Star Diamond and Rio Tinto clash over project ownership

In spite of a legal dispute between partners Star Diamond (TSX: DIAM) and Rio Tinto (NYSE: RIO; LSE: RIO) at the Star-Orion South diamond project in north-central Saskatchewan, the project should begin to see results this year from the first significant work conducted there in years.

In April, Rio Tinto began processing a bulk sample totalling 8,271 wet tonnes that was extracted from the Star kimberlite via 10 holes drilled last year. The major has built an onsite bulk sample processing plant, with mineral concentrates being shipped offsite for final diamond recovery. Star expects the sample to be processed and reported in 2020.

At issue is the ownership of the project. Rio Tinto signed an agreement to earn a majority stake in Star-Orion, located 60 km east of Prince Albert, in 2017. Under the 7.5-year option agreement, Rio can earn up to 60% of the project in four phases by spending a total of $75 million. But in November, the major gave Star notice that it was exercising all four options at once and well ahead of schedule.

Star, however, disputes that the major has validly earned a 60% stake, and in March, filed legal proceedings against Rio Tinto. The company claims Rio Tinto has breached the agreement, incurred excessive costs, failed to share information with the junior and engaged in “predatory” practices. In court documents, Star said Rio Tinto spent $103 million at the project last year, almost double the amount Rio Tinto previously had estimated.

Rio Tinto has filed a statement of defence asking the court to dismiss its partner’s lawsuit, calling its claims baseless, and has also asked for unspecified damages.

Once Rio Tinto has earned 60% of the project, Star will have to pay its proportionate share of costs, or its interest in Star-Orion will be diluted. The cost of the proposed 2020 program was $106 million.
As a junior with a market cap of $122 million and $6.7 million in working capital at the end of the first quarter, raising its share of funding would be a challenge.

As part of the legal proceedings, Star has asked the court for an injunction against Rio Tinto to prevent the major from calling a meeting of the management committee of the joint venture, or exercising any of its option rights. The injunction hearing is set for late June. Rio Tinto has agreed not to exercise any option rights until then.

Star-Orion is a large, low-grade project that contains high-value diamonds (both large diamonds and rare Type IIa stones). The project has the potential to produce 66 million carats over a 34-year mine life, according to the most recent economic study on the project, a preliminary economic assessment from 2018 that pegged the capex at $1.4 billion.

K120 kimberlite

In May, Star announced it had received microdiamond results from a hole drilled as part of a wider exploration program Rio Tinto is conducting at the project, outside of the two main kimberlites.

An 83-mm-diameter hole drilled at the K120 kimberlite returned 323 diamonds, two of which were macrodiamonds, from a 231.5-kg sample. The larger macrodiamond weighed 0.552 carat and was a fragment, broken from a larger stone.

“The occurrence of a 0.55-carat diamond in a microdiamond sample is anomalous and speaks to the potential for a coarse diamond size frequency distribution and supports previous evaluation work conducted by Star Diamond on the Orion North kimberlites,” George Read, Star Diamond’s senior vice-president of exploration and development, said in a news release.