Form 51-102F1
Annual Management Discussion and Analysis
For
Stornoway Diamond Corporation
(“Stornoway” or the “Company”)
Containing Information up to and including July 15, 2010
Overall Performance
Stornoway has a well diversified and highly prospective diamond property portfolio, focused in Canada, that includes Renard, a development track diamond project with the potential to become Quebec’s first diamond mine, three advanced projects in eastern Nunavut at the minibulk sampling stage and several early stage grass roots projects throughout Canada in geologically prospective, underexplored regions. Stornoway’s strategy is to capitalize on near-term, small to medium sized diamond mining opportunities to build a growth oriented company that succeeds in the practical business of mining and selling rough diamonds, while at the same time, remains exposed to significant upside through exploration. Although the rough diamond market was significantly affected by the global economic crisis in 2008 and 2009, in taking a longer-term view, the rough diamond market is expected to strengthen in the face of tightening supply and Stornoway is well positioned to add diamond resources from existing projects and further acquisitions as new opportunities are identified. In addition, the Company has a management team with experience at each stage of the diamond pipeline, from exploration through development and marketing.
As of July 15, 2010, the Company holds interests, directly or through joint ventures, in a property portfolio of some 21 properties representing approximately 3.1 million acres that can be roughly subdivided into 168,000 acres of ‘development’ stage projects (the Foxtrot Property, which includes the Renard Diamond Project), 1.6 million acres of ‘advanced’ exploration properties (Aviat, Qilalugaq, Churchill and Timiskaming) and 3.1 million acres of ‘early stage’ projects (Hammer Property and others). Collectively these properties contain some 170 kimberlite bodies.
Forward-Looking Statements
This document may contain “forward-looking statements” within the meaning of Canadian securities legislation and the United States Private Securities Litigation Reform Act of 1995. These forward-looking statements are made as of the date of this document and the Company does not intend, and does not assume any obligation, to update these forward-looking statements, except as required by law.
Forward-looking statements relate to future events or future performance and reflect management’s expectations or beliefs regarding future events and include, but are not limited to, statements with respect to the estimation of mineral reserves and resources, the realization of mineral reserve estimates, the timing and amount of estimated future production, costs of production, capital expenditures, success of mining operations, environmental risks, unanticipated reclamation expenses, title disputes or claims and limitations on insurance coverage.
These forward-looking statements include, among others, statements with respect to Stornoway’s objectives for the ensuing year, our medium and long-term goals, and strategies to achieve those objectives and goals, as well as statements with respect to our beliefs, plans, objectives, expectations, anticipations, estimates and intentions. The words “may,” “could,” “should,” “would,” “suspect,” “outlook,” “believe,” “plan,” “anticipate,” “estimate,” “expect,” “intend,” and words and expressions of similar import are intended to identify forward-looking statements. In particular, statements regarding Stornoway’s future operations, future exploration and development activities or other development plans contain forward-looking statements.
All forward-looking statements and information are based on Stornoway’s current beliefs as well as assumptions made by and information currently available to Stornoway concerning anticipated financial performance, business prospects, strategies, regulatory developments, development plans, exploration, development and mining activities and commitments. Although management considers these assumptions to be reasonable based on information currently available to it, they may prove to be incorrect.
By their very nature, forward-looking statements involve inherent risks and uncertainties, both general and specific, and risks exist that predictions, forecasts, projections and other forward-looking statements will not be achieved. We caution readers not to place undue reliance on these statements as a number of important factors could cause the actual results to differ materially from the beliefs, plans, objectives, expectations, anticipations, estimates and intentions expressed in such forward-looking statements.
These factors include, but are not limited to, developments in world diamond markets, changes in diamond valuations, risks relating to fluctuations in the Canadian dollar and other currencies relative to the US dollar, changes in exploration, development or mining plans due to exploration results and changing budget priorities of Stornoway or its joint venture partners, changes in project parameters as plans continue to be refined; possible variations in ore reserves, grade or recovery rates; accidents, labour disputes and other risks of the mining industry; delays in obtaining governmental approvals or financing or in the completion of development or construction activities, the effects of competition in the markets in which Stornoway operates, the impact of changes in the laws and regulations regulating mining exploration and development, judicial or regulatory judgments and legal proceedings, operational and infrastructure risks and the additional risks described in Stornoway’s most recently filed Annual Information Form, and Stornoway’s anticipation of and success in managing the foregoing risks. Stornoway cautions that the foregoing list of factors that may affect future results is not exhaustive. When relying on our forward-looking statements to make decisions with respect to Stornoway, investors and others should carefully consider the foregoing factors and other uncertainties and potential events. Stornoway does not undertake to update any forward-looking statement, whether written or oral, that may be made from time to time by Stornoway or on our behalf, except as required by law.
Highlights for the Year Ended April 30, 2010 and to July 15, 2010
During the year ended April 30, 2010 and the period ended July 15, 2010, the Company’s primary focus was the completion of two updated National Instrument (“NI”) 43-101 compliant technical reports for the Renard Diamond Project in North Central Québec.
The first NI 43-101 technical report was a revised mineral resource estimate that was announced in early December 2009; the technical report was filed in January 2010. Highlights of this work include:
- A total Indicated Mineral Resource of 23.0 million carats and a total Inferred Mineral Resource of 13.3 million carats, increases of 228% and 195% respectively over the previous estimates published in December 2008.
- At Renard 2, an Indicated Mineral Resource of 18.0 million carats, grading 103 carats per hundred tonnes (“cpht”) and an Inferred Mineral Resource of 6.4 million carats, grading 120 cpht.
- A diamond valuation of US$117 per carat to be applied equally to each of the Renard 2, 3, 4 and 9 kimberlite pipes for resource estimation purposes.
- New geological models demonstrating extensive upside in multiple kimberlite bodies.
The second NI 43-101 technical report was an updated preliminary assessment announced in March 2010; the technical report was filed in May 2010. The updated preliminary assessment comprises a number of elements, including: a conceptual mine plan, capital and operating cost estimates, a cash flow model, a diamond processing plant design (with capital and operating cost estimates), and social, environmental and permitting aspects. The conceptual mine plan included in the preliminary assessment is based upon the revised mineral resource estimate reported in the NI 43-101 technical report filed by Stornoway in January 2010.
Highlights from the technical report for the preliminary assessment, on a 100% project basis, are as follows:
- Base case estimates of pre-tax Net Present Value (“NPV”) and Internal Rate of Return (“IRR”) at C$885 million (at an 8% discount rate) and 24.8% respectively using a September 2009 diamond valuation of US$117/carat and a US dollar exchange rate of C$1.11.
- A conceptual mine life of 25 years based on a production rate of 1.8 million tonnes per year and a total diamond production of 30 million carats.
- Estimated pre-production capital cost of C$450 million, including contingencies of $65.8 million, which increases to a total capital cost of C$511 million after sustaining capital and closure cost.
- Average life of mine operating cost of C$39.45/tonne in a conceptual mine plan utilizing both open pit and underground mining.
- Estimates of pre-tax NPV and IRR at C$1,173 million (at an 8% discount rate) and 29.7% respectively using current market assumptions for rough diamond pricing and the current US dollar exchange rate.
In addition to the filing of the two technical reports for the Renard Diamond Project, the Company also:
- Completed a drill program of 12,718 metres at Renard 2 during the summer of 2009, which resulted in a high confidence geological model approximately four times larger than the mineral resource estimate for Renard 2 originally provided in December 2008. This new information was included in the technical report filed by the Company in January 2010;
- Filed a Notice of Intent in February 2010, the first step in the mine permitting process for the Renard Diamond Project, which is expected to take 18 to 24 months;
- Announced, in April 2010, the completion of a 1,711 metre geological drill program at Renard 3, Renard 4 and Renard 65, resulting in intersections at depth in three separate kimberlites; and
- Appointed, in May 2010, Patrick Godin as Chief Operating Officer, and hired key members of a Quebec based mining team to transition the Renard Diamond Project through feasibility, then into construction and ultimately production.
Other Exploration Highlights
- At the Aviat Project, reported a diamond content of 159 cpht for the 190.9 dry tonnes of kimberlite collected from the ES1 kimberlite, the largest body within the Eastern Sheet Complex;
- In July 2009, discovered, by prospecting, a new kimberlite on a mineral claim within the Hammer Property area of interest and at the head of a previously unexplained kimberlitic indicator mineral anomaly with diamond inclusion chemistry;
- At the Churchill Project, announced an overall diamond recovery of 86 cpht for a 17.3 dry tonne sample from the Notch kimberlite dyke and, in August 2010, announced an agreement with Kennecott Canada Exploration Inc. and Shear Minerals Inc. whereby Kennecott may acquire up to a 70% interest in the diamond rights to the Chesterfield Inlet Diamond Project, previously the northern part of the Churchill Project;
- Increased the Company’s ownership in the Qilalugaq Project, Nunavut, to 100% by providing BHP Billiton Diamonds Inc. with a 3% gross production royalty interest on diamonds and a 3% net smelter return royalty on other minerals. Stornoway has 100% of the diamond marketing rights for this project.
- Modeled diamond contents of between 26 and 38 cpht, a substantial improvement on historical sampling results for four kimberlite lithologies within the Renard 65 kimberlite, the largest kimberlite pipe in the Renard cluster. Demonstrated diamond size frequency distribution for Renard 65 to be similar to other Renard kimberlite pipes, confirming a single diamond population previously shown to be characterized by large, high value gems.
- Continued an ongoing assessment of the Company’s various exploration properties (covering approximately 3.1 million acres), in addition to a continued review of in-house regional geological, geochemical and geophysical databases, with the objective of targeting acquisitions of promising diamond exploration properties within Canada.
Corporate Highlights
- In May 2009, the Company completed a brokered private placement, with Sandfire Securities Inc. as lead agent, consisting of 8,421,276 “flow-through” common shares of the Company for gross proceeds of $1,431,617. Proceeds from this financing were used to fund Stornoway’s 50% share of the exploration drill program at the Renard Diamond Project during the Summer of 2009.
- In February 2010, the Company filed a short-form prospectus with securities regulators and completed an equity financing. Including exercise of an over-allotment option, the Company issued 25,370,000 common shares at $0.50 per share for gross proceeds of $12.7 million. Proceeds from this financing will be used for feasibility-level work at the Renard Diamond Project and for working capital.
- In June 2010, the Company issued 8,775,000 “flow-through” common shares for gross proceeds of $5,001,750 by way of a brokered private placement, with Desjardins Securities Inc. as lead agent. Proceeds from this financing will be used to fund Stornoway’s 50% share of an exploration drill program at the Renard Diamond Project during 2010, as well as grass-roots exploration work at several of the Company’s other Canadian exploration properties.
