The Canadian government has sanctioned a new royalty policy for the mining the precious stone in the western province of Saskatchewan, the Vancouver Sun reported.

The decision was made despite the fact that there is no current diamond production in Saskatchewan. The government anticipates mining companies will eventually take advantage of large deposits found in the northern part of the province.

The province said establishing a royalty system gives the diamond industry a better financial picture for future projects. The royalty system would take a 1% cut of the total annual value of a mine's production, but only after a five-year holiday on royalties that gives companies time to recoup investments.

Miner Shore Gold Inc aims to establish Saskatchewan's first diamond mine, and the new royalty policy is another milestone that brings production closer, Vice-President George Read said.

"It's very much a royalty regime that promotes the development of the diamond deposits in Saskatchewan," Read said. "It's another milestone crossed. Until today, the province did not have a diamond royalty regime."

The diamond miner said it anticipates a production decision in 2011, which would put Shore Gold on track to build the mine and start commercial production in 2016.

Shore Gold estimates there is a 35-million carat reserve of diamonds at its Star-Orion South Diamond project near Prince Albert.