Brenda Bouw

Vancouver — From Saturday's Globe and MailPublished on Friday, Apr. 02, 2010 6:44PM EDTLast updated on Saturday, Apr. 03, 2010 2:03AMEDT

Eira Thomas remembers sitting on arock overlooking Lac de Gras, gazing at the northern tundra and itsautumn shades of red and gold, when her father, a fellow geologist, puttheir huge Diavik discovery into perspective.

He turned to his daughter, then 25 years old and head of a team thatdiscovered in the Northwest Territories what would become one of theworld's largest diamond mines, and tried to temper her future careerexpectations.

“He said to me, ‘Eira, you have to remember this is a rare and uniquething ... So many geologists, very capable and good geologists, makegreat discoveries throughout their career, but never see them go intoproduction,'” recalled Ms. Thomas, now 41.

“I always felt like I won the lottery the first time around.”

Today, Ms. Thomas is playing another ticket with Renard, an undevelopeddeposit that her company, Stornoway DiamondsCorp., (SWY-T0.650.011.56%)is trying to transform into Quebec's first diamond mine.

Vancouver-based Stornoway recently released an independent preliminaryassessment from the project in Northern Quebec that suggests the areahas triple the resources originally expected and could produce aboutthree times longer, for about 25 years.

The catch, of course, is that it will also cost a lot more to build –about $511-million, compared to previous estimates of $308-million whenthe proposed mine was thought to be smaller. Stornoway still has tosecure the financing to build a mine and clear several other hurdles tomeet its production target of late 2013.

It's an “aggressive” schedule, according to Ms. Thomas, who isstraightforward about the risks.

“The risks are, can a company of Stornoway's size actually go out to thecapital marketsand raise the necessary capital to put the mine into production, andcan we meet the schedule?” the company's executive chairman said in arecent interview.

“For us, it's more about when, not if.”

Renard also means Ms. Thomas will try to repeat the already rare successher father alluded to years ago.

“There is a lot of pressure, there is no question. People are alwayslooking and saying ‘Well, you can't do that more than once.'”

Stornoway is clear about one thing though: Renard is not another Diavik.It's expected to produce about 1.6 million carats a year versus abouteight million from Diavik, which began production in 2003. Renard isalso about one-quarter the grade of Diavik, which means it has fewercarats per tonne. However, the company says production costs will bemuch cheaper at an estimated $39 a tonne, compared with an average ofwell over $100 for Diavik, which cost $1.3-billion to build.

But Renard has so far turned out better than Stornoway had hoped when itbought the development through a hostile takeoverof Ashton Mining of Canada Inc. as part of a three-way merger withContact Diamond Corp. in 2007.

“What we didn't anticipate was that we would triple the size of the orebody by drilling deep. It's a huge geological revelation … Suddenly,Renard has gone from something which is kind of marginal to somethingthat really can be a company maker.”

That kind of promotional talk can be a turn-off for many mininginvestors, especially those burned by high-profile scandals of the past.Add the fact that diamond mining is not as well understood by investorsas many other types of mining, and it's not surprising most analystsare cautious about recommending Stornoway.

In addition to financing and regulatory approvals, Stornoway also facesthe question of whether it can execute, given typically long lead timesbetween diamond discovery to production, Raymond James analyst BartJaworski said in a recent note.

“We encourage investors to remain cautious on [the stock], given alimited return to target at this time,” he wrote.

One advantage Stornoway is said to have with Renard is its 50-50 jointventure with Soquem Inc., a mining and exploration investment companyowned by the Quebec government. Local aboriginals groups are also saidto be on board.

“We are of the view that support from the government of Quebec and theCree Nation will crystallize in a number of forms over the next twoyears, again, with positive implications for the project's economics,”Canaccord's Eric Zaunscherb said in a recent note, who neverthelessrefers to Stornoway as a speculative play.

The province has already committed millions to building a road to theproposed mine site, located about 800 kilometres north of Montreal. Thegovernment, through Soquem, is also responsible for half of the costs tobuild the mine. Ms. Thomas is hoping to finance Stornoway's portionthrough a half-equity, half-debt financing, but says it's too early tonail that down.

Right now, Stornoway is working the investment circuit, marketing itsrecent Renard results. Stornoway chief executive officer Matt Manson wasin Montreal recently, while Ms. Thomas, who is expecting her secondchild in July, works the phone from the company's modest headquarters inan industrial park in North Vancouver. Both will travel to London inthe coming weeks for a diamond conference and to try to generateinvestor interest in Europe.

Sipping a cup of tea and donning a pair of Diavik-sourced diamondearnings she calls her “uniform,” the red-haired geologist acknowledgesshe has become the face of Stornoway largely because of her success withDiavik and her unique status as a woman at the top of a mining company.All of that attention, and the nickname “Queen of Diamonds,” which hasfollowed her for years, has been both frustrating and fortunate.

“It's great that it generates interest, but at the same time you alwaysfeel somewhat torn ... you don't want to leave the perception that thisis a one-woman show. It definitely isn't.”

She points in particular to Mr. Manson, whom she has known since theystudied geology together at the University of Toronto, as having beenovershadowed in the Stornoway story.

Mr. Manson refers to Ms. Thomas as the “relationship person” in thecompany, while he deals with much of the day-to-day operations. “A lotof our business, the business of exploring and finding and developingthings and building mines, is kind of aspirational. Another way ofsaying that is promotional. We are all optimists in this business.”

But do they have a mine?

“I think so,” Mr. Manson said. “At this stage, it's looking justterrific.”

Performance

Stornoway shares hit a 52-week high of 80 cents recently aftersurprising investors with a better-than-expected economic assessmentfrom its Renard diamond development project in Northern Quebec. Lastsummer, the shares were dragged down as low as 10 cents, partly as aresult of a depressed diamond market that saw consumers stop purchasingthe luxury stones and producers stop pulling them from the ground. Thediamond market has bounced back since, almost reaching the highestlevels in 2008.

Ownership

Agnico-Eagle became Stornoway’s largest shareholder after a three-waymerger between Stornoway, Contact Diamond Corp. and Ashton Mining ofCanada Inc. in 2007. Contact was a subsidiary of Agnico-Eagle at thetime of the takeover, while Rio had a 52-per-cent interest in Ashton.Lorito Holdings is a company run by Lukas Lundin, chairman ofVancouver-based Lundin Mining Corp. Mr. Lundin, Stornoway executivechairman Eira Thomas and Bear Creek Mining Corp. chairman CatherineMcLeod-Seltzer are also involved in Vancouver-based Lucara DiamondCorp., an African-focused diamond exploration and development company.

Quebec

Renard, touted as being Quebec’s first diamond mine, is 50-50 jointventure between Stornoway and Soquem Inc., a mining and explorationinvestment company owned by the Quebec government. The province hascommitted $130-million in capital funding to build a road that willservice four mines and a new park in the area. Production at Renard, 800kilometres north of Montreal, is set for late 2013.