Matthew O’Keefe,M.Sc MBA, (416) 943-6705, mokeefe@cormark.com
Rajbir Gill – Associate, (416) 943-6729, rgill@cormark.com
Rajiv Chail – Associate, (416) 943-6430, rchail@cormark.com

METALS & MINING

January 7, 2009 Diamonds

New Players To Supply The Shortfall Ahead
We are initiating coverage on:

Stornoway Diamond Corp.

Recommendation: Buy
Target: $1.10

..Lucara Diamond Corp.
Recommendation: Buy (S)
Target: $1.60

We are adding to our Watchlist:

Peregrine Diamond Corp.
Recommendation: N/A
Target: N/A

•

During the past twenty-four
months, Cormark Securities Inc.,
either on its own or as a syndicate
member, participated in the
underwriting of securities for Lucara
Diamond Corp.

Disclosure statements located at
the back and inside back cover

Unless otherwise denoted, all figures shown in C$
We are using C
.90 conversion rate

Diamond prices peaked in August 2008 only to take a significant hit as a
result of the credit crisis and subsequent recession. Although rough diamond
prices have experienced some recovery, neither rough nor polished diamond
prices have enjoyed the same recent rises as other precious metals.
Diamond sales are driven by consumer spending, which remains weak,
particularly in the United States where the bulk of diamond jewelry is sold.
However, India and China are growing consumers of precious metals and
minerals and are expected to drive demand going forward.

Production of rough diamonds remains flat as most of the large, aging mines
in Russia, Africa and Canada move to lower-tonnage underground
operations. As a result, diamond production past 2010 should continue to be
flat or even slightly declining. By 2012, demand should outstrip supply
pushing the price of rough and polished prices higher, particularly at the high
end. At present, we are taking a conservative view and project rough
diamond prices will remain flat through 2011 followed by 3% growth annually
for five years thereafter as the supply gap becomes more noticeable.

In this report, we outline the complexities of the diamond market, the supply-
demand factors that support higher prices in the future and highlight three
names in the diamond space that have potential to feed into this pending
supply crunch. For the purposes of this report, we have focused on
advanced diamond developers listed on the TSX as the developers can offer
a better risk reward ratio as they have exposure to diamond prices,
development milestones and potential future cash flow.

JANUARY 7, 2010 MATTHEW O’KEEFE 416·943·4222; RAJBIR GILL ASSOCIATE 416·943·6729 RAJIV CHAIL ASSOCIATE 416·943·6430 JANUARY 7, 2010 MATTHEW O’KEEFE 416·943·4222; RAJBIR GILL ASSOCIATE 416·943·6729 RAJIV CHAIL ASSOCIATE 416·943·6430
Investment Summary

Diamond Market Poised For
The rough diamond market sits within the universe of precious metals and minerals. In

Rebound
2008, sales of rough diamonds were $14.2 BB compared to $70 BB for gold, $14 BB for
silver and $12 BB for platinum and palladium. The economic crisis hit this subsector hard
leading to weak prices and forcing a number of temporary mine closures. However, with
the improved outlook for economy, interest is coming back to the sector along with the
realization of an impending supply shortage in the next few years. In the past few months,
prices for rough diamonds and diamond equities have risen and several companies have
completed equity financings totaling over $300 MM, demonstrating increased investor
risk tolerance and confidence in the future of the diamond market (see Figure 1).

Figure 1
Financing Activity In Diamond Sector

Share Price 52 Week Mkt. Cap. Equity Fin.*

Company
Ticker

($MM) High Low ($MM) (C$MM)

all values in USD unless otherwise indicated

Canadian Developers

Shore Gold Inc. SGF C
.97 C$1.68 C
.24 $211 $27.5
Mountain Province Diamonds MPV C$2.20 C$3.31 C
.73 $142 $5.0
Stornoway Diamond Corp. SWY C
.64 C
.69 C
.06 $150 $1.4

Canadian Explorers

Lucara Diamonds Corp. LUC C$1.02 C$1.20 C
.31 $214 $110.0
Dianor Resources Inc. DOR C
.07 C
.14 C
.06 $14
.6
Metalex Ventures Ltd. MTX C
.98 C$1.38 C
.30 $43 $30.0

International Producers

Petra Diamonds Ltd. PDL £0.64 £0.90 £0.23 $351 $123.8
Rockwell Diamonds Inc. RDI C
.06 C
.12 C
.03 $14 $12.5
*Represent Gross Proceeds. After Close Where Applicable

Source: Cormark Securities

Stornoway Diamonds
We are initiating coverage on Stornoway Diamond Corp. with a Buy rating and a 12

(SWY-T)
month target price of $1.10 per share. In our view, its Renard Project in Quebec is on-
track to develop into a sizeable and robust diamond mining operation. A quality pipeline
of exploration projects should keep investor interest and add further upside potential as
Renard progresses through its definitive feasibility study and through to production.

Lucara Diamonds (LUC-V)
We are initiating coverage on Lucara Diamond Corp. with a Buy (S) rating and a 12month
target price of $1.60 per share. In our view, Lucara’s entry into the AK-6 project
in Botswana will allow it to move the project quickly into production. Its Mothae project
in Lesotho is more risky but has potential to add significant value should the ongoing
test-mining prove this a consistent 100+ carat producer like the neighboring Letseng pipe.

Peregrine Diamonds Ltd. We are adding Peregrine Diamond Corp. to our Watchlist. As an early stage exploration
(PGD-T) company, we have no target or rating but are intrigued by its kimberlite discoveries on
Baffin Island with early diamond results that point to high grade potential of the cluster.

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JANUARY 7, 2010 MATTHEW O’KEEFE 416·943·4222; RAJBIR GILL ASSOCIATE 416·943·6729 RAJIV CHAIL ASSOCIATE 416·943·6430 JANUARY 7, 2010 MATTHEW O’KEEFE 416·943·4222; RAJBIR GILL ASSOCIATE 416·943·6729 RAJIV CHAIL ASSOCIATE 416·943·6430
The Diamond Market

Diamonds-A Brief History
Diamonds have long been a symbol of wealth, durability, quality and status. Throughout
its long history, the diamond trade has seen its markets expand from royalty to the masses
as new sources of supply were discovered. Diamonds were first sourced from alluvial
deposits in India and began appearing in European regalia and jewelry in the 13th and
14th centuries. In the 18th century, new supply began to arrive from alluvial deposits in
South America at which time diamonds first became abundant in women’s jewelry. The
modern diamond industry began in the late 19th century when Cecil Rhodes and Barney
Barnato consolidated the first kimberlite discoveries in South Africa to form De Beers
Consolidated Mines (named after the two Afrikaner farmers, Diederik and Johannes De
Beers, who owned the farms that held the deposits).

The De Beers group shaped today’s diamond market by controlling supply (approaching
90% at one point but today just about 40%) and, more importantly, developing new
markets. The best example of this is its launch of one of longest-running and most
successful marketing campaigns in history built around the slogan “A Diamond is
Forever”. As a result of the campaign, which started in the United States during the
1930s, diamonds became inexorably linked to romantic love and a symbol of lasting
commitment. It added mystique and emotional value to the diamond engagement ring. It
also reinforced the connection to wealth and status of the rich and famous. The impact
was impressive, increasing diamond demand and making the United States the largest
market for diamond jewelry. The campaign has been so successful that today over 80%
of all engagement rings sold include diamonds, up from less than half that in the early
1930s. The story was repeated in Japan in the 1950s supplanting pearls as the romantic
gift of choice. And diamonds are penetrating new emerging markets like China and India
which, given their combined populations of 2.5 BB people, is expected to drive
significant growth.

The Diamond Pipeline
The diamond market has a few complexities that differentiate it from precious metals.
Primarily, they are not a commodity and do not have a spot market; every diamond has
different characteristics and a different value. And every diamond mine has a different
population of diamonds. For these reasons, there are several unique steps in the pipeline
(value chain) between mining a diamond and its final sale as jewelry. The pipeline is
illustrated in Figure 2:

Figure 2
The Diamond Pipeline

Mine Production
($13.8 BB)
Supply To
Manufacturers
($15.5 BB)
Polished To
The Market
($19.8 BB)
Diamond
Jewelry
Retail Sales
($73.1 BB)
Supply To
Rough Dealers
($14.0 BB)
Sources: Cormark Securities Inc., Idex Online

The mining process is fairly standard with unique geological bodies called kimberlites
being the main source (the process for finding these deposits is outlined in Appendix C).
Depending on the mine, some of the best margins along the value chain can be made at
this end of the chain. After being mined, the rough diamonds are examined, registered,
certified and sealed by a recognized authority as per the Kimberley Process Certification
Scheme. At sorting facilities mainly in London, Antwerp, Gaborone, Kimberley and

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