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                                  AGREEMENT ON
                  EXPLORATION OF NATAL I & NATAL II CONCESSIONS

                                       13

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                                  AGREEMENT ON
                  EXPLORATION OF NATAL I & NATAL II CONCESSIONS


         This Agreement is made as of this 12th day of October, 1998 ("Effective
Date") between Dragon Diamond Corporation ("Dragon")
and
South African  Diamond  Holding Corp.  ("SADIA")  together with its wholly owned
United  States and  Venezuelan  subsidiaries,  namely  Adamantine  Mining  Corp.
(U.S.A.)   ("Adamantine   U.S.A."),   and  Compania  Minera   Adamantine,   C.A.
("Adamantine  Venezuela"),  all  hereunder  referred to  collectively  as "SADIA
Group"

RECITALS

            A. South African Diamond Mining Corp.  wholly owns Adamantine Mining
Corp.  (U.S.A.),  and  Adamantine  Mining  Corp.  (U.S.A.)  wholly  owns  Minera
Adamantine,  C.A., and Minera Adamantine C.A. has exclusively contractual rights
(the "Contract  Rights") to carry out such activities  consisting of exploration
for, and development and exploitation of,  gold-bearing ores, alluvial diamonds,
and  diamond-bearing  veins  throughout  the territory that makes up the Guayana
Region,  in the Capital  District of Cedeno in the State of Bolivar,  Venezuela,
known  as  Natal  I and II (the  "Properties")  totally  approximately  6,378.17
hectares.

            B.  Dragon  wishes to acquire an  interest  in the  Contract  Rights
exclusively for the Properties,  and SADIA Group is willing to grant any and all
of the Contract Rights to Dragon.


            ARTICLE I 1.1 General. Dragon and SADIA Group hereby enter into this
Agreement for the purposes hereinafter stated. All of the rights and obligations
of the  Participants in connection with the Properties and all Operations  shall
be subject to and  governed  by this  Agreement.  SADIA Group  hereby  grants to
Dragon  exclusively any and all of the Contract Rights for the exploration,  and
development and exploitation  of,  gold-bearing  ores,  alluvial  diamonds,  and
diamond-bearing  veins throughout the Properties  according to the terms of this
Agreement.

            1.2  Purposes.  This  agreement  is entered  into for the purpose of
establishing  diamond  operations  within the Properties,  which may include the
following:-

               a) to establish alluvial exploration and exploitation programs;
               b) to establish central and field diamond buying offices;
               c) to establish a Miner's Small Tools Program;
               d) to evaluate existing and explore new kimberlite locations;
               e) to evaluate the possible development and mining by exploration
and, if justified,  to engage in development  and mining;
               f) to conduct further exploration within the Properties;
               g) to  perform  any other  activity  necessary,  appropriate,  or
incidental  to any of the foregoing  included in the Contract  Rights within the
Properties.

                                   Page 1 of 7

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            1.3 Term.  The term of this  Agreement  shall be for a term of three
(3) years from the Effective  Date unless the contract is earlier  terminated as
herein provided.


ARTICLE II
REPRESENTATIONS AND WARRANTIES; TITLE TO ASSETS; INDEMNITIES

            2.1 Representations  and Warranties of Both Participants.  As of the
Effective Date, each Participant warrants and represents to the other that:-

            a) it is a  corporation  duly  organized and in good standing in its
state of  incorporation  and is qualified to do business and is in good standing
in those  states  where  necessary  in order to carry out the  purposes  of this
Agreement;

            b) it has the capacity to enter into and perform this  Agreement and
all transactions contemplated herein and that all corporate, board of Directors,
shareholder,  surface and mineral rights owner, lessor, lessee and other actions
required to  authorize  it to enter into and perform  this  Agreement  have been
properly taken;

            c) it will not breach any other agreement or arrangement by entering
into or performing this Agreement;

            d) it is not subject to any governmental  order,  judgment,  decree,
debarment, sanction or Laws that would preclude the permitting or implementation
of Operations under this Agreement; and

            e) this  Agreement has been duly executed and delivered by it and is
valid and binding upon it in accordance with its terms.

            2.2  Representations of SADIA Group. As of the Effective Date, SADIA
Group makes the following representations to Dragon:

               a) With respect to those  Properties SADIA Group has the Contract
Rights in the Properties free and clear of all encumbrances or defects in title.

               b) With respect to those Properties in which SADIA Group holds an
interest under the Contract Rights to the Properties:

                  (i) SADIA  Group  has the  exclusive  Contract  Rights of such
Properties;
                  (ii)  SADIA  Group is not and has not  received  any notice of
default of any of the terms or provisions of such Contract Rights;
                  (iii) SADIA Group has the authority  under the Contract Rights
to perform fully its obligations under this Agreement;
                  (iv) to SADIA Group's knowledge, the Contract Rights are valid
and in good standing;
                  (v) SADIA Group  shall not sell or transfer  any or all of its
Contract Rights in the Properties nor lease,  mortgage or otherwise encumber the
Properties  during the term of this Agreement  without the prior written consent
of Dragon, such consent

                                   Page 2 of 7

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not to be  unreasonably  withheld by Dragon.  SADIA Group hereby  grants  Dragon
first  right of refusal on any sale or  transfer  or it's  interest  or Contract
Rights in the  Properties.  Dragon  must  exercise  it's right of first  refusal
within 15 days of notice from SADIA  Group's  intent to sell or transfer  any or
all of it's  Contract  Rights in the  Properties.  In the event  SADIA sells the
Contract Rights to a third party,  then such Contract Rights shall be subject to
the rights and interests conferred to Dragon by this Agreement

               (c) SADIA  Group  provides  to Dragon  exclusively  the  Contract
Rights  to  carry  out  such  activities  consisting  of  exploration  for,  and
development and exploitation  of,  gold-bearing  ores,  alluvial  diamonds,  and
diamond-bearing veins throughout the territory that makes up the Guayana Region,
in the Capital District of Cedeno in the State of Bolivar,  Venezuela,  known as
Natal I and II (the "Properties") totally approximately  6,378.17 hectares,  for
the term of this Agreement.


ARTICLE III
RELATIONSHIP OF THE PARTICIPANTS

            3.1 No  Partnership.  Nothing  contained in this Agreement  shall be
deemed to constitute  any  participant  the partner or the venture of the other,
or, except as otherwise herein expressly provided, to constitute any Participant
the agent or legal  representative  of the  other,  or to create  any  fiduciary
relationship between them.


ARTICLE IV
CONTRIBUTIONS BY PARTICIPANTS 

            4.1 Dragon will carry out exploration  programs on the Properties as
follows:- 
               a) To target diamond producing areas ("Target Area") according to
Dragon's engineer's recommendations;
               b) To pursue the purposes set out in section1.2 herein;

            4.2  Dragon agrees to:
               a) issue to SADIA: -

                  (i) 60,000 shares of Dragon as set out in section 4.8;
                  (ii) 80,000 shares of Dragon on the first  anniversary of this
agreement;
                  (iii) 110,000  shares of Dragon on the second  anniversary  of
this agreement;
               b) spend $250,000 in exploration on the Properties as follows:
                  (i) $50,000 during the first year of this agreement;
                  (ii) $80,000 during the second year of this agreement;
                  (iii) $120,000 during the third year of this agreement.

               (c) In the event that Dragon  shall spend funds in excess of that
stated in 4.2(b)(i)(ii)  in any year of this agreement,  then, that excess shall
be carried forward to the next year.

                                   Page 3 of 7

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            4.3 This  Agreement  is subject to the  approval of the  authorities
having jurisdiction and Dragon agrees to instruct its attorneys to apply for the
approval and issuance of 60,000  Dragon shares to SADIA that within five working
days of the effective date of this agreement.

            4.4 In the event that Dragon shall: -
               (i) issue the 250,000 shares of Dragon to SADIA;
               (ii) spend  U.S.$250,000 as stated in clause 4.2(b) herein;  then
SADIA shall cause SADIA Group to grant and  transfer to Dragon a 50% interest in
the Properties.  If in addition to issuing the above mentioned 250,000 shares to
SADIA,  Dragon shall spend a total of $750,000 in  exploration on the Properties
within three (3) years of the effective date of this Agreement, then SADIA shall
cause  SADIA  Group to grant  and  transfer  to  Dragon  a 75%  interest  in the
Properties.

            4.5 In the event  Dragon's  explorations  indicates  the presence of
such quantities of diamonds that, in Dragon's sole judgment,  it is economically
feasible  to mine,  Dragon  and SADIA  Group will form a joint  venture  company
("Joint Venture Company") dedicated to mining that Target Area of the Property.

            4.6 Each Joint Venture Company will be owned and controlled  equally
by SADIA Group and Dragon and the Joint Venture Company's function will be to:

               a) engage  in  alluvial,  fluvial  and  kimberlite  mining of the
target area;

               b) continue  development of the target area,  which would include
test-mining,  pilot  plant  recovery  of  diamonds  and  negotiating  with major
partners and financial institutions.

               Notwithstanding  the  foregoing,  if in addition to spending  the
funds as set out in section 4.2(b) herein,  Dragon spends an additional $500,000
on the  Properties  then Dragon shall have a 75%  interest in any Joint  Venture
Company and SADIA Group shall have a 25% interest in any Joint Venture Company.

            4.7 To  accomplish  and comply with Sections 4.4, 4.5 and 4.6 above,
the  Corporacion  Venezolana  de Guayana  ("C.V.G.")  will be requested by SADIA
Group  to  allow  assignment  of all or part of SADIA  Group's  interest  in the
Properties  to the Joint  Venture  company or companies or to Dragon as the case
may be. Should the C.V.G.  not allow any such  assignment,  then SADIA Group and
Dragon  will  enter  into  whatever  inter-corporate  arrangements  through  the
transfer of the common stock of Adamantine  U.S.A.  or  Adamantine  Venezuela or
other means that are mutually agreeable to the Participants, that:

               a)  in  regard  to  Section  4.4  will  accomplish  an  effective
assignment to Dragon of either:

                  (i) 50% interest in the Properties; or

                  (ii) 75% interest in the  Properties  in the event that Dragon
spends an additional $500,000 on the Properties, as the case may be.

               b)  in  regard  to  Section  4.6  will  accomplish  an  effective
assignment to Dragon of either:

                                   Page 4 of 7

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                  (i) a 50% interest in the subject target area as  contemplated
in section 4.4 herein; or

                  (ii) a 75%  interest in the  subject  target area in the event
that Dragon spends an additional  $500,000 on the Properties  within the term of
the Agreement.

            4.8  Notwithstanding  section 4.5 herein, if either party elects not
to participate  in an individual  Joint Venture  company,  then that party shall
have no further  interest in or right to that specific target area and the other
party shall have the right to proceed  unilaterally with the further development
of the target area.

            4.9 On each  Target Area where  Dragon  elects not to proceed to the
next step (hereinafter called "SADIA Site"),  Dragon will provide SADIA with the
exploration  data on that SADIA Site and Dragon will have no further interest in
or rights to each SADIA  Site.  On each  Target  Area that  SADIA  elects not to
proceed to the next step (hereinafter  called "Dragon Site"),  SADIA will assign
all of its interest in the Dragon Site to Dragon,  and should  C.V.G.  not allow
such   assignment  then  SADIA  Group  and  Dragon  shall  enter  into  whatever
inter-corporate  arrangements  that will  accomplish an effective  assignment to
Dragon of a 100% interest in each Dragon Site.

            4.10  SADIA  will  provide  to Dragon a Notice of Intent to sell the
Dragon shares issued to SADIA pursuant to this  Agreement,  at which time Dragon
shall  have the right to  purchase  the said  shares  issued to SADIA at a price
equal to the  greater  of the  market  value of the  shares or $1.00 per  share,
within 30 clear days of receiving the said Notice of Intent to sell.

            4.11  Notwithstanding the foregoing,  in the event that Dragon fails
to issue the shares or fails to spend the funds as stated in clause 4.2  herein,
then this agreement  shall be null and void, and neither party hereto shall have
any recourse against the other to enforce the terms of this agreement.


ARTICLE V
GENERAL PROVISIONS

            5.1 Notices All notices,  payments  and other  required or permitted
communications  ("Notices") to either participant shall be in writing, and shall
be addressed respectively as follows:

                  If to SADIA Group:- South African Diamond Holding Corp.
                                      P.O. BOX 9
                                      Payson Arizona 85541
                  Attention           Thomas L. Crom III
                  Telephone           (520) 474-9151
                  Facsimile           (520) 474-8354

                                      
                                   Page 5 of 7

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                  If to Dragon:-    Dragon Diamond Corporation
                                    P.O. BOX 34007
                                    Vancouver, B.C. Canada, V6J 4M1
                  Attention         Larry N. Lorenz
                  Telephone         (604) 737-8597
                  Facsimile         (604) 737-8593

            5.2  Currency.  All  references  to dollars  or $ herein  shall mean
lawful currency of the United States of America.

            5.3 Force  Majeure  Except for the  obligation to make payments when
due hereunder, the obligations of a Participant shall be suspended to the extent
and  for  the  period  that  performance  if  prevented  by any  cause,  whether
foreseeable or unforeseeable,  beyond its reasonable control, including, without
limitation,  labor disputes (however arising and whether or not employee demands
are reasonable or within the power of the  Participant  to grant);  Acts of God;
Laws,  instructions  or  requests  of any  government  or  governmental  entity;
judgments or orders of any Court;  inability to obtain on reasonably  acceptable
terms any public or private license, permit or other authorization;  curtailment
or suspension of activities to remedy or avoid an actual or alleged,  present or
prospective  violation of Environmental Laws; action or inaction by any federal,
state or local authority that delays or prevents the issuance or granting of any
approval or authorization  required to conduct  Operations beyond the reasonable
expectations   of  the  Participant   seeking  the  approval  or   authorization
(including,  without  limitation,  a failure to complete any review and analysis
required by a National  Environmental  Policy Act or any similar  Venezuelan law
within  one month of  initiation  of that  process);  acts of war or  conditions
arising out of or attributable  to war,  whether  declared or undeclared;  riot,
civil strife,  insurrection or rebellion;  fire, explosion,  earthquake,  storm,
flood, sink holes, drought or other adverse weather condition;  delay or failure
by  suppliers  or  transporters  of  materials,  parts,  supplies,  services  or
equipment or by  contractors'  or  subcontractors'  shortage of, or inability to
obtain,  labor,  transportation,   materials,  machinery,  equipment,  supplies,
utilities  or  services;  accidents;   breakdown  of  equipment,   machinery  or
facilities;  actions by native rights  groups,  environmental  groups,  or other
similar special interest  groups;  or any other similar special interest groups;
or any other cause whether similar or dissimilar to the foregoing.  The affected
Participant  shall  promptly  give  notice  to  the  other  participant  of  the
suspension of performance,  stating  therein the nature of the  suspension,  the
reasons therefor,  and the expected duration thereof.  The affected  Participant
shall  resume  performance  as soon as  reasonably  possible.  The  term of this
Agreement shall be extended by an amount of time equal to a period or periods of
suspension.


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            5.4 Further  Assurances  Each of the  Participants  shall take, from
time to time and without  additional  consideration,  such  further  actions and
execute such additional instruments as may be reasonably necessary or convenient
to implement and carry out the intent and purpose of this Agreement or as may be
reasonably required by lenders in connection with project financing.



            5.5  Counterparts  This  Agreement  may be executed by any number of
counterparts,  and  it  shall  not  be  necessary  that  the  signatures  of all
Participants be contained in any counterpart.  Each counterpart  shall be deemed
an original,  but all  counterparts  together shall  constitute one and the same
instrument.

                                   Page 6 of 7

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Signed by South African Diamond Holding Corp. this ______ day of September, 1998
by:


/s/Thomas L. Crom III                               
Thomas L. Crom III
President

Signed by Adamantine Mining Corp. this _______ day of September, 1998 by:


/s/Thomas L. Crom III                               
Thomas L. Crom III

Signed by Compania Minera Adamantine C.A. this _____ day of September, 1998 by:



/s/Thomas L. Crom III                               
Thomas L. Crom III



Signed by Dragon Diamond Corporation this _______ day of September, 1998 by:



/s/Larry N. Lorenz                          /s/Aubrey L. McGinnis   
Larry N. Lorenz                             Aubrey L. McGinnis
President                                   Secretary-Treasurer

                                       21

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                                   Exhibit 27

                             Financial Data Schedule

                                       21
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