IN THE MATTER OF THE PLAN OF COMPROMISE OR ARRANGEMENT OF:

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1 SUPERIOR COURT Commercial Division (Sitting as a court designated pursuant to the Companies Creditors Arrangement Act, R.S.C. 1985, c. C-36, as amended) N o : IN THE MATTER OF THE PLAN OF COMPROMISE OR ARRANGEMENT OF: QUÉBEC LITHIUM INC., a corporation incorporated pursuant to the laws of Québec, having its head office at 1 Place Ville-Marie, Suite 4000, Montreal, and its principal place of business at 500 Route Québec Lithium, La Corne, Québec. -and- QLI MÉTAUX INC., a corporation incorporated pursuant to the laws of Québec, having its head office at 1 Place Ville-Marie, Suite 4000, Montreal, Québec. -and- RB ENERGY INC., a corporation incorporated pursuant to the laws of Canada, having its head office at 401 Bay Street, Suite 2010, Toronto, Ontario. -and- SIROCCO MINING INC., a corporation incorporated pursuant to the laws of British Columbia, having its head office at Three Bentall Centre, 595 Burrard Street, Suite 2600, Vancouver, British Columbia. -and- Petitioners KPMG INC., a corporation incorporated pursuant to the laws of Canada, having a place of business at Tour KPMG, 600 de Maisonneuve Boulevard West, Suite 1500, Montreal, Québec. Monitor FIRST REPORT OF THE MONITOR, KPMG INC. NOVEMBER 12, 2014

2 TABLE OF CONTENTS INTRODUCTION AND PURPOSE OF THE MONITOR S REPORT... 1 REPORT RESTRICTIONS AND SCOPE LIMITATIONS... 2 ACTIVITIES OF THE MONITOR TO DATE... 3 RECEIPTS AND DISBURSEMENTS FOR THE THREE-WEEK PERIOD ENDED NOVEMBER 1, UPDATED CCAA CASH FLOW FORECAST... 7 PROPOSED SALE AND INVESTOR SOLICITATION PROCESS SELECTION OF THE SALES ADVISOR STATUS OF THE PETITIONERS INTERIM FINANCING SUPPLIER MATTERS OTHER MATTERS THE MONITOR S OBSERVATIONS AND RECOMMENDATIONS i

3 INDEX TO SCHEDULES Schedule A Copies of notices published in La Presse and the Globe and Mail National Edition Schedule B Copies of the notices to creditors Schedule C Updated Cash Flow Forecast for the 26-Week Period Ending May 2, 2015 Schedule D Summary of the fees payable to the Sales Advisor (sealed) ii

4 INTRODUCTION AND PURPOSE OF THE MONITOR S REPORT 1. KPMG Inc. ( KPMG or the Monitor ) was appointed as Monitor pursuant to the order issued by this Honourable Court on October 14, 2014 (the Filing Date ) in respect of the motion (the October 14 Motion ) filed by Québec Lithium Inc. ( QLI ), QLI Métaux Inc. ( Metals ), RB Energy Inc. ( RBE ) and Sirocco Mining Inc. ( Sirocco, together with QLI, Metals and RBE, the Petitioners ) under the Companies' Creditors Arrangement Act, R.S.C. 1985, c. C-36, as amended (the CCAA ). On October 15, 2014, this Honourable Court issued the Amended and Restated Initial Order (the Initial Order ) granting, inter alia, a stay of proceedings (the Stay ) until November 13, The proceedings brought by the Petitioners under the CCAA will be referred to herein as the CCAA Proceedings. 2. On October 14, 2014, KPMG filed the Pre-Filing Report of the Proposed Monitor (the Monitor s Pre-Filing Report ) which described certain of the Petitioners background information, its cash flow forecast, proposed interim financing arrangements, the Key Employee Retention Plan as well as the Petitioners preliminary restructuring plans. 3. On October 29, 2014, this Honourable Court granted the Second Amended and Restated Initial Order (the Amended Initial Order ) which, amongst other things, granted priority (the CCAA Charge Priority ) to each of the CCAA Charges (as defined in the Initial Order) ahead of certain legal hypothecs (including any and all legal hypothecs arising from the construction or renovation of an immovable of the Petitioners) registered against the Petitioners property. 4. The purpose of this first report of the Monitor is to provide this Honourable Court with information regarding the following: a. The activities of the Monitor from the Filing Date to the date of this report; b. The actual cash flow of the Petitioners for the three-week period ended November 1, 2014, as compared to the Petitioners cash flow forecast submitted to this Honourable Court as part of the October 14 Motion (the CCAA Cash Flow Forecast ); c. The Petitioners updated cash flow forecast for the 26-week period ending May 2, 2015 (the Updated CCAA Cash Flow Forecast ), which was prepared by senior management of the Petitioners ( Senior Management ) to update stakeholders on the 1

5 ongoing and future liquidity profile of the Petitioners based on the latest information available at the time of this report; d. The Petitioners proposed Sale and Investor Solicitation Process (the SISP ); e. The investment banker selection process and engagement of Rothschild Inc. as the Petitioners financial advisor and investment banker (the Sales Advisor ); f. The status of the Petitioners interim financing and the availability of additional advances under the Interim Financing Term Sheet (as defined in the Initial Order); g. An update in respect of certain supplier and other matters; and h. The Monitor s observations and recommendations in respect of the Petitioners motion returnable on November 13, 2014 seeking an extension of the Stay to April 30, 2015 (the Extended Stay Period ), approval of the SISP, approval of the retention of the Sales Advisor and the sealing of the Sales Advisor s engagement letter. 5. A more detailed description of the business operations of the Petitioners, including certain information regarding the background of their restructuring efforts in the period prior to the Filing Date is provided in the October 14 Motion and summarized in the Monitor s Pre-Filing Report. REPORT RESTRICTIONS AND SCOPE LIMITATIONS 6. In preparing this report, the Monitor has been provided with, and has relied upon, unaudited financial information, books and records and financial information prepared by Senior Management (collectively, the Information ). The Monitor has reviewed the Information for reasonableness, internal consistency and use in the context in which it was provided. However, the Monitor has not audited or otherwise attempted to verify the accuracy or completeness of the Information in a manner that would wholly or partially comply with Canadian Auditing Standards ( CASs ) pursuant to the Chartered Professional Accountants Canada Handbook and, accordingly, the Monitor expresses no opinion or other form of assurance contemplated under the CASs in respect of the Information. 7. Some of the information referred to in this report consists of forecasts and projections. An examination or review of the financial forecasts and projections, as outlined in the Chartered Professional Accountants Canada Handbook, has not been performed. Future oriented financial information referred to in this report was prepared based on Senior Management's 2

6 estimates and assumptions. Readers are cautioned that since projections are based upon assumptions about future events and conditions that are not ascertainable, the actual results will vary from the projections, even if the assumptions materialize, and the variations could be significant. 8. The information contained in this report is not intended to be relied upon by any prospective purchaser or investor in any transaction with the Petitioners. 9. Unless otherwise stated, all monetary amounts contained in this report are expressed in Canadian dollars, which is the Petitioners common reporting currency. ACTIVITIES OF THE MONITOR TO DATE 10. The Monitor fulfilled the requirements set out in Paragraph 39(a) of the Initial Order in respect of notifying the Petitioners creditors and other stakeholders of the CCAA Proceedings: a. The Monitor published notices in La Presse (October 22 and 29, 2014) and the Globe and Mail National Edition (October 23 and 30, 2014) containing the information prescribed under the CCAA. Copies of the notices that were published are attached to this report as Schedule A; b. Within five business days after the date of the Initial Order, the Monitor: i. Made the Initial Order publicly available by posting it on the Monitor s website at (the Monitor s Website ); ii. iii. Sent a notice (in both English and French; together, the Notices ) to all known creditors having a claim against one or more of the Petitioners advising them that the Initial Order is publicly available on the Monitor s Website, and also posted copies of the Notices on the Monitor s Website. This occurred on October 20, Copies of the Notices are attached to this report as Schedule B; and Prepared a list of known creditors showing their names, addresses and estimated claim amounts and made it publicly available in the prescribed manner by posting it on the Monitor s Website. 11. In accordance with other requirements set out in the Initial Order or otherwise, the Monitor has also been engaged in the following activities since the Filing Date: 3

7 a. Established cash controls, disbursement review and reporting procedures with Senior Management to allow for a proper monitoring of the Petitioners receipts and disbursements; b. Arranged and attended update meetings between Senior Management, the Interim Lender and the Agent (both as defined in the Initial Order) and their respective advisors, and the holders of the $72 million senior secured debt facility (the Senior Lenders ) and Investissement Quebec; c. Assisted the Petitioners with establishing reporting protocols for the Interim Lender and the Agent; d. Reviewed and otherwise participated in the development of the SISP; e. Facilitated and monitored the process through which the Petitioners interviewed prospective investment bankers to conduct the SISP and ultimately engaged the Sales Advisor, subject to Court approval, including providing assistance with settling the engagement letter between the Petitioners and the Sales Advisor dated as of November 1, 2014 (the Engagement Letter ); f. Assisted the Petitioners in the preparation of the Updated CCAA Cash Flow Forecast; g. Reviewed the Petitioners interim financing requirements and arrangements, including assisting Senior Management in monitoring compliance with the terms set out in the Interim Financing Term Sheet; h. Prepared for and attended at court hearings in these CCAA Proceedings on October 14, 15 and 29, 2014; i. Updated the Monitor s Website, including posting the various materials filed to date with this Honourable Court in respect of the CCAA Proceedings; j. Completed and filed the requisite statutory documentation with the Office of the Superintendent of Bankruptcy; k. Assisted the Petitioners in responding to and dealing with various creditor inquiries and issues; l. Attended to various inquiries which the Monitor received from the Petitioners creditors and other stakeholders; and m. Attended at and conducted numerous meetings and discussions with Senior Management and the Petitioners legal advisors regarding the Petitioners business, financial affairs restructuring efforts and other matters relating to the CCAA Proceedings. 4

8 RECEIPTS AND DISBURSEMENTS FOR THE THREE-WEEK PERIOD ENDED NOVEMBER 1, The Petitioners cash receipts and disbursements for the three-week period ended November 1, 2014 (the Reporting Period ) as compared to the CCAA Cash Flow Forecast is tabled below: RB Energy Inc. and Québec Lithium Inc. (excluding Sirocco and Metals) Actual versus Forecast Cash Flow for the Three-Week Period Ended November 1, 2014 (Note 1) Unaudited (CAD $000) Actual Forecast Variance RBE QLI Combined Combined Cash Inflow Receipts from lithium deliveries Total Cash Inflow Cash Outflow Quebec energy costs - (51) (51) (140) 89 Quebec site admin and maintenance - (189) (189) (290) 101 Corporate head office costs 1-1 (108) 109 Employee and management compensation (39) (764) (803) (964) 161 Insurance (190) - (190) (506) 316 Deposits for critical suppliers (570) 570 Professional fees (594) - (594) (1,656) 1,062 DIP facility fees and interest (364) - (364) (421) 57 Impact of foreign exchange Total Cash Outflow (1,161) (1,003) (2,164) (4,655) 2,491 Net Cash Flow, before DIP Advances and Intercompany Transfers (1,161) (843) (2,004) (4,516) 2,512 Intercompany transfers (440) DIP advances (in CAD equivalent, see Note 2) 6,720-6,720 6,720 - Net Cash Flow 5,119 (403) 4,716 2,204 2,512 Cash, beginning of period (October 14, 2014) ,000 (43) Cash, end of period (November 1, 2014) 5, ,673 3,204 2,469 Note 1: Readers are cautioned to read the "Report Restrictions and Scope Limitations" section of this report. Note 2: Senior Management has used an average foreign exchange rate of C$1.12/US$ for all Canadian dollar conversions from US dollars. 5

9 13. In aggregate, there was a $2.5 million net positive variance during the Reporting Period, the majority of which is the result of timing differences. A summary of the more significant variances is as follows: a. Beginning Cash Balance: The opening cash balance was lower than expected due to a timing difference with respect to the funding of employee payroll just prior to the Filing Date. b. Employee and Management Compensation: The $161,000 net positive variance was the result of certain timing differences between actual and expected weekly payroll amounts, most of which are expected to reverse in the coming weeks, and a $43,000 permanent variance mostly due to the payment of certain payroll amounts just prior to the Filing Date (noted above). c. Insurance: The consolidated variance of $316,000 is a timing difference relating to a premium which was due to be paid during the Reporting Period in respect of builder s risk coverage. The Petitioners did not pay this premium on a precautionary basis while in discussions with the insurer to ensure that there was no impact to the coverage or risk under this policy after the lithium mine and plant located in La Corne, Quebec (the Lithium Project ) was put on care and maintenance in early October 2014 thereby giving the insurer the ability to terminate the policy. Senior Management advised that it has received initial confirmation of continued coverage and expects that it will receive definitive confirmation of coverage from its insurer during the week ending November 15, 2014 at which time the outstanding premium will be paid. d. Deposits for Critical Suppliers: QLI had anticipated that significant deposits would be required to secure the continued supply of certain services. However, no demands for such deposits have been made to QLI to date nor does Senior Management expect there will be any deposits paid. This variance is therefore considered permanent in nature. e. CCAA and Sales Process Costs: The $1.1 million positive variance is primarily a timing difference in the receipt of various professional fee invoices. f. Other Variances: The positive variances for Quebec Energy ($89,000) and Foreign Exchange ($26,000) are permanent differences, and Senior Management expects that the remaining variances presented in the table above are generally the result of timing differences and, as such, will reverse in due course. 6

10 14. As forecast, during the first week of the Reporting Period, the Petitioners received the first advance (the First Advance ) in the amount of US$6.0 million (approximately CAD$6.7 million) under the terms of the Interim Financing Term Sheet. UPDATED CCAA CASH FLOW FORECAST 15. Senior Management, with assistance of the Monitor, has prepared the Updated CCAA Cash Flow Forecast for the 26-week period ending May 2, 2015 (the Updated Cash Flow Period ). The Updated CCAA Cash Flow Forecast reflects certain updated estimates and assumptions of Senior Management based on developments to date during the course of these CCAA Proceedings. 16. A copy of the Updated CCAA Cash Flow Forecast is attached to this report as Schedule C. Consistent with the initial CCAA Cash Flow Forecast, the Updated CCAA Cash Flow Forecast is presented on a combined basis as well as individually for each of RBE and QLI. There have been no individual cash flow forecasts provided for Sirocco or Metals as these entities are holding companies and are not expected to have any ordinary course cash transactions throughout the Updated Cash Flow Period. A summary of the Updated CCAA Cash Flow Forecast is set out in the table below: 7

11 RB Energy Inc. and Québec Lithium Inc. (excluding Sirocco and Metals) Summary of the Updated CCAA Cash Flow Forecast (Note 1) For the 26-Week Period Ending May 2, 2015 Unaudited (CAD $000) RBE QLI Combined Forecast Cash Inflow Receipts from lithium deliveries Management services Total Forecast Cash Inflow Forecast Cash Outflow Quebec energy costs - (1,177) (1,177) Quebec site admin and maintenance - (1,478) (1,478) Corporate head office costs (898) - (898) Employee and management compensation (660) (2,080) (2,740) Directors fees & benefits (90) - (90) Insurance (515) (579) (1,094) Professional fees (4,940) - (4,940) KERP payments (760) - (760) DIP facility fees and interest (695) - (695) Total Forecast Cash Outflow (8,558) (5,314) (13,872) Net Cash Flow, before DIP Advances and Intercompany Transfers (8,303) (5,162) (13,465) Intercompany transfers (4,960) 4,960 - DIP advances (in CAD equivalent, see Note 2) 7,840-7,840 Net Cash Flow (5,423) (202) (5,625) Cash, beginning of period (November 2, 2014) 5, ,673 Cash, end of period (May 2, 2015) Note 1: Readers are cautioned to read the "Report Restrictions and Scope Limitations" section of this report. Note 2: Senior Management has estimated all Canadian Dollar conversions from US Dollars using an expected average foreign exchange rate of C$1.12/US$. 17. During the Updated Cash Flow Period, the estimated aggregate net cash outflow for the Petitioners is $13.5 million, consisting of individual cash outflows of $8.3 million and $5.2 million, respectively, for each of RBE and QLI, before receipt of interim financing advances and intercompany transfers. 18. Senior Management expects that the Petitioners forecast cash flow requirements will be funded by the cash remaining from the First Advance as at the end of the Reporting Period, as well as by obtaining additional interim financing in the amount of $7.8 million (US$7.0 million) from the Interim Lender during the Updated Cash Flow Period. As subsequently 8

12 discussed (under the Status of the Petitioners Interim Financing section of this report), there are certain outstanding conditions precedent that may impact further advances from the Interim Lender. Pursuant to provisions of the Interim Financing Term Sheet, all required repayments are to be made to the Interim Lender prior to the end of the Updated Cash Flow Period. However, this repayment is excluded from the Updated CCAA Cash Flow Forecast as the terms of any transaction for a sale, refinance or other transaction involving the Petitioners or its assets cannot be forecast at this stage. 19. The following provides a general discussion of the key components of the forecast $13.5 million net cash outflow during the Updated Cash Flow Period: a. Care and maintenance costs for the Lithium Project are forecast at $2.7 million, consisting of $1.5 million for general site maintenance costs, consumables and property taxes, and $1.2 million for energy costs. The latter category reflects savings of approximately $100,000 per month (as compared with estimates contained in the CCAA Cash Flow Forecast) which are expected to result from Senior Management s negotiation of revised electricity rate terms (as subsequently discussed under Supplier Matters, further below). b. Corporate head office costs for RBE are forecast at $0.9 million and are consistent with monthly costs which were contemplated in the CCAA Cash Flow Forecast. c. Total employee and management compensation is forecast at $2.7 million, of which $2.1 million is expected to be required for payment of QLI s current complement of staff and management as well as for funding payments of $490,000 for pre-filing vacation pay and related benefits for the 208 employees QLI temporarily laid off in early October The vacation pay is scheduled to be paid in April The balance of approximately $0.7 million represents the forecast payroll and executive management costs for RBE. d. Insurance costs are forecast at $1.1 million and include the delayed payment of the aforementioned premium for builder s risk coverage which was not paid during the Reporting Period (as discussed in the previous section of this report). e. As previously discussed, the CCAA Cash Flow Forecast had contemplated payment of deposits to certain suppliers which QLI had deemed to be critical. Senior Management no longer expects that supplier deposits will be required and therefore have removed this item from the Updated CCAA Cash Flow Forecast. 9

13 f. Total professional fees of $4.9 million are forecast to be paid during the Updated Cash Flow Period for the various corporate, tax, legal and restructuring professional firms, as well as the Monitor. This forecast amount contemplates the reversal of the $1.1 million positive variance in professional fees during the Reporting Period (as previously discussed) as well as an increase in estimated ongoing professional fees throughout the CCAA Proceedings on account of the sales process costs (discussed below) and the general level of time required to be expended by the restructuring professionals to deal with various matters that have arisen in the CCAA Proceedings to date. g. Forecast payments total $0.8 million under the Key Employee Retention Plan which was approved by this Honourable Court in the Initial Order. Of this total, a portion in respect of certain employees will not be paid until all required repayments have been made to the Interim Lender in accordance with provisions of the Interim Financing Term Sheet. As previously noted, the repayment to the Interim Lender is excluded from the Updated CCAA Cash Flow Forecast. h. Interest and financing fees are forecast at $0.7 million during the Updated Cash Flow Period pursuant to RBE s expected borrowing levels and the terms of the Interim Financing Term Sheet. 20. The Updated CCAA Cash Flow Forecast presents a funded scenario. However, Senior Management is concerned that, should the professional fees exceed the budgeted amounts in the Updated CCAA Cash Flow Forecast, such excess fees will have to be satisfied by proceeds of realization which will be subject to the Administration Charge. PROPOSED SALE AND INVESTOR SOLICITATION PROCESS 21. Subject to approval by this Honourable Court, the SISP documents the parameters under which the Sales Advisor will market the Petitioners assets, including both the Lithium Project and the iodine mine located in Chile (the Chilean Operations ), available for sale and also present the opportunity for parties to make an investment in the Petitioners businesses. It is proposed that the SISP will be carried out by the Petitioners, with the assistance of, and in consultation with, the Sales Advisor and under the supervision of the Monitor (collectively, the SISP Team ). Additionally, the Petitioners and the SISP Team will be conducting the SISP in consultation and coordination with the Interim Lender and the Agent. 10

14 22. A copy of the SISP is attached to the Notice of Motion dated November 10, 2014 (the November Motion ). The key process milestones and target dates included in the SISP, along with comments in respect of these timelines and the process generally, are summarized in the following table (capitalized terms not defined in the table below are used as defined in the SISP): Process Milestone Target Date Comments Commencement of solicitation process Preliminary due diligence period Deadline for submission of nonbinding Letters of Intent ( LOI ) Identification of Qualified Bidders As soon as reasonably practical following granting of the SISP Approval Order Continuous process once commenced until January 23, 2015 On or before January 23, 2015 On or before January 31, 2015 The Sales Advisor will prepare a Teaser Letter, Confidential Information Memorandum ( CIM ) and a Process Letter, and will send the Teaser Letter and a Confidentiality Agreement ( CA ) to those prospective purchasers and investors (each a Solicited Party ) listed on a Contact List to be created by the SISP Team. The Petitioners will set up and populate an electronic data room with relevant information that will be updated as required. Upon signing a CA and providing certain disclosure information and evidence of financial wherewithal to complete a transaction contemplated by the SISP, a Solicited Party will be provided access to confidential information about the Petitioners, including the CIM, the Process Letter and the electronic data room, in order to perform due diligence. The SISP sets out numerous matters which are required to be addressed in LOI s submitted as Purchase Bids or Investment Bids. The LOI requirements are reasonably exhaustive given the requirement of the SISP Team, the Agent and the Interim Lender that full details be provided about the expected final form of offer that each Prospective Bidder may ultimately submit. Obtaining detailed expressions of interest will permit the SISP team, in consultation with the Agent and Interim Lender, to assess the likelihood that a satisfactory transaction will be completed and whether such a transaction can be completed prior to the Target Closing Date (as subsequently discussed). The SISP Team, in consultation with the Agent and the Interim Lender, will evaluate each LOI against certain Bid Criteria to identify Prospective Bidders with which 11

15 Deadline for submission of Binding Offers On or before March 27, 2015 the Petitioners would like to continue to work with a view to obtaining a Binding Offer from the Prospective Bidder (once so selected, a Qualified Bidder ). Prospective Bidders shall be notified in writing by January 31, 2015 as to whether they are Qualified Bidders. Any Prospective Bidder that the Agent reasonably requests to be deemed as a Qualified Bidder will be designated by the Petitioners as a Qualified Bidder. If no Qualified Bidders are selected, the Petitioners shall apply to this Honourable Court to continue, modify or terminate the SISP. Qualified Bidders will be given time to complete their due diligence and submit a Binding Offer, which must be submitted in the form of a template asset purchase or sponsor/investment agreement (for which a template may also be provided at the election of the Petitioners). A cash deposit in the amount of 10% of the purchase price or investment amount, as applicable, must be included with all Binding Offers. Binding Offers must be available for acceptance until May 31, 2015 and provide proof of financial ability to close the transaction, and cannot contain material conditions to closing other than Court approval or other statutorily required consents or approvals. The Petitioners are permitted to accept one or more nonoverlapping Qualified Offers and continue negotiations with other Qualified Bidders with a view to finalizing an agreement. Target Closing Date April 15, 2015 Upon accepting an offer or non-overlapping offers (a Successful Bid(s) ), the Petitioners are required to apply to this Honourable Court, on at least seven days notice to the Service List, for an order approving the Successful Bid(s). Upon obtaining this order, the Petitioners will work towards completing the transaction contemplated in the Successful Bid(s) by the Target Closing Date. The SISP provides some flexibility for extending the Target Closing Date if necessary, subject to obtaining consent of each of the Monitor, the Interim Lender and the Agent, or by Court order. 12

16 23. Prior to finalizing the SISP, there was considerable discussion between Senior Management, the Sales Advisor, the Agent, the Interim Lender and the Monitor (and each of their advisors) in regard to key process milestones and associated timelines. These discussions were taken into consideration by the Petitioners in preparing the SISP. The SISP timeline reflects the view, strongly held by the Sales Advisor, that a longer period of time at the front end of the process (pre-loi submission) will lead to wider exposure of the opportunity and more detailed and stronger LOI s being submitted leading to a higher likelihood that a successful transaction(s) can be closed that maximizes value. In addition, the SISP allows for some flexibility in the timing of the process overall with either the consent of the Agent, the Interim Lender and the Monitor or with the approval of this Honourable Court. 24. The Monitor does note, however, that the SISP provides for a relatively short period of time between the Deadline for Submission of Binding Offers (March 27, 2015) and the Target Closing Date (April 15, 2015). A closing by April 15, 2015 may be difficult for a more complex transaction. Greater transparency into the type, nature and complexity of transactions contemplated by interested parties will be obtained following receipt of the detailed LOI s on January 23, The Monitor notes that although the SISP contemplates certain flexibility in its timeline, execution of a transaction that would close beyond April 15, 2015 will likely require the Petitioners to either amend the Interim Financing Term Sheet to provide for additional borrowings and extend the maturity date, or seek alternate sources of funding. As noted above, it appears that any requirement to extend the current outside date of April 15, 2015 would only be considered once meaningful LOI's are received. 26. The Agent has advised the Petitioners and the Monitor that the Senior Lenders are of the view that Successful Bids should be completed by April 15, 2015 to avoid the need for the Petitioners to seek additional financing and the costs associated with such funding, and an extended process. If necessary, the Senior Lenders are, however, prepared to evaluate the costs and benefits of additional financing and an extended process in the context of the bids actually received under the SISP. 13

17 27. Considering the interests of all stakeholders and after significant discussions and negotiations between the Petitioner and the Agent, the Interim Lender, the Sales Advisor, the Monitor and the respective advisors to all parties, the Monitor is of the view that the proposed SISP is reasonable under the circumstances and provides the Petitioners with a real opportunity to achieve meaningful recoveries for the benefit of the Petitioners stakeholders. SELECTION OF THE SALES ADVISOR 28. On October 23 and 24, 2014, Senior Management, representatives from the Interim Lender and the Agent, the Monitor and various counsel representing these parties undertook an investment bank selection process which included reviewing presentations and proposals from a number of highly qualified and reputable investment banking firms. 29. As a result of this process, Rothschild Inc. was selected to be the Sales Advisor for the Petitioners in accordance with the terms of the Engagement Letter. The Sales Advisor will provide investment banking and financial advisory services with respect to a potential financial restructuring, financing, sale transaction or investment, in accordance with the Engagement Letter, subject to the approval of this Honourable Court. 30. The scope of the Sales Advisor s mandate includes various investment banking services designed to lead to a transaction that may include the sale of the Lithium Project and/or the Chilean Operations, the recapitalization, refinancing or financing of the Petitioners (or a subset thereof), a merger or other form of corporate finance transaction. 31. The Engagement Letter will be filed with this Honorable Court in the November Motion, subject to a sealing request. The Monitor has drafted a summary of the fees outlined in the Engagement Letter, Schedule D to this report, which will be filed with this Honourable Court subject to a sealing request. 32. The terms of the Engagement Letter requires that the Petitioners obtain an order from this Honourable Court to include the Sales Advisor s outstanding monthly fees within the existing Administration Charge (as defined in the Initial Order) and to have the Sales Advisors other fees and expenses (but excluding an indemnification claim) paid in priority to any secured creditor of the Petitioners (but secondary to the Administration Charge and the Interim 14

18 Lender Charge in favour of the existing Interim Lender but not any replacement Interim Lender). 33. The proposed scope of the Sales Advisor s engagement was discussed thoroughly by the Petitioners and the Monitor (and their respective counsel), and with the Agent and the Interim Lender. As a result of these discussions, various amendments were made to the Engagement Letter and the timeline proposed under the SISP. 34. The Monitor considers the scope of the Engagement Letter and the compensation provided to the Sales Advisor to be reasonable for the following reasons: a. The scope is generally consistent with the Petitioners expectations, other comparable processes observed by the Monitor over the last several years and the proposed processes submitted by the other prospective investment banking firms (the Other Firms ) who participated as candidates in the selection process; b. The quantum of the fees proposed by the Sales Advisor is competitive with fee levels charged by financial advisors in other CCAA proceedings and the fees proposed by the Other Firms. This also considers that the Sales Advisor appears to have sufficient resources and depth to provide investment banking services for the Chilean Operations, and thus does not require an additional investment bank to be engaged (at an additional cost) in respect of the Chilean Operations; c. The Sales Advisor is proposing that work fees above a certain threshold be credited against transaction fees; and d. The Sales Advisor is not seeking a priority charge for all of its fees and instead, has requested that its outstanding monthly fees be included in the Administration Charge, which appears to be workable as the Sales Advisor is to be paid in advance on a monthly basis thus making it less likely that a claim could be made against the Administration Charge. 35. The Monitor also notes that the Engagement Letter contains commercially sensitive information, including with respect to the Sales Advisor s fee structure. It is the Monitor s view that if the Engagement Letter were made publicly available, including to prospective purchasers and investors, the SISP could be prejudiced. 15

19 STATUS OF THE PETITIONERS INTERIM FINANCING 36. Pursuant to the terms of the Interim Financing Term Sheet, the Interim Lender funded the First Advance to RBE on October 16, The Interim Financing Term Sheet contains sixteen conditions precedent (the Conditions ) which must be met or waived in order for RBE to obtain additional advances up to the maximum of US$13.0 million available under the Interim Financing Term Sheet (the Additional Advances ). Pursuant to the Updated CCAA Cash Flow Forecast the Petitioners anticipate requiring a further advance of US$2.5 million during the week ending January 3, 2015 to fund the ongoing needs of the Petitioners. A number of the Conditions are in effect negative or affirmative covenants dealing with the Petitioners general compliance with the terms of the Interim Financing Term Sheet and orders of this Honourable Court. To the best of the Monitor s knowledge, the Petitioners are in compliance with these provisions. Other Conditions require certain deliverables by the Petitioners. The key Conditions, including the status of the Petitioners compliance with them, are as follows: a. The Petitioners were required to file a motion in a form satisfactory to the Interim Lenders and obtain the CCAA Charge Priority within prescribed time periods following the granting of the Initial Order. The Petitioners have satisfied these two Conditions. b. The Interim Lender shall have received satisfactory opinions of counsel to the Petitioners relating to title to real property of QLI. A draft of this opinion has been delivered to counsel for the Interim Lender, which draft the Monitor understands from counsel to the Petitioners, is in substantially settled form and is expected to be finalized imminently. c. The Petitioners are required to enter into bank account control agreements in form and substance satisfactory to the Interim Lender. The standard form bank account control agreements have been provided to the Interim Lender s counsel for its review and comment. Comments on the form of control agreement were provided to counsel for the Petitioners by counsel to the Interim Lender on Friday, November 7, Those comments are currently under review. Counsel to the Petitioners advises the Monitor that it is anticipated that a revised form of control agreement will be submitted to the applicable banks for approval shortly. The Monitor understands that the estimated time for review and finalization by the banks is two to three weeks. 16

20 d. Chempro Finance Ltd. ( Chempro ), a Bermuda company and a subsidiary of Sirocco is required to guarantee the DIP Obligations (as defined in the Interim Finance Term Sheet) and secure such guarantee by assigning to the Interim Lender all amounts owing to it by Atacama Minerals Chile S.C.M. ( Atacama ), an indirect subsidiary of Sirocco. Counsel to the Petitioners advises the Monitor that all relevant documentation in connection with this intercompany loan has been provided to the Interim Lender s counsel. The Monitor also understands that the Interim Lender has retained Bermuda counsel and that Petitioners counsel is awaiting delivery of draft assignment and security documents for its review. e. Although not Conditions, RBE also has affirmative covenants relating to (i) using its reasonable best efforts to cause the intercompany loans between Chempro and Atacama to be secured on the assets of Atacama on a basis subordinate to Atacama s existing bank debt; and (ii) using reasonable best efforts to cause its other subsidiaries to grant guarantees of payment to the Interim Lender and to grant charges on their assets to secure the DIP Obligations. However, no such guarantee or security will be required for those subsidiaries which the Interim Lender reasonably determines have no material value or where the giving of such guarantees and security is illegal or unduly onerous. The Monitor is advised by Petitioners counsel that the Interim Lender has requested guarantees and security from a number of the Petitioners offshore subsidiaries. The Monitor is advised that the Petitioners are reviewing and considering these requests. f. There is a Condition that the Petitioners be in compliance with all covenants and obligations contained in the Interim Financing Term Sheet. The Monitor notes that this includes numerous covenants (both affirmative and negative) and other terms, relating to such matters as provision of weekly cash reporting and other updates to the Interim Lender, paying all required interest and fees to the Interim Lender when due, and various other requirements and restrictions. Senior Management has advised that it is not aware of any compliance violations with any of these other covenants. On November 3, 2014, the Petitioners counsel wrote to counsel for the Interim Lender requesting confirmation that (i) provided that the bank control agreements were submitted to the applicable banks reflecting reasonable revisions by the Interim Lender; and (ii) the Petitioners are working towards finalizing the assignment documents for Chempro/Atacama, once received, the Conditions will be satisfied. The Monitor understands that the Petitioners have not yet received the requested confirmation. 17

21 37. If the Additional Advances do not become available, and no further sources of funding are found, the Updated CCAA Cash Flow Forecast indicates that the Petitioners will not have sufficient liquidity to satisfy their ongoing obligations beyond approximately January 3, The Monitor will continue to keep close watch on this situation and report promptly to this Honourable Court in respect of any material developments of which the Monitor believes this Honourable Court should be made aware. SUPPLIER MATTERS Hydro Québec 38. After the Filing Date, QLI engaged in negotiations with Hydro Québec in an effort to reduce the energy costs for operating the Lithium Project on a care and maintenance basis as the current contract was based on the presumption that the plant was operating at full capacity and included a high monthly standby and consumption charges. As a result of those negotiations, Senior Management has arranged a new rate structure effective as at the Filing Date which will result in estimated savings of approximately $100,000 per month based on a minimal monthly standby charge combined with relatively low usage charges. Disposition of Chemical Reagents 39. Senior Management raised concerns with its legal advisors, the Monitor and the Interim Lender in respect of various chemical reagents being stored at the Lithium Project. Senior Management was concerned with the financial costs and attendant risks of continuing to store these chemical reagents, some of which are potentially hazardous, and, accordingly, investigated options for disposing of them. As a result of the risk of potential contamination and the potential cost savings from not having to maintain these chemical reagents, the Petitioners determined that the best and most cost-effective option was to return these chemical reagents to the original supplier, Univar Canada Ltd. ( Univar ). Univar was unwilling to re-purchase the chemical reagents from QLI for a cash payment but agreed to provide a credit to be applied against pre-filing liabilities owed by QLI to Univar in the amount of approximately $130,000. The only other viable alternative was to pay a third party disposal firm to remove and safely dispose of the reagents. The Monitor understands that the Interim Lender has consented to QLI returning these chemical reagents to Univar on this 18

22 basis. The Monitor understands that QLI is in discussions with Univar regarding the terms of the proposed return of the chemical reagents. Supplier Claims for Repossession of Property 40. Since the Filing Date, the Petitioners and the Monitor have been approached by a number of suppliers seeking the return of goods supplied to the Lithium Project prior to the Filing Date. Certain of these requests have related to claims which are clearly stayed in the CCAA Proceedings and such creditors have been so advised by the Monitor. In addition, one supplier, UAP Inc., has claimed that it supplied goods (consumables for equipment maintenance, including storage cabinets for those consumables) to QLI on a consignment basis and has demanded the return of these goods. The Monitor and its counsel are reviewing this claim, as well as similar potential claims from three other suppliers which allege they supplied goods to QLI on a consignment basis. OTHER MATTERS 41. RBE s common shares trade on the Toronto Stock Exchange ( TSX ) and the U.S. OTCQX. Trading of its shares was suspended by the TSX effective immediately on the Filing Date to provide time for the TSX to determine whether RBE met the TSX s requirements for continued listing. On October 22, 2014, the TSX notified RBE that it will de-list RBE s common shares effective at the close of business on November 24, RBE s common shares will remain suspended from trading on the TSX until that time. In addition, effective on November 6, 2014, the U.S. OTCQX ceased the trading of RBE s shares on that exchange. 42. Equity Financial Trust Company ( Equity ), the trustee in respect of the $27.5 million of 11% convertible unsecured subordinated debentures issued by RBE in May 2013 (the Debentures ), delivered a notice to RBE on October 22, 2014 stating that events of default had occurred. Equity further advised that it would be delivering notices of events of default to the registered holders of the Debentures who may instruct Equity to notify RBE that the principal, interest and premium of the Debentures has been declared to be due and payable immediately. It is unclear what, if any, additional steps Equity may seek to take on behalf of the holders of the Debentures at this time given that these creditors are subject to the Stay 19

23 imposed by this Honourable Court. The Monitor will continue to review this development and provide updates to this Honourable Court as deemed necessary. 43. As of the Filing Date, there were six legal hypothecs in favour of a person having taken part in the construction or renovation of an immovable ( Construction Liens ) registered against the Petitioners property, representing total claims of approximately $2.9 million in respect of work performed at the Lithium Project. Subsequent to the Filing Date, an additional nine construction liens, totaling $2.4 million, were registered against the Petitioners property. The Construction Liens are summarized in the following table: RB Energy Inc., Québec Lithium Inc., QLI Métaux Inc. and Sirocco Mining Inc. Summary of Construction Liens (all amounts in Canadian Dollars) Registrant Amount Registration Number Registration Date Québec Inc. $ 96, Oct-2014 J.Y. Moreau Électrique 570, Oct Québec Inc. 10, Oct Canada Inc. 734, Oct-2014 WSP Canada Inc. 1,192, Oct-2014 Construction P.B.M. Inc. 253, Oct-2014 Les Industries Blais Inc. 325, Oct Canada Inc. 174, Oct-2014 BREMO Inc. 70, Oct-2014 Dynamitage Castonguay Ltée 535, Oct-2014 Les Structures GB Ltée 470, Oct-2014 Construction PROMEC Inc. 200, Oct-2014 Construction Norascon Inc. 286, Oct-2014 Location Dumco Inc. 39, Oct Québec Inc., dba «Excavation DG» 325, Oct-2014 Total $ 5,287,

24 THE MONITOR S OBSERVATIONS AND RECOMMENDATIONS 44. In the Monitor s opinion, the Petitioners are acting in good faith and with due diligence in an effort to further their restructuring objectives. To date, reasonable progress has been made, notably in the development of the SISP and in the retention of the Sales Advisor, both of which are subject to approval by this Honourable Court. 45. The SISP, which has been developed by the Petitioners with the assistance of its counsel, the Monitor and the Sales Advisor, has been thoroughly discussed with the Agent and the Interim Lender, and in the Monitor's view, represents a reasonable opportunity for the Petitioners to effect a transaction within a reasonable period of time that could result in meaningful recoveries for their stakeholders. 46. The retention of the Sales Advisor is the result of a process that involved a number of highly qualified candidates and the participation of representatives of both the Agent and Interim Lender. The Monitor is of the view that the Sales Advisor is qualified to lead the SISP and the Sales Advisor s proposed fees are competitive under the circumstances. 47. Whereas the Updated CCAA Cash Flow Forecast indicates that the Petitioners can fund their ongoing requirements until May 2, 2015 (except for any outstanding professional fees that are incurred above budget which may be claimed pursuant to the Administration Charge), this is critically dependent on the Petitioners receiving a further US$7 million in advances under the Interim Lending Term Sheet, and if this restructuring were to proceed beyond April 15, 2015, an extension of the maturity date of the Interim Lending Term Sheet will be required. To date, certain Conditions which are required to be met pursuant to the terms of the facility have not been met. The Monitor will continue to closely review the status of all of the Interim Financing Term Sheet Conditions and report back to this Honourable Court as necessary. 21

25 48. The Monitor respectfully recommends to this Honourable Court that: a. The Petitioners request for the Extended Stay Period to April 30, 2015 be granted; b. The SISP be approved; c. The engagement of the Sales Advisor pursuant to the Engagement Letter be approved; and d. The Engagement Letter be sealed. All of which is respectively submitted to this Honourable Court this 12th day of November, KPMG Inc., in its capacity as Monitor of Québec Lithium Inc., QLI Métaux Inc., RB Energy Inc. and Sirocco Mining Inc. Per: Philip J. Reynolds Per: Anthony Tillman Senior Vice President Senior Vice President 22

26 Schedule A

27

28

29 Schedule B

30 KPMG Inc. PO Box Dunsmuir Street Vancouver BC V7Y 1K3 Canada Telephone (604) Fax (604) Internet October 20, 2014 NOTICE TO CREDITORS Re: Québec Lithium Inc., QLI Métaux Inc., RB Energy Inc. and Sirocco Mining Inc. (collectively, the Companies ) On October 14, 2014, the Companies filed a motion pursuant to the Companies' Creditors Arrangement Act (the CCAA ) before the Commercial Division of the Quebec Superior Court in the District of Montreal (the Court ) under court file number The Court issued an order (the Initial Order ) on October 14, 2014 (the Filing Date ) granting a stay of proceedings (the Stay ) against the Companies until October 15, The Court also appointed KPMG Inc. as monitor (the Monitor ) of the Companies. On October 15, 2014, the Court granted a further order (the Amended and Restated Initial Order ) which, amongst other things, extended the Stay to November 13, 2014 (the Stay Period ). In accordance with the terms of the Amended and Restated Initial Order, the Companies are continuing to operate in the ordinary course while under protection from their creditors. Pursuant to the Amended and Restated Initial Order, all persons having verbal or written agreements with the Companies or statutory or regulatory mandates for the supply of goods or services are restrained until further order of the Court from discontinuing, altering, interfering with or terminating the supply of such goods or services as may be required by the Companies provided in each case that the normal prices or charges for all such goods or services received after the Filing Date are paid by the Companies in accordance with the normal payment practices of the Companies or such other practices as may be agreed upon by the supplier or service provider and the Companies, with the Consent of the Monitor, or as may be ordered by the Court. During the Stay Period, no proceeding against or in respect of the Companies or their assets, shall be commenced or continued except with leave of the Court. No procedure for the calling of claims against the Companies has been approved by the Court as at this date. The Monitor will, at a later date subject to further order of the Court, invite creditors to submit proofs of claim in order to prove a claim against one or more of the Companies. The Initial Order, the Amended and Restated Initial Order and lists of the names and addresses of the Companies creditors and the estimated amounts of their claims, as well as copies of other materials filed in the CCAA proceedings, are available on the Monitor s website at The Monitor will post additional documents, including its reports to the Court, on its website as they become available, and interested parties are encouraged to refer to the Monitor s website frequently for updates on the status of the Companies CCAA proceedings. KPMG Inc. is a subsidiary of KPMG LLP, a Canadian limited liability partnership and a member firm of the KPMG network of independent member firms affiliated with KPMG International Cooperative ( KPMG International ), a Swiss entity.