Operations / Consolidated Data

Operations Update

2014 Second Quarter

HIGHLIGHTS

Safety: Karowe had one lost time injury during the quarter, resulting in a Lost Time Injury Frequency Rate ("LTIFR") of 0.15 for the 12 months to June 30. LTIFR is the number of lost time injuries multiplied by 200,000 and divided by the number of hours worked.

Cash flows and operating margins: The Company achieved second quarter tender proceeds of $95.0 million ($849 per carat) from sales of 111,902 carats of diamond. This includes proceeds of $24.7 million, which were received after the quarter and will be reported in the Company's third quarter revenues. Total proceeds for the first half of the year were $128.6 million ($586 per carat) from the sale of 219,370 carats of diamond. Total Company proceeds for the half year of $586 per carat at an operating cost of $124 per carat resulted in an operating margin of $462 per carat.

Revenues for the second quarter, excluding the late proceeds of $24.8 million were $71.0 million ($836 per carat). At an operating cost of $132 per carat, the operating margin for the quarter was $704 per carat.

Following the second quarter the Company concluded its second exceptional stone tender in July for proceeds of $40.1 million, which results in full year to date proceeds of $168.6 million at a sales price of $764 per carat. This compares to the Company's 43-101 technical report average price of $394 per carat. These sales tenders excluding the exceptional stone sales have sold for an average sales price of $361 per carat and the exceptional stone tenders have achieved an average sales price of $33,839 per carat for the year.

Net cash position: The Company's quarter-end cash balance was $82.1 million compared to a net debt position of $29.6 million in the previous year and $49.4 million of cash at the end of 2013. The June cash balance of $82.1 million excludes $24.8 million of cash received after the quarter end.

Karowe operating performance: Karowe's operating performance exceeded plan during the period in terms of ore and waste mined and carats recovered. The Company recovered a record number of 252 special stones (+10.8 carats) during the period with an average size of 27.84 carats.

Adjusted Earnings per share: Adjusted earnings per share (see pages 5 and 7 Non-IRFS measures), is $0.10 per share for the three month period ended June 30, 2014 and $0.13 per share for year to date June. Adjusted earnings per share removes the non-cash foreign exchange impact on an intercompany loan between Corporate and Karowe and a deferred tax charge in order to present the current cash distributable on an earnings per share basis. This more accurately reports the Company's distributable profit per share (see select financial information for further detail).


Dividends paid: The Company paid its inaugural semi-annual dividend of 2 cents per share on June 19. The Company is forecast to pay its year-end and special dividend in December. The special dividend will be determined based on revenues generated from the exceptional stone tenders during the year, the Company's financial position and it's expected cash requirements in future periods.

Outlook: The Company has increased its revenue forecast by approximately 60% for the year to between $240-$250 million based on year to date sales, current diamond inventory and its forecast production. The Company has maintained its overall cost outlook for the mine of between $31-$33 per tonne ore processed. The forecast is discussed in the outlook section of the MD&A.

FINANCIAL HIGHLIGHTS
Three months ended
June 30
Six months ended
June 30
In millions of U.S. dollars unless otherwise noted
2014
2013
2014
2013
Revenues (*)
$ 71.0
$ 47.2
$ 103.8
$ 79.7
    Average price per carat sold ($/ct)
836
527
540
345
    Operating expenses per carat sold ($/ct)
132
102
124
92
    Operating expenses per carat sold ($/ct)
704
425
416
253
Net income for the period
15.6
22.7
20.7
28.8
Earnings per share (basic and diluted)
0.04
0.06
0.05
0.08
Adjusted earnings per share (see pages 5
and 7 Non-IRFS measures)
0.10
0.06
0.13
0.08
Cash on hand
82.1
28.5
82.1
28.5
(*) Revenue is presented based on cash receipts received during the period and excludes tender proceeds received after each quarter end. See results of operations (page 3) for reconciliation of revenue and total proceeds for tenders received for each quarter.

2014 First Quarter

HIGHLIGHTS

Safety: Karowe's Lost Time Injuries Frequency Rate ("LTIFR") for the quarter was zero as there were no Lost Time Injury ("LTI's") and no reportable environmental incidents during the period. LTIFR is defined as the total number of work hours lost per 200,000 work hours.

Cash flows and cash operating margins: The Company achieved proceeds of $33.5 million ($312 per carat) from sales of 107,470 carats of diamond during the first quarter of 2014. Proceeds of $750,000 were received after the quarter and will be accounted for in Q2 revenues. The average price of $312 per carat compares to $225 per carat for the first quarter in the prior year. Revenues during the period, which exclude the proceeds received after period end, were $32.8 million for the period.

At an average operating expense of $118 per carat, the cash operating margin during the quarter was $187 per carat.

Net cash position: The Company's quarter-end cash balance was $56.8 million compared to to a net debt position of $26.2 million in the previous year and $49.4 million at the end of 2013. In addition to production costs of $118 per carat the Company spent $1.9 million on Karowe's plant optimization project and paid the December 2013 tender royalty and 2013 employee bonus payments during the quarter.

Karowe operating performance: Karowe performed better than budget in terms ore mined and carats recovered during the period. Waste mining was marginally below budget during the period and plans are in place to meet full year budget volumes. The Company recovered 111,037 carats including 188 special stones (+10.8 carats) during the period.

FINANCIAL HIGHLIGHTS
  Three months ended
March 31
In millions of U.S. dollars unless otherwise noted 2014 2013
Revenue $ 32.8 $ 32.5
      Average price per carat sold  ($/ct) $  305 $  225
      Operating expenses per carat sold ($/ct) 118 86
      Cash operating margin per carat sold ($/ct) 187 139
Net income for the period 5.1 6.2
Earnings per share (basic and diluted) 0.01 0.02
Adjusted earnings per share ((see pages 4 and 6 Non-IRFS measures)) 0.03 0.02
Cash on hand 56.8 17.4

2013 Annual

The following summarizes the Company's current land holdings:

Country Name Interest Held Area (km2)
Botswana Karowe Diamond License 100% 15.3
Lesotho Mothae Diamond Mining Lease 75% 20.0

HIGHLIGHTS

Safety: There were no Lost Time Injury ("LTI's") and no reportable environmental incidents at Karowe during the fourth quarter of 2013. Karowe's full year Lost Time Injuries Frequency Rate ("LTIFR") was 0.17. LTIFR is defined as the total number of work hours lost per 200,000 work hours.

Cash flows, cash operating margins and year end diamond inventory: The Company achieved revenue of $47.9 million ($433 per carat) from sales of 110,635 carats of diamond during the fourth quarter of 2013 including one exceptional stone tender. This excludes revenue of $10.9 million, which was received during the quarter from Karowe's late September tender. At an average operating expense of $109 per carat, the cash operating margin during the quarter was $324 per carat.

Full year sales of 438,717 carats achieved proceeds of $180.5 million, or $411 per carat. The Company achieved a full year cash operating margin of $311 per carat based on operating expenses of $100 per carat. Full year operating cost per tonne milled was $18 compared to budget of $23 per tonne. Attention to cost control and the revenues from exceptional stone tenders have resulted in the Company achieving a full year earnings before deducting interest and other financial charges, income taxes, depreciation and amortization ("EBITDA" see page 7 Non-IFRS measures) of $102.9 million in its first full year of operations.

At year end the Company was well positioned for 2014 with a significant diamond inventory of approximately 67,000 carats of diamond, including a selection of exceptional stones totalling over 1,000 carats. The Company expects to hold its first Exceptional Stone Tender of 2014, early in the second quarter.

Exceptional stone tenders: The Company continued to recover large and exceptional diamonds, resulting in an exceptional stone tender during the quarter achieving revenue of $22.9 million ($20,280 per carat). During 2013 the Company held three exceptional stone tenders achieving revenues of $72.1 million (2,971 carats at $24,290 per carat).

Net cash position: The Company continued to achieve strong cash operating earnings of $39.0 million during the quarter and $118.6 million for the year resulting in a year-end cash balance of $49.4 million. Management expects to use the existing cash resources to finance Karowe's plant upgrade capital expenditure during 2014. At year-end the Company remains debt free with the $25 million Scotiabank credit facility being undrawn.

Karowe operating performance: Karowe exceeded budget in terms of carats recovered and sold and surpassed its initial and updated revenue forecast of $90 million and $118 million respectively due largely to the recovery of its large and exceptional diamonds.

RESULTS OF OPERATIONS

Karowe Mine, Botswana
  UNIT Q4-13 Q3-13 Q2-13 Q1-13 Q4-12
Sales            
Revenues US$m 58.7 42.1 47.2 32.5 29.1
Proceeds generated from sales tenders conducted in the quarter are comprised of: US$m 47.8 50.9 49.3 32.5 29.1
Sales proceeds received during the quarter US$m 58.7 42.1 47.2 32.5 29.1
September tender proceeds received in October US$m (10.9) 10.9 - - -
Sales proceeds received post June period end US$m - (2.1) 2.1 - -
Carats sold for proceeds generated during the period Carats 110,635 80,918 102,452 144,712 100,987
Carats sold for revenues recognized during the period Carats 127,804 76,582 89,619 144,712 100,987
Average price per carat for proceeds generated during the period US$ 433 625 481 225 289
             
Production            
Tonnes mined (ore) Tonnes 918,765 898,501 1,157,747 969,330 701,931
Tonnes mined (waste) Tonnes 1,694,134 1,430,105 1,259,479 1,109,727 1,267,343
Tonnes milled Tonnes 613,064 647,304 560,910 533,260 545,354
Average grade processed cpht (*) 18.9 17.6 15.6 23.1 25.4
Carats recovered Carats 116,061 113,882 87,580 123,228 138,487
             
Costs            
Operating costs per carats sold (see page 7 Non-IRFS measures) US$ 109 110 102 86 84
Capital expenditures US$m 1.5 2.4 1.7 2.2 0.4
             
(*) carats per hundred tonnes            

Operational performance at Karowe was as per forecast for the last quarter of 2013. Tonnes of ore mined were on target, and overall waste stripping was well advanced to access the deeper sections of the ore body in the south lobe as per the life of mine plan. The mine currently has three months of ore exposed providing flexibility of material processed. The process plant performed well during the quarter, and tonnes processed and carats produced were in line with forecast.

The first full year of operations at Karowe was very successful with production and cost targets either being met or exceeded. The 2013 year end target of 440,000 carats recovered was surpassed.

The frequency of special stones (+10.8 carats) recovered during the quarter was significant with 190 stones recovered with an average size of over 26 carats. This included five stones of over 100 carats and a single 281 carat stone. The recovery of specials during 2013 far exceeded expectations with 732 specials recovered with a total weight of over 18,000 carats equating to 4% of annual production. Included in this were 17 stones over 100 carats and 4 stones over 200 carats.

The geological resource update was completed during the quarter, which demonstrated superior value through the recognition of a continued presence of exceptional stones within the centre and south lobes. This is now reflected in the size frequency distributions and an increase in average modeled price to $394 per carat for an indicated mineral resource of 46.2 million tonnes with an average grade of 16 carats per hundred tonnes. The NI43-101 technical report accompanying the resource update was published on February 3, 2014 and can be found at www.sedar.com.

REVIEW OF PROJECTS

Mothae Diamond Project, Lesotho

The Mothae project is located in northeast Lesotho and is a large low grade kimberlite containing a population of large, high value Type IIa diamonds.

The Company is currently reviewing a number of development options for Mothae.

Karowe, Plant Optimization Project

Karowe's plant optimization project to modify the process plant to treat the harder material at depth and improve the recovery of exceptional diamonds is advancing. Orders have been completed for some long lead items, and the project schedule is on track to be complete by year end.

2013 Third Quarter

Karowe Mine - Botswana

Safety: There were no Lost Time Injury ("LTI's") and no reportable environmental incidents at Karowe during the quarter. Karowe's year to date Lost Time Injuries Frequency Rate ("LTIFR") is 0.25. LTIFR is defined as the total number of work hours lost per 200,000 work hours.

Cash flows and cash operating margins: The Company achieved proceeds of $50.9 million ($625 per carat) during the quarter, of which $10.9 million was received in October for its late September tender. At average operating expenses of $110 per carat, the cash operating margin achieved for the quarter was $515 per carat. Sales during the quarter included one tender of over 80,000 carats and its second exceptional stone tender during the quarter.

Full year to date sales of 328,000 carats have achieved proceeds of $132.7 million, or $404 per carat, which exceeds previous full year 2013 revenue guidance. The Company has achieved a year to date cash operating margin of $308 per carat based on operating expenses of $96 per carat.

Exceptional stone tenders: The Company continued to recover exceptional diamonds, resulting in a large stone tender during the quarter achieving revenues of $24.7 million ($24,025 per carat). The Company's two exceptional tenders have contributed $49.3 million ($26,745 per carat) of revenue.

Based on the continued recovery of exceptional stones, the Company is planning a third exceptional stone sale in late November. The sale is planned to include 14 stones with 4 stones in excess of 100 carats.

Net cash position: Third quarter cash flows have significantly strengthened the Company's balance sheet with quarter end cash of $33.6 million and a net cash position (total cash and cash equivalents less short and long term debt) of $17.5m. In early October, this cash position was further strengthened following the receipt of $10.9 million of gross proceeds from its late September tender. The outstanding debenture balance at September 30 of $16.6 million was subsequently repaid after the quarter end, fully repaying the $50 million debenture.

Karowe operating performance: Karowe's mined tonnes and tonnes milled were in line with budget during the quarter. The Company advanced access to deeper sections of the south lobe and currently has three months of exposed ore providing flexibility in terms of process plant feed.

Mothae Diamond Project, Lesotho

The Mothae project is located in northeast Lesotho and is a large low grade kimberlite containing a population of large, high value Type IIa diamonds.

The Company is currently reviewing a number of development options for Mothae.

Exploration and other mining costs

Exploration expenditures and other mining costs relating to the Mothae project were $0.3 million during the third quarter of 2013 compared to $4.5 million during the third quarter of 2012. The decrease in costs during the current quarter compared to the previous year was due to Mothae's Preliminary Economic Assessment work performed last year and the one time redundancy costs incurred as Mothae went into care and maintenance. The Company is currently reviewing a number of development options for Mothae.

2013 Second Quarter

Karowe Mine - Botswana
  • During the second quarter the Company completed its first large and exceptional stone tender along with two regular tenders achieving gross proceeds of $49.3 million (1). Full year to date proceeds are $81.8 million. The diamond sales completed during the second quarter included:

    • Large and exceptional stone tender held in May consisting of 15 single stone lots. All stones were sold for gross proceeds of $24.6 million ($30,184 per carat with a combined weight of 815 carats).
(1) Total proceeds for diamond sales during the quarter were $49.3 million ($485 per carat) resulting in full year to June 30, 2013 proceeds of $81.8 million. Proceeds of $2.1 million or 12,833 carats were collected post June 30, 2013 due to the timing of the June month end sale and therefore not recognized as revenue in the Company's condensed interim consolidated statement of operations resulting in total revenue for the quarter of $47.2 million ($527 per carat). These $2.1 million proceeds were collected in early July and will be recognized as revenues in the third quarter of 2013.

    • The Company's two regular tenders during the second quarter totalled 101,637 carats of diamond, achieving winning bids of $24.7 million or $243 per carat.
    • The average value of run-of-mine diamonds recovered and sold during the quarter was $485 per carat.
  • During the period the Company continued to recover a number of significant gem quality diamonds from its run of mine production. The Company is planning its second exceptional stone tender in September 2013, which will feature 16 single diamond lots, including five diamonds larger than 100 carats and one small pink diamond. Operating costs per carat sold was $102 during the quarter compared to $86 per carat sold in the previous period. The increase is in line with budget and the Company's mine plan and reflects lower grades processed (15.6cpht) as the mine transitioned from the north lobe to the upper benches in the centre lobe as well as the planned increase in ore and waste mined.
  • Cash operating earnings during the second quarter of 2013 (excluding depreciation, amortization and depletion) were $33.3 million or 71% of gross revenue.
Mothae Project - Lesotho
  • The Mothae project remained on temporary care and maintenance during the quarter and the Company is currently reviewing a number of development options for Mothae.
Corporate
  • Cash on hand as at June 30, 2013 was $28.5 million. The Company's $25 million Scotiabank credit facility is currently undrawn.
  • The principal balance of a $50 million debenture was reduced to $33.3 million ($50.0 million at December 31, 2012) with the quarterly $8.3 million payments being made as scheduled at the end of the first and second quarter 2013.
  • Appointment of Mr Paul Day as Chief Operating Officer of the Company based in Gaborone effective April 15, 2013. Mr Day is a mining engineer with over 22 years of operational experience in the sub-Saharan mining industry. During this time Mr Day has been responsible for managing large scale open pit and underground mines as well as being involved in greenfield mine start ups and project development.
Safety
  • There was one Lost Time Injury ("LTI's") and no reportable environmental incidents at Karowe during the quarter. Karowe's Lost Time Injuries Frequency Rate ("LTIFR") was 0.67 for the quarter and is 0.36 for the year. LTIFR is defined as the total number of work hours lost per 200,000 work hours.
INTRODUCTION

The Company is a diamond mining company focused in Africa. The business of the Company consists of the acquisition, exploration, development and operation of diamond properties. The Company's head office is in Vancouver, BC, Canada and its common shares trade on the Toronto Stock Exchange, the NASDAQ OMX First North in Sweden and the Botswana Stock Exchange under the symbol "LUC".

The principal assets of the Company and the focus of the Company's development, exploration activities are its interests in assets in Lesotho and Botswana.

The following summarizes the Company's current land holdings:

Country Project Name and Interest Held Area (km2)
Botswana Karowe Diamond License
(100% interest)
15.3
Lesotho Mothae Diamond Mining Lease
(75% interest)
20.0

Karowe Mine, Botswana
  Unit Q2-13 Q1-13 Q4-12 Q3-12 Q2-12
             
Sales            
Revenues
US$m
$          47.2
$          32.5
$          29.1
$          12.7
$            -
Carats sold
Carats
89,619
144,712
100,987
51,737
-
Average price per carat
US$
527
225
289
245
-
 
Production
Tonnes mined (ore)
Tonnes
1,163,761
968,871
701,931
561,230
337,810
Tonnes mined (waste)
Tonnes
1,259,478
1,109,727
1,267,343
1,240,062
1,566,791
Tonnes treated
Tonnes
560,911
533,918
545,354
594,000
188,328
Average grade processed
cpht
15.6
23.1
25.4
15.4
34.1
Carats produced
Carats
87,580
123,335
138,487
91,476
64,204
 
Costs
 
Operating costs per carats sold
US$
102
86
84
107
-
 
Capital expenditures
US$m
1.7
2.2
0.4
19.9
4.2
 

Tonnes of ore mined ex-pit for the quarter was in line with budget with diamond grade favourable by 5%. Waste mining to access deeper sections of the ore body in the south lobe was according to plan during the period. A drill programme to deliver ten water supply holes was completed with good water yields achieved. Equipping of these boreholes will take place during the second half of the year.

Process plant performance has been in line with expectations with over 30% of the second quarter mill feed being competent ore from the deeper section of the north lobe. Diamonds recovered surpassed budget of 86,523 carats with a total production of 87,580 carats for the quarter. A total of five diamonds in excess of 100 carats were recovered during the second quarter. These diamonds will be sold during the Company's second exceptional stone tender in September 2013.

Mothae Diamond Project, Lesotho

The Mothae project is located in northeast Lesotho and is a large low grade kimberlite which contains a population of large, high value Type IIa diamonds.

Mothae Diamonds (PTY) Ltd. ("Mothae Diamonds"), a subsidiary which is held 75% by the Company and 25% by the Government of Lesotho, holds a 100% interest in the Mothae project. One half of the interest held by the Government (12.5% of the project interest) is a free carried interest and the other 12.5% will ultimately be paid for by the Government through its share of future project dividends. The Company, through a wholly owned subsidiary, is the project operator.

In 2010, the Company commenced a trial mining program to mine and process up to an additional 620,000 dry tonnes of material from various kimberlite domains, which had been identified in the bulk sample program. This trial mining was aimed at providing confirmation of the frequency of occurrence of large, high value diamonds within the principal kimberlite domains of the Mothae pipe, better assess the grade potential of these domains and delineate the tonnage potential and internal geology of the pipe to a depth of 300 meters. To establish the market value of Mothae diamonds, four sealed tender sales were held in March 2011, December 2011, September 2012 and February 2013.

Trial mining on the Mothae project was completed in the fourth quarter of 2012 at which time the plant was put on temporary care and maintenance.

Geological modeling of the Mothae kimberlite was completed in the first quarter of 2013. The final mineral resource table is summarized as follows (2.0 mm bottom screen). The table contains rounded figures. The Company's NI 43-101 Technical Report and Mineral Resource Estimate for the Mothae Diamond Project is available on SEDAR at www.sedar.com.

  Volume (Mm3) Bulk Density (g/cm3) Tonnes (Mt) Grade (cpht) Average Revenue (USD/ct) Average rock value (USD/t) Total Resource (Mct)
               
Total Indicated
1.04
2.29
2.39
3
1,196
34
0.07
Total Inferred
14.37
2.55
36.57
2.7
1,053
28
1.00

Performance during the three months ended June 30, 2013

The Company is currently reviewing a number of development options for Mothae following the completion of its trial mining program.

2013 First Quarter

Karowe Mine - Botswana
  • During the first quarter of 2013 the Company completed two sales totalling 144,712 carats for proceeds of $32.5 million. The 2013 sales included six parcels totalling 18,233 carats, which were withheld from the December 2012 sale due to low volumes of competitive bidding. Excluding the December inventory sold in January, the average sales price for full 2013 production sold was $243 per carat. Total sales forecast for 2013 is 400,000 carats.
  • The Company sold its second blue stone, a 4.77 carat diamond in its March sale for $1.6 million or $341,416 per carat.
  • During the period the Company recovered a number of significant gem quality diamonds from its run of mine production. This includes 6 diamonds in excess of 50 carats and 28 diamonds between 20 and 50 carats. The Company is planning its first large and exceptional stone tender in May, which is in addition to its normally planned tender of over 50,000 carats of diamond. The diamonds which will be sold during the large stone tender can be seen on the Company's website.
  • Operating expenses per carat sold was $86 per carat.
  • Cash operating earnings during the first quarter of 2013 (excluding depreciation, amortization and depletion) was $16.8 million or 52% of gross revenue.
Mothae Project - Lesotho
  • A final sale of Mothae diamonds recovered from the test mining phase was held in February 2013. A total of 2,102 carats of diamond were sold for $918,828 for an average price of $437 per carat representing all unsold diamonds recovered from the Mothae test mining phase.
  • The Mothae project remained on temporary care and maintenance during the quarter and the Company is currently reviewing a number of development options for Mothae.
Corporate
  • Cash on hand as at March 31, 2013 was $17.4 million. This included $4.5 million drawn from the Company's Scotiabank credit facility.
  • The principal balance of a $50 million debenture was reduced to $41.7 million ($50.0 million at December 31, 2012) with the first payment being made as scheduled at the end of the first quarter.
Safety
  • There were no Lost Time Injuries ("LTI's") or reportable environmental incidents at Karowe during the year continuing its excellent safety, health and environment record. There have been over 3.2 million hours worked without any LTI's since March 2011, including 0.3 million hours since the beginning of 2013. Karowe's Lost Time Injuries Frequency Rate ("LTIFR") was zero for the quarter. LTIFR is defined as the total number of work hours lost per 200,000 work hours.
INTRODUCTION

The Company is a diamond mining company focused in Africa. The business of the Company consists of the acquisition, exploration, development and operation of diamond properties. The Company's head office is in Vancouver, BC, Canada and its common shares trade on the Toronto Stock Exchange, the NASDAQ OMX First North in Sweden and the Botswana Stock Exchange under the symbol "LUC".

The principal assets of the Company and the focus of the Company's development, exploration activities are its interests in assets in Lesotho and Botswana.

The following summarizes the Company's current land holdings:

Country Project Name and Interest Held Area (km2)
Botswana Karowe Diamond License
(100% interest)
15.3
Lesotho Mothae Diamond Mining Lease
(75% interest)
20.0

Karowe Mine, Botswana

The Company was granted a mining license in 2008 over the AK6 Diamond Project which is located in central Botswana and is part of the Orapa/Letlhakane kimberlite district, one of the world's most prolific diamond producing areas. The kimberlite consists of three lobes, South, Center and North, of which the South Lobe makes up approximately 75% of the kimberlites' resource potential. The pipe has an area of 4.2 hectares at the surface, which expands to 7 hectares at a depth of 120 meters.

In July 2010, a formal decision was made to proceed with the construction of the AK6 diamond mine. The project has been completed within budget at a cost marginally below the budget of $120 million. In January 2012 the name of the mine was officially changed to the Karowe Mine.

Based on the technical report for the Karowe Mine dated December 31, 2010, the project has an Indicated Resource of 51 million tonnes ("mt") containing an estimated 8.2 million carats ("ct") of diamond. The mine design delineates a Probable Reserve of 36.2 million tonnes of ore, containing an estimated 6.1 million carats of diamond at a 1.5mm bottom cut-off size, in an open pit to a depth of 324 meters. The reserves will be mined over an estimated 15 year life. The process plant has been designed at throughput rate of 2.5 million tonnes per annum ("mtpa").

An independent resource reconciliation was conducted on the 2012 production. In summary 1.82mt of ore was mined of which 1.18mt was processed and 0.73mt was stockpiled. Adjustments to the ore/waste contacts (actual contact positions compared to modelled contact positions) resulted in a net 70,000t added to the Indicated Resource category.

Performance during the three months ended March 31, 2013

During the quarter, the Company successfully conducted two diamond sales totalling 144,712 earning proceeds of $32.5 million.

Modified AG mill discharge ports installed in January 2013 resulted in a 10% throughput improvement when treating hard ore. Further mill optimization test work is continuing to improve mill throughput on hard ore, which material will constitute the bulk of the feed to the mill from 2014 onwards.

The mill treated 0.6 million tonnes in the first quarter of 2013 and produced a total of 123,228 carats of diamond. Average grade processed during the quarter was 22.4 carats per hundred tonnes, which exceeded expectations.

Mothae Diamond Project, Lesotho

The Mothae project is located in northeast Lesotho and is a large low grade kimberlite which contains a population of large, high value Type IIa diamonds.

Mothae Diamonds (PTY) Ltd. ("Mothae Diamonds"), a subsidiary which is held 75% by the Company and 25% by the Government of Lesotho, holds a 100% interest in the Mothae project. One half of the interest held by the Government (12.5% of the project interest) is a free carried interest and the other 12.5% will ultimately be paid for by the Government through its share of future project dividends. The Company, through a wholly owned subsidiary, is the project operator.

In 2010, the Company commenced a trial mining program to mine and process up to an additional 620,000 dry tonnes of material from various kimberlite domains, which had been identified in the bulk sample program. This trial mining was aimed at providing confirmation of the frequency of occurrence of high value diamonds within the principal kimberlite domains of the Mothae pipe, better assess the grade potential of these domains, delineate the tonnage potential and internal geology of the pipe to a depth of 300 meters. To establish the market value of Mothae diamonds, four sealed tender sales were held in March 2011, December 2011, September 2012 and February 2013.

Trial mining on the Mothae project was completed in the fourth quarter of 2012 at which time the plant was put on temporary care and maintenance.

Geological modeling of the Mothae kimberlite was completed in the first quarter of 2013. The final mineral resource table is summarized as follows (2.0 mm bottom screen). The table contains rounded figures. The Company's NI 43-101 Technical Report and Mineral Resource Estimate for the Mothae Diamond Project is available on SEDAR at www.sedar.com.

  Volume (Mm3) Bulk Density (g/cm3) Tonnes (Mt) Grade (cpht) Average Revenue (USD/ct) Average rock value (USD/t) Total Resource (Mct)
               
Total Indicated 1.04 2.29 2.39 3 1,196 34 0.07
Total Inferred 14.37 2.55 36.57 2.7 1,053 28 1.00

Performance during the three months ended March 31, 2013

The Company completed a diamond sale in February 2013. Approximately 2,102 carats of diamond were sold for gross proceeds of $918,828 for an average price of $437 per carat.

The Company is currently reviewing a number of development options for Mothae following the completion of its trial mining program.

2012 Annual

Karowe Mine - Botswana (formerly AK6 Diamond Project)
  • There were no Lost Time Injuries ("LTI's") or reportable environmental incidents at Karowe during the year continuing its excellent safety, health and environment record. There have been over 2.9 million hours worked without any LTI's since March 2011, including 1.8 million hours since the beginning of 2012. Karowe's Lost Time Injuries Frequency Rate ("LTIFR") was zero for 2012. LTIFR is defined as the total number of work hours lost per 200,000 work hours.
  • Commissioning and production ramp-up activities to achieve sustainable production were completed in the third quarter. Ramp-up to full production capacity, which commenced in April, was achieved by August.
  • During the fourth quarter, the mine treated 545,354 tonnes compared to a forecast of 538,242 tonnes, producing 138,487 carats against a forecast of 108,981 carats. During 2012, the mine treated 1.4 million tonnes, 9% above the forecast of 1.27 million tonnes, producing 303,000 carats, which was 12% above the forecast of 271,000 carats. The average recovered grade during the fourth quarter was 25.4 carats per hundred tonnes. The average recovered grade for 2012 was 22.0 carats per hundred tonnes.
Mothae Diamond Project - Lesotho
  • The trial mining program was completed in September with final processing of hard, unweathered kimberlite from the central resource domain of the south lobe of the Mothae kimberlite. This brings the total tonnage sampled from the Mothae kimberlite for economic evaluation purposes to 603,819 dry tonnes yielding an average sample grade of 3.88 carats per hundred tonnes ("cpht").
  • In the fourth quarter of 2012, the x-ray recovery tailings audit of all recovery tailings was completed. The project is now fully transitioned to a small care and maintenance team.
  • The Company is currently reviewing a number of development options for Mothae following the completion of its trial mining program.
INTRODUCTION

The Company is a diamond mining company focused in Africa. The business of the Company consists of the acquisition, exploration, development and operation of diamond properties. The Company's head office is in Vancouver, BC, Canada and its common shares trade on the Toronto Stock Exchange, the NASDAQ OMX First North in Sweden and the Botswana Stock Exchange under the symbol "LUC".

The principal assets of the Company and the focus of the Company's development, exploration activities are its interests in assets in Lesotho and Botswana.

The following summarizes the Company's current land holdings:
Country Project Name and Interest Held Area (km2)
Botswana Karowe Diamond License
(100% interest)
15.3
Lesotho Mothae Diamond Mining Lease
(75% interest)
20.0

Karowe Mine, Botswana (formerly AK6 Diamond Project)

The Company was granted a mining license in 2008 over the AK6 Diamond Project which is located in central Botswana and is part of the Orapa/Letlhakane kimberlite district, one of the world's most prolific diamond producing areas. The kimberlite consists of three lobes, South, Center and North, of which the South Lobe makes up approximately 75% of the kimberlites' resource potential. The pipe has an area of 4.2 hectares at the surface, which expands to 7 hectares at a depth of 120 meters.

In July 2010, a formal decision was made to proceed with the construction of the AK6 diamond mine. The project has been completed within budget at a cost marginally below $120 million. In January 2012 the name of the mine was officially changed to the Karowe Mine.

Based on the technical report for the Karowe Mine dated December 31, 2010, the project has an Indicated Resource of 51 million tonnes ("mt") containing an estimated 8.2 million carats ("ct") of diamond. The mine design delineates a Probable Reserve of 36.2 million tonnes of ore, containing an estimated 6.1 million carats of diamond at a 1.5mm bottom cut-off size, in an open pit to a depth of 324 meters. The reserves will be mined over an estimated 15 year life. The process plant has been designed at throughput rate of 2.5 million tonnes per annum ("mtpa").

Performance during the year ended December 31, 2012

In August, Karowe production exceeded design capacity near month end. Ramp-up to full process plant throughput, therefore, was achieved in a little over four months having overcome water supply and water demand issues. The equipping of additional boreholes added to the water supply, and this was effectively supplemented by return water from the slimes dam. These projects, along with reduced water consumption per tonne treated, as the operations team optimized the autogenous mill operation, enabled the mine to meet and then exceed design capacity within the third quarter.

The mill treated 1.4 million tonnes (9% above forecast) in 2012 and produced a total of 303,000 carats of diamond (12% above forecast). Average grade processed during the fourth quarter of 2012 was 25.4 carats per hundred tonnes. The average grade processed during 2012 was 22.0 per hundred tonnes.

During the year, the Company successfully conducted five diamond sales earning proceeds of $54.6 million. A table reconciling sales proceeds and revenues reported in the Company's statement of operations can be found on page 7. The Company withheld diamonds from the July sale as the rough diamond market softened, especially in the high-color, high-quality diamond categories. This was due to the diamonds not being offered a competitive price for the quality of goods on sale. These diamonds were then sold in September for an improved price. The sales in June and July were conducted with client viewings being held in Gaborone. For the last three sales in 2012, viewings were held in both Gaborone and Antwerp increasing the client base substantially. In the December sale the Company withheld diamonds in the small size categories due to low bidding volume. These were sold in the first sale of 2013.

The Karowe Mine was officially opened by the President of Botswana, His Excellency Lieutenant General Seretse Khama Ian Khama on August 17, 2012 by which time the process facilities had ramped up to design capacity and the Company had successfully conducted two diamond sales.

Mothae Diamond Project, Lesotho

The Mothae project is located in northeast Lesotho and is a large low grade kimberlite which contains a significant population of large, high value Type IIa diamonds.

Mothae Diamonds (PTY) Ltd. ("Mothae Diamonds"), a subsidiary which is held 75% by the Company and 25% by the Government of Lesotho, holds a 100% interest in the Mothae project. One half of the interest held by the Government (12.5% of the project interest) is a free carried interest and the other 12.5% will ultimately be paid for by the Government through its share of future project dividends. The Company, through a wholly owned subsidiary, is the project operator.

Between February 2008 and December 2009, the Company conducted an 82,000 dry tonne bulk sample program to make an initial assessment of the nature of the diamond population contained within the Mothae kimberlite, to evaluate the grade potential of the pipe and to make a preliminary assessment of tonnage potential.

In 2010, the Company commenced a trial mining program to mine and process up to an additional 620,000 dry tonnes of material from various kimberlite domains, which had been identified in the bulk sample program. This trial mining was aimed at providing confirmation of the frequency of occurrence of high value diamonds within the principal kimberlite domains of the Mothae pipe, better assess the grade potential of these domains, delineate the tonnage potential and internal geology of the pipe to a depth of 300 meters. To establish the market value of Mothae diamonds, three sealed tender sales were held in March 2011, December 2011 and September 2012.

Performance during the year ended December 31, 2012

Trial mining on the Mothae project was completed in the fourth quarter of 2012.

The following table summarizes all kimberlite material processed from the Mothae pipe through to completion of the trial mining program:
Fiscal Period Wet Tonnage Dry Tonnage Stones Carats* Ave Stn Size (ct/stone) Dry Grade (cpht)*
Pre 2010 99,959 82,328 8,894 3,873.21 0.44 4.68
FY 2010 160,686 137,578 8,753 3,659.58 0.42 2.66
FY 2011 240,652 206,998 20,368 9,521.59 0.47 4.60
FY 2012 194,641 176,915 14,002 6,391.44 0.46 3.61
TOTALS 695,938 603,819 52,017 23,445.82 0.45 3.88
*All diamond recoveries and grades are reported at a bottom cut-off size of 2.0mm

Tonnage estimates are based on daily plant weightometer readings and moisture content measurements to determine a dry tonnage estimate. The process plant was operated at a 2.0mm bottom cut-off size for diamond recovery. Diamond recovery and characterization work was carried out by Mothae Diamonds sorting staff with recovery results being monitored and reported by Remote Exploration Services, also under contract to Mothae Diamonds.

The Company completed a diamond sale on September 2012. A total of 4,657 carats of diamond were sold for gross proceeds of $1.5 million for an average price of $324 per carat. The sale which took place in Antwerp consisted of 32 lots of which 26 were sold on a sealed tender basis.

Subsequent to year-end, the Company completed a diamond sale in February 2013. Approximately 2,100 carats of diamond were sold for gross proceeds of $900,000 for an average price of $437 per carat.

Work on the PEA of the Mothae kimberlite during the year included:
  • development of a provisional resource model for the Mothae kimberlite. The model is currently subject to review by an independent Qualified Person (as defined by NI43-101) who will prepare an Independent Technical Report on the Motahe resource. This report will be filed on SEDAR in the second quarter of 2013.
  • development of a provisional mine design and mine plan.
  • finalization of conceptual layouts for site infrastructure, and
  • preliminary estimation of costs for various design options and infrastructure development.
The Company is currently reviewing a number of development options for Mothae following the completion of its trial mining program.

2012 Third Quarter

Land status

The following summarizes the Company's current land holdings:

Country Project Name and Interest Held Area (km2)

Botswana

Karowe Diamond License
(100% interest)

15.3

Lesotho

Mothae Diamond Mining Lease
(75% interest)

20.0

Karowe Mine, Botswana (formerly AK6 Diamond Project)

The Company was granted a mining license in 2008 over the AK6 Diamond Project which is located in central Botswana and is part of the Orapa/Letlhakane kimberlite district, one of the world’s most prolific diamond producing areas. The kimberlite consists of three lobes, South, Center and North, of which the South Lobe makes up approximately 75% of the kimberlites’ resource potential. The pipe has an area of 4.2 hectares at the surface, which expands to 7 hectares at a depth of 120 meters.

In July 2010, a formal decision was made to proceed with the construction of the AK6 diamond mine.  The project has been completed within budget at a cost marginally below $120 million. In January 2012 the name of the mine was officially changed to the Karowe Mine.

The project has an Indicated Resource of 51 million tonnes (“mt”) containing an estimated 8.2 million carats (“ct”) of diamond. The mine design delineates a Probable Reserve of 36.2 million tonnes of ore, containing an estimated 6.1 million carats of diamond at a 1.5mm bottom cut-off size, in an open pit to a depth of 324 meters. The reserves will be mined over an estimated 15 year life. The process plant has been designed at throughput rate of 2.5 million tonnes per annum (“mtpa”).

In August, Karowe production exceeded design capacity on several shifts. Ramp-up to full process plant throughput, therefore, was achieved in a little over four months having overcoming water supply and water demand issues. In September, 233,507 tonnes were processed which was 14% above design capacity. For the quarter, a total of 594,000 tonnes were milled producing 91,480 carats.

The mine dewatering projects were well advanced during the third quarter. The equipping of additional boreholes added to the water supply, and this was effectively supplemented by return water from the slimes dam. These projects, along with reduced water consumption per tonne treated, as the operations team optimized the AG mill operation, enabled the mine to meet and then exceed design capacity within the third quarter.  In October, for the first time since start-up, primary, fresh kimberlite was mined and processed.  This competent ore impacted the mill throughput as it takes longer to breakdown than the weathered ore.  Mill operational optimisation work is ongoing to achieve sustained design tonnage throughput.

During the quarter, the mine successfully conducted two sales earning proceeds of $19.9 million. The Company withheld goods from the July sale as the rough diamond market softened, especially in the high-color, high-quality diamond categories. This was due to the diamonds not being offered a competitive price for the quality of goods on sale. For the September sale, viewings were held in both Gaborone and Antwerp increasing the client base substantially. All goods withheld in the July sale were sold in September.  Viewings for the September sale were held in both Gaborone and Antwerp, which resulted in three times the number of people attending viewings compared to viewings being held solely in Gaborone in June and July.

The Karowe Mine was officially opened by the President of Botswana, His Excellency Lieutenant General Seretse Khama Ian Khama on August 17, 2012 by which time the process facilities had ramped up to design capacity and the Company had successfully conducted two diamond sales.

There were no LTI’s or reportable environmental incidents at Karowe during the quarter continuing its excellent safety, health and environment record. There have been over 2.5 million hours worked without any LTI’s since March 2011, including 1.3 million hours since the beginning of 2012. The Karowe Mine has an LTIFR of 0.07.

Mothae Project, Lesotho

The Mothae project is located in northeast Lesotho and is a large low grade kimberlite which contains a significant population of large, high value Type IIa diamonds.

Mothae Diamonds (PTY) Ltd. (“Mothae Diamonds”), a subsidiary which is held 75% by the Company and 25% by the Government of Lesotho, holds a 100% interest in the Mothae project. One half of the interest held by the Government (12.5% of the project interest) is a free carried interest and the other 12.5% will ultimately be paid for by the Government through its share of future project dividends. The Company, through a wholly owned subsidiary, is the project operator.

Between February 2008 and December 2009, the Company conducted an 82,000 dry tonne bulk sample program to make an initial assessment of the nature of the diamond population contained within the Mothae kimberlite, to evaluate the grade potential of the pipe and to make a preliminary assessment of tonnage potential.

In 2010, the Company commenced a trial mining program to mine and process up to an additional 620,000 dry tonnes of material from various kimberlite domains, which had been identified in the bulk sample program. This trial mining was aimed at providing confirmation of the frequency of occurrence of high value diamonds within the principal kimberlite domains of the Mothae pipe, better assess the grade potential of these domains, delineate the tonnage potential and internal geology of the pipe to a depth of 300 meters and generally, provide sufficient technical information needed to complete a Preliminary Economic Assessment (“PEA”) of the Mothae kimberlite. To establish the market value of Mothae diamonds, three sealed tender sales were held in March 2011, December 2011 and September 2012.

The trial mining program was completed in September 2012. A small team remains on site into the fourth quarter to reprocess x-ray recovery tailings through the Bourevestnik X-ray unit as an audit of process plant recovery efficiencies. Otherwise, the project has been put on care and maintenance as work continues on completion of the PEA.

Performance during the three and nine months ended September 30, 2012

The Company completed a diamond sale on September 14, 2012. A total of 4,657 carats of diamond were sold for gross proceeds of $1.5 million for an average price of $324 per carat. The sale consisted of 32 lots of which 26 were sold on a sealed tender at the offices of Bonas-Couzyn in Antwerp.

Trial mining continued in the central portion of the south lobe of the Mothae kimberlite, and focused on extraction of a sample of fresh, unweathered kimberlite from the south central domain to determine diamond grade and liberation characteristics of this material as compared to the overlying soft, weathered kimberlite. Samples F3A, CD1B and CD1C were completed during the quarter.

Sample F3A consists of material in a geologic transition zone between the west resource domain and the central resource domain of the south lobe of the Mothae pipe. This sample was processed primarily to gain mining access to the central resource domain and also to provide additional diamond size, grade and value data. F3A produced 365.91 carats of diamond from 7,659 dry tonnes of kimberlite for an average sample grade of 4.78 cpht and had an average stone size of 0.63 carats per stone.

Sample CD1B consists of central domain kimberlite in the transition zone between overlying soft weathered kimberlite and underlying hard unweathered kimberlite. CD1B produced 2,936.74 carats of diamond from 52,559 dry tonnes of kimberlite for an average sample grade of 5.59 cpht and had an average stone size of 0.44 carats per stone.

Sample CD1C consists of hard fresh kimberlite from the central resource domain of the Mothae pipe and is representative of the bulk of the central domain resource in terms of processing and diamond liberation characteristics. CD1C yielded 262.07 carats from 5,563 dry tonnes of kimberlite for an average sample grade of 4.71 cpht and had an average stone size of 0.50 carats per stone. This sample was the final kimberlite material processed in the trial mining program.

The following table summarizes all kimberlite material processed from the Mothae pipe through to completion of the trial mining program:

Fiscal Period
Wet Tonnage
Dry Tonnage
Stones
Carats*
Ave Stn Size (ct/stone)
Dry Grade (cpht)*
Pre 2010
99,959
82,328
8,894
3,873.21
0.44
4.68
FY 2010
160,686
137,578
8,753
3,659.58
0.42
2.66
FY 2011
240,652
206,998
20,368
9,521.59
0.47
4.60
Q1 - Q2 2012
131,364
118,793
6,786
3,191.74
0.47
2.69
Q3 2012
63,277
58,122
7,216
3,199.70
0.44
5.51
TOTALS
695,938
603,819
52,017
23,445.82
0.45
3.88

*All diamond recoveries and grades are reported at a bottom cut-off size of 2.0mm

Tonnage estimates are based on daily plant weightometer readings and moisture content measurements to determine a dry tonnage estimate. The process plant was operated at a 2.0mm bottom cut-off size for diamond recovery. Diamond recovery and characterization work was carried out by Mothae Diamonds sorting staff with recovery results being monitored and reported by Remote Exploration Services, also under contract to Mothae Diamonds.


 

2012 Second Quarter

Land status

The following summarizes the Company's current land holdings:

Country Project Name and Interest Held Area (km²)
Botswana Karowe Diamond License
(100% interest)
15.3
Lesotho Mothae Diamond Mining Lease
(75% interest)
20.0

Karowe Mine, Botswana

The Company was granted a mining license in 2008 over the AK6 Diamond Project which is located in central Botswana and is part of the Orapa/Letlhakane kimberlite district, one of the world's most prolific diamond producing areas. The kimberlite consists of three lobes, South, Center and North, of which the South Lobe makes up approximately 75% of the kimberlites' resource potential. The pipe has an area of 4.2 hectares at the surface which expands to 7 hectares at a depth of 120 meters.

In July 2010, a formal decision was made to proceed with the construction of the AK6 diamond mine. The project has been completed within budget at a cost marginally below $120 million.

The project has an Indicated Resource of 51 million tonnes ("mt") containing an estimated 8.2 million carats ("ct") of diamonds. The mine design delineates a Probable Reserve of 36.2 million tonnes of ore, containing an estimated 6.3 million carats of diamonds at a 1.5mm bottom cut-off size, in an open pit to a depth of 324 meters. The reserves will be mined over an estimated 15 year life. The process plant has been designed at throughput rate of 2.5 million tonnes per annum ("mtpa").

Performance during the three and six months ended June 30, 2012

The Karowe mine transitioned from construction to commissioning in the second quarter of 2012, with its first diamond being recovered on April 4.

During the month of April, production commissioning activities commenced and 30,000 tonnes of kimberlite were treated yielding 10,200 carats. Commissioning and testing continued through May and June with 19,062 carats and 35,007 carats being recovered respectively. Commercial production commenced on July 1.

During this period, it was identified that the material characteristics of the weathered ore differed from that modeled at the design stage impacting commissioning and ramp-up to full production. Water consumption per tonne treated, therefore, has been much higher than expected. Projects have been initiated to increase water supply from the dewatering wells and to reduce water consumption per tonne treated. By the end of the second quarter, the process plant was milling consistent tonnage on a daily basis.

The production plan for 2012 has been reforecast taking cognizance of the ore feed and water balance. The forecast for the second half of 2012 anticipates the treatment of 1.02 million tonnes and the yield of 208,010 carats. Total production for 2012 is expected to be approximately 270,000 carats. The mine plan includes waste stripping and stockpiling of lower grade ore to access better grade ore and ensure sustainable operations into 2013. The Company is forecasting to achieve design capacity during Q1 2013.

The mine continued its excellent safety, health and environment record during the second quarter as the mine transitioned to operations and site responsibility transferred to Karowe staff. Since the beginning of the year, 1.06 million hours have been worked without any loss time injuries. There have been over 2.25 million hours worked since the only LTI recorded at Karowe during March 2011 (LTIFR is 0.09).

The mine's inaugural diamond sale was conducted in June. There were 35 lots totalling 29,339 carats of which 30 lots were sold for gross total proceeds of $5.6 million or $215 per carat. As the Company was in pre-commercial production the proceeds of $5.6 million was allocated to reduce plant and equipment accounts during the six months to June 30, 2012. Karowe's second sale on July 16, 2012, included a total of 35 individual lots containing 36,842 carats of diamond, of which 32 lots were sold for gross total proceeds of $US 6.5 million or $179 per carat. The bidding for high-color, high-quality diamonds was particularly soft and three lots of these goods were withdrawn from the sale.

Mothae Diamond Project, Lesotho

The Mothae project is located in northeast Lesotho and is a large low grade kimberlite which contains a significant population of large, high value Type IIa diamonds.

Mothae Diamonds (PTY) Ltd. ("Mothae Diamonds"), a subsidiary which is held 75% by the Company and 25% by the Government of Lesotho, holds a 100% interest in the Mothae project. One half of the interest held by the Government (i.e. 12.5% of the project interest) is a free carried interest and the other 12.5% will ultimately be paid for by the Government through its share of future project dividends. The Company, through a wholly owned subsidiary, is the project operator.

In 2010, the Company commenced a trial mining program, based on results from a 100,000 tonne bulk sample completed in 2009. The trial mining program is designed to sample and process up to an additional 620,000 wet tonnes of kimberlite from various kimberlite domains identified within the pipe to confirm the occurrence of high value Type IIa diamonds and to better assess the economic potential of the Mothae kimberlite. Sealed tender diamond sales are being undertaken to establish diamond value. In 2011, diamond sales were conducted in March and December.

Performance during the three and six months ended June 30, 2012

Mining was conducted in the central portion of the south lobe, exposing fresh, unweathered kimberlite, which will be tested to determine the comminution and liberation properties of the material. This kimberlite makes up the majority of the potential resource at Mothae. Sample C11C was completed in the second quarter of 2012 and consists of unweathered kimberlite from the west resource domain of the south lobe of the Mothae kimberlite.

Table 1 summarizes trial mining results, together with prior bulk sample results as of June 20, 2012. The bottom cut-off size for diamonds recovered at Mothae is 2.0mm; diamond grade and diamond size information reported in Table 1 is for diamonds greater than 2.0mm.

Samples C11A and C11C were completed during the quarter and sample F3A commenced. Sample C11A consists of kimberlite in the transition zone between weathered kimberlite and fresh kimberlite in the west resource domain of the south lobe of the Mothae pipe. This sample yielded 1,907.59 carats of diamond from 68,110 dry tonnes of kimberlite for a sample grade of 2.80 carats per hundred tonnes ("cpht") and an average stone size of 0.44 carats per stone.

Sample C11C consist of fresh, unweathered kimberlite from the west resource domain of the south lobe of the Mothae pipe and is positioned directly below sample C11A. C11C produced 474.18 carats of diamond from 23,078 dry tonnes of kimberlite for an average grade of 2.05 cpht and an average stone size of 0.51 cpht. The reduction in relative grade and increase in relative stone size in sample C11C as compared to C11A is a result of reduced liberation of small diamonds from hard, unweathered kimberlite in the comminution processes.

Sample F3A consists of material in a geologic transition zone between the west resource domain and the central resource domain of the south lobe of the Mothae pipe. This sample was processed to gain additional diamond size, grade and value data, and to develop access to fresh, unweathered kimberlite in the central resource domain of the pipe.

Table1. Mothae Bulk Sample and Trial Mining Results as of June 20, 2012

FISCAL PERIOD SAMPLE ID Wet Tonnage Moisture % Dry Tonnage Stones Carats* AVE* Stone Size (CPS) Dry* Grade (CPHT)
Bulk Sample Program
   99,959 17.6 82,838 8,899 3,873.21 0.44 4.68
Trial Mining
FY 2010   160,693 15.2 136,231 8,753 3,659.58 0.42 2.69
FY 2011   240,586 14.9 204,822 20,371 9,523.06 0.47 4.65
 
Q1 2012 E2A 18,115 13.2 15,720 631 329.06 0.52 2.09
Q1/Q2 2012 C11A 75,473 9.8 68,110 4,373 1,907.59 0.44 2.80
Q2 2012 C11C 24,550 6.0 23,078 933 474.18 0.51 2.05
Q2 2012 F3A 8,799 9.8 7,936 585 365.91 0.63 4.61
FY 2012 YTD   126,937 9.5 114,844 6,522 3,076.74 0.47 2.68
 
Project to Date   628,175 14.2 538,735 44,545 20,132.59 0.45 3.74

* All diamond recoveries and grades are reported at a bottom cut-off size of 2.0mm

Tonnage estimates are based on daily plant weightometer readings and moisture content measurements to determine a dry tonnage estimate. The process plant is being operated by Minopex under contract to Mothae Diamonds and operates at a 2.0mm bottom cut-off size for diamond recovery. Diamond recovery and characterization work is carried out by the Mothae Diamonds diamond sorting staff with recovery results being monitored and reported by Remote Exploration Services, also under contract to Mothae Diamonds.

A delineation drilling program was completed in the first quarter of 2012 and consisted of 5,630 meters of core drilling in 31 holes. Evaluation and analysis of the core was carried out during the second quarter to assess the tonnage potential of the Mothae pipe to a depth of 300 meters and to model the internal geology of the pipe. Interpretation of the overall pipe shape to 300 meters depth was completed in the second quarter. This drill information will be used to define the resource model for the Preliminary Economic Assessment which will be completed in the fourth quarter this year.

Work on interpreting the internal geology of the Mothae pipe is ongoing and is expected to be used to model the pipe's resource potential. This work is expected to be completed in the fourth quarter of 2012.

Work on the preliminary economic assessment of the Mothae kimberlite during the quarter focused primarily on:

  • systematic data collection from processing hard kimberlite as input for process plant design,
  • ore dressing studies (ODS) of the west resource domain of the south lobe of the pipe for determination of additional plant design parameters,
  • drill core logging and interpretation to assess the pipe's tonnage potential to a depth of 300 meters, and
  • site layout and infrastructure review, including water and power options.

Work on the Preliminary Economic Assessment is expected to continue through the third quarter and is expected to be complete during the fourth quarter of 2012.

2012 First Quarter

Land status

The following summarizes the Company's current land holdings:

Country Project Name and Interest Held Area (km²)
Botswana Karowe Diamond License
(100% interest)
15.3
Lesotho Mothae Diamond Mining Lease
(75% interest)
20.0

Karowe Mine, Botswana

The Company was granted a mining license in 2008 over the AK6 Diamond Project which is located in central Botswana and is part of the Orapa/Letlhakane kimberlite district, one of the world's most prolific diamond producing areas. The kimberlite consists of three lobes, South, Center and North, of which the South Lobe makes up approximately 75% of the kimberlites' resource potential. The pipe has an area of 4.2 hectares at the surface which expands to 7 hectares at a depth of 120 meters.

In July 2010, a formal decision was made to proceed with the construction of the AK6 diamond mine which is estimated to require a capital investment of approximately $120 to $130 million (based on a ZAR/USD exchange rate of R7.53), which includes the process plant and all mine site and off-site infrastructures. In December 2011, the AK6 diamond mine was renamed to the Karowe Mine.

The project has an Indicated Resource of 51 million tonnes ("mt") containing an estimated 8.2 million carats ("ct") of diamonds. The mine design delineates a Probable Reserve of 36.2 million tonnes of ore, containing an estimated 6.3 million carats of diamonds at a 1.5mm bottom cut-off size, in an open pit to a depth of 324 meters. The reserves will be mined over an estimated 15 year life. The process plant has been designed at throughput rate of 2.5 million tonnes per annum ("mtpa"). Diamond recovery is estimated at approximately 400,000 carats per year at a November 2011 diamond price of $301/ct.

Performance during the three months ended March 31, 2012

In the first quarter of 2012, activities across engineering, procurement, construction and the development of the operations team advanced the project such that construction was sufficiently complete to allow integrated ore commissioning activities to commence in early April.

During the first quarter, all unit processes had been run individually at, or above, design capacity. More than 5,000t of ore was processed through the front-end of the plant (primary crusher to stockpile). Mining activities concentrated on waste stripping (1.5 million tonnes in the first quarter) once the ore stockpile had been built up to 280,000t. In addition to the ore stockpile, production benches were prepared and ready to feed ore directly to the processing plant.

As at March 2012, the project had achieved over 1,500,000 hours without a lost time injury (LTI) and no environmental incidents have been recorded.

The operations team comprising Karowe staff, mining contractor (Kalcon) and process plant contractor (Minopex) staffed up during the first quarter.

Commissioning activities at the Karowe mine were completed during April 2012 and the process facilities have been handed-over to operations. Ramp-up to full production is in progress with a target of 50% of the design throughput during May and 75% in June. At the end of the second quarter the operations are expected to be operating, as scheduled, at the full design capacity of 350 tonnes per hour.

In the sales and marketing offices in Gaborone, the security systems and the stock control systems were installed and commissioned and the facilities are now ready to receive diamonds from the Karowe mine.

The first Karowe sale is forecast in June, with five additional sales scheduled during the year.

Mothae Diamond Project, Lesotho

The Mothae project is located in northeast Lesotho and is a large low grade kimberlite which contains a significant population of large, high value Type IIa diamonds.

Mothae Diamonds (PTY) Ltd. ("Mothae Diamonds"), a 75% owned subsidiary of the Company, holds a 100% interest in the Mothae project. The other 25% is owned by the Government of Lesotho. The Company, through a wholly owned subsidiary, is the project operator. One half of the project interest held by the Government (i.e. 12.5% of the project interest) is a free carried interest and the other 12.5% will ultimately be paid for by the Government through its share of future project dividends.

In 2010, the Company commenced a trial mining program, based on results from a 100,000 tonne bulk sample completed in 2009. The trial mining program is designed to sample and process up to an additional 620,000 wet tonnes of kimberlite from various kimberlite domains identified within the pipe to confirm the occurrence of high value Type IIa diamonds and to better assess the economic potential of the Mothae kimberlite. Sealed tender diamond sales are being undertaken to establish diamond value. In 2011, diamond sales were conducted in March and December.

Performance during the three months ended March 31, 2012

Mining was conducted in the central portion of the south lobe, exposing fresh, unweathered kimberlite, which will be tested to determine the comminution and liberation properties of the material. This kimberlite makes up the majority of the potential resource at Mothae. Sample C11A commenced in mid-January and exaction and processing is ongoing. Summary tonnage and grade results for the trial mining program are shown in the following table:

Table1. Mothae Trial Mining Results as of March 31, 2012

Fiscal Period Bulk
Sample
Wet Tonnage Dry
Tonnage
Stones Carats* Average Stone Size
(cts/stone)
Dry Grade
(cpht)*
2010 F1D 1,769 1,592 111 77.65 0.70 4.88
C4A 33,785 29,649 1,458 759.23 0.52 2.56
C5A 58,427 48,542 3,133 1,120.07 0.36 2.31
C6A 8,122 7,296 529 260.50 0.49 3.57
C8A 58,590 49,152 3,522 1,442.13 0.41 2.93
2011 C9A 47,797 40,370 3,841 1,940.71 0.51 4.81
G2A 40,185 33,691 4,256 1,909.78 0.45 5.67
F2A 59,692 50,181 4,083 1,979.66 0.48 3.95
G2B 25,931 22,689 3,022 1,286.89 0.43 5.67
G3A 34,497 29,874 3,722 1,654.70 0.44 5.54
C7A 21,287 18,425 875 403.20 0.46 2.19
C6B 11,215 9,592 572 348.02 0.61 3.63
Q1 2012 E2A** 18,115 15,720 631 329.06 0.52 2.09
C11A*** 61,990 55,514 2,736 1,411.96 0.52 2.54
  Totals 481,402 412,287 32,491 14,923.56 0.46 3.62

* All diamond recoveries and grades are reported at a bottom cut-off size of 2.0mm
** About 3,500t of sample E2A was processed in December 2011.
*** Sample C11A is ongoing. Final results will be reported when this sample is completed.

Tonnage estimates are based on daily plant weightometer readings and moisture content measurements to determine a dry tonnage estimate. The process plant is being operated by Minopex under contract to Mothae Diamonds and operates at a 2.0mm bottom cut-off size for diamond recovery. Diamond recovery and characterization work is carried out by the Mothae Diamonds diamond sorting staff with recovery results being monitored and reported by Remote Exploration Services, also under contract to Mothae Diamonds.

The delineation drilling program which commenced in the fourth quarter of 2011 was completed during the quarter. A total of 31 holes were completed totalling 5,630 meters. Delineation drilling to define the internal geology of the Mothae pipe and to define the kimberlite volume to a depth of 320 meters comprised 26 core holes. In addition to these core holes, five holes were drilled for mining and civil geotechnical evaluation. Information from this drilling campaign is being interpreted to develop an updated geologic and resource model for the Mothae kimberlite.

Work on the preliminary economic assessment of the Mothae kimberlite during the quarter focused primarily on planning for detailed ore dressing studies (ODS) of the main kimberlite facies within the pipe. Core samples from the delineation drilling program have been collected and submitted for preliminary metallurgical analysis. In addition to this, approximately 15,000t of fresh, unweathered kimberlite from sample C11A have been stockpiled and will be processed through the Mothae plant early in the second quarter of 2012 to determine milling characteristics and diamond liberation requirements for this material.

2011 Annual

Land status

The following summarizes the Company's current land holdings:

Country Project Name and Interest Held Area (km²)
Botswana Boteti AK6 Diamond License
(100% interest)
15.3
Lesotho Mothae Diamond Mining Lease
(75% interest)
20.0

Karowe Mine, Botswana

The Company was granted a mining license in 2008 over the AK6 Diamond Project which is located in central Botswana and is part of the Orapa/Letlhakane kimberlite district, one of the world's most prolific diamond producing areas. The kimberlite consists of three lobes, South, Center and North, of which the South Lobe makes up approximately 75% of the kimberlites' resource potential. The pipe has an area of 4.2 hectares at the surface which expands to 7 hectares at a depth of 120 meters.

In July 2010, a formal decision was made to proceed with the construction of the AK6 diamond mine which is estimated to require a capital investment of approximately $120 to $130 million (based on a ZAR/USD exchange rate of R7.53), which includes the process plant and all mine site and off-site infrastructures. In December 2011, the AK6 diamond mine was renamed to the Karowe Mine.

The project has an Indicated Resource of 51 million tonnes ("mt") containing an estimated 8.2 million carats ("ct") of diamonds. The mine design delineates a Probable Reserve of 36.2 million tonnes of ore, containing an estimated 6.3 million carats of diamonds at a 1.5mm bottom cut-off size, in an open pit to a depth of 324 meters. The reserves will be mined over an estimated 15 year life. The process plant has been designed at an estimated throughput rate of 2.5 million tonnes per annum ("mtpa"). Diamond recovery is estimated at approximately 400,000 carats per year at a November 2011 diamond price of $301/ct.

Performance during the year ended December 31, 2011

In 2011, activities across engineering, procurement, construction and the development of the operations team advanced the project significantly. By year end, engineering, procurement and fabrication activities were essentially complete and project construction was standing at over 90% complete. Delays to the project schedule as a result of the steel industry industrial action in July impacted the overall project schedule and the handover to operations shifted from the end of 2011 to early in the second quarter of 2012.

As at December 2011, the project had achieved 1,000,000 hours without a lost time injury (LTI) and no environmental incidents have been recorded.

Environmental and community relations activities as detailed in the Environmental Management Plan were well executed throughout the year. A competition to name the mine as it transitions into production was well supported by the local communities and schools and Karowe (meaning "previous stone" in the local dialect) was selected. Several community projects, including village clean-up campaigns and health and wellness initiatives, in conjunction with the community members were completed. Archaeological monitoring of all construction areas continued throughout the year and no artefacts were discovered on site or at the Boteti housing sites in Letlhakane.

The 25km, 33kVA power-line from the Orapa sub-station to the Karowe Mine site sub-station was completed during the last quarter of 2012 and handed over to BPC. The mine switched to grid power in time to support commissioning activities.

The mine operations contract with Kalcon was concluded mid-year and the contractor mobilized to site in October. The initial mine development has gone according to plan, ore boundaries match the resource model and initial ore benches have been established. At December 31, 2011, an ore stockpile of 230,000 tonnes [containing 87,000 carats (37.8 cpht)] had been established to support commissioning activities with 552,000 tonnes of waste having been removed and stockpiled.

The process plant operations and maintenance contract was also concluded, and the Company's contractor, Minopex has site established. Minopex are working with the operations staff on process stores and operational procedures and are also fully integrated with the commissioning planning.

The operations senior management, technical and support staff were successfully recruited as required to support project advancement throughout the year.

In Gaborone, the sales and marketing offices were completed and the senior staff recruited. The installation of the security systems and the stock control systems commenced in the fourth quarter.

Table1. Mothae Trial Mining Results as of 3 October 2011

Mothae Diamond Project, Lesotho

The Mothae project is located in northeast Lesotho and is a large low grade kimberlite which contains a significant population of large, high value Type IIa diamonds.

Mothae Diamonds (PTY) Ltd. ("Mothae Diamonds"), a 75% owned subsidiary of the Company, holds a 100% interest in the Mothae project. The other 25% is owned by the Government of Lesotho. The Company, through a wholly owned subsidiary, is the project operator. One half of the project interest held by the Government (i.e. 12.5% of the project interest) is a free carried interest and the other 12.5% will ultimately be paid for by the Government through its share of future project dividends.

In 2010, the Company commenced a trial mining program, based on results from a 100,000 tonne bulk sample completed in 2009. The trial mining program is designed to sample and process up to an additional 620,000 wet tonnes of kimberlite from various kimberlite domains identified within the pipe to confirm the occurrence of high value Type IIa diamonds and to better assess the economic potential of the Mothae kimberlite. Sealed tender diamond sales are being undertaken to establish diamond value. In 2011, diamond sales were conducted in March and December.

Performance during the year ended December 31, 2011

Mothae Diamonds processed 31,488 dry tonnes (36,430 wet tonnes) of kimberlite in the fourth quarter of 2011 recovering 796.97 carats of diamond. In 2011, Mothae Diamonds processed 208,293 dry tonnes (244,532 wet tonnes) of kimberlite recovering 12,157.35 carats of diamond. Table 1 summarizes Mothae production for the trial mining program which commenced in June 2010.

Table1. Mothae Trial Mining Results as of December 31, 2011

Fiscal Period Bulk
Sample
Wet Tonnage Dry
Tonnage
Stones Carats* Average
Stone Size
(cts/stone)
Dry Grade
(cpht)*
2010 F1D 1,769 1,592 111 77.65 0.70 4.88
C4A 33,785 29,649 1,458 759.23 0.52 2.56
C5A 58,427 48,542 3,133 1,120.07 0.36 2.31
C6A 8,122 7,296 529 260.50 0.49 3.57
C8A 58,590 49,152 3,522 1,442.13 0.41 2.93
January 1 to September 30, 2011 C9A 47,797 40,370 3,841 1,940.71 0.51 4.81
G2A 40,185 33,691 4,256 1,909.78 0.45 5.67
F2A 59,692 50,181 4,083 1,979.66 0.48 3.95
G2B 25,931 22,689 3,022 1,286.89 0.43 5.67
G3A 34,497 29,874 3,722 1,654.70 0.44 5.54
October 1 to December 31, 2011 C7A 21,287 18,425 875 403.20 0.46 2.19
C6B 11,215 9,592 572 348.02 0.61 3.63
E2A 3,928 3,471 98 45.75 0.47 1.32
  Totals 405,225 344,524 29,222 13,228.29 0.45 3.84

* All samples processed using a bottom cut-off size of 2mm; carats and sample grade represent diamonds greater than 2mm in size.

Plant throughput was reduced in the fourth quarter of 2011 as a result of a shutdown in November to complete upgrades to the plant crushing and diamond recovery circuits. These included integration of a new secondary crushing circuit required to handle harder kimberlite material as mining operations move deeper into less weathered, fresher kimberlite and interlocking of a Bourevestnik high intensity diamond recovery unit into the main plant circuit. In December, the plant operated at a reduced throughput as part of the commissioning of these upgrades.

Samples G3A, C7A and C6B were completed in the fourth quarter with overall results shown in Table 1. A small tonnage of sample E2A was also processed as part of the commissioning of plant upgrades.

The bulk of sample G3A was processed in the third quarter of 2011 and the sample was completed in the fourth quarter. A total of 3,722 diamonds weighing 1,654.70 carats were recovered from 29,874 dry tonnes (34,497 wet tonnes) yielding a sample grade of 5.54 carats per hundred tonnes (cpht) and an average stone size of 0.44 carats/stone. Recoveries included 2 stones between 10 and 20 carats, 19 stones between 5 and 10 carats and 68 stones between 2 and 5 carats. The three largest diamonds recovered were 19.94, 11.81 and 10.97 carats.

Sample C7A yielded 875 diamonds weighing 403.20 carats from 18,425 dry tonnes (21,287 wet tonnes) for a sample grade of 2.19 cpht. Recoveries included one diamond weighing 56.62 carats, 4 stones between 5 and 10 carats and 14 stones between 2 and 5 carats. The three largest diamonds recovered were 56.62, 8.06 and 6.62 carats.

Sample C6B produced 572 diamonds weighing 348.02 carats from 9,592 dry tonnes (11,215 wet tonnes) for a sample grade of 3.63 cpht. C6B yielded one stone larger than 10 carats, 6 stones between 5 and 10 carats and 18 stones between 2 and 5 carats. The three largest diamonds recovered were 10.52, 8.59 and 8.58 carats. Sample C6B comprised the remaining portion of sample C6A which was excavated and partially processed in 2010 (Table 1). Sample C6B is that portion of the C6 sample which was stockpiled pending upgrade of the process plant crushing circuits.

No grease table audits of x-ray recovery tailings were conducted during the quarter and diamond grades reported above are subject to change pending audit results.

Tonnage estimates are based on daily plant weightometer readings and moisture content measurements to determine a dry tonnage estimate. The process plant is being operated by Minopex under contract to Mothae Diamonds and operates at a 2mm bottom cut off size for diamond recovery. Diamond recovery and characterization work is carried out by the Mothae Diamonds diamond sorting staff with recovery results being monitored and reported by Remote Exploration Services, also under contract to Mothae Diamonds.

In August 2011, Mothae Diamonds acquired a Bourevestnik X-ray (high powered X-ray) diamond recovery machine in an effort to improve recovery of low luminescent, potentially high value Type IIa diamonds. The Bourevestnik unit was initially tested and commissioned in an audit capacity to audit recovery tailings from the Flowsort and VE x-ray diamond recovery units in the main plant circuit. In the fourth quarter of 2011, the Bourevestnik unit was interlocked into the main plant circuit as the primary large diamond recovery facility, bypassing the Flowsort unit, which has been taken offline.

During the year, a primary crushing unit and a secondary crushing unit were installed and commissioned. Both units are required to efficiently process harder kimberlite and basalt xenoliths and in particular, to process unweathered kimberlite samples that are planned in 2012.

A drilling contact was awarded to Remote Drilling Services to conduct a 5,400m delineation drilling program. The objectives of the program are to define the internal geology of the Mothae kimberlite as well as to extend the currently defined kimberlite volume from a depth of 200m to 320m, to collect suitable sample material for ore dressing studies and to collect core for geotechnical evaluation.

During October 2011, a contract was awarded to ADP Projects to complete a preliminary economic assessment of the Mothae kimberlite. The objective of this study will be to gain an increased understanding of the economic potential of the Mothae project through greater definition of the capital and operating costs required for the development of a mine at Mothae.

Two diamond sales were completed during the year. The first took place in March 2011 which sold a total of 9,379 carats for gross proceeds of $8.2 million (average of $871 per carat). The second took place in December 2011 which sold a total of 7,190 carats for gross proceeds of $6.4 million (average of $893 per carat).

During the third quarter of 2011, Mothae Diamonds completed an Environmental Impact Assessment (EIA) of the Mothae project based on a conceptual mining study completed by the Company in 2009. The EIA has been submitted to and approved by the Lesotho Department of Environment.

Namibia

Following an evaluation of the exploration work conducted to date on the Kavango Project in eastern Namibia by the Company and its joint venture partner, Namdeb Diamond Corporation, the Company has made a determination not to renew the licenses which expired at October 29, 2011. The Company is currently preparing the documentation required to formally relinquish its interest in all ten of the prospecting licenses.

2011 Third Quarter

Land status

The following summarizes the Company's current land holdings:

Country Project Name and Interest Held Area (km²)
Botswana Boteti AK6 Diamond License
(100% interest)
15.3
Lesotho Mothae Diamond Mining Lease
(75% interest)
20.0

Boteti AK6 Diamond Project, Botswana

Boteti was granted a mining license in 2008 over the AK6 Diamond Project which is located in central Botswana and is part of the Orapa/Letlhakane kimberlite district, one of the world's most prolific diamond producing areas. The kimberlite consists of three lobes, South, Centre and North, of which the South Lobe makes up approximately 75% of the kimberlites' resource potential. The pipe has an area of 4.2 hectares at the surface which expands to 7 hectares at a depth of 120 meters.

In July 2010, a formal decision was made to proceed with the construction of the AK6 diamond mine which is estimated to require a capital investment of approximately US$120-US$130 million (based on ZAR/US$ exchange rate of R7.00), which includes the process plant and all mine site and off-site infrastructures.

The project has an Indicated Resource of 51 million tonnes ("mt") containing an estimated 8.2 million carats ("ct") of diamonds. The mine design delineates a Probable Reserve of 36.2 million tonnes of ore, containing an estimated 6.3 million carats of diamonds at a 1.5mm bottom cut-off size, in an open pit to a depth of 324 metres. The reserves will be mined over an estimated 15 year life. The process plant has been designed at an estimated throughput rate of 2.5 million tonnes per annum ("mtpa"). Diamond recovery is estimated at approximately 400,000 carats per year at a March 2010 diamond price of $243/ct.

Nine Months to September Performance

Excellent progress has been made on the development of the AK6 Project. The continued focus on safety, health and environment by the Company, employees, the EPCM contractor and all sub-contractors resulted in 220,000 hours worked with no lost time injuries or environmental incidents. As of the end of September the project had worked 809,474 hours with a LTIFR of 0.25.

Construction advanced from 55% complete at the end of Q2 to 84% complete at the end of Q3. This is as per the August re-baselined schedule, which reflects the impact of the steel industry strike in July. During the quarter, engineering, procurement and fabrication were essentially completed in support of construction activities and the focus of the EPCM contractors and Boteti is fully on the AK6 project site activities. The project is still trending within the initial capital budget, and expenditure to end Q3 is 46% of budget with a total of 83% of the approved capital budget being committed.

In addition to the civil works, structural and mechanical activities, in Q3 building works, piping and electrical installation contractors commenced work on site. By the end of Q3 over 3km of piping around the open pit and to the process plant raw water dam had been installed. Equipping of the required eight dewatering wells is on schedule for delivery of water to the process facility during commissioning. The medium voltage (MV) and low voltage (LV), communications and instrumentation contracts have been awarded. The MV contractor has mobilized to site and work is progressing well. The LV, communications and instrumentation contractor mobilized to site in October.

The overhead power line from the Orapa sub-station to site has been completed. The AK6 substation is expected to be commissioned before the end of November, and the permanent tie in completed during Q4. Initial grid power for commissioning activities will come from a temporary tie in to the Letlhakane line that was completed during Q3.

The senior operation's team has made excellent progress with recruitment of key operations personnel for site. The mining contractor has mobilized to site and the sinking cut for the first production bench has commenced -- the first blast in the pit took place on October 8. Extraction and stockpiling of ore started in October in preparation for commissioning activities early in Q1, 2012. The plant operations and maintenance contractor has mobilized to site and have commenced local recruiting. The contracts management team is working with the Boteti metallurgical team on finalizing operational and critical spares holdings and operational procedures.

In Gaborone the diamond sorting, sales and marketing offices have been completed and senior diamond sorting personnel have been recruited. The stock control software platform has been selected and operational procedures are being developed.

On September 2, Lucara was pleased to host Dr. Ponatshego Kedikilwe, Minister of Minerals, Energy and Water Resources, and other regional and local officials at the AK6 project site. The Minister was impressed by the work completed and the safety, health and environmental accomplishments.

Mothae Diamond Project, Lesotho

The Mothae project is located in northeast Lesotho and is a large low grade kimberlite which is anticipated to contain a population of large, high value Type IIa diamonds.

Mothae Diamonds (PTY) Ltd ("Mothae Diamonds"), an indirect 75% owned subsidiary of the Company, holds a 100% interest in the Mothae Project. The other 25% is owned by the Government of Lesotho. The Company, through a wholly owned subsidiary, is the project operator. One half of the project interest held by the Government (ie 12.5% of the project interest) is a free carried interest and the other 12.5% will ultimately be paid for by the Government through its share of future project dividends, if any.

In 2010, the Company commenced a trial mining program, based on results from the 100,000 tonnes bulk sample completed in 2009. The trial mining program is designed to sample and process up to 720,000 tonnes (including the former bulk sample of 100,000 tonnes) of kimberlite from various kimberlite domains, which have been identified within the pipe to confirm geological potential and the presence of the high value Type IIa diamonds. Periodic open-tender diamond sales, the first of which occurred in March 2011, are being undertaken to validate estimates of diamond value.

Nine Months to September Performance

On the Mothae trial mining project in Lesotho, sampling during Q3 on the 'F' and 'G' kimberlite domains, with samples 2A and G2B having been completed during the period. Results continue to be very good with above average grades returned. Summary tonnage and grade results are shown in the following table:

Table1. Mothae Trial Mining Results as of 3 October 2011

Bulk
Sample
Dry
Tonnage
Stones Carats Ave Stn Size
(cts/stone)
Dry Grade
(cpht)
F1D 1,592 111 77.65 0.70 4.88
C4A 29,649 1,453 757.70 0.52 2.55
C5A 48,542 3,119 1,117.07 0.36 2.29
C6A 7,296 525 259.54 0.49 3.40
C8A 49,152 3,511 1,440.49 0.41 2.93
C9A 40,370 3,835 1,938.66 0.51 4.78
G2A 33,691 4,245 1,906.87 0.45 5.65
F2A 50,181 4,077 1,978.33 0.49 3.93
G2B 22,689 2,997 1,280.23 0.43 5.64
G3A* 19,721 2,248 985.07 0.44 5.00
Totals 302,883 26,121 11,741.61 0.45 3.88

*Sample G3A is currently in progress, with final results expected during Q4.

Sample F2A yielded 2 stones larger than 20 carats, 10 stones between 10 and 20 carats, 19 stones between 5 and 10 carats, and 95 stones between 2 and 5 carats. The three largest diamonds recovered were 29.94, 22.86, and 19.21 carats.

Sample G2B yielded 2 stones larger than 20 carats, 2 stones between 10 and 20 carats, 9 stones between 5 and 10 carats, and 48 stones between 2 and five carats. The largest 3 diamonds were 28.91, 25.09 and 12.00 carats.

Previous samples yielded the following results:

  • F1D, C4A, C5A and C6A completed by October 2011 produced 3 stones greater than 20 carats, 9 stones between 10 and 20 carats, 25 stones between 5 and 10 carats and 97 stones between 2 and 5 carats. The largest three stones recovered to date in this program are 53.53 carats, 37.24 carats and 20.26 carats
  • C8A completed in December 2011, produced 1 diamond greater than 20 carats, 12 stones between 10 and 20 carats, 23 stones between 5 and 10 carats and 62 stones between 2 and 5 carats. The three largest stones were 31.87, 17.88 and 16.54 carats.
  • C9A completed in mid-March 2011 produced 3 stones greater than 20 carats, 8 stones between 10 and 20 carats, 28 stones between 5 and 10 carats and 82 stones between 2 and 5 carats. The three largest stones were 48.54, 33.80 and 21.82 carats.
  • G2A completed in May 2011 produce 1 stone greater than 20 carats, 3 stones between 10 and 20 carats, 10 stones between 5 and 10 carats and 83 stones between 2 and 5 carats. The largest three stones were 41.38, 19.35 and 12.63 carats.

Tonnage estimates are based on daily plant weightometer readings and moisture content measurements to determine a dry tonnage estimate. The process plant is being operated by Minopex under contract to Mothae Diamonds and operates at a 2mm bottom cut off size for diamond recovery. Diamond recovery and characterization work is carried out independently by the diamond sorting staff of Remote Exploration Services, also under contract to Mothae Diamonds.

In August, the Bourevestnik X-ray (high powered X-ray) machine was commissioned on site. The unit has been installed in an audit capacity and is being used to audit recovery tailings. Once audit work has been completed, the unit will be included as part of the sample plant flowsheet, reducing the current bottleneck constraints with currently installed equipment.

A primary crushing unit was delivered to site in early September and has been fully commissioned. A larger capacity secondary crusher will be installed in Q4. Both units are required to efficiently process harder kimberlite and basalt xenoliths, and in particular, to process unweathered kimberlite samples that are planned toward the end of the trial mining program.

A drilling contact was awarded to Remote Drilling Services to conduct a 5,400m delineation drilling program. The objectives of the program are to define the internal geology of the Mothae kimberlite, as well as to extend the currently defined kimberlite volume from a depth of 200m to 320m, to collect suitable sample material for ore dressing studies, and to collect core for geotechnical evaluation.

During October, a contract was awarded to ADP Project, to conduct a pre-feasibility level study in support of a preliminary economic assessment at Mothae. The objective of this study will be to gain an increased understanding of the economic potential of the Mothae project through greater definition of the capital and operating costs required for the development of a mine at Mothae.

Depending on current rough diamond market conditions the Company plans to sell a parcel of diamonds recovered from the trial mining program in December 2011. On March 28, 2011, Mothae had its first diamond sale in Antwerp. The parcel of diamonds totalled 9,381.35 carats and sold for an average price of US$871.70/ carat. Gross proceeds totalled $8.2 million. The three stones with the highest per carat value were a 13.87 carat diamond, which sold for $43,000/ct, a 24.57 carat diamond, which sold for $32,351/ct, and a 20.13 carat diamond, which sold for $27,995/ct.

Namibia

Following an evaluation of the exploration work conducted to-date on the Kavango Project in eastern Namibia, by the Company's joint venture partner, Namdeb Diamond Corporation, the Company has made a determination not to renew the licenses which expire at the end of Q4. The Company is currently preparing the documentation required to formally relinquish its interest in all ten of the prospecting licenses.

2011 Second Quarter

Land status

The following summarizes the Company's current land holdings:

Country Project Name and Interest Held Area (km²)
Lesotho Mothae Diamond Mining Lease
(75% interest)
20
Botswana Boteti AK6 Diamond Mining License
(100% interest)
15.3
Namibia Kavango Prospecting License (10)
(100% interest)
8,359

Boteti AK6 Diamond Project, Botswana

Boteti was granted a mining license in 2008 over the AK6 Diamond Project which is located in central Botswana and is part of the Orapa/Letlhakane kimberlite district, one of the world's most prolific diamond producing areas. The kimberlite consists of three lobes, South, Centre and North, of which the South Lobe makes up approximately 75% of the kimberlites' resource potential. The pipe has an area of 4.2 hectares at the surface which expands to 7 hectares at a depth of 120 meters.

In July 2010, a formal decision was made to proceed with the construction of the AK6 diamond mine which is estimated to require a capital investment of approximately US$120-US$130 million (based on ZAR/US$ exchange rate of R7.00), which includes the process plant and all mine site and off-site infrastructures.

The project has an Indicated Resource of 51 million tonnes ("mt") containing an estimated 8.2 million carats ("ct") of diamonds, the mine design delineates a Probable Reserve of 36.2 million tonnes of ore, containing an estimated 6.3 million carats of diamonds, using a 1.5mm bottom cut-off size, in an open pit to a depth of 324 metres, The reserves will be mined over an estimated 15 year life. The process plant has been designed at an estimated throughput rate of 2.5 million tonnes per annum ("mtpa"). Diamond recovery is estimated at approximately 400,000 carats per year at a base price of $243/ct

As at the end of the second quarter 2011 there were 495 people on site and 497,000 hours worked since the construction decision was made (July 2010). Overall project progress was 75% complete, with engineering 99%, procurement 87%, construction was proceeding on schedule at 55% and fabrication 76% completed. During the quarter, construction of the power line and sub-stations was ongoing and grid power is anticipated to be available in time for early commissioning tasks. In addition, the construction contract was awarded for the employee housing and the contractor has mobilized to site.

In July 2011, there was an industrial action in the South Africa steel industry that caused delays to steel fabrication and delivery of supplies to the project. Work did continue on the site, delivered steel was erected and project tasks re-prioritised to mitigate the impacts on the construction schedule. The Company is currently evaluating the full impact of the industrial action, which has now ended, on the construction schedule and will provide further updates at they become available.

An agreement was reached with Kalcon (Proprietary) Ltd for a three year mining contract in early July 2011 and they are expected to mobilize to site during the third quarter. The processing contract was awarded to Minopex and negotiations are underway with the agreement anticipated to be finalized in August 2011.

In addition, negotiations continued with Lucara's primary sales consultants to provide diamond sales advisory services for Boteti, with the aim of developing an in-house sales team. Boteti's corporate office relocated in July 2011 and conversion of the current office space in the diamond technology park in Gaborone to a sorting/sales office is expected to be completed during the fourth quarter.

Mothae Diamond Project - Lesotho

The Mothae project is located in northeast Lesotho and is a large low grade kimberlite which is anticipated to contain a population of large, high value Type IIa diamonds.

Mothae Diamonds (PTY) Ltd ("Mothae Diamonds"), an indirect 75% owned subsidiary of the Company, holds a 100% interest in the Mothae Project. The other 25% is owned by the Government of Lesotho. The Company, through a wholly owned subsidiary, is the project operator. One half of the project interest held by the Government (ie 12.5% of the project interest) is a free carried interest and the other 12.5% will ultimately be paid for by the Government through its share of future project dividends, if any.

In 2010, the Company commenced a trial mining program, based on results from the 100,000 tonnes bulk sample completed in 2009. The trial mining program is designed to sample and process up to 720,000 tonnes of kimberlite from various kimberlite domains, which have been identified within the pipe to confirm geological potential and the presence of the high value Type IIa diamonds. Periodic diamond sales, by open tender, will be conducted in order to improve the validity of our valuation process.

Total dry tonnes of kimberlite processed for the current quarter and first half of 2011 were 55,850 and 107,891, respectively, bringing the project to date to 245,539 tonnes, resulting in the recovery of 19,658 stones weighing 8,890 carats.

Diamond recovery information remains provisional; as Mothae Diamonds commissioned a grease table recovery unit during the current quarter and is in the process of treating x-ray recovery tailings for audit purposes. Results of this work will be incorporated into revised diamond recovery and grade information when complete. In addition, the Bourevestnik ("BV") x-ray diamond recovery unit was installed and commissioned subsequent to quarter end and is anticipated to be fully operational in August 2011.

Mothae Diamonds completed an upgrade to the process plant screens during May and early June as a means to reduce maintenance time and thereby increase daily plant throughput. In addition, Mothae Diamonds is planning the installation of a primary crushing circuit and an upgrade to the secondary crusher to improve the plant's ability to process harder kimberlite material encountered as mining progresses deeper into less weathered portions of the Mothae pipe.

During the quarter, work commenced on the Environmental Impact Assessment (EIA) in support of future mine development. It is anticipated that the EIA will be available prior to the end of the third quarter 2011.

2011 First Quarter

Land status

The following summarizes the Company's current land holdings:

Country Project Name and Interest Held Area (km²)
Botswana Boteti AK6 Diamond Mining License
(100% interest)
15.3
Lesotho Mothae Diamond Mining Lease
(75% interest)
20
Namibia Kavango Prospecting License (10)
(100% interest)
8,359

Boteti AK6 Diamond Project, Botswana

Boteti was granted a mining license in 2008 over the AK6 Diamond Project which is located in central Botswana and is part of the Orapa/Letlhakane kimberlite district, one of the world's most prolific diamond producing areas. The kimberlite consists of three lobes, South, Centre and North, of which the South Lobe makes up approximately 75% of the kimberlites' resource potential. The pipe has an area of 4.2 hectares at the surface which expands to 7 hectares at a depth of 120 meters.

In July 2010, a formal decision was made to proceed with the construction of the AK6 diamond mine which is estimated to required a capital investment of approximately US$120-US$130 million (based on ZAR/US$ exchange rate of R7.00), which includes the process plant and all mine site off-site infrastructures.

The project has an Indicated Resource of 51 million tonnes ("mt") containing 8.2 million carats ("ct") of diamonds, the mine design delineates a Probable Reserve of 36.2 million tonnes of ore, containing 6.3 million carats of diamonds, using a 1.5mm bottom cut-off size, in an open pit to a depth of 324 metres, The reserves will be mined over an estimated 15 year life. The process plant has been designed at an estimated throughput rate of 2.5 million tonnes per annum ("mtpa"). Diamond recovery is estimated at approximately 400,000 carats per year at a base price of $243/ct.

As at the end of the May 2011, project execution is on schedule at overall 64% complete and 65% of the capital investment being committed. Agreements were reached during the first quarter with Botswana Power Corporation for the supply of power and contracts for the construction of the bulk power line which has commenced. Grid power is anticipated to be available in July 2011 in time for early commissioning tasks.

Fabrication of mechanical package orders are progressing very well, with some of the critical long lead items on route or have been delivered to warehouse in South Africa. First planned steel recoveries deliveries have arrived.

Mothae Diamond Project, Lesotho

The Mothae project is located in northeast Lesotho and is a large low grade kimberlite which contains a population of large, high value Type IIa diamonds.

Mothae Diamonds (PTY) Ltd ("Mothae Diamonds") an indirect 75% owned subsidiary of the Company, holds a 100% interest in the Mothae Project. The other 25% is owned by the Government of Lesotho. Mothae Diamonds Holdings Inc, an indirect wholly owned subsidiary of the Company, is the project operator. One half of the project interest held by the Government (ie 12.5% of the project interest) is a free carried interest and the other 12.5% will ultimately be paid for by the Government through its share of future project dividends, if any.

In 2010, the Company commenced a trial mining program, based on results from 100,000 tonnes bulk sample completed in 2009. The trial mining program is designed to sample and process up to 720,000 tonnes of kimberlite from various kimberlite domains, which have been identified within the pipe to confirm geological potential and the presence of the high value Type IIa diamonds. Periodic diamond sales, by open tender, will be conducted in order to improve the validity of our valuation process.

For the quarter 51,966 dry tonnes of kimberlite were processed bringing the project to date to 189,994 tonnes, resulting in the recovery of 13,985 stones weighing 6,261 carats.

Mothae Diamonds completed an upgrade to the process plant screens during May and early June as a means to reduce maintenance time and thereby increase daily plant throughput. In addition, Mothae Diamonds is planning the installation of a primary crushing circuit to the sample plant to improve processing of harder kimberlite material encountered as mining progresses deeper into less weathered portions of the Mothae pipe.

2010 Annual

Land status

The following summarizes the Company's current land holdings:

Country Project Name and Interest Held Area (km²)
Lesotho Mothae Diamond Mining Lease
(75% interest)
20
Botswana Boteti AK6 Diamond Mining License
(100% interest)
15.3
Namibia Kavango Prospecting License (10)
(100% interest)
8,359

Boteti AK6 Diamond Project, Botswana

In December 2009, the Company, through its indirect wholly-owned subsidiary Boteti Diamond Holdings Inc. ("Boteti Diamond"), acquired an initial 70.268% interest in Boteti Mining (Pty) Limited ("Boteti"). In April 2010, African Diamonds exercised its option to increase its interest in Boteti by a further 10.268% in consideration of a cash payment of $7.3 million to the Company. After the exercise of the option, Boteti was held 60% held by Boteti Diamond and 40% held by African Diamonds.

In December 2010, the Company acquired African Diamonds' non-controlling interest in Boteti for consideration of 80,245,726 common shares of the Company on the basis of 0.80 ("Ratio") of a common share of the Company in exchange for every one common share in the capital of African Diamonds.

Boteti was granted a mining license over the AK6 Diamond Project which is located in central Botswana and is part of the Orapa/Letlhakane kimberlite district, one of the world's most prolific diamond producing areas. The Boteti AK6 kimberlite consists of three lobes, South, Centre and North, of which the South Lobe makes up approximately 75% of the kimberlites' resource potential. The pipe has an area of 4.2 hectares at the surface which expands to 7 hectares at a depth of 120 meters.

In June 2010, a definitive feasibility study updating previous work to a confidence level to support project approval was completed. The study detailed a cost effective technical solution with a process plant initially designed at a throughput rate of 2.5 million tonnes per annum ("mtpa") increasing to 4.0 mtpa after 4 years. This phased production approach, combined with contract mining reduces up-front capital required to bring this project on stream.

As part of the feasibility study, a resource update was completed on the project. From an Indicated Resources of 51 million tonnes ("mt") containing 8.2 million carats of diamonds, the mine design delineates a Probable Reserve of 36.2 million tonnes of ore, containing 6.3 million carats of diamonds, using a 1.5mm bottom cut off size, in an open pit to a depth of 324 metres. The reserves will be mined over an estimated 12 year mine life.

A formal decision was made to proceed with the construction of the AK6 diamond mine which is estimated to require a capital investment of approximately US$120-US$130 million (based on ZAR/US$ exchange rate of R7.00 to 7.50), which includes the process plant and all mine site and off-site infrastructure. Operating costs over the life of mine are estimated to average US$17.51 per tonne treated (based on ZAR/US of R7.53).

Project development activities commenced upon completion of the feasibility study with the selection of Dowding Reynard and Associates ("DRA") as the engineering, procurement and construction management contractor. The project development focus areas in 2010 were the critical path activities to ensure that ramp up to full production in the first quarter of 2012 is achieved. By year end engineering was 40% complete and all major equipment orders had been placed and procurement was 55% complete. The earthworks contract for the site civil works and the access road upgrade was awarded and the contractor mobilized to site in September 2010.

During 2010, parties affected by the mine development were relocated in accordance with the Botswana Land Board assessment report as a minimum. Relocation and resettlement claims were finalized to all parties' satisfaction.

Agreements were reached with Botswana Power Corporation for the supply of power to project and Debswana Diamond Company (PTY) Ltd, to use their existing construction camp. The bulk power line contract was put out to tender and the contract was awarded in March 2011, and grid power is anticipated to be available in July 2011 in time for early commissioning tasks.

Amendments to certain provisions of the mining license with the Government of the Republic of the Botswana ("GRB") were concluded. The mining license was amended to allow the sale of the entire AK6 production of diamonds either through open tender sales or exclusive contract, the removal of the commercial production start date and the mine lease area expanded.

As of the end of the 1st quarter of 2011, project execution is on schedule at overall 42% complete and 55% of the capital investment committed. Major operations contracts for mine operations and plant operations and maintenance are being adjudicated and ramp-up of Boteti manpower continues. All permits and licenses to operate are in place.

Mothae Diamond Project - Lesotho

The Mothae project is located in northeast Lesotho and is a large low grade kimberlite which contains a population of large, high value Type lla diamonds.

Mothae Diamonds (PTY) Ltd ("Mothae Diamonds"), an indirect 75% owned subsidiary of the Company, holds a 100% interest in the Mothae project. The other 25% is owned by the Government of Lesotho. Mothae Diamonds Holdings Inc, an indirect wholly owned subsidiary of the Company, is the project operator. One half of the project interest held by the Government (i.e. 12.5% of the project interest) is a free carried interest and one half is funded by the Government through its share of project dividends.

In 2010, the Company commenced a trial mining program, based on results from the 100,000 tonne bulk sample completed in 2009. The trial mining program is designed to sample and process up to 720,000 tonnes of kimberlite from various kimberlite domains which have been identified within the pipe to confirm geological potential, the presence of the high value Type lla diamonds and achieve true price discovery through periodic diamond sales by open tender.

Prior to the initiation of trial mining significant modifications were made to the process plant to allow for recovery of large diamonds (up to approximately 40mm in diameter) and to minimize diamond breakage.

Following a competitive bidding process for mining and process plant operations, a mining contract was awarded to Lesotho based Thotanyana Mining and Civil Works and a plant operation contract was awarded to Lesotho based Minerals Operation Executive (Pty) Ltd. Key personnel in Lesotho have been recruited to manage the operations.

Test mining commenced in late May 2010 and continues. The upgraded process plant was commissioned using F domain kimberlite remaining on stockpile from the prior bulk sampling program and plant throughput achieved design capacity of 30,000 tonnes per month in August 2010. Mining and processing during the year was focused on the C domain kimberlite, which is currently interpreted to comprise the largest kimberlite domain of the Mothae pipe. In 2010, a total of 138,798 dry tonnes of kimberlite were processed resulting in recovery of 8,723 stones weighing 3,671 carats. As in the prior bulk sampling program, the bottom cut-off size for diamond recoveries is 2mm. In addition, a total of approximately 90,000 cubic meters of topsoil and residual overburden material have been stockpiled for processing at a later date.

To the end of December 2010, the Company has recovered a total 17,602 stones containing 7,538 carats during the 100,000 bulk sample and test mining phases. The diamonds recovered have been valued and classified as inventory based on weighted average valuations of US$492/ct used for the preparation of the Kingdom of Lesotho Kimberley Process Certificate and export to Antwerp where the diamonds were subsequently sold.

In March 2011, Mothae Diamonds held its first diamond sale by open tender of 9,381 cts and realized total proceeds of $8.18 million at an average of US$871/ct. Included in the sale were diamonds recovered subsequent to year end that had a higher weighted average valuation than those recovered prior to year end.

2010 Third Quarter

Land status

The following summarizes the Company's current land holdings:

Country Project Name and Interest Held Area (km²)
Lesotho Mothae Diamond Mining Lease
(75% interest)
20
Botswana Boteti AK6 Diamond Mining License
(60% interest)
9
Namibia Kavango Prospecting License (10)
(100% interest)
8,359

Boteti AK6 Diamond Project, Botswana

In December 2009, the Company, through its indirect wholly-owned subsidiary Boteti Diamond Holdings Inc. ("Boteti Diamond"), acquired an initial 70.268% interest in Boteti AK6. In April 2010, African Diamonds exercised its option to increase its interest in Boteti AK6 by a further 10.268% in consideration of a cash payment of $7.3 million to the Company. The current shareholdings in Boteti AK6 are 60% held by Boteti Diamond and 40% held by African Diamonds. Boteti Diamond is the operator.

In October 2010, the Company entered into an agreement with African Diamonds to acquire its interest in Boteti AK6 by acquiring all of the issued and outstanding shares of African Diamonds on the basis of 0.80 of a common share of the Company for each African Diamond common share ("Acquisition"). It is anticipated that the Acquisition will close in December 2010. Upon completion of the Acquisition, ownership of the Boteti AK6 will be consolidated and the Company will hold an undivided 100% indirect interest in the project. In connection with the Acquisition, all of African Diamonds' other assets other than its interest in Boteti AK6, will be transferred into a newly formed company which will be owned by the former African Diamond shareholders.

The Boteti AK6 Diamond Project is located in central Botswana and is part of the Orapa/Letlhakane kimberlite district, one of the world's most prolific diamond producing areas. The Boteti AK6 kimberlite consists of three lobes, South, Centre and North, of which the South Lobe makes up approximately 75% of the kimberlites' resource potential. The pipe has an area of 4.2 hectares at the surface which expands to 7 hectares at a depth of 120 meters.

In June 2010, a definitive feasibility study updating previous work to a confidence level to support project approval was completed. The study details a cost effective technical solution with a process plant initially designed at a throughput rate of 2.5 million tonnes per annum ("mtpa") increasing to 4.0 mtpa after 4 years. This phased production approach, combined with contract mining reduces up-front capital required to bring this project on stream.

The updated study indicates the first phase will require a capital investment, including a 14.5% contingency of approximately US$120 million, which includes the process plant and all mine site and off-site infrastructure. Operating costs over the life of the mine are estimated to average US$17.51 per tonne treated. The project holds all government approvals to proceed and the execution schedule indicates that with work, which commenced in the third quarter, diamond production is expected to ramp up to full design capacity during 2012.

As part of the feasibility study, a resource update was completed on the project. From an Indicated Resources of 51 million tonnes ("mt") containing 8.2 million carats of diamonds, the mine design delineates a Probable Reserve of 36.2 million tonnes of ore, containing 6.3 million carats of diamonds, using a 1.5mm bottom cut off size, in an open pit to a depth of 324 metres. The reserves will be mined over an estimated 12 year mine life.

Project engineering has been awarded to DRA Africa (PTY) Ltd ("DRA") and work commenced in July 2010. Work on weather sensitive tasks commenced in the third quarter such as the upgrading of the mine access road, contractors lay down area, and plant terracing. In addition, orders for long lead items, the autogenous mill, primary jaw crusher and X-Ray Machines, have been placed.

Agreements were reached during the quarter with Botswana Power Corporation for the supply of power to project and Debswana Diamond Company (PTY) Ltd, to use their existing construction camp. In addition, contracts are being finalized to secure homes and housing plots in the town of Letlhakane for employees.

Relocation of parties affected by the mine development has been completed in accordance with the Botswana Land Board assessment report as a minimum. Relocation and resettlement claims have been finalized to all parties' satisfaction.

Amendments to certain provisions of the mining license with the Government of the Republic of the Botswana ("GRB") have been concluded. The mining license was amended to allow the sale of the entire AK6 production of diamonds either through open tender sales or exclusive contract and the removal of the commercial production start date.

Recruiting of senior management and operating team personnel is progressing according to schedule.

Mothae Diamond Project - Lesotho

The Mothae project is located in northeast Lesotho and is a large low grade kimberlite which contains a population of large, high value Type lla diamonds.

Mothae Diamonds (PTY) Ltd ("Mothae Diamonds"), an indirect 75% owned subsidiary of the Company, holds a 100% interest in the Mothae project. The other 25% is owned by the Government of Lesotho. Mothae Diamonds Holdings Inc, an indirect wholly owned subsidiary of the Company, is the project operator. One half of the project interest held by the Government (i.e. 12.5% of the project interest) is a free carried interest and one half is funded by the Government through its share of project dividends.

Based on results from the 100,000 tonne bulk sample completed in 2009, the Company commenced a test mining program at Mothae to sample and process up to 720,000 tonnes to confirm geological potential and the presence of the high value Type lla diamonds.

Following a competitive bidding process for mining and process plant operations, a mining contract was awarded to Lesotho based Thoytanyana Mining and Civil Works and a plant operation contract was awarded to Lesotho based Minerals Operation Executive (Pty) Ltd. Key personnel in Lesotho have been recruited to manage the operations.

Test mining commenced in late May and to the end of September a total of 100,939 tonnes of kimberlite have been mined from the F and C kimberlite domains. The C domain comprises the largest kimberlite domain of the Mothae pipe. In addition, a total of approximately 90,000 cubic meters of topsoil and residual overburden material have been stockpiled for processing at a later date.

Upgrades to the plant were completed during the first half of the year and commissioning completed during the third quarter. A total of 70,339 dry tonnes of kimberlite has been processed to end of September 2010, with the plant reaching design capacity of 30,000 tonnes per month mid August 2010.

To the end of September a total of 3,823 stones containing 1,760 carats have been recovered, including, 20 stones greater than 5 carats, 8 stones greater than 10 carats and 3 stones greater 20 carats. The bottom cut-off size on the Mothae Project is 2mm. The diamonds recovered have been valued and classified as inventory based on June 2009 valuation report.

Diamond recoveries for the period were lower than forecast in part due to limited plant throughput through commissioning and ramp up to full capacity, and part due to sampling work being concentrated on the comparatively lower grade C domain kimberlite versus forecast recoveries being based on the global grade estimate for Mothae project from previous bulk sampling.

Mothae Diamonds anticipates holding its first diamond sale by open tender in the first quarter of 2011.

During the current quarter, work commenced to increase the tailings dam capacity by raising the height of the dam walls a further 7 meters above current elevation. The expansion is expected to be completed prior to year end and is estimated to cost US$1.0 million.

2010 Second Quarter

The following summarizes the Company's current land holdings:

Country Property Type Area (km²)
Lesotho Mothae Diamond Mining Lease 20
(75% interest)
Botswana Boteti AK6 Diamond Mining License 9
(60% interest)
Namibia Kavango Prospecting License (10) 8,359
(100% interest)

Boteti AK6 Diamond Project, Botswana

In December 2009, the Company, through its indirect wholly-owned subsidiary Boteti Diamond Holdings Inc. ("Boteti Diamond"), acquired an initial 70.268% interest in Boteti AK6. In April 2010, African Diamonds exercised its option to increase its interest in Boteti AK6 by a further 10.268% in consideration of a cash payment of $7.3 million to the Company. The current shareholdings in Boteti AK6 are 60% held by Boteti Diamond and 40% held by African Diamonds. Boteti Diamond is the operator.

The Boteti AK6 Diamond Project is located in northeast Botswana and is part of the Orapa/Letlhakane kimberlite district, one of the world's most prolific diamond producing areas. The Boteti AK6 kimberlite consists of three lobes, South, Centre and North, of which the South Lobe makes up approximately 75% of the kimberlites' resource potential. The pipe has an area of 4.2 hectares at the surface which expands to 7 hectares at a depth of 120 meters.

The partners retained an independent Johannesburg based EPCM firm to complete a bankable feasibility study to upgrade previous work to a confidence level to support project approval. This updated feasibility study was completed in June 2010. The study details a cost effective technical solution with a process plant initially designed at a throughput rate of 2.5 million tonnes per annum ("mtpa") increasing to 4.0 mtpa after 4 years.

This phased production approach, combined with contract mining reduces up-front capital required to bring this project on stream.

The updated study indicates the first phase will require a capital investment, including a 14.5% contingency of US$120 million, which includes the process plant and all mine site and off-site infrastructure. Operating costs over the life of the mine are estimated to average US$17.51 per tonne treated. The project holds key government approvals to proceed and the execution schedule indicates that with work commencing this quarter, diamond production is expected to ramp up to full design capacity during 2012.

As part of the feasibility study, a resource update was completed on the project. From an Indicated Resources of 51 million tonnes ("mt") containing 8.2 million carats of diamonds, the mine design delineates a Probable Reserve of 36.2 million tonnes of ore, containing 6.3 million carats of diamonds, using a 1.5mm bottom cut off size, in an open pit to a depth of 324 metres. The reserves will be mined over an estimated 11 year mine life.

Project engineering has been awarded to DRA Africa (PTY) Ltd ("DRA") and work has commenced. Work on weather sensitive tasks has commenced in the third quarter such as the upgrading of the mine access road and plant terracing.

Relocation of parties affected by the mine development has been completed in accordance with the Botswana Land Board assessment report as a minimum. Relocation and resettlement claims have been finalized to all parties' satisfaction.

Amendments to the diamond sales provisions of the mining license with the Government of the Republic of the Botswana ("GRB") have been concluded. The mining license was amended to allow the sale of the entire AK6 production of diamonds either through open tender sales or exclusive contract. A further amendment to the mining license pertaining to a revised start of commercial production has been submitted to the GRB. The Ministry of Mines has made their recommendation to the Minister and the formal approval of the amendment is expected by the end of the third quarter.

The first of key personnel have been hired, including Mr. Ribson Gabonowe as CEO of Boteti and Gerald Ndlovu as Boteti's General Manager.

Mothae Diamond Project - Lesotho

The Mothae project is located in northeast Lesotho and is a large low grade kimberlite which contains a population of large, high value Type lla diamonds.

Mothae Diamond, an indirect 75% owned subsidiary of the Company, holds a 100% interest in the Mothae project, in partnership with the Government of Lesotho, which holds a 25% interest. Mothae Diamonds is the project operator. One half of the project interest held by the Government (i.e. 12.5% of the project interest) is a free carried interest and one half is funded by the Government through its share of project dividends.

Based on results from the 100,000 tonne bulk sample completed in 2009, the Company is pursuing a test mining program at Mothae to sample and process up to 720,000 tonnes over the next 18 to 24 months to confirm geological potential and the presence of the high value Type IIa diamonds

Following a competitive bidding process for mining and process plant operations, a mining contract was awarded to Lesotho based Thoytanyana Mining and Civil works and a plant operation contract was awarded to Lesotho based Minerals Operation Executive (Pty) Ltd. Mining commenced in late May establishing a kimberlites stockpile feed for the diamond recovery plant. Planned upgrades to this plant were completed during the quarter and plant commissioning completed in mid July 2010. The process feed rate is being ramp up to design capacity of 30,000 tonnes per month, with the target of achieving this throughput by the end of the third quarter. Total cost to complete the process upgrades was approximately $3.2 million.

All diamond recovery units are functioning well and provisional audit work on x-ray tailings indicates a high level of recovery efficiency which was a key object of the plant upgrade.

A 53.3 carat, Type lla diamond was recovered in the first week of processing. Diamond grades for the material processed to date have been consistent with material processed during previous treatment of the Mothae kimberlite material.

Mothae Diamonds has recruited the first of key personnel in Lesotho, including Nyakallo Mpatuoa as the Managing Director and Shaun Simmonds as the Company Site Representative, required to manage and oversee the test mining program. Mothae Diamonds has engaged in dialogue locally and with the Government to foster relationships at all levels and to ensure integration within the community.

2010 First Quarter

Land status

The following summarizes the Company's current land holdings:

Country Property Type Area (km²)
Lesotho Mothae Diamond Mining Lease 20
(75% interest)
Botswana Boteti AK6 Diamond Mining License 9
(60% interest)
Namibia Kavango Prospecting License (9) 7,411
(49% interest)

Mothae Diamond Project - Lesotho

The Mothae project is located in northeast Lesotho and is a large low grade kimberlite which contains a significant population of large, high value Type lla diamonds.

Mothae Diamond, an indirect wholly owned subsidiary of the Company, holds a 75% interest in the Mothae project, in partnership with the Government of Lesotho, which holds a 25% interest. Mothae Diamonds is the project operator. One half of the project interest held by the Government (i.e. 12.5% of the project interest) is a free carried interest and one half is funded by the Government through its share of project dividends.

Based on results from the 100,000 tonne bulk sample completed in 2009, the Company is planning a test mining program at Mothae to sample and process up to 720,000 tonnes over the next 18 to 24 months commencing in June 2010 to confirm geological potential and the presence of the high value Type IIa diamonds. In order to carry out this phase of processing, the Company commenced in early 2010 an upgrade to the process plant, including a large diamond recovery system, enhanced water systems and a new X-ray recovery circuit. Electrical systems in the process plant were upgraded to provide for sustainable operations over the next two years. Total estimated cost to complete the process upgrades is approximately $3.0 million ($905,000 expended by March 31, 2010).

Following a competitive bidding process for mining and process plant operation, a mining contract has been awarded to Lesotho based Thoytanyana Mining and Civil works and a plant operation contract has been awarded to Lesotho based Minerals Operations Executive (Pty) Ltd. The mining fleet mobilized to site in early May to begin pre-stripping of overburden and stockpiling kimberlite for plant commissioning. Commissioning of the plant is expected to continue through June, subsequent to which trial mining will commence at a targeted production rate of 30,000 tonnes per month.

Based on average grade estimates from the 100,000 tonne bulk sample completed in 2009, the trial mining program is expected to produce approximately 1,000 carats of diamonds per month and the Company anticipates holding Mothae diamond sales periodically, with the first sale expected before year end.

Mothae Diamonds has recruited the first of key personnel in Lesotho, including the Managing Director and the Company Site Representative, required to manage and oversee the test mining program.

Mothae Diamonds has engaged in dialogue locally and with the Government to foster relationships at all levels and to ensure integration within the community.

Boteti AK6 Diamond Project, Botswana

In December 2009, the Company, through its indirect wholly-owned subsidiary Boteti Diamond Holdings Inc. ("Boteti Diamond"), acquired an initial 70.268% interest in Boteti AK6. In April 2010, African Diamonds exercised its option to increase its interest in Boteti AK6 by a further 10.268% in consideration of a cash payment of $7.3 million to the Company. Following the option exercise, the Company has a 60% interest in Boteti AK6 and is the project operator. The remaining 40% is held by African Diamonds.

Boteti AK6 is located in northeast Botswana and is part of the Orapa/Letlhakane kimberlite district, one of the world's most prolific diamond producing areas. The Boteti AK6 kimberlite consists of three lobes, South, Centre and North, of which the South Lobe makes up approximately 75% of the kimberlites' resource potential. The pipe has an area of 4.2 hectares at the surface which expands to 7 hectares at a depth of 120 meters.

The partners have retained an independent Johannesburg based EPCM firm to complete the feasibility study to upgrade previous work to a confidence level to support project approval. The project scope includes a revised mine plan, confirmation of process plant flowsheet and design, confirmation of site and support infrastructure, engineering and cost estimated to support capital and operating cost estimates and the preparation of an execution schedule.

As part of the ongoing feasibility study, a resource update was completed on the project in March 2010. The new resource update estimates an indicated resource of just over 51 million tonnes at an average grade of 22 cpht and an average modeled diamond value of US$194 per carat, and an inferred resource of approximately 20 million tonnes at an average grade of 19 cpht and an average modeled diamond value of US$183 per carat.

Boteti AK6 is on schedule for construction to commence in the fourth quarter of this year, and to be in production in late 2011, ramping up to full production in first half of 2012. The project holds key government approvals to proceed to development - a Mining License and an approved Environmental Impact Assessment ("EIA").

In order to achieve the project schedule, key tasks will be initiated ahead of full capital approval. An early works budget has been approved to bridge the gap between completion of the feasibility study and full capital approval. This budget is focused on weather sensitive project tasks such as the upgrading of the mine access road and completion of plant terracing before the rainy season. Ongoing environmental and socio-economic activities which are essential to project success will be funded by this budget.

The first of key personnel have been hired, including the General Manager, required to guide the project through detailed engineering, construction and commissioning. In line with the EIA, an Environmental and Community Liaison Officer has also been hired which will enable consistency and continuity in environmental and socio-economic programs throughout the mine life.

The feasibility study considers a phased development. Phase I mining will commence in late 2011 with production ramping up to 2.5 million tonnes per annum in 2012. Phase II is scheduled to commence in 2015 with production ramping up to 4.0 million tonnes per annum by the addition of a second mill circuit. The process design contemplates a 1.5 millimeters bottom cutoff so as to optimize plant throughput and enhance project economics. Open pit optimisation work has been conducted by Johannesburg based ASG Consulting to determine open pit mine reserve, waste to ore stripping ratio, pit depth and provisional mine life. Work on the feasibility study is well advanced and is scheduled to be complete by mid year 2010.

2009 Annual

Mothae Diamond Project - Lesotho

Prior to the start of the calendar year 2009, Lucara elected to proceed with Phase II of the Mothae Project evaluation sampling program, which comprised the processing of an additional 70,000 metric tonnes) of kimberlite and the completion of a 2,500 metre delineation drilling program to define the Mothae kimberlite ore body to a depth of approximately 200 metres. The program was completed in April of 2009 under a budget of approximately $4.2 million.

The following table summarizes the tonnage sampled and diamonds recovered (greater than 2 millimeters) from both Phase I and Phase II of the Mothae evaluation program.

Table M-1 - Mothae Phase I & II Sample Grade Information

Kimberlite
Domain
Wet
Tonnes
Dry
Tonnes
# of
Stones
Total
Carats
Carats/
Stone
Dry
Grade
A Phase 5,341 4,565 372 129.83 0.35 2.84
C Phase 28,529 23,592 2,042 902.51 0.44 3.83
E Phase 5,363 4,338 255 99.61 0.39 2.30
F Phase 26,223 21,664 2,681 1,160.05 0.43 5.35
G Phase 34,503 28,169 3,536 1,575.04 0.45 5.59
ALL SAMPLES 99,959 82,328 8,886 3,867.04 0.44 4.70

A fifteen hole, 2,452 metre core drilling program was completed in early February, 2009 and led to the development of a preliminary geological model which outlined between 35 and 40 million tonnes of kimberlite to 200 metres depth. The southern lobe of the Mothae pipe, which produced the highest bulk sample diamond grades, is estimated to contain between 20 and 25 million tonnes of the outlined 35 to 40 million tonnes. At this stage of the evaluation, these tonnage figures indicate the geologic potential of the Mothae kimberlite and are not intended to imply a 43-101 compliant resource tonnage.

Of significance, several large, high quality diamonds were recovered during the bulk sample program including the recovery of a 23.39 carat white anhedral Type IIa broken diamond with additional pieces indicating an original stone estimated to be greater than 60 carats. Other highlights include the recovery of 217 stones greater than 2 carats, 63 stones greater than 5 carats, 13 stones greater that 10 carats, and 5 stones greater than 20 carats. The five largest diamonds weigh 24.60, 23.39, 22.71, 22.62 and 20.04 carats.

In April, 2009, a conceptual study was completed for Mothae which contemplated the requirements to build and operate a mine at Mothae which would be capable of processing at a rate of 2.5 million tonnes per annum. The conceptual study formed the basis for an application to the Government of Lesotho for a mining license at Mothae. In September, 2009, the Government of Lesotho awarded a mining license to Mothae Diamonds (Pty) Ltd. to mine for diamonds at Mothae. As part of the license award, the Government of Lesotho has taken a 25% interest in the project, 50% of which will be free carry with the remainder being contributed from dividends. The license was awarded for a 10 year period, renewable for a further 10 years.

Looking forward at Mothae

In order to confirm the potential for Mothae to yield large high value diamonds, a preproduction test mining phase that contemplates the processing of up to 720,000 tonnes at a rate of 30,000 tonnes per month, was initiated in November 2009. To complete this phase of processing, the process plant will be upgraded to include a large diamond recovery X-ray system, enhanced water systems and a new X-ray recovery circuit. Additional to the above, the electrical systems in the process plant will be upgraded to provide for sustainable operations over the next two years. Additional delineation drilling may also be completed to help better define the internal geology of the Mothae kimberlite. The capital costs for the plant upgrade is estimated to be in the order of C$3.0 million.

Boteti AK6 - Botswana

In early November, the Company acquired a 70.268% interest in Boteti, which holds a 100% interest in the AK-6 project, from De Beers in consideration for US$49.0 million. The AK-6 project is an advanced diamond development project located in the Orapa district of Botswana, the largest diamond producing region in the world. The acquisition of the De Beers interest in AK-6 was completed on December 17, 2009.

The Company entered into a Share Holder Agreement with its development partner on the AK-6 property, African Diamonds plc. ("African Diamonds"). The Agreement includes a Call Option whereby African Diamonds can earn an additional 10.268% interest in the AK-6 property through a cash payment of approximately US$7.0 million. African Diamonds have 120 days from December 17, 2009 to exercise this option. Under the Agreement, the Company is the operator of the joint venture with a minimum 60% interest in AK6.

The Company initiated a feasibility study update for AK-6 which is scheduled for completion in the second quarter of 2010. This study will confirm the capital costs and detailed schedule which currently is contemplated to have detailed design, development and construction activities taking place during the latter half of 2010 and through 2011.

Paradigm Project Management has been selected to complete the feasibility study update.

Looking Forward at Boteti

Lucara intends to aggressively develop the AK-6 project in Botswana. The initiation of tasks defined in the project's Environmental Management Plan (EMP), which encompasses both environmental and socio-economic programs, will be an area of focus early in 2010 as we advance the AK-6 project and establish ourselves as a partner of choice in Botswana. Boteti will recruit key staff in Botswana to further foster relationships at all levels to ensure the successful integration of Boteti within the community and for the advancement of the EMP commitments.

Exploration

Kavango Project - Namibia

Lucara's joint venture partner, Namdeb, did not conduct any field programs in 2009 due to budget restrictions. Data analysis and reporting early in 2009 of drill programs completed in 2008 identified a high interest down-hole heavy mineral anomaly in drill hole RC-29, located northwest of the main Omatako indicator mineral anomaly. Namdeb is developing a follow-up program of detailed ground geophysics and further drill testing for 2010.

Namdeb failed to meet its vesting obligations required to hold a 51% interest in the Kavango project in 2009. The agreement has been amended, in principle, such that all interest held by Namdeb reverts to Lucara, and the time period in which Namdeb has to meet its expenditure obligation has been extended to December, 2010.

Drill hole RC-29 produced a down-hole kimberlite indicator mineral anomaly that suggests that the source kimberlite may be located nearby. Follow-up work planned for 2010 includes detailed ground geophysical surveys over selected areas near RC-29 and subsequent drill testing of any anomalies generated from this work.

Lufupa Option - DRC

Lucara has the option to earn a 50% interest in diamond prospects in southern DRC by incurring exploration expenditures of US$2.0 million by October, 2012. To date, approximately US$250,000 has been spent on heavy mineral sampling and ground geophysical surveys designed to develop drill targets.

A work program to drill test up to 18 prioritized drill targets on a budget of approximately US$300,000 was proposed in May 2009. This program was deferred in response to other priorities and budget uncertainties.

Heavy mineral sampling carried out in 2008 and interpretation of airborne magnetic data has resulted in identification of 18 priority drill targets as potential source contributors to the regional kimberlite indicator mineral anomaly. Work planned for 2010 includes additional ground geophysical work as needed to position drill collars, followed by drill testing of these targets.