3,517 new warrants to subscribe for shares in the Company were granted exercisable at £0.251 and £1.005 per share, respectively. These warrants expired on 31 March 2010 and 30 June 2010, respectively.

The replacement of the share warrants in Stellar Diamonds Limited has been treated as a modification of the existing share warrants. The difference between the fair value of the replacement share warrants and the net fair value of the cancelled share warrants immediately before cancellation on 22 February 2010 is a decline in value by $4,267 which is not recognised in the financial statements in accordance with IFRS 2. The fair value of the replacement options was calculated using the Black-Scholes option pricing model and the following assumptions: nil dividend yield, a weighted average expected volatility of the Company’s share price of 67%, a weighted average annual risk free rate of 2.76% and a weighted average expected life of three months. The Company granted 1,190,125 warrants to the Company’s broker for the Placing to subscribe for up to 1,190,125 ordinary shares of 5p each in the Company exercisable for a price of 20p per share warrant. The warrants issued have resulted in a charge to the share premium of $143,024 using the Black-Scholes option pricing model and the following assumptions: nil dividend yield, a weighted average expected volatility of the Company’s share price of 67%, a weighted average annual risk free rate of 2.76% and an expected life of two years.

Number of warrants

Warrant reserve

$

At 1 January 2009 21,960,308 1,171,714Expired warrants (3,277,357) (901,913)

At 30 September 2009 18,682,951 269,801Cancellation of Stellar Diamonds Limited warrants on acquisition (18,682,951) –Replacement for Stellar Diamonds Limited warrants on acquisition 18,776,363 –Share warrants issued 1,190,125 143,024Expired warrants (18,776,363) (269,801)

At 30 June 2010 1,190,125 143,024

14. Share optionsThe share option reserve represents the value of the share options issued to the Group’s Directors and employees under the Group’s share option scheme.

On 22 February 2010, 3,992,000 Stellar Diamonds Limited options were surrendered in exchange for the issuance of 4,012,000 new options of the Company. The number of replacement options issued was determined by the exchange ratio of 1.005 used in the acquisition.



14. Share options continuedThe exercise price of 3,482,325 replacement options was modified from £0.225 to £0.20 per share. The terms and conditions of 530,138 replacement options were the same as before. The replacement of the share options in Stellar Diamonds Limited has been treated as a modification of the existing share options and has resulted in an incremental increase in the fair value of the options of $261,632, which has been recognised as an expense for the current period. The incremental increase was calculated as the difference between the fair value of the replacement share options and the net fair value of the cancelled share options immediately before cancellation on 22 February 2010. The fair values were calculated using the Black-Scholes option pricing model and the following assumptions: nil dividend yield, a weighted average expected volatility of the Company’s share price of 67%, a weighted average annual risk free rate of 2.76% and an expected life of seven years.

On 22 February 2010, WAD had 1,420,000 outstanding share options issued in prior periods to employees and consultants in exchange for services provided. They vested immediately on issue. There were no changes to the terms and conditions of these options under the terms of the acquisition. The outstanding share options had an IFRS 2 measured value on date of issue of $639,292 which was assumed by the Group on reverse acquisition of Stellar Diamonds Limited.

The following is a summary of the share options outstanding and exercisable as at 30 June 2010 and 30 September 2009 and changes during the period:

30 June 2010 30 September 2009

Number of options

Weighted average

exercise price GBP£

Number of options

Weighted average

exercise price GBP£

Outstanding and exercisable, beginning of period 3,992,500 0.310 2,992,500 0.890Cancellation of Stellar Diamonds Limited options on acquisition (3,992,500) (0.310) – –Replacement for Stellar Diamonds Limited options on acquisition (re-priced) 3,482,325 0.200 – –Replacement for Stellar Diamonds Limited options on acquisition (not re-priced) 530,138 0.871 – –Options re-priced – – (2,465,000) (0.871)Options re-priced – – 2,465,000 0.225Options assumed on acquisition (note 3) 1,420,000 0.655 – –Options granted – – 1,000,000 0.225

Outstanding and exercisable, end of period 5,432,463 0.388 3,992,500 0.310

As at 30 June 2010 the following stock options were outstanding and exercisable:

Number of stock options outstanding

Exercise price per share

GBP£ Expiry date

100,000 1.000 21-Feb-1180,000 1.175 21-Feb-11400,000 1.000 15-Sep-13100,000 1.000 02-Dec-1320,000 1.000 08-Feb-1420,000 1.175 10-Apr-1440,000 1.150 17-Jul-1460,000 1.225 30-Sep-14600,000 0.150 23-Jul-16530,138 0.875 22-Feb-17 3,482,325 0.200 22-Feb-17

5,432,463

15. Convertible loan30 June

2010 $

30 September 2009

$

Opening balance 1,053,161 –Proceeds from issuance – 1,053,161Fair value accretion 32,908 –Unrealised foreign exchange gain (26,016) –Conversion to shares in Stellar Diamonds Limited (474,991) –Paid during the period (100,000) –

485,062 1,053,161

Presented in the consolidated statement of financial position as:– Current portion of convertible loan – 537,456– Non-current portion of convertible loan 397,209 390,317– Embedded derivative – 37,535– Convertible loan reserve 87,853 87,853

485,062 1,053,161



15. Convertible loan continuedOn 1 May 2009, Stellar Diamonds Limited issued convertible loans (secured on Mandala mining assets) which bear interest of 20% per annum raising $574,991. The principal amount is convertible by the holders into common shares of the Company at a conversion price of £0.20 per share at any time prior to maturity.

As the conversion option is denominated in foreign currency terms such that the option will not be settled by Stellar Diamonds Limited exchanging a fixed number of its own equity instruments for a fixed amount of cash, the Note does not meet the definition of a compound financial instrument. Instead the convertible loan (the host contract) is a hybrid financial instrument and the option to convert is an embedded derivative. The host contract carrying value on initial recognition is based on the net proceeds of issuance of the note reduced by the fair value of the embedded derivatives and is subsequently carried at each reporting date at amortised cost.

The embedded derivatives are separated from the host contract as their risks and characteristics are not closely related to those of the host contract and the host contract is not carried at fair value. At each reporting date the embedded derivatives are measured at fair value with changes in fair value recognised in the statement of comprehensive income as they arise.

On 22 February 2010, $474,991 of the convertible loans issued on 1 May 2009, including $200,000 held by African Aura Mining Inc., a shareholder of Stellar Diamonds Limited, and accrued interest of $71,250 were converted into Stellar Diamonds Limited shares. On the same date, the remaining $100,000 of the convertible debentures issued by Stellar Diamonds Limited on 1 May 2010 and accrued interest of $15,000 were repaid. As a result of these transactions, the embedded derivative of $37,535 related to the convertible debentures has been derecognised.

On 21 September 2009, the Company issued convertible loans (secured on Mandala mining assets) and raised £300,000 ($478,170). The notes are repayable on 21 September 2011 and bear interest of 16.5% per annum. The principal amount is convertible by the holders into common shares of Stellar at a conversion price of the lesser of the IPO price or £0.20 per share at any time prior to maturity. The holder will be issued one share purchase warrant for each ordinary share issued pursuant to the conversion which shall be exercisable at the lesser of £0.25 per share or a 25% premium to the IPO price per share expiring 24 months after IPO. The holders of these loans opted not to convert on listing of Stellar Diamonds plc.

The proceeds received on issue of these notes were allocated into their liability ($390,317) and equity ($87,853) components and presented separately in the consolidated statement of financial position. The amount initially attributed to the debt component equals the discounted cash flows using a market rate of interest that would be payable on a similar debt instrument that did not include an option to convert. The difference between the net proceeds of the convertible debt and the amount allocated to the debt component is credited direct to equity and is not subsequently remeasured.

Included in trade and other payables at 30 June 2010 is accrued interest on convertible loan of $59,695 (30 September 2009: $47,968).

16. Provision30 June

2010 $

30 September 2009

$

Balance at beginning of the period 54,369 –Recognised during the period – 54,369

Balance at end of the period 54,369 54,369

The provision relates to the rehabilitation of the Mandala mine which is expected to be incurred in 2014.

17. Trade and other payables30 June

2010 $

30 September 2009

$

Trade payables and accruals 278,504 209,016Amounts due to Non-Executive Directors (note 19) – 120,060Accrued interest on convertible loans 59,695 47,968

338,199 377,044

The carrying amount of trade and other payables approximately equal their fair value.

18. Other liabilities30 June

2010 $

30 September 2009

$

Amounts due to Petra Diamonds Limited – 715,478

– 715,478

On 25 February 2010, the Company fully repaid the amounts due to Petra Diamonds Limited, the joint venture partner for the Kono project in Sierra Leone.



19. Related partiesThe ultimate parent company and controlling party of Stellar Diamonds Limited prior to the reverse acquisition was African Aura Mining Inc. (AAM). During the period, the Company and its subsidiaries, in the ordinary course of business, entered into various transactions with AAM. These transactions occurred under terms and conditions that are no less favourable than those arranged with third parties.

Transactions with other related parties have arisen within the normal course of business and are payable on demand unless otherwise stated.

The following table summarises the related party transactions:Nine months

ended 30 June

2010 $

Nine months ended

30 September 2009

$

African Aura Mining Inc., shareholder– management fees charged 91,884 112,500– net (repayment)/proceeds of loans from AAM (400,000) 400,000– issuance of convertible loans – 200,000– conversion of convertible loans into shares 200,000 –– conversion of accrued interest on convertible loans into shares 30,000 –– conversion of unpaid 2009 management fee into shares in Stellar Diamonds Limited 150,000 –

The convertible loan and the accrued interest at 30 June 2010 as disclosed in note 15 are owed to Altus Resource Capital. Steven Poulton, Non-Executive Director, is a Director of Altus Asset Management, the manager for Altus Resource Capital.

Nine months ended

30 June 2010

$

Nine months ended

30 September 2009

$

Directors– shares issued on successful admission of the Company on AIM in lieu of bonus payment (note 13) 34,828 –– shares issued in lieu of accrued Directors’ fees (note 13) 208,676 –– payments made on behalf of the Directors to acquire shares in the Company 14,820 –– social security payments made on behalf of the Directors 29,004 –– ordinary shares in the Company granted at nil consideration – 205,323

The Directors are considered the Company’s key management personnel. The remuneration earned in respect of the financial period by each Director is as follows:

Salary or fees $

Listing bonus paid in cash

$

Listing bonus paid in shares

$

Nine months ended

30 June 2010

$

Nine months ended

30 September 2009

$

Lord Daresbury 68,182 – – 68,182 68,138N. Karl Smithson 134,500 22,368 23,219 180,087 177,511Angus Ogilvie 97,250 11,574 13,657 122,481 106,789Luis da Silva 18,490 – – 18,490 18,478Steven Poulton 28,891 – – 28,891 28,872James Campbell 6,027 – – 6,027 –

353,340 33,942 36,876 424,158 399,788

The Directors who held office at 30 June 2010 had the following interests in the ordinary shares of the Company as of 30 June 2010:

30 June 2010 30 September 2009

Ordinary shares Share options Warrants

Ordinary shares Share options Warrants

Lord Daresbury 2,650,456 402,000 – 1,507,289 402,000 550,000N. Karl Smithson 515,757 1,306,500 – 372,550 1,306,500 54,115Angus Ogilvie 144,030 201,000 – 65,828 201,000 25,000Luis da Silva 166,439 603,000 – 72,639 603,000 48,815Steven J. Poulton 286,601 402,000 – 117,058 402,000 93,750James Campbell 60,430 220,000 – 60,430 220,000 –

3,823,713 3,134,500 – 2,195,794 3,134,500 771,680



19. Related parties continuedAt the end of the period, the amounts payable to related parties are as follows:

30 June 2010

$

30 September 2009

$

Non-Executive Directors (note 17) – (120,060)Petra Diamonds Limited, joint venture partner (note 18) – (715,478)

At the end of the period, the amounts receivable from related parties (note 12) are as follows: 30 June

2010 $

30 September 2009

$

Non-Executive Directors 15,275 –African Aura Mining Inc. 580,923 359,305Friendship Diamonds Guinee SA, subsidiary (formerly associated company) – 128,841

The amounts due from Non-Executive Directors as of 30 June 2010 have been repaid as of the date of these financial statements.

The amount receivable from Friendship Diamonds Guinee SA at 30 September 2009 was repaid on 30 October 2009.

20. Financial instrumentsThe fair value of a financial instrument is defined as the amount at which the instrument could be exchanged in a current transaction between willing parties, other than in a forced or liquidation sale. The fair values of these financial instruments are estimated to approximate their carrying values due to their immediate or short-term nature.

The Company’s financial instruments are:Cash and cash equivalents •Receivables•Trade and other payables •Convertible loans•Embedded derivative•

The carrying amounts for the financial instruments are as follows:30 June

2010 $

30 September 2009

$

Financial assets:Loans and receivables, measured at amortised costCash and cash equivalents 689,650 418,981Receivables 699,717 488,146

1,389,367 907,127

Financial liabilities:Other liabilities, measured at amortised costTrade and other payables 338,199 1,092,522Convertible loan 397,209 927,773Financial liabilities at fair value through profit or lossDerivative financial instruments – 37,535

735,408 2,057,830

In the normal course of its operations, the Group is exposed to commodity prices, currency, interest rate, liquidity and credit risk.

Foreign currency riskIn the normal course of business, the Company enters into transactions denominated in foreign currencies (primarily Pound Sterling and South African Rand). As a result, the Company is subject to exposure from fluctuations in foreign currency exchange rates. In general, the Company does not enter into derivatives to manage these currency risks. The Company attempts to reduce its exposure to currency risk by entering into contracts denominated in US Dollars whenever possible. The Company has taken no other action to reduce its exposure to foreign currency risk during the period.

30 June 2010

$

30 September 2009

$

Carrying value of foreign currency balancesCash and cash equivalents include balances denominated in:Pound Sterling (GBP) 86,698 137,017Receivables include balances denominated in:Pound Sterling (GBP) 157,406 –Trade and other payables include balances denominated in:Pound Sterling (GBP) 90,421 150,826Euros 23,461 –South African Rand (ZAR) 7,878 160,714



20. Financial instruments continuedThe sensitivities set out below are based on financial assets and liabilities held at 30 September 2009 where balances were not denominated in the functional currency of the Company. The sensitivities do not take into account the Company’s income and expenses and the results of the sensitivities could change due to other factors such as changes in the value of financial assets and liabilities as a result of non-foreign exchange influenced factors.

Closing exchange

rate

Effect on net assets of USD strengthening

10% $

At 30 June 2010Pound Sterling (GBP) 1.507 15,368Euros (EUR) 0.819 2,346South African Rand (ZAR) 7.631 788

At 30 September 2009Pound Sterling (GBP) 1.582 (1,381)South African Rand (ZAR) 8.149 (16,071)

Interest rate and liquidity riskFluctuations in interest rates impact on the value of short-term cash investments and interest payable on financing activities (including long term loans), giving rise to interest rate risk. The Company has in the past been able to source financing through private offerings. This cash is managed to ensure surplus funds are invested in a manner to achieve maximum returns while minimising risks. In the ordinary course of business, the Company is required to fund working capital and capital expenditure requirements. The Company typically holds financial assets with a maturity of less than 30 days to ensure adequate liquidity and flexibility.

Due to the short maturity of the financial assets, if interest rates were to double, it would have an insignificant impact on the Company’s financial performance.

The Company manages its liquidity risk associated with its financial liabilities through the issuance of additional equity and continuously monitoring forecast and actual cash flows, as required to meet the capital requirements of maturing liabilities.

The following table details the Group’s remaining contractual maturity for its non-derivative financial liabilities. The table has been drawn up based on the undiscounted cash flows of financial liabilities based on the earliest date on which the Group is required to pay. The table includes both interest and principal cash flows.

Weighted average

effective interest rate

Less than 12 months 1 to 5 years

30 June 2010Trade and other payables – 338,199 –Convertible loan 31.4% – 478,170

338,199 478,170

30 September 2009Trade and other payables – 377,044 –Other liabilities 5.6% 715,478 –Convertible loan 30.6% 574,991 478,170

1,667,513 478,170

If effective interest rates were to increase or decrease by 10%, interest expense would increase or decrease by approximately $47,817. Credit riskThe maximum credit exposure of the Company as at 30 June 2010 amounted to $1,389,367 (30 September 2009: $907,127) relating to the Company’s cash and cash equivalents and receivables. The Directors believe there is limited exposure to credit risk, as the receivable from African Aura Mining Inc. has been subject to an independent third party review and receipt is imminent, and the Company’s cash and cash equivalents are held with major financial institutions. Historically, the Company has not had collection issues associated with its trade receivables and the aging of receivables is reviewed on a regular basis to ensure the timely collection of amounts owing to the Company.

The Company manages its credit risk in cash and cash equivalents by holding surplus funds in high credit worthy financial institutions and maintains minimum balances with financial institutions in remote locations.

30 June 2010

$

30 September 2009

$

Financial institutions with S&P AA– rating or higher 508,665 271,967Financial institutions un-rated or unknown rating 180,985 147,013

689,650 418,980



20. Financial instruments continuedCapital risk managementThe Company’s objectives when managing capital are to maintain its ability to continue as a going concern in order to provide returns for shareholders and benefits for other stakeholders and to ensure sufficient resources are available to meet day to day operating requirements. The capital structure of the Company consists of convertible debt as disclosed in note 15, cash and cash equivalents and equity attributable to equity holders of the parent, comprising issued capital, reserves and retained earnings.

The Company’s Board of Directors takes full responsibility for managing the Company’s capital and does so through Board meetings, review of financial information, and regular communication with Officers and Senior Management.

The Company expects its current capital resources will be sufficient to carry out its plans and operations through its current operating period.

The Company is not subject to externally imposed capital requirements and there has been no change in the overall capital risk management as at 30 June 2010.

21. Subsequent eventsOn 10 August 2010, the Company granted a total of 2,950,000 share options to Directors and employees at an exercise price of 11p per ordinary share exercisable for a period of five years from the date of grant. On the same date, the Company issued 72,727 newly-issued ordinary shares of 5p each to the Company’s Chief Operating Officer as a performance related payment.

On 12 October 2010, the Company placed 38 million new ordinary shares of 5p each (the “Placing Shares”) with institutional and other investors at par value to raise gross proceeds of £1.9 million (the “Placing”). The funds will be used to accelerate exploration at the Droujba Kimberlite pipe in Guinea. The Company also agreed to grant warrants to each placee on the basis of one warrant for every two Placing Shares subscribed (the “Placing Warrants”). Each Placing Warrant will entitle the holder to subscribe for one new ordinary share at a price of 12p each for a period of 18 months from the date of admission of the Placing Shares to trading on AIM.

Following the Placing the enlarged issued share capital will be 139,266,659 ordinary shares and the Placing Shares will represent approximately 27.3% of the enlarged issued share capital. The total number of Placing Warrants, together with those issued in lieu of fees, will be 23,064,383.



Notes30 June

201030 April

2009

AssetsNon-current assetsIntangible assets 3 1,302,561 3,756,106Investment in subsidiaries 4 4,157,484 6

Total non-current assets 5,460,045 3,756,112

Current assetsTrade and other receivables 5 7,836,186 10,334,729Cash and cash equivalents – 227,999

Total current assets 7,836,186 10,562,728

Total assets 13,296,231 14,318,840

Equity and liabilitiesCapital and reservesShare capital 6 7,875,264 1,004,699Share premium 6 22,023,543 14,170,930Warrant reserve 6 143,024 –Share option reserve 7 1,276,267 522,937Foreign currency translation reserve (773,363) –Accumulated loss (17,288,473) (1,614,908)

Total equity 13,256,262 14,083,658

Current liabilitiesTrade and other payables 8 39,969 235,182

Total current liabilities 39,969 235,182

Total liabilities 39,969 235,182

Total equity and liabilities 13,296,231 14,318,840

The financial statements of Stellar Diamonds plc, registered number: 5424214 were approved by the Board of Directors and authorised for issue on 17 November 2010. They were signed on its behalf by:


Company statement of financial positionAs at 30 June 2010(Stated in U.S. dollars)


Share capital (note 6)

Share premium (note 6)

Warrant reserve (note 6)

Share option reserve (note 7)

Foreign currency

translation reserve

(note 1.3)Accumulated

loss Total equity

Balance at 1 May 2008 599,615 11,430,678 – 522,937 – (1,252,255) 11,300,975Total comprehensive income for the period – – – – – (362,653) (362,653)Issue of share capital 405,084 2,740,252 – – – – 3,145,336

Balance at 30 April 2009 1,004,699 14,170,930 – 522,937 – (1,614,908) 14,083,658Issue of shares 367,604 694,486 – – – – 1,062,090Share options issued – – – 89,077 – – 89,077Conversion of debt to equity 26,840 80,521 – – – – 107,361Exchange difference arising on change in

functional currency 32,274 812,730 – 27,278 (773,363) (98,919) –Total comprehensive income for the period – – – – – (15,574,646) (15,574,646)Issue of shares on acquisition of Stellar Diamonds

Limited 4,157,484 – – – – – 4,157,484Issue of placing shares 1,951,938 5,784,958 – – – – 7,736,896Share issue costs – (380,023) – – – – (380,023)Share warrants issued – (143,024) 143,024 – – – –Share options issued on acquisition of Stellar

Diamonds Limited – – – 636,975 – – 636,975Shares issued to Directors on re-admission to AIM 8,784 26,044 – – – – 34,828Issue of shares on acquisition of Basama

Diamonds Limited 325,641 976,921 – – – – 1,302,562

Balance at 30 June 2010 7,875,264 22,023,543 143,024 1,276,267 (773,363) (17,288,473) 13,256,262

Company statement of changes in equityFor the 14 months ended 30 June 2010(Stated in U.S. dollars)



Fourteen months

ended 30 June 2010

Twelve months ended

30 April 2009

Cash flows from operating activities:Net loss for the period (15,574,646) (398,588)Adjustments for:Impairment of intangible assets 3,105,766 –Impairment of investment in subsidiary 3 –Exchange movements – (10,012)Share-based payment expense 726,052 –Shares issued to Directors on re-admission to AIM 34,828 –Finance cost – 4,137Investment revenue – (5,717)Change in working capital items:Decrease/(Increase) in receivables 3,260,422 (2,634,953)(Decrease) in trade and trade and other payables (87,847) (28,347)

Cash used by operations (8,535,422) (3,073,480)Finance cost – (4,137)Investment revenue – 5,717

Net cash used in operations (8,535,422) (3,071,900)

Cash flows from investing activitiesPayments to acquire intangible assets (111,540) (180,087)

Net cash used in investing activities (111,540) (180,087)

Cash flows from financing activitiesProceeds from share placing, net of costs 7,356,873 –Proceeds from other issue of share capital, net of costs 1,062,090 3,457,000

Net cash generated by financing activities 8,418,963 3,457,000

Net (decrease)/increase in cash and cash equivalents (227,999) 205,013Cash and cash equivalents, beginning of period 227,999 35,566Effect of foreign exchange rate changes – (12,580)

Cash and cash equivalents, end of period – 227,999

Company statement of cash flowsFor the 14 months ended 30 June 2010(Stated in U.S. dollars)


1. Basis of preparation1.1 Stellar Diamonds plcOn 22 February 2010, the Company completed its acquisition of Stellar Diamonds Limited in a share for share exchange.

Under the terms of the acquisition agreement, the Company agreed to acquire the entire issued share capital of Stellar Diamonds Limited for a consideration equating to approximately three times the value of WAD, represented by an approximate 75:25 split of the share capital in the enlarged group prior to the issue of Placing shares – 75% being attributable to consideration shares to be allotted to Stellar Diamonds Limited shareholders and 25% being attributable to ordinary shares held by WAD shareholders.

1.2 Basis of accountingStellar Diamonds plc is presenting audited financial statements as of and for the fourteen months ended 30 June 2010. The comparative period presented is audited financial statements as of and for the twelve month period ended 30 April 2009.

The financial statements have been prepared in accordance with International Financial Reporting Standards (“IFRS”). The financial statements have also been prepared in accordance with IFRSs as adopted by the European Union. They also have been prepared in accordance with the Companies Act 2006. The financial statements have been prepared on an historical cost basis, as adjusted for certain financial instruments carried at fair value.

1.3 Functional and presentational currencyThe functional and presentational currency of the Company changed from pound sterling to US dollars during the period. The Company invested in Stellar Diamonds Limited on 22 February 2010, which resulted in increasing sales of diamonds and purchases of services and goods being denominated in US dollars and represents significant change in the underlying events and circumstances of the Company. The Company primarily became the holding company, therefore it resulted in a change in functional currency effective as at the same date and with a prospective effect.

In accordance with IAS 21, this change in functional currency in the Company has been accounted for by translating items in the consolidated income statement at the average USD/GBP exchange rate from 1 May 2009 to 22 February 2010 of $1.61722. Items in the consolidated balance sheet and reserves were translated at the exchange spot rate on 22 February 2010 of $1.56155.

For the purposes of changing the Company’s presentation currency, the comparatives for the period ended 30 April 2009 in the consolidated statement of cash flows have been translated at the average USD/GBP exchange rate from 1 May 2008 to 30 April 2009 of $1.67709. Comparatives for the same period in the consolidated balance sheet have been translated using USD/GBP exchange spot rate on 30 April 2009 of $1.47142.

The exchange difference arising on change in functional currency at 22 February 2010 is recognised as a foreign currency translation reserve. 1.4 Standards adopted during the periodThe Company has adopted the following standards which are effective for the first time this period. The impact is discussed below:

Revised IFRS 3 Business Combinations•Amendments to IFRS 7 Improving Disclosures about Financial instruments•Amendments to IAS 27 Consolidated and Separate Financial Statements •Amendments to IAS 39 Financial Instruments: Recognition and Measurement: Eligible Hedged Items •Amendments to IFRIC 9 and IAS 39 Embedded Derivatives •IFRIC 12 Service Concession Agreements•IFRIC 15 Agreements for the Construction of Real Estate•IFRIC 16 Hedges of a Net Investment in a Foreign Operation•

The adoption of these standards and interpretations did not have a material impact to the financial statements.

1.5 Standards in issue but not yet effectiveThe following standards and interpretations which have been recently issued or revised have not been adopted early.

Improvements to IFRSs 2009 (effective 1 January 2010)•Improvements to IFRSs 2010 (effective 1 January 2011)•Amendment to IAS 32 Classification of Rights Issues (effective 1 February 2010)•Amendment to IFRS 2 Group Cash-settled Share-based Payment Transactions (effective 1 January 2010)•Amendments to IFRS 1 Additional Exemptions for First-time Adopters (effective 1 January 2010)•Amendments to IFRS 7 Disclosures – Transfers of Financial Assets (effective 1 July 2011)•Amendment to IFRIC 14 Prepayments of a Minimum Funding Requirement (effective 1 January 2011)•

The Directors anticipate that the adoption of these standards and interpretations in future periods will have no material impact on the financial statements.

Notes to the Company financial statements For the 14 months ended 30 June 2010(Stated in U.S. dollars)



2. Significant accounting policiesThe accounting policies set out below have been applied consistently in these financial statements, unless otherwise stated.

2.1 Foreign currency translation2.1.1 Functional and presentation currencyItems included in the financial statements of the Company are measured using the currency of the primary economic environment in which the Company operates (“the functional currency”). As discussed in note 1.3, the financial statements are presented in U.S. dollars (“$”), which is the functional and presentation currency for the Company. 2.1.2 Foreign currency transactions Foreign currency transactions are translated into the functional currency using the exchange rates prevailing at the dates of the transactions. Foreign exchange gains and losses resulting from the settlement of such transactions and from the translation at period-end exchange rates of monetary assets and liabilities denominated in foreign currencies are recognised in the statement of comprehensive income.

2.2 Exploration and evaluation expenditureThe Company follows the method of accounting for its mineral properties whereby all costs related to acquisition, exploration and evaluation are capitalized by property pending determination of the feasibility of the project. These assets are not depreciated. Exploration and evaluation assets are assessed for impairment when facts and circumstances suggest that the carrying amount of an exploration and evaluation asset may exceed its recoverable amount. When facts and circumstances suggest that the carrying amount exceeds the recoverable amount, the Company measures, presents and discloses any resulting impairment loss in the statement of comprehensive income.

The facts and circumstances indicating impairment include the following:the period for which the Company has a right to explore in the specific area has expired or is expected to expire;•the exploration and evaluation has not led to the discovery of economic reserves;•the development of the reserves is not economically or commercially viable; and•the exploration is located in an area that has become politically unstable.•

2.3 Financial instrumentsFinancial assetsAll financial assets are recognised and derecognised on trade date when the purchase or sale of a financial asset is under a contract whose terms require delivery of the financial asset within the timeframe established by the market concerned. Financial assets are initially measured at fair value, plus transaction costs, except for those financial assets classified as at fair value through profit or loss (FVTPL), which are initially measured at fair value.

Financial assets at FVTPLFinancial assets are classified as at FVTPL where the financial asset is either held for trading or it is designated as at FVTPL.

A financial asset is classified as held for trading if:it has been acquired principally for the purpose of selling in the near future; or•it is a part of an identified portfolio of financial instruments that the Company manages together and has a recent actual pattern of •short-term profit-taking; or it is a derivative that is not designated and effective as a hedging instrument.•

A financial asset other than a financial asset held for trading may be designated as at FVTPL upon initial recognition if: such designation eliminates or significantly reduces a measurement or recognition inconsistency that would otherwise arise; or •the financial asset forms part of a group of financial assets or financial liabilities or both, which is managed and its performance is •evaluated on a fair value basis, in accordance with the company’s documented risk management or investment strategy, and information about the company is provided internally on that basis; orit forms part of a contract containing one or more embedded derivatives, and IAS 39 Financial Instruments: Recognition and •Measurement permits the entire combined contract (asset or liability) to be designated as at FVTPL.

Financial assets at FVTPL are stated at fair value, with any resultant gain or loss recognised in profit or loss. The net gain or loss recognised in the statement of comprehensive income incorporates any dividend or interest earned on the financial asset.

Loans and receivablesTrade receivables, loans and other receivables that have fixed and determinable payments that are not quoted in an active market are classified as loans and receivables. Loans and receivables are measured at amortised cost using the effective interest method, less any impairment. Interest income is recognised by applying the effective interest rate, except for short-term receivables when the recognition of interest would be immaterial.

Notes to the Company financial statements continuedFor the 14 months ended 30 June 2010(Stated in U.S. dollars)


2. Significant accounting policies continuedImpairment of financial assets at amortised costFinancial assets that are measured at amortised cost are assessed for indicators of impairment at the end of each reporting period. Financial assets are considered to be impaired when there is objective evidence that, as a result of one or more events that occurred after the initial recognition of the financial asset, the estimated future cash flows of the financial asset have been affected.

Cash and cash equivalentsCash and cash equivalents comprise cash on hand and demand deposits, and other short-term highly liquid investments that are readily convertible to a known amount of cash and are subject to an insignificant risk of changes in value.

Derecognition of financial assetsThe Company derecognises a financial asset only when the contractual rights to the cash flows from the asset expire; or it transfers the financial asset and substantially all the risks and rewards of ownership of the asset to another entity. If the Group neither transfers nor retains substantially all the risks and rewards of ownership and continues to control the transferred asset, the Group recognises its retained interest in the asset and an associated liability for amounts it may have to pay. If the Group retains substantially all the risks and rewards of ownership of a transferred financial asset, the Company continues to recognise the financial asset and also recognises a collateralised borrowing for the proceeds received.

Financial liabilities and equityFinancial liabilities and equity instruments are classified according to the substance of the contractual arrangements entered into.

Equity instrumentsAn equity instrument is any contract that evidences a residual interest in the assets of the Company after deducting all of its liabilities. Equity instruments issued by the Company are recorded at the proceeds received, net of direct issue costs.

Financial liabilities Financial liabilities are classified as either financial liabilities ‘at FVTPL’ or ‘other financial liabilities’.

Financial liabilities at FVTPL Financial liabilities are classified as at FVTPL where the financial liability is either held for trading or it is designated as at FVTPL.

A financial liability is classified as held for trading if:it has been incurred principally for the purpose of disposal in the near future; or•it is a part of an identified portfolio of financial instruments that the Company manages together and has a recent actual pattern of •short-term profit-taking; or it is a derivative that is not designated and effective as a hedging instrument. •

A financial liability other than a financial liability held for trading may be designated as at FVTPL upon initial recognition if:such designation eliminates or significantly reduces a measurement or recognition inconsistency that would otherwise arise; or •the financial liability forms part of a group of financial assets or financial liabilities or both, which is managed and its performance is •evaluated on a fair value basis, in accordance with the Company’s documented risk management or investment strategy, and information about the Company is provided internally on that basis; orit forms part of a contract containing one or more embedded derivatives, and IAS 39 Financial Instruments: Recognition and •Measurement permits the entire combined contract (asset or liability) to be designated as at FVTPL.

Financial liabilities at FVTPL are stated at fair value, with any resultant gain or loss recognised in the statement of comprehensive income as the Company chooses not to disclose the effective interest rate for debt instruments that are classified as at fair value through profit or loss. The net gain or loss recognised in profit or loss incorporates any interest paid on the financial liability.

Other financial liabilities Other financial liabilities, including borrowings, are initially measured at fair value, net of transaction costs. Other financial liabilities are subsequently measured at amortised cost using the effective interest method, with interest expense recognised on an effective yield basis. The effective interest method is a method of calculating the amortised cost of a financial liability and of allocating interest expense over the relevant period. The effective interest rate is the rate that exactly discounts estimated future cash payments through the expected life of the financial liability, or, where appropriate, a shorter period.

Derecognition of financial liabilitiesThe Company derecognises financial liabilities when, and only when, the Company’s obligations are discharged, cancelled or they expire.

2.4 Income tax The current income tax charge is calculated on the basis of the tax laws enacted or substantively enacted at the balance sheet date in the countries where the Company’s subsidiaries operate and generate taxable income. Management periodically evaluate positions taken in tax returns with respect to situations in which applicable tax regulation is subject to interpretation and establishes provisions where appropriate on the basis of amounts expected to be paid to the tax authorities.



2. Significant accounting policies continuedDeferred tax is provided in full, using the liability method, on temporary differences arising between the tax bases of assets and liabilities and their carrying amounts in the financial statements. However, the deferred tax is not accounted for if it arises from initial recognition of an asset or liability in a transaction other than a business combination that at the time of the transaction affects neither accounting nor taxable profit or loss. Deferred tax is determined using tax rates (and laws) that have been enacted or substantively enacted by the balance sheet date and are expected to apply when the related deferred tax asset is realised or the deferred tax liability is settled.

Deferred tax assets are recognised to the extent that it is probable that future taxable profit will be available against which the temporary differences can be utilised.

Deferred tax is provided on temporary differences arising on investments in subsidiaries and associates, except where the timing of the reversal of the temporary difference is controlled by the Company and it is probable that the temporary difference will not reverse in the foreseeable future.

2.5 Share-based paymentsEquity-settled share-based payments to employees and others providing similar services are measured at the fair value of the equity instruments at the grant date. Fair value is measured by use of a Black-Scholes model. The expected life used in the model has been adjusted, based on management’s best estimate, for the effects of non-transferability, exercise restrictions and behavioural considerations.

Equity-settled share options granted to employees vest immediately and therefore the charge is recognised in the statement of comprehensive income at the grant date.

Equity-settled share-based payment transactions with other parties are measured at the fair value of the goods and services received, except where the fair value cannot be estimated reliably, in which case they are measured at the fair value of the equity instruments granted, measured at the date the entity obtains the goods or the counterparty renders the service.

2.6 Revenue recognitionRevenue relating to sale of diamonds is measured at the fair value of the consideration received or receivable. Revenue is recognised when the following conditions are satisfied:– the Company has transferred to the buyer the significant risks and rewards of ownership of the goods;– the Company retains neither the continuing managerial involvement to the degree usually associated with ownership nor effective

control over the goods sold;– the amount of revenue can be measured reliably;– it is probable that the economic benefits associated with the transaction will flow to the Company; and– the costs incurred or to be incurred in respect of the transaction can be measured reliably.

2.7 Critical accounting judgements and sources of estimation uncertainty In the application of the Company’s accounting policies, the directors are required to make judgements, estimates and assumptions about the carrying amounts of assets and liabilities that are not readily apparent from other sources. The estimates and associated assumptions are based on historical experience and other factors that are considered to be relevant. Actual results may differ from these estimates.

The estimates and underlying assumptions are reviewed on an ongoing basis. Revisions to accounting estimates are recognised in the period in which the estimate is revised if the revision affects only that period, or in the period of the revision and future periods if the revision affects both current and future periods.

Key sources of estimation uncertainty and judgements made in applying specific accounting policies are as follows:

Share-based paymentsIn determining the fair value of share-based payments made during the period to employees and those parties providing services of a similar nature, a number of assumptions have been made by management. The details of these assumptions are reflected in note 7.

Revenue recognitionIn making its judgement, the Directors consider the Company accounting policy for the recognition of revenue from sale of diamonds.

Carrying value of non-current assetsThe continuing production from the Mandala and Bomboko mines and the outcome of ongoing exploration on the Kono project, and therefore whether the carrying value of the investments in subsidiaries, as amounts receivable from subsidiaries and exploration and evaluation expenditures will ultimately be recovered, is inherently uncertain.



2. Significant accounting policies continuedThe ability of the Company to realise the carrying values of these assets is contingent upon production or discovery of economically recoverable mineral reserves, the on-going title to the resource properties, the ability of the Company to finance the development of the properties and on the future profitable production or proceeds from the property. The success of the Company’s mineral exploration properties is also influenced by significant risks, legal and political risks and future diamond prices.

The Directors make the judgements necessary to implement the Company’s policy with respect to capitalisation of these assets and consider them for impairment at least annually with reference to indicators in IAS 36 and IFRS 6. If an indication exists, an assessment is made of the recoverable amount. The recoverable amount is the higher of value in use (being the net present value of expected future cash flows) and fair value less costs to sell. Value in use is estimated based on operational forecasts for advanced stage projects with key inputs that include diamond resources, diamond prices, production levels including grade and tonnes processed, production costs and capital expenditure. However, because of the above-mentioned uncertainties, actual future cash flows could materially differ from those estimated.

The carrying value of exploration and evaluation expenditures and investments in subsidiaries are set out in notes 3 and 4.

3. Intangible assets30 June

2010 $

30 April 2009

$

Exploration and evaluation expenditure:CostOpening balance 3,756,106 3,592,255Additions 1,414,101 163,851Transfer to a subsidiary (761,880) –

Closing balance 4,408,327 3,756,106

ImpairmentOpening balance – –Charge for the period 3,105,766 –

Closing balance 3,105,766 –

Carrying value 1,302,561 3,756,106

Additions during the period include $1,302,561 relate to shares issued to Petra Diamonds Limited to acquire the remaining share in the Kono project. During the period, the Company transferred the evaluation and exploration expenditure in relation to the Bomboko project to West African Diamonds plc SARL, the company that holds the Bomboko licence.

An independent review of the assets as part of the reverse acquisition of Stellar Diamonds Limited suggested that the assets in Sierra Leone are unlikely to be commercially viable. No further expenditure on exploration for and evaluation of mineral resources in Sierra Leone has been budgeted or planned. As a result of this review an impairment of $3,105,766 (30 April 2009: $nil) has been recorded during the period.

As discussed in note 2.7, the realisation of intangible assets of $1,302,561 is dependent on the discovery and successful development of economic mineral reserves among other factors.

4. Investment in subsidiaries On 22 February 2010, the Company completed its acquisition of Stellar Diamonds Limited by issuing 53,248,164 new ordinary shares with a value of $4,157,484.

The Directors of the Company recognise that the enlarged Group will have a number of opportunities to harness corporate and operational synergies, thus allowing the operational cost base per carat to be reduced. Revenue streams from two producing alluvial mines will also reduce financial risk, increase cash flow and will enhance growth possibilities. The enlarged Group will have four high grade kimberlite projects at various stages of development. The new Board has significant experience in the West African mining industry and a proven track record of developing mines.

The movement in the investment in subsidiaries during the period is summarised below:30 June

2010 $

30 April 2009

$

At cost, unlisted:Opening balance 6 6Investments during the period 4,157,481 –Written off (3) –

4,157,484 6



4. Investment in subsidiaries continuedThe wholly-owned subsidiaries of the Company at 30 June 2010 are:

Company Country of incorporation Nature of business

Stellar Diamonds Limited Guernsey Holding companyWest African Diamonds plc SARL Guinea Diamond producerCastlebay Resources Limited Scotland Prospecting and exploration of diamondsBasama Diamonds Ltd. and its branch: Republic of Seychelles Prospecting and exploration of diamondsBasama Diamond Ltd. (Sierra Leone Branch) Sierra Leone Prospecting and exploration of diamondsSierra Diamonds Limited and its branch: British Virgin Islands Prospecting and exploration of diamondsSierra Diamonds Limited (Sierra Leone Branch) Sierra Leone Prospecting and exploration of diamondsGuinean Diamond Corporation Ltd. and its subsidiaries Republic of Seychelles Holding companyMano River Diamants Guinee SA Guinea Prospecting and exploration of diamondsRessources Mandala Guinée SARL Guinea Diamond producerFriendship Diamonds Guinee SA Guinea Prospecting and exploration of diamonds

As discussed in note 2.7, the realisation of investments in subsidiaries of $4,157,484 is dependent on the discovery and successful development of economic mineral reserves among other factors.

5. Trade and other receivables30 June

2010 $

30 April 2009

$

Amounts due within one year:VAT 11,033 11,231Amounts due after one year:Amounts due from subsidiaries 7,825,153 10,323,498

7,836,186 10,334,729

Amounts due from subsidiaries comprise of:Stellar Diamonds Limited 7,017,948 –West African Diamonds plc SARL 807,205 –Grampian Resources Limited – 10,299,209Castlebay Resources Limited – 24,289

7,825,153 10,323,498

The Directors consider the carrying amount of trade and other receivables is approximately equal to their fair value. The outstanding amounts are unsecured and will be settled in cash. No guarantees have been given or received. As discussed in note 2.7, the realisation of amounts due from subsidiaries of $7,825,153 is dependent on the discovery and successful development of economic mineral reserves among other factors. 6. Share capital, share premium and warrant reserveShare capitalAuthorised:Unlimited number of ordinary shares of 5p each.

NumberShare capital

$Share premium

$

Alloted called-up and fully paid:Balance at 1 May 2008 8,150,152 599,615 11,430,678Issue of shares 5,506,017 405,084 2,740,252

Balance as at 30 April 2009 13,656,169 1,004,699 14,170,930Issue of shares 4,333,335 367,604 694,486Conversion of debt to equity 343,764 26,840 80,521Exchange difference arising on change in functional currency – 32,274 812,730Issue of shares on acquisition of Stellar 53,248,164 4,157,484 –Issue of placing shares 25,000,000 1,951,938 5,784,958Share issue costs – – (380,023)Share warrants issued – – (143,024)Bonus shares issued to directors 112,500 8,784 26,044Other shares issued 4,500,000 325,641 976,921

101,193,932 7,875,264 22,023,543

As part of the acquisition of Stellar Diamonds Limited, the Company performed a 5 for 1 share consolidation. The number of shares stated from 1 May 2008 to 30 April 2009 has been restated for the 5 for 1 share consolidation.

On 6 August 2009, a total of 4,333,335 new ordinary shares were issued at 15p per share to fund ongoing operations.



6. Share capital, share premium and warrant reserve continuedOn 22 February 2010, a total of 343,764 new ordinary shares were issued at 20p per share to the previous Directors of the Company in consideration for their unpaid fees.

On 22 February 2010, the Company completed its acquisition of Stellar Diamonds Limited in a share for share exchange.

Under the terms of the acquisition agreement, the Company agreed to acquire the entire issued share capital of Stellar Diamonds Limited for a consideration equating to approximately three times the value of WAD, represented by an approximate 75:25 split of the share capital in the enlarged group prior to the issue of Placing shares – 75% being attributable to consideration shares to be allotted to Stellar Diamonds Limited shareholders and 25% being attributable to ordinary shares held by WAD shareholders.

A total of 53,248,164 consideration shares were issued and allotted to the shareholders of Stellar Diamonds Limited on the basis of 1.005 new ordinary shares in the Company for each Stellar Diamonds Limited share. In accordance with Companies Act 2006, the value attributed to the acquisition is the par value of the issued shares of $4,157,484.

On 22 February 2010 the enlarged Company raised $7,356,873, net of share issue costs of $380,023, in new funds (the “Placing”) by issuing 25,000,000 new ordinary shares.

On 23 February 2010, a total of 112,500 new ordinary shares of 5p each (“bonus shares”) were allotted and issued to Karl Smithson, Chief Executive Officer, and Angus Ogilvie, Finance Director. These allotments are in satisfaction of half of their respective listing bonuses of £30,000 and £15,000 following the successful admission of the Company on AIM (as set out in the Company’s Admission Document).

On 24 May 2010, the Company announced the completion of the share purchase agreement with Petra Diamonds Limited in respect of the acquisition of the remaining 51% of the Kono kimberlite project in Sierra Leone in exchange for the issuance of 4,500,000 new ordinary shares to Petra Diamonds Limited as consideration for the agreed purchase price of £900,000, at a price of 20p per share.

Share warrantsThe warrants reserve represents the value of the warrants issued by the Company to subscribe for shares in the Company.

Number of warrants

Warrant reserve

$

At 1 May 2009 – –Share warrants issued on acquisition of Stellar Diamonds Limited 18,776,363 269,801Share warrants issued on placing of new shares 1,190,125 143,024Expired warrants (18,776,363) (269,801)

At 30 June 2010 1,190,125 143,024

Pursuant to the terms of the reverse acquisition agreement with Stellar Diamonds Limited, 18,679,451 warrants dated 19 December 2008 and 3,500 warrants dated 31 March 2008 originally issued by Stellar Diamonds Limited and exercisable at £0.25 and £1.00 per share, respectively were cancelled. 18,772,846 and 3,517 new warrants to subscribe for shares in the Company were granted exercisable at £0.251 and £1.005 per share, respectively. These warrants expired on 31 March 2010 and 30 June 2010, respectively.

The Company granted 1,190,125 warrants to the Company’s broker for the Placing to subscribe for up to 1,190,125 ordinary shares of £0.05 each in the Company exercisable for a price of 20p per share warrant. The warrants issued have resulted in a charge to the share premium of $143,024 using the Black-Scholes option pricing model and the following assumptions: nil dividend yield, a weighted average expected volatility of the Company’s share price of 67%, a weighted average annual risk free rate of 2.76% and an expected life of two years. 7. Share optionsThe share option reserve represents the value of the share options issued to the Company’s Directors and employees under the Company’s share option scheme.

As part of the acquisition of Stellar Diamonds Limited, the Company performed a 5 for 1 share consolidation. The number of share options stated from 1 May 2008 to 30 April 2009 has been restated for the 5 for 1 share consolidation.

On 23 July 2009, the Company issued 600,000 share options to Directors and employees. The fair value of $89,077 was calculated using the Black-Scholes option pricing model and the following assumptions: nil dividend yield, a weighted average expected volatility of the Company’s share price of 63.8%, a weighted average annual risk free rate of 0.5% and an expected life of seven years.

As part of the acquisition on 22 February 2010, 3,992,000 Stellar Diamonds Limited options were surrendered in exchange for the issuance of 4,012,463 new options in the Company. The number of replacement options issued was determined by the exchange ratio used in the acquisition of 1.005.

The exercise price of 3,482,325 replacement options was modified from £0.225 to £0.20 per share. The terms and conditions of 530,138 replacement options were the same as before.



7. Share options continuedThe replacement share options were measured and recorded at their fair value of $636,974 on the date of issuance, using the Black-Scholes option pricing model and the following assumptions: nil dividend yield, a weighted average expected volatility of the Company’s share price of 67%, a weighted average annual risk free rate of 2.76% and an expected life of seven years.

The number of options outstanding and exercisable at 30 June 2010 and changes during the period are as follows:

30 June 2010 30 April 2009

Number of options

Weighted average

exercise price £

Number of options

Weighted average

exercise price £

Outstanding and exercisable, beginning of period 820,000 0.655 820,000 1.024Options granted 600,000 0.150 – –Replacement for Stellar Diamonds Limited options on acquisition (repriced) 3,482,325 0.200 – –Replacement for Stellar Diamonds Limited options on acquisition (not repriced) 530,138 0.875 – –

Outstanding and exercisable, end of period 5,432,463 0.388 820,000 1.024

As at 30 June 2010 the following stock options were outstanding and exercisable:

Number of stock options outstanding

Exercise price per share

£ Expiry date

100,000 1.000 21-Feb-1180,000 1.175 21-Feb-11400,000 1.000 15-Sep-13100,000 1.000 02-Dec-1320,000 1.000 08-Feb-1420,000 1.175 10-Apr-1440,000 1.150 17-Jul-1460,000 1.225 30-Sep-14600,000 0.150 23-Jul-16530,138 0.875 22-Feb-17 3,482,325 0.200 22-Feb-17

5,432,463

EligibilityOptions may be granted to Directors or employees of or consultants to the Company.

Grant of optionsThe price per ordinary share at which options may be exercised shall be determined by the Directors, such price to be not less than the average closing market price for the shares in the five dealing days preceding the grant of the option. An option granted under the share option scheme (the “Share Option Scheme”) may not be transferred, assigned, charged or otherwise alienated other than to the participant’s personal representative on death. Any other transfer, assignment, charge, disposal or dealing with the rights and interest of the option will render the option void.

Limits on the issue of new sharesThe aggregate number of shares issued under or pursuant to options granted under the Share Option Scheme shall not exceed 10% of the shares issued in the capital of the Company from time to time.

Option termNo option granted under the Share Option Scheme shall be capable of being exercised more than seven years after the date upon which it was granted.

AdjustmentsFollowing an adjustment of the share capital of the Company, the Board may adjust the number of ordinary shares under option and/or the option exercise price.

8. Trade and other payables30 June

2010 $

30 April 2009

$

Amounts due within one year:Trade creditors and accruals 39,969 13,850Amounts owed to related parties – 221,332

39,969 235,182

The Directors consider the carrying amount of trade and other payables is approximately equal to their fair value.



9. Related party and other transactionsUp until 22 February 2010, Stellar Diamonds plc shared offices and overheads with a number of companies based at 162 Clontarf Road, Dublin 3. These companies had a number of common directors.

During the period $25,500 (2009: $89,708) was paid by other companies and recharged to the Company in respect of these overheads and office costs as follows:

Fourteen months ended

30 June 2010

$

Twelve months ended

30 April 2009

$

Cooley Distillery plc 25,500 39,238African Diamonds plc – 50,470

25,500 89,708

As at 30 June 2010 $nil (30 April 2009: $38,382) was due to Cooley Distillery plc and $nil (30 April 2009: $nil) was due to African Diamonds plc.

On 26 January 2009, the Company was notified that John Teeling, a Director of the Company at that date, had pledged 1,015,862 ordinary shares of 1p each as security against personal borrowings.

Amounts due from subsidiaries at 30 June 2010 are disclosed in note 5.

The remuneration of the directors, who are considered to be the key management personnel, are as follows:

Salary or fees $

Listing bonus paid in cash

$

Listing bonus paid in shares

$

Fourteen months ended

30 June 2010

$

Twelve months ended

30 April 2009

$

Lord Daresbury 19,667 – – 19,667 –N. Karl Smithson 78,377 21,784 23,219 123,380 –Angus Ogilvie 42,586 11,574 13,657 67,817 –Luis da Silva 5,333 – – 5,333 –Steven Poulton 8,333 – – 8,333 –James Campbell 67,384 – – 67,384 83,854Alex Van Zyl 26,954 – – 26,954 33,542John Teeling 53,907 – – 53,907 67,083James Finn 26,954 – – 26,954 33,542

329,495 33,358 36,876 399,729 218,021

10. Parent company income statementAs permitted by Section 408 of the Companies Act 2006 the parent company’s income statement has not been presented in these financial statements. The loss after taxation for the parent company for the fourteen month period ended 30 June 2010 is $15,574,646 (year ended 30 April 2009: $362,653).

11. Subsequent eventsOn 10 August 2010, the Company granted a total of 2,950,000 share options to Directors and employees at an exercise price of 11p per ordinary share exercisable for a period of five years from the date of grant. On the same date, the Company issued 72,727 newly-issued ordinary shares of 5p each to the Company’s Chief Operating Officer as a performance related payment.

On 12 October 2010, the Company placed 38 million new ordinary shares of 5p each (the “Placing Shares”) with institutional and other investors at par value to raise gross proceeds of £1.9 million (the “Placing”). The funds will be used to accelerate exploration at the Droujba Kimberlite pipe in Guinea. The Company also agreed to grant warrants to each placee on the basis of one warrant for every two Placing Shares subscribed (the “Placing Warrants”). Each Placing Warrant will entitle the holder to subscribe for one new ordinary share at a price of 12p each for a period of 18 months from the date of admission of the Placing Shares to trading on AIM.

Following the Placing the enlarged issued share capital will be 139,266,659 ordinary shares and the Placing Shares will represent approximately 27.3% of the enlarged issued share capital. The total number of Placing Warrants, together with those issued in lieu of fees, will be 23,064,383.


Shareholder information

Registered Office 41 Maiden LaneLondonWC2E 7LJ

T: +44 (0) 20 7257 2930 F: +44 (0) 20 7257 2939 E-mail: [email protected]

Chief Executive OfficerKarl SmithsonCell: +44 (0) 778 370 7971E-mail: [email protected]

Company SecretaryAngus OgilvieCell: +44 (0) 788 520 1903E-mail: [email protected]

Nominated Adviser and BrokerRBC Capital Markets71 Queen Victoria StreetLondonEC4V 4DET: +44 (0) 20 7489 1188F: +44 (0) 20 7029 7900

Joint BrokerNorthland Capital Partners Limited30 Old Broad StreetLondonEC2N IHTT: +44 (0) 20 7448 4400F: +44 (0) 20 7448 4477E-mail: [email protected]

SolicitorsCobbetts LLPOne Colmore SquareBirminghamB4 6AJT: 0845 404 2404 F: 0845 404 4144E-mail: [email protected]

Auditors Deloitte & ToucheDeloitte & Touche HouseEarlsfort TerraceDublin 2IrelandT: 353 (1) 417 2200F: 353 (1) 417 2300

RegistrarsComputershare Services (Ireland) LimitedHeron HouseCorrig RoadSandyford Industrial EstateDublin 18


Notes


Notes

Stellar Diamonds plc is a London (AIM:STEL) listed diamond mining and exploration company that is focused on the renowned, yet under-developed, diamond region of West Africa. The Company has two projects in production in Guinea, Mandala and Bomboko, as well as 100% rights over four high-grade kimberlite projects in Sierra Leone and Guinea that are at various stages of development from drilling through bulk sampling to trial mining. Contents

Overview01 Highlights02 At a Glance04 Chairman’s Statement

Business Review06 Chief Executive’s Statement08 Mandala10 Bomboko12 Tongo14 Kono16 Droujba17 Bouro18 Corporate Social Responsibility

Governance20 Board of Directors22 Directors’ Report24 Statement of Directors’

responsibilities

Financial Statements25 Independent Auditor’s report26 Consolidated Statement of

comprehensive income27 Consolidated statement

of financial position28 Consolidated statement

of changes in equity29 Consolidated statement of cash flow30 Notes to the consolidated

financial statements

62 Shareholder information

Pol-K Diamonds

A leading diamond producer in West Africa

Stellar Diamonds plcAnnual Report & Accounts 2010

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Stellar Diamonds plc41 Maiden LaneLondonWC2E 7LJ

T: +44 (0) 20 7257 2930F: +44 (0) 20 7257 2939E-mail: [email protected]

www.stellar-diamonds.com

Documents

Sellar Diamonds AR 2010