It was the little Canadian diamond mine that could – then fell off the rails.

Hopes were high for the Jericho mine when it started cranking out carats five years ago in Nunavut, 420 km northeast of Yellowknife. But operational setbacks, the strong loonie, skyrocketing oil prices and sinking rough diamond prices all took their toll. Former owner Tahera Diamond Corp. went into bankruptcy protection and was forced to mothball it less than two years into production.

But the daughter of a Canadian mining icon and a very determined geologist hope to breathe new life into this former gem after purchasing the shuttered property last year with a goal of reopening it as early as next year.

“Ultimately we bought Jericho with a view that it wasn’t irreparably broken, but there is a lot of work to do to get it to where we want it,” says Julie Lassonde, executive chairman of the mine’s new owner Shear Diamonds Ltd.

Her name is very familiar in mining circles through her legendary father Pierre Lassonde, who amassed a fortune in gold mining as founder of Franco-Nevada Mining Corp. and former president of Newmont Mining Corp.

Although he has a lot of expertise and a wealth of knowledge in the industry, dad is “hands off” on this project, she says.

In fact the ball got rolling when Shear’s experienced chief executive Pamela Strand – who has discovered 88 kimberlites and eight properties across the eastern Arctic and Alberta over the last decade -- decided to assemble a team to scoop up Jericho.

“As the diamond market turned around in 2010, we started to look really seriously at this acquisition,” says Strand on the phone from Yellowknife last week after hosting several community meetings in Nunavut to discuss Shear’s progress at the site.

A big motivator to get moving on the project is that the price of rough or uncut diamonds has gone up about 50 per cent since the original Jericho mine was in operation. Demand has also steadily increased, particularly from Japan, China and India, while supply has remained fairly flat as global diamond mines age and prepare eventually for closure.

“All the major diamond mines today are basically in the autumn of their lives,” notes Lassonde.

“China is very strongly into the bridal diamonds, and India as well. They are ultimately going to be the main drivers,” she says.

Though Canada is a world leader in mining, it is relatively new to the global diamond scene. Gem exploration began here as early as the 1960s, but major kimberlite discoveries were not made until the 1980s. In 1991, the first economic diamond deposit was discovered in the Lac de Gras area of the Northwest Territories and the biggest staking rush since the Klondike gold days began.

Canada finally became a producer in October 1998 when the Ekati diamond mine opened about 300 km northeast of Yellowknife. Since the massive Diavik deposit opened in the same region in 2003, Canada has become the world’s third largest diamond producer on a value basis after Botswana and Russia. De Beers Canada also has two mines in operation, including the only one in Northern Ontario.

While explorers world-wide comb the planet for the next big discovery, Strand figures Shear Diamonds has a big leg up on competitors with its hands on a known kimberlite deposit where an open pit mine and major infrastructure are already in place.

“The region is extremely remote but the mine and mill have already been built so we don’t have to spend $200 million on construction” as did their predecessors, she says.

“It’s a luxury facility and a full, 2,000-tonne per day (processing) plant,” she adds.

“It takes out a huge part of the risk of being involved,” agrees Lassonde, who spent last week at the frozen site on Carat Lake about 75 km south of the Arctic Circle.

These days it’s humming with activity as a 25-person crew re-opens the dormant camp and prepares for a spring drilling program that will get underway when the land thaws out in the coming weeks. But it had a real “ghost town” feel when Lassonde first visited the site last August once the takeover was complete.

“There were coffee mugs sitting at desks with congealed coffee still in them. The guys’ work boots were sitting out. The mess hall still had all its chairs and TVs and all the beds were made. It really just looked like people had left for the day and were planning on coming back,” she recalls.

It took three years, but they did. The junior company’s $4.6 million work plan for this year has three main exploration and development priorities: to prove-up and expand the current resource at the Jericho kimberlite complex, to explore for new diamond-bearing kimberlites close to the existing mine, and to begin work on determining if the project will be economically feasible.

The new owner is also focusing on the renewal of Jericho’s water license and other permits, leases and regulatory requirements from all levels of government.

“We have to make sure we have what we need to turn this mine back on again,” says Strand.

“We’re being very methodical. We can’t afford to make mistakes a second time,” she adds.

Indeed, Jericho first opened with fanfare in mid-2006. Prime Minister Stephen Harper even climbed atop a drill rig skid and declared Canada one of the most important diamond producers in the world with Jericho on board. He joined local dignitaries at a traditional ribbon-cutting ceremony to usher in the new territory’s first official mine – “a real gem”, as then-premier Paul Okalik described it.

During its first year of operation the mine unearthed a 59-carat gem stone, which sold for $450,000 U.S. There were also three low-quality stones recovered in excess of 100 carats each, which doesn’t happen every day in a diamond dig.

But storm clouds loomed. Jericho had a low carat-per-tonne ratio and it wasn’t nearly the size of -- or the safe bet as -- its successful Canadian-based predecessors Ekati and Diavik, which global mining giants BHP Billiton and Rio Tinto had scooped up respectively.

On top of that Tahera was getting only 0.55 carats of diamonds per tonne – down from the 0.85 carats per tonne predicted in their feasibility study – and processing just 1,700 tonnes of kimberlite per day from the fledgling mine, far short of the anticipated 2,200. More problematic was that ongoing exploration didn’t turn up anything new.

The warm and early spring in 2006 was another nail in the coffin because it meant less time to use the winter road to bring in much-needed supplies, particularly fuel.

That forced Tahera to go after some more available but less rich kimberlite to conserve fuel. The meteoric rise of oil prices and the Canadian dollar were also bad news since the mine’s costs were in Canadian dollars but the diamonds were sold in the U.S.

It was in such financial dire straits that it was costing then-owner Tahera $2 million more per month to dig the diamonds out of the ground than the company was able to sell them for.

“People get really excited about how much money could be made in the diamond industry, but they neglect to look at the huge risks,” says Lassonde. “It is so much more complicated and a much lengthier process to get a diamond mine into production” than a gold or base metals mine.

Operations at Jericho ground to a halt and Tahera went into court-ordered creditor protection in January 2008. Its shares were suspended from the Toronto Stock Exchange the following month.

The company then announced it was selling the mine, which was under the care of the federal government.

Enter Strand and Lassonde.

The two women have only known each other a few years but struck up a friendship since sitting on the board of directors together at gold explorers Takara Resources Inc. and St. Eugene Mining Corp.

“You sort of gravitate to the other women in the industry, and so Pam came to me one day and said: ‘I’m doing this deal and wondering if you would take a look at it and tell me what you think, and see if you are interested in it’,” recalls Lassonde, a civil engineer who started her career at SNC-Lavalin and then became an investment banker.

“Shear was her baby. Pam was strictly in diamond exploration before this deal. She saw the downfall of Tahera and she knew that at some point Jericho was going to go for sale. She asked if I could help because it wasn’t going to be an easy road,” says Lassonde, 39.

“Pam is the geologist and I’m the engineer. We pretty much split it down the middle like that. And I was probably at the forefront with the investment bankers and the financial side,” she says, having worked on mining transactions at Macquarie Bank Ltd. in Australia and the U.S.

RBC helped them raise money and Shear then made a $38-million cash and stock deal to buy the property from bankrupt Tahera Diamond last July.

“We did a lot of due diligence. None if it was, or is, easy,” Lassonde says.

“We're going to look at everything that went wrong,” says Strand.

“We've got a number of questions about the geological resource — that's the first part — secondly, the milling, because of the low recovery of diamonds, and thirdly, the permitting.”

The company hopes to have a plan in place next year to reopen the mine. In the meantime they are going to process the kimberlite stockpile from the original processing of the ore.

So why do they think the landscape is better now?

“One of the major issues around Jericho was the diamond recovery. It was significantly less than what they had expected,” says Lassonde.

She notes it comes down to a two-part process of what she calls diamond “liberation” and diamond recovery.

“It has to be extracted from the kimberlite. Jericho has one of the hardest kimberlites than anybody’s ever seen so that was a huge challenge for Jericho. I think maybe there was a lack of full understanding of how hard this kimberlite was.

“Now we’re looking at how to get the crushing right from the get-go this time. Let’s not try to start up the mill and tweak it here and tweak it there, sort of like a sailor playing with sails,” says Lassonde.

Rising rough diamond prices this time around are another plus. The central lobe of the Jericho kimberlite pipe was assessed last July at likely achieving $112 per carat, which is considered better then average. However, diamond prices since then have increased, on average, about 35 per cent, so they are hoping to see even better prices if they go into production.

Jericho had produced more than 780,000 carats of gem-quality diamonds, some of which are still for sale at Tiffany’s on Bloor St. in Toronto. Much of the machinery and equipment that Jericho used at the site had been removed by creditors, but the major facilities, such as the pit, office and accommodation buildings for 225 personnel, remain intact.

The duo says this will be a pivotal year for them at Jericho, which Shear is spending most of its time and resources on since it is the most prospective of its properties. The company trades on the TSX Venture Exchange.

“At first blush, it looked fixable but challenging,” says Lassonde, adding it still does but that they are encouraged so far by what they’re finding out.

“We’re focused on exploration and working on the resource to add tonnage, which can only improve our economics,” says Strand, adding: “We want to have our ducks in a row for 2012.”

“In effect, nothing that is Jericho today has any relationship to Tahera from the past, except the logo in the odd place, but we’re slapping up the Shear Diamonds logo,” jokes Lassonde.

“In my heart of hearts I want it to succeed and I want it to go into production. But I am an engineer...So it’s baby steps,” she adds.