Diamonds in Canada November 2015 by The Northern Miner Group

—IN CANADA—

November | 2015

Kennady causes a

commotion

Diamond stocks fight headwinds

Botswana beckons

It has “ everyone excited ”

says president and CEO Patrick Evans

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Contents

NOVEMBER 2015

14 Editorial Diamond market in wait-and-see mode. . . . . . . . . . . 4

Big changes at De Beers Canada New CEO discusses HQ move to Calgary. . . . . . . . . . 18

Rough year creates opportunity in diamonds

On the cover: Patrick Evans, president and CEO of Kennady Diamonds at the Kennady North project, in the Northwest Territories. Credit: Kennady Diamonds

A Q&A with Dundee Capital’s Matthew O’Keefe . . . . . 5

Stornoway benefits from ‘good timing’

Kennady causes a commotion

Renard on track for commercial production in 2017 . . . . . . . . . . . . . . . . . . . . . . . . . . 20

A visit to the ‘exciting’ Kennady North project By Lesley Stokes. . . . . . . . . . . . . . . . . . . . . . . . . . . . 10

Sable PEA sweetens Ekati Dominion works to add mine life to operation. . . . 22

Botswana beckons Prolific diamond nation attracts explorers By Alisha Hiyate. . . . . . . . . . . . . . . . . . . . . . . . . . . . . 14

Digital copy available to subscribers at www.northernminer.com

38 Lesmill Rd, Unit 2, Toronto, Ontario, M3B 2T5 Phone: (416) 510-6768 Fax: (416) 510-5138 E-mail: ahiyate@northernminer.com

Publisher: Anthony Vaccaro

Editor: Alisha Hiyate

Advertising Sales: Joe Crofts Dave Chauvin

Art Director: Melissa Crook

Production Manager: Jessica Jubb Contributing Writer: Lesley Stokes

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Alisha Hiyate Editor

“

Diamonds have become more expensive for most of the world, courtesy of the strong U.S. dollar.

”

Diamond market in wait-and-see mode

he response of diamond miners to the decline in rough prices over the past year — they’ve fallen around 16%, according to the WWW rough diamond index — has been variable. The world’s largest diamond producer by value, De Beers, has slashed production three times in 2015 in response to the market slowdown. For the first nine months of the year, De Beers’ output is down 11% compared to the same period in 2014. De Beers’ guidance for 2015 has shrunk to around 29 million carats from between 32 million and 34 million carats at the start of the year. Perhaps more telling, De Beers’ sales volumes were down 35% as of the end of the third quarter compared to the same period in 2014, as the diamond powerhouse has allowed sightholders to defer purchases. Alrosa, the world’s largest producer by volume, has gone in the opposite direction. The Russian diamond miner increased production for the first nine months of 2015 by 16% over the same period in 2014. Its production target for the year remains unchanged at 38 million carats, and its third-quarter output of 11.6 million carats was its highest quarterly output recorded in seven years. At the same time, Alrosa has reported prices for its goods fell 8% in the third quarter alone, while diamond sales fell 44% year on year to $563 million for the quarter. Rio Tinto has also cut production by about 2 million carats to 18 million carats for 2015. Meanwhile, smaller diamond miners who don’t have the volume to influence the market haven’t pulled in production. Whether the decline in rough prices is a mere blip — or something longer-term as seen

in other parts of the mining industry over the past few years — may become apparent during the upcoming holiday season. Diamond jewelry demand in China has weakened due to the economic slowdown there, and diamonds have become more expensive for most of the world, as other currencies have fallen against the strong U.S. dollar. Therefore, demand in the United States will play a paramount role. In this issue of Diamonds in Canada, Matthew O’Keefe, vice-president and senior analyst at Dundee Capital Markets, helps explain what’s going on in the diamond market and the reasons for the decline in prices (see facing page). O’Keefe expects diamonds to pick up next year — if we see a strong holiday season this winter. He also shares his top diamond equity picks with us. Our interview with De Beers Canada’s new CEO, Kim Truer (Page 18), also touches on the market, as well as the company’s corporate restructuring and progress at its 51%-owned Gahcho Kué project. And we also include some intriguing news from diamond explorers: Northern Miner staff writer Lesley Stokes reports from Kennady Diamonds’ Kennady North project (Page 10), and we report the latest news from several explorers and developers who are finding fertile ground for diamonds in Botswana (Page 14).

As ever, we welcome your feedback at ahiyate@northernminer.com.

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Q&A

Rough year creates opportunity in diamonds Diamond equities have had a rough ride in 2015, but what about next year? In an interview in early November, Matthew O’Keefe, vice-president and senior analyst at Dundee Capital Markets, explains why diamond prices have been hard hit over the past year, and why he expects 2016 to be a more exciting year for the diamond sector.

Diamonds in Canada: For quite a while diamond stocks were the only segment of the mining sector that was doing well. That’s changed over the past year with diamond producers down on average 32% for the year and developers down 18%. Why have diamond equities started to follow the other commodity equities down? Matthew O’Keefe: The main driver has been diamond prices — they have been weaker and weakening since last year and that’s put pressure on equities. Year-to-date, rough diamond prices are down about 16% and polished prices are down about 7%. The catalyst that started the decline was the closure last year of the Antwerp Diamond bank and that really put a lot of pressure on the middle pipeline — the cutters and polishers — where a lot of the inventory, both polished and rough, has been stored traditionally. The result has been a bit of a liquidity crisis for the middle pipeline, so they have had to sell more inventory and reduce the amount of inventory they’re carrying. So it’s not so much that demand for diamonds has dried up — it’s that there’s been a shock to the system putting more diamonds up for sale than

An 8.03-carat pink diamond from Lucara Diamond’s Karowe mine. Credit: Lucara Diamond

the system can handle in the short term. The pipeline has to be rebalanced, which means moving out a lot of what’s now become oversupply. The other thing that’s added pressure more recently has been the slowdown in the Chinese economy. The Chinese market for diamond jewelry has slowed and basically the stores are overstocked — they were expecting much stronger growth for longer than they’re seeing. That’s put pressure on diamond prices as well and it’s affected the equities. It’s not all bad. In the United States, which accounts for about half of the diamond market overall, demand for diamond jewelry is back to historic levels. DiC: You mentioned that rough prices are down about 16% year-to-date (based on the WWW rough diamond index). Are prices likely to fall further? MO: Maybe not a lot further, but we think there’s probably still some weakness there. We aren’t expecting to see diamond prices recover before the new year. Producers have acted pretty responsibly: De Beers still controls about 40% of the market, November 2015 v 5

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and they did a lot of things that you would want to see a big producer do — they reduced output, so they’re leaving diamonds in the ground. They also allowed their sightholders to defer purchases, so they’re carrying more inventory themselves. And they’ve recently lowered prices, so that should also help the middle market to buy more diamonds once they’ve increased their liquidity. They’ve also increased their advertising budget for this holiday season, which should help to spur demand, so they’re doing what they can to manage the situation and help rebalance the pipeline. We’re coming up on the holiday season here and in the U.S., Drilling at Peregrine Diamonds’ Chidliak project, in Nunavut. Credit: Peregrine Diamonds

Diamonds from Chidliak’s CH-6 kimberlite. Credit: Peregrine Diamonds

which is still about half the market for diamond jewelry, this is the biggest season for diamond jewelry. About 40% of purchasing happens between Christmas and Valentine’s Day. That should help to clear off this oversupply, but we do need to have a strong holiday season. If it’s a weaker season, we might see the muted prices for another year. But right now we’re thinking this will be a good opportunity to clear off a lot of inventory and then lead to restocking next year: so we’re expecting prices to improve early next year. DiC: And you’re still positive in the long-term on diamonds. MO: Long-term we’re positive: The supply dynamic is such that after 2017, there aren’t really any big diamond mines coming onstream. And mines do get old, so supply starts to drop fairly

consistently after 2018. So the long-term fundamentals are quite strong in that there’ll be a lack of supply by the end of the decade that should lead to higher prices. DiC: Let’s talk about some of the equities you cover. Which companies are you most bullish on right now — if not in the short term, then in the medium to long-term? MO: There’s going to be a headwind right through to the end of the year, plus because a lot of diamond stocks have had a rough year, you might get some additional pressure toward the end of the year due to tax-loss selling. So in the short-term it’s not looking too rosy, but in the new year, we’re pretty positive. One company that stands out for us is Dominion Diamond (TSX: DDC; NYSE: DDC). We’re buy-rated, we have a $25 target on Dominion, which is trading at around $12.40 now. It had a rough year — it sold off quite a bit, mostly due to diamond headwinds. But we like it for 2016, which should be a real turning point for them as the Misery Main pipe is coming into production at Ekati. They’re getting into the core of that pipe and it’s very high grade, over 4 carats per tonne, with very good margins. They’ll also get the full effect of Pigeon, which is another pipe they’ve been developing with very high-value stones (US$200 per carat). So the net effect will be a significant increase in their margins and in our model, the cash flow jumps to almost US$300 million, which is more than double this year’s estimate. So 2016 should be a very, very good year for Dominion. Longer-term, we should also see permitting progress on their Jay pipe, which is really important for Ekati’s long-term future. DiC: Dominion Diamond took over Ekati in 2013 and before that they hadn’t been an operator, just a 40% owner of the Diavik mine. How would you rate their performance as an operator? MO: Mostly good. Since they received the operation they’ve effectively updated the plant, which was due for some upgrades, and they were able to increase throughput. They’ve also kept the Pigeon and Misery projects on track. They had a couple of hiccups earlier this year — they had a belt failure at Ekati — but this is mining, those things happen. They managed to get it back on track without too much disruption. A lot of the credit I think goes to their CEO, Chantal Lavoie, who was brought in right after the acquisition. So they brought in the right people to lead the operations and they kept much of the operating team from the former owner BHP Billion. In addition to maintaining and improving operations at the existing and planned projects, they’ve pushed ahead with the Jay and Sable projects, which the previous owner BHP Billiton (NYSE: BHP; LSE: BLT) (not rated) hadn’t shown much interest in. Dominion made the acquisition based on adding mine life and formally adding new projects into the mine plan and they’re on track to do that with both Jay and Sable. I think the market has been particularly tough on Dominion as a reflection of diamond prices as opposed to their performance.

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Dominion Diamond’s Ekati mine, in the Northwest Territories. Credit: Dominion Diamonds

Another positive with Dominion is that their balance sheet has been very well managed in light of the weaker market and this transition that they’ve been going through. It’s exceptionally strong, with about US$340 million in cash and only about US$40 million in debt. So they should be able to fund their development out of cash flow. DiC: What other diamond stocks are you especially positive on going forward?

MO: We’ve got a buy rating and a $1.30 target on Stornoway Diamond (TSX: SWY), which will have first production from its 100%-owned Renard project in Quebec by the end of 2016. That’s a medium-sized mine, about 1.9 million carats with some very good diamond values, about US$200 a carat. The other company in a similar situation is Mountain Province Diamonds (TSX: MPV; NASDAQ: MDM): we have a buy rating and a $6.50 target on them. They are the 49% owner of the Gahcho Kué project in the Northwest Territories that De Beers is operating. They’re on track to start production in mid-2016. It’s a much bigger mine, expected to produce over 5 million carats a year. These are both developers that will become producers next year, and that’s generally a catalyst for a stock price rerating. DiC: How is the strength of the U.S. dollar and the corresponding weakness in the Canadian dollar affecting diamond producers and developers with projects in Canada? MO: For Canadian producers, it should be a wash. We adjusted our models for the F/X rate and there was virtually no change to our NAVs or our targets. The bulk of their costs are in Canadian dollars, and their revenues are in U.S. dollars, so for Canadian

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producers, the diamond price pullback has been offset largely by the exchange rate. Diamond equities have come off, but that’s more of a concern over diamond demand given the oversupply in the pipeline. As far as the developers go, they’ve actually benefited more from the F/X because they raised some proportion of their financings in U.S. dollars when the Canadian dollar was stronger. Mountain Province and Stornoway have benefited from the exchange rate to varying degrees, and regardless of what happens to the Canadian dollar from here, they’ve already locked in some F/X gains. The other thing that’s been benefiting these developers is there’s not a lot of competition to build mines right now, so

MO: We have a buy rating on Kennady Diamonds and their initial diamond results were positive, but lower than we expected. We were expecting US$100-140 a carat and they were at the low end of that, which was a reflection of two things. One, we’re in a weak diamond price environment and they did their valuation at one of the lowest points. Second was an insufficient sample size. It was clear from the discussion in their press release that WWW needed more sample to give a fully confident diamond valuation — they just didn’t have enough stones. So Kennady is doing another 500-tonne bulk sample this winter from the North lobe of the Kelvin kimberlite and that should give them over 2,000 carats in total to come out with a more reliable result. The results were positive,

Overburden removal at Stornoway Diamond’s Renard project, in Quebec. Credit: Stornoway Diamond Credit: Stornoway Diamond

Diamonds from Kennady Diamond’s Kelvin kimberlite. Credit: Kennady Diamonds

they’re getting access to good people, and almost no wait for equipment. It’s a very good time to be building a mine in Canada: We’re not expecting these guys to fall behind schedule or go over budget on their projects. DiC: Lucara Diamond (TSX: LUC) recovers some really large and special diamonds from their Karowe mine in Botswana. Is the market for those high-value stones holding up better? MO: Lucara has seen similar reductions in prices on their run of mine production, their small and regular stones. But with their large stones, they’ve seen continued strength in prices. Mining has moved into the South Lobe of the AK6 kimberlite, where they’ve been getting more of these large stones, so as a result, their overall average diamond value hasn’t been impacted. The bulk of their revenue comes from their higher value and large stones and they’ve proven that the Karowe mine is a consistent and reliable source for those stones. We have a buy rating and a $2.25 target on Lucara. DiC: Just to touch on some of the diamond explorers that you cover, we’ve had diamond valuations recently from both Kennady Diamonds’ (TSXV: KDI) Kennady North project in the Northwest Territories and North Arrow Minerals’ (TSXV: NAR) Qilalugaq project in Nunavut. What did you make of those results?

but they weren’t conclusive so they need to do more work and we’re going to see that coming up. With North Arrow, their valuation results from Qilalugaq were disappointing. It was a small sample as well and they got a pretty low value, US$43-92 a carat. Our research suggested they would need at least US$155 a carat to support an economic project, so that fell well short of the mark. There might be some limited follow-up work — the yellow stones they were hoping to find were there and some of the diamond people we talked to were pretty excited about the colours, but it appears that the shapes and some of the underlying stones didn’t quite carry the value. It’s a fairly large pipe and more work should probably be done on it, but for a company of North Arrow’s size and the expense of doing that, they’ll probably save it for another day and focus on their earlier-stage Pikoo project in Saskatchewan instead. At Pikoo, they’ve discovered several new diamond-bearing kimberlites and are planning a drill program for 2016. We do like that project for its proximity to infrastructure, which means it will have a much lower economic threshold than anything at Qilalugaq or any of the other northern projects and it has great team on it, but it’s still early days. We have a buy rating on North Arrow. DiC: Both Kennady and North Arrow have had more luck accessing financing in what’s been a terrible market for exploration.

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The camp at North Arrow Minerals’ Pikoo project, in Saskatchewan. Credit: North Arrow Minerals

MO: Yes, that’s one of the reasons we like all three of our explorer picks, Peregrine Diamonds (TSX: PGD) being the third. Not only do they have good projects and very good technical teams, they have the boards and the supportive shareholders that will allow them to continue to fund these projects. Diamond exploration is high risk, expensive, and it takes a long time, so you need supportive shareholders that are in it for the long haul and all these three companies have demonstrated they have that. DiC: What milestones does Peregrine have coming up?

MO: We have a buy rating on Peregrine Diamonds. Peregrine was a fairly quiet story in 2015, but they’ve actually got a lot of catalysts coming up in early 2016. They collected a bulk sample from the CH-7 pipe, so we’re expecting to see a valuation on those stones in the new year. They’ll also provide a resource update on CH-6 and CH-7, which will inform a preliminary economic assessment they are targeting for delivery in mid-2016. CH-6 is very high-grade and high-value — usually you get one or the other, but you have both with CH-6. However, it is a fairly small pipe. With two pipes, you might get the tonnage up to support a mine — but you also have to have the value in the second pipe, and that’s what the current program is designed to answer. Disclosures: Matthew O’Keefe beneficially owns, has a financial interest in, or exercises investment discretion or control over, securities issued by SWY. Dundee Capital Markets (DCM) has provided investment banking services to NAR in the past 12 months. DCM and its affiliates, in the aggregate, beneficially own 5% or more of a class of equity securities issued by PGD. Matthew O’Keefe has visited material operations of PGD, DDC, LUC, SWY, MPV and KDI. Matthew O’Keefe and/or DCM has been partially reimbursed for expenses or partial expenses were paid for by SWY, MPV, and KDI for travel to material operations.

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Kennady causes a

commotion

Junior expands highgrade potential at unique Kelvin kimberlite

By Lesley Stokes Special to Diamonds in Canada

ellowknife — There’s a frosty glow across the rugged northern tundra at the Kennady North diamond project, 280 km east of Yellowknife, but the icy shimmer still doesn’t compare to the sparkle of diamonds trapped in the rocks beneath. For the past three years, owner and operator Kennady Diamonds (TSXV: KDI) has been on the hunt for these precious stones at its flagship Kelvin kimberlite pipe, and the high-grade results has everyone in the diamond business intrigued. Diamonds in Canada travelled to Yellowknife to meet with president and CEO Patrick Evans before venturing out on a site visit to see the project and find out why it’s creating such a stir. “Kennady North is one of the highest-grade diamond discoveries in the world,” he says while waiting for a table at the eccentric Bullocks fish restaurant located at the heart of the city. “We believe we have Canada’s next diamond mine and that’s why we’re committing a huge amount of money towards it.”

Flying over Kennady Diamond’s Kennady North project. Credit: Lesley Stokes

The company recently closed the first tranche of a $48-million private placement, which is enough cash, Evans says, to advance the project to full feasibility by the end of 2017. But first, the company is scheduled to deliver the maiden resource for the Kelvin kimberlite pipe before the New Year — building on bulk-sample results released in August. The 443-tonne bulk sample returned 16,247 diamonds weighing 892.9 carats for a sample grade of 2.02 carats per tonne. “We’re calculating the resource based on a conceptual open-pit design that extends to 350 metres depth,” Evans says. The company is expecting a resource estimate to fall between 13 and 16 million tonnes at grades of between 2 and 2.5 carats per tonne. Evans notes that the Kelvin bulk sample was taken from the upper reaches of the deposit, where the grades are usually lower. Leading up to its initial resource later this year, at presstime, Kennady had just released results from a valuation study by WWW International Diamond Consultants on a 989-carat diamond parcel from Kelvin. The diamonds were separated into four parcels representing three zones of the kimberlite. The Zone A parcel of 442.82 carats was modelled at US$56 per carat and the Zone B parcel of 447.05 carats at US$70 per carat. A Zone 3 parcel of 80.44 carats was too small to create a modelled price, but

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the parcel’s average price was reported at US$123 per carat. Values for a small (16.79 carat) fourth parcel of mixed diamonds weren’t released. While there were only 88 diamonds greater than 0.66 carat per stone in the overall parcel, WWW noted that it was “encouraging to see so many good colour white gem stones, especially in the C sample.” The three highest-value diamonds in the parcel were: a 4.22-carat Zone B stone valued at US$1,603 per carat; a 2.58-carat Zone C stone valued at US$1,366 per carat; and a 2.38-carat Zone C stone valued at US$1,196 per carat. In a release, Evans said he was pleased that the results confirm Kelvin hosts a population of high-value, gem-quality white diamonds. “These good results were achieved despite the valuation being done at a challenging time with the rough diamond price index at multi-year lows,” he noted. The company will follow up with a 500-tonne bulk sample from the Kelvin North Lobe in early 2016, which is expected to more than double the Kelvin diamond parcel to over 2,000 carats, the size recommended by the CIM for accurate revenue modelling for a feasibility level study.

Onsite at Kennady North. Credit: Lesley Stokes

for something like that, then you’re certainly not going to find this. Kelvin is the first of its kind: It’s unique and it has everyone excited.” Peering outside the plane window, it’s easy to see how the lakes can be an easy distraction for explorers at these northern latitudes. Scattered across the rolling and rugged landscape are a countless number of irregularly shaped bodies

Geological model At the site, Evans uses a 3-D-printed geological model to demonstrate the unique shape and grade distribution of the kimberlite — a special type of igneous rock that originates from deep within the earth’s mantle. He explains that around 150 km below the surface, high temperatures and pressures condense any carbon stored in the rocks into a diamond. If one of these mantle plumes intercepts a diamond-enriched layer during its ascent, he says, it’ll assimilate the diamondiferous fragments before venting to surface in the form of a vertical, cylindrical pipe. But the geology at the Kennady North property doesn’t quite fit with the conventional model explorers use to zero in on the pipes, which is likely why previous explorers missed its potential. “In the world of kimberlite geology, people look for a round lake and indicator trains to point them towards vertical, carrot-shaped bodies that host the diamonds,” Evans says during a one-hour float-plane journey to the property. “But if you’re looking

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“They didn’t think the kimberlite went anywhere so they returned the property back to Mountain Province and focused on developing Gahcho Kué because it’s a big job,” says Evans, who is also president and CEO of Mountain Province. Mountain Province decided to pick up where De Beers left off by funnelling the project into Kennady, and brought on a contract geology crew from Aurora Geosciences to manage the operation. Shortly thereafter, the technical team discovered that the pipe unexpectedly shifted direction to the north, where it ballooned to over 200 metres vertical length and 50 to 70 metres wide horizontally. “There’s a lot of ideas around how this pipe was formed, but the one we consider the Lindsay Nelson, a junior most probable is that the kimberlite of water, partially frozen by the fallgeologist with Aurora squeezed its way into preexisting strucing temperatures of an approaching Geosciences, examines winter and sparkling like diamonds tural grain within the rock,” he says. core at Kennady North. under the mid-day sun. “It’s almost like a branch off a tree, and Credit: Lesley Stokes In the distance looms the Gahthe big dollar question for us now, is, cho Kué diamond mine, which is in where’s the trunk?” development under the world’s leadAt the core shack on site, contract geologists point to fragments of graning diamond miner, De Beers, with 49% joint-venture partner Mountain ite that are entrained within the kimProvince Diamonds (TSX: MPV). berlites, which suggests that the pipe The mine is scheduled to start procould become a lot bigger than anyone —Patrick Evans, ducing from three kimberlite pipes by thought previously. president and CEO, late 2016, which boasts reserves of “We think the kimberlite is coming Kennady Diamonds in from the west because we’re seeing a 55.5 million carats within 35.4 millot of granite fragments in the drill core, lion tonnes at 1.57 carats per tonne. and the only place where we see that granite at surAlmost 20 years ago, De Beers ventured onto the Kennady North property, 5 km northeast of face is 700 metres west of current drilling,” he adds. Gahcho Kué, and identified a sheet-like kimberlite Exploration drilling is currently under way that outcrops at surface and plunges gently underto test the downplunge extensions of the Kelvin North kimberlite outside the resource model, and cover, where it mysteriously vanishes at depth. so far, the results are showing that the pipe has shifted back towards the northwest. In a recent press release, Evans noted that drilling has expanded Kelvin’s strike length 120 metres GLOBAL PRODUCTION STATS beyond the current model, for a total of 720 metres, >G lobal rough diamond production reached 146 million carats and it is still open at depth. (US$18 billion), in 2013, well below the peak of 176 million carats “It looks like the kimberlite is bending back to in 2005. the northwest, but we don’t know if it’ll continue > A lack of major new discoveries in the last decade and a dipping shallowly or turn down more steeply,” he projected slowdown in existing, aging mines means that overall said during the site visit. supply is expected to plateau in 2020. Drilling at Kelvin is suspended for the balance of > New mines coming online represent only 17 million additional the year but will resume again in early 2016. carats per year. Bulk samples taken from the Kelvin North > Gahcho Kué will add about 5 million carats per year at its peak extensions returned 2.6 carats per tonne from a of production, about 3-4% of annual global production. 2.4-tonne sample for diamonds of commercial size, *All data from De Beers 2014 Insight Report* reported in October. Meanwhile, two diamond-drill rigs are punching

“Kelvin is the first of its kind: it’s unique and it has everyone excited.”

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holes just outside camp testing the extensions of similarly shaped kimberlites at the Faraday 1 and Faraday 2 prospects, along with another rig testing the MZ kimberlite, 25 km to the north. Evans expects that the prospects could add significant tonnage to the project. “I would be surprised if De Beers isn’t looking in this direction and curious about what’s happening,” he says, predicting that Kennady North may become a neighbouring mine site in the shadow of the world-class miner. The only obstacle he predicts Kennady may encounter on the road to development is obtaining the class A water license from the Mackenzie Valley Land and Water board — a permit that took De Beers nearly a decade to obtain. “There are two paths with the review board: either an assessment or a full environmental review, which could take two years, or even longer,” he says. “But we think the risk that Kennady will be pushed to full review is very low because all of the issues have already been identified and studied in

extraordinary detail when De Beers went through their permitting.” Inside the heavily insulated office tent, the crew speak about what it’s like working in the remote reaches of Canada’s north — watching the Northern Lights during a late-night visit to the drill-rig, to the dangers of frostbite working in -40°C conditions. Winter also brings about a 280-km stretch of ice road from Yellowknife that will service the nearby Gahcho Kué mine, which will help ease logistics for the exploration crew and boost the outlook on future mine planning. “For us, it’s fantastic knowing that for the next 20 years there will be an ice road that goes right past us,” Evans says. “We’re all very excited about the project, and pleased by how it’s coming together.” Kennady has traded within a 52-week range of $2.80-6.50 and closed at $3 at press time. It has 29.8 million shares outstanding.

Above: Aerial view of Kennady North. Credit Lesley Stokes Below: A diamond from the Kelvin kimberlite. Credit: Kennady Diamonds

— Lesley Stokes is a Vancouver-based staff writer with The Northern Miner.

This is our backyard… Kennady Diamonds - Kennady North Project - Kelvin Kimberlite

35+ years of geological, geophysical and exploration services in some of the most remote places on earth. Go ahead – pick our brains aurorageosciences.com November 2015 v 13

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Botswana

beckons Prolific diamond nation attracts explorers

top two photos: The past-producing BK11 diamond project. Credit: Tango Mining Bottom left to right: Soil samples collected in October at Peregrine Diamonds’ Malolwane project in Botswana. Credit: Peregrine Diamonds Collecting soil samples at one of Pangolin Diamonds’ projects. Credit: Pangolin Diamonds

otswana is the world’s largest diamond producer by value and home to the incredibly rich and long-lived Tier 1 Orapa and Jwaneng mines, both owned by Debswana, a 50/50 joint venture of De Beers and the Botswana government. Orapa, which started proBy duction in 1982 and ranks as the Alisha world’s richest diamond mine Hiyate by value, contributes 60-70% of Debswana’s total revenue. But Botswana still has more to offer. The AK6 kimberlite at Lucara Diamond’s (TSX: LUC) Karowe mine was discovered in 1969 by De Beers, but not thought to be of significant size or grade until the early 2000s. However, since production at Karowe began in 2012, it has been proven to host exceptional, high-value diamonds. It also demonstrates that all the prospective ground in the country isn’t locked up by De Beers. Mike DeWit, president and COO of Botswanabased junior Tsodilo Resources (TSXV: TSD), says he sees a renewed in interest in Botswana, particularly in diamonds. Lucara’s production of large diamonds is definitely part of the draw. “(Karowe) sort of helps to make people aware

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well there are other kimberlites around still that may have these big stones,” he said in an interview from his office in Maun, Botswana. With most of the country being covered by Kalahari sediments that have made exploration challenging, there’s a belief that there are substantial kimberlites in Botswana that have yet to be found (with new technology), DeWit says. “The other thing is Botswana still rates with Namibia as the friendliest exploration nations in Africa and Botswana itself is elephant country for diamond deposits,” he adds. Rather than focus on greenfield exploration companies are generally following up on previous discoveries that they hope will prove to have similarly unrecognized value as Karowe. Here’s a sample of what some Canadian-listed companies are up to in Botswana.

BK11 project. BK11 was in production for about a year before being put on care and maintenance in early 2012. Recoveries at the mine weren’t as good as expected at BK11, which had been projected to produce 100,000 carats of diamonds a year. The problem with the project was the mill, says Terry Tucker, executive chairman and interim CEO of Tango Mining. “It’s very clear now from all the work that we’ve done that the plant they put in was not the proper plant for recovering diamonds from a kimberlite. They actually put in an alluvial diamond plant and their recoveries were terrible.” The mine produced less than 15,400 carats in just over a year of production. Firestone put the project on care and maintenance in 2011, after its financial backers declined to lend them money for a plant upgrade — preferring that the company instead focus on its much larger Liqhobong project in Lesotho. Earlier this year, Tango struck a deal with Firestone to acquire BK11 for US$8 million. (The total cost of the deal is US$8.8 million as Tango has to acquire a minority shareholder’s 10% stake in Firestone’s Monak subsidiary, which holds the mining lease on BK11.)

Lucara Diamond Lucara recently took a 500-tonne bulk sample from its BK02 kimberlite, about 30 km east of its Karowe mine. BK02 is located on one of two exploration licences in the Orapa kimberlite field awarded to Lucara in 2014. The concessions are on trend with Karowe and host three known kimberlites — BK02, AK11, and AK12. BK2, which was discovered in 1967, is about 2.4 hectares at surface. Previous work has established that it is diamondbearing, however, more work is required to determine its size, internal geology, grade and diamond quality. Initial sample results are expected before the end of the year. Lucara also plans some sampling work for AK11 and AK12, which are located just southeast of Debswana’s Orapa mine and 15 km north of Karowe, and has applied for drilling and bulk-sampling permits. AK12, which is 1 to 2.5 hectares at surface, is known to be diamondiferous.

Tango Mining Penny stock Tango Mining (TSXV: TGV) is in the midst of acquiring Firestone Diamonds’ (LSE: FDI) past-producing

TSXV:NAR

Exploring Diamond Opportunities

in Canada

info@northarrowminerals.com Suite 960, 789 West Pender Street Vancouver, BC V6C 1H2 604.668.8355

@narminerals northarrowminerals northarrowminerals.com

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Tango structured deal so it could make it public and reportable, Tucker says. “That allowed me to go out and access the investor world and allowed us access to the property,” he said. Tango spent August and September completing a compliant resource and positive preliminary economic assessment (PEA) on BK11. The PEA didn’t take long to complete because a full feasibility study had been completed on BK11 in 2010. While Tango does have some income from several metallurgical coal-washing plants in South Africa, and has recently put its Oena alluvial diamond mine in South Africa into production, it is looking to raise US$25-27 million to put BK11 back into production. That will cover a US$15-million capital investment at BK11 for a new processing plant as well as the payment to Firestone. Under an amended agreement in October, Tango has until April 8, 2016 to close its financing and receive all approvals. Under the PEA, completed in October, Tango expects it can have the mine back in production in early 2017, after financing is completed and an autogenous mill is installed.

“

Botswana is elephant country for diamond deposits. — Mike DeWit, Tsodilo Resources

”

It expects to produce nearly 570,000 carats over a sevenyear mine life. While Tucker doesn’t expect it will be easy to raise the money needed to put BK11 back into production in the current financing environment, he believes there is a good appetite for diamonds and for projects that are close to production. “Since we put out the news release (about the BK11 acquisition), it’s been quite amazing the response that we’ve got,” he says, adding that the project’s proximity to Lucara’s Karowe mine, only 3 km away, has also helped spur interest. “One of the unique things about this story is that there’s an existing mining licence, all the environmental permits are in place — we do have to amend one of the environmental permits to accommodate the new mill that we’re contemplating — but basically from closing of the financing to commencement of production, it could be twelve months.” The BK11 diamonds were recently valued at US$260 per carat, and the study forecasts the project’s post-tax net present value (excluding acquisition costs) at US$40 million, using a discount rate of 8%. The study pegged BK11’s IRR (including acquisition costs) at 43%. At presstime, Tango was trading at 1¢ per share, down from

5¢ in early October. Tucker says part of the company’s investor base was more interested in gold than diamonds and sold the stock “relentlessly” on release of the PEA.

Tsodilo Resources Tsodilo Resources is a Botswana-based explorer with a promising iron ore project, a joint venture with First Quantum Minerals (TSX: FM) to explore for sedimentary-hosted copper, and several diamond projects. At the moment, however, its BK16 project in central Botswana is its flagship project, says Tsodilo’s president and COO, Mike DeWit. The company has already done more than 3,600 metres of core drilling on the kimberlite, which was discovered in 1969 by De Beers. “They did find diamonds in it, but they didn’t think that this was a proposition to go forward,” DeWit says. “It’s very similar to the story of AK6, Lucara’s deposit where people thought it was a small body, didn’t have a high grade, etc.” Originally, BK16 was thought to be about 3.5 hectares, but drilling by Tsodilo since it acquired the exploration permit in October 2014 has shown it’s closer to 6 hectares in size. De Beers also thought the kimberlite was very low grade because the bulk sample it took from BK16 was taken from the basalt breccia cover that lies over about two-thirds of the pipe. “All the kimberlites in the Orapa province, including Lethlakane, which was mined extensively, and some of the Damtshaa mines here, have remnants of those basalt breccias on top of the pipe,” DeWit says. “De Beers got their original sample out of this very diluted basalt breccia. We believe that clean kimberlite will have much better grades and we can see that from some of the drill results from other people. So we think there’s tremendous upside for it to be in the same sort of ballpark as AK6 in terms of grades.” In the diluted zone, sample grades were under 2 carats per hundred tonnes (cpht). However, more recent bulk samples from outside of the diluted basalt breccia zone returned sample grades of up to 21 cpht.

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Left to Right: Examining drill core from Tsodilo Resources’ BK16 project. Credit: Tsodilo Resources

Lucara Diamond’s new bulk-sampling plant. Credit: Lucara Diamond

The value of the BK16 diamonds has not yet been determined. After doing detailed geophysics work and drilling, Tsodilo has completed a geological model and is now looking to raise $4 million to conduct a bulk sample by large-diameter drilling (LDD) at BK16. DeWit says the LDD program will consist of about 11 24-inch holes drilled to 250 to 300 metres depth. The program will help establish whether BK16 hosts big diamonds, like AK6. Tsodilo has also recovered a small, 25-carat parcel of diamonds, which look to be of good quality, from one of BK16’s previous operators.

and completed in July. As part of the deal, which gives Peregrine 5,746 sq. km of diamond prospecting licences in Botswana, it has assumed a $450,000 loan from vendor DES UK, granted it a 1% gross overriding royalty, and entered into a services agreement that will see DES UK manage the exploration program on the concessions. Peregrine has budgeted $300,000 for the 2015 exploration program in Botswana.

Pangolin Diamonds Pangolin Diamonds (TSXV: PAN) plans drilling at its Malatswae project, 90 km southeast of the Orapa mine, before the end of the year. In late September, Pangolin reported it was planning gravity surveys this fall over two aeromagnetic targets at Malatswae. The results were expected to guide the selection of drill targets later in the year. The junior raised $628,600 in an oversubscribed private placement financing in September. Soil sampling at the 2,480-sq. km project has so far returned four white diamonds and one brown aggregate diamond, as well as multiple KIMs.

Peregrine Diamonds In October, Peregrine Diamonds (TSX: PGD) announced a four-hole, 570-metre drill program at its Moralane project in east-central Botsawana. Four targets will be tested with a rotary air-blast drill. “The Moralane area hosts some of the most compelling and unexplained indicator mineral chemistry in Botswana,” said Herman Grutter, vice-president, technical services in a release. “These indicator minerals are compositionally unique within the Botswana context and cannot be explained by any of the known kimberlite clusters in the region.” Grutter compared the area’s kimberlite indicator mineral (KIM) chemistry to prolific mines such as Finsch in South Africa and Jwaneng in Botswana. At its Malolwane project, a 251-sq.-km area with little or no Kalahari cover, Peregrine has collected 284 KIM samples. Results from the program will be used to identify drill targets. The junior also planned to collect KIM samples across 10 targets at its Gope project, 15 km north of Gem Diamonds’ (LSE: GEMD) Ghagoo mine, in late October, with follow-up drill testing planned for next year. Soil sampling of magnetic anomalies is also planned for Peregrine’s Nata project, which lies along the same Cretaceous kimberlite emplacement corridor as Ghaghoo and Orapa. Peregrine acquired its Botswana projects with the takeover of privately held Diamexstrat Botswana, announced in March

62,798,801

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The Gahcho Kué mine, 51% owned by De Beers with 49% partner Mountain Province Diamond. Credit: De Beers

Big changes at De Beers Canada

n a plan that is expected to be complete by the end of next June, De Beers Canada is moving its headquarters to Calgary from Toronto as part of a larger restructuring of its operations. The company is also relocating some workers from its Yellowknife and Timmins offices to Calgary, as well from its Victor mine in northern Ontario. In an interview, Kim Truter, De Beers Canada’s new CEO, said the move was not solely a reaction to the diamond market, which has weakened over the past year. “We wanted to show a little bit of industry leadership around how we’re organized within Canada,” Truter said. “When you look at De Beers in Canada, we’ve probably got the largest geographical spread of operations that any of the mining companies has under one commodity type.”

De Beers’ Snap Lake mine and 51%-owned Gahcho Kué project in the Northwest Territories and its Victor mine in Ontario are spread out over 4,000 km, he explains. “What we’re trying to do is maximize the sum of the parts, find a way of operating in Canada that is more efficient.” Truter joined De Beers Canada in August to replace former CEO Tony Guthrie, who has retired. Calgary was chosen because of a combination of features, including its status as a flight centre and an attractive place to live and work, Truter said. “Generally it’s easier to attract people with industrial skill sets to a place like Calgary,” Truter said. “Our operations are obviously very remote, either Arctic or sub-Arctic and as I said, 4,000 km apart — so we needed to do something a little bit

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different. All of that obviously also helps with the market because we’re also looking for a cheaper operating model to sort of cushion ourselves against the market.”

Diamond Market Rough diamond prices have fallen by about 16% over the past year, according to the WWW rough diamond index. De Beers, which is 85% owned by Anglo American (LSE: AAL) and 15% owned by the government of Botswana, has cut production repeatedly this year in response to market weakness.

“

Gahcho Kué De Beers is building the Gahcho Kué mine, due to come online in the second half of 2016, with 49% partner Mountain Province Diamonds (TSX: MPV). Construction at the project was 70% complete in early October and both companies are very happy with the development project, which is on budget and on time, so far. “It’s going very well, and that’s important because if you look around the world when people build projects, they often don’t go well,” Truer says. “We’re

We’re very pleased with the way the Gahcho Kué project has proceeded in terms of timelines and our cost containment efforts.

”

— Kim Truter, CEO, De Beers Canada The company is now expecting to produce around 29 million carats for 2015, down from its forecast of 32-34 million carats at the start of the year. Canadian operations haven’t seen any cuts yet, though Truter says they could, depending on market conditions. “The diamond market has now followed what’s happened to some of the other commodities, so we’re seeing three effects: we’re seeing the demand for rough stones come off, we’re seeing prices soften somewhat, and then we’re obviously suffering some of the effects from exchange rates, especially with the deterioration of all of the major currencies vs. the U.S. dollar.” Whether the recent drop in diamonds prices will be a sustained drop is a difficult question to answer, Truter says. “At the moment, we’re just looking at it and examining what our responses could be, but we don’t really know, to be honest,” he said. “Christmas is a very important period for us, because traditionally it’s a good indicator of things to come. I think once we’ve been through the festive season, we’ll be in a better position to understand the broader implications.” Truter says there are also important milestones coming up next year that could affect demand — China’s five-year plan and developments in the U.S.

very pleased with the way the Gahcho Kué project has proceeded in terms of timelines and our cost containment efforts.” As for timing of first production at Gahcho Kué and whether those diamonds will be sold into a stronger market, Truter says closer to that time, the companies will work out whether the timing is right. “At this stage, our plans aren’t changed. Our plan currently between ourselves and Mountain Province is to bring it online in the second half (of 2016), as was previously indicated.” Lastly, regarding De Beers’ Victor project and the Tango extension, which could add seven years to the mine life, Truter said more work is needed before the company can make a decision on whether to build the project. An environmental assessment is under way at the Tango extension, as are economic and other studies. Without Tango, Victor’s mine life will end in 2018. “Our intentions with Victor are to maximize value whichever way we go. Obviously Tango would be a very nice addition to Victor, but we need to make sure we’re examining it from all sides,” Truter said. “We’re not under any significant time pressure. So we don’t have an imminent decision planned for Tango — we’ll just read it as we go along.”

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Stornoway’s

‘good timing’ at Renard

On track for commercial production in Q2 2017

ince it raised $946 million last July to build its Renard diamond mine in Quebec, Stornoway Diamond (TSX: SWY) has kept construction and engineering at the project on time and on budget. In fact, the company has had to meet its milestones in order to access a total of US$250 million in upfront streaming payments that are part of the larger financing, said president and CEO Matt Manson at the company’s annual general meeting in October. Stornoway has so far received two tranches of the streaming financing: US$80 million in March and U$80 million in September. Another US$90 million is still to come next March. “If you want any external validation that we’re doing our job, if you want to go beyond management’s rhetoric and talk to some external validation that we’re on budget and on schedule, it’s that (being able to access that money),” Manson told shareholders. “Because we have to demonstrate with third-party engineers that we are on budget and on schedule to have that money fund.” The company is so far running ahead of plan, with construction 47.4% completed at the end of September as opposed to the scheduled 42.9%. Stornoway has also come out ahead with the fall in the Canadian dollar. About half of its $946-million financing was raised in U.S. dollars at a time when the dollar was at US92¢. “This is an example of good timing in the mining business and we’re very fortunate and happy to have it, but what it means

Above: In the new garage at Renard. Credit: Stornoway Diamond

Concrete pour in September at the processing plant. Credit: Stornoway Diamond

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Caption Credit: ????

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Left and right: Construction at Renard in September. Credit: Stornoway Diamond

is the balance sheet is stronger now than it would have been looking twelve months ago, when we raised all the money.” Only about 15% of the diamond developer’s costs are in dollars. Stornoway expects plant commissioning to begin in the second half of 2016, with commercial production slated for the second quarter of 2017. “By that time, we should have about $101 million in room for error because of the exchange rate,” Manson said. The company’s forecasts use an US80¢ dollar, which is higher than the current US76¢. Manson noted that the company’s timing has been good in other respects as well. While Stornoway’s financing deal was pulled together in a tough market, the market for debt and equity has since deteriorated. “We couldn’t do that deal this year,” he acknowledged. Lastly, Stornoway has found that having the only major mine in construction in Quebec — and in all of eastern Canada — comes with advantages, such as “first call” on the best people, contractors and equipment. In 2011, when the junior conducted the feasibility for Renard, located 350 km north of Chibougamau, there was an 18-month lead time for Caterpillar equipment, Manson recalled. That’s now down to weeks or a couple of months. Along with bottlenecks and costs declining over the past few years, however, so have diamond prices. “The diamond market is the only cloud on our horizon,” Manson said. “It’s been a tough twelve months. Diamond prices are down versus 2014 (by) about 20%.”

Prices are now lower than they were in 2011, but only in U.S. dollars. “We’re still ahead of where we expected to be in our local operating currency,” Manson noted.

Resource update In September, Stornoway updated the resource estimate for Renard, increasing indicated resources by 11% to 30.2 million carats (including reserves), up from 27.1 million carats. The indicated resource is contained in 42.6 million tonnes grading 71 carats per hundred tonnes (cpht). The increase was achieved by upgrading inferred resources at the Renard 2 kimberlite down to 700 metres depth, and by adding more than 4 million tonnes of lower-grade Country Rock Breccia material from Renard 2. The CRB material was previously classified as stripping waste or mining dilution. Inferred resources stand at 24.5 million tonnes grading 54 cpht for 13.4 million carats, a decrease of 20.8%. The new resource will be used to update the mine plan at Renard in the second quarter of 2016. The new plan will look at an extended mine life at Renard, deeper open pits at Renard 2 and Renard 3, and the inclusion of indicated resources at Renard 65 for open-pit mining. Probable reserves at Renard currently stand at 17.9 million carats in 23.8 million tonnes grading 75 carats per hundred tonnes supporting an 11-year mine life. A 2013 feasibility update pegged the project’s after-tax net present value at $391 million (at a 7% discount rate) and its after-tax internal rate of return at 16.3%. November 2015 v 21

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Sable PEA

sweetens

Ekati

Drilling at Dominion Diamond’s Sable project.

Dominion works to add mine life to operation

ooking to extend the mine life at its Ekati operation beyond 2020, when it’s now slated for closure, Dominion Diamond (TSX: DDC; NYSE: DDC) has been busy this year proving up the Jay and Sable pipes at the property. After releasing a positive prefeasibility study for its much larger Jay pipe at Ekati in January, it has now also released a preliminary economic assessment (PEA) for its Sable pipe at the project. The study looked at developing Sable, which is 17 km north-northwest of the existing infrastructure at Ekati in conjunction with Jay, which lies 25 km southeast of the main camp. According to the PEA, released in September, Sable can be developed with US$147.4 million in initial capex and US$20 million in sustaining capital. The study projected Sable’s internal

Credit: Dominion Diamond

rate of return at 17.3% and an incremental after-tax net present value of US$233 million. The study used a discount rate of 7%. The PEA is based on production of 9 million carats at a grade of 0.8 carat per tonne and a diamond value of US$190 per carat. Although it’s small, Sable lies in the project’s Core zone, meaning Dominion owns 88.9% of the pipe. Moreover, Sable is already fully permitted, as opposed to Jay, where permitting is expected to be completed in 2016. As part of the Buffer zone at the mine, Dominion owns only 65.3% of the Jay pipe. The company sees the project sharing infrastructure and equipment with Jay. Together, the two pipes should keep the processing plant at capacity until 2033, with mining at Sable ending in 2027.

Dominion foresees development at Sable beginning in the first half of 2016, with construction of rock dams and infrastructure in 2017, dewatering and prestripping in 2018, and production from Sable starting in 2019. A prefeasibility on Sable is under way. Indicated resources stand at 15.4 million tonnes grading 0.8 carat per tonne for 11.7 million carats, on a 100% basis. The Jay pipe prefeasibility pegged initial development costs at US$657 million, with an after-tax, internal rate of return of 16% and a net present value of US$610 million. By itself, Jay is projected to add 11 years of mine life to Ekati, which is now slated for closure in 2020. The pipe holds probable reserves of 84.6 million carats contained in 45.6 million tonnes grading 1.9 carats per tonne.

advertiser’s index Aurora Geosciences Ltd . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 13

North Arrow Minerals Inc. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 15

DGI Geoscience Inc. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 11

Saskatchewan Research Council . . . . . . . . . . . . . . . . . . . . . . . . . . 24

Kennady Diamonds . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 7

Talmora Diamond Inc. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 17

Mountain Province Diamonds Inc. . . . . . . . . . . . . . . . . . . . . . . . . . . 9

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