Letter from the President and CEO
Dear fellow shareholders
2009 has been a momentous year for all businesses, and the diamond sector has been no exception. From the perspective of the diamond producers, polished manufacturers and jewellery retailers that constitute the “diamond market”, and also the family of publically traded companies that comprise the exploration and development industry here in Canada, the year has brought retrenchment and investor pessimism. As prices for rough diamonds bottomed out in mid-winter, investors questioned the investment rationale for new diamond projects when the world’s major diamond producers were suspending production at existing mines. The advice that we received from many at that time was: stop all activities; conserve your cash.
However, such a strategy is not how businesses grow. Certainly, in 2009, we reduced our overhead costs with cuts that included lay-offs and executive salary cuts. We also chose to restrict exploration expenditures to only the key projects that will grow investor value in the near term. We recognised, however, that our industry is cyclical, that the long term supply and demand imbalance for rough diamonds is unchanged, and that we possess a 50% interest in Renard, a project that is rapidly becoming one of the best undeveloped diamond deposits in the world. The drill program that we launched at Renard in January, and which at time of writing is ongoing, has justified our confidence.
The Renard Diamond Project is getting bigger. At the end of 2008, we released the first formal resource calculation at Renard, and a preliminary economic assessment. Based on the drilling and sampling completed to that date, the project gave a modestly positive return based on a 7 year mine life, a $308m capital cost and a total indicated resource of 7.5 million carats and inferred resource of 4.5 million carats. We regarded this study as a good start, but we recognised the need to establish a longer mine life to generate the kind of economics that would warrant a production decision. The 2008 study highlighted the large amount of additional “potential mineral deposit” that was implied to exist but which remained outside of the formal resource statement and, starting in January, we set about drilling for this material.
The results of this drilling have greatly exceeded our expectations. We discovered that Renard 2, which already comprised approximately 5 years of our 7 year conceptual mine life, was larger in dimension at depth than at surface. In an April press release we reported that, in terms of tonnage, the pipe was at least twice as large when modelled to 600m depth (the depth of the ramp contained within the existing mine design) and at least three times as large when modelled to a depth of 700m and was open at depth. As I write, the summer drill program designed to confirm this new material as mineral resource is nearing its completion, and it is clear that Renard 2 is becoming a very substantial ore body. We expect to report a revised resource calculation for Renard in the fall, and a revised economic assessment thereafter.
Although many hurdles remain, we have growing confidence that the basic elements of a successful and long-lived diamond mine at Renard are now in place. With the Quebec Government’s announced in March of major capital funding for the Route 167 Extension, the infrastructure elements for the mine are also now taking shape. We look forward to moving swiftly to a full feasibility study and permitting process starting in 2010.
Despite the expenditure restrictions applied to our other exploration projects in 2009, we have been able to achieve good results on a cost efficient basis using patience, opportunism and in-house resources. In October 2008 we announced the results of a conceptual study at Aviat, our “pipeline project” in Nunavut. The study indicated 12.4 to 16.0 million tonnes of kimberlite outlined in four separate sheets, and in May we announced the final results of the first large scale sampling at the project, with diamond contents of 144 and 210 carats per hundred tonnes from the two localities sampled. Aviat represents a large potential diamond resource for Stornoway in a good jurisdiction. What is uncertain at this time is how we would mine the deposit and what rock value we might obtain. This work remains to be done. The discovery of the Hammer kimberlite in August, a discovery achieved through simple patience, highlights the potential lying within our grass roots exploration portfolio. As the equity and diamond markets recover, and as we establish Renard on a well financed development track, we look forward to bringing these projects forward further.
As a fellow shareholder of Stornoway holding a significant number of shares, I share the frustration of many on the poor performance of the stock in the past year. It is always possible to do better in communicating our story and protecting shareholder value. However, we have also been part in a general contraction in the equity value of the publicly traded diamond companies, which was approximately $5 billion in mid-2008 and which reached half a billion in March 2009. In the face of this contraction, we have chosen to look to the future, and have focussed our efforts on doing the work on the ground that is required to move forward our most important asset. In terms of long term shareholder value, I am confident this decision was the right one, and we look forward to the job at hand of developing Quebec’s first, and possibly Canada’s next, diamond mine.
Matt Manson
President and CEO, August 2009
