Diamond071714initiation

Please see Disclosures and Disclaimers at the end of this report. A division of Dundee Securities Ltd.

Dundee Capital Markets is a registered trademark of Dundee Corporation, used under license.

Diamond Producers

July 17, 2014

Lucara Diamond & Dominion Diamond - Miners at the Extremes

Source: Diavik Diamond Mine

Matthew O'Keefe / (647) 253-1131

[email protected] Erik Bermel / (647) 253-1112

[email protected]

We are initiating coverage of Dominion Diamond Corp and Lucara Diamond Corp, two diamond producers listed in Canada. Dominion recently consolidated Canada's first two diamond mines, Ekati and Diavik and is looking at opportunities to extend the lives at these maturing operations. Lucara recently started producing from its Karowe Mine in Botswana and has exceeded expectations consistently producing large, high value diamonds.

Diamond Prices on the Rise Provide Tailwind. Diamond prices have risen steadily over the past 2-years on increased global demand driven by growth in China and India and the economic recovery in the United States. Demand growth is expected to continue in line with the global economy while diamond supply remains limited and set to decrease in the medium and longer term.

Dominion Diamond Corp - A Pretty Kettle of Fish. The recent consolidation of production in Canada's premier diamond district at Lac de Gras has provided DDC investors with great opportunity but also elevated levels of risk. The high grade Diavik Mine is set for a steady decline in production in its remaining eight-years unless partner Rio Tinto approves the construction of A-21. At Ekati, permitting of Jay is needed to extend the mine life and make the acquisition meaningful. Uncertainty also surrounds the magnitude and structure of growing reclamation bond requirements. Meanwhile operations are marginal until new ore from the Misery pipe can boost production and cash flow in 2016. If Jay is a "go", DDC represents excellent value trading at 0.59x NAV. If neither Jay nor A-21 are approved, DDC is likely fully valued. We initiate coverage on Dominion Diamond Corp. with a BUY, High Risk rating and C$20.50 target price on the assumption that Jay, the game-changing project, will go ahead.

Lucara Diamond Corp - The Biggest Stones in Botswana. In its second year of operation Karowe has proven to be an exceptional mine allowing Lucara to eliminate debt, build cash and attract a premium valuation. While longer-term growth is available on-site, we expect Lucara to use its big stones to grow by acquisition. We initiate coverage on Lucara Diamond Corp. with a BUY, High Risk rating and C$3.00 target price.

Valuations At Each Extreme: DDC appears cheap trading at 0.59x NAV whereas LUC appears expensive at 1.18x NAV vs peers at 0.95x NAV. LUC's large stones, longer-term upside and accretive M&A potential all merit a premium valuation, whereas DDC's discount is attributable to permitting risk around Jay, a capital intensive next two years and an uncertain production profile at both mines.

Rating & Target Methodology: Our valuations for producers DDC and LUC are driven by a DCF analysis to our mine models based on recent feasibility studies, technical reports and discussions with management. We use a 5% discount rate to arrive at our NAV estimates which is in-line with precious metals producers. Our target prices are based on multiples to NAV which capture construction, financing and execution risk.

mailto:[email protected]


Diamond Sector July 17, 2014

DUNDEE CAPITAL MARKETS Page | 2

Contents

Investment Thesis: .....................................................................................................................................................3

Investing In Canadian Diamonds: Targeting Producers ..................................................................................................... 3

Investment Summaries ...................................................................................................................................................... 5

DDC and LUC - Canadian Listed Producers at the Extremes ..........................................................................................6

Lucara Diamond Corp ...................................................................................................................................................... 10

Dominion Diamond Corp. ................................................................................................................................................ 29

Appendix A - The Diamond Market ........................................................................................................................... 57

Supply & Demand: Expecting Steady Growth Ahead ...................................................................................................... 61

Diamond Prices - Stability Returning ............................................................................................................................... 64

Appendix B: Canadian Diamonds: A Short & Successful History ................................................................................. 66



INVESTMENT THESIS:

INVESTING IN CANADIAN DIAMONDS: TARGETING PRODUCERS

In our May 2014 report Canadian Diamond Developers & Explorers - Catching the Next Wave of Discovery and Production we focused on what we see as the top explorer-developers in the Canadian diamond space. In this report we extend coverage to include the Canadian producers.

Strengthening Diamond Market: Diamond prices have resumed their steady upward movement after a period of volatility touched off by the credit crisis in 2008 (Figure 1), as outlined in detail in Appendix A. Prices are expected to resume growing at 2-4% annually driven by steady demand growth in the traditional markets of North America, Europe and Japan and higher growth from the emerging and very large markets of China and India. Diamond supply is also growing but should top out in 2017, below previous 2008 highs and start to decline as older and depleted mines are not replaced (Figure 2).

Figure 1: Diamond Prices

Source: PolishedPrices.com, Bain and Co., DCM

Figure 2: Diamond Supply-Demand

Source: Bain and Co., DCM

Globally, the equity market for diamonds is relatively small, dominated by a few large players including Alrosa, De Beers (owned by diversified miner Anglo American) and diversified miner Rio Tinto.

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Rough diamond prices have increased at a CAGR of 13% since 2009 and 5% over the longer term.

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For investors looking for pure play diamond producers, there are few publically traded names to choose from. The main current pure-play producers are Dominion Diamond (BUY, High Risk, C$20.50 target), Petra Diamond (PDL-LON, not rated), Gem Diamonds (GEMD-LN, not rated) and Lucara Diamond (LUC-T, BUY, High Risk, C$3.00 target) (Figure 3). While UK-listed Petra and Gem have shown good performance over the last 12-months, we believe Canadian-listed producers offer excellent opportunities in top performer Lucara Diamond and renewing producer Dominion Diamond.

Figure 3: Comparable Diamond Companies

*Consensus estimates unless covered by DCM; **DDC adjusted for Jan 31 year end; Source: DCM, Company Reports, Intierra, Factset, Bloomberg

INITIATING COVERAGE

As a way to gain exposure to strengthening diamond markets, we are initiating coverage on Dominion Diamond Corp with a BUY, High Risk rating and C$20.50 target and Lucara Diamond Corp. with a BUY, High Risk rating and C$3.00 target. This rounds out our coverage of the top names in the Canadian diamond universe (Figure 4).

Figure 4: Dundee Diamond Coverage List

Source: DCM, *SWY-CA is DCM June 2014 top pick

Valuation Methodology:

Our valuations are based on a net asset value per share approach, based on our estimated pro-forma share structure. For diamond prices, we apply a 2.5% annual real growth rate to our base case price assumptions, as discussed in Appendix A.

($CAD) unless otherwise notedTicker Security Name Last Mkt Cap Debt Cash EV P/NAV*

local C $MM C$ MM C$ MM C$ MM 2014 2015 2016 2014 2015 2016Canadian ProducersDDC-CA Dominion Diamond Corporation $15.23 $1,297 $4.8 $273.1 $1,028 4.3x 6.3x 3.3x 2.7x 4.7x 1.9x 0.59x

International ProducersALRS-MIC AC ALROSA OJSC R 44.75 $10,301 $4,481 $300 $14,482 6.2x 5.9x 5.5x nm nm nm 0.98xPDL-LON Petra Diamonds Limited £1.94 $1,832 $224.0 $27.6 $2,028 5.4x 3.9x 3.5x 10.2x 8.2x 6.8x 0.90xLUC-CA Lucara Diamond Corp. $2.72 $1,029 $0.0 $59.2 $970 9.8x 11.1x 11.9x 6.4x 7.0x 7.6x 1.18xGEMD-LON Gem Diamonds Limited £1.75 $446 $0.0 $24.2 $422 4.9x 3.6x 3.5x 4.7x 3.8x 3.6x 0.95xKDL-ASX Kimberley Diamonds Ltd $0.22 $19 $10.7 $8.5 $21 13.8x 11.6x 1.5x 3.2x 0.8x 0.8x 0.10xTSX-JSE Trans Hex Group Limited $3.45 $37 $0.1 $41.7 -$5 nm nm nm nm nm nm nmRDI-CA Rockwell Diamonds Inc. $0.44 $24 $8.6 $1.3 $31 nm nm nm 2.8x nm nm 0.83xAVERAGE 7.4x 7.1x 4.9x 5.0x 4.9x 4.7x 0.95x

Canadian DevelopersMPV-CA Mountain Province Diamonds Inc $5.05 $581 $0.0 $71.3 $510 nm nm nm nm nm nm 0.44xSWY-CA Stornoway Diamond Corporation $0.68 $497 $197.8 $332.0 $363 nm nm nm nm nm nm 0.35xSGF-CA Shore Gold Inc. $0.25 $56 $0.0 $0.8 $55 nm nm nm nm nm nm nmAVERAGE nm nm nm nm nm nm 0.40x

ValuationEV/EBITDA*Price to Cash Flow*

Capital Structure

Company Ticker Rating Risk Target NAVPSDominion Diamond Corporation DDC-CA BUY High C$20.50 C$25.66Lucara Diamond Corp. LUC-CA BUY High C$3.00 C$2.30Mountain Province Diamonds Inc. MPV-CA BUY High C$9.00 C$11.37Stornoway Diamond Corporation SWY-CA BUY High C$1.60 C$1.95Kennady Diamonds, Inc. KDI-CA BUY Speculative N/A N/ANorth Arrow Minerals Inc. NAR-CA BUY Speculative N/A N/APeregrine Diamonds Ltd. PGD-CA BUY Speculative N/A N/A



INVESTMENT SUMMARIES

Dominion Diamond Corp: Lac de Gras: A Pretty Kettle of Fish. Dominion Diamond is Canada's premier diamond producer currently producing 4MM carats (attributable) annually from its 40%-owned Diavik Mine and 90%-owned and operated Ekati Mine. This mature pair of operations will see current reserves exhaust in 2022. However, the recent consolidation of the Lac de Gras Diamond District has provided Dominion with a great opportunity for expansion. Should permitting of the Jay pipe be approved, the mine life at Ekati would be extended by 10-years while failure would trigger an expensive reclamation from 2022. Given the reduced footprint of Jay, the significant impact to longevity of Ekati and the importance of Ekati to the NWT, we believe Jay will be permitted and constructed. Including Jay, DDC represents excellent value trading at 0.59x NAV. If its future remains uncertain or it is not approved, DDC is fully valued with a final push from the high grade Misery pipe through 2022. We are initiating coverage on Dominion Diamond Corp. with a BUY, High Risk rating and C$20.50 target price. Our target multiple of 0.8x NAV is a discount to similar diamond produces at 0.95x NAV which we feel captures Dominion's lack of clarity and uncertainty surrounding its future mine life and potential commitments. Following resolution of reclamation requirements and clarity surrounding Jay and A-21 construction, we believe Dominion should trade in line with its peers.

Figure 5: Dominion Diamond Modeled Production Profile

Source: Company Reports, DCM

Lucara Diamond Corp: The Biggest Stones in Botswana. Lucara is in its second year of operation at its newly commissioned Karowe which has proven to be an exceptional mine allowing LUC to eliminate debt, build cash and attract a premium valuation. The regular recovery of large (100+ carat) high value diamonds averaging $425 per carat (and $576 in the last 9-months) is well above initial estimates in the DFS. Production is expected to stabilize at 420,000 carats per year but values should continue to climb as mining focuses on the highest value Center and South lobes. While longer-term growth is available on-site, we expect Lucara to use its big stones to grow by acquisition. With an established high margin operation, growing cash, no debt and a premium market value, Lucara is well-positioned to pursue M&A. We expect LUC to maintain its position as a large stone producer, highlighting like-sized producers/developers Gem Diamonds (GEMD-LN, not covered) and Stornoway Diamond (SWY-T; BUY, C$1.60 target, High Risk) as potential acquisition candidates. Gem's Letseng mine in Lesotho would give Lucara tighter control of the large-stone diamond market as well as offer synergies with its Mothae project that could possibly improve the project from marginal to economic. Stornoway's Renard Project in Quebec is also attractive

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Trading at a discount due to near term uncertainty. High grade Misery pipe should double cash flow in CY2017

Lucara runs a high margin operation, has growing cash, no debt and a premium market value, positioning itself well to pursue M&A



as we expect it to yield similar upside as Karowe given its large stone size distribution. We initiate coverage on Lucara Diamond Corp. with a BUY, High Risk rating and C$3.00 target price based on a 1.3x multiple to NAV. The stock is trading at a premium of 1.18x to our NAV estimate which we see as warranted and light given upside potential from an expanded mine life, higher diamond prices and accretive M&A opportunities.

Figure 6: Lucara's Production Profile


DDC AND LUC - CANADIAN LISTED PRODUCERS AT THE EXTREMES

Although DDC and LUC are both Canadian-listed diamond producers, they are positioned at opposite ends of the diamond producer spectrum, highlighted by several key attributes. In Figures 7 and 8, we compare relevant operation metrics.

1) New versus Renewing: Dominion Diamond has been producing for over a decade and, based on current reserves, has just 8-years of mine life left. Dominion is in the midst of its third renewal moving from discoverer and marketer of rough diamonds (Aber) to top end jeweler (Harry Winston) and now to mature miner scrambling to add reserves (Dominion Diamond). Lucara, by contrast, has the benefit of youth. Its Karowe mine is less than two years in with a 13-year reserve and likely 10 additional years from resource. Some investors may prefer the fresh, clean slate of Lucara over the Dominion. On the other hand, the approval of A-21 and Jay should be significant catalysts for Dominion, extending its life from 8 to 18 years and buying time for additional discoveries on the sizeable land package.

2) Jurisdictions: There are clear differences between the political and operating environments of Canada and Botswana. Both are considered top operating jurisdictions and politically stable. However, Dominion's mines, located in Canada's far north, clearly have the disadvantage with respect to costs and logistics. Water is an issue in both countries, which can lengthen or impede the permitting process, with Canada having too much and Botswana not having enough. Lucara is permitted for Karowe; Dominion has yet to permit Jay.

3) Mining Scope and Scale: Dominion is a large producer of small to medium stones while Lucara is a relatively modest producer of exceptional stones. Annual production from Diavik and Ekati is ~9 MM carats with ~4MM attributable to Dominion. This is almost 10x the carat production of Lucara's Karowe at ~420,000. But both operations move and process similar amounts of material with Diavik processing 2.4MM tpa and Ekati about 4.3MM tpa versus Karowe at 2.5MM tpa. But it's the impact of grade and value is what really drives the difference with modest grades at Karowe in the 20 cpht range significantly lower than the 50 cpht reserves at Ekati and 295 cpht at Diavik. Diamond values are also at opposite ends of

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the spectrum. Karowe producers large, high value specials with regularity that have pushed average carat values to $425/carat and still climbing while Diavik and Ekati have produced no specials of note with average values in the $118-$150/carat range. The real luxury goods producer in this pair is Lucara but the volume of carats and flexibility of two mines afforded by Dominion also has its appeal.

4) Valuation: Of course, the most relevant measure is valuation; Dominion appears cheap trading at 0.59x NAV whereas Lucara appears expensive at 1.18x NAV. But as we discuss, the large stones, longer-term upside and accretive M&A potential for Lucara all merit a premium valuation supporting our C$3.00 target price. Dominion has more risk predominantly around permitting of Jay for which we apply a lower multiple of 0.8x NAV to achieve our target price of C$20.50 per share. Risk adjusted, they are not that far apart with LUC trading at 0.91x our target and DDC trading at 0.74x our target.

For the more risk adverse investor, LUC is the more appealing stock today given the long life ahead of it and more "bang for the buck" in its large, high value diamonds. However, we believe DDC is poised to "pop" following several key decisions in the short and medium term; namely a "go" decision for A-21, "go" decision & permitting approval for Jay and production start at Misery in 2016.

Figure 7: Lucara - Dominion Diamond Operational Comparison


LUC-CACapitalizationCurrent Price (C$) $2.72Target Price (C$) $3.00Return To Target 10%NAVPS (C$) $2.30P/NAV 1.18xMarket Cap (C$MM) $1,029EV (C$MM) $970Project Karowe Ekati DiavikProject Ownership 100% ~90% 40%Location Botswana NWT NWTAccess All-Seasoned Winter Road Winter RoadMining Method Open Pit OP & UG UndergroundWater Management Land Based Retention

Dykes Retention

Dykes Operator Lucara Dominion Rio TintoEst. Net Remaining Capex (US$MM) $29 $909 $3Modeled Production MetricsMine Life (years) 13.5 18.5 8.25Throughput (MM tpa) 2.55 4.35 2.40 2014 Production (MM ct, gross/net) 0.4 1.84/1.55 6.5/2.6Grade (cpht) 18 50 294 Base Diamond Value (US$/ct) $560 $302 $137LOM Avg Diamond Value (US$/ct) $583 $118 $148Most Recent QuarterValue Per Tonne (US$/t) $107 $167 $424Operating Cost (US$/t) $19 $80 $160Operating Margin 83% 52% 62%G&A per Tonne (US$) $3.10G&A per Carat (US$) $18.98*~90% ownership assumes Fipke transaction closes

DDC-CA

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$20.50$15.23

$7.11$6.05

$1,297$1,028



Figure 8: Lucara & Dominion Production and Cash Flow Comparison

Source: DCM

We also look at LUC and DDC in the context of the global diamond universe (Figure 9). On a valuation basis, they stack up pretty much where expected with Lucara at a premium to NAV for its top end goods, high margins and expandable mine life and Dominion at a discount given the uncertainty around production growth and funding requirements. Steady-state producers Alrosa (ALRS-MIC, not covered) and Gem (GEMD-LN, not covered) trade at or above NAV, which is typical of established diamond producers.

Figure 9: P/NAV of Covered Diamond Names in Global Context

Source: DCM, Company Reports, Bloomberg

What's worth considering is the steep discount of SWY-CA (BUY C$1.60) and MPV-CA (BUY C$9.00) relative to LUC and DDC. Both are in construction and will have fresh, new mines starting up in 2016; this is about the same timeframe as Dominion is due to start Misery. We perceive the present risk in Dominion to be on par to MPV-CA given that, while both are involved with experienced operators (MPV has De Beers building and operating Gahcho Kué, DDC has Rio Tinto operating Diavik and acquired the Ekati operating team). Both also have permitting and funding risks ahead. SWY lacks operating experience but is permitted and fully financed and trading at the steepest discount and remains the best value in our coverage universe.

The other aspect that stands out is Lucara's premium valuation and opportunity for accretive acquisition. As discussed in more detail in the Lucara section, the best fits for LUC are Gem Diamonds (GEMD-LN, not covered) and Stornoway Diamond. Both are the rights size, majority own and operate their core assets, trade at discounts to NAV and are large diamond producers (we expect SWY to be) that would allow Lucara to maintain its position as a dominant large stone producer.

Calendar YearLUC-CA DDC-CA LUC-CA DDC-CA LUC-CA DDC-CA

Production (MM ct, net) 0.42 4.15 0.45 3.86 0.43 6.58 Grade (cpht) 18 93 18 82 17 140 Diamond Value (US$/ct) $574 $217 $574 $195 $562 $155Revenue ($MM) $240 $900 $257 $752 $244 $1,019CFO ($MM) $94 $269 $84 $185 $78 $357EBITDA ($MM) $136 $338 $124 $198 $114 $475Free Cash Flow ($MM) $36 $63 $75 -$34 $72 $194P/CF 9.8x 4.3x 11.1x 6.3x 11.9x 3.3xEV/EBITDA 6.4x 2.7x 7.0x 4.7x 7.6x 1.9x

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*Consensus estimate for companies not covered by DCM


Lucara Diamond Corp. (LUC-T: C$2.72) July 17, 2014

BUY, High Risk Dundee target: C$3.00

Matthew O'Keefe / (647) 253-1131 [email protected]

Erik Bermel / (647) 253-1112 [email protected]

The Biggest Stones in Botswana

We are initiating coverage on Lucara Diamond Corp. with a BUY rating and a 12- month target price of C$3.00 per share. Lucara owns and operates the Karowe diamond mine in Botswana which has developed into a consistent producer of large, high value diamonds since starting production in 2012. Based on the current mine plan, Karowe will produce 420,000 carats annually for 13-years.

• Diamond Success Story: Lucara has quickly developed into a large stone producer routinely recovering +100 carat diamonds. The effect on average diamond price has been dramatic averaging $425/carat versus the $243/carat citied in the 2010 feasibility study.

• Generous Dividend Policy: Lucara has initiated a C$0.02/share semi-annual dividend for a current yield of 1.6% and allowed for a special dividend linked to exceptional stone tenders which could add up to C$0.10/share annually.

• Premium Producer: LUC currently trades at 1.18x our NAV estimate and 0.91x our target price. This is at the top end of comparable producers which we attribute to its operation success, ongoing potential for larger and better diamonds, top management and technical team and aggressive growth potential.

• Ready to Hunt: The aggressive acquisition of Karowe and its subsequent success has put Lucara in a strong position with growing cash, no debt and a premium valuation. As part of the Lundin Group of Companies with active interest from Chairman and major shareholder Lukas Lundin, we expect near-term growth through M&A.

• Resource and exploration upside: The Karowe mine has additional resource at depth which could extend the mine life by up to 10-years. The Orapa district in Botswana remains prospective for additional diamond discoveries and we expect additional properties at various stages to be added and evaluated.

Target Price Valuation Methodology: Our C$3.00 target is based on a 1.3x NAV target multiple. We feel LUC's top operational performance, extended mine life potential, clean balance sheet and further diamond price upside potential justifies the premium 1.3x multiple, compared to other diamond producers which trade at 0.95x. Our target implies a 10.8x 2015E price to cash flow multiple, valuing Lucara towards the top end of comparable diamond producers who trade at an average of 7.1x 2015E cash flow.

LUC: Price/Volume Chart

Source: Factset Company Description Lucara owns and operates the Karowe diamond mine in Botswana which has developed into a consistent producer of large, high value diamonds since starting production in 2012. Karowe is set to produce 420k ct/yr over its 13 year mine life.

LUC-T New LastRating:Target:Risk:NAVPS:

Company DataPrice (07/15/14):52-Week Range:Market Capitalization ($MM):Enterprise Value ($MM):Shares Outstanding - Basic (MM):Shares Outstanding - FD (MM):Avg Daily Volume (3 Mos) (000s):Cash ($MM):Debt ($MM):Dividend YieldFiscal Year-End:Est. (MM) 2013 A 2014 E 2015 ENet Prod. 0.44 0.42 0.45Grade (cpht) 19 18 18Value US$/ct 409 574 574Cost US$/t 19 30 36Revenue ($) 181 240 257CFO ($) 100 94 84EBITDA ($) 103 136 124CFPS (C$) 0.29 0.28 0.25Valuaion 2013 A 2014 E 2015 EP/CF 9.3x 9.8x 11.1xEV/EBITDA 8.5x 6.4x 7.0x

P/NAV EV/ct EV/Value1.18x 86.21 0.20x

All Figures in US$ Unless Otherwise NotedSource: Factset, Company reports, Bloomberg, DCM

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Lucara Diamond Corp. (LUC-CA)

Volume (Millions) Price (CAD)Volume Lucara Diamond Corp.





INTRODUCTION

Lucara Diamond Corp. is a Vancouver-headquartered diamond producer that started producing in 2012 from its 100%-owned Karowe Mine located in north-central Botswana (Figure 10). Karowe is part of the Orapa/Letlhakane Kimberlite district which is one of the most prolific diamond producing regions in the world. The Company holds a 75% interested in the Mothae diamond project located in the Maluti Mountains of Lesotho where it is reviewing a number of development options. Both Mothae and Karowe have consistently produced large, "special", Type II stones.

Lucara currently has 378MM shares outstanding, with management and insiders owning ~21%. As of May, 2014, Lorito Holdings Ltd. (8.67%), Zebra Holdings (9.23%), both controlled by the Lundin Trust, and JPMorgan Chase & Co (5.9%) were the largest shareholders of the stock along with Board members Eira Thomas (2.04%) and Lukas Lundin (1.06%). The company has a current cash position of $57MM in the treasury, with no debt. Lucara’s shares trade on the TSX, NASDAQ OMX Stockholm and the Botswana Stock Exchange under the symbol LUC.

Figure 10: Lucara Diamond Properties in Southern African Context

Source: Company Reports

Karowe is part of the most prolific diamond producing regions in the world



KAROWE - PRODUCER WITH THE BIGGEST STONES IN BOTSWANA

Lucara's 100% owned Karowe Mine in Botswana is the main asset in its portfolio driving our valuation. The new mine started production in mid-2012 and has since exceeded expectations with the consistent recovery of large, high quality diamonds. Average grades are only about 16 carats per hundred tonne (cpht) with pre-production diamond values in the $240/carat range. However, average diamond values to date are tracking $425/carat and $476/carat on a 9-month rolling average at the end of Q1/14 driven by the preponderance of large, high quality diamonds "specials" that have returned values averaging over $40,000 per carat from three "exceptional stone" tenders. Karowe is a modest producer on a total carat basis, yielding only about 420,000 carats per year from an open pit with the current reserve life good for about 13 years of production with an additional 5-8 years potential life in indicated resource below 400 metres. The consistency of large stones suggests that Karowe will be mined for as long as feasible as it is one of the few mines that routinely produces >100 carat gems like the Letseng and Cullinan mines.

Figure 11: Lucara at a Glance

Source: DCM, Company Reports

LUNDIN'S DIAMOND VEHICLE

Lucara began in its present form in 2007 with the acquisition of the Mothae project in Lesotho for a staged earn-in of $8MM with principal contributions and new Board including members of the Lundin Group, Catherine McLeod Selzer and Eira Thomas. In 2009 Lucara acquired a 70.3% interest in the Karowe project (then known as AK6) from then operator De Beers for $49MM, eventually consolidating the balance from African Diamonds plc (28.4%) and Wati Ventures Ltd. (1.4%) in December 2010. The mine went into construction the following year and was officially opened on August 17, 2012. As part of the Lundin Group of Companies, Lucara sees active involvement from Chairman and major shareholder Lukas Lundin who, as discussed above, controls about 17.9% of the Company's stock.

Lucara Diamond Corp. Key StatisticsF2013A F2014E F2015E F2016E F2017E F2018E

Production (MM ct) 0.441 0.418 0.447 0.435 0.417 0.402 Average Grade, net (cpht) 19 18 18 17 17 16 Diamond Value (US$/ct) $409 $574 $574 $562 $549 $552Rock Value (US$/t) $77 $105 $101 $98 $92 $89Cost per Tonne (US$/t) $19 $30 $36 $37 $37 $39Revenue (MM US$) $181 $240 $257 $244 $229 $222CFO (MM US$) $99 $90 $84 $78 $69 $62EBITDA (MM US$) $103 $136 $124 $114 $100 $89Free Cash Flow (MM US$) $36 $36 $75 $72 $63 $56EPS (C$/sh) $0.19 $0.22 $0.19 $0.17 $0.14 $0.12CFPS (C$/sh) $0.29 $0.28 $0.25 $0.23 $0.20 $0.18Current Valuation MetricsP/CF 9.3x 9.8x 11.1x 11.9x 13.5x 15.0xEV/EBITDA 8.5x 6.4x 7.0x 7.6x 8.8x 9.9xP/E 12.8x 11.0x 13.0x 14.3x 17.2x 20.5x

Karowe started production in mid-2012 and has since exceeded expectations

Part of the Lundin Group of Companies, Lucara sees active involvement from Lukas Lundin who controls about 18% of the stock.



WELL SITUATED IN A TOP MINING JURISDICTION

The Karowe Mine is located in north-central Botswana and is part of the Orapa kimberlite field, one of the world's most prolific diamond producing areas with over 80 kimberlites, five of which (AK1, BK9, DK1, DK2 and AK6) are currently being mined (Figure 12). Letlhakane village is the closest settlement and offers basic facilities, including fuel and connects to the major cities of Gaborone by good quality paved roads. There is an airstrip in the Karowe Mine lease area for light aircraft and the closest airport with commercial flights is Francistown, 200km to the east. Electrical power is provided by Botswana Power Corporation's national grid and water comes from aquifers in the area.

Figure 12: Karowe Well Located in Orapa Kimberlite Field


The AK6 Kimberlite was discovered by De Beers in 1969, but was initially considered to be small and low grade based on early work. Reassessment led by De Beers from 2003 revealed that the Kimberlite was larger and had a higher grade than previously estimated. In June 2010, a definitive feasibility study updating previous work to a confidence level to support project approval was completed. A formal decision was made in 2010 to proceed with the construction of the diamond mine which was estimated to require a capital investment of approximately $120MM to $130MM, which included the process plant and all mine site and off-site infrastructure. It was commissioned on-time and on-budget in June 2012. The low capex compared to North American projects and indeed De Beers original budget demonstrates the quality operating team and the benefit of operating in Botswana, with low labour costs and having the benefit of working within an established diamond district.

The country of Botswana is currently the world’s largest diamond producer, accounting for 23% by value. Access and infrastructure within the country are very good and the semi-arid climate allows exploration and development work to continue year-round in most places. The country’s economy relies heavily on diamond mining, which has taken it from one of the poorest nations in Africa in the 1950s to one of the richest. Botswana has established high-quality public institutions and legal systems with very low corruption. As a result, Botswana rates among the top countries in the world for mining investment, such that Standard and Poor’s has assigned the country an “A” credit rating. The Government of Botswana (GoB) has a 10% gross overriding royalty on Karowe as it does with other diamond projects in the country.

Botswana is the world’s largest diamond producer, by value and rates among the top countries in the world for mining investment



KAROWE KIMBERLITE - THE BEST IS YET TO COME

The Karowe kimberlite is a three-lobed body with primarily composed of volcaniclastic kimberlite with lesser hypabyssal facies kimberlite (Figure 13). The three lobes are distinguished based on textural characteristics, relative proportion of internal country-rock dilution and degree of weathering. The South Lobe is distinctly different from the North and Centre Lobes which are similar to each other in terms of their geological characteristics. The North and Centre Lobes exhibit internal textural complexity whereas the bulk of the South Lobe is more massive and internally homogeneous.

Figure 13: Karowe Geologic Model


The current mineral reserve estimate which includes mineable material by open pit to 324 metres, is 33.1MM tonnes grading 15.5 cpht for a total of 5.1MM contained carats (Figure 14). The bulk of this reserve (75%) is contained in the high value South Lobe and 18% in the Centre Lobe with the remainder comprising of the North Lobe and low grade stockpile. At the current processing rate of about 2.5MM tpa this is sufficient for 13-years of mine life. However, considerable resource exists with depth with a global resource (indicated and inferred) of 69.1MM tonnes averaging 16 cpht for a total of 10.7MM contained carats to 750 meters which has the potential to nearly double the mine life.

Considerable resource exists with depth which has the potential to nearly double the mine life



Figure 14: Karowe Mineral Reserves & Estimated Minable Material


The North Zone is the shallowest, most weathered and has largely been mined out as it was the focus of production in the first 18-months. A large part of the weathered material in the Centre Lobe has also been mined out but it will continue to contribute material for much of the mine life. The Company has recently started mining the South Lobe, the largest portion of the resource and the main source of the large, +100 carat diamonds (Figure 15). The consistency of the recovery of these stones in the South Lobe points to a much higher average diamond value than that of the North and Centre Lobes.

Figure 15: Long Section Showing Consistent Recovery of Very Large Stones


Karowe Reserve Statement - December 2013 DCM EstimateCategory Lobe/facies Tonnes Grade Carats Value Value (2014)

(MMt) (cpht) (MMct) US$/ct US$/ctProbable (to 324m) North 1.0 18.4 0.2 $217 $250

Centre 6.0 18.4 1.1 $351 $565South 25.3 15.1 3.8 $413 $565

Probable LOM Stockpile 0.9 5.7 0.0 $350 $350Total Probable 33.1 15.5 5.1 $394 $552*Mining recovery of 97% and dilution of 4.5% applied, 1.25mm cutoff screen

Karowe Resource Estimate - December 2013 DCM EstimateLobe/facies Tonnes Grade Carats Value Value (2014)

(MMt) (cpht) (MMct) US$/ct US$/ctIndicated (to 400 m) North 1.8 16 0.3 $217 $250

Centre 6.5 20 1.3 $351 $565South 37.9 16 5.9 $413 $565Working SP 0.6 13 0.1 $333 $333LOM SP 1.2 6 0.1 $350 $350

Total Indicated 48.1 16 7.6 $393 $548Inferred (400m to 750m)Centre 0.2 15 0.0 $351 $565

South 20.8 14 3.0 $413 $565Total Inferred 21.0 14 3.0 $412 $565

Total 69.1 15 10.7 $399 $553* 1.25mm cutoff screen

The consistent recovery of +100 carat stones from the South Lobe points to a much higher average diamond value than that of the North and Centre Lobes.



DIAMOND VALUE - GOOD STONES WITH UPSIDE POTENTIAL

Diamond recoveries from Karowe have exceeded expectations eclipsing the original valuations in the 2010 feasibility study with a reserve value of $243/carat. The values summarized in Figure 16 below and applied in the 2013 resource are based on three production parcels totaling 161,500 carats with about 1/3 from each lobe. The authors of the technical report note that the valuation process is considered to have generated reliable value estimates for all size ranges with the exception of the +10.8 carat size class (above this threshold are "specials"). These +10.8 carat stones are particularly relevant to the Centre and South Lobes for which +10.8 carat diamonds comprise a significant proportion of the total diamond population and contribute substantially to the average value. They also noted that due to blending of material from different lobes during most production periods it was noted that the diamond values for the +10.8 carat stones for the South Lobe and Centre Lobe are not conclusive. As such, the value applied to the +10.8 carat fraction is flattened at $6,063 per carat for an average modeled price of $413/carat (Figure 17).

Figure 16: Karowe Diamond Valuation Estimates


Sales since the updated resource diamond values have continued to rise on a per carat basis with each successive tender as more diamonds are recovered. To date over 730,000 carats have been sold pushing the cumulative average value to $425 per carat. As more material comes from the South and Centre Lobes (the focus of current and future mining) we expect that average values to rise higher, continuing the trend. Projecting forward we expect average diamond values to settle out in the $525/carat range. Ongoing mining in the South Lobe should continue to contribute more large stones and eventually flatten out the cumulative price curve at which point we will be more confident in the forecast. Quarter over quarter diamond values will remain volatile due to the presence or absence of exceptional stone tenders (we expect three per year) and the occurrence of truly exceptional stones like the 167 carat stone that sold in the April tender for $12.7MM (or $76,011 per carat) or the 9.6 carat blue that sold for $4.5MM or $477,072 per carat. But over the longer term, we expect prices for the Centre and South Lobes to average $565 per carat.

Size2013 Tech Report North Centre South +3 DTC 38 49 42 +5 DTC 52 54 46 +7 DTC 63 62 61 +9 DTC 84 69 68 +11 DTC 118 86 97 3-6 Gr 235 186 215 8-10 Gr 451 326 433 3-5 ct 753 573 716 6-10 ct 1033 587 1031 +10.8 ct 1425 6063 6063All 217 351 413DCM Adj. 250 565 5652010 values 276 276 231

Average Value ($US/ct)Quarter over quarter diamond values will remain volatile but we expect prices for the Centre and South Lobes to average $565/carat.



Figure 17: Diamond Value Forecast


SPECIALS & FANCIES - RECOVERING THE BIG ONES

The Karowe mine has produced some truly exceptional stones in its short history. The mine consistently produces "Specials", gems over 10.8 carats, pushing up average run of mine values to over $425/carat. But Karowe has also produced and sold 19 specials over 100 carats in as many months and is expected to increase this frequency as more production comes from the South Lobe. The exceptional stone tenders, which take place 3 times per year, averaged $37,000 per carat. Also, the mine has produced rare coloured stone including an exceptional rare blue stones with values of up to $477,272 per carat (Figure 18). An assortment of large stones at a relative scale may be viewed in Figure 29.

Figure 18: Karowe Diamond Sales Highlights


There are not many mines in the world that consistently produce large +100 carats stones. Along with Karowe there is the Letseng Mine in Lesotho (Gem Diamonds) which is very low grade (less than 2 cpht) and the Cullinan Mine in South Africa (Petra Diamond). It is worth noting that both of these mines have produced diamonds greater than 500 carats. Lucara has yet to recover anything larger than 259 carats, which is about the limit under the current mill configuration. However, the Company is currently installing a large diamond recovery circuit (discussed below) which will allow for the recovery of 500 carat or larger stones.

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Karowe consistently produces "Specials" +10.8 carats, the best of which are sold in exceptional stone tenders that take place three times per year and have averaged sales of $37,000 per carat



PLANT UPGRADE - HARDER ORE AND BETTER RECOVERY OF LARGE STONES

In 2014 Lucara is undertaking a capital expenditure program which includes $50MM for optimization of the Karowe plant to improve large diamond recovery and enable sustainable processing of hard ore in the South Lobe. Lucara could afford to wait for this modification as the upper 70 m of the kimberlite (now mostly mined out) is significantly weathered and diamonds liberated easily. To address the harder ore a secondary gyratory crusher will be added to ensure sustainable 2.5MM tpa throughput. The more competent ore is also un-weathered which will result in a higher volume of dense media separates (DMS) reporting to the recovery plant (increasing to 3-7% from 2% in the weathered material). Rather than adding additional DMS capacity Lucara has elected to augment the existing system with X-ray Transmissive technology (XRT). The +1.5, –8 mm material will report to the existing DMS while the other size fractions will report to the new Large Diamond Recovery bulk sorter circuit consisting of high capacity XRT sorting machines. This sensor-based sorting technology uses physical properties such as x-ray luminescence, atomic density and transparency which are inherently different to the gangue minerals present to separate diamonds. The XRT technology along with additional sorting at higher size fractions will also help in the recovery of very large diamonds and Type II diamonds. Orders have been completed for long lead items, and the full upgrade expected to be complete by early 2015. Based on the regular occurrence of large diamonds, the Large Diameter Recovery (LDR) unit will be installed in Q3/14.

CURRENT KAROWE MINE PLAN

Operations are in full swing with the pit excavated across all three lobes down to about 85 meters (Figure 19). The mill has achieved throughput capacity and Karowe is forecast to process 2.2MM to 2.4MM tonnes of ore and to produce and sell 400,000 to 420,000 carats in 2014. Ore mined is forecast between 3.0MM and 3.5MM tonnes and waste mined is expected to be between 10MM to 11MM tonnes for operating cash costs in the $31 to $33 per tonne ore treated range.

Figure 19: Karowe Pit


We have modeled Karowe based on the existing resource as outlined in the 2013 independent NI43-101 report. Production will continue in the 400-450k carat range through 2018 peaking at just under 450,000 carats in 2015 (Figure 20 and 21). Production should dip in 2019 and 2020 as lower grade material from the deeper more dilute parts of the North Lobe are extracted. However, margins should expand from this period as the major pushback is completed by 2019 (Figure 22) and mining benefits from lowering strip ratios and greater contribution from the high value South and Central Lobes (Figure 23).

Ongoing plant optimization will improve large diamond recovery and enable sustainable processing of harder ore at depth



Figure 20: Production Profile (000's tonnes milled)


Figure 21: Production Profile (000's ct)


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Production will predominantly come from the high value South and Centre Lobes in the next three years.

Annual production should be above 400,000 carats through 2018 but margins will rise as major pushbacks are complete.



Figure 22: Ore and Waste Profile


Figure 23: Pipe Comparison Based on Results to Date


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Karowe sees the strip ratio increasing to 5.5:1 from 2016 through 2018 before dropping to less than 1:1 as the major pushback is complete.

The highest values and margins come from the South and Centre Lobes while lower grade material will be stockpiled

At present, Mothae appears marginal as very high values are offset by very low grades



MOTHAE - LARGE STONES ON THE SHELF

The Mothae project is located in northeast Lesotho owned 75% indirectly by Lucara and 25% by the Lesotho Government. It hosts a large low grade kimberlite approximately 150km northeast of Maseru, the capital of Lesotho and 6.5 km from Gem Diamonds' (GEMD-LN) Letseng project. Like Letseng, Mothae contains a population of large, high value Type IIa diamonds, but since it is a low grade high value kimberlite, evaluation is particularly difficult because very large bulk samples are required to provide adequate diamond recoveries for grade and revenue estimation. Bulk samples processing of about 700,000 tonnes has shown a very coarse size frequency distribution but work to date has yet to demonstrate its economic potential as data on very large stones (over 60 carats) is still lacking. Average diamond values are modeled at between $615 and $1364 per carat, averaging $1062/carat on the 39MM tonne indicated and inferred resource. The Mothae project remains on temporary care and maintenance as the Company reviews a number of development options. Given the high quality of the work done to date, we believe that Mothae is unlikely to be developed on its own in the near term but could benefit greatly from synergies with another operation such as Letseng that is just 6.5 km to the southeast.

CASH FLOW & DIVIDENDS

Karowe is shaping up to be a strong cash flow generator with our model pointing to an average of $81MM of operating cash flow and $71MM in free cash flow annually. The company plans on holding eight diamond tenders and three exceptional stone tenders during the year. The timing of these tenders will be based on Karowe’s production profile as well as commercial decisions to maximize diamond revenue, however, we expect they will occur in Q2, Q3 and Q4. In February 2014, the Company approved a dividend policy, declaring its first semi-annual dividend of C$0.02 per share. The board has also approved the issuance, from time to time, of a special dividend based on revenues generated from exceptional stone tenders, subject to the Company's overall financial position and other factors existing at the time under consideration. The strong cash flow and low sustaining capital requirements (the mining fleet is contracted) supports a sustained dividend with room to grow. As for special dividends, while our cash flow model could support over C$0.10 per share in additional annual dividends, we expect it to be much more restrained in the short term, allowing Lucara to build a war chest of cash to fuel further growth through M&A.

Figure 24: Cash Flow Profile ($000's)


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We believe that Mothae is unlikely to be developed on its own in the near term but could benefit greatly from synergies with Gem's neighboring Letseng Mine

Karowe is shaping up to be a strong cash flow generator with our model pointing to an average of $81MM of operating cash flow and $71MM in free cash flow annually supporting a semi-annual dividend with room to grow



VALUATION

Our NAV and target price are summarized in Figure 25 below. Now at steady-state commercial production, throughput at Karowe should remain on the order of 2.5MM tonnes per year for an average annual production of 420,000 carats, generating approximately $81MM in free cash flow per year. Sustaining capex should be less than $4MM annually. We value Lucara based on a discounted cash flow analysis of Karowe applying a 5% discount rate resulting in a project NPV of $885MM. The company has no debt. Our diluted shares outstanding number considers all in-the-money options and warrants and we do not expect any equity issues in the near-medium term. As a result we arrive at a net asset value for Lucara of $881MM or $2.30 per share.

Figure 25: Net Asset Value Calculation


On an operating cash flow basis, we expect Lucara to generate $94MM in 2014 and $84MM in 2015 or C$0.28 and C$0.25 per share respectively. Over the life of mine it should average $81MM or C$0.24 per share. Similar-sized diamond and precious metals producers trade at 4x to 12x 2015 CFPS. Given the 13-year reserve life at Karowe, upside potential from additional tonnes and higher diamond valuations, and special dividend potential we would expect Lucara to trade at the higher end of this range. On a cash flow basis, we would apply a 10x FY2015 CFPS for a target of $2.75 per share.

However, in the context of other diamond producers we see NAV as a more appropriate valuation metric. Lucara currently trades at 1.18x our NAVPS estimate which is a premium compared to other diamond and precious metals peers which trade at 0.6x to 1.1x NAVPS (Figure 26). In our view, a premium is justified given that the high margin, high value operation has ongoing potential for positive surprises in the form of very large stones which increases with the completion of the ongoing plant modifications. In addition, there is good potential to almost double the mine life with existing resource at depth and development potential for Mothae. The premium valuation also affords LUC with valuable stock with which to pursue accretive M&A opportunities. As such, we apply a 1.30x premium multiple to NAV to arrive at a 12-month NAV-based target price of C$3.00 per share.

Lucara Diamond Corp. Net Asset Value BreakdownDiscount

RateNAV

(MM C$)NAV per

shareKarowe, Botswana (100%) 5% $885 $2.31Total Producing Assets $885 $2.31Other Assets 5% $0 $0.00Total Corporate Adjustments 5% -$4 -$0.01Lucara Diamond Corp. Net Asset Value $881 $2.30

Target Price Value Multiple Weight Per ShareNet Asset Value $2.30 1.30x 100% $2.99

In our view, a premium valuation is justified given the high margin, high value operation, ongoing potential for large stones, expansion potential at depth and ability for accretive M&A opportunities



Figure 26: P/NAV Estimate Relative to Consensus


To add further context for Karowe we can convert our estimates into gold equivalent ounces, which provides greater familiarity to some investors. On a gold equivalent basis (assuming $1350/oz), the operation at Karowe is the equivalent of a 160k oz per year producer with cash costs of $700/oz from an open pit reserve of 2.4MM oz grading 2.1 g/t.

UPSIDE & SENSITIVITIES

The mine life at Karowe could be almost doubled by moving to an underground operation as an additional 34MM tonnes of material resides in resource below the 324 metre lower level of the pit. We anticipate feasibility work to be conducted in the next couple years but would expect the cost of sinking a production shaft and related development to be less than $200MM. Assuming 30MM additional tonnes, this would add up to 12-years to the mine life and ~$0.80 to our NAVPS. Shorter term growth would have to come from development of Mothae and/or M&A (discussed below).

Additional upside potential to our target could come from higher realized diamond prices. We expect the average diamond price to top out in the $565 per carat range but the recovery of 400-500 carat stones, soon to be a realistic expectation with the ongoing modifications to the plant, could add another step-up to the diamond pricing curve. In Figure 27 below, we show our NAV sensitivity to diamond price, which could see upside from a coarser distribution of stones. It also highlights the sensitivity to major factors such as the diamond price growth assumption and exchange rate. Investors should expect ongoing volatility in diamond values quarter to quarter which is normal for a coarse distribution.

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The mine life at Karowe could be doubled by moving to an underground operation with additional upside potential from higher realized diamond prices.



Figure 27: NAVPS Sensitivity to Changes Key Inputs

Source: Company reports, DCM

Our valuation is also sensitive to assumptions regarding annual growth in diamond price and changes in the United States/Canadian currency exchange rate. We currently assume an annual diamond price growth rate of 2.5% per year for the "normal" goods found in the North Lobe, in line with global GDP growth and an USD:CAD exchange rate of 0.9:1. For the Central and South Lobes we apply a lower 1.5% price growth rate on the assumption that the increased availability of these goods may impair the upside somewhat.

M&A OPPORTUNITIES

With an established high margin operation, growing cash, no debt and a high market value, Lucara is well-positioned to pursue M&A. Assuming it wants to maintain its position as a large stone producer, like-sized candidates include Gem Diamonds (GEMD-LN, not covered) and Stornoway Diamond (SWY-T; BUY, C$1.60 target, High Risk). Gem is the most obvious candidate, as its Letseng mine in Lesotho would give Lucara tighter control of the large diamond market as well as offer synergies with the Mothae project that could bring it from marginal to economic. Stornoway is attractive for its Renard Project in Quebec which we expect to yield similar upside as Karowe given its large stone size distribution. On the junior side, we see Peregrine Diamonds (PGD-T; BUY, Speculative Risk) and North Arrow (NAR-V; BUY, Speculative Risk) as potential candidates as well. Peregrine's Chidliak Project has demonstrated high grades and high values and over the next 18-months should be ready to move into the development stage similar to where Karowe was when acquired by Lucara. North Arrow's Qilalugaq project could be very attractive and development track ready following a successful bulk-sample program this summer.

Figure 28: Potential Acquisition Targets For LUC


Value NAV NAV Growth NAV NAV FX NAV NAVChange $2.30 Change Rate $2.30 Change Rate $2.30 Change60% $0.83 -64% -1.0% $1.88 -18% 1.04 $1.99 -14%70% $1.20 -48% -0.5% $1.94 -16% 1.02 $2.03 -12%80% $1.57 -32% 0.0% $1.99 -13% 1.00 $2.07 -10%85% $1.75 -24% 0.5% $2.05 -11% 0.98 $2.11 -8%90% $1.93 -16% 1.0% $2.11 -8% 0.96 $2.16 -6%95% $2.12 -8% 1.5% $2.17 -6% 0.94 $2.20 -4%98% $2.23 -3% 2.0% $2.24 -3% 0.92 $2.25 -2%100% $2.30 0% 2.5% $2.30 0% 0.90 $2.30 0%102% $2.38 3% 3.0% $2.37 3% 0.88 $2.35 2%105% $2.49 8% 3.5% $2.44 6% 0.86 $2.41 5%110% $2.67 16% 4.0% $2.51 9% 0.84 $2.47 7%115% $2.85 24% 4.5% $2.58 12% 0.82 $2.53 10%120% $3.04 32% 5.0% $2.65 15% 0.80 $2.59 13%130% $3.41 48% 5.5% $2.73 18% 0.78 $2.66 16%140% $3.77 64% 6.0% $2.81 22% 0.76 $2.73 19%

Diamond Value (US$/ct) Diamond Value Growth USD:CAD Exhange Rate

CompanyEV

($MM)Project of Potential Interest Status

Resource (MMcts)

Grade (cpht)

Value (US$/ct) Rationelle for Acquisition

Capex Estimate

GEM Diamonds $422 Letseng (70%) Production 5.0 1.7 $2,074 large stones, synergies with Mothae Built

Stornoway $363 Renard (100%) Construction 23.8 89.0 $222 large deposit, long life, expected large stones, geographical diversification

Fully Financed

Peregrine $56 Chidliak (100%) Evaluation 7.5 258.0 $213 high grade, high value, large stone potential

$300-600 MM

North Arrow $27 Qilalugaq (40%) Evaluation 26.1 53.6 n/a large resource, potential high value "fancies"

$700-900 MM

With an established high margin operation, growing cash, no debt and a high market value, Lucara is well-positioned to pursue M&A.



RISKS

• Diamond Price Risk: Diamond prices are sensitive to global diamond supply and demand factors as well as the specific shapes, colours, clarity and carat size of diamonds recovered. Fluctuations in either area may lead to fluctuations in financial performance, and deviation from our expectations. We model a CAGR in global diamond values of 2.5% for regular stones and 1.5% for larger goods, which we deem conservative in context of historic rates and current industry guidance. Historically diamond values have been driven by growth in GDP, disposable income and consumer confidence, all of which are improving. Specific to Lucara, the large high quality stones contribute about 60% to our expected diamond values. As such, any change to this market could have a negative impact on NAV.

• Mineral inventory estimates: For producers and developers, there is a risk that production will not reconcile with resource and reserve estimates. Our valuation is predicated on currently available NI 43-101 technical reports, available bulk sample and drill results, as well as recent sales data. Karowe has so far exceeded expectations based on the repeated occurrence of large high quality stones that contribute about 60% to our estimated diamond value. As a result, the loss of big stones from resource would have a negative impact to our NAV.

• Production risks: Our valuation is based on a variety of assumptions including production and recovery rates, capital costs, operating costs and mine life backed by technical reports and comparable projects. Specific to Lucara, the large high quality stones contribute about 60% to our expected diamond values. As such, the loss of big stones during recovery could have a negative impact on NAV.

• Political Risk: Lucara's main asset, Karowe, is located in Botswana. The country's economy relies heavily on diamond mining, which has taken it from one of the poorest nations in Africa in the 1950s to one of the richest. Botswana rates among the top countries in the world for mining investment, such that Standard and Poor’s has assigned the country an “A” credit rating. Botswana has established high-quality public institutions and legal systems with very low corruption.

• Exploration risk: Lucara has limited exploration but may ramp up exploration or acquire new properties. In some cases, the market may build in expectations for exploration success before the actual exploration work has taken place. In the event that results do not meet with the market’s expectation, the company’s shares may be negatively affected.

• Financing risk: Lucara has a strong balance sheet with growing cash and minimal sustaining capex. New growth plans could be funded out of cash flow and /or new debt. For M&A, the high valuation should be supportive of accretive acquisition.

CONCLUSION

We are initiating coverage on Lucara Diamond Corp. with a BUY rating and a 12-month target price of C$3.00 per share based on a 1.3x multiple to NAV. The startup of its Karowe diamond mine in Botswana has exceeded expectations consistently producing high value "specials" resulting in high margins and strong, sustainable cash flows. Lucara offers investors a semi-annual dividend offering a 1.6% yield and will likely increase this with a special dividend at year-end. With an established high margin operation, growing cash, no debt and a high market value, Lucara is also well-positioned to offer growth through M&A. Additional upside comes from expanded mine life and higher diamond price opportunities.

Initiating coverage with a BUY recommendation, High Risk and twelve month price target of C$3.00 per share

The main risk for Lucara is that Karowe stops yielding large stones.



MANAGEMENT BIOGRAPHIES

William Lamb, President, CEO & Director has over 20 years' experience in the mining operations and project development including De Beers as their Dense Medium Service Specialist and Metallurgical Superintendent he was responsible for process design and certain project management aspects of Canadian diamond projects. After completing an MBA through the Edinburgh Business School, Mr. Lamb joined the Lundin Group in May 2008 as the General Manager for Lucara Diamond Corp.

Paul Day, Chief Operating Officer is a mining engineer with over 22 years of operational experience in the sub-Saharan African mining industry in senior production and operational management positions within JCI, Anglogold Ashanti and Areva BG Mines.

Anthony George, Vice President Development is a mining engineer with over 27 years of experience in operations, design and construction. In his career with De Beers he was mine general manager on the team that brought the Victor open pit diamond project through feasibility, engineering and construction.

Dr. John Armstrong, Vice President Mineral Resources has over 25 years of combined experience in mineral exploration, mining and government. Dr. Armstrong has been involved in the planning and execution of successful diamond exploration and sampling programs ranging from generative to delineation and valuation.

Glenn Kondo, Chief Financial Officer has senior executive and corporate board experience in the mining industry, including many years with Anglo American. Mr. Kondo is a Chartered Accountant and holds a Bachelor of Commerce degree from the University of Toronto.

DIRECTORS BIOGRAPHIES

Lukas H. Lundin, Chairman graduated from the New Mexico Institute of Mining and Technology (Engineering). Throughout his career, he has been responsible for various resource discoveries, including the multi-million ounce Veladero gold deposit. Mr. Lundin has also led numerous companies through very profitable business acquisitions and mergers; most recently the $9.2 billion sale of Red Back Mining Inc. Mr. Lundin currently sits on the Board of a number of publicly traded companies.

Paul K. Conibear has over 30 years of experience in the mining industry. His background includes 18 years of project and construction management across a diverse range of minerals projects. For the last 12 years he has held public company executive management and director's positions with the Lundin group of companies. Mr. Conibear also serves as President, CEO & Director of Lundin Mining.

Richard P. Clark is a lawyer who practiced mining and securities law in British Columbia from 1987 to 1993. For the past ten years Mr. Clark has been a senior executive with the Lundin Group of Companies.

Brian Edgar has been active in public markets for over 25 years. Mr. Edgar serves on the Board of a number of public companies.

Eira Thomas is a respected Canadian geologist with a highly successful career in the mining industry. She served as a geologist with Aber Resources Ltd. (now Dominion Diamond Corporation) from 1992 to 1997, leading the field exploration team.

Marie Inkster is the Chief Financial Officer of Lundin Mining Corporation and has held positions of increasing responsibility in a number of publicly traded companies.



Figure 29: Assortment of Lucara Specials sold at its Exceptional Stone Tenders Shown to Scale




Lucara Diamond Corp.Rating BUY Basic Shares (MM) 378.4 Dundee Capital Markets Dundee Capital MarketsRisk High Diluted Shares (MM) 382.5 Matthew O'Keefe, MSc, MBA Erik BermelTarget Price $3.00 Basic Mkt Cap (MM C$) C$1,029 647-253-1131 647-253-1112Share Price $2.72 Enterprise Value (MM C$) C$970 [email protected] [email protected]

OPERATING STATISTICS BALANCE SHEET2013A 2014E 2015E 2016E 2017E 31-Dec (MM US$) 2013A 2014E 2015E 2016E 2017E

Gross Ore Mined 2.4 2.28 2.54 2.50 2.48 AssetsGross Diamonds Prod. (MM cts) 0.4 0.42 0.45 0.43 0.42 Cash and Equivalents $49 $72 $133 $191 $240Net Diamonds Prod. (MM cts) 0.44 0.42 0.45 0.43 0.42 Product Inventory $21 $23 $23 $23 $23Average Grade, net (cpht) 19 18 18 17 17 Other Current $4 $3 $3 $3 $3Rock Value (US$/t) $77 $105 $101 $98 $92 Current Assets $74 $98 $160 $218 $267Diamond Value (US$/ct) $409 $574 $574 $562 $549 Mineral Properties $173 $213 $202 $189 $174

Restricted Cash/notes $0 $0 $0 $0 $0MINE & FINANCIAL PROFILE Other LT $0 $0 $0 $0 $0Karowe, Botswana (100%) Total Gross Diamonds Mined (k cts) TOTAL ASSETS $247 $311 $362 $406 $441

LiabilitiesCurrent debt/debentures $0 $0 $0 $0 $0Long-term debt/debentures $0 $0 $0 $0 $0Future income tax liabilities $14 $17 $17 $17 $17Provision for reclamation $15 $15 $15 $15 $15Other Liabilities $31 $26 $26 $26 $26TOTAL LIABILITIES $60 $58 $58 $58 $58LIABILITIES AND EQUITY $247 $311 $362 $406 $441

INCOME STATEMENT31-Dec (MM US$) 2013A 2014E 2015E 2016E 2017ETotal revenue $181 $240 $257 $244 $229Operating costs (net dep) $65 $94 $121 $121 $120Depreciation/amort. $15 $14 $19 $20 $20Exploration expenses $1 $2 $4 $2 $2

Karowe, Botswana (100%) Gross Ore Mined & Processed (k t) Administration & other $11 $8 $7 $7 $7EBITDA $103 $136 $124 $114 $100EBIT $88 $122 $105 $94 $79Interest payments -$4 $0 $0 $0 $0EBT $84 $122 $105 $94 $79Current Tax expense $15 $44 $41 $36 $31Deferred Income tax expense $0 $0 $0 $0 $0Net earnings (loss) $65 $76 $64 $58 $48Adjusted net earnings (loss) $65 $76 $64 $58 $48EPS $0.19 $0.22 $0.19 $0.17 $0.14Average Shares 376.3 377.8 378.4 378.4 378.4

CASH FLOW STATEMENT31-Dec (MM US$) 2013A 2014E 2015E 2016E 2017ENet Income (loss) for the period $65 $76 $64 $58 $48Depreciation & Amortization $15 $14 $19 $20 $20Other $19 $4 $0 $0 $0

NET ASSET VALUE Operating Cash Flow $100 $94 $84 $78 $69(C$MM) C$/share Operating CFPS $0.29 $0.28 $0.25 $0.23 $0.20

Karowe, Botswana (100%) $885 $2.31 Changes in working capital -$1 -$4 $0 $0 $0Total Producing Assets $885 $2.31 Cash from Operations $99 $90 $84 $78 $69Other Assets $0 $0.00 Capital Expenditure -$8 -$55 -$8 -$6 -$6Total Corporate Adjustments -$4 -$0.01 Other $0 $0 $0 $0 $0Lucara Diamond Corp. Net Asset Value $881 $2.30 Cash from Investing -$8 -$55 -$8 -$6 -$6DCF Target Multiple 1.3x Equity Financing $0 $0 $0 $0 $0Share Price Target $3.00 Debt repayment/drawdowns -$55 $0 $0 $0 $0

Other $0.5 -$14 -$14 -$14 -$14VALUATION DATA Cash from Financing -$54.0 -$14 -$14 -$14 -$14Relative F2014E F2015E F2016E F2017E F2018EP/CF 9.8x 11.1x 11.9x 13.5x 15.0x Change in Cash & Equiv. $36 $22 $61 $58 $49EV/EBITDA 6.4x 7.0x 7.6x 8.8x 9.9x Cash, Beginning of Period $13 $49 $72 $133 $191P/E 11.0x 13.0x 14.3x 17.2x 20.5x Cash, End of Period $49 $72 $133 $191 $240

P/NAV EV/ct EV/ValueLucara Diamond Corp. 1.18x $86.21 0.20x FCF before financing (CFO+CFI) $92 $40 $75 $72 $63

Net free cash flow $36 $36 $75 $72 $63Operating CFPS (C$/sh) $0.29 $0.28 $0.25 $0.23 $0.20

DIAMOND RESERVES, RESOURCESSize Grade Carats Value TOP SHAREHOLDERS

(MMt) (cpht) (MM) (US$/ct) Institution/Insider Shares Value %Karowe, Botswana (100%) JPMorgan Asset Management (UK) Ltd. 22.3 $56 5.9%Total Probable 33.1 16 5.1 $394 O'Shaughnessy Asset Management LLC 4.5 $11 1.2%Total Indicated 48.1 16 7.6 $393 TD Asset Management, Inc. 3.2 $8 0.9%Total Inferred 21.0 14 3.0 $412 Canada Pension Plan Investment Board 3.1 $8 0.8%Total 69.1 15 10.7 $399 Pembroke Management Ltd. 3.0 $7 0.8%

Total Institutional Ownership 53.9 $136 14.3%Mothae, Botsawana (75%) 39.0 3 1.0 $1,040 Total Insider Ownership 80.6 $203 21.3%

Total 134.5 $339 35.6%

Source: Company reports, Bloomberg, Factset, Dundee Capital Markets estimates

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Dominion Diamond Corp. (DDC-T: C$15.23), (DDC-NYSE: US$14.16)

July 17, 2014

Matthew O'Keefe, MSc, MBA / (647) 253-1131 [email protected]

Erik Bermel / (647) 253-1112 [email protected]

BUY, High Risk Dundee target: C$20.50

Lac de Gras: A Pretty Kettle of Fish

We are initiating coverage on Dominion Diamond Corp. with a Buy rating and a 12- month target price of C$20.50 per share. Dominion recently consolidated the Lac de Gras region, a world class diamond district and now have ownership in two of the largest and richest diamond mines in the world. Both have underappreciated development pipelines which could expand the existing eight year mine life.

• Near Term Uncertainty Clouding Long Term Potential: Dominion’s next two years are filled with several capital intensive but manageable expansion projects and a relatively uninteresting production and cash flow profile. Looking past the next two years, production and cash flow are set to double in FY2017 with the high grade, 75% margin Misery pipe giving boost to operations.

• Jay Will Be A Game Changer: Approval of the high grade, high value Jay pipe would extend Ekati’s mine life from 8 years to 18 years while delivering reasonable 39% margins LOM. In addition, it should push back Ekati’s $435MM reclamation liability by ten years.

• Reclamation Liability Manageable: The Company will likely be required to post an additional $145MM in reclamation collateral for Ekati and its $60MM share for Diavik. In addition to $212MM in cash on hand, the company has only $4.3MM in debt and the possibility to use its ownership in Diavik as collateral. We expect clarity from the territorial government by year end.

• Larger Risk Offers Bigger Reward: Dominion offers compelling value currently trading at 0.59x NAV vs peers at 0.95x should expansion at Ekati go according to plan. Even at a discounted 0.8x target multiple, our C$20.50 target price offers a healthy risk-adjusted return.

• A-21 Provides Additional Upside: Construction of A-21 would rejuvenate an otherwise declining production profile at the Diavik mine, filling mill capacity drastically improving costs and increasing profitability. Diavik’s operator Rio Tinto is expected to make a construction decision on the project by year end.

Target Price Valuation Methodology: Our C$20.50 target price is based on 0.80x our C$25.66 NAVPS, which is a discount to similar diamond producers trading at 0.95x. As uncertainty surrounding its future mine life is resolved, capital and reclamation bond commitments clarified and construction decisions for Jay and A-21 are made, we believe Dominion Diamond stock should trade up, in line with its peers. Our target implies an 8.1x 2015E price to cash flow multiple, valuing Dominion in line with diamond producers who trade at an average of 7.1x 2015E cash flow.

DDC: Price/Volume Chart

Source: Factset

Company Description Dominion has ownership in two high grade diamond operations in the Northwest Territories, Canada. Dominion's share of production from its two world class assets, Ekati & Diavik, is approximately 4MM ct.

DDC-T New LastRating:Target:Risk:NAVPS:

Company DataPrice (07/15/14):52-Week Range:Market Capitalization ($MM):Enterprise Value ($MM):Shares Outstanding - Basic (MM):Shares Outstanding - FD (MM):Avg Daily Volume (3 Mos) (000s):Cash ($MM):Debt ($MM):Dividend YieldFiscal Year-End:Est. (MM) 2014 A 2015 E 2016 ENet Prod. 4.0 4.1 3.9Grade (cpht) 132 93 82Value US$/ct 188 217 195Cost US$/t 128 128 130Revenue ($) 752 900 752CFO ($) 160 269 185EBITDA ($) 681 338 198CFPS (C$) 2.09 3.43 2.36Valuaion 2014 A 2015 E 2016 EP/CF 7.3x 4.4x 6.5xEV/EBITDA 1.4x 2.7x 4.7x

P/NAV EV/ct EV/Value0.59x 6.83 0.03x

All Figures in US$ Unless Otherwise NotedSource: Factset, Company reports, Bloomberg, DCM

C$12.31-16.83

BUYC$20.50

HighC$25.66

C$15.23

C$5n/a

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Dominion Diamond Corporation (DDC-CA)

Volume (Millions) Price (CAD)VolumeDominion Diamond Corporation





INTRODUCTION

Dominion Diamond Corp. is a Canadian diamond mining company with ownership in two major producing diamond mines located in the Lac De Gras region, approximately 300km northeast of Yellowknife in the Northwest Territories (Figure 30).

Figure 30: Dominion Diamond Project Location


The company operates its recently acquired Ekati Mine and is in the process of increasing its ownership interest from 80% to 90% in the core zone, which includes the current operating mine and other permitted kimberlite pipes, and the surrounding buffer zone mineral claims, which hold the Jay pipe, from 58.8% to 68.8% (Figure 31). It also has a 40% interest in the high grade nearby Diavik Mine, which is 60%-owned and operated by Rio Tinto (RIO-LON, not covered). The Ekati and Diavik mines produced 8.6MM carats in FY2014 (4MM carats net to Dominion), which was approximately 6.5% of 2013 global production. Of note, Dominion's financial year ends on January 31.

Two world class high grade diamond mines in Canada's Northwest Territories



Figure 31: Ownership Interest Breakdown

Source: Company Reports DCM

In 2013, Dominion Diamond transitioned from a diamond marketer and retailer to pure play diamond miner by purchasing the Ekati diamond mine from BHP Billiton for $500MM cash and selling its Harry Winston luxury brand to The Swatch Group for $750MM. The transactions left the company on solid financial footing with two producing assets in a premiere diamond district. The strategy ahead is to optimize existing operations and pursue the prospective expansion opportunities on the large, well-endowed land package (Figure 32).

Figure32: Dominion Diamond Property Map


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Legend:Expected ownershipCurrent ownership

Selling Harry Winston in 2013 left the company on solid financial footing with two producing assets in a premiere diamond district.



Robert Gannicott, Chairman and CEO, has forty years mining experience including extensive work in NWT. He was appointed CEO in 1999 and has led the Company from its early operational days as Aber Diamond Corp., used the early cash flow to rebuild the luxury goods retailer Harry Winston and now looks to consolidate and extend mining operations at Lac de Gras as Dominion Diamond. Key to implementing this strategy is Chantal Lavoie, who was appointed President and Chief Operating Officer of Dominion Diamond Ekati Corporation in May 2013 and formerly ran De Beers Canada's operations.

Dominion Diamond has a relatively tight structure with only 85MM shares outstanding and 88MM shares fully diluted. Its shares are widely held institutionally with approximately 72% institutional ownership and an additional 6% owned by management and insiders. Dominion's three largest shareholders are M&G Investment Management at 19%, Parnassus at 5% and Blue Harbour Group at 4%. CEO Bob Gannicott owns 1.3%. The company currently has approximately $466MM in working capital including $212MM in cash on its balance sheet and only $4.3MM in debt outstanding.

MINER IN RENEWAL

Dominion's operations are uninteresting in the short term with lower returns at Ekati and declining production profile at Diavik. However several expansion projects offer exceptional growth opportunity.

Strong production from the high grade Diavik mine have built Dominion over the past decade, however as mining of its three main pipes proceeds deeper underground, throughput decreases, costs increase and Diavik's production is becoming less impactful. The potential exists to develop the nearby A-21 pipe, which would help fill the mill, reduce costs and keep Diavik's production profile steady over its remaining eight years.

Ekati's production profile can be broken out into three distinct stages. Over the next two years operations are expected to be high cost as Dominion processes lower value stockpiled ore and focuses on construction of the Misery, Lynx and Pigeon pipes. Once mining at the high grade Misery pipe kicks off in FY2017, margins increase drastically, doubling production from Ekati for six solid years. The contemplated Jay pipe represents Ekati's long term future, as the current mine plan comes to an end in FY2022.

Figure 33: Dominion's Production Profile (MM carats) with Jay and A-21 Potential


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Several expansion projects offer exceptional growth opportunity.



Figure 34: Dominion at a Glance Including Jay


NEXT SIX MONTHS PIVOTAL

Fiscal year 2015 (ending January 31, 2015) is a pivotal year for Dominion. Construction decisions are expected for the Jay Project (Ekati) and A-21 (Diavik) would extend the life of operations, which are currently set to deplete in FY2023. This would also push out the significant reclamation liabilities. For investors, an updated technical report at Ekati is imminent, which should show provide welcome detail on current operations and the magnitude of the reclamation costs. It should also reflect a boost in grade and total carats due to recent measures taken to increase small stone recovery, highlighting management's progression in optimizing Ekati. Concurrently, the territorial government is expected to provide further clarity on the requirements for Ekati's reclamation liability, which could provide clarity to allow the company to re-allocate some of the $212MM in unrestricted cash on the balance sheet towards project development. The stock is currently trading well below NAV at 0.59x reflecting uncertainty on the aforementioned issues. Should all go to plan, Dominion should move up towards its peer group average of 0.95x. However, delays or unfavourable decisions would continue to overhang the stock at least until the high grade Misery pipe comes on-stream in mid FY2017.

Construction Decision on Jay

The Jay pipe is a high grade, high value development pipe adjacent to the Misery pipe which could more than double the current mine life at Ekati. It is targeted to start production in FY2020. An updated mine plan is expected by year end which should see a decrease in Jay's ecological footprint, simplified water management plan and reduced reclamation liability compared to previous guidance (Figure 35). We do not expect initial costs to decrease much from the original $800MM guidance as the length and volume of material required to construct the ring dyke will remain about the same. However reduced pumping costs and a reduced footprint should be positive. A fish-out of the lake is expected later in the year, which we would view as a positive sign towards permitting progress.

Dominion Diamond Key StatisticsF2014A F2015E F2016E F2017E F2018E F2019E

Production (MM ct) 4.0 4.1 3.9 6.6 7.9 7.7 Average Grade, net (cpht) 132 93 82 140 174 170 Rock Value (US$/t) $248 $201 $160 $217 $277 $266Cost per Tonne (US$/t) $169 $115 $110 $108 $131 $131Revenue (MM US$) $752 $900 $752 $1,019 $1,255 $1,200CFO (MM US$) $166 $253 $185 $357 $430 $401EBITDA (MM US$) $681 $338 $198 $475 $604 $552Free Cash Flow (MM US$) -$499 $63 -$34 $194 $174 $78EPS (C$/sh) -$0.41 -$2.12 -$0.25 $1.80 $2.91 $2.46CFPS (C$/sh) $2.09 $3.43 $2.36 $4.54 $5.46 $5.10Current Valuation Metrics

F2014A F2015E F2016E F2017E F2018E F2019EP/CF 7.3x 4.4x 6.5x 3.4x 2.8x 3.0xEV/EBITDA 1.4x 2.7x 4.7x 1.9x 1.5x 1.7xP/E na na na 7.6x 4.7x 5.6x

Jay should generate nearly $110MM in free cash flow per year once ramped up.



Figure 35: Previous vs Updated Footprint for Jay Project


We estimate the Jay project pipe should generate nearly $110MM in free cash flow per year once ramped up. The project adds only about $153MM of our NAVPS estimate based on the timeline, a hefty $800MM of initial capex and DDC's 68.8% ownership interest. The Company should generate sufficient cash flow from current operations to internally fund the bulk of the initial capex.

A host of benefits will come from building Jay. The most obvious is that it extends the mine life by approximately 10 years, but it will also push back the substantial reclamation costs and allow better management of the closure and a likely reduction in cost. Permitting would seem to be the biggest risk to the Jay project as it contemplates a new drainage and the majority of the permitting process lies ahead, but the smaller area of impact should dispel any opposition. A Development Assessment Report is expected to be submitted in Q3 FY2015, with permitting expected to be completed over the next two years allowing production to begin in FY2020. Dominion Diamond plays a significant role in the Northwest Territories' economy (it’s one of the largest employers in the NWT with close to 60% of its employees Northerners and Aboriginal First Nations). Given the reduced footprint of Jay, the significant impact to longevity of Ekati and the importance of Ekati to the NWT, we believe Jay will be permitted and constructed. As such, we have included it in our valuation.

Construction Decision on A-21

At Diavik, operator Rio Tinto is expected to make a construction decision on the A-21 pipe by year end. The inclusion of A-21 would fill excess mill capacity and much improve an otherwise declining mine life adding approximately $2.12 to our NAVPS estimate (Figure 36 below). Costs at Diavik are largely fixed, as high as 80% to 90%, so not only will A-21 will add approximately $65MM in average annual cash flow over its six year mine life but filling the excess capacity in the Diavik mill would decrease costs on a per carat basis significantly maintaining the high margins in the later years of Diavik's life. While this makes sense for Dominion, Rio Tinto has yet to give an indication on its intentions for A-21. Its diamond unit, Rio Tinto Diamonds and Minerals, recently reiterated its focus on reducing unit costs and cutting capex from ~$1B in 2012 to ~$500MM in 2015 and further in 2016 so it may not be interested in committing the additional capital. As such, a positive construction decision is not a foregone conclusion and we have not included A-21 in our valuation. Should Rio decide to go ahead with A-21, we estimate $500MM in initial capex ($200MM net to Dominion) with initial production in FY2018. The high grade 277 cpht pipe should contribute 13MM carats over its 6-year mine life with an average value of $193/ct.

The project adds only about $153MM of our NAVPS estimate due to our conservative $800MM initial capex and DDC's 68.8% ownership



Figure 36: Diavik Production Profile Excluding/Including A-21 Pipe (k cts)


Clarity on Reclamation Bond

Details on the amount of the reclamation liability for Ekati and further clarity from the government of the NWT on the requirements for the reclamation bonds is expected by year end. The reclamation bonds for Diavik and Ekati are currently $60MM (covered by Rio Tinto) and $115MM (posted by Dominion), respectively. We have assumed Dominion will increase the posted Ekati bond to $260MM as guided which represents 66% of Dominion's net liability of ~$391MM ($435MM total) at the end of the mine life. It is also expected to have to post the $60MM for Diavik currently covered by Rio Tinto. This is a significant amount of working capital to tie up and which could constrain project financing and growth plans. As such, clarity is key in planning for and financing longer-term growth plans. Options to be addressed include the possibility of posting a portion of its Diavik asset as collateral for the Ekati or posting a surety bond. We estimate that Dominion has capacity to post the additional $145MM for Ekati and $60MM for Diavik and still meet its current planned capital expenditures and funding for Jay. Should Dominion need to fund A-21 on top of these expenditures, it would likely need to access additional funds.

Clarity on Dividend Policy

With steady state operations, $212MM cash on the balance sheet and approximately $50MM in excess inventory, questions have been raised surrounding the potential to return cash to shareholders in the form of dividends. The company has stated it would make a decision near the end of the year, once more clarity surrounding construction decisions at Jay and A-21, along with the reclamation liability at Ekati is provided. However, given the relatively weaker cash flows over the next two years, we do not see the potential for a dividend for some time. Anticipated capital commitments are approximately $367MM over the next three years for existing programs and the posting of up to an additional $205MM for reclamation bonds must be budgeted for. There is also the potential for additional outflows to fund Jay and A-21 of $550MM and $200MM, respectively. As such, we don't see the possibility of a dividend before Misery comes online in FY2017 or more likely until Jay comes online at the end of FY2020 (Figure 37). As such, we currently do not include a dividend in our estimates.

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A dividend is likely not possible before Misery in FY2017 or more likely until Jay comes online at the end of FY2020

Dominion likely has capacity to post the additional $145MM for Ekati and $60MM for Diavik and still meet its current planned capex including Jay



Figure 37: Quarterly Cash Flow Estimates (k US$)


MISERY TO GIVE WAY TO JOY

The Misery open pit will be Ekati's main source of growth in production in the next two years driven by its very high grades. Even at an average strip ratio of 16.9:1, Misery is set to be Ekati's most profitable pipe with rock values averaging approximately $500/tonne. As seen in Figure 36 above and Figure 37, Dominion's cash flow and total carats produced are set to increase dramatically in FY2017 following two relatively break-even years. Construction is nearing completion for the second phase of the open pit and mining is expected to begin in the second half of FY2016.

Figure 38: Ekati Quarterly Net Diamonds Recovered


Dominion is also developing the Pigeon and Lynx pits which will contribute to growth over the same period. Neither pits have a big impact on our NAV estimate as the Pigeon pit has value rock averaging just $110/tonne and Lynx's mine life is just two years. Although

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Misery Jay

Misery is set to be Ekati's most profitable pipe with rock values averaging approximately $500/tonne



marginal on their own, both pits fill mill throughput and offer additional synergies on the property.

CONSOLIDATING EKATI

In early July 2014 Dominion purchased Chuck Fipke’s 10% interest in Ekati claims for a total of $67MM brining its ownership in Core Zone from 80% to 90% & Buffer Zone to 58.8% to 68.8% (Figure 31). The price is equivalent to the price Dominion paid to BHP for Ekati in 2013. We view the transaction as positive as it further consolidates area in Dominion’s favour and signals its confidence in growth plans at Ekati and specifically in the Jay Project in the Buffer Zone. To fully consolidate Ekati, Dominion would need to acquire Stewart Blusson's 10% ownership in the core zone and Blusson-controlled Archon Minerals (ACS-CN; not covered) for the last 31.2% of the buffer zone. Based on the same deal terms as Fipke, this would require another $50MM for the Core Zone interest and $53MM for the Buffer Zone. We do not anticipate this in the near term as Archon is publically traded (thinly), has additional assets and a market capitalization of $80MM. In any case we expect the deep pockets of Blusson and his long-term interest in the region will maintain Archon's ownership interest.

GROWTH TIMELINE AND FINACING REQUIREMENTS

Between ongoing expansions at Misery, Pigeon, and Lynx and potential additions of Jay and A-21, Dominion has plenty of growth opportunity in the pipeline (Figure 38). However, it will not come cheap. First off, Dominion is expected to post up to an additional $205MM in reclamation collateral in the next year. Over the next two years we estimate cash outflows of approximately $367MM for capex and exploration related to Pigeon, Misery and assessment work on Jay. And over the next five-years, with the inclusion of Jay and A-21, capital investment could be close to 1.4B (Figure 39). Such is the nature of mining.

Figure 39: Estimated Project Timeline & Capital Requirements


We estimate that the company has the means to cover its near-term expansion and consolidation plans, and eventual cash flow from Misery would likely cover funding for Jay.

Project Q3 2015 Q4 2015 F2016E F2017E F2018E F2019E F2020E F2021E F2022E F2023EPigeon Open PitMisery PipeA-21Lynx Open PitJay Pipe

Permitting Construction Production Constr. Decision

LikelyhoodCapital ($MM) Description

Additional Reclamation Bond

Expected $205 - Currently $115MM posted for Ekati; expecting additional $145MM at Ekatiand $60MM from Diavik

Misery , Pigeon, Lynx Underway $367 - Estimated remaining capex and explorationJay Highly Likely $550 - PEA coming by YE; capex estimate could be higher if partner

Archon decline to participateA-21 Uncertain $200 - Rio Tinto Decision; Capital est based on 40% ownershipFipke Purchase Underway $67 - Purchased Fipke's 10% in core & buffer zones for $67MM plus

last two years of JV commitmentsTotal Estimated Cash Outflows $1,389

Multiple options available to fund expansion projects

Possibility exists to further increase Dominion's ownership in Ekati



However, should A-21 be given the go-ahead, Dominion would likely require additional project financing.

Dominion currently has approximately $212MM unrestricted cash, $50MM in excess diamond inventory (a total of $285MM inventory) and operating cash flow that should contribute $454MM over the next two years. However, this leaves little room for additional consolidation which would increase its commitments in both acquisition cost and capital requirement or any delays or issues at current operations. At present the company has only $4.3MM in debt so has significant room for additional debt. We would expect a credit line of up to $500MM to be made available.

EXPLORATION POTENTIAL & THE LAC DE GRAS JV

Exploration work by BHP and Rio Tinto over the Diavik and Ekati claims has been extensive with the discovery of close to 200 pipes in the region. However, areas to the south of Lac de Gras along important structural trends remain underexplored. Dominion has limited staff focusing on exploration and has teamed up with North Arrow's (NAR-V; BUY, Speculative Risk) team of seasoned explorers to evaluate the 307,000 acre LDG property south of Ekati & Diavik (Figure 40). The Lac De Gras JV sees Dominion earning into 55% interest by spending $5MM over 5 years. Dominion has a very limited budget beyond this program.

Figure 40: Lac De Gras Property


Current commitments manageable should everything fall perfectly in line.

Working with North Arrow Minerals to explore the prospective ground surrounding Ekati & Diavik



VALUATION

We value Dominion based on a discounted cash flow analysis of its respective ownerships in Ekati and Diavik (Figure 41). We include current operations, along with the Jay pipe applying a 5% discount rate. The corporate adjustments reflect the repayment of debt, current inventory balances and the outflow of $205MM for reclamation bonds at Ekati and Diavik. Our diluted shares outstanding number considers all in-the-money options. As a result, we arrive at a net asset value for Dominion of C$2,243MM or C$25.66 per share.

Figure 41: Comparative Company P/NAV

Source: Factset, Bloomberg, Company Reports, DCM

We apply a 0.8x multiple to NAV to arrive at our 12-month target price of C$20.50 per share. Our 0.8x multiple is at the bottom end of similar established diamond producers, that trade in a range from 0.6x to 1.2x NAV (Figure 42). We attribute Dominion's current discount to a lack of clarity and certainty surrounding its future mine life and potential commitments at both Ekati and Diavik. Following resolution of reclamation bond requirements and further clarity surrounding the construction of Jay and A-21, we believe Dominion should trade in line with its peers.

Figure 42: Comparative Company P/NAV

Source: Factset, Bloomberg, Company Reports, DCM

Underpinning our NAV based target is Dominion's strong longer-term cash flow profile. With annual production estimated to grow from the current 4MM carats to 7.9MM carats in FY2018 once the Misery pipe comes online, cash flow should also increase significantly to $429MM or $5.46 per share (Figure 43).

Dominion Diamond Net Asset Value BreakdownDiscount

RateNAV

(MM C$)NAV per

shareEkati, NWT (~90%) 5% $1,461 $16.71Diavik, NWT (40%) 5% $697 $7.97Total Producing Assets $2,158 $24.68Other Assets 5% $0 $0.00Corporate G&A 5% -$376 -$4.30Working Capital $466 $5.33Other & Corporate Adjustments $85 $0.98Dominion Diamond Net Asset Value $2,243 $25.66

Target Price Value Multiple Weight Per ShareNet Asset Value $25.66 0.80x 100% $20.53

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DDC-CA RDI-CA PDL-LON GEMD-LON Producer Avg. ALRS-MIC LUC-CA(DCM)


Attractively valued on a NAV basis should permitting & expansion be successful



Figure 43: Cash Flow Profile


Since Dominion's next two years of production are not reflective of the Company's cash flow profile post Misery or, longer term, from Jay, we have opted for a NAV based target. However, to demonstrate DDC's longer term potential, Figure 44 below outlines potential targets using an EBITDA or cash flow based methodology. We note that diamond producers currently trade at 4.9x next year's EBITDA and 7.1x next year's CF, which compares to Dominion at 4.7x and 6.3 for FY2016 (CY2015), but only 1.9x and 3.3x for FY2017 (CY2016). Similarly, our DCM universe of precious metal producers trades at 7.0x next year's EBITDA and 9.0x next year's CF.

Figure 44: Implied Target Price Using Cash Flow Multiples

Source: DCM

Figure 45: Comparative Company Valuation Metrics

* Calendar year; Source: Factset, Bloomberg, Company Reports, DCM

Our valuation is also sensitive to assumptions regarding annual growth in diamond price and changes in the United States/Canadian currency exchange rate (Figure 46). We currently assume an annual diamond price growth rate of 2.5% per year, in line with global GDP growth and an USD:CAD exchange rate of 0.9:1. We note that a portion of Dominion's costs are in US$, reducing its sensitivity to overall costs.

Dominion Diamond Key StatisticsF2014A F2015E F2016E F2017E F2018E F2019E

Production (MM ct) 4.0 4.1 3.9 6.6 7.9 7.7 Revenue (MM US$) $752 $900 $752 $1,019 $1,255 $1,200EBITDA (MM US$) $681 $338 $198 $475 $604 $552CFPS (C$/sh) $2.09 $3.43 $2.36 $4.54 $5.46 $5.10

Target Price Sensitivity to Multiple & Valuation Period5.0x 6.0x 6.0x 7.0x 8.0x 9.0x 10.0x

2015 EV/EBITDA $24.52 $28.81 $28.81 $33.10 $37.40 $41.69 $45.982016 EV/EBITDA $15.62 $18.13 $18.13 $20.64 $23.15 $25.66 $28.182017 EV/EBITDA $33.25 $39.28 $39.28 $45.32 $51.35 $57.39 $63.432015 P/CF $19.07 $22.88 $22.88 $26.70 $30.51 $34.32 $38.142016 P/CF $13.09 $15.70 $15.70 $18.32 $20.94 $23.55 $26.172017 P/CF $25.23 $30.27 $30.27 $35.32 $40.36 $45.41 $50.45

P/NAVCalendar Year 2014 2015 2016 2014 2015 2016Dominion Diamond Corporation 4.3x 6.3x 3.3x 2.7x 4.7x 1.9x 0.59xLucara Diamond Corp. 9.8x 11.1x 11.9x 6.4x 7.0x 7.6x 1.18xAC ALROSA OJSC 6.2x 5.9x 5.5x nm nm nm 0.98xPetra Diamonds Limited 5.4x 3.9x 3.5x 10.2x 8.2x 6.8x 0.90xGem Diamonds Limited 4.9x 3.6x 3.5x 4.7x 3.8x 3.6x 0.95xKimberley Diamonds Ltd 13.8x 11.6x 1.5x 3.2x 0.8x 0.8x naRockwell Diamonds Inc. nm nm nm 2.8x nm nm 0.83xProducer Average 7.4x 7.1x 4.9x 5.0x 4.9x 4.2x 0.91x

Price to Cash Flow EV/EBITDAEV/EBITDA & P/CF do not accurately capture Dominion's long term growth potential



Figure 46: NAVPS Sensitivity to Changes Key Inputs


UPSIDE TO OUR VALUATION

We currently apply a 0.8x multiple to our NAV on the assumption that Dominion's uncertainty surrounding reclamation and its future production profile creates additional risk on top of everyday operations. As the uncertainties surrounding Dominion's future production profile, reclamation expense and potential risks surrounding financing and construction are resolved we would expect to see our multiple expand. Given Dominion's potential for a long robust mine life at Ekati, we could potentially justify a premium for Dominion.

On the project side, there is potential upside from the inclusion of the A-21 pipe (Diavik) or the Sable pipe (Ekati) in our valuation:

• At Diavik, we estimate A-21 would add 13MM gross carats to Diavik's production profile over its six year mine life for gross capex of approximately $500MM (net $200MM to DDC). In addition it should decrease operating costs per carat by almost 40% at the end of Diavik's mine life, increasing our NAV estimate by about 8%.

• At Ekati, we see Sable's additional 15MM tonnes at 90 cpht (13MM carats) offering potential to further extend mine life. Although it is at a lower grade than Jay's 203 cpht, Sable is part of the core zone and therefore 90% of cash flow would accrue to Dominion.

• Exploration potential still remains on both properties and at the Lac De Gras Exploration JV, as discussed above.

None of this upside is currently included in our estimates.

Value NAV NAV Growth NAV NAV FX NAV NAVChange C$25.66 Change Rate C$25.66 Change Rate C$25.66 Change80% C$11.25 -56% 0.0% C$15.38 -40% 1.00 C$23.00 -10%85% C$14.86 -42% 0.5% C$17.26 -33% 0.98 C$23.49 -8%90% C$18.46 -28% 1.0% C$19.23 -25% 0.96 C$24.00 -6%95% C$22.06 -14% 1.5% C$21.28 -17% 0.94 C$24.53 -4%98% C$24.22 -6% 2.0% C$23.42 -9% 0.92 C$25.08 -2%100% C$25.66 0% 2.5% C$25.66 0% 0.90 C$25.66 0%102% C$27.10 6% 3.0% C$27.99 9% 0.88 C$26.26 2%105% C$29.26 14% 3.5% C$30.43 19% 0.86 C$26.88 5%110% C$32.86 28% 4.0% C$32.99 29% 0.84 C$27.54 7%115% C$36.46 42% 4.5% C$35.65 39% 0.82 C$28.22 10%120% C$40.06 56% 5.0% C$38.44 50% 0.80 C$28.94 13%

Diamond Value (US$/ct) Diamond Value Growth USD:CAD Exhange Rate

Multiple expansion resulting from increased clarity & a construction decision at A-21 offer upside to our valuation



NEAR TERM CATALYSTS

We are expecting resolution of several key items during this calendar year. Below is the current timeline. We have discussed each of the following at length in this report.

• Q3 FY2015 - Submission of Jay project Development Assessment Report (DAR). Particular focus on social and employment, water chemistry, road construction and caribou migration. Paves way for permitting.

• H2 FY2015 - Updated resource estimate at Ekati incorporating smaller stone recovery. Results should highlight Dominion's operating expertise and ability to optimize Ekati after taking over in 2013. We are currently modeling a 15% increase in grade, with the incremental stones at a value of $50 per carat.

• Q4 FY2015 - Mine plan for Jay pipe. We currently include Jay in our estimates, which accounts for $1.75 per share or 7% of our NAV. The mine plan will incorporate a revised water management plan which should greatly reduce Jay's environmental footprint.

• Q4 FY2015 - Construction decision from Rio Tinto for A-21 pipe. We do not currently include A-21 in our estimates. If approved, A-21 could add approximately $2.12 per share and would bolster an otherwise declining production profile at Diavik.

• H2 FY2015 - Government decision regarding size of reclamation liability at Ekati, as well as clarity into amount required to be posted as collateral.

• H2 FY2015 - Following the resolution of the items above, we expect Dominion to make a formal announcement regarding a dividend policy. We believe a dividend is most suitable once the Misery pipe comes online in FY2017.

CONCLUSION

We are initiating coverage on Dominion Diamond Corp. with a BUY rating and a 12- month target price of C$20.50 per share. Dominion has consolidated ownership in the largest and richest diamond mines in Canada located in the Lac de Gras region of the Northwest Territories. Although the current mine plan sees Diavik's production profile declining over the next eight years and Ekati's operations flat until the Misery pipe comes on stream in FY2017, several key announcements over the next 6-months should allow Dominion to firmly demonstrate the viability of and commitment to its Jay expansion project that will extend the mine life past 2030. Dominion currently trades at a discounted valuation of 0.59x our NAV estimate due to the uncertainty surrounding its production profile and funding commitments. However, as economic studies and funding requirements are clarified over the next 6-months, the stock should move up toward our target price and allow us to re-visit our valuation. Dominion is cheap for a reason, but as management puts the formerly neglected Ekati mine back on track both the mine and the stock should return to its former glory offering a good opportunity for more risk tolerant investors.

Dominion is cheap for a reason, but as management puts the formerly neglected Ekati mine back on track both the mine and the stock should return to its former glory offering a good opportunity for more risk tolerant investors



ASSET DESCRIPTIONS:

EKATI DIAMOND MINE: MISERY ET AL.

Figure 47: The Ekati Diamond Mine


The Ekati property accounts for 63% of our NAV estimate. Ekati is located 310km northeast of Yellowknife in the Northwest Territories in the Lac de Gras region. The property is 1,045 hectares; more than 150 kimberlites have been discovered on the property, with 17 of 40 of those tested returning significant macrodiamond results. Current production comes from the core zone (Figure 48), of which Dominion owns 80% (in the process of acquiring up to 90%), while growth is expected to come from the Buffer Zone, of which Dominion owns 58.8% (in the process of acquiring up to 68.8%). Ekati is approximately 40km north of Diavik. Ekati was named after the Tlicho word meaning "fat lake".

Figure 48: Ekati Project Location

Source: Company Report, DCM

Jay: Future of Ekati

Misery: Near term production growth

Core Zone:80% 90%

Buffer Zone:58.8% 68.8%

EKATI MINE

Processing Plant

Current Production

One of the world's richest diamond mines; set to double production in FY2017



History: Exploration in the Lac de Gras region began in the late 1980's with Charles Fipke and Stewart Blusson, who still own a large portion of Ekati personally and as Archon Minerals (ACS-T, not covered). The two inked a deal with BHP to fund exploration and Canada's first diamondiferous kimberlite was discovered in 1992. The discovery eventually led to Canada's first diamond mine, Ekati, which started production under BHP in 1998.

Location & Infrastructure: The property is accessible via a 475km winter road to Yellowknife that resupplies to the Ekati, Snap Lake and Diavik mines during January to March each year. Winter road operations and logistics in the area have been refined over its almost 20 year operating history, which greatly reduces risk during the crucial months for transporting supplies needed for construction and operations. Personnel and time sensitive supplies may be flown in year round.

Fifteen years of production: Ekati is a proven mine with production officially beginning in October 1998. Mining started with the Panda pipe which was mined via open pit and eventually moved to underground in 2005. The still active Koala pipe also began as an open pit in 2003 and is now underground. The first phase of the Misery open pit was mined between 2002 and 2007 and a push back is currently underway for the second phase which is scheduled to begin mining in FY2017. Ekati has produced approximately 58MM carats and annual throughput has been steadily above its nameplate 4.35MM tpa capacity for the past decade.

The Pipes: The Ekati property currently hosts 17 diamondiferous pipes (key pipes outlined in Figure 49 below), four of which are currently being mined (Koala, Koala North, Fox and Misery) and four of which are set to be mined or have 43-101 compliant resources (Pigeon, Lynx, Jay and Sable). Our modeled 18 year mine life includes the current operations, Lynx, Pigeon, Misery and the expansion of Jay. Excluding Jay, we model current resources at Ekati depleting at the end of FY2022 for an 8 year mine life. Including Jay, the mine life stretches to FY2032.

Figure 49: Ekati Key Pipes


In total, Ekati hosts over 145MM carats grading 122 cpht, however as seen in Figure 50 below, the different pipes at Ekati range in diamond value and in grade. As the older legacy Koala and Fox pipes come offline, we see the major driver of value in the medium term coming from Misery, while Jay should extend the mine life and become the sole mill feed after FY2022.

Stage Pipe Type OwnershipModeled

Mine Life NotesKoala UG 90% 6.50 Higher valueKoala North UG 90% 0.50 Higher value, wrapping up in FY2015Fox UG/OP 90% 1.75 Misery OP 90% 6.50 Higher grade

Lynx OP 68.8% 2.00 Estimated beginning FY2017Pigeon OP 90% 6.50 Estimated beginning FY2016Jay OP 68.8% 13.00 Estimated beginning FY2020Sable 58.8% na Not included in estimates

Cardinal 58.8% na Not included in estimatesPegasus 58.8% na Drilled in 2000-2002Impalla 58.8% na Drilled in 2001-2002Gazelle 58.8% na Drilled in 1995, 1997, 1999

Beartooth 90% naPanda 90% na

Other Stockpile 90% na Used to fill mill capacity

Pipes with Resources

Exploration Potential

Currently Mined

Depleted

An experienced operation with plenty of potential life left in it



Figure 50: Ekati Mineral Reserves & Estimated Minable Material


• Koala & Koala North underground: The Koala pipes are higher value, lower grade underground operations which have been the cornerstone of Ekati for the past decade. They are accessible via two ramps (Figure 51), which were originally constructed for the nearby Panda and Koala North pits. The pipes offer high margins of 58% (Figure 52), but Koala North set to deplete at the end of the year and Koala in FY2021.

Figure 51: Koala & Koala North 3D View


• Fox open pit: Fox has been in production for seven years and is scheduled to wrap up by the end of FY2016. Although of lower grade, waste stripping at Fox is largely complete, resulting in slightly lower cost mill feed as Misery ramps up.

• The Misery open pit: Misery will be Ekati's main source of growth in production over the next two years due to its extremely high grade. A total of 3.7MM tonnes were originally mined by open pit from 2002 to 2008 and the phase two portion of open pit mining is expected to begin in FY2017. Even with an average strip ratio of 16.9:1, Misery is set to be Ekati's most profitable pipe with rock values averaging approximately $500/tonne and life of mine operating margins in the 75% range (Figure 52). Portions of the satellite pipes surrounding Misery will also be processed over the next two years as they are excavated as part of pre-stripping, although they are not formally part of the mine plan. Misery is 29km south of the Ekati mill and is located geographically closer to Diavik but excess capacity at Ekati, ownership structure at Diavik and lack of connecting infrastructure prevent using the Diavik mill.

• Pigeon and Lynx open pits: are expected to come online in FY2016 and FY2017. Neither pits have a huge impact on our NAV estimate as the Pigeon pit has value rock averaging just $110/tonne and Lynx's mine life is just two years. Although marginal on their own,

Diamond Value Tonnes Grade CaratsTonnes Grade CaratsTonnes Grade CaratsTonnes Grade CaratsZone * US$/ct (MM) (cpht) (MM) (MM) (cpht) (MM) (MM) (cpht) (MM) (MM) (cpht) (MM)Koala UG 90% $395 5.1 60 3.0 7.1 60 4.3 0.2 100 0.2 7.3 61 4.5 Koala North UG 90% $440 - - - - - - 0.1 60 0.1 0.1 60 0.1 Pigeon OP 90% $195 7.3 40 3.1 12.0 50 5.9 1.7 40 0.8 13.7 49 6.7 Misery OP 90% $100 3.0 400 12.3 3.7 450 16.8 0.8 290 2.3 4.5 422 19.1 Fox UG/OP 90% $315 0.5 30 0.2 26.2 29 7.5 6.5 30 1.9 32.7 29 9.4 Sable OP 90% $140 - - - 15.4 90 13.3 - - - 15.4 90 13.3 Lynx OP 68.8% $225 - - - 1.3 80 1.0 0.1 80 0.1 1.4 80 1.1 Jay OP 68.8% $74 - - - 36.2 220 78.1 9.5 140 12.9 45.7 203 91.0 Subtotal 15.9 114 18.6 101.9 127 126.9 18.9 98 18.3 120.8 122 145.2 Stockpile (Ekati) N/A 90% $93 1.1 20 0.2 0.1 20 0.3 6.6 20 1.0 6.7 20 1.3 Ekati, NWT (~80%) Total $166 17.0 108 18.8 102.0 126 127.2 25.5 78 19.3 127.5 117 146.5 *Pro-forma ownership (currently 80% for core and 58.8% for buffer zone)

P&P M&I TotalInf.



Pigeon is 6km from the main Ekati site, limiting required infrastructure and Lynx is adjacent to the Misery pipe but located in the Buffer Zone and should provide mill feed as Koala comes to an end. Both pipes are permitted for production.

• The Jay pipe: Jay's large size and relatively high grade of 220 cpht should provide average margins of 39% over its mine life. Targeted for production in FY2020, Jay should extend the mine life at Ekati by at least 10-years to 2032. We estimate an NPV of $153MM ($1.75/sh) for Dominion's 68.8% ownership in Jay based on a conservative initial capex of $800MM (net $550MM). As a result of the high initial capex and only 68.5% ownership, Jay has a minimal impact to our NAV, however the extra ten years of mine life offers beneficial flexibility to push back Ekati's reclamation liability. A revised mine plan for Jay is expected in Q4 FY2014 which should better define the economics. It should also allow for up to 10% savings in in reclamation costs by eliminating redundancies including reclaiming mined out pits during operations and using Jay waste to backfill Misery and Lynx. On permitting, a Development Assessment Report is expected to be submitted in Q3 FY2015, with a hearing and recommendation in Q4 FY2015. Permitting is expected to take three quarters allowing construction beginning in the second half of FY2016 for production in FY2020.

Figure 52: Ekati Pipe Breakdown (LOM Estimate)


Production Set to Explode in FY2017: The current operations at Ekati generate reduced cash flow over the next two years as lower grade stockpiles are being used to supplement the 4.35MM tpa mill (Figure 53). Given the relatively fixed-cost nature of the operation, costs on a per carat basis are expected to be high over until the end of FY2016. However, net capex of $177MM in capex is planned for FY2015 and $161MM in FY2016, which should bring the Misery, Pigeon and Lynx pipes online, doubling production and significantly lowering unit costs from $154 per tonne in FY2014 to $93 per tonne in FY2017.

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Figure 53: Ekati Gross Carats Produced


When we look at Ekati's production profile on a tonnage basis, it becomes evident that mill feed dictates margins. Operating margins at Ekati are expected to be 33% and 14% in FY2015 and FY2016 as lower grade stockpile is processed. However once the higher grade Misery pipe comes online, rock value on a US$/tonne increases from $112 in FY2016 to $251 in FY2018, boosting margins to 52%. Once the Jay pipe becomes the sole source of mill feed in 2023, margins are set to decline back to the 39% range (Figure 54).

Figure 54: Ekati Gross Tonnes Processed


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Jay and Lynx are part of the buffer zone which Dominion is expected to own 68.8%. Although production at Ekati continues strong past FY2022, we see a distinct drop off in Dominion's net EBITDA from Ekati (Figure 55) as the higher margin Misery pipe depletes and project ownership shifts from 90% to 68.8%.

Figure 55: Ekati Free Cash Flow (k US$)


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Ekati free cash flow poised to take off once Misery comes online



DIAVIK DIAMOND MINE: WINDING DOWN WITHOUT A-21

Figure 56: The Diavik Diamond Mine


The Diavik property, which accounts for 33% of our NAV, is located 300km northeast of Yellowknife in the Northwest Territories in the Lac de Gras region with Rio Tinto owning 60%, while Dominion owns 40%. Current production comes from three main pipes, A-154 North, A-154 South and A-418 (Figure 56) and is expected to wind down in FY2023. However a decision regarding construction for the nearby A-21 pipe could improve Diavik's production profile, adding an additional 13MM carats and increase our C$718MM NAV for Diavik by 25%. Diavik is approximately 40km South of Dominion's main asset Ekati.

Diavik History: Early in the 1990s, Grenville Thomas, who had been prospecting in the Northwest Territories since the mid-1960's, teamed up with the experienced South African diamond geologist Chris Jennings. The two formed Aber Diamond Corp. (now Dominion Diamond) and staked area to the southeast of Lac de Gras. Initial discovery was in 1994 and they would go on to discover the A-154 South pipe, one of the richest discoveries in the world. Rio Tinto purchased a 60% stake in the asset and initial production began in 2003. Diavik has been Dominion's flagship asset for the past ten years, producing 86MM carats since inception.

Location & Infrastructure: The property is accessible via a 475km winter road to Yellowknife that resupplies the Ekati, Snap Lake and Diavik mines during January to March each year. Winter road operations and logistics in the area have been refined over its almost 20 year operating history, which greatly reduces risk during the crucial months for transporting supplies needed for construction and operations. Personnel and time sensitive supplies may be flown in year round.

Steady production at one of the world's richest diamond mines with potential for significant expansion at A-21



Figure 57: Diavik Project Layout


Three relatively small, but high grade pipes: The Diavik diamond mine began production in January 2003 via open pit, although all three current pipes are now being mined from underground. Most of the historic production has come from A-154 South and A-154 North, while the A-418 pipe began as an open pit in 2008. Throughput has remained relatively constant at approximately 2.4MM tonnes per year as the majority of costs at Diavik are fixed. Diavik is mining some of the highest grade pipes in the world which has allowed for a profitable operation despite the very high operating costs. We estimate costs in the $180/tonne range increasing towards to the $230/tonne range as throughput decreases.

Figure 58: Diavik Mineral Reserves & Estimated Minable Material


The three pipes in production at Diavik are small funnel shaped pipes and are currently being mined via underground (Figure 59). Although small, the pipes are high grade and high value, offering high value rock averaging $425 per tonne. The three pipes are close in proximity and feed a central 2.4MM tpa mill. The fourth pipe A-21 lies approximately 2km to the southwest of the main pipes and is currently being contemplated by operator Rio Tinto.

Diamond Value Tonnes Grade CaratsTonnes Grade CaratsTonnes Grade CaratsZone US$/ct (MM) (cpht) (MM) (MM) (cpht) (MM) (MM) (cpht) (MM)A-154 South Pipe UG 40% $145 2.2 360 7.8 0.0 400 0.1 0.9 353 3.2 A-154 North Pipe UG 40% $190 7.5 210 16.1 2.2 260 5.7 3.9 224 8.7 A-418 Pipe UG 40% $105 6.5 340 22.4 0.3 240 0.7 2.7 340 9.2 A-21 Pipe OP/UG 0% $165 - - - 4.8 277 13.3 - - - Subtotal 16.2 283 46.3 7.4 271 19.8 7.5 281 21.1 Coarse Ore Rejects N/A 40% $50 0.2 270 0.5 - - - 0.1 250 0.2 Diavik, NWT (40%) Total $141 16.4 282 46.8 7.4 271 19.8 7.6 281 21.3

P&P MI&I Total

Steadily declining production as experienced operations wind-down unless A-21 is constructed

Three high grade pipes with a decision on 4th pipe A-21 expected from Rio Tinto by year-end



Mining at Diavik is high cost at $180 per tonne given the remote location, water retention issues and underground mining method.

Figure 59: Diavik Key Pipes


Figure 60: Diavik Pipe Breakdown (LOM Estimate)


Generating reasonable cash flow over the next eight years: We have modeled Diavik based on the current mine plan. As such, we see operations generating about $102MM in net free cash flow per year to Dominion and slowly ramp down to finish at in FY2023 (Figure 61). Coarse ore rejects are being processed in order to maintain mill throughput, keeping costs low. Minimal amounts of capital expenditures are currently planned, we estimate about $7MM in sustaining capex per year. As seen in Figures 61and 62 below, costs are expected to increase as throughput decreases, we estimate costs in the $180/tonne range increasing towards to the $230/tonne range.

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Figure 61: Diavik Gross Carats Produced


Figure 62: Diavik Gross Tonnes Processed


A-21 would significantly expand Diavik's production profile: Rio Tinto is expected to make a construction decision in regards to the A-21 pipe by year end. As seen in Figure 63 below, not only would A-21 generate approximately $65MM in average annual cash flow over its six year mine life, but by filling excess capacity in the Diavik mill, cost per carat produced would decrease significantly in the later years of Diavik's life. We estimate A-21 has the potential to increase Diavik's NAV by 27% or approximately $2.12 per share.

Rio Tinto has yet to give an indication on its intentions for A-21, however Rio Tinto Diamonds & Minerals Division recently reiterated its focus on reducing unit costs and cutting capex from ~$1B in 2012 to ~$500MM in 2015 and further in 2016. A commitment from Rio Tinto is not a foregone conclusion; as such we have not included A-21 in our valuation. Should Rio decide to go ahead with A-21, we estimate $500MM in initial capex ($200MM net to Dominion) resulting in initial production beginning in FY2018 and producing 13MM carats LOM at a grade of 277 cpht and value of $175/ct.

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Proven high grade operation generating approximately $102MM free cash flow per year.

A-21 would lower overall cash costs by almost $50/tonne due to high fixed-cost nature



Figure 63: Diavik Gross Tonnes Processed Including A-21


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RISKS

• Permitting risk: Dominion is not yet permitted for production at Jay, its biggest expansion project. Following construction decisions, which are expected by the end of the year, we would expect permitting to take an additional 9 to 15 months. We expect timely receipt of required permits and do not anticipate any delays as the result of regulatory issues given the long lead time until initial construction. While we have included Jay in our valuation, we note that material risk surrounds production past FY2023.

• Funding risk: Uncertainty remains surrounding Dominion's expansion projects, along with a potential cash outflow surrounding its reclamation liability at Ekati. Although Dominion's balance sheet appears strong with $212MM in cash, $285MM in inventory and $115MM in restricted cash, should the required amount of collateral for Ekati reclamation be larger than $205MM, we would expect the company to require external financing. Jay could conceivably be funded with cash and cash from operations should operations at Misery be in line with our estimates. However, should A-21 be approves, the company would likely require additional capital to fund A-21, Misery and Jay concurrently. The company is virtually debt free, opening itself to the possibility to increase leverage to pay for additional requirements.

• JV Partner risk: At Ekati, Dominion's largest risk in terms of partnership surrounds the upfront capital at Jay. Archon own 31.2% of the buffer zone and should they be unable or unwilling to fund their portion, Dominion would be required to raise the full $800MM initial capital (DCM estimate). Increasing its ownership at Ekati could be positive for Dominion depending on the terms, however inopportune timing could negatively impact Dominion. At Diavik, Dominion is partnered with very strong mine operator Rio Tinto. However as minority owner, Dominion does not have control of operations or expansion or closure plans, all of which could be material to Dominion.

• Production risks: Our valuation is based on a variety of assumptions including production and recovery rates, capital costs, operating costs and mine life backed by technical reports and comparable projects. Specifically, a large portion of operating costs at both Diavik and Ekati are fixed. Should throughput at either operation drop below our estimates, we would expect a negative impact on its costs per tonne estimates and therefore on our NAV estimate.

• Mineral inventory estimates: For producers and developers, there is a risk that production will not reconcile with resource and reserve estimates. Our valuation is predicated on currently available NI 43-101 technical reports as well as recent sales data. Specific to Dominion, we have assumed a 15% grade increase at Ekati based on smaller stone recovery from recent mill amendments, which is in addition to the recent technical reports. We are expecting an updated 43-101 report shortly which should confirm our estimates and reduce this risk.

• Diamond Price Risk: Diamond prices are sensitive to global diamond supply and demand factors as well as the specific shapes, colours, clarity and carat size of diamonds recovered. Fluctuations in either area may lead to fluctuations in financial performance, and deviation from our expectations. We model a CAGR in global diamond values of 2.5% for regular stones. Historically diamond values have been driven by growth in GDP, disposable income and consumer confidence, all of which are improving.

The main risk for Dominion is permitting at Jay & its ability to fund near term capital commitments



MANAGEMENT BIOGRAPHIES

Robert A. Gannicott – Chairman & CEO

Robert Gannicott has over 40 years' experience in the mining industry. Mr. Gannicott was appointed Chief Executive Officer of the Company in September 1999, and was appointed Chairman of the Board in June 2004. A geologist, Mr. Gannicott has worked extensively in the Northwest Territories and Greenland.

Chantal Lavoie – President, Dominion Diamond Ekati Corporation

Chantal Lavoie is President of Dominion Diamond Ekati Corporation. He joined the Company in July 2013. Mr. Lavoie is a mining engineer with more than 25 years of experience in open pit and underground mining including permitting, construction, operation and senior management. He has a deep understanding of remote, northern operating conditions and their inherent physical and social challenges.

Richard Chetwode – VP, Corporate Development

Richard Chetwode is Vice President, Corporate Development. He joined the Company in January 2012. Mr. Chetwode has held a variety of senior investor relations and corporate advisory positions in the mining industry. Prior to joining the Company he was Head of Investor Relations for Gem Diamonds and the De Beers Group.

Brendan Bell – President, Dominion Diamond Holdings Ltd.

Brendan Bell is President of Dominion Diamond Holdings Ltd. and is responsible for External Affairs and Human Resources. He joined the Company in July 2013. Prior to joining the Company, Mr. Bell served eight years in the Northwest Territories Legislative Assembly including terms as Minister Responsible for Energy and Mines, Minister Responsible for the Environment and Minister of Justice and Attorney General in the Government of the Northwest Territories.

Wendy Kei – CFO

Wendy Kei is the Company’s Chief Financial Officer. Having joined the Company in February 2004 as Corporate Controller, she was appointed Chief Financial Officer, Mining in 2011, and to her current position in 2013. Prior to joining the Company, she held various senior management roles with PriceWaterhouseCoopers LLP and Sunoco Inc. Ms. Kei is a Chartered Professional Accountant, Chartered Accountant and a Certified Public Accountant (Delaware).

James R.W. Pounds – Executive VP & President, Dominion Diamond Marketing Corporation

Jim Pounds is Executive Vice President of the Company and President of Dominion Diamond Marketing Corporation. He joined the Company in August 2002 as the Managing Director of the Company’s Belgian subsidiary. Prior to joining the Company, he was Project Manager, De Beers Group following his position as Managing Director, Diamdel Israel, which is De Beers’ direct trading arm in Israel.



DIRECTOR BIOGRAPHIES

Graham Clow has more than 40 years’ experience in all aspects of mine exploration, feasibility, finance, development, construction, operations, and closure. Mr. Clow is the Chairman of the Board of Roscoe Postle Associates Inc. Prior to joining Roscoe Postle Associates Inc., Mr. Clow held senior executive positions, including Chief Executive Officer and operating responsibility for several publicly listed mining companies. He has lived and worked extensively in mining operations in northern Canada.

Robert Gannicott (see Management Biographies)

Nicole Harwerth was former COO if Citibank International PLC and has gained considerable experience in the financial services industry. Prior to that, she served as Chief Tax Officer of Citigroup, Dun & Bradstreet Corporation and Kennecott Copper Corporation where she worked on large complex international mining transactions. Ms. Harwerth currently serves on the board of directors of Royal & Sun Alliance Insurance, Logica Group, Impellam Group PLC, and is Deputy Chairman of Sumitomo Mitsubishi Banking Europe.

Dr. Fiona Perrott-Humphrey is currently a Senior Consultant to global mining companies, particularly in relation to industry trends, capital markets and strategy, with the Rothschild mining team in London.

Daniel Jarvis was previously Vice Chair and CFO of Concert Properties Ltd., a real estate development and investment firm from 2009 to 2011. Prior to 2011, Mr. Jarvis held a number of senior executive positions, including Executive VP and CFO of Intrawest Corporation, CFO of BCE Development Corporation and Treasurer of BCE. Mr. Jarvis serves on the board of several infrastructure, real estate and hospitality companies.

Tom Kenny has 38 years’ experience in bulk commodity transport and logistics in Western and Northern Canada, including most recently as Chairman of RTL Westcan Group of Companies. Mr. Kenny has served on the board of directors for the Canadian Trucking Alliance, and was involved for several years with the Alberta Motor Transport Association, including a term as President.

Ollie Oliveira has over 30 years’ experience in the natural resources and mining industry, corporate finance, and operations and strategy. Mr. Oliveira is currently managing partner of Greengrove Capital LLP and previously held various senior executive positions with Anglo American and De Beers groups, including Executive Director, Corporate Finance, Head of Strategy and Business Development. Mr. Oliveira currently serves on the board of directors of Antofagasta PLC and Ferrous Resources Limited.

The Honourable Chuck Strahl is a former political from British Columbia with extensive experience and understanding of government, regulations, and northern affairs to the Board. While in office, Mr. Strahl served at different times as Minister of Agriculture, Minister of Indian and Northern Affairs, and Minister of Transport and Infrastructure.

Lyle Hepburn has more than forty years of law experience in the general areas of business, corporate and commercial law. Since 1985, his practice has been focused on advising and representing public mining and mineral exploration companies.



Dominion DiamondRating BUY Basic Shares (MM) 85.1 Dundee Capital Markets Dundee Capital MarketsRisk High Diluted Shares (MM) 87.6 Matthew O'Keefe, MSc, MBA Erik BermelTarget Price $20.50 Basic Mkt Cap (MM C$) C$1,297 647-253-1131 647-253-1112Share Price $15.23 Enterprise Value (MM C$) C$1,028 [email protected] [email protected]

OPERATING STATISTICS BALANCE SHEET2014A 2015E 2016E 2017E 2018E 31-Jan (MM US$) 2014A 2015E 2016E 2017E 2018E

Gross Ore Mined 4.9 6.44 6.35 6.35 6.35 AssetsGross Diamonds Prod. (MM cts) 8.6 8.34 7.50 10.53 12.03 Cash and Equivalents $225 $40 $6 $200 $374Net Diamonds Prod. (MM cts) 4.00 4.15 3.86 6.58 7.88 Product Inventory $441 $514 $514 $514 $514Average Grade, net (cpht) 132 93 82 140 174 Other Current $48 $41 $41 $41 $41Rock Value (US$/t) $248 $201 $160 $217 $277 Current Assets $714 $595 $561 $755 $929Diamond Value (US$/ct) $188 $217 $195 $155 $159 Mineral Properties $1,470 $1,486 $1,516 $1,483 $1,538

Restricted Cash/notes $114 $319 $319 $319 $319MINE & FINANCIAL PROFILE Other LT $8 $14 $14 $14 $14Ekati, NWT (~90%) Total Gross Diamonds Recovered (k cts) TOTAL ASSETS $2,305 $2,415 $2,411 $2,572 $2,801

LiabilitiesCurrent debt/debentures $1 $4 $0 $0 $0Long-term debt/debentures $4 $0 $0 $0 $0Future income tax liabilities $243 $226 $226 $226 $226Provision for reclamation $431 $639 $639 $639 $639Other Liabilities $296 $402 $398 $398 $398TOTAL LIABILITIES $974 $1,272 $1,263 $1,263 $1,263LIABILITIES AND EQUITY $2,305 $2,415 $2,411 $2,572 $2,801

INCOME STATEMENT31-Jan (MM US$) 2014A 2015E 2016E 2017E 2018ETotal revenue $752 $900 $752 $1,019 $1,255Operating costs (net dep) $513 $528 $536 $525 $613Depreciation/amort. $138 $210 $185 $196 $201Exploration expenses $15 $28 $3 $3 $3

Diavik, NWT (40%) Total Gross Diamonds Recovered (k cts) Administration & other $49 $36 $35 $35 $35EBITDA $681 $338 $198 $475 $604EBIT $543 $127 $13 $279 $403Interest payments -$27 -$4 $0 $0 $0EBT $516 $124 $13 $279 $403Current Tax expense $36 $58 $12 $118 $174Deferred Income tax expense $0 $0 $0 $0 $0Net earnings (loss) $471 -$141 $0 $162 $229Adjusted net earnings (loss) -$31 -$168 -$20 $142 $229EPS $6.17 -$1.78 $0.00 $2.06 $2.91Average Shares 85.0 86.6 87.4 87.4 87.4

CASH FLOW STATEMENT31-Jan (MM US$) 2014A 2015E 2016E 2017E 2018ENet Income (loss) for the period $471 -$141 $0 $162 $229Depreciation & Amortization $140 $211 $185 $196 $201Other -$451 $199 $0 $0 $0

NET ASSET VALUE Operating Cash Flow $160 $269 $185 $357 $430(C$MM) C$/share Operating CFPS $2.09 $3.43 $2.36 $4.54 $5.46

Ekati, NWT (~90%) $1,461 $16.71 Changes in working capital $6 -$16 $0 $0 $0Diavik, NWT (40%) $697 $7.97 Cash from Operations $166 $253 $185 $357 $430Total Producing Assets $2,158 $24.68 Capital Expenditure -$613 -$190 -$215 -$163 -$256Other Assets $0 $0.00 Other $746 -$55 $0 $0 $0Other & Corporate Adjustments $85 $0.98 Cash from Investing $132 -$245 -$215 -$163 -$256Dominion Diamond Net Asset Value $2,243 $25.66 Equity Financing $0 $0 $0 $0 $0DCF Target Multiple 0.8x Debt repayment/drawdowns -$52 $0 -$4 $0 $0Share Price Target $20.50 Other $2.9 $11 $0 $0 $0

Cash from Financing -$49.0 $11 -$4 $0 $0VALUATION DATARelative F2015E F2016E F2017E F2018E F2019E Change in Cash & Equiv. $234 $21 -$34 $194 $174P/CF 7.3x 4.4x 6.5x 3.4x 2.8x Cash, Beginning of Period $104 $338 $359 $325 $520EV/EBITDA 1.4x 2.7x 4.7x 1.9x 1.5x Cash, End of Period $338 $359 $325 $520 $694P/E na na na 7.6x 4.7x

P/NAV EV/ct EV/Value FCF before financing (CFO+CFI) $292 $24 -$30 $194 $174Dominion Diamond 0.59x $6.83 0.03x Net free cash flow -$499 $63 -$34 $194 $174

Operating CFPS (C$/sh) $2.09 $3.43 $2.36 $4.54 $5.46

DIAMOND RESERVES, RESOURCES TOP SHAREHOLDERSSize Grade Carats Value Institution/Insider Shares Value %

(MMt) (cpht) (MM) (US$/ct) M&G Investment Management Ltd. 16.3 $231 19.2%Diavik, NWT (40%) Total 16.4 282 46.8 $141 Parnassus Investments 4.3 $61 5.1%Ekati, NWT (~90%) Total 17.0 108 18.8 $166 Blue Harbour Group LP 3.2 $46 3.8%Proven & Probable 33.4 194 65.6 $148 Steinberg Asset Management LLC 2.5 $36 3.0%Diavik, NWT (40%) Total 7.4 271 19.8 $141 Connor, Clark & Lunn Investment Management Ltd. 2.0 $28 2.4%Ekati, NWT (~90%) Total 127.5 117 146.5 $166 Total Institutional Ownership 61.2 $867 71.9%Measured, Indicated & Inf. 134.9 125 166.3 $148 Total Insider Ownership 5.4 $77 6.4%

Total 66.6 $944 78.3%

Source: Company reports, Bloomberg, Factset, Dundee Capital Markets estimates

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APPENDIX A - THE DIAMOND MARKET

A Brief History of Diamonds

Diamonds have long been a symbol of wealth, durability, quality and status. Throughout history, the diamond trade has seen its markets expand from royalty to the masses as new sources of supply were discovered. Diamonds were first sourced from alluvial deposits in India and began appearing in European regalia and jewelry in the 13th and 14th centuries. In the 18th century, new supply began to arrive from alluvial deposits in South America at which time diamonds first became abundant in women’s jewelry. The modern diamond industry began in the late 19th century when Cecil Rhodes and Barney Barnato consolidated the first kimberlite discoveries in South Africa to form De Beers Consolidated Mines (named after Diederik and Johannes De Beers, the two Afrikaner farmers who owned the farms that held the deposits). Today, diamond reserves are found in 19 countries around the world (Figure 64).

Figure 64: Global Diamond Reserves

Source: Bain & Co.

The De Beers group shaped today’s diamond market by controlling supply (approaching 90% at one point but today just about 35%) and, more importantly, developing new markets. The best example of this is its launch of one of longest-running and most successful marketing campaigns in history built around the slogan “A Diamond is Forever”. As a result of the campaign, which started in the United States during the 1940's, diamonds became inexorably linked to romantic love and a symbol of lasting commitment. It added mystique and emotional value to the diamond engagement ring. It also reinforced the connection to wealth and status of the rich and famous. The impact was wildly successful, increasing diamond demand in the United States and propelling the country to the largest market in the world for diamond jewelry. The campaign has been so successful that today over 80% of all engagement rings sold include diamonds, up from less than half that in the early 1930s. The story was repeated in Japan in the 1950s supplanting pearls as the romantic gift of choice and is repeating itself again in the emerging markets of China and India. Their combined population of 2.6B people is expected to drive significant growth off a well-established base in the west.

De Beers shaped the diamond industry, controlling supply until the 1980's, but now only controls about 35%



The Diamond Pipeline

The diamond market has a few complexities that differentiate it from precious metals and deserves some understanding for prudent investment. Primarily, diamonds are not a fungible commodity and therefore do not have a spot market; every diamond has different characteristics and a different value. And every diamond mine has a different population of diamonds. For these reasons, there are several unique steps in the pipeline (value chain) between mining a diamond and its final sale as jewelry. The pipeline is illustrated below in Figure 65.

Figure 65: The Diamond Pipeline

Source: Bain & Co.

The mining process is fairly standard with unique geological bodies called kimberlites being the main source. Depending on the mine, some of the best margins along the value chain can be made at this end of the chain. After being mined, the rough diamonds are examined, registered, certified and sealed by a recognized authority as per the Kimberley Process Certification Scheme (discussed below). At sorting facilities mainly in London, Antwerp, Gaborone, Kimberley and Moscow, rough diamonds are classified into thousands of categories based on size, shape, quality and color.

Sorted rough diamonds are then sold to rough diamond dealers or directly to manufacturers where the rough stone is cut and polished to a precious gem. Cutting is a labour intensive industry and is concentrated in centres in India, China, Southern Africa, Belgium, Israel, Russia, Thailand and Vietnam. The polished stones are classified according to the "Four Cs" (cut, colour, clarity and carat weight) and then sold by diamond dealers through diamond trading centres mainly in Antwerp, Tel Aviv, Dubai and New York. The middle of the pipeline is a very fragmented, family oriented business so the rough diamond dealers and manufacturers are often squeezed and work on very skinny margins and high levels of debt.

The polished diamonds are sold to jewelry manufacturers that add significant value through the design and marketing of the final product to be sold. The jewelry industry is also quite fragmented and locally competitive so margins tend to be tight with the large, high-end and well-branded jewelers like Tiffany achieving 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.

Highest operating margins in rough diamond exploration and production



The Kimberley Process - A Long-term Solution

The United Nations defines conflict diamonds as those “that originate from areas controlled by forces or factions opposed to legitimate and internationally recognized government, and are used to fund military action in opposition to those governments, or in contravention of the Security Council”. The popular 2006 film “Blood Diamond”, set in the 1999 in the middle of Sierra Leone’s civil war exemplifies the extreme case but it was this war that really brought attention to the link between conflicts (and blood) to diamonds. In May 2000, diamond-producing states met in Kimberley, South Africa, to discuss ways to stop trade in conflict diamonds and ensure that diamond purchases were not funding violence.

Today, the Kimberley Process ensures that more than 99% of the global production of rough diamonds is certified to be from conflict free sources. The Kimberley Process Certification Scheme is an international government-led cross-sector initiative with 81 countries, which draws on the contribution of both the diamond industry and civil society. States participating in the Kimberley Process have to meet minimum requirements through the enactment of national legislation and ensure relevant institutions meet certain standards and processes. This includes import and export institutions as well as internal controls. Member states must also commit to full and transparent exchange of statistical data. The Kimberley Process Certification Scheme requires rough diamonds to be transported in sealed, tamper-free containers accompanied by forgery-resistant certificates. Issued by the exporting country’s government, each certificate has a unique serial number. They are backed by a system of internal controls in the producing countries, as well as those countries that trade, cut and polish rough diamonds. Canada is of course part of the Kimberly process having the added benefit of a shorter and pristine history relative to more traditional producers. As a result, investors can look to Canadian producers to avoid any past association with conflict stones.

Figure 66: Participating Nations in Kimberley Process (applicants in light green)

Source: Kimberley Process

More than 99% of the global production of rough diamonds is certified to be from conflict free sources



Synthetic Diamonds: A Limited Threat

Although synthetic diamonds comprise about 2% of the gem market, we do not expect synthetics to be a major threat to rough or polished prices, particularly at the higher end of the market. While gem-grade synthetics are typically less expensive than naturally mined diamonds (about 30% comparing a 1-carat white stone on Blue Nile to a comparable stone on Gemesis), they are generally limited to their cut stone size to less than 1.5 carats as the cost to produce high quality diamonds becomes prohibitive with size.

These factors coupled with end-consumers’ desire to own real natural diamonds that were created naturally over a billion years ago (supported by strong marketing campaigns from De Beers and its customers) has limited the emergence of synthetic diamonds as a material threat to the high end gem market. Consider too that despite the fact that synthetic gem-quality rubies and sapphires have been available for nearly 60 years, their availability has not impacted the demand for the natural product or their prices. Coloured synthetic diamonds are easier to produce and now readily available (pink and yellow) in sizes up to 3.5 carat, but these haven't replaced the demand for their natural counterparts either. We do however see a market for synthetics at the low end as accent stones and for coloured stones. There is also a growing business in "Memorial" or "Cremation" diamonds where companies such as Remembrance Diamonds, Life Gem and Phoenix Diamond use the ashes of a passed loved one to make a diamond (specifically, the carbon in the ash). Evidently "As different as human beings are, so as distinct are the tints of the diamonds".

Figure 67: Main Markets for Synthetic Diamonds


The technology to produce synthetic diamonds has been around since the 1950s when General Electric first manufactured diamond for industrial purposes. As it stands today, there are two main methods for creating lab diamonds:

• The high-pressure, high temperature (HTHP) method

• The Chemical Vapor Deposition (CVD) method

Although both methods are capable of producing near flawless diamonds, synthetics can easily be detected using infrared, ultraviolet or X-ray spectroscopic methods. For the most part, synthetic diamonds are used for industrial purposes (machining tools, stone cutting and polishing) due to the level of quality control and customization offered by the technology. But synthetic diamonds are also forming the basis of many new "supermaterials" that benefit from diamond's extreme properties in applications from precision machining to electronics and optics. De Beers has embraced this market with its subsidiary Element Six which is a leader in this space. Currently synthetics comprise about 98% of the industrial diamond market, so while much of the non-gem material from mines finds its way into the industrial market, no mines today are built or operated on that market alone.

Synthetic diamonds comprise of about 2% of the gem market but with growth in technology and niche markets.



SUPPLY & DEMAND: EXPECTING STEADY GROWTH AHEAD

Diamond Demand

Since the beginning of 2013, diamond demand has shown considerable improvement (Figure 68). Specifically, demand from the United States, the largest diamond market has returned to pre-crisis levels with Japan, China and India moving back to long-term trends. Longer term, demand should continue to grow in step with GDP growth, the continued growth of the middle class and the adoption of western traditions such as diamond engagement rings and other bridal gifts. According to Bain & Company, demand for rough diamonds, global rough-diamond demand in value terms should increase at a compound annual rate of 5.1%, to $26 billion in 2023. In the US, diamond demand is expected to grow in-line with overall economic growth (~2.4%), while China and India will grow at a faster rate driven by the rise of the middle class and disposable income. This trend, along with increased consumer confidence, should continue to improve over the longer term.

Figure 68: Global Rough Diamond Demand Forecast

Source: IDEX, Tacy, Ltd, Bain and Co., DCM

Figure 69: Global Real GDP Growth (% Growth Y/Y)

Source: DCM, International Monetary Fund

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Global demand built on steady base of US market, growth driven by rise of the middle class and disposable income in China and India



Figure 70: Consumer Confidence (US & Global)

Source: OECD, DCM

Limited New Supply Coming

Total production of rough diamonds in 2013 was about 131MM carats or US$16.4B. This is down almost 26% from peak production in 2005 of 176.7MM carats. The bulk of gross production in term of carats comes from Russia, Botswana and the DRC while in terms of value the top contributors to the ~$14B rough diamond industry are Botswana, Russia and Canada followed by Angola, South Africa and Namibia.

Figure 71: Global Rough Diamond Supply by Country (MM carats)

Source: Kimberley Process Statistics, Bain & Co., DCM

Diamond production continues to be dominated by just few major suppliers, including Russian giant Alrosa, De Beers and Rio Tinto (Figure 16). However, an abundance of other suppliers and marketing channels established in the last decade has created a competitive environment and although De Beers still wields strong influence, they no longer control diamond prices.

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2004 2005 2006 2007 2008 2009 2010 2011 2012

Angola Australia Botswana Canada DRC Namibia Russia South Africa Zimbabwe Other Total

Consumer confidence has rebound in the US and globally following financial crisis



Figure 72: Major Diamond Producers (2012)

Source: DCM, Bain and Co.

Supply growth estimates see production returning to 150MM carats (+15%) by 2017, with up to 18MM carats from new mines. The bulk of near-term production additions are expected to come from Stornoway’s (SWY-T, BUY, High Risk, C$1.60) Renard project (close to 2MM carats by 2018) and the De Beers/Mountain Province (MPV-T, BUY, High Risk, C$9.00) Gahcho Kué mine (over 4MM carats by 2018). Beyond these two mines and Rio Tinto’s Bunder project in India (which may produce 3.5MM carats by 2016), there is a distinct lack of significant new diamond projects (Figure 73), as most exploration budgets throughout the industry remain tight. As a world class discovery today would likely take 10-12 years to reach initial production, we believe demand is likely to outpace supply from existing mines in the short to medium term.

Figure 73: Rough Diamond Supply Forecast by Producer

Source: Bain and Co., DCM

27%

22%

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2%

38%

Diamond Production By Carats

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De Beers

Rio Tinto

BHP Billiton

Dominion

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22%

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Alrosa

De Beers

Rio Tinto

BHP Billiton

Dominion

Other

Distinct lack of significant new diamond projects after 2018



DIAMOND PRICES - STABILITY RETURNING

The volatility that rocked precious metal prices from 2008 also impacted diamond prices (Figure 74). Rough diamond trading and manufacturing are highly leveraged businesses and as a result, most were forced to liquidate stocks during the 2008 crisis. Liquidation of inventory happened simultaneously and into a very soft market, which drove down prices and all severely impacted demand for rough diamonds.

While retail diamond sales fell by about a third at the end of 2008, sales of rough diamonds by mining companies slumped as much as 70% as wholesalers used up stockpiles. Most large producers implemented temporary production cuts, while many small alluvial operations shut down completely.

As prices have rebound from 2009 lows, credit markets continue to re-open up and cutters have restocked rough diamonds. As the retail market has seen good demand growth, normal growth is returning to the rough diamond market. In 2012, the World average price of diamond production was US$99 per carat and average Canadian production was US$192 per carat, which compares to a typical range between US$90 per carat to US$570 per carat.

Figure 74: Historic Diamond Prices & Estimates

Source: PolishedPrices.com, Bain and Co., DCM

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+5% CAGR +13% CAGR

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Rough diamond prices have increased at a CAGR of 13% since 2009 and 5% over the longer term.

DCM Assuming 2.5% growth per year in diamond prices



Positive Outlook for Prices - Demand Expected To Outpace Supply

In the near-term, supply and demand appear to be in close balance with new production fulfilling the resurgence in growth. Should new supply be delayed or prove un-financeable, demand could quickly outstrip supply. Longer term, the lack of new discoveries should lead to a widening deficit and drive diamond prices higher. Assuming relative stability going forward, we see growth in demand continuing at in line with global GDP growth. The main driver for diamond price growth, as with other luxury goods, is the steady recovery in the global economy. We believe the lack of supply should accelerate prices, particularly for higher quality stones. Producers of larger, higher value stones should see better stronger price increases as demand.

Figure 75: Rough Diamond Supply & Demand Forecast

Source: Bain and Co.

Given the strong moves in recent months (rough prices up approximately 4% YTD) and confidence in the addition of near term production, we see diamond prices growing at a real rate of 2.5% (Figure 74), although we note price increases in excess of 5% could be feasible. De Beers raised its prices by 5% at the start of 2014 and is forecasting this rate annually going forward. Similar forecasts have been given by Alrosa, Petra and Dominion Diamond. This is not bullish or aggressive since, as discussed previously, historically, diamond prices have risen at a CAGR of approximately 4%.

Lack of supply should accelerate prices, particularly for higher quality stones



APPENDIX B: CANADIAN DIAMONDS: A SHORT & SUCCESSFUL HISTORY

Canada’s diamond industry took flight in the late 1980's after prospectors Chuck Fipke and Stewart Blusson discovered the first indicator minerals in the NWT. Careful sampling led to the Lac des Gras area, where extremely high levels of diamond indicator minerals were found, suggesting the location of a diamondiferous kimberlite pipe.

In 1990, flowing the initial staking of 450,000 acres north of Lac de Gras, an agreement was struck between the Blackwater (consisting of Dia Met Minerals Ltd., Charles Fipke and Stewart Blusson) and BHP, where BHP would fund all exploration in order to earn a 51% interest in the project. In 1991, diamonds were discovered at Point Lake, kicking off the largest staking rush in Canadian mining history with some fifty million acres claimed over a two year period. The Point Lake discovery was the first in the Lac des Gras region and led to the development of Ekati, Canada's first diamond mine, which started production in 1998.

Figure 76: Kimberlite Projects in Canada


Aber Diamond Corp, which later became Harry Winston Diamond Corp and Dominion Diamond Corp., developed the second diamond mine in Canada and one of the most successful. Early in the 1990s, Grenville Thomas, who had been prospecting in the Northwest Territories since the mid-1960's, teamed up with the experienced South African diamond geologist Chris Jennings and staked area to the southeast of Lac de Gras. Through their company, Aber Resources, the four rich pipes that would become the Diavik diamond



mine were found. The discovery of the A154S pipe went on to be one of the richest discoveries in the world. The central pipe of the Diavik Diamond mine, with an average grade of 4.8 carats per tonne of high quality stones, would become Dominion Diamond's flagship asset.

The flurry of exploration in the early 1990’s and early 2000’s led to the discovery of several diamond districts across Canada and the construction of 5 mines; Ekati, Diavik, Snap Lake, Victor and Jericho. All are still operating except Jericho, which closed shortly after opening due to a combination of factors including exchange rate, diamond prices and operations. The success at Ekati and Diavik has yet to be repeated, although some promising discoveries were made in the early 2000's by Mountain Province, Ashton Mining (now Stornoway), Peregrine Diamonds and others. Over the past five years many junior explorers and developers disappeared as financing for resources and in particular, exploration, dried up. Revisiting the space today, we believe those companies that remain are generally in possession of the better projects, the highest quality people and best funded management teams.

We believe interest is picking up in the Canadian diamond market again. The recovery of capital markets is seeing risk capital return to the diamond space and two new mines are under construction, the Renard Mine in Québec (SWY-T, BUY, High Risk, C$1.60 target) and Gahcho Kué in the Northwest Territories (MPV-T, BUY, High Risk, C$9.00 target). These two mines were discovered at about the same time as Diavik but only now being developed. Additionally, several developers and explorers appear to be well positioned to deliver the regeneration of Canadian diamond mines over the next few years. Producer Dominion Diamond (DDC-T, BUY, High Risk, C$20.50 target) is mature but in the process of renewing itself and should continue to be the premier Canadian diamond name. Lucara Diamond Corp. (BUY, High Risk, C$3.00 target) has been taken its aggressive Canadian approach back to Botswana where it has demonstrated great success in building and operating Karowe, a former De Beers asset.



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A Research Analyst/Associate involved in the preparation of this research report has visited certain material operations of the following issuer(s): Dominion Diamond Corp. and Lucara Diamond Corp. Matthew O'Keefe viewed Dominion Diamond's Diavik mine. Matthew O'Keefe viewed Lucara Diamond's Karowe mine. Explanation of Recommendations and Risk Ratings Dundee target: represents the price target as required under IIROC Rule 3400. Valuation methodologies used in determining the price target(s) for the issuer(s) mentioned in this research report are contained in current and/or prior research. Dundee target N/A: a price target and/or NAV is not available if the analyst deems there are limited financial metrics upon which to base a reasonable valuation. Recommendations: BUY: Total returns expected to be materially better than the overall market with higher return expectations needed for more risky securities. NEUTRAL: Total returns expected to be in line with the overall market. 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Securities with poor liquidity or high volatility are considered to be High risk. Liquidity and volatility are measured using the following methodology: a) Price Test: All securities with a price <= $3.00 per share are considered high risk for the purpose of this test. b) Liquidity Test: This is a two-tiered calculation that looks at the market capitalization and trading volumes of a company. Smaller capitalization stocks (<$300MM) are assumed to have less liquidity, and are, therefore, more subject to price volatility. In order to avoid discriminating against smaller cap equities that have higher trading volumes, the risk rating will consider 12 month average trading volumes and if a company has traded >70% of its total shares outstanding it will be considered a liquid stock for the purpose of this test. c) Volatility Test: In this two step process, a stock’s volatility and beta are compared against the diversified equity benchmark. Canadian equities are compared against the TSX while U.S. equities are compared against the S&P 500. Generally, if the volatility of a stock is 20% greater than its benchmark and the beta of the stock is higher than its sector beta, then the security will be considered a high risk security. Otherwise, the security will be deemed to be a medium risk security. Periodically, the equity risk ratings will be compared to downside risk metrics such as Value at Risk and Semi-Variance and appropriate adjustments may be made. All models used for assessing risk incorporate some element of subjectivity. SECURITY ABBREVIATIONS: NVS (non-voting shares); RVS (restricted voting shares); RS (restricted shares); SVS (subordinate voting shares). Dundee Capital Markets Equity Research Ratings

As at June 30, 2014 Source: Dundee Capital Markets

73%

24%

3%

35%

12%17%

0%

11%

22%

33%

44%

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Buy Neutral Sell

% of companies covered by Dundee Capital Markets ineach rating category

% of companies within each rating category for whichDundee Capital Markets has provided investment bankingservices for a fee in the past 12 months.

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