Companies Diamond Industry Series

Dominion Diamond Corporation

Equity Communications

July 25, 2013

Table of Contents
Production Diamond Sales Introducing Ekati Outlook Page 2 Page 5 Page 7 Page 10

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Figure 1: Dominion Diamond Corporation

Overview
Dominion Diamond Corporation evolved out of Harry Winston Corporation after the company sold the Harry Winston luxury diamond jewellery brand to the Swatch Group. Dominion has 40 percent ownership interest the Rio Tinto operated Diavik Mine and 80 percent ownership interest in the Ekati Mine.

Dominion Diamond Main Office Canada

Mining Operations Diavik Mine 40% Ekati Mine 80%

Exploration Projects

Canada

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1. Production
Figure 2: Diavik Mine production (DDC share)

Source: Company Reports, Equity Communications

Figure 3: Diavik Mine Quarterly Production (DDC share)

Source: Company Reports, Equity Communications

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Figure 4: Diavik Mine Quarterly Production (100 percent basis)

Source: Company Reports, Equity Communications

The Diavik Mine is an unincorporated joint-venture between Rio Tinto Diamonds (60 percent ownership) and Dominion Diamond Corporation (40 percent ownership). Rio Tinto is the operator of the mine. Diamonds recovered are split and marketed separately. Over its first decade, Diavik has produced over 75 million carats of rough diamonds. The open pit was depleted in 2012 but underground operations are expected to produce diamonds possibly until 2023. Three of the four remaining pipes are being mined, with all major capital expenditure completed. Development of the fourth pipe, A-21, would require major capital expenditure. This has been deferred for a few years until a pre-feasability study is completed. Nevertheless, A-21 budget is approximately US$500 million not excluding the feasibility phase of US$5.8 million. It is hoped that an improved diamond market would boost the project's economics. Rough diamond production for the calendar year 2012 increased 8 percent to 7.2 million carats compared to 6.7 million carats in the prior calendar year (on a 100 percent basis). The increase was due primarily to improved grades in each of the kimberlite pipes. Full year production forecasts for Diavik is 7.2 million carats in 2013 as full underground mining starts.

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2. Rough diamond sales

Figure 5: Rough Diamond Sales

Figure 6: Quarterly Rough Diamond Sales

Figure 7: Rough Diamond Prices

Source: Company Reports, Equity Communications

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Dominion's sales strategy is shaped by activity in the diamond market. If the diamond market is soft, the company often does hold back diamond sales until the market picks up. The higher quality diamonds are sold in Antwerp while the lower quality diamonds usually go to India. The mix of carats sold varies from season to season, depending on how the company reads the diamond market. Diamond markets are quite seasonal. With that said, general prices of rough diamonds kept trending downwards for most of 2012. This was a general pullback from all-time highs achieved for most categories in the middle of 2011. Prices for diamonds from the A-154 North and South pipes were down 35 percent from their peak by October 2012. The pullback appears to have bottomed-out as we start to witness a steady rebound in the general prices of rough diamonds. It is highly unlikely that rough diamond prices will rise above the peak of 2011 within the next twelve months. We do not observe any aggressive buying in the market.

What is ahead for Dominion's share of Diavik Mine? The important thing to remember is that Rio Tinto operates Diavik. Excluding sustaining capital, there's no major capital expenditure in the pipeline for the coming year. What this means is that the quality of ore grades and movements in the diamond market will continue to shape Dominion's Diavik-related revenue.

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3. Introducing Ekati Mine

Dominion Diamond Corporation purchased BHP Billiton's interest in the Ekati cluster in April 2013 for an aggregate cash consideration of US$553 million (after adjustments). The Ekati Mine is a joint venture held 80 percent by Dominion Diamond Corporation and 10 percent each by Dr. Charles Fipke and Dr. Stewart Blusson. The Ekati Diamond Mine consists of 282 mining leases over 262,175 hectares, containing 150 known kimberlites, with Mineral Resources currently estimated for eight pipes, and Mineral Reserves for five. Indicated Mineral Resources (inclusive of Mineral Reserves) of 105.7 million tonnes containing an estimated 127.5 million carats Inferred Mineral Resources of 24.9 million tonnes containing an estimated 19.1 million carats Probable Mineral Reserves of 20.6 million tonnes containing an estimated 19.6 million carats

Figure 8: Historical Production of Ekati Mine

Source: Company Reports, Equity Communications

The Ekati Mine has produced over 54 million carats of rough diamonds since 1998. The current life-of-mine plan is on its last legs. In 2012 Ekati produced 1.8 million carats of diamonds, significantly lower than in 2011 because of the continued processing of lower quality ore. This is consistent with the mine plan. The current phase of production at Ekati includes ore sourced primarily from the lower grade, but high carat value Fox open pit, supplemented by underground production from the lower portion of the Koala kimberlite pipe and from the Koala North pipe. Although production in the next two years is forecast to be lower than the average achieved over the last five years, it is expected to return to higher levels as the mine transitions
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to higher grade, but lower carat value, ore from the Misery and Pigeon open pits.
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Figure 9: Ekati Mine Mineral Reserve Statement Ekati Mine Mineral Reserves Statement - December 31, 2012
Classification Joint Venture Agreement Area Core Zone Kimberlite Pipe Koala UG Koala N UG Fox OP Misery OP Pigeon OP Stockpiles Tonnes (millions) 5.8 0.3 4.7 3 6.7 0.1 20.6 Grade Carats (cpt) (millions) 0.6 0.6 0.2 4 0.4 0.5 1 3.6 0.2 1.1 12.2 2.6 0.04 19.6

Probable

Total Probable

Source: Company Reports

Figure 10: Ekati Mine Production Forecasts

Source: Company Reports, Equity Communications

What's in it for DDC?

Dominion Diamond Corporation believes the aquisition of the Ekati cluster is profitable at the current mine life. We think so too. The returns are not that great but will eventually be better than what they were getting with the Harry Winston brand.

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In the short-term, 12 to 18 months, Dominion will probably continue with the work BHP was doing on the Misery pipe to guarantee a good return on the acquistion. Cash generated from current mining activities will likely be spent on the development of the Misery Pipe, whose eventual production will provide a decent return on investment. In the long-term, Dominion management is talking about taking a fresh look at the mining plans for the Ekati cluster with the intention of extending its life. The Misery and Pigeon pipes should provide a decent return on investment once production commences but the idea is to investigate the potential available in the buffer zone. Dominion Diamond Corporation is determined to access some of the deep mineral resources that could substantially extend the mine life of the Ekati cluster. Specifically, the Jay Kimberlite . The Jay pipe is part of the buffer zone joint venture held 58.8 percent by the company, 10 percent by Dr. Charles Fipke, and 31.2 percent by Archon Minerals Ltd. It contains 106 mining leases covering 89,151.6 ha, and hosts 39 known kimberlite occurrences including the Jay and Lynx kimberlite pipes. The recently released resource statement reveals potential of 90 million carats in the Jay pipe. It is the poorest of all pipes quality-wise but it iss also the richest quantity-wise. The pipe can provide decent annual production well into the future but there's a catch: a lake is in the way. In addition to that, Dominion would have to go through the permitting process all over again because the buffer zone is not fully permitted for mine development. There are also shareholding aspects to consider if they manage to get to the development phase. BHP Billiton probably found the whole thing too complicated to bother with but the guys at Dominion are up for the challenge. They believe they can get around the challenging technical aspect of getting the lake out of the way. If they manage to figure it out, we are looking at more than US$1 billion pre-production capital investment. The good news is that there is plenty of time available to figure out what to do with the pipes in the buffer zone. The current life of mine has another seven years or so to go and this will keep the processing plants occupied for now. Perhaps by then diamond prices would also have risen considerably higher than project cost inflation.

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4. Outlook for Dominion

Dominion Diamond Corporation has one glaring short-coming: Ekati is the first time the company will actually be managing a diamond mining business. Management may be qualified but it is not experienced. The ideal situation would be to hold on to as many people as possible from the talent that was running Ekati. To their credit, management at Dominion have relocated to Yellowknife to be right in the thick of things.

Progression of the Diamond Market

Our expectations for the diamond market in the short-to-medium term are less aggressive. In the next three years, we believe annual world production of rough diamonds will receive a boost of 10 to 15 million carats in mainly lower quality diamonds as the Argyle underground mine also expands to full production. We already anticipate increased production from Zimbabwe after four new companies were awarded mining licences for different areas of the Marange concession, doubling the number of companies mining diamonds in Chiadzwa. What this means is that diamond prices will likely rise at a slower pace than had been anticipated just two years ago. Add to this the fact that emerging diamond markets are not growing quickly enough to replace diminishing demand in developed diamond markets.

For in-depth analysis of Dominion Diamond Corporation in the context of the global diamond industry, please visit the 2013 Diamond Report Section of the Diamond Shades website.

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About Authors
Gerald Manyengavana isthe a Research Analyst at Series, Equity a Communications. You may contact by email This publication is part of Diamond Industry series of diamond industry reportshim produced by at: Equity mgerald@equityzw.com; Communications ahead of the 2013 Diamond Report. Equity Communications Diamond Report provides detailed analysis of trends in the diamond industry value chain in 2012-2013, from theCommunications. production end to the may retail end. It Supervision was provided by Tinashe Takafuma , Head of Research at Equity You contact is in by its email third edition. him at: ttinashe@equityzw.com

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