Management s Discussion and Analysis For the year ended December 31, 2014

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1 For the year ended The following management s discussion and analysis of financial position and results of operations ( MD&A ) of Adriana Resources Inc. (along with its subsidiaries, Adriana or the Company ) was prepared as of February 26, 2015 and should be read in conjunction with the Company s audited consolidated financial statements and related notes thereto (the Audited Financials ) for the year ended. Included in this MD&A are matters that constitute "forward-looking" information within the meaning of Canadian securities law. See Cautionary Statement Regarding Forward-Looking Information. All dollar figures included herein are expressed in Canadian dollars unless otherwise indicated. Additional information about the Company has been filed electronically through the System for Electronic Document Analysis and Retrieval ( SEDAR ) under the Company s profile at and is available online on the Company s website at The Company s common shares ( Common Shares ) are listed on the TSX Venture Exchange under the symbol ADI. Overview of the Company Adriana is a Canadian publicly-listed company engaged, through its 40% interest in Lac Otelnuk Mining Ltd. ( LOM ), in the development of mineral properties in Nunavik, Québec, Canada (the Lac Otelnuk Project ). Adriana also holds land associated with a previously proposed iron ore port facility in Brazil (the Land ). On January 12, 2012, Adriana closed a Joint Venture Agreement (the JV Agreement ) with a whollyowned subsidiary of WISCO International Resources Development & Investment Limited ( WISCO ) to engage in the development and operation of the Lac Otelnuk Project. Pursuant to the JV Agreement, WISCO funded an aggregate of $91,634,000 of which $51,634,000 was paid directly to Adriana and the remaining $40,000,000 was paid to LOM. WISCO acquired a 60% interest in LOM while Adriana holds the remaining 40% interest. To date, the Company has not recorded any revenues from operations and has no source of operating cash flow. With the capital provided by WISCO in connection with the closing of the JV Agreement, the Company has financial resources sufficient to cover LOM cash calls, necessary administrative and support costs through 2016, based upon present plans. Development of the Lac Otelnuk Project will require additional financing. The Audited Financials have been prepared on a going concern basis. Management believes there are no uncertainties that lead to significant doubt the entity can continue as a going concern for at least the next twelve months, including continuity of operations, realization of assets and the satisfaction of liabilities in the ordinary course of business. Investment in Lac Otelnuk Mining Ltd.: Lac Otelnuk Iron Ore Project, Nunavik, Québec, Canada LOM owns two properties within the Labrador Trough in the Nunavik region of northern Québec: the Lac Otelnuk property and the December Lake property. The Lac Otelnuk property is located approximately 165 kilometres northwest of Schefferville, and consists of 1,398 mineral claims totalling approximately 673 square kilometres. The December Lake property is comprised of 160 mineral claims totalling approximately 74 square kilometres, and is located approximately 65 kilometres from the Lac Otelnuk property and 230 kilometres north of Schefferville.

2 In October 2013, Watts, Griffis and McOuat Limited completed a block model and updated the NI Mineral Resource estimate which included information from the 2012 drilling program. The results show that the Measured and Indicated Mineral Resources increased to billion tonnes, representing an increase of approximately 82% compared with the estimate of August 2012, based on a Davis Tube Weight Recovery ( DTWR ) cutoff grade of 18%. The Total Iron (Head Fe analysis), DTWR and Satmagan results (Head magnetic Fe) are shown in the table below: CATEGORIZED MINERAL RESOURCE ESTIMATE FOR LAC OTELNUK PROJECT (CUTOFF OF 18% DTWR) Resource Classification Tonnes (in billions) TFe Head % DTWR % Magnetic Fe % Measured Indicated Total M&I Inferred LOM engaged SNC-Lavalin Inc. ( SNC-Lavalin ) in October 2013 to carry out a definitive feasibility study (the Feasibility Study ). The Feasibility Study is based on an open pit mine and a processing plant designed to produce 50 million tonnes per year of high quality iron ore concentrate as a final product. The Feasibility Study includes: (i) a 735 kv power transmission line; (ii) a product delivery system (the PDS ); and (iii) a dewatering storage ship loading system at the Port of Sept-Iles. The PDS study is being jointly completed by Ausenco Limited and SNC Lavalin. The engineering of the Feasibility Study is complete and the draft Feasibility Study report is anticipated to be completed in early In October 2014, LOM announced that it joined the Government of Québec and Champion Iron Limited in a partnership formed to carry out a feasibility study regarding a new multi-user rail link between the Port of Sept-Iles and the Labrador Trough. The objective is to focus on a phased construction approach that would satisfy the needs of all potential users. There has been no new major field work carried out in The Environmental and Social Impact Assessments are still in the preliminary stages and significant activity will begin after the Feasibility Study is completed. Consultations with Inuit and First Nations will form part of these studies. LOM has a commitment to pay 1.25% of its gross revenue on 328 of its land claims to the former owner of these land claims. In respect of these claims, LOM must pay a minimum royalty advance of $450,000 in November of each year until commencement of commercial production. Xiaogang Hu, P. Eng, the Project Director for LOM who is a Qualified Person as defined in NI , has reviewed and approved the technical disclosure relating to the Lac Otelnuk Project contained in this MD&A. Land The Company s Brazilian Land is located in Sepetiba Bay, approximately 70 kilometres west of Rio de Janeiro in the state of Rio de Janeiro, Brazil, on a contiguous coast land position totalling approximately 860,000 square metres with direct access to the transportation network including the railway that services the iron ore producing area of Minas Gerais and on a land parcel on the adjacent island. The Company currently holds a 56.1% effective indirect interest in the Land through a 60% owned indirect subsidiary, Page 2

3 Brazore Holdings Ltd. ( Brazore Holdings ), which owns a 93.5% interest in Brazore Representação, Importação, Exportação e Consultoria Ltda. ( Brazore Ltda. ), the Company s Brazilian subsidiary which owns the Land (collectively referred to as Brazore ). Pursuant to an agreement dated August 21, 2007 with Athena Holdings LLC ( Athena ) (the Brazore Transaction ), the Company transferred its interest in its subsidiary, Brazore Holdings, to Athena in exchange for Athena s 93.5% interest in Brazore Ltda. The existing agreement does not provide for any capital contributions by Athena, nor for any additional dilution of Athena s interest. Through December 31, 2014, the Company incurred $42,676,000 of cash expenditures relating to the Land, including all outof-pocket expenses. Brazore Ltda. is a defendant in certain legal actions in Brazil pursuant to which a third party is seeking the payment of approximately $3,200,000 under a conditional agreement entered into by the Company in 2008 for the purchase of certain lands. The Brazilian courts have put a lien in the amount of approximately $2,800,000 on a separate parcel of land owned by the Company s Brazilian subsidiary as security in this dispute. The Company is vigorously defending itself including seeking the return of its initial payment of approximately $850,000 and the annulment of the agreement on the basis of misrepresentations therein. Although the ultimate outcome of these actions cannot be measured with reliability, it is the opinion of management of the Company that these claims are without merit and the resolution of these matters will not have a material adverse effect on the financial position of the Company. The Company has determined that it will not proceed with the development of the Land into a port facility at this time, and is considering various strategic alternatives on how to best proceed with the Land, including the potential sale of the Land. Impairment Charge During the fourth quarter of 2013, management engaged a third party to determine the recoverable amount of the Land utilizing direct comparisons with sales of comparable properties. The recoverable amount of the Land, reflecting the estimated fair value less costs to sell, was determined to be $4,739,000 and the Company recognized an impairment charge of $49,559,000, before tax. Management received an updated appraisal as at and the Land values did not materially change, so no adjustment was made to the carrying value. As a result of the 2013 impairment charge, the net loss attributable to the non-controlling interest in 2013 exceeded the cumulative non-controlling interest recorded as a component of the Company s equity. Hence in accordance with IFRS 10, Consolidated Financial Statements, paragraphs B 94 and B 98, the non-controlling interest will continue to be carried in a deficit balance until either Brazore has sufficient earnings to eliminate the deficit, or until the Company ceases to control this subsidiary. In the event that the Company ceases to control the subsidiary, any deficit balance in non-controlling interest will be recognized through a charge in the Company s statement of comprehensive loss. Discussion of Operations For the year ended and December 31, 2013 The Company s comprehensive loss for the year ended was $3,996,000, compared to a comprehensive loss of $49,846,000 for the year ended December 31, 2013, a variance of $45,850,000. As at December 31, 2013, the Company s management determined that the Land s value was impaired, and the carrying cost was written down through an impairment charge of $49,559,000. In 2014, the comprehensive loss was due to general and administrative, travel and Land care and maintenance costs incurred throughout the year. Page 3

4 Change in fair value of financial assets classified as fair value through profit or loss for the year ended was $33,000, compared to $98,000 for the year ended December 31, 2013, a decrease in loss of $65,000. The loss was due to the decline in market value of the common shares of Cap-Ex Iron Ore Ltd. General and administrative expenses for the year ended were $1,817,000, compared to $2,200,000 for the year ended December 31, 2013, a decrease of $383,000. The decrease was mainly due to lower salary and rent expenses. As of June 30, 2014 the Company s 50% share of rental obligations for its former premises in Vancouver ended. Land care and maintenance expenses for the year ended were $1,541,000 compared to $nil for the year ended December 31, These expenses represent amounts related to the Brazil Land since December 31, 2013, when management took an impairment charge. These costs are made up of general and administrative and professional and consulting expenses. Prior to the December 31, 2013 impairment charge these costs were capitalized. The capitalized Land costs for the year ended December 31, 2013 were $1,040,000. The increase of $501,000 related to the decision not to proceed with the Brazil port project, including severance costs for three employees and additional professional fees. Share-based payment expense for the year ended was $178,000, compared to $595,000 for the year ended December 31, 2013, a decrease of $417,000. The decrease reflects the 1,925,000 options granted in 2014 having a lower fair value than previous option grants, therefore the share-based payment expense is lower than in prior years. The Company s investment in LOM has been accounted for as an investment in associate since January 12, LOM incurred a loss during 2014 of $1,001,000 (2013 $1,612,000) and Adriana s 40% share of the loss was $400,000 (2013 $645,000), a decrease of $245,000. The decrease in loss was due to LOM s lowered travel, professional and consulting expenses in Professional and consulting fees for the year ended were $600,000 compared to $430,000 for the year ended December 31, 2013, an increase of $170,000. The increase is mainly due to retail marketing initiatives for the Company s common shares. Foreign exchange loss for the year ended was $72,000, compared to a $56,000 gain for the year ended December 31, 2013, an increase in loss of $128,000. The foreign exchange gain reflected exchange rate variations on the Brazore Ltda. (Brazil) non-trade payables and the Brazore Holdings (Barbados) advance royalty payable to Athena. The Brazilian real and US dollar spot exchange rates on December 31, 2013 were and respectively, while the rates were and on. In the prior year, the Brazilian real and US dollar rates on December 31, 2012 were and respectively. Interest income for the year ended was $583,000 compared to $774,000 for the year ended December 31, 2013, a decrease of $191,000. The decrease was due to lower cash balances on hand in 2014 that earned less interest income than in the previous year. Gain on disposal of mineral property interests for the year ended was $64,000, compared to $2,851,000 for the year ended December 31, 2013, a decrease of $2,787,000. On January 28, 2014 and February 14, 2014, Adriana received $11,000 and $96,000, respectively, from Revenu Québec representing refundable tax credits for resource expenditures incurred on the Lac Otelnuk Project in 2008, 2011 and In periods prior to the receipt of these monies, the Company had given no accounting recognition to these credits, reflecting the uncertainty of the outcome of Revenu Québec s review. Other than the interest, these amounts relate to expenditures incurred before the closing of the JV Agreement, and hence the period in which Adriana owned 100% of the Lac Otelnuk project. Accordingly, 60% of the refunds received ($64,000) have been recorded as an additional gain on the sale Page 4

5 of the Lac Otelnuk project, while the remaining 40% of the refund ($43,000), has been recorded as a reduction in the carrying value of Adriana s investment in LOM. Gain on disposal of mineral property interests for the year ended December 31, 2013 was $2,851,000, as a result of Adriana receiving $4,752,000 on August 27, 2013 from Revenu Québec and Ministère des Ressources naturelles et de la Faune (Ministry of Natural Resources and Wildlife) representing refundable tax credits for resource expenditures incurred on the Lac Otelnuk Project in 2008, 2011 and Other than the interest, these amounts relate to expenditures incurred before the closing of the JV Agreement, and hence the period in which Adriana owned 100% of the Lac Otelnuk project. Accordingly, 60% of the refunds received ($2,851,000) were recorded as an additional gain on the sale of the Lac Otelnuk project, while the remaining 40% of the refund ($1,901,000), was recorded as a reduction in the carrying value of Adriana s investment in LOM. As noted above, the Company recognized an impairment charge of $49,559,000 in 2013, which has been applied against its Land. The recoverable amount of the Land, reflecting the estimated fair value less cost to dispose, was determined to be $4,739,000 and the Company has written down the carrying amount to this value. Fourth Quarter For the three months ended and December 31, 2013 During the three months ended, Adriana and LOM continued focusing on the Feasibility Study work with SNC-Lavalin, and updating the NI Mineral Resource estimate. The Company s comprehensive loss for the three months ended was $942,000, compared to $50,084,000 for the three months ended December 31, The decrease in loss was due to the impairment charge on the Land recognized in December General and administrative expenses for the three months ended were $395,000 compared to $648,000 for the three months ended December 31, 2013, a decrease of $253,000. The decrease was mainly due to lower salary and rent expenses. As of June 30, 2014 the Company s 50% share of rental obligations for its former premises in Vancouver had ended. Land care and maintenance expenses for the three months ended were $449,000 compared to $nil for the three months ended December 31, These expenses represent amounts related to the Brazil Land since December 31, 2013, when management took an impairment charge. These costs are made up of general and administrative, travel and professional and consulting expenses. Prior to the December 31, 2013 impairment charge these costs were capitalized. For the three months ended December 31, 2013, the capitalized Land costs were $608,000. The decrease of $159,000 related to lower salary expenses and professional fees. Share-based payment expense for the three months ended was $54,000 compared to $63,000 for the three months ended December 31, 2013, a decrease of $9,000. The decrease reflects the options granted in 2014 having a lower fair value than in previous periods. Share of loss of LOM for the three months ended was $165,000, compared to $113,000 for the three months ended December 31, 2013, an increase of $52,000. The increased loss is a result of an increase in the salary expense due to accrued employee bonuses for the three months ended. Gain on disposal of mineral property interests for the three months ended was $nil compared to $252,000 for the three months ended December 31, As noted above, Adriana received cash refunds in 2013 from the Québec Ministry of Natural Resources related to Page 5

6 Summary of Quarterly Results The following sets out certain selected quarterly financial information with respect to the Company: ($'000's except per-share amounts) Dec 31 Sep 30 Jun 30 Mar 31 Dec 31 Sep 30 Jun 30 Mar 31 Revenues Administrative and professional expenses (566) (599) (702) (732) (824) (836) (968) (597) Change in fair value of financial assets classified as fair value through profit or loss (4) (4) (10) (15) (3) (12) (20) (63) Land care and maintenance (449) (209) (384) (498) Impairment charge (49,559) Gain on disposal of property interests , Foreign exchange gain/(loss) 102 (22) 302 (454) (2) (130) Share of loss of Lac Otelnuk Mining Ltd. (165) (92) (83) (59) (113) (90) (70) (372) Other income Income tax recovery (Loss) / income for the period (942) (785) (727) (1,542) (50,084) 2,013 (798) (977) Attributable (loss) / income to: Owners of the Company (942) (785) (727) (1,542) (30,195) 2,044 (748) (844) Non-controlling interests (19,889) (31) (50) (133) (Loss) / income per common share asattributable to owners: Basic and diluted ($0.00) ($0.00) ($0.00) $ (0.01) $ (0.19) $ 0.01 ($0.00) $ (0.01) The gain in the third quarter of 2013 was due to refundable tax credits from Revenu Québec for resource expenditures incurred on the Lac Otelnuk Project in 2008, 2011 and The loss in the fourth quarter of 2013 was due to the impairment charge in connection with the Land. Liquidity and Capital Resources The Company s cash balance was $36,366,000 at, compared with $41,656,000 at December 31, 2013, a decrease of $5,290,000, reflecting a cash call to LOM and general expenses offset by the tax credit refunds received during the year. The Company s working capital at has decreased to $31,837,000 from $37,485,000 at December 31, 2013, a decrease of $5,648,000. On August 11, 2014, Adriana contributed $2,292,000 to LOM in satisfaction of its 40% share of LOM s $5,729,000 cash call, and WISCO contributed $3,438,000 in satisfaction of its 60% share. During the year ended, the Company incurred cash outlays for costs related to the capitalized Land of $1,541,000 (December 31, 2013 $1,040,000, which includes general and administrative expense, plus professional fees directly related to the Land, to make the comparative figures consistent). These cash outlays represent amounts related to the Brazil Land since December 31, 2013, when management took an impairment charge. As at the date hereof, the Company has financial resources sufficient to cover LOM cash calls, necessary administrative and support costs for at least the next twelve months, based upon present plans. Corporate administrative expenditures are projected at approximately $2,500,000 annually, including Brazil Land care and maintenance costs. The Company s annual commitments are as follows: Payments Due by Period Jan. 1 to 1-3 years 4-5 years After Contractual Obligations Total Dec. 31, 2015 after 2015 after years Operating Leases $ 229,055 $ 176,666 $ 52,389 $ - $ - Page 6

7 Brazore Holdings agreed to pay to Athena Resources LLC, the owner of the 40% non-controlling interest, a royalty of US$0.50 per dry tonne of iron ore transported or shipped through the proposed port facility up to an aggregate maximum of US$3,000,000. To October 31, 2009, Brazore Holdings paid five advance royalty installments totaling US$1,250,000 which, prior to the impairment charge, were capitalized in the accumulated costs of the Land. No further advance payments have been made since that date; however, the Company has recorded the balance of US$1,750,000 as a liability through the consolidation of its interest in Brazore Holdings. Off Balance Sheet Arrangements The Company has not entered into any off-balance sheet arrangements. Transactions with Related Parties All related party transactions relate to the reimbursement of general and other administrative expenses, including travel and meal expenses, with arm s-length third party suppliers that the Company pays on behalf of LOM. All related party transactions are at historical cost and there are no provisions for bad debts. From January 1, 2014 to, Adriana paid for expenses in the amount of $121,912 on behalf of LOM for travel travel costs. During the year ended, LOM reimbursed Adriana in the amount of $161,227 related to intercompany receivables. The total receivable from LOM as of is $10,185. Internal Controls Receivable from LOM, January 1, 2014 $ 50,130 Add: Payments made on behalf of LOM 121,912 Less: Amounts reimbursed from LOM (161,227) Receivable from LOM, $ 10,815 The Company has only five employees at its Toronto head office, including the Chief Executive Officer and the Chief Financial Officer. As such, management of the Company is not able to design a traditional control system that relies on the segregation of duties. Within that context, management has established processes which are in place to provide them sufficient knowledge to support management representations that they have exercised reasonable diligence that: (i) the consolidated financial statements do not contain any untrue statement of material fact or omit to state a material fact required to be stated or that is necessary to make a statement not misleading in light of the circumstances under which it is made, as of the date of and for the periods presented by the consolidated financial statements; and (ii) the consolidated financial statements fairly present in all material respects the financial condition, results of operations and cash flows of the Company, as of the date of and for the periods presented by the consolidated financial statements. In contrast to the certificate required under National Instrument Certification of Disclosure in Issuer s Annual and Interim Filings ( NI ), the Company utilizes the Venture Issuer Basic Certificate (the Certificate ) which does not include representations relating to the establishment and maintenance of disclosure controls and procedures ( DC&P ) and internal control over financial reporting ( ICFR ), as defined in NI In particular, the certifying officers filing the Certificate are not making any representations relating to the establishment and maintenance of: i) controls and other procedures designed to provide reasonable assurance that information required to be disclosed by the issuer in its annual filings, interim filings or other reports filed or Page 7

8 submitted under securities legislation is recorded, processed, summarized and reported within the time periods specified in securities legislation; and ii) a process to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with the issuer s accounting policies. The Company s certifying officers are responsible for ensuring that processes are in place to provide them with sufficient knowledge to support the representations they are making in this Certificate. Investors should be aware that inherent limitations on the ability of certifying officers of a venture issuer to design and implement on a cost-effective basis DC&P and ICFR as defined in NI may result in additional risks to the quality, reliability, transparency and timeliness of interim and annual filings and other reports provided under securities legislation. Disclosure of Outstanding Share Data The Company is authorized to issue an unlimited number of Common Shares. As at the date of this MD&A, the Company had 157,554,238 Common Shares issued and outstanding. As at the date of this MD&A, stock options to purchase 6,275,000 Common Shares at a weighted average price of $0.51 were outstanding. During the year ended, 16,667 stock options were forfeited with a weighted average exercise price of $0.22 and 3,858,333 stock options expired with a weighted average exercise price of $0.41. The following details the share capital structure as of the date of this MD&A: Exercise Number Number Expiry date price of securities of shares Common Shares issued and outstanding 157,554,238 Stock options for Common Shares, at weighted average exercise price expiring in the year ending: December 31, ,000 December 31, ,000 December 31, ,375,000 December 31, ,525,000 December 31, ,925,000 $ ,275,000 Common Shares, on a fully diluted basis 163,829,238 Changes in Accounting Policies including Initial Adoption Statement of Compliance The Audited Financials have been prepared in accordance with International Financial Reporting Standards ( IFRS ) as issued by the International Accounting Standards Board ( IASB ), and effective for the year ended. Adoption of New and Amended Accounting Pronouncements The IASB recently issued a number of new accounting standards. The new standards determined to be applicable to the Company are disclosed below. Other standards have been excluded as they are not applicable. Page 8

9 (i) IFRIC 21, Levies IFRIC 21, Levies ( IFRIC 21 ) provides guidance on the accounting for levies within the scope of IAS 37, Provisions, Contingent Liabilities and Contingent Assets. Levies are imposed by governments in accordance with legislation and do not include income taxes, which are accounted for under IAS 12, Income Taxes or fines or other penalties imposed for breaches of legislation. IFRIC 21 defines an obligating event as the activity that triggers the payment of the levy, as identified by legislation. IFRIC 21 also notes a liability to pay a levy is recognized progressively if the obligating event occurs over a period of time. The Company adopted the interpretation effective January 1, The adoption did not have any impact on the consolidated financial statements. (ii) IFRS 2, Share-Based Payment IFRS 2, Share-Based Payment ( IFRS 2 ) was amended by the IASB on December 12, The amendments clarify the definition of vesting conditions. The amendments change the definitions of vesting condition and market condition in the Standard, and add definitions for performance condition and service condition. They also clarify that any failure to complete a specified service period, even due to the termination of an employee s employment or a voluntary departure, would result in a failure to satisfy a service condition. This would result in the reversal, in the current period, of compensation expense previously recorded reflecting the fact that the employee failed to complete a specified service condition. These amendments are effective for transactions with a grant date on or after July 1, The Company adopted the amendments effective July 1, The adoption of these amendments did not have an impact on the Company s consolidated financial statements. (iii) IAS 36, Impairment of Assets IAS 36, Impairment of Assets ( IAS 36 ) was amended by the IASB in May The amendments require the disclosure of the recoverable amount of impaired assets when an impairment loss has been recognized or reversed during the period and additional disclosures about the measurement of the recoverable amount of impaired assets when the recoverable amount is based on fair value less costs of disposal, including the discount rate when a present value technique is used to measure the recoverable amount. The Company adopted these amendments effective January 1, The adoption of these amendments did not have any impact on the consolidated financial statements. Adoption of New and Amended Accounting Pronouncements: Issued but not yet Effective The Company is currently evaluating the impact of these standards and amendments which have been issued, but are not yet effective, on its consolidated financial statements: (i) IFRS 8, Operating Segments IFRS 8, Operating Segments ( IFRS 8 ) was amended by the IASB on December 12, The amendments add a disclosure requirement for the aggregation of operating segments and clarify the reconciliation of the total reportable segments' assets to the entity's assets. The amendments are effective for annual periods beginning on or after July 1, (ii) IFRS 9, Financial Instruments IFRS 9, Financial instruments ( IFRS 9 ) was issued by the IASB on July 24, 2014 and will replace IAS 39, Financial instruments: recognition and measurement ( IAS 39 ). IFRS 9 utilizes a single approach to determine whether a financial asset is measured at amortized cost or fair value and a new mixed measurement model for debt instruments having only two categories: amortized cost and fair value. The approach in IFRS 9 is based on how an entity manages its financial instruments in the context of its business model and the contractual cash flow characteristics of the financial assets. Page 9

10 Final amendments released on July 24, 2014 also introduce a new expected loss impairment model and limited changes to the classification and measurement requirements for financial assets. IFRS 9 is effective for annual periods beginning on or after January 1, (iii) IFRS 11, Joint Arrangements IFRS 11, Joint Arrangements ( IFRS 11 ) was amended by the IASB on May 6, The amendments add new guidance on how to account for the acquisition of an interest in a joint operation that constitutes a business. The amendments are effective for annual periods beginning on or after January 1, (iv) IFRS 13, Fair Value Measurement IFRS 13, Fair Value Measurement ( IFRS 13 ) was amended by the IASB on December 12, The amendments clarify that the portfolio exception applies to all contracts within the scope of IAS 39, Financial Instruments: Recognition and Measurement or IFRS 9, Financial Instruments, regardless of whether they are financial assets or financial liabilities. The amendments are effective for annual periods beginning on or after July 1, The adoption of these amendments is not expected to have an impact on the Company s consolidated financial statements. (v) IFRS 15, Revenue from Contracts with Customers IFRS 15, Revenue from Contracts and Customers ( IFRS 15 ) was issued by the IASB on May 28, 2014, and will replace IAS 18, Revenue, IAS 11, Construction Contracts, and related interpretations on revenue. IFRS 15 sets out the requirements for recognizing revenue that apply to all contracts with customers, except for contracts that are within the scope of the standards on leases, insurance contracts and financial instruments. IFRS 15 uses a control based approach to recognize revenue which is a change from the risk and reward approach under the current standard. Companies can elect to use either a full or modified retrospective approach when adopting this standard and it is effective for annual periods beginning on or after January 1, (vi) IAS 24, Related Party Disclosures IAS 24, Related Party Disclosures ( IAS 24 ) was amended by the IASB on December 12, The amendments clarify the identification and disclosure requirements for related party transactions when key management personnel services are provided by a management entity. The amendments are effective for annual periods beginning on or after July 1, The adoption of these amendments is not expected to have an impact on the Company s consolidated financial statements. Financial Instruments As at, the Company s financial instruments are cash and cash equivalents, investment in equity securities, receivable from LOM and other receivables, prepaid deposits, and accounts payable and accrued liabilities. The following is a discussion of the Company s risk exposures: a) Credit risk: Credit risk is the risk that one party to a financial instrument will cause a financial loss for the other party by failing to discharge an obligation. The Company s cash and cash equivalents, prepaid deposits, receivable from LOM and other receivables are exposed to credit risk. Management believes the credit risk for cash and cash equivalents, prepaid deposits and other receivables is low because the counterparties are highly rated financial institutions and the federal and provincial governments, and the credit risk for the receivable from LOM is low Page 10

11 because the counterparty is LOM, which has sufficient cash on hand and can request cash calls from its parent companies. b) Interest rate risk: Interest rate risk is the risk that the fair value of future cash flows of a financial instrument will fluctuate because of changes in market interest rates. The Company is not exposed to significant interest rate risk due to the short term to maturity of its financial instruments. The Company had no interest rate swaps or financial contracts in place as at or during the year ended. c) Currency risk: Currency risk is the risk that the fair value of future cash flows of a financial instrument will fluctuate because of changes in foreign exchange rates. The Company s financial position and performance are exposed to the risk of currency fluctuations. The Company s functional currency is Canadian dollars but a proportion of its expenditures are incurred in US dollars and Brazilian reais. Any significant change in the US dollar or Brazilian real exchange rates will have an impact on the operating results of the Company, its financial position and cash flows. d) Liquidity risk: Liquidity risk is the risk that the Company will encounter difficulty in meeting obligations associated with financial liabilities. The Company s accounts payable and accrued liabilities are all current and due within 90 days, or can become due, within 90 days of the date of the statement of financial position. The Company manages liquidity risk through a cash flow model, an annual budget and ongoing monitoring of expenses and capital expenditures to ensure it has sufficient liquidity to meet its business requirements as they come due. Risks and Uncertainties Investing in the Company involves risks that should be carefully considered. In addition to the risks, uncertainties and factors as discussed below in the Cautionary Statement Regarding Forward-Looking Information, in conducting its business, the Company is subject to a number of other risks and uncertainties that could have a material adverse effect on, among other things, the Company s business prospects or financial condition and could result in a delay or indefinite postponement in the development of the Company s properties and projects. Going Concern To date, the Company has not recorded any revenues from operations, has no source of operating cash flow and no assurance that additional funding will be available to it for further exploration and development of its projects. Although the Company has sufficient liquidity to carry on for at least the next twelve months, the continuation of the Company as a going concern beyond the next twelve months is dependent on new funding being obtained through successful debt or equity financings and/or the sale of assets. Failure to obtain adequate financing could result in a material and adverse effect on the Company and its operations, and there is no guarantee that any financing will be obtained, or if obtained, will be obtained on reasonable terms. Any future equity financing will result in dilution for the Company s current shareholders (other than WISCO, if it exercises its pre-emptive share subscription right). Under the terms of the JV Agreement, WISCO may, but is not obliged to, provide funding assistance of up to a maximum of $200,000,000 for a term of up to 12 months in the event that the Company has difficulty in funding its share of any cash call by LOM prior to the achievement of commercial production. Financial markets remain such that it is a challenge for companies such as Adriana to raise additional funds. The Company has incurred operating losses since its inception and the Company expects to continue to incur operating losses for the foreseeable future until such time as the Lac Otelnuk Project is in commercial production and generates sufficient revenues to fund continuing operations. The development of the Lac Otelnuk Project will continue to require the commitment of substantial resources. While the Company anticipates that its financial resources as at the date of this MD&A are sufficient to cover costs through at least the next twelve months based upon present plans, there can be no assurance that the Company will Page 11

12 continue as a going concern, generate any revenues or achieve profitability, develop the Lac Otelnuk Project or have the financial resources to satisfy any costs above estimated costs. Exploration, Mining and Development Risks The Company, through its 40% interest in LOM, is engaged in exploration and development of the Lac Otelnuk Project. These activities involve significant risks, which even a combination of careful evaluation, experience and knowledge may not mitigate. Few properties that are explored are ultimately developed into producing mines. In addition to the normal and usual risks of exploration and mining, the Lac Otelnuk Project is located in remote, undeveloped areas of Québec and the availability of infrastructure such as surface access, skilled labour, fuel and power at an economical cost cannot be assured. These are integral requirements for exploration, development and production facilities on mineral properties. The proposed future operations will require significant expenditures to complete the feasibility study and to construct mining facilities and other necessary infrastructure and there can be no assurance that the Lac Otelnuk Project will be successful in developing such infrastructure or in developing it on economically feasible terms. Consequently, there can be no assurance that the Lac Otelnuk Project will ultimately be developed or if developed, will result in a profitable commercial mining operation. Mineral Resource and Reserve Estimates are Uncertain by their Nature There are numerous uncertainties inherent in estimating mineral resources and mineral reserves. Such estimates are a subjective process and the accuracy of any mineral resources and mineral reserves estimate is a function of the quantity and quality of available data, and of the assumptions made and judgments used in engineering and geological interpretation. These amounts are estimates only and the actual level of recovery of iron ore from such deposits may be different. Differences between management s assumptions, including economic assumptions such as metal prices, market conditions and actual events could have a material adverse effect on such estimates and on the Company s financial position and results of operations. Integration and Strategic Relationships The JV Agreement signed on January 12, 2012 changed the scale of the Company s business and operations, and may expose the Company to new geographic, political, operating, financial and geological risks. The strategic relationship under the JV Agreement may have unknown significant liabilities. Pursuant to the JV Agreement, the Company may have difficulty realizing anticipated synergies and maximizing the financial and strategic position of the strategic relationship. The integration of the strategic relationship may disrupt the Company s ongoing business and its relationships with employees, customers, suppliers and contractors. Any failure by LOM to meet its obligations, or any disputes with respect to the parties respective rights and obligations could have a material adverse effect on the Company. Disputes between the Company and WISCO or its Affiliates Could Harm the Company s Operations Disputes may arise between the Company and WISCO or its affiliates in a number of areas, including with respect to LOM under the JV Agreement. The Company may not be able to resolve any potential conflicts, and even if it does, the resolution may be less favourable than if the Company were dealing with a party that did not own a majority interest in the Company s principal mineral property and a significant equity interest in the Company. The Company may be Subject to Dilution of its Interest in LOM and the Lac Otelnuk Project The Company may be subject to dilution of its interest in LOM and the Lac Otelnuk Project, should additional funding become necessary to continue operations. Should additional funds become necessary to supplement, increase, or improve the operations, the Company may not be in the position to invest Page 12

13 additional capital, and if it fails to invest additional capital its interest in LOM and the Lac Otelnuk Project could be diluted. At present, the Company owns a minority interest in LOM. At the present time, the Company does not have the ability to fund the Lac Otelnuk Project to commercial production. Furthermore, there is no assurance that WISCO, the majority holder in LOM will be able to fund the Lac Otelnuk Project either. The inability to fund may have a great impact on the Company s ability to continue as a going concern. If the Lac Otelnuk Project is not funded properly, the Company and/or LOM may lose its rights to the Lac Otelnuk Project. LOM is not the Company s Subsidiary The Company has a minority interest in LOM and does not control the board of directors of LOM and the Company s business plans for LOM may conflict with the plans of WISCO who owns the majority interest in LOM. This may restrict the ability of the Company to deal freely with LOM and the Lac Otelnuk Project, to increase its equity interest in LOM and the Lac Otelnuk Project and to structure its business in a tax effective manner. One of the Company s Directors may have Conflicts of Interest due to their Relationship with WISCO One of the Company s directors and some of the directors of LOM are employed by, are directors or officers of, or otherwise have a material relationship with WISCO (such persons the WISCO Representatives ) and the presence of such WISCO Representatives on the board of directors of LOM or the Company could create, or appear to create, potential conflicts of interest and other issues with respect to their fiduciary duties to the Company when the Company s directors are faced with decisions that could have different implications for WISCO than for the Company. WISCO may not Vote its Shares in the Best Interest of the Company WISCO s interest in LOM and the Lac Otelnuk Project is greater than its investment in the Company. To the extent any vote of Company shareholders is required, it could create a conflict of interest between what is in the best interest of the Company and what is in the best interest of WISCO, including in circumstances where a shareholder vote is required in respect of a financing and the failure to obtain such financing could result in WISCO diluting the Company s interest in LOM and increasing WISCO s interest in LOM. WISCO has Effective Control of the Company s Principal Asset, LOM As of the date of this MD&A, WISCO beneficially owned 30,216,480 of the Company s Common Shares. WISCO s beneficial ownership represents approximately 19.2% of the issued and outstanding Common Shares. Further, as at the date of this MD&A, WISCO beneficially owned 60% of the common shares of LOM, and WISCO has the right to appoint a majority of the directors to LOM. Accordingly, WISCO has effective control of LOM and the Lac Otelnuk Project, the principal mineral property of the Company. First Nations and Inuit First Nations and Inuit in Québec are increasingly making lands and rights claims in respect of existing and prospective resource projects on lands asserted to be First Nation and Inuit traditional or treaty lands, which could materially adversely affect the Company s business. The Supreme Court of Canada has found that the Crown has a duty to work with First Nations and Inuit to identify the nature of the rights that will be affected, to respect and accommodate these rights and to reconcile these rights with the proposed development. The government has interpreted this to mean that companies need to enter into a consultation process with First Nations and Inuit. At the low end of the spectrum, the duty to consult has been found to require the provision of information, direct engagement about potential adverse impacts, Page 13

14 listening carefully to concerns and a requirement to attempt to minimize adverse impacts on the rights. At the high end of the consultation spectrum, the duty to consult requires First Nation and Inuit representatives on a project management committee and providing various forms of funding. Legal and Title Risks Title to land including mineral properties and mining rights involves certain inherent risks including difficulties in identification of the actual location of specific properties. Although the Company has exercised due diligence with respect to determining title to and interests of LOM in its land and the Lac Otelnuk Project, there is no guarantee that such title or interests will not be challenged or impugned or become the subject of title claims by other parties. Title insurance is generally not available. Challenges to the title of the properties in which the Company or LOM have an interest, if successful, could result in the loss or reduction of the Company s interests in such properties and the Company's projects thereon not proceeding, all of which could have a material adverse effect on the Company's financial condition, liquidity or results of operations. Licences, Permits, Laws and Regulations The Company s exploration and development activities, including the development of the Lac Otelnuk Property, require permits and approvals from various government authorities and other third parties, and are subject to extensive national, provincial and local laws and regulations governing prospecting, development, production, construction, the environment, transportation, taxes, labour standards, occupational health and safety, mine safety and other matters. Environmental legislation is complex and is evolving in a manner that is creating stricter standards, while enforcement, fines and penalties for noncompliance and environmental assessments of proposed projects are becoming more stringent. The Company is required to obtain additional licences, permits and consents from various governmental authorities and other third parties to continue and expand its exploration and development activities. There is no assurance that the Company will be able to obtain and maintain all necessary licences, permits and approvals that may be required to explore and develop its properties and projects and to commence construction or operation of facilities at the Lac Otelnuk Property. Compliance with existing and possible future legislation could cause additional expense, capital expenditures, restrictions and delays in the activities of the Company, the extent of which cannot be predicted and which could have a material adverse effect on Company s financial condition, liquidity or results of operations. Furthermore, any failure to comply fully with all applicable laws and regulations could have significant adverse effects on the Company, including the suspension or cessation of operations. Financial Conditions and Capitalization for Mining Companies The Company anticipates that it will have to rely on equity financings for its working capital requirements and to fund its exploration and development activities. The access to global financial markets for mining companies has been impacted by significant downturns in the mining industry and by a severe contraction in access to financing for mining companies. These declines are negatively affecting substantially all mineral development and exploration companies including Adriana. There is no assurance that the Company and/or LOM will be successful in obtaining the required equity or debt financing as and when needed on favourable terms or at all. This may negatively impact the timeline for commencement of commercial production of the Lac Otelnuk Project. Additionally, global economic conditions may cause decreases in asset values that are deemed to be other than temporary, which may result in impairment losses. The continuation of such adverse market conditions could have negative implications for the Company in terms of the ability to continue as a going concern. Commodity Prices The Company s future profitability is largely dependent on movements in commodity prices. The prices of commodities, including iron and steel, fluctuate widely and are affected by many factors outside the Page 14