After 17 long years of working to develop the Gahcho Kué diamond deposit into what promises to be one of the world's largest and richest diamond mines, Mountain Province Diamonds Ltd. is turning its attention to the diamonds next door.

The Toronto-based junior and its 51 percent partner De Beers are rapidly closing in on their long-sought goal at the Kennady Lake diamond project in the Northwest Territories. The joint venture is permitting an open-pit mine expected to produce about 4.5 million carats per year for 11 years initially. Gahcho Kué ("Place of Big Rabbits") will be Canada's sixth diamond mine and the fourth developed in the Northwest Territories.

But the road to development has been a long one. Mountain Province staked the properties at Kennady Lake during Canada's diamond rush 20 years ago and discovered the project's first kimberlite - 5034 - in 1994. Currently, the 5034 kimberlite has a reserve grade of nearly 2 carats per metric ton and contains more than 23 million carats for an in-situ value of more than US$4.2 billion.

Mountain Province entered into a JV with De Beers in 1995 under which the major could earn a 51 percent interest in Gahcho Kué. De Beers discovered a further six kimberlites, three of which (5034, Hearne and Tuzo) have a probable reserve of 31.2 million metric tons with a fully diluted mining grade of 1.57 carats per metric ton for a total reserve of 49 million carats. A Dec. 1, 2010 feasibility study filed by Mountain Province (available on SEDAR) indicates that the Gahcho Kué project has an internal rate of return of 33.9 percent. At an average 2011 diamond price of US$236 per carat, this represents in-situ value of more than US$11.5 billion.

De Beers, a global leader in the diamond industry, has two established mines in Canada - Snap Lake, also located in Northwest Territories, and Victor located in the James Bay Lowlands of Northern Ontario. Both mines were officially opened in July 2008.

The Snap Lake Mine, De Beers' first diamond mine outside of Africa, is built on the shores of Snap Lake 220 kilometers (137 miles) northeast of Yellowknife. The mine is Canada's first completely underground diamond mine.

2015 start-up target

Mountain Province is De Beers' largest commercial mining partner. Though it holds a 49 percent interest in the JV, all material decisions in the venture require the approval of both partners, effectively making the operation a 50/50 JV.

The JV's current business strategy is to secure construction and operating permits for Gahcho Kué by year's end 2013, begin mine construction in 2014 and commence commercial production in 2015.

Each partner will market its own share of diamond production from Gahcho Kué, which gives Mountain Province control over the marketing of more than 2 million carats a year. With operating costs projected at about $30 per carat and continued strong consumer demand, the junior likely will enjoy a large operating margin and generate considerable annual revenue throughout the life of the mine.

Gahcho Kué also has potential for expansion. In October, the partners completed an airborne gravity survey over the project with 1,198 line-kilometers flown. The AGG survey was flown by Fugro Airborne Surveys. On-site quality control and interpretation of the data was done by independent consultant Kit Campbell, P. Geoph., of Intrepid Geophysics, Vancouver B.C.

"The Fugro airborne gravity survey is the first property-wide airborne gravity survey to be conducted at Kennady Lake since the start of exploration, approximately 17 years ago," said Mountain Province President and CEO Patrick Evans.

The survey results were to be announced once the JV completed an analysis of the final report.

The company also said the Gahcho Kué JV decided to expand a previously planned five-hole Tuzo Deep drill program to six holes because it improved the probability that an inferred mineral resource will be established below 350 meters, which is the current limit of the Tuzo mineral resource. As a result of the expansion of the Tuzo Deep drill program, the six-hole program was expected to be completed by the end of February.

The first of the six planned Tuzo Deep drill holes intersected more than 200 meters of kimberlite. This hole was drilled at an angle from land to the south of the Tuzo kimberlite. The hole was surveyed to establish the precise kimberlite pierce points. A second rig drilled a site to the north of the Tuzo kimberlite.

New diamond venture

Mountain Province is also preparing for the future. In December, the junior said analysis of the final results of the airborne gravity gradiometry survey also flown over its Kennady North project in October identified more than 70 geophysical targets, of which 29 are considered high priority and closely resemble the known kimberlites in the Kennady Lake area.

Located directly north and west of the Gahcho Kué project, the Kennady North project encompasses 13 contiguous leases and claims. Past exploration at Kennady North led to the discovery of the diamondiferous Faraday, Kelvin and Hobbes kimberlites. Drilling of these kimberlites returned excellent micro-diamond counts with a size frequency distribution very similar to the highly diamondiferous Gahcho Kué kimberlites, which have a fully diluted reserve grade of 1.57 carats per metric ton.

Evans said the large number of high-priority geophysical targets that have been identified at Kennady North is "exciting."

"Besides the excellent micro-diamond counts and size frequency distribution from the known kimberlites, a 0.40-carat diamond was recovered from a 65-kilogram sample taken from Faraday and the samples recovered from Faraday also exhibit an unusually high percentage of yellow diamonds. This is very encouraging," he said. "As soon as we've secured a land-use permit for Kennady North, we intend following up with ground-truthing of the high-priority targets in preparation for drilling (in 2011). Mountain Province has retained Aurora Geosciences Ltd. based in Yellowknife, NWT, to manage the Kennady North exploration program."

In January, Mountain Province's board of directors approved a plan to spin out the 100 percent-controlled Kennady North project into a newly incorporated company, Kennady Diamonds Inc. The company said the final decision on the proposed spin-out was made with a view to the best interests of shareholders and after a study of mechanisms for the transaction.

"The proposed spin-out of Kennady North is intended to deliver greater value to Mountain Province shareholders by unlocking the value of this highly prospective diamond project," said Evans.

"The transaction also will enable Mountain Province to focus on its flagship Gahcho Kué Project, while Kennady Diamonds focuses on advancing the 123-square-kilometer (47.5 square miles) Kennady North Project." The proposed spin-out will occur through a plan of arrangement and will be subject to regulatory and court approval, as well as shareholder approval at a special meeting currently planned for April.

Upon completion of the arrangement the proposed listing of Kennady Diamonds on the TSX Venture Exchange, the company intends to distribute 100 percent of the shares of Kennady Diamonds to Mountain Province shareholders on a pro rata basis.

Mountain Province also will provide Kennady Diamonds with sufficient working capital to fund the planned exploration activities for 2012.