Shear processes stockpiles at Jericho

Shear Diamonds Ltd. is advancing a plan to return the Jericho Diamond Mine located in the Kitikmeot region of Nunavut to full production as early as 2014.

The junior reported May 1 that it has begun processing high-grade concentrate stockpiles at the Jericho Diamond Mine located in the Kitikmeot region of Nunavut. A total of about 3,500 carats had been recovered from 358 metric tons of the recovery reject stockpiles after the first 10 full days of processing.

These diamonds and all future production from Jericho, other than diamonds subject to a royalty if the holder has elected to take the royalty in kind, are to be delivered to Tache Company N.V., Shear's diamond marketing partner, for sale into end markets. The company's marketing agreement with Tache allows Shear to participate in the profit upside of diamond sales and provides the company with C$2 million a revolving line of credit and access to a C$3 million line of credit when it begins delivering diamonds.

For the next 10 months or so, Shear's operations will be focused on processing these stockpiles. Among the would-be producer's goals for this program:

Demonstrate that a significant number of diamonds went un-recovered during Jericho's previous operation and that these diamonds are recoverable;

Generate cash flow to support operations in 2012, while sources of funding for achieving full commercial production at Jericho are sought; and,

Acquire key processing knowledge which can be applied to future production at Jericho.

"It is incredibly gratifying for the entire Shear team to see the first recovered diamonds from Jericho since its shutdown in early 2008," said Shear President and CEO Julie Lassonde in announcing the move. "We are seeing daily improvements in tonnage processed as well as recoveries as we continue to ramp up during the re-commissioning of the recovery portion of the diamond recovery plant."

Lassonde said Shear has had to overcome some significant challenges in its efforts to restart diamond recoveries at Jericho, some of which likely result from the facility having been shut and abandoned for three years. These include, among others, the balancing of processes and general flowsheet fine-tuning, basic maintenance and legacy repair issues that had to be resolved, recruitment and training of operational personnel, as well as significant stoppages in power generation and software malfunctions.

The company also had to begin arranging for delivery of fuel for Jericho earlier than originally expected. Live commissioning of the recently-modified Jericho diamond recovery plant is underway on a day-shift basis only while the company ramps up production. Shear, so far, has achieved a maximum processing rate of 50 metric tons over a 12-hour shift and hopes to hit about 80 tpd with an average recovery rate of some 10 carats per metric ton as plant moves to 24-hour operation in the coming weeks.

Production gamble

Shear acquired a 100 percent interest in its flagship asset, the past-producing Jericho Diamond Mine and surrounding exploration properties, from Tahera Diamond Corp. and Benachee Resources Inc. in a court-sanctioned transaction in August 2010. The mine is located about 400 kilometers (250 miles) northeast of Yellowknife, NWT. The acquisition was subject a number of conditions outlined in a definitive purchase agreement, including successful completion by Shear of a minimum C$10 million equity financing, related development work, approval of the TSX Venture Exchange and other applicable regulatory approvals.

The mine was developed, opened and operated by Tahera from 2006 to 2008 until financial losses forced the miner to seek protection from creditors. The mine was estimated to be able to produce 375,000 carats a year with a value of C$25 million.

More than C$200 million had been invested in infrastructure at Jericho before the open-pit mine was shut down and abandoned. Existing facilities include a 2,000-metric-ton-per-day diamond recovery plant, maintenance shop, fuel farm, staff offices and accommodations for 225 workers, the open pit mine and a year-round airstrip.

In addition, the former owner poured another C$150 million in to previous exploration.

From 1.5 million metric tons of kimberlite mined and 1.3 million metric tons processed, the former owner produced some 780,000 carats of diamonds during the brief period, including more than 1,000 predominantly colorless stones with more than 10 carats each, a 59-carat gem that sold for C$450,000 and a 200-carat stone that was crushed during previous milling.

Jericho hosts a diamond resource currently estimated at 1.88 million carats in the indicated category and 1.13 million carats in the inferred category.

A new geological interpretation and 3-D model completed by Shear in the third-quarter of 2011 indicates that Jericho has significant resource potential.

And due to extraordinarily low previous recoveries (a 0.62 carats-per-metric-ton average versus an anticipated average of 1.05 cpt), Shear believes it can achieve substantial milling improvements in the mine systems to achieve higher diamond recovery.

In 2011, the company audited 18,000 metric tons recovery rejects and found a high level of concentrate. A 308.8 kilogram sample averaged 11.3 cpt, while a 4,048.5-kilogram sample averaged 14.5 cpt.

From the 18,000-metric-ton stockpile, Shear hopes to generate positive cash flow, assuming diamond prices remain strong.

In a processing trial reported in October, Shear recovered 200 carats from 22 wet metric tons.

Shear also audited 900,000 metric tons of processed kimberlite tails, taking a 1,345-kilogram sample that averaged 0.84 cpt.

"We will test as we proceed, proving diamonds are there and proving we can recover them," Lassonde told investors in May.

The stockpile recovery program also will allow the company to train a core team of workers for future production at Jericho as well as offset ongoing operating costs.

Jericho is permitted to begin full production, with Shear receiving final approval for an eight year renewal of its Type A water license in February. It is the longest term for water license ever issued in Nunavut.

In March, the junior raised C$2.85 million in the equity markets, of which it said net proceeds will be used primarily for equipment and other expenses related to Shear's efforts to bring the Jericho mine back into production and for further exploration at Jericho, in addition to Shear's other exploration properties in Nunavut and Northwest Territories.

Shear said it hopes to secure C$30 million in project financing in the third quarter of 2012, move forward with the planned equipment purchases and installation at the mine beginning in the fourth quarter, and restart production at Jericho in the third quarter of 2013.

Shear is also exploring several other properties, including the 448,057-acre Churchill Diamond Project located on tidewater of Hudson Bay between the communities of Rankin Inlet and Chesterfield Inlet in the Kivalliq region of Nunavut. The junior owns a 58.14 percent in the Churchill property, while its partner, Stornoway Diamonds Corp., controls the remaining 41.86 percent. Some 88 kimberlites have been discovered on the property and another 400 targets have been identified for additional exploration. Churchill was Shear's main focus prior to the Jericho acquisition, and Shear continues to maintain the core claims.