Star-Orion South Preliminary Economic Assessment

During 2018, Star Diamond Corp. announced the positive results of the independent Preliminary Economic Assessment (“PEA”) on the Star and Orion South Kimberlites, on mineral dispositions held 100% by Star Diamond Corp. (see Star Diamond Corp. News Release dated April 16, 2018 and Technical Report dated May 30, 2018). The PEA estimates that 66 million carats of diamonds could be recovered in a surface mine over a 38-year Project life, with a Net Present Value (“NPV”) (7%) of $2.0 billion after tax, an Internal Rate of Return (“IRR”) of 19% and an after-tax payback period of 3.4 years after the commencement of diamond production.

The PEA Highlights Include 1.:

The PEA was led by independent mining, processing and design consultants, with support from the Star Diamond technical team. The principal consultants include: SGS Canada Inc. - Geostat (“SGS”); DRA Americas Inc. (“DRA”) and ENGCOMP Engineering and Computing Professionals Inc. (“ENGCOMP”). A number of other independent consulting firms and potential vendors also provided their study results to Star Diamond for use in developing the PEA. All currency amounts are quoted in Canadian Dollars, unless otherwise stated.

PEA Results

The PEA cash flow model is based on developing two open pits, initially on Orion South and subsequently on Star. The cash flow model assumes one processing plant and infrastructure that will serve both open pits and assumes the Project has a four-year pre-production development period followed by a 34 year production period.  The economic criteria used in the cash flow model are listed in Table 1.

Table 1. Economic criteria used in PEA cash flow model

Area Criterion Value
Production Parameters No. of operating days per year 350 days per year
Process plant availability 87%
Processing rate 45,000 tpd kimberlite
Estimated LOM total plant feed 470 Mt mill feed at a weighted average 14 cpht grade
Diamond Price Escalation Projected diamond price escalation 2%
Cost Assumptions Exchange rate $1.00=US$0.80
Marketing costs Average 1% of Revenue
Royalties Based on Saskatchewan

 

royalty regime

Operating Costs Mining (includes waste removal cost) $4.37 / tonne processed
Mill Feed processing $2.30 / tonne processed
General and Administration $2.47 / tonne processed
Contingency Initial capital cost contingency 7% of Initial Capital Cost

Abbreviations: Mt – Million metric tonnes; tpd – metric tonnes per day.

Pre-production Capital Expenditure

The pre-production capital of $1.4 billion is detailed in Table 2.

Table 2. Pre-production Capital

Area Amount
Processing Plant $350 million
Site Facilities $250 million
Overburden Stripping $74 million
Overburden Stripping Equipment $410 million
Kimberlite Mining Equipment $64 million
Other Costs $156 million
Contingency $106 million
Total $1,410 million

Economic Analysis

The Base Case scenario uses the Model diamond price and 2% diamond price escalation, while Case 1 uses the High Model diamond price and 2% diamond price escalation. The economic model includes a $106 million capital contingency. Pre-tax and after-tax results of the economic analysis are shown in Table 3 for comparison.

Table 3. Economic analysis results of discounted cash flow model for Base Case and Case 1.

Item Base Case (Model Price) Pre-Tax & Royalty Case 1 (High Model Price) Pre-Tax & Royalty Base Case (Model Price) Post-Tax & Royalty
Undiscounted Net Cash Flow $18.0 Billion $26.1 Billion $11.4 Billion
NPV (5.5%) $4.6 Billion $7.3 Billion $2.9 Billion
NPV (6.0%) $4.1 Billion $6.6 Billion $2.6 Billion
NPV (6.5%) $3.7 Billion $6.0 Billion $2.3 Billion
NPV (7%) $3.3 Billion $5.4 Billion $2.0 Billion
NPV (7.5%) $3.0 Billion $4.9 Billion $1.8 Billion
NPV (8.0%) $2.7 Billion $4.5 Billion $1.6 Billion
NPV (8.5%) $2.4 Billion $4.1 Billion $1.4 Billion
IRR 22% 32% 19%
Simple Payback (years)* 3 years 3 months 2 years 4 months 3 years 5 months

* After start of processing.

Sensitivity Analysis

Economic risks were assessed using base case cash flow sensitivities to recovered grade, diamond prices, CDN$/US$ exchange rate, capital costs and operating costs. Each of the sensitivity items were independently adjusted up and down by 10%, 20% and 30% to project the impact on NPV (7%). The NPV (7%) value after each sensitivity item was adjusted are presented in Table 4. The sensitivity analysis shows that the PEA is most sensitive to CDN$/US$ exchange rate fluctuations on the positive side while grade and diamond price have the most significant negative effect.

Table 4. Base Case Sensitivity Analysis Results (pre-tax & royalty basis, NPV (7%))

Sensitivity Parameter 70% 80% 90% 100% 110% 120% 130%
Grade $1.6 B $2.2 B $2.7 B $3.3 B $3.9 B $4.5 B $5.1 B
Diamond Price $1.6 B $2.2 B $2.7 B $3.3 B $3.9 B $4.5 B $5.1 B
CDN$/US$ Exchange Rate $4.7 B $4.1 B $3.7 B $3.3 B $3.0 B $2.7 B $2.4 B
Capital Costs $3.6 B $3.5 B $3.4 B $3.3 B $3.2 B $3.1 B $3.0 B
Operating Costs $3.6 B $3.5 B $3.4 B $3.3 B $3.2 B $3.1 B $3.1 B

Mineral Resource Estimate

The PEA is based on the Revised Mineral Resource Estimate as documented in the  NI 43-101 Technical Report: Technical Report and Revised Resource Estimate for the Star – Orion South Diamond Project Fort a La Corne area, Saskatchewan,  Canada December 21, 2015 3. This report is available on the Corporation's website (www.stardiamondcorp.com) and on SEDAR (www.sedar.com).

Diamond Prices

Diamond prices used in the PEA are based on price applications by WWW International Diamond Consultants Ltd (“WWW”) in mid-April 2018 using their March 31, 2018 price book. The Base Case scenario uses the Model prices for each kimberlite unit within Star and Orion South. The Case 1 scenario uses High Model prices for comparative purposes. WWW has stated that per annum rough diamond price escalation of 2.5 per cent is a reasonable figure, given the future outlook for the rough diamond market over the next ten years. For the purpose of the PEA Star Diamond has elected to use a more conservative diamond price escalation of 2%. The details of the April 2018 valuation of the Star and Orion South diamond parcels are listed in Tables 5 and 6.

Table 5. The Parcel and Model Price Details for the Star Kimberlite (March 31, 2018)

Star Kimberlite Unit Carats Parcel Price (US$/carat) Model Price (US$/carat) Minimum Model Price (US$/carat) High Model Price (US$/carat)
Cantuar 1,667.96 281 303 253 438
Pense 1,410.47 141 162 126 203
EJF 7,124.74 162 207 172 265
MJF-LJF 91.28 170 173 131 249
Orion South Kimberlite Unit Carats Parcel  Price (US$/carat) Model Price (US$/carat) Minimum Model Price (US$/carat) High Model Price (US$/carat)
EJF 1,400.01 126 173 118 242
Pense 581.47 81 144 101 199

Mining

Mine plan optimization determined that the optimal economic approach to the mining of the combined Star - Orion South resources is to commence with mining Orion South, followed by mining on Star, for a total LOM of 34 years. The pit plans incorporate the geotechnical and hydrogeological design criteria developed prior to 2011.

Mining of the kimberlite is by conventional open pit. Conventional hydraulic excavators and haul trucks create a starting “key” for three BWEs to remove the sand and clay overburden from the kimberlite. Conveyor belts transfer the sand and clay from the BWEs to the nearby overburden waste area. The exposed kimberlite is lightly blasted and conventional hydraulic shovels load the rock into trucks. These trucks transfer the rock to an in-pit feeder and the kimberlite is delivered to the processing plant via conveyor belt.

Processing Plant and Infrastructure

The processing facility is favourably located near the Star and Orion South pit edges. The processing rate is 45,000 tonnes of kimberlite per day employing autogenous milling followed by screening, X-ray Transmission (“XRT”) diamond recovery and dense media separation of heavy mineral concentrate. The recovery section employs X-ray technology with grease as the scavenging technology to recover the low-luminescence diamonds. The diamonds would be sorted into parcels within the on-site sorting facility.

Environment Assessment

The Environmental Impact Statement (“EIS”), which describes the potential environmental and socio-economic effects of the Project, was previously submitted to provincial and federal regulators. In December 2014, the Canadian Environment Assessment Agency announced an Environmental Assessment Decision for the proposed Project (See News Release dated December 3, 2014). The Federal Environment Minister announced that the Project “is not likely to cause significant adverse environmental effects when the mitigation measures described in the Comprehensive Study Report are taken into account.” The Corporation is presently awaiting a decision on the EIS from the province.

Final site reclamation and closure, including the removal of site facilities, will be performed at the end of the LOM in accordance with regulatory requirements. The conceptual closure plan will be based on a target end land use of self-sustaining forest.

Community Relations

Since 2007, the Corporation has engaged with local communities and provided information updates at meetings of the Diamond Development Advisory Committee ("DDAC"). The DDAC is a community-based committee comprised of approximately two dozen representatives of cities, towns, villages, rural municipalities and Indigenous parties in the vicinity of the Fort à la Corne forest.  Additionally, the general public has been widely consulted through forums such as community open house meetings conducted by the Corporation, with local communities showing overwhelming support for the Project. A description of extensive community engagement activities forms part of the EIS. Development of a mine will bring substantial economic development to communities in the surrounding region. The proposed Project is expected to provide direct employment for hundreds of people throughout the construction phase and in excess of 500 people continuously over its 38 year life.


1.  Cautionary note: The PEA was prepared in accordance with National Instrument 43-101 Standards of Disclosure for Mineral Projects ("NI 43-101"). Readers are cautioned that the PEA is preliminary in nature and includes the use of Inferred Mineral Resources that are considered too speculative geologically to have the economic considerations applied to them that would enable them to be categorized as Mineral Reserves, and there is no certainty that the results of the PEA will be realized.

2.    Diamond-bearing kimberlite is produced from the mine and diamonds are recovered in the processing plant for 34 years. The overall project life is 38 years, which includes just over four years of pre-stripping activities.

3. During the fourth quarter of 2015, the Company announced Revised Mineral Resource estimates for the Star and Orion South Kimberlites (see Star Diamond Corp. News Release dated November 9, 2015 and Technical Report filed December 21, 2015). Accordingly, the mineral resources and economic assessment previously disclosed by Star Diamond Corp. for the Project should no longer be relied upon.