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Diamonds from Stornoway’s Renard Mine, seen under construction above, are breaking in processing to a higher degree than the company expected, hurting both the price they’re fetching at auction as well as Stornoway stock.

Quebec's first diamond mine has a grating problem: Its gemstones are breaking more than anyone anticipated. And that's hitting the shares of its owner, Stornoway Diamond Corp.

The emerging diamond producer built the Renard mine in the Otish Mountains, a range of hills north of Lac Mistassini in north-central Quebec, in the summer of 2016 with a $946-million financing package. The project came in under budget and five months ahead of schedule, igniting hopes that it will lead to other resource development in the province's vast northern territory.

But Stornoway has hit a snag. The Renard diamonds are breaking in processing to a higher degree than the company expected, hurting both the price they're fetching at auction as well as Stornoway stock. In the diamond industry, bigger is better. And too many big Renard diamonds are getting smashed in its crushers. The quality profile of the diamonds has suffered as well.

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"It's serious for us but we're making money here even with this issue on top of us," Matt Manson, Stornoway chief executive, said in an interview. "It's not an existential problem for us. It's a quality problem. We should be doing better. We can be doing better and that's what we're engaged on. The underlying business is very strong."

The development adds pressure to Mr. Manson's ambitions for the diamond producer. Stornoway was among the potential suitors for Dominion Diamond Corp., which controls the Ekati diamond mine in the Northwest Territories and owns 40 per cent of the territory's Diavik mine as well, when it entertained offers earlier this year. Stornoway looked at Dominion's books but it never made a formal bid. U.S. conglomerate Washington Cos. won control of Dominion, leaving Stornoway facing a more difficult path to build a multisite, Canadian-owned diamond champion.

Stornoway shares have failed to gain ground in each of the last 11 trading sessions, dropping nearly 4 per cent on Oct. 12 following a downgrade from RBC Capital Markets highlighting the breakage issue. They lost another 7 per cent on Tuesday.

The company sold two lots of diamonds in its most recent third quarter. In all, 438,632 carats of gems were auctioned at an average price of $94 (U.S.) per carat for total proceeds of $51.6-million (Canadian). Despite the steady increase in pricing achieved during the course of the year on a quarterly basis, the company says it likely won't be able to achieve the average price of $100 to $132 (U.S.) per carat it previously gave as guidance for fiscal 2017.

"We believe that it will take until at least spring 2018 for the current price discount to materially abate," RBC analyst Richard Hatch said in his report this month. "Should the realized price discount continue beyond this point, we see potential for sustained cash burn and balance sheet and debt convenant concerns."

Mr. Manson is positive about the company's prospects, however, and rejects the characterization of the company in the RBC report. He points to the strong cash position of the company – which is unusual for a new producer – a good cash operating margin, and its undrawn credit facility with Investissement Québec, its biggest shareholder. The province's investment arm is a supportive and long-term partner that wants the project to succeed, he said.

Every diamond producer has to deal with the particular characteristics of the rock found at its mine sites and every producer breaks diamonds. At Renard, however, the rock that surrounds the kimberlite ore – kimberlites contain the diamonds – is particularly plentiful, Mr. Manson said. And because that waste rock is harder than the kimberlite, it is creating a highly abrassive environment in two of Renard's crushing machines. The liners in Renard's crushers are meant to last six months but Stornoway is going through one every six weeks, the CEO said.

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Stornoway's board of directors in August approved a $22-million (Canadian) plan to improve the quality of Renard production, to be funded from existing financial resources. The main element of the plan is putting in place a new ore and waste sorting circuit to mitigate the breakage issue.

Using spectral analysis technology, the Renard team will shine light on the ore and try to split out the waste rock using air jets before it gets to the crushers. The concrete foundations for the new system have been poured and work on the rest of the equipment is under way for an expected start in the first quarter of 2018.

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