DiamonDs

The name Diamond is derived from the Greek word, Adamas. This means the unconquerable

Cut Color Clarity Carat

Diamonds are always valued in terms of the Four Cs

Diamonds are found in various colors such as blue and pink, yellow and brown. In its purest state, diamonds are colorless and brilliant in appearance

The weight of a one carat diamond is 0.2 grams thus, diamond ore at a grade of one carat per tonne is equivalent to 0.2 parts per million

Diamonds are composed of only one chemical element carbon

Diamonds have the highest melting point of any natural substance

Diamonds are almost fire proof. In order for a diamond to burn it needs to be heated to 1292 degrees Fahrenheit

It is believed that the engagement diamond ring is worn on the third finger of the left hand because the ancient Egyptians believed the vein directly connected to the heart

The first diamond engagement ring was gifted by Archduke Maximillian of Austria to Mary of Burgundy in the year 1477

DiamonDs from KimBErLiTE

Geology of a Diamond Pipe

Diamonds are transparent crystals of carbon that are formed under extreme pressure at relatively low temperatures, at depths between 100 and 400 km below the Earths surface. Studies suggest that the majority of diamonds formed very early in the Earths history and therefore represent physical processes happening deep within the Earth, in a region known as the upper mantle, shortly after the formation of the planet. Many processes of the active Earth since that time and continuing to the present have been destructive to these originally formed crystals, converting them into graphite or other minerals containing carbon. Unique and long lasting physical conditions of pressure and temperature have been required to provide refuge for these primeval diamonds, conditions that occur only in the oldest and most stable parts of each continent. For this reason, the worlds great diamond mines all occur within regions referred to by geologists as stable Archean Cratons, the nuclei of continents as we know them today. The Kaapvaal/Zimbabwe craton of southern Africa, the Slave craton of northern Canada, the Siberian craton and others all of these represent portions of the Earths crust that stabilized at a very early geologic time, have survived dramatic geologic evolution since then and, in doing so, provided refuge for the crystalline treasure below. Getting these diamonds to the surface is a special geologic operation. Normal tectonic processes of subduction and crustal uplift are too slow and hot, destroying the diamonds. Typical volcanic events such as the Hawaiian islands, or Mt Etna develop in regions where the diamonds have already been destroyed and the magma chambers feeding these volcanoes
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are too shallow anyway. It takes a special magma, and a special type of volcano the Kimberlite. The formation of kimberlite magma is a process that is not well understood. What is known is that these magmas form very deep and that they have a relatively high component of gases, such that when they do erupt into a volcano, they do it quickly and violently. Kimberlite magma moves upward from the mantle into the lower crust, following existing fractures and weaknesses in the surrounding rock. It picks up fragments of surrounding rock as it moves upward and assimilates this material into itself. As the magma rises higher in the crust, surrounding pressure becomes less; the contained gases expand more, fracturing more rock, moving upward faster and faster as surrounding pressure becomes less and less, and in a very short time erupts to the surface. On eruption, contained gasses escape immediately, which effectively freezes the remaining magma in the chamber it has hammered out for itself on its upward journey. This leaves a body of kimberlite in the shape of a classic champagne flute, known as a kimberlite pipe. The upper portion of the pipe is the crater, and contains fine grained kimberlite magma that was hurled upward as the eruption occurred and then fell back into the hole created. Time will also allow surrounding material to erode into the crater, which results in a mix of fine grained kim5

Crater Diatreme Xenoliths Root

berlite and sediments of surrounding rocks. Below the crater, is the diatreme, a jumble of kimberlite fragments together with material that the magma brought up with it on its long journey from the upper mantle, all of which was frozen in mid-action when the mobilizing gases escaped on eruption. Going deeper into the root zone of the pipe are dykes and sills of kimberlite, representing kimberlite magma still under some pressure on eruption of the pipe and therefore allowed to cool more slowly into a hard igneous rock. These dykes and sills also testify to the cracks and weaknesses that the rising magma explored in its effort to reach the surface. Kimberlites and related types of volcanoes occur all over the world and all of them provide insights as to the nature of deep crustal and upper mantle material. It is only where kimberlite magmas have formed underneath stable Archean cratons that there is a chance that the magma will pass through a zone of diamond enrichment on its upward journey, assimilating diamond into itself and elevate these to the surface. It does not
KIMBERlITE pIpES Diamond bearing pipe Non diamond bearing pipe

Upper mantle Diamonds

Upper mantle

take much assimilating of diamond rich mantle material to make a great mine. Consider that many economic kimberlite mines operate on grades of 1 carat per tonne or less, sometimes much less. The weight of one carat is 0.2 grams. This equates to a diamond concentration in the kimberlite of 200 parts per billion. All of this is to say that the formation of a diamondiferous kimberlite deposit is a very special set of well-timed geologic events. primeval diamond crystals must be sheltered from destructive geologic events for millions of years. Kimberlite magmas must form and ascend to the surface in an area that causes the magma to rise through and assimilate diamond rich mantle material. The ascent of the magma must be quick so that assimilated diamonds are not dissolved and resorbed by corrosive gases within the magma. The resultant diamondiferous pipe must be preserved from subsequent erosion for millions of years, waiting for the lucky prospector who can recognize its potential, and understands how to develop the deposit into a mine.
KIMBERlITE pIpES lAvAS SANDSTONE REDBEDS TUFF CONE lAKE

SEDIMENDS KIMBERlITE SHAlES

QUARTZITE

ARCHAEAN GRANITE SCHIST

500 m

Evaluation of Kimberlite Pipe

Evaluating a kimberlite pipe for diamond content and its economic potential requires answering three questions in sequence:

1 Does the kimberlite have any diamonds in it? 2 If the kimberlite does in fact have diamonds, how abundant
are they, what is the grade?

3 What are the diamonds worth?

A limited assessment of the economic potential of a newly discovered kimberlite can be made from core and percussion drill samples. Analysis of Kimberlite Indicator Minerals, pyrope garnet, chromite, and ilmenite, together with analysis of kimberlite for microdiamond content (diamonds less than 0.5 mm) can be used to make a qualitative assessment of the diamond carrying capacity of an untested kimberlite. These analyses provide information that is essential to making a decision as to proceed with more costly bulk sampling programs to recover a parcel of larger diamonds. Bulk sampling to determine diamond grade and quality is warranted on kimberlite bodies which have been sufficiently delineated to indicate potential of mineable tonnage, and for which microdiamond and kimberlite indicator mineral analyses provide positive confirmation of diamond content. Bulk sampling operations generally require significant capital investment, but can be carried out in stages to progressively reduce the risk of investing heavily in a kimberlite discovery which may prove to be uneconomic. Sampling programs designed to collected 100 500 carats of diamond can be used to make an initial assessment of macrodiamond grade and size distribution, and provide some
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information of diamond quality. Collecting a sufficient number of diamonds to confidently assess diamond quality and carry on with mining feasibility study is very much dependent on the nature of the diamond population. As a minimum, samples of 1,000 to 3,000 carats of diamond is required to produce a statistical diamond value estimate. If a kimberlite contains a unique diamond population, in particular, if a small portion of the diamond population has a strong influence on value estimates, samples of 5,000 to 10,000 carats may be required. Concurrent with bulk sampling for diamonds, other parameters critical to an economic assessment of a kimberlite are evaluated. Accessibility and ease of mining, appropriate milling technology for the ore, fiscal considerations for the jurisdiction in which the pipe is located, availability of qualified labor, water, power, environmental and socioeconomic assessment all have significant influences on the economic viability of a potential project. valuation of bulk sample diamond parcels is generally conducted by one or more experienced diamantaires who are active and current in the rough diamond trade. value estimates of the actual parcel of diamonds recovered in bulk sampling efforts are then statistically modeled to create an estimate of diamond value to be expected on full scale mining. These modeling efforts consist of analyzing the size distribution of diamonds recovered in the bulk sample program and the relative values of each size category. The statistical model is then used to project the frequency of various diamond size fractions in a full population of diamonds from the kimberlite to arrive at an estimate of run of mine diamond values. Because of their rarity, diamonds have historically been graded into hundreds of value categories base on the Four Cs: color, carat weight, cut, clarity. These can all be grouped into the following general categories:
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1 Investment diamonds the infrequent among the rare.

These are very large (10 carat and above), high quality stones (great clarity, intense color, no flaws). This is not the stone you buy for an engagement ring. These stones are so rare that they command very high prices from those who are making an investment purchase.

2 Jewellery diamonds rough diamonds cut for use as gemstones in jewellery, and,

3 Industrial diamonds natural and synthetic diamonds used in

a wide range of manufacturing processes. Although approximately 80% of rough diamonds produced fall into the third category, the reverse is true for value more than 80% of the value of rough diamonds produced in the world is contained in jewellery and investment stones.

Rough Diamond Price vs. Commodity Trend

Normalized to Jan 2011 2.50 Au Di Al Cu Ni Zn pb

2.00

1.50

1.00

0.50

2005

2006

2007

2008

2009

2010

2011

Source: www.kitco.com, London Metal Exchange, Diacro Diamonds

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mining and Processing Diamondiferous Kimberlites

Mining of kimberlite pipes is typically initiated as an open pit mining operation. Modern truck and shovel mining is a cost effective means of extracting high tonnages of kimberlite ore to great depths. If the kimberlite ore is of sufficient value, open pit mining operation may evolve into underground mines once the economically practical depth of an open pit operation has been reached. processing of kimberlite to separate diamond from its host rock is comparatively unique in the mining world for two reasons:

1 The physical properties of diamond, its hardness, density,

hydrophobic nature, and that it can be made to fluoresce under x-ray radiation lend themselves to unique and efficient recovery processes, and

2 Kimberlite rarely contains environmentally harmful byproducts which allows good environmental management practices to give full effect to minimizing the impact for mining and processing.

Kimberlite ore is broken down in a series of crushing and grinding steps to liberate contained diamonds. More diamonds are recovered the finer the kimberlite is broken down; however, higher costs are incurred in finer grinding, and the extra diamonds recovered are of a smaller size and lower value. The
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operator determines the extent of size reduction based on the analysis of the economics. Most diamond mining operations settle somewhere between 1 and 2 millimeters as a bottom cutoff size. liberated diamonds are separated from most of the rest of the kimberlite ore by density separation. Crushed product is mixed with a dense solution and passed through a DMS cyclone. The cyclone separates heavy minerals, including diamonds from the low density gauge material. The high density material and diamonds are directed to the diamond recovery circuit while the low density fraction goes to tailings. This concentrate of heavy minerals is then typically passed through a x-ray recovery unit, as the stream of heavy minerals passes through the x-ray, diamonds fluoresce, which fluorescence is picked up by a photomultiplier, and this triggers the recovery machine to eject the diamond from the particle stream. Tailings from the x-ray recovery system may be passed over a grease table for further recovery or as an audit of the x-ray machines efficiency. Because of diamonds hydrophobic nature, it will stick to grease whereas other minerals will wash off.

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When and How did modern Diamond mining start?

Modern diamond mining started during the 1870s in South Africa, following the discovery of the Star of South Africa diamond (83.5 carats in size) on the banks of the Orange River (at the border of Namibia and South Africa) in 1869. A diamond rush followed and by 1888 the first working mines in the area were established. As prospecting increased, more diamonds were discovered in other southern African locations. The diamond industry has since expanded across southern Africa, making this the primary global location for diamond sources today.

The Kimberley Process

After being mined, the rough diamonds are examined, registered, certified and sealed by a recognized authority as per the Kimberley process Certification Scheme (KpCS). The Kimberley process (Kp) is a joint government, industry and civil society initiative established to minimize the flow of illicit diamonds and to provide purchasers with confidence that they are buying diamonds from a legitimate source. The KpCS imposes extensive requirements on its members to enable them to certify shipments of rough diamonds as conflict-free. As of December 2009, the Kp has 49 members, representing 75 countries, with the European Community and its Member States counting as an individual participant.

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Gem diamond production (volume)

Other 23% Russia 26%

Canada 9%

South Africa 10% DRC 15%

Botswana 17%

Total: 133,120,898

Gem diamond production (value)

Other 16% Botswana 22%

Angola 15%

South Africa 15%

Russia 20%

Canada 19%

Total US$11,998,001,932
Source: Kimberley process Certification Scheme (July 28, 2011)

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selling rough Diamonds

Once processed at the mine, rough diamonds are delivered to sorting facilities mainly in london, Antwerp, Surat, Gaborone, Kimberley and Moscow, where the rough diamonds are classified. There are thousands of different categories into which diamonds can be sorted, dependent on size, shape, quality and colour. The majority of diamonds fall within a range of standard colours from colourless to faint yellow or brown tints. Some very rare diamonds, known as fancies, are bright colours, such are pink, blue or green. A perfectly transparent diamond with no colour or hue is considered to be the purest, but the majority of rough diamonds have some distinguishing marks, known as inclusions. The best quality diamonds in terms of colour and clarity are distributed to the gem market. Historically, the market for rough diamonds was managed by De Beers, which controlled the vast majority of rough diamond production and was able to control the market structure for Rough Diamond Supply and Demand Analysis
(US$M) 22,000

18,000

14,000

10,000

8,000 2006

2008

2010E Supply

2012E Demand

2014E peak Demand

2016E

2018E

2020E

Source: BMO Capital Markets Ltd

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rough diamond sales. Beginning in the 1990s, a number of producers came on line and operated outside the De Beers system. These new producers did not disrupt the existing pricing structure but sold their product either through exclusive sales contracts, open tenders or auctions. Tenders and auctions are particularly effective in establishing a pricing structure for a mines product in that buyers compete directly with each other for the type of diamonds that they want. Through these selling platforms the producer can be confident that he is receiving a true and current market value for the full range of his product, and the clients are able to focus their purchasing efforts on the type of product that they want.

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Down the Pipeline

After the producer has sold his diamonds into the rough market, the stones move down the diamond pipeline. Rough diamond buyers distribute their purchases to their own cutting and polishing factories or re-sort and re-sell to third party cutters and polishers.

Cutting & Polishing

Gem quality diamonds are usually distributed to one of the main diamond cutting and trading centres in Antwerp, Mumbai, Tel Aviv, New York, Surat, China, Thailand or Johannesburg. Once they arrive at the diamond centres, experts known as diamantaires cut and polish the rough diamonds into shapes, such as the round brilliant, the oval, the pear, the heart and the emerald. polishing follows cutting, before the diamonds are again classified by their cut, colour, clarity and carat weight; the Four Cs. These diamonds are typically sold to diamond wholesalers or diamond jewellery manufacturers in one of the 24 registered diamond exchanges located across the world.

Jewellery manufacturing
Wholesalers or manufacturers buy relatively small amounts of unset, polished diamonds. Wholesalers sell these to jewellery designers, manufacturers or retailers. Manufacturers will produce diamond jewellery designed and commissioned by a retailer or other jewellery designer. They may also create jewellery, designed by in-house teams, and sold direct to retailers. The System of Warranties is used as a declaration on the invoice for each transaction of polished diamonds to assure industry purchasers and consumers that their diamonds are from conflict free sources.
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retailing
The final stage of the diamond pipeline is when diamond jewellery is sold by retailers to the consumer. The value of diamond jewellery sold each year is approximately US$72 billion, which includes the cost of the diamonds, precious metals and other gems. The USA represents the largest market (50%), followed by Japan (15%), Italy (5%), India (3%), China (2%), The Gulf (2%) and other countries (23%). According to independent research, diamond jewellery is the most highly sought-after category of luxury goods, both by women for themselves and by men for gifts. The jewelry industry is quite fragmented and locally competitive so margins tend to be tight, but large, high-end jewelers like Tiffany do achieve higher margins. A key to maintaining these brands is security of supply; in this case large, high quality diamonds. large, high quality stones are rare so the likes of Harry Winston, Tiffany and Graff will go to great lengths to secure supply through off-take arrangements, acquiring diamond mines and setting up their own rough marketing channels.

industrial Diamonds
Industrial quality diamonds are low quality or badly included stones and are suitable only for industrial use; for example, they are used in dentists drills and earthmoving equipment.

Industry Profile
For most of the 20th century over 80% of the worlds rough diamonds passed through De Beers, but in the period 2001 2009 the figure has decreased to around 45%. De Beers sold off the vast majority of its diamond stockpile in the late 1990s
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 early 2000s and the remainder largely represents working stock (diamonds that are being sorted before sale). This was well documented in the press, but remains little known to the general public. As a part of reducing its influence, De Beers withdrew from purchasing diamonds on the open market in 1999. As at January 2011, De Beers states that it only sells diamonds from the following four countries: Botswana, Namibia, South Africa and Canada. Almazy Roskii-Sakha (Alrosa), De Beers Russian rival, is currently owned by federal and regional governments. It operates mines in Russia and Angola, accounting for 25% of global carat production and 97% of the Russian production. Chinas Polished Diamond Imports
(US$M) 1,800 20% 1,600

1,400 13%

1,200

1,000

800

7%

600

400

200 0

2005

2006

2007

2008

2009

2010E

2011E

Source: Shanghai Diamond Exchange

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Global Diamond Jewellery sales

At mid 2010, Chinas diamond imports for general trade increased by 92 percent year on year to a record high of $577 million. Diamond consumption in China has surpassed Japan and is now second only to the U.S. The Shanghai Diamond Exchange (SDE) is the only diamond exchange in China, which enjoys favourable taxation policy and is operated in accordance with international practice of diamond industry. It provides diamond dealers a fair and safe transaction venue with closed management.

Economic impact of Diamonds

As one of Africas major natural resources, diamonds are helping transform southern Africa and the lives of its people. In particular, Africans are using the revenue from diamonds to create wealth for themselves. The diamond trade contributes approximately US$8.5 billion a year to Africa and is helping the continent in four key ways: Financial: Diamonds provide a significant economic contribution to the countries in which they are found for example diamonds represent 33% of the GDp of Botswana (approximately US$3.3 billion) Health: Diamonds play a significant role in helping tackle the HIv pandemic in southern Africa through the funding of counselling, testing, education, treatment programmes, clinics and hospices Education: Southern African countries are using the revenue from diamonds to help more children go to school for longer Employment: More than 38,000 people in southern Africa are employed by the diamond industry Botswana is the jurisdiction that has derived the greatest
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China and india promise to be the next engines of growth for the industry
Rest of World, 19%

Italy, 4% Hong Kong, 2% China, 5% India, 7% Taiwan, 2% Japan, 11% Gulf, 8%

USA, 41%

2008
Rest of World, 15%

Italy, 3.5% Hong Kong, 2% China, 9%

USA, 37%

India, 11% Taiwan, 3% Japan, 9% Gulf, 9%

2016E
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Source: De Beers Estimates Note: Excludes currency effects

economic impact from diamonds. Over 30% of its GDp, and approximately 50% of government revenues are derived from diamonds. Diamond revenues for the Government of Botswana come in a variety of forms: royalties, taxes and dividends. Over 3,000 jobs will be created in the diamond cutting and polishing sector, an increase of 30% in diamond employment in Botswana.

responsible Trading Practice

To promote the trading of diamonds from legitimate sources and to ensure that consumers can be confident in their diamond jewellery purchases, governments, NGOs and the international diamond industry have worked together to implement a certificate of origin system, the Kimberley process described above. The Kimberley process is a certification system designed to prevent illicit diamonds from entering the legitimate diamond supply chain. The Kimberley process ensures that only rough diamonds accompanied by a government-issued certificate can be imported and exported, providing an assurance that the diamonds are from conflict free sources. Under this United Nations mandated system, only countries that are part of the Kimberley process can import or export rough diamonds. Today, 75 countries are members of the Kimberley process, ensuring that more than 99% of diamonds are from conflict free sources.

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885 W. Georgia Street Suite 2000 vancouver, BC Canada v6C 3E8

T 604 689 7842 F 604 689 4250 lucara@namdo.com lucaradiamond.com

lUC: TSX lUC: BSE (Botswana) lUC: OMX (Stockholm)

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01/11/12