<p>THE CARAT CHRONICLES – Q4 2008<br/>... provides a general overview of events in the diamond market from the exploration<br/>and mining to the retail front, with particular focus in the Canadian diamond scene. We<br/>also analyze current issues in the sector and key trends.<br/>HIGHLIGHTS<br/> Rough Diamond Pricing – Q4 Diamond Trading Company (DTC) sight sales (two) did see a<br/>decrease in the pricing of smaller rough stones. The November and December sights hit new<br/>lows, reaching $300 mln in November and $100 mln in the December.<br/> Polished Prices – Rapaport pricing for polished rounds in Q4 2008 showed price declines in<br/>the quarter for all sized stones, with 0.5 ct (carat) stones down 2.2%, 0.7 ct down 1.7%, 1 ct<br/>down 2.9%, 2 cts down 3.2%, 3 cts down 5.2% and 5 cts down 6.1%.<br/> Retail and Trends – Retail sales continue to decline; Q3 retail jewellery sales were weak as<br/>both higher-end and mid-market retail jewellers saw negative growth. The holiday season was<br/>no better for normal retailers or for online retailers. On the other hand, high-end auctions<br/>continued to sell its larger ticket items at record prices. We expect weak retail sales to<br/>continue during 2009 with the global economic slowdown and the GDP outlook.<br/> Equity Performance – The S&P/TSX Basic Material Index was down 12% in Q4, as the market<br/>continues to be crushed by the economic crisis. The best performing diamond stock was<br/>Peregrine Diamonds (up over 80%) and the worst was Vaaldiam (down 75%). Harry Winston<br/>was down about 65% in Q4.<br/> North American News – Canada launches an initiative to establish its first diamond<br/>exchange. On the company front, Stornoway received a positive economic study for the Renard<br/>project in Quebec, Shore Gold reduced its 2009 exploration budget and released results from<br/>the Fort a La Corne and the Canadian government takes over Tahera's Jericho mine. Several<br/>smaller diamond companies managed to raise equity through flow-through financings.<br/> International News – On the company front, De Beers and ALROSA have ended their trade<br/>relationship. Instead, De Beers opens a new mine in South Africa and cuts its production in<br/>Canada. ALROSA announced it may slash supply of rough diamonds to market in 2009 given<br/>the market conditions. BHP and Rio Tinto reported declines in diamond production in Q3 and<br/>also in Q4 (Rio Tinto). Gem Diamonds has warned it may end 2008 with loss and Pala<br/>Investments has withdrawn its offer for Rockwell Diamonds.<br/> Outlook – Expectations for both financial markets, consumer spending and overall retail sales<br/>continue to look bleak for 2009. Retail jewellery sales have been weakening and this has been<br/>evident with the holiday sales numbers being released on the back of the global economic<br/>downturn. In the diamond market, both small and large stones showed declines in value this<br/>quarter and we expect diamond demand to be down this year over 2008. On the company front,<br/>in our coverage universe, Harry Winston (rated Sector Perform with a US$6.00 price target) is<br/>also struggling. It did not meet its production guidance for 2008 of 10 - 10.5 mln cts and reported<br/>production of 9.2 mln cts; on the retail side, we expect the company will also be impacted by the<br/>weaker jewellery market. The company will report its year-end results in April.</p><p>TABLE OF CONTENTS<br/> <br/> <br/>  <br/><br/> <br/> <br/>PURPOSE OF REPORT 3<br/>DTC SIGHT SALES 4<br/>POLISHED PRICES 5<br/>RETAIL NEWS AND TRENDS 9<br/>PERFORMANCE OF GLOBAL DIAMOND PRODUCERS 14<br/>NORTH AMERICAN NEWS 16<br/>INTERNATIONAL NEWS 20<br/>APPENDIX 25<br/>RELEVANT DIAMOND STATISTICS 25<br/>GLOSSARY OF TERMS 32<br/>DISCLOSURES 35</p><p></p><p> <br/></p><p></p>