Letter to Shareholders
September 16, 2010
Dear fellow shareholders
The past 12 months have been good for your Company. Stornoway is in the enviable position of owning 50% of one of the best undeveloped diamond projects in the world, on a solid development track, in one of the world's best mining jurisdictions. Renard, located in north central Québec, has emerged as a significant, and company making, asset. Getting to this point has been the result of a decision, taken with our 50% JV partner SOQUEM at the bottom of the market, to drill for the unknown, a decision taken out of the belief that mining businesses can't grow unless they are prepared to drill for ore. That drill program commenced in the winter of 2009, and at this time last year, as we attended our 2009 Annual General Meeting, it was nearing final completion and its full impact on our future was shortly to become evident.
Based on an early economic assessment and resource estimate that had been completed in December 2008, we knew that Renard was potentially viable, but needed to grow in size to generate the kind of economics that would warrant a production decision. We focussed our drilling on the Renard 2 kimberlite pipe, which comprised the bulk of the initial mineral resource, and which had had little delineation at depth. During the course of 2009, as our drilling progressed, we reported on just how much bigger Renard 2 was becoming. Ultimately, we realised that Renard 2 was flaring open as we went down, and was becoming increasingly dominated by a higher grade phase of kimberlite.
It was a home run. By December 2009 we had released an update to the project's resource statement showing Indicated and Inferred Resources of 23.0 and 13.3 million carats respectively, increases of 226% and 192% over the previous year's estimates. Resource grades had shown corresponding increases of 27% and 39%, and an additional 12 to 26 million carats of upside were classified as a "Potential Mineral Deposit". By Christmas, Stornoway's stock had gained 600% on the year and was the 16th best performing equity on the Toronto Stock Exchange. The increased resources had a predictable impact on the project's economics. In March 2010 we released the results of an updated Preliminary Assessment that showed a remarkable 1400% increase in base-case pre-Tax NPV to C$885m, up from C$56m in the previous study. The mine life was estimated at 25 years compared to the previous 7 years, despite being based on a higher production rate. By the end of this program of work, a modest $4m of flow-through capital invested into the ground and matched by our partners had resulted in the addition of over $3 billion of project resource value. It had been a remarkable run, and a true exercise in shareholder value creation. All this, and the deposit is still open. At time of writing, we continue to chase the upside of the project with carefully placed, deep step out holes on several kimberlite pipes, but already the scope and nature of Québec's first diamond mine is now clearly in focus.
Rather than being the modest project with "room to grow" that we imagined in December 2008, we now see Renard as a major future diamond producer, with strong margins, a long mine life, exploration upside, and a competitive mining cost profile. Our job now is to deliver on the project's potential. To this end, we initiated a full Feasibility Study in July that puts us on track for a production decision at Renard at the end of 2011, and potential production at the end of 2013. This work program will be overseen by an experienced mine development team currently being assembled in Montreal under the leadership of Pat Godin, Stornoway's new COO. A key element of the project's success, and timely development, will be the development of our access road, the "Route 167 Extension", which we are pleased to report is progressing on schedule under the auspices of Transports Québec.
As we step up to this next stage in the project's evolution, we are enjoying the close co-operation of our partner, SOQUEM, and their parent, Société générale de financement du Québec, the Québec government's main industrial and financial holding company. Our joint venture was recently pleased to announce the signing of a Pre-Development Agreement with the Crees of the James Bay region. This agreement was the culmination of a long dialogue with our community stakeholders, particularly in the Cree community of Mistissini, and provides for business and employment opportunities for the Crees during the period running up to mine construction and operation. We see this agreement as a stepping stone to a more comprehensive business relationship with both the Crees and our regional partners. At our first, large scale public open houses in Mistissini and Chibougamau, held in March, we enjoyed an overwhelming turnout and strong community support for the project.
The development of Renard will be our primary focus going forward. However, Stornoway will always be a company that offers the investor a credible internal growth strategy in diamonds, and we have not forgotten that our business is still one that can turn dramatically on the results of a single drill hole. We were very pleased to be able to announce in early September the re-commencement of our Canadian grass roots exploration programs which had been put on care and maintenance in 2008. Pursuing the discovery potential in this portfolio will be a priority for our exploration team. Our more advanced projects, such as Aviat in the Melville Peninsula of Nunavut, have demonstrated the potential for significant tonnages and high diamond contents on a non-resource basis, and provide the company with significant exposure to long term diamond price growth. However, the next logical stage in the progression of this project, delineation drilling and bulk sampling to establish formal mineral resources, will be capital intensive, and by necessity will not be completed until Renard is fully financed and on track to production.
The question of how and when we intend to finance our 50% share of Renard's development cost is, understandably, a regular question from shareholders. During the course of 2011 we will work diligently to provide an answer. Strengthening the company's balance sheet, and putting project financing into place on a basis that is not overly dilutive to existing shareholders, is a key priority for your board and management team. For now, when asked this question, we point to the strength of our asset, the future market fundamentals for our product, the financial capacity of our partner, and our location in one of the lowest risk mining jurisdictions in the world.
Despite our transformative year, we are conscious that the full value of our assets is still not reflected in our stock price. Our job is to keep telling our story and work diligently to bring out that value. We are confident, however, that all of the key elements for strong future growth are now in place.
President and CEO