Form F1 Interim Management Discussion and Analysis For Stornoway Diamond Corporation

Transcription

1 Form F1 Interim Management Discussion and Analysis For Stornoway Diamond Corporation ( Stornoway or the Corporation ) For the three and nine months ended January 31, 2015, containing information up to and including March 9, 2015 The following interim management discussion and analysis ( MD&A ) of the Corporation s financial condition and results of operations for the three and nine months ended January 31, 2015 should be read in conjunction with the unaudited condensed interim consolidated financial statements for the three and nine months ended January 31, 2015 and the audited consolidated financial statements and annual MD&A for the years ended April 30, 2014 and 2013 together with the notes thereto. These financial statements have been prepared in Canadian dollars, which is the Corporation s presentation and functional currency, in accordance with International Accounting Standards 34, Interim Financial Reporting ( IAS 34 ) and International Financial Reporting Standards ( IFRS ), as issued by the International Accounting Standards Board ( IASB ). The Corporation s significant accounting policies are set out in Note 2 of the annual audited consolidated financial statements for the years ended April 30, 2014 and April 30, 2013 and in Note 2 of the unaudited condensed interim consolidated financial statements for the three and nine months ending January 31, Additional information on the Corporation, including the Corporation s Annual Information Form ( AIF ) dated July 24, 2014 and other continuous disclosure documents can be accessed through the System for Electronic Document Analysis and Retrieval ( SEDAR ) website at and from the Corporation s website at To the extent applicable, updated information contained in this MD&A supersedes older information contained in previously filed continuous disclosure documents. Information contained on the Corporation s website is not incorporated by reference herein and does not form part of this MD&A. This MD&A contains forward looking statements that are based on certain estimates and assumptions and involve risks and uncertainties. Actual results may vary materially from management s expectations. See the Forward Looking Statements section later in this MD&A for further information. Unless otherwise noted, all amounts are presented in Canadian Dollars. Technical disclosure for the Renard Diamond Project included in this MD&A, with the exception of the technical disclosure related to mineral resources and the 2014 resource expansion drill program, has been reviewed by Patrick Godin, Ing. (Québec). Mr. Godin is Stornoway s Chief Operating Officer ( COO ) and a Qualified Person ( QP ) under National Instrument Standards of Disclosure for Mineral Projects ( NI ). Technical disclosure related to the Renard Diamond Project s mineral resources and the 2014 resource expansion drill program has been reviewed by Robin Hopkins, P.Geol. (NT/NU), Stornoway s Vice President, Exploration and a QP under NI The Board of Directors approved this MD&A on March 9, Page 1 of 22

2 OVERVIEW Stornoway is a Canadian diamond exploration and development company listed on the Toronto Stock Exchange ( TSX ) and headquartered in Longueuil, Québec. Stornoway s principal focus is its 100% owned Renard Diamond Project located in north central Québec, a project in construction with the potential to become Québec s first diamond mine. Stornoway s strategy is to build a growth oriented company that succeeds in the business of mining and selling rough diamonds. Stornoway s long term view of the rough diamond market is positive, based on its outlook for a tightening mine supply and growing demand, particularly in developing markets, resulting in real, long term price growth. In this context, Stornoway is well positioned, with the completion of a series of financing transactions on July 8, 2014, to build the Renard Diamond Project as Québec s first diamond mine. The Corporation has a management team with experience at each stage of the diamond pipeline, from exploration through development, mine construction, operations and marketing. On July 8, 2014 the Corporation completed a series of financing transactions for gross proceeds of $946 1 million, including the issuance of convertible debentures, a public offering of securities and private placements of subscription receipts with Orion Co Investments I Limited ( Orion ), Ressources Québec ( RQ ) and Diaquem Inc. ( Diaquem ) both wholly owned subsidiaries of Investissement Québec ( IQ ), and the Caisse de dépôt et placement du Québec ( CDPQ ). Gross proceeds received on July 8, 2014 totaled $458 million 2. In addition, the Corporation concurrently entered into a diamond streaming agreement (the Stream ), a senior secured loan (the Senior Secured Loan ), an equipment finance facility and cost over run facilities (collectively with the convertible debentures, public offering and private placements, the Financing Transactions ). Proceeds of US$250 million from the Stream are expected to be received in three tranches, beginning in March 2015; the Corporation expects to draw from the $100 million Senior Secured Loan, Tranche A during 2016 and the Corporation expects to borrow up to US$35 million under Tranche A of its equipment finance facility; the first draw under the equipment finance facility occurred in August Subject to meeting certain conditions precedent, the Corporation should also be able to borrow up to $48 million from the cost over run facilities arranged as part of the Financing Transactions. So long as the Corporation meets the conditions precedent to the Stream, Senior Secured Loan and cost over run facilities (if needed), the Corporation anticipates that proceeds from the Financing Transactions will be sufficient to meet its capital requirements over about a 36 month period, to the commencement of commercial production at the Renard Diamond Project. Proceeds from the Financing Transactions will be used for construction of a mine at the Renard Diamond Project, as well as interest and financing expenses during the construction period and for working capital. A summary of the Financing Transactions can be found in the condensed consolidated interim financial statements for the three and nine months ended January 31, 2015 and in the Corporation s interim MD&A for the first quarter ending July 31, 2014 in the section: Completed Financings Three months ended July 31, Following the conclusion of the Financing Transactions, the Corporation s Board of Directors made a formal decision to proceed to mine construction and production at Renard. Construction activities started immediately and the Corporation expects to commence commercial production of rough diamonds in the second quarter of The Financing Transactions are intended to provide a comprehensive funding package for the development of the Renard Diamond Project, which has an estimated capital cost of $811 million, including contingencies and escalation. 1 For illustrative purposes, assumes a C$:US$ conversion rate of $1.10. Actual proceeds of each financing tranche are measured at the C$:US$ exchange rate in effect on the date the funds are received. 2 As at July 8, 2014 C$:US$ conversion rate of $ Page 2 of 22

3 KEY HIGHLIGHTS FOR THE THREE MONTHS ENDED JANUARY 31, 2015: Construction at the Renard Diamond Project continues in line with planned schedule and budget. Incurred costs and commitments at the quarter end totaled $225.0 million, or 27.7% of budget. Overall construction progress stood at 17.4% compared to a planned 15.6%. Work progress under Stornoway's EPCM contract stood at 22.9% compared to a planned 27.0%. On site manpower during the month of January averaged 197 workers, of which 32% were Crees of the Eeyou Istchee. At the end of the quarter, significant milestones achieved included the completion of the permanent accommodation facilities, the completion of the waste water and potable water plants, and the commencement of development on the underground mine portal and ramp. Pre stripping at the Renard 2 Renard 3 open pit began on schedule subsequent to the quarter end Cash and cash equivalents stood at $321 million, with net earnings for the quarter of $7.7 million, or basic earnings of $0.01 per share and $0.01 per share fully diluted. Net earnings for the nine months ended January 31, 2015 were $7.8 million or $0.01 basic and fully diluted earnings per share. CONSTRUCTION HIGHLIGHTS / RESOURCE UPDATE Renard Diamond Project, Québec Stornoway s principal mineral property and primary focus is the Renard Diamond Project, part of the larger Foxtrot Property in the Otish Mountains located in Québec, Canada. Stornoway s wholly owned subsidiary SDCI has a 100% interest in the Foxtrot Property, which contains the Renard cluster of kimberlite bodies. The Renard Diamond Project is located approximately 250 km north of the Cree community of Mistissini and 350 km north of Chibougamau in the James Bay region of North Central Québec. The Renard Diamond Project benefits from year round road access via Route 167; a 1,497m permanent airstrip was recently completed and is being used for the mobilization of site workers. Mine construction activities commenced on July 10, 2014 immediately after the successful conclusion of financing for the project development on July 8, Diaquem, an indirect wholly owned subsidiary of IQ, has a 2% gross revenue royalty on life of mine production from Renard. In July 2014, as part of the Financing Transactions, SDCI entered into a diamond streaming agreement pursuant to which SDCI will sell a 20% undivided interest in each of the run of mine diamonds produced over the life of the Renard Diamond Project. In November 2011, Stornoway released the results of a Feasibility Study at Renard, followed by an Optimization Study in January 2013, which highlighted the potential of the project to become a significant producer of high value rough diamonds over a long mine life. Probable Mineral Reserves as defined under NI stand at 17.9 million carats. Total Indicated Mineral Resources, inclusive of the Mineral Reserve, stand at 27.1 million carats, with a further 16.9 million carats classified as Inferred Mineral Resources, and 25.7 to 47.8 million carats classified as non resource exploration upside. All kimberlites remain open at depth. Readers are referred to the technical report dated December 29 th, 2011 in respect of the November 2011 Feasibility Study (the 2011 Feasibility Study ) for the Renard Diamond Project, and the technical report dated February 28th, 2013 in respect of the January 2013 Page 3 of 22

4 Optimization Study (the Optimization Study ), for further details and assumptions relating to the project. Mine Production Schedule and Construction Budget Upon the release of the project for construction in July 2014, a development schedule was established that assumes plant commissioning beginning in the second half of calendar 2016 and commercial production achieved in the second calendar quarter of The capital cost to develop the Renard Project based on the Optimization Study, the subsequent October 2013 LNG Feasibility Study, all contingencies, and a capital escalation allowance based on this development schedule, is estimated to be $811 million. As at the reporting date, there are no changes to the commissioning schedule. Construction Highlights Third Quarter ended January 31, 2015 At quarter end, overall construction progress stood at 17.4% based on man hour estimates compared to a planned 15.6%. Calendar 2014 construction activities, which were successfully completed during the quarter, represented approximately 15% of the total execution plan, with 36% of work scheduled for 2015, 46% for 2016 and 3% for Two lost time incidents were recorded during the quarter. Significant progress was achieved during the quarter in the completion of the project s civil works, including pad and road construction, piping and surface water management. By quarter end over 825,000 of tonnes of aggregate had been mined from the Renard 65 pit area, well ahead of plan. The first transfer of site construction staff to the new 327 bed permanent accommodation complex occurred at the end of January, at which time assembly of the 60 modules comprising the permanent mine office had also been completed. Occupation of the mine office is scheduled for the end of March. By quarter end, the project s waste water treatment plant and potable water plant had been completed and commissioned. Construction of the 2.2mtonne per annum diamond plant represents the project s critical path activity. Engineering work on the plant is progressing well, with the first pouring of the concrete foundations expected to commence in April as scheduled. The plant building is scheduled to be completed and heated by the fourth quarter of 2015, allowing the installation of the temperature sensitive crushing and recovery circuits through the first half of The plant is scheduled to be energized in the second half of 2016 with wet commissioning beginning in the fourth quarter of that year. A 10 month commissioning ramp up is planned, with a view to commercial production being achieved in the second quarter of 2017 and full production by the summer of An optimization study completed in the Fall of 2014 demonstrated sufficient design efficiencies and cost savings could be implemented in the process plant to allow for a Large Diamond Recovery circuit to be fully integrated into the plant s primary flow sheet within the existing capital budget and with no change of scope in the existing ore processing capacity of 2.2mtonnes per annum. The modified plant design that will be built contemplates the recovery of diamonds up to 45mm in diameter (equivalent to a 600 carat round octahedral stone). Development of the box cut, portal and ramp for the underground mine commenced during the quarter, several months ahead of plan, using on site contractors. Development of the ramp was suspended during January and February, and is expected to commence again in late March. Removal of lake sediment in the Renard 2 Renard 3 pit area was successfully completed in January and February, and pre stripping of the open pit commenced in early March, within the planned schedule. Open pit mining of Renard 2 and Renard 3 during the construction phase of the project is expected to result in the availability of a 0.7mtonne ore stockpile by the time plant commissioning begins in late In support of these activities, procurement of mining equipment stood at 82% for the mobile open pit Page 4 of 22

5 mining fleet, 63% for the mobile underground fleet, and 63% for general surface mobile equipment by the end of January Renard 2 Mineral Resource Update Fieldwork for the 2014 resource expansion program at Renard concluded in November Highlights to date from the field program are as follows: 12,145 meters of deep directional drilling completed at the Renard 2 kimberlite Total of 33 branches from 3 pilot holes plus 3 separate shallower holes from surface Deepest kimberlite intersection returned was at 1,012 vertical metres below surface Initial geological modeling suggests Renard 2 maintains a substantial cross sectional area to 1,000m depth, with preliminary geological modeling suggesting a tonnage range of 9 to 12 mtonnes between 600m and 1,000m. Four primary kimberlite rock types identified in the upper part of the pipe are present, appear to remain consistent in the deep drilling and there is no indication at this stage that the proportion of the diatreme units Kimb2a and Kimb2b diminishes markedly with depth. Sample processing of drill core for diamond content is underway and includes the recovery of a 1.01 carat diamond from a caustic fusion sample and a 0.97 carat diamond from a dense media separation sample, the presence of such large diamonds in small samples being a characteristic of the Renard Project. The Renard 2 deep drilling commenced in early April 2014 with three drill rigs establishing a single pilot hole each from which a series of tightly constrained branches were cut using directional drilling equipment. Two drills were situated within the outline of Renard 2 and drilled sub vertically within the kimberlite, while a third drill was positioned outside the body and focused on inclined holes. A total of 33 branches were cut from the three pilot holes, ranging in length from 5.3m to 724.8m. Three separate shorter holes were also drilled from surface within the Renard 2 body (including a hole collared for geotechnical purposes but also used for geological logging and sampling). Total meterage drilled during the program was 12,145m and comprised a mixture of BQ, NQ and HQ diameter core. The longest continuous drill hole trace ran 1,086m from surface to the end of the hole. The deepest vertical depth tested from surface was 1,056m, and the deepest vertical depth of kimberlite intersected was 1,012m. This drilling has resulted in sufficient internal kimberlite intersections and external pierce points on the margins of the body to allow it to be outlined between 600m (at the base of the current Indicated Mineral Resource and Mineral Reserve) and 1,000m depth. Each of the four characteristic geological units that comprise the Renard 2 kimberlite have been intersected, including Kimb2a ( Blue kimberlite), Kimb2b ( Brown kimberlite), Kimb2c (Hypabyssal Kimberlite) and CRB/CRB 2a ( Country Rock Breccia ). Initial geological modeling from the drill results suggests that Renard 2 maintains a substantial crosssectional area to 1,000m depth and that the pipe is open below that point. Irregularities in the pipe shape previously noted in the upper 600m of the pipe continue to 1000m depth, and there is no indication at this stage that the proportion of the diatreme units Kimb2a and Kimb2b within the kimberlite diminishes markedly with depth. This means that the root zone, which can be expected to be comprised of narrow zones of primarily hypabyssal kimberlite, has not yet been reached, and Renard 2 can be considered open below 1,000m. The reader is cautioned that mineral resources that are not mineral reserves do not have demonstrated economic viability. In addition, the potential quantity and grade of any exploration target is conceptual in nature, and it is uncertain if further exploration will result in it being delineated as a mineral resource. Page 5 of 22

6 Detailed core logging, sampling and dilution measurements are now complete. Three dimensional geological modelling, as well as data compilation and interpretation, are ongoing to determine the internal architecture of Renard 2 below 600m and the relative proportion of each geological unit. Sampling focused on investigating the pipe in a series of 50m horizontal depth slices. New work completed on Renard 2 in 2014, and currently being compiled, includes 12,145m of diamond drilling (36 holes), 4.8 t of samples submitted for microdiamond analysis by caustic dissolution, 59.4 t of samples submitted for macrodiamond analysis by dense media separation, 250 thin sections, 213 samples collected for indicator mineral characterization, 626 geochemical samples, 189 density samples and approximately 6,200 dilution measurements. At present there is no evidence to suggest any variation from the previously determined grade characteristics of the Renard 2 body. Diamond recoveries from dense media separation samples include a 0.97 carat stone from the kimb2c unit in Renard 2 at 450 to 500m below surface, described as a brown distorted tetrahexahedroid aggregate. In addition to the Renard 2 work, studies are also underway to better understand the grade and petrographic characteristics on certain other kimberlites which contain Inferred Mineral Resources outside of the current Mineral Reserve, such as Renard 3, Renard 4, Renard 9, Lynx and Hibou, and on bodies outside of the current Mineral Resource, such as Renard 1, Renard 7, Renard 8, Renard 10 and certain of the other dyke systems. This new data will include 2.6 t of samples submitted for microdiamond analysis by caustic dissolution, 8.8 t of samples submitted for macrodiamond analysis by dense media separation, 462 thin sections, 127 samples collected for indicator mineral characterization, 1,519 geochemical samples, 239 density samples and approximately 3,570 dilution measurements. In the course of this work, a 1.01 carat stone has been recovered from a caustic fusion sample of the Kimb4c (Hypabyssal kimberlite) unit in Renard 4 which was taken from archived core. This stone is described as a colourless distorted partially resorbed octahedra. The regular recovery of such large diamonds from relatively small samples is a characteristic feature of the Renard Project. Of particular note, a discrete 126.6m intersection of kimberlite was observed in drill hole R2 81J between 942.2m and 1,068.8m down hole, after the hole had exited the interpreted eastern margin of the Renard 2 kimberlite. Ongoing work suggests this intersection may represent an extension of the Renard 3 kimberlite pipe at depths of 919m to 1,037m below surface, more than 550m deeper than any previous drilling. The horizontal width implied by this single intersection is a minimum of 46m at 1,000m depth. The interpretation of a Renard 3 intersection at these depths may have implications on future potential mining of Renard 3 beneath the currently contemplated underground mine. The 2014 Renard drill program was fully funded from the proceeds of a $10 million private placement of flow through shares undertaken by Stornoway in late Results of the work program are currently being compiled, analyzed and interpreted. A revised Mineral Resource estimate for Renard 2 is expected at the end of the second quarter of calendar year 2015 (i.e. end of June 2015). Exploration activities update Stornoway retains an ownership interest in two diamond exploration projects operated by North Arrow Minerals Inc. ( North Arrow ). During 2014, North Arrow collected an approximately 1,500 tonne sample at the Qilalugaq Project in Nunavut with a view to the recovery of a diamond parcel for valuation purposes. This program is being undertaken under the terms of a 2013 option agreement that allows North Arrow to earn an 80% interest in the project, subject of a one time back in right of Stornoway s. Processing of the sample by dense media separation is being undertaken at Microlithics Laboratories Inc. in Thunder Bay, Ont. with final diamond recovery being conducted at Stornoway s facility in North Vancouver, B.C. On February 26 th, 2015, North Arrow announced that 5,366 diamonds greater than +1 Page 6 of 22

7 DTC (~1 mm) weighing carats had been recovered from the processing on an initial dry tonnes of kimberlite. The recovered diamonds included 17 diamonds larger than the 3 grainer (~0.6 carat) size and 8 diamonds larger than 1 carat. The largest three diamonds recovered were 4.42 carats (greenish yellow cubic aggregate), 4.16 carats (intense yellow cubic aggregate), and 3.53 carats (pale yellow cubic aggregate). Yellow diamonds, representing a range of hues and tones, comprised approximately 8.5% by stone count (21.4% by carat weight) of the +1 DTC diamonds recovered. Sample processing is expected to be completed in April. Upon the completion of the diamond recovery portion of the work program and a subsequent independent valuation of the diamonds, North Arrow will have completed the option work program. Exploration is also being conducted with North Arrow at the Pikoo Project in northern Saskatchewan under an 80 per cent (North Arrow)/20 per cent (Stornoway) participating joint venture arrangement. Kimberlites were first discovered at the Pikoo project in 2013, with the PK150 kimberlite showing encouraging early microdiamond counts. Follow up exploration in 2014 confirmed the presence of additional kimberlite indicator mineral trains indicative of further undiscovered kimberlite bodies on the property. On February 11 th, 2015, North Arrow announced the commencement of a 3,000m drill program to test certain additional targets. Stornoway has elected to participate in this program at the level of its 20% participating interest. RESULTS OF OPERATIONS AND FINANCIAL ACTIVITES Year to date Statement of Income (loss) Three Months Ended Nine Months Ended (expressed in thousands of Canadian dollars) January 31, 2015 January 31, 2014 Increase (decrease) January 31, 2015 January 31, 2014 Increase (decrease) Amortization (15) (70) Exploration expense (recovery) (1,113) 115 (1,228) Loss (gain) on disposal of assets 1, ,858 1,863 (13) 1,850 Office, rent and sundry (31) 1,131 1,264 (133) Professional fees, regulatory and shareholder communication ,712 1, Salaries, benefits and directors ,363 1,763 fees 600 Share based payments , ,192 Operating Expenses (4,118) (1,347) 2,771 (8,240) (4,413) 3,827 Other income, net 11,776 11,776 16,337 16,337 Earnings (loss) before Income Taxes 7,658 (1,347) 9,005 8,097 (4,413) 12,510 Deferred income tax expense (2) (2) (261) (261) Net Earnings (loss) for the Period 7,656 (1,347) 9,003 7,836 (4,413) 12,249 Quarterly Statement of Income (loss) The Corporation s basic net and diluted earning per share for the three months ended January 31, 2015 (the Current Quarter ) was $0.01, as compared to a basic net and diluted loss per share of $0.01 for the three months ended January 31, 2014 (the Comparative Quarter ). The Current Quarter earnings of $7.7 million (Comparative Quarter $1.3 million loss) are affected by several items which are not reflective of the Corporation s underlying operating performance, including a gain of $10.9 million (Comparative Quarter $Nil) on the fair value of derivatives (representing 92% of other income of $11.8 million in the Current Quarter), and a net foreign exchange gain of $1.4 million (Comparative Quarter $Nil). Operating expenses of $4.1 million in the Current Quarter (Comparative Quarter $1.3 million) were increased by a loss on disposal of assets of $1.9 million (Comparative Page 7 of 22

8 Quarter $Nil) following the decommissioning of a dense media separation ( DMS ) plant used for exploration, as well as an increase of $0.2 million for salaries, benefits and directors fees as compared to the three months ended January 31, Professional fees, regulatory and shareholder communication expense increased by $0.2 million in the Current Quarter from the Comparative Quarter, primarily resulting from an increased activity level following the July 8 th financing. Share based payments, a non cash expense, increased by $0.4 million in the Current Quarter. Year to date Statement of Income (loss) The Corporation s basic and diluted net earning per share for the nine months ended January 31, 2015 (the Current Period ) was $0.01, as compared to a basic and diluted net loss per share of $0.03 for the nine months ended January 31, 2014 (the Comparative Period ). Net earnings of $7.8 million in the Current Period (Comparative Period $4.4 million net loss) are attributable primarily to other income of $16.3 million (Comparative Period $Nil) which includes income and expenses related to the Corporation s financing activities and in particular, includes transaction fees of $2.1 million and a gain of $17.5 million in the fair value of derivatives during the Current Period. Finance costs totalled $7.6 million, including $3.1 million for standby fees related to the Corporation s various financing facilities and $4.5 million for transaction costs directly related to the liability portion of private placement subscription receipts which were received in US dollars (see Note 10 of the condensed, interim consolidated financial statements for the three and nine months ended January 31, 2015). The transaction costs are a one time expense during the Current Period since the subscription receipts were converted into common shares as at July 8, In addition, the Corporation recorded a foreign exchange gain of $6.9 million (Comparative Period $nil) related to the convertible debentures. Interest income of $1.7 million (Comparative Period $Nil) generated from cash, cash equivalents and short term investments was recorded during the period. Salaries, benefits and director s fees (Current Period $2.4 million; Comparative Period $1.8 million) and share based payment expense (Current Period $2.2 million; Comparative Period $0.02 million) were the largest general and administrative expenses in the Current Period, comprising 56% of operating expenses of $8.2 million. During the Current Period and in connection with the closing of the Financing Transactions on July 8, 2014, the Corporation paid bonuses to its employees, including special bonuses for the CEO, CFO and COO which were linked to the successful financing of the Renard Diamond Project. In addition, during the Current Period, the Corporation granted 21,915,000 stock options to directors, officers and employees (these grants represent approximately 3.1% of the post financing issued and outstanding share capital) and recorded share based payment expense of $2.2 million for the stock options which vested in the Current Period. In the Comparative Period, the Corporation granted 200,000 stock options to directors, officers and employees and recorded share based payment expense of $0.02 million. Professional fees, regulatory and shareholder communications expense increased to $1.7 million from $1.1 million in the Comparative Period, a reflection of an increase in the Corporation s activity levels in the Current Period. The Corporation recorded an exploration recovery of $1.1 million in the Current Period (Comparative Period $0.1 million exploration expense) due to the receipt of tax credits for resources. Deferred income tax expense totaled $0.3 million as compared to $Nil in the Comparative Period. Page 8 of 22

9 Statements of Cash Flows: Three months ended January 31, 2015 January 31, 2014 Nine months ended January 31, 2015 January 31, 2014 (expressed in thousands of Canadian dollars) Cash used in operating activities, before changes in non cash working capital (2,355) (1,302) (5,428) (4,264) Changes in non cash working capital (5,623) 637 (17,480) (4,294) Cash used in operating activities (7,978) (665) (22,908) (8,558) Cash used in investing activities (257,661) (18,612) (324,488) (59,335) Cash provided by financing activities (17) 15, ,385 55,724 Effect of foreign exchange rate changes on cash and cash equivalents 11,358 18,719 Increase (decrease) in cash and cash equivalents (254,298) (4,249) 106,708 (12,169) Cash and cash equivalents Beginning of the Period 387,989 24,962 26,983 32,882 Cash and cash equivalents End of the Period 133,691 20, ,691 20,713 Statements of Cash Flows Current Quarter During the Current Quarter, the Corporation s cash and cash equivalents decreased by $254.3 million to $133.7 million as at January 31, 2015, after giving effect to foreign exchange rate changes of $11.4 million on cash and cash equivalents. The Corporation s short term investments increased to $187.9 million as at January 31, 2015 as compared to $0.4 million at January 31, The acquisition of property, plant and equipment (Current Quarter $70.0 million; Comparative Quarter $18.6 million) accounted for a significant part of the expenditures in the Current Quarter as construction at the Renard Diamond Project increased. Operating activities used $8.0 million (Comparative Quarter $0.7 million provided by operating activities), of which $5.6 million (Comparative Quarter $0.6 million) related to changes in non cash working capital. Financing activities used $0.02 million in the Current Quarter, primarily for financing fees and expenses. In the Comparative Quarter, the Corporation received $8.5 million from the issuance of long term debt as compared to $Nil proceeds from long term debt in the Current Quarter. The Corporation paid $2.5 million for deferred financing fees in the Comparative Quarter, as compared to $0.04 million in the Current Quarter. Statements of Cash Flows Year to date During the nine months ended January 31, 2015, the Corporation s cash and cash equivalents increased by $106.7 million, including an $18.7 million foreign exchange rate change on cash and cash equivalents maintained in US dollars associated with the US dollar portion of the financings. During the Current Period, the Corporation received net proceeds of $435.4 million from the issuance of $86.7 million (US$81.3 million) convertible debentures (Comparative Period $nil) after a 4% discount on the principal amount $3.5 million (US$3.3 million) received from the purchasers and other debenture issuance costs of $0.9 million. The Corporation received $373.9 million from the issuance of subscription receipts by way of a public offering and private placements (see Note 9 of the condensed interim consolidated financial statements for the three and nine months ended January 31, 2015), before issuance costs of $17.7 million. In addition, the Corporation paid a subordination fee of $0.6 million related to long term debt. In the Comparative Period, the Corporation received $0.4 million from the exercise of stock options (Current Period $0.1 million) and expended $6.1 million on financing fees (Current Period $6.2 million). The Corporation also received proceeds of $7.1 million from the issuance of long term debt (Comparative Period $53.3 million). Investing activities totaled $324.5 million in the Current Period, of which $136.1 million was used for the acquisition of property, plant and equipment (Comparative Period $59.4 million) and $1.8 million represents an increase in other financial assets (Comparative Period $Nil). In addition, short term investments increased by $187.5 million in the Current Period (Comparative Period $Nil). Short term Page 9 of 22

10 investments consist of highly liquid investments with a weighted average interest rate of 1.04% and maturity dates between May and November In the Current Period, the Corporation completed civil works related to the Renard Mine Road and Renard Airstrip with loan proceeds of $7.1 million and commenced mine construction activities on July 10, 2014 at the Renard Diamond Project using proceeds from the Financing Transactions which closed on July 8, 2014 (see Construction Highlights under Material Mineral Project Renard Diamond Project, Québec above). Changes in non cash working capital include a net increase in receivables of $14.5 million (Comparative Period $0.6 million) of which $11.4 million relates to sales tax receivables, as well as an increase in prepaid expenses and deposits ($0.2 million). Sales tax receivables increased significantly due to the start up of construction activities on July 10 th. Payables and accrued liabilities decreased by $3.2 million in the Current Period, as compared to a decrease of $3.0 million in the Comparative Period. The Corporation used $22.9 million for operating activities in the Current Period (Comparative Period $8.6 million). Statements of Financial Position (expressed in thousands of Canadian dollars) As at January 31, 2015 Year Ended April 30, 2014 Increase / (decrease) Cash and cash equivalents 133,691 26, ,708 Short term investments 187, ,461 Receivables 15, ,502 Other current assets 439 1,499 (1,060) Deferred financing fees 18,991 8,069 10,922 Rough diamond inventory 1,004 1,004 Property, plant and equipment 443, , ,077 Other assets 1,837 1,837 Total assets 802, , ,447 Current liabilities 30,264 30,450 (186) Long term debt 101,657 57,203 44,454 Convertible debentures 80,232 80,232 Deferred income tax liabilities 1,608 1,608 Asset retirement obligation 4,035 1,981 2,054 Equity 584, , ,285 Total liabilities and equity 802, , ,447 During the Current Period, total assets increased by $503.4 million to $802.7 million due primarily to proceeds from the Financing Transactions and additions to property, plant and equipment. The Corporation s property plant and equipment increased by $183.1 million due to the commencement of mine construction at the Renard Diamond Project and the completion of civil work for the Renard Mine Road and Renard Airstrip. Short term investments increased by $187.5 million to $187.9 million representing cash surpluses invested (see cash flow analysis). The balance of the increase in total assets relates to $10.9 million in deferred financing fees, reflecting the costs associated with arranging financing for the Renard Diamond Project and an increase of $14.5 million in receivables (mostly sales tax receivables) and $1.8 million in other assets. The Corporation s current liabilities of $30.3 million consist of payables and accrued liabilities mostly related to the Corporation s construction activities. As at April 30, 2014, the current debt of $19.9 million related to an unsecured, non revolving bridge facility from Diaquem which was to mature on June 27, The maturity date of this facility was extended on June 26, 2014 until the earlier of: closing of Tranche A of the Senior Secured Loan (anticipated to take place in 2016) and June 30, Accordingly, amounts due under this facility from Diaquem are included as long term debt as at January 31, Long term debt increased by $44.5 million during the nine months ended January 31, 2015, as the Corporation borrowed additional amounts to finance the Renard Mine Road construction and Page 10 of 22

11 extended the maturity date of the Diaquem bridge facility past twelve months. In addition, on July 8, 2014 the Corporation issued convertible debentures totalling $86.7 million (US$81.3 million), before a discount of 4% to the purchaser. As at January 31, 2015, equity consists of share capital, contributed surplus, accumulated other comprehensive loss and a deficit of $222.4 million (April 30, 2014 $230.2 million). Share capital increased from $362.9 million to $765.6 million from the conversion of subscription receipts for 366,272,310 common shares (private placements) and the conversion of subscription receipts for million common shares and 94.3 million warrants (public offering). During the nine months ended January 31, 2015, the Corporation issued 1,704,254 common shares for an interest payment, 283,750 common shares upon the exercise of stock options and converted 22,543,918 non voting convertible shares into common shares in connection with IQ s participation in the Financing Transactions. As at January 31, 2015, the Corporation had 732,310,440 common shares issued and outstanding and no nonvoting convertible shares outstanding. On June 20, 2014, in connection with the Financing Transactions, all 22,543,918 non voting convertible shares of the Corporation were converted into common shares of the Corporation for no further compensation, and the Corporation s Articles were amended to eliminate this share class. SELECTED QUARTERLY INFORMATION The following table sets out selected unaudited consolidated quarterly financial information of Stornoway covering the last eight quarters and is derived from the unaudited condensed interim consolidated financial statements prepared by management in accordance with International Accounting Standards 34, Interim Financing Reporting ( IAS 34 ), using the same accounting policies and methods of application as the audited consolidated financial statements of the Corporation. Quarter Ended Net Earnings (Loss) (in thousands of Canadian dollars) Basic and Diluted Earnings (Loss) per share January 31, , * October 31, , July 31, 2014 (11,515) (0.04) April 30, 2014 (7,886) (0.07) January 31, 2014 (1,347) (0.01) October 31, 2013 (1,648) (0.01) July 31, 2013 (1,418) (0.01) April 30, 2013 (12,085) (0.07) *Diluted net earnings per share of $0.01 for the three months ended January 31, 2015 Quarterly results will vary in accordance with the Corporation s exploration, development, construction and financing activities. Historically, exploration and evaluation expenses, share based payment expenses and, to a lesser extent exploration and evaluation asset write offs had the most significant impact on the Corporation s quarterly results, followed by general and administrative expenses (which include exploration and evaluation expenses). Starting July 10, 2014, the Corporation will be in a period of construction until the second quarter of 2017 (approximately) when the commencement of commercial production is expected to occur at the Renard Diamond Project. It is likely that the Corporation s quarterly results will continue to fluctuate until the Corporation reaches the operations phase, expected to occur by mid In connection with the Financing Transactions, the Corporation received proceeds in US dollars and issued US dollar denominated convertible debentures which have an embedded derivative which will be revalued at each balance sheet date. Changes in the fair value of the derivative are recorded in the consolidated statements of income (loss) and can reasonably be expected to affect the Corporation s future quarterly results (see Note 3 Critical Accounting Estimates and Judgments in the condensed interim consolidated financial statements for the three months ended Page 11 of 22

12 July 31, 2014). Fluctuations in the Canadian dollar, which is the Corporation s functional currency, against the US dollar will also affect the Corporation s quarterly results in the future for cash and cash equivalents and liabilities denominated in US dollars. LIQUIDITY AND CAPITAL RESOURCES As at January 31, 2015 the Corporation had current assets of $337.1 million to settle current liabilities of $30.3 million, resulting in working capital of $306.8 million. As at December 31, 2014, the Corporation had incurred qualifying exploration expenditures of $10.1 million using proceeds from the flow through financing which closed in December 2013 (see section Renard 2 Mineral Resource Update for details). The estimated capital cost for mine construction at the Renard Diamond Project is $811 million, including contingencies and escalation. In addition, financing costs and general working capital needs will increase the Corporation s cash requirements during the construction period until positive cash flow from operations commences. The construction period started in July 2014 and is expected to last 27 months, followed by approximately 10 months for process plant commissioning. On July 8, 2014, the Corporation received gross proceeds of $458 million 3, consisting of $254 million and US$110 million released from escrow (from the subscription receipts issued on May 23, 2014 in connection with the Corporation s public and private common share offerings) and gross proceeds of US$81.3 million from the issuance of convertible debentures before a discount to the purchaser of 4% (US$3.3 million) of the principal amount. After deducting the 4% discount and other expenses of $24 million paid on the closing date, the Corporation s net proceeds totaled $431 million, before the allocation of deferred financing fees to the tranches of financing received on July 8, Proceeds of US$250 million from the Stream are expected to be received in three tranches, beginning in March 2015; the Corporation expects to draw from the $100 million Senior Secured Loan, Tranche A during 2016 and the Corporation commenced borrowing under Tranche A of the equipment finance facility in August Subject to meeting certain conditions precedent and if required to complete construction of a mine at the Renard Diamond Project, the Corporation should also be able to borrow up to $48 million from the cost over run facilities arranged as part of the Financing Transactions. So long as the Corporation meets the conditions precedent to the Stream, Senior Secured Loan and cost over run facilities (if needed), the Corporation anticipates that proceeds from the Financing Transactions will be sufficient to meet its capital requirements over about a 36 month period, to the commencement of commercial production at the Renard Diamond Project. Should the Corporation not be able to draw from those facilities, or in the event that the cost over run facilities are insufficient to complete construction and commissioning of the mine, the Corporation may require additional third party financing or seek to complete further offerings of equity and/or debt securities. As at January 31, 2015, the Corporation had long term debt of $101.7 million (April 30, 2014 $57.2 million) and convertible debentures of $80.2 million (April 30, 2014 $nil). A summary of the annual principal and interest payments payable pursuant to the Corporation s indebtedness can be found in Note 3 Financial Instruments Future Payments of the condensed interim consolidated financial statements for the three and nine months ended January 31, 2015 and under Commitments below. As at January 31, 2015, the Corporation was in compliance with all of the covenants contained within the various financing agreements. The Corporation has no history of profitable operations and its present business is at the development stage. The Corporation has no source of operating cash flow and no assurance that additional funding will be available to it for further exploration and development of its projects when required. As such, the 3 As at July 8, 2014 C$:US$ conversion rate of $ Page 12 of 22

13 Corporation is subject to many risks common to such enterprises, including under capitalization, cash shortages and limitations with respect to personnel, financial and other resources and the lack of revenues (see Risks and Uncertainties in the Corporation s AIF dated July 24, 2014 for more details). With the closing of the Financing Transactions on July 8, 2014, Management believes that the Corporation has sufficient financial resources to meet its planned expenditures for the next 12 to 18 months. Furthermore, the Corporation has sufficient financial resources available to it, subject to certain conditions, to complete the development of a diamond mine at the Renard Diamond Project, and also to provide for general working capital and interest and financing fees during the construction phase, which is expected to last about 36 months (from July 2014 to mid 2017). Failure to obtain additional financing (if required) or failure to meet the loan covenants or conditions precedent in any of the Corporation s outstanding debt facilities or the Stream which prevents the Corporation from drawing from these facilities could result in the delay or indefinite postponement the development of a mine and related infrastructure at the Renard Diamond Project and ultimately the loss of the Corporation s exploration and development properties, including the Renard Diamond Project. Completed Financings Nine months ended January 31, 2015 On July 8, 2014, the Corporation completed the Financing Transactions for gross proceeds of $946 4 million, which are intended to provide a comprehensive project financing package for the construction of the Renard Diamond Project through to the commencement of commercial production in The Financing Transactions consist of a combination of senior and subordinated debt facilities, common share equity issuances, warrants, an equipment financing facility and a diamond stream. On July 8, 2014, the Corporation received gross proceeds of $254 million and US$110 million from the public and private offerings of common share subscription receipts which were released from escrow and US$81.3 million from the issuance of convertible debentures. The proceeds of the senior secured loan, the purchase and sale agreement for the diamond stream, the equipment financing facility and the cost over run facilities (if and when needed) are expected to be made available to the Corporation in due course in accordance with their terms. A description of the Financing Transactions can be found in Note 6g and Note 9 of the condensed interim consolidated financial statements for the three and nine months ended January 31, 2015 and in the first quarter MD&A dated September 9, For illustrative purposes, assumes a C$:US$ conversion rate of $1.10. Actual proceeds of each financing tranche are measured at the C$:US$ conversion rate in effect at the date the funds are received. Page 13 of 22

14 Financing Use of Proceeds Analysis The following table presents the anticipated use of proceeds from the Financing Transactions which closed on July 8, 2014, as well as the equipment finance facility and the Renard Mine Road loan. The table compares previously stated assumptions found in Stornoway s final prospectus dated May 12, 2014 to actual use of proceeds: (all amounts expressed in millions of Canadian dollars) Assumed Actual use of proceeds as at January 31, 2015 Renard Diamond Project Capital Expenditures Route 167 Extension (1) Loan Principal Re payments during Construction 19 Interest paid in cash during Construction 20 7 Debt Financing Costs and Stream Commitment Fee 19 9 Mine Closure Guarantee (2) 16 2 Pre production Net Revenue (26) Total Project Costs General Corporate Purposes Equity fees and transaction costs General working capital, administrative and salary expenses 14 Total Uses (1) The total amount borrowed pursuant to the Renard Mine Road loan was $77 million, of which $70 million was used for construction of the Renard Mine Road and $7 million was used for civil works related to the airstrip. Costs related to the airstrip were included in the $811 million capital expenditures line in the table above. (2) See Financial Guarantee below. Mine construction activities started on July 10, 2014 and will continue for approximately 27 months, with a further 10 months required for plant commissioning until commercial production is achieved in The majority of construction related expenditures will be incurred in 2015 and See Construction Highlights in the section Material Mineral Project Renard Diamond Project, Québec above for more details. Significant target milestones during calendar year 2014 included: completion of early works at the project site; commencement of detailed engineering and the preparation of bid packages for long lead and major items; installation of temporary camp facilities immediately following the commencement of construction to facilitate the building and installation of permanent camp facilities later in 2014, completion of the Renard Mine Road and Renard Mine Airport for year round use; building a concrete batch plant; and installing a raw water intake and pumphouse. The Corporation has made significant progress to achieving these milestones as at January 31, See Construction Highlights in the section Material Mineral Project Renard Diamond Project, Québec above for more details. Significant target milestones in calendar year 2015 will focus on civil work and open pit mining. These milestones include: final commissioning of camp facilities for use in early 2015, completion of concrete pads, completion of foundations and structural steel work for the processing plant and the power plant, completion of foundations and mechanical work for the crusher and commencement of underground ramp development and mining of the R65 open pit and R2/R3 open pits. Page 14 of 22