365 Bay Street, Suite 400 Toronto, Ontario M5H 2V1, Canada. DARNLEY BAY RESOURCES LIMITED (An Exploration Stage Enterprise) FINANCIAL STATEMENTS

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1 365 Bay Street, Suite 400 Toronto, Ontario M5H 2V1, Canada Tel:(416) DARNLEY BAY RESOURCES LIMITED FINANCIAL STATEMENTS FOR THE YEARS ENDED DECEMBER 31, 2015 AND DECEMBER 31,

2 365 Bay Street, Suite 400 Toronto, Ontario M5H 2V1, Canada Tel:(416) MANAGEMENT S RESPONSIBILITY FOR FINANCIAL STATEMENTS The accompanying financial statements have been prepared by and are the responsibility of management of Darnley Bay Resources Limited. The financial statements have been prepared in accordance with International Financial Reporting Standards issued by the International Accounting Standards Board and reflect management s best estimate and judgment based on currently available information. Management is also responsible for a system of internal controls, which is designed to provide reasonable assurance that assets are safeguarded, liabilities are recognized and that financial information is relevant and reliable. The Board of Directors is responsible for ensuring that management fulfills its responsibilities in respect of financial reporting and internal control. The Audit Committee of the Board of Directors, comprised of independent directors, meets periodically with management and the Company s independent auditors to discuss auditing matters and financial reporting issues. In addition, the Audit Committee reviews the annual financial statements and provides a recommendation to the Board of Directors on their approval. The Company s independent auditors, Collins Barrow Toronto LLP, are appointed by the shareholders to conduct an audit in accordance with Canadian generally accepted auditing standards, and their report follows. (Signed) Patricia Mannard Chief Financial Officer, Director (Signed) Jamie Levy Chief Executive Officer, Director 2

3 Collins Barrow Toronto LLP Collins Barrow Place 11 King Street West Suite 700, PO Box 27 Toronto, Ontario M5H 4C7 Canada INDEPENDENT AUDITORS' REPORT T F To the Shareholders of Darnley Bay Resources Limited We have audited the accompanying financial statements of Darnley Bay Resources Limited (the Company ), which comprise the statements of financial position as at December 31, 2015 and December 31, 2014 and the statements of loss and comprehensive loss, changes in shareholders deficiency and cash flows for the years then ended and a summary of significant accounting policies and other explanatory information. Management s Responsibility for Financial Statements Management is responsible for the preparation and fair presentation of these financial statements in accordance with International Financial Reporting Standards, and for such internal control as management determines is necessary to enable the preparation of financial statements that are free from material misstatement, whether due to fraud or error. Auditors Responsibility Our responsibility is to express an opinion on these financial statements based on our audits. We conducted our audits in accordance with Canadian generally accepted auditing standards. Those standards require that we comply with ethical requirements and plan and perform the audit to obtain reasonable assurance about whether the financial statements are free from material misstatement. An audit involves performing procedures to obtain audit evidence about the amounts and disclosures in the financial statements. The procedures selected depend on the auditor s judgment, including the assessment of the risks of material misstatement of the financial statements, whether due to fraud or error. In making those risk assessments, the auditor considers internal control relevant to the entity s preparation and fair presentation of the financial statements in order to design audit procedures that are appropriate in the circumstances, but not for the purpose of expressing an opinion on the effectiveness of the entity s internal control. An audit also includes evaluating the appropriateness of accounting policies used and the reasonableness of accounting estimates made by management, as well as evaluating the overall presentation of the financial statements. We believe that the audit evidence we have obtained in our audits is sufficient and appropriate to provide a basis for our audit opinion. Opinion In our opinion, these financial statements present fairly, in all material respects, the financial position of Darnley Bay Resources Limited as at December 31, 2015 and December 31, 2014, and its financial performance and its cash flows for the years then ended in accordance with International Financial Reporting Standards. Emphasis of Matter Without qualifying our opinion, we draw attention to Note 1 in the financial statements which describes material uncertainties that may cast significant doubt about the Company's ability to continue as a going concern. Chartered Professional Accountants Licensed Public Accountants April 29, 2016 Toronto, Ontario 3 This office is independently owned and operated by Collins Barrow Toronto LLP. The Collins Barrow trademarks are used under license.

4 CURRENT DARNLEY BAY RESOURCES LIMITED STATEMENTS OF FINANCIAL POSITION (in Canadian dollars) December 31, 2015 ASSETS As at December 31, 2014 Restated - Note 4 January 1, 2014 Restated - Note 4 Cash $ 1,991 $ 413,974 $ 46,441 Other receivables 26,509 28,173 63,566 Prepaid expenses and deposits 31,525 4,489 64,404 60, , ,411 LONG-TERM DEPOSITS - 42,238 42,238 $ 60,025 $ 488,874 $ 216,649 CURRENT LIABILITIES Accounts payable and accrued liabilities (note 9) $ 769,339 $ 488,156 $ 351,248 Other liabilities (note 10) - 90,053 - Current portion of long-term debt (note 15) 12,692 7,857 7, , , ,420 LONG-TERM DEBT (note 15) 104,109 98,754 90, , , ,558 SHAREHOLDERS' EQUITY (DEFICIENCY) CAPITAL STOCK (note 11(a)) 27,470,668 27,294,645 27,013,097 RESERVE FOR WARRANTS (note 11(b)) 729, , ,710 RESERVE FOR SHARE-BASED PAYMENTS (notes 11(e)) 348, , ,233 DEFICIT (29,375,405) (29,080,746) (28,664,949) Commitments (note 14) Going concern basis (note 1) (826,115) (195,946) (231,909) $ 60,025 $ 488,874 $ 216,649 Approved on Behalf of the Board (signed) Jamie Levy, Director (signed) Patricia Mannard, Director The accompanying notes are an integral part of the financial statements. 4

5 STATEMENTS OF LOSS AND COMPREHENSIVE LOSS FOR THE YEARS ENDED DECEMBER 31, 2015 and 2014 (in Canadian dollars) EXPENSES Restated Note 4 Corporate and office administration services $ 142,596 $ 158,181 Professional fees 68,726 60,780 Stock-based compensation (note 11(e)) 34,243 - Shareholder communication 23,409 50,106 Write off deposit 42,238 - Premises rent 10,014 16,168 Interest expense 11,485 9,301 Mineral property expense 768, ,497 Operating loss (1,100,792) (454,033) Gain on debt settlement (note 11(a)) 92,619 - (1,008,173) (454,033) Deferred income tax recovery (note 10) 134,394 - NET LOSS AND COMPREHENSIVE LOSS FOR THE YEAR $ (873,779) $ (454,033) Loss per share: Basic and diluted loss per share (note 12) $ (0.023) $ (0.017) Weighted average number of common shares outstanding 38,807,845 27,323,028 The accompanying notes are an integral part of the financial statements. 5

6 STATEMENTS OF CHANGES IN SHAREHOLDERS EQUITY (DEFICIENCY) (in Canadian dollars) Capital stock Reserves for Shares Amount Warrants Share-based payments Accumulated deficit Total Balance, January 1, ,300,508 $27,013,097 $ 587,710 $ 832,233 ($28,664,949) ($ 231,909) Issued for cash under private placement 8,219, , , ,475 Share issue cost - (24,274) (12,152) - - (36,426) Flow through share premium (Note 10) - (90,053) (90,053) Fair value ascribed to broker warrants issued in private placement - (14,945) 14, Fair value of warrants expired - - (38,236) - 38,236 - Net loss (454,033) (454,033) Balance, December 31, ,520,174 $27,294,645 $757,922 $832,233 ($29,080,746) ($ 195,946) Issued under private placement for cash 2,400, , ,000 Share issue cost - (4,068) (557) - - (4,625) Flow through share premium - (44,341) (44,341) Fair value ascribed to warrants issued in private placement - (33,901) 33, Issued under debt conversion 333,333 18, ,333 Issued under option agreement 1,600, , ,000 Fair value of warrants expired - - (61,630) - 61,630 - Fair value of options granted ,243-34,243 Fair value of options expired (517,490) 517,490 0 Net loss (873,779) (741,970) Balance, December 31, ,853,507 $27,470,668 $729,636 $348,986 ($29,375,405) ($694,306) The accompanying notes are an integral part of the financial statements. 6

7 CASH USED IN OPERATING ACTIVITIES: STATEMENTS OF CASH FLOWS (in Canadian dollars) Net loss for the year $ (873,779) $ (454,033) Add: items not affecting cash Stock-based agreement compensation 118,400 - Stock-based compensation 34,243 - Flow through share premium (134,394) - Shares issued against debt 17,278 - Interest accrued but not paid 10,190 9,301 Write off deposit 42,238 Net changes in non-cash working capital balances: Accounts receivable (40,574) 35,394 (Increase) decrease in prepaid expenses and deposits 15,201 59,915 Accounts payable and accrued liabilities 281, ,907 Cash used in operations (530,013) (212,516) CASH PROVIDED BY FINANCING ACTIVITIES: Proceeds on issuance of common shares, warrants and special warrants 120, ,475 Share issue cost (1,970) (36,426) Cash provided by financing 118, ,049 INCREASE (DECREASE) IN CASH POSITION (411,983) 367,533 CASH POSITION AT BEGINNING OF THE YEAR 413,974 46,441 CASH POSITION AT END OF THE YEAR $ 1,991 $ 413,974 The accompanying notes are an integral part of the financial statements. 7

8 1. NATURE OF OPERATIONS AND GOING CONCERN: The Company was incorporated under the laws of the Province of Ontario. The Company is headquartered at 365 Bay Street, Suite 400, Toronto ON, M5H 2V1. Its principal business activities are the exploration for metals and diamonds in the Northwest Territories and Quebec, Canada. To date, the Company has not earned revenues and still is considered to be in the exploration stage. The Company s shares are listed on the TSX Venture Exchange (Trade symbol - DBL:CN). The business of mining and exploration for minerals involves a high degree of risk and there can be no assurance that current exploration programs will result in future profitable mining operations. The Company s continued existence is dependent upon the discovery of economically recoverable ore reserves, the ability of the Company to obtain necessary financing to explore and develop potential ore reserves or by way of entering into joint venture arrangements, future profitable production, or alternatively, upon the Company s ability to dispose of its interests on an advantageous basis. As at December 31, 2015, the Company has working capital deficiency of $722,006 compared to a working capital deficiency of $139,430 at December 31, 2014 and an accumulated deficit of $29,375,405 (December 31, $29,080,746). Management is currently pursuing several financing alternatives to raise additional capital. The ability of the Company to continue as a going concern is dependent on the Company having access to financing to meet operational cash needs. It is not possible to determine with any certainty the success or adequacy of these initiatives. The financial statements of the Company have been prepared on the basis that the Company will continue as a going concern, which presumes that it will be able to realize its assets and discharge its liabilities and commitment in the normal course of business. The financial statements do not reflect any adjustments that might be necessary to the carrying value of the assets and liabilities which might be significant if the Company is unable to continue as a going concern. 2. BASIS OF PRESENTATION: The annual financial statements are prepared on the historical cost basis except for certain assets and liabilities which are measured at their fair values, as explained in the relevant accounting policies. The financial statements are presented in Canadian dollars which is also the Company s functional currency. Statement of Compliance The financial statements have been prepared in accordance with International Financial Reporting Standards ( IFRS ) as issued by the International Accounting Standards Board ( IASB ). The financial statements for the year ended December 31, 2015 (including comparatives) were approved and authorized for issue by the board of directors on April 29, The accounting policies applied in preparing the financial statements for the years ended December 31, 2015 and December 31, 2014 are set out below. Change in Accounting Policies During the year ended December 31, 2015, the Company retrospectively changed its accounting policy for exploration and evaluation expenditures. See note 4. 8

9 3. SIGNIFICANT AND FUTURE ACCOUNTING POLICIES Significant Accounting Estimates and Assumptions The preparation of financial statements in conformity with IFRS requires that management make estimates and assumptions about future events that affect the amounts reported in the financial statements and related notes to the financial statements. Actual results may differ from those estimates. Significant estimates used in the preparation of these financial statements include, but are not limited to the valuation of warrants, stock based compensation and income taxes. Actual results could differ from management s best estimates. a) Valuation of warrants and stock based compensation The calculation of the fair value of warrants and options issued requires the use of estimates of inputs in the applicable valuation models. b) Income taxes The interpretation of existing tax laws or regulations in Canada where the Company s operations are located requires the use of judgement. Differing interpretation of these laws or regulations could result in an increase in the Company s taxes, or other government charges, duties or impositions. In addition, the recoverability of deferred income tax assets, including expected periods of reversal of temporary differences and expectations of future taxable income, are assessed by management at the end of each reporting period. c) Determination of going concern assumption The assessment of the Company s ability to execute its strategy by funding future working capital requirements involves judgement. Estimates and assumptions are continually evaluated and are based on historical experience and other factors, including expectations of future events that are believed to be reasonable under the circumstances. There is a material uncertainty regarding the Company s ability to continue as a going concern. Exploration and Evaluation Expenditures Acquisition costs and exploration and evaluation expenditures incurred prior to the establishment of technical feasibility and commercial viability of extracting mineral resources and prior to a decision by the board of directors to proceed with mine development are charged to the statement of loss and comprehensive loss as incurred. Currently, all acquisition costs and exploration and evaluation expenditures are expensed as incurred. The Company may occasionally enter into transfer-out arrangements, whereby the Company will transfer part of a mineral interest, as consideration, for an agreement by the transferee to meet certain exploration and evaluation expenditures that would have otherwise been undertaken by the Company. The Company does not record any expenditures made by the transferee on its behalf. Any cash consideration received from the agreement is charged to the mineral property expense in the statement of loss and comprehensive loss. 9

10 3. SIGNIFICANT AND FUTURE ACCOUNTING POLICIES (continued) Income Taxes Income tax on the profit or loss for the periods presented comprises current and deferred tax. Income tax is recognized in profit or loss except to the extent that it relates to items recognized directly in equity, in which case it is recognized in equity. Current tax expense is the expected tax payable on the taxable income for the year, using tax rates enacted or substantively enacted at period end, adjusted for amendments to tax payable with regards to previous years. Deferred tax is recorded for temporary differences, between the carrying amounts of assets and liabilities for financial reporting purposes and the amounts used for taxation purposes. Deferred income taxes are recorded to recognize tax benefits only to the extent, based on available evidence, that it is probable that they will be realized. The following temporary differences are not provided for: goodwill not deductible for tax purposes; the initial recognition of assets or liabilities that affect neither accounting nor taxable loss; and differences relating to investments in subsidiaries to the extent that they will probably not reverse in the foreseeable future. The amount of deferred tax provided is based on the expected manner of realization or settlement of the carrying amount of assets and liabilities, using tax rates expected to be applied to temporary differences when may reverse, based on tax laws, enacted or substantively enacted at the statement of financial position date. Deferred tax assets and liabilities are offset when there is a legally enforceable right to set off current tax assets against current tax liabilities and when they relate to income taxes levied by the same taxation authority and the Company intends to settle its current tax assets and liabilities on a net basis. Share-based Payments Equity-settled share-based payments to employees and others providing similar services are measured at the fair value of the equity instruments at the grant date. Details regarding the determination of the fair value of equity-settled share-based transactions are set out in the share-based compensation note (see note 10(e)). For options to employees that do not immediately vest, the fair value is measured at the grant date and each tranche is recognized on a graded-vesting basis over the period in which the options vest. At the end of each reporting period, the Company revises its estimate of the number of equity instruments expected to vest. The impact of the revision of the original estimates, if any, is recognized in profit or loss such that the cumulative expense reflects the revised estimate, with a corresponding adjustment to reserve for share-based payments. Equity-settled share-based payment transactions with parties other than employees are measured at the fair value of the goods or services received, except where that fair value cannot be estimated reliably, in which case they are measured at the fair value of the equity instruments granted, measured at the date the entity obtains the goods or the counterparty renders the service. For those options that expire after vesting, the recorded value is transferred to retained earnings (deficit). 10

11 3. SIGNIFICANT AND FUTURE ACCOUNTING POLICIES (continued): Impairment The carrying amounts of the Company s long-lived assets are reviewed at each reporting date to determine whether there is any indication of impairment. If any such indication exists, the asset s recoverable amount is estimated. Impairment is determined for an individual asset unless the asset does not generate cash inflows that are independent of those generated from other assets or group of assets, in which case, the individual assets are grouped together into cash generating units ( CGU ) for impairment purposes. Impairment exists when the carrying amount of the asset, or group of assets, exceeds its recoverable amount. The impairment loss is the amount by which the carrying value exceeds the recoverable amount and such loss is recognized in the statement of comprehensive loss. The recoverable amount of an asset is the higher of its fair value less costs to sell and its value in use. In assessing value in use, the estimated cash flows are discounted to their present value using a pre-tax discount rate that reflects the current market assessments of the time value of money and the risks specific to the asset. An impairment loss is only reversed if there is an indication that the impairment loss may no longer exist and there has been a change in the estimates used to determine the recoverable amount, however, not to an amount higher than the carrying amount that would have been determined had no impairment loss been recognized in previous years. Assets that have an indefinite useful life are not subject to amortization and are tested annually for impairment. Revenue Recognition Interest income is recognised on an accrual basis as it is earned. Basic and Diluted Earnings (Loss) per Share Basic earnings (loss) per share is based on the weighted average number of common shares of the Company outstanding during the period. The diluted earnings (loss) per share reflects the potential dilution of common share equivalents, such as outstanding share options and warrants, in the weighted average number of common shares outstanding during the period, if dilutive. Reclamation Obligations A legal or constructive obligation to incur restoration, rehabilitation, and environmental costs may arise when environmental disturbance is caused by the exploration, development, or ongoing production of a mineral property interest. The Company s exploration activities are subject to various governmental laws and regulations relating to the protection of the environment. These environmental regulations are continually changing and are generally becoming more restrictive. The fair value of the liability for a reclamation obligation is recorded when it is incurred and the corresponding increase to the asset is amortized over the life of the asset. The liability is increased over time to reflect an accretion element considered in the initial measurement at fair value. 11

12 3. SIGNIFICANT AND FUTURE ACCOUNTING POLICIES (continued): Flow-through Shares Upon the issuance of flow-through shares, the Company records the initial proceeds to capital stock, net of any flow-through premium. The liability on the statement of financial position represents the premium of the financing price in excess of the market share price on the date of the flow-through share financing. The liability pertaining to the premium is recognized in the statement of comprehensive income (loss) as deferred income tax recovery upon renunciation of the tax benefit of the expenditures to investors. The Company renounces the tax benefits of the expenditures to investors upon filing the necessary paperwork to renounce with the tax authorities. Warrants Proceeds from unit placements are allocated between shares and warrants issued according to their relative fair value. The fair value of the share component is credited to share capital and the value of the warrant component is credited to reserve for warrants account. Upon exercise of the warrants, consideration paid by the warrant holder together with the amount previously recognized in the reserve for warrants account is recorded as an increase to capital stock. For those warrants that expired unexercised, the recorded value is transferred to retained earnings (deficit). Share Issuance Costs Professional, consulting, regulatory fees and other costs that are directly attributable to the issuance of shares are charged to capital stock when the related shares are issued, net of any tax effects. Transaction costs of abandoned equity transactions are recognized in the statement of comprehensive income. Financial Instruments The Company recognizes a financial asset or a financial liability when, and only when, it becomes a party to the contractual provisions of the instrument. Such financial assets or financial liabilities are initially recognized at fair value and the subsequent measurement depends on their classification. Financial assets classified as fair value through profit and loss ("FVTPL") are measured at fair value with any resultant gain or loss recognized in profit or loss. Financial assets classified as available-for-sale are measured at fair value with any resultant gain or loss being recognized directly in other comprehensive income. Investments in equity instruments classified as available-for-sale that do not have a quoted market price in an active market and whose fair value cannot be reliably measured are measured at cost. When available-for-sale financial assets are derecognized, the cumulative gain or loss previously recognized directly in accumulated other comprehensive income is recognized in profit or loss. Financial assets classified as loans and receivables and held to maturity are measured at amortized cost using the effective interest rate method. Transaction costs associated with FVTPL financial assets are expensed as incurred, while transaction costs associated with all other financial assets are included in the initial carrying amount of the asset. 12

13 3. SIGNIFICANT AND FUTURE ACCOUNTING POLICIES (continued): Financial Instruments (continued): All financial liabilities are recognized initially at fair value plus, in the case of loans and borrowings, directly attributable transaction costs. Financial liabilities are classified as other financial liabilities, and are subsequently measured at amortized cost using the effective interest rate method. The Company s financial assets include cash and other receivables. The Company s financial liabilities include accounts payable and accrued liabilities, and long-term debt. Classification of these financial instruments is as follows: Cash Other receivable Accounts payable and accrued liabilities Long-term debt FVTPL Loans and receivables Other financial liabilities Other financial liabilities Financial assets and financial liabilities are offset and the net amount presented in the statement of financial position when, and only when, the Company has a legal right to offset the amounts and intends either to settle on a net basis or to realize the asset and settle the liability simultaneously. Impairment of financial assets A financial asset not carried at fair value through profit or loss is assessed at each reporting date to determine whether there is objective evidence that it is impaired. A financial asset is impaired if objective evidence indicates that a loss event has occurred after the initial recognition of the asset, and that the loss event had a negative effect on the estimated future cash flows of that asset that can be estimated reliably. An impairment loss in respect of a financial asset measured at amortized cost is calculated as the difference between its carrying amount and the present value of the estimated future cash flows discounted at the asset s original effective interest rate. Losses are recognized in profit or loss and reflected in an allowance account against accounts receivable. Financial instruments recorded at fair value Financial instruments recorded at fair value on the statements of financial position are classified using a fair value hierarchy that reflects the significance of the inputs used in marking the measurements. The fair value hierarchy has the following levels: Level 1 valuation based on quoted prices (unadjusted) in active markets for identical assets or liabilities; Level 2 valuation techniques based on inputs other than quoted prices included within Level 1. Derivative instruments in this category are valued using models or standard valuation techniques derived from observable market inputs; Level 3 valuation techniques using inputs that are less observable, unavailable or where the observable data does not support a significant portion of the instrument s fair value. The company s cash is classified as Level 1. 13

14 3. SIGNIFICANT AND FUTURE ACCOUNTING POLICIES (continued): Provisions Provisions are recognized when the Company has a present obligation (legal or constructive) as a result of a past event, it is probable that an outflow of resources embodying economic benefits will be required to settle the obligation, and a reliable estimate can be made of the amount of the obligation. The expense relating to any provision is presented in the statement of comprehensive income, net of any reimbursement. If the effect of the time value of money is material, provisions are discounted using a current pre-tax rate that reflects, where appropriate, the risks specific to the liability. Where discounting is used, the increase in the provision due to the passage of time is recognized as a finance cost. Current and Future Accounting Changes Certain new standards, interpretations, amendments and improvements to existing standards were issued by the IASB or IFRS Interpretation Committee that are mandatory for accounting periods beginning after January 1, 2016 or later periods. Updates that are not applicable or are not consequential to the Company have been excluded there from. The Company is in the process of evaluating the impact on its financial statements. IFRS 9 Financial Instruments was issued in final form in July 2014 by the IASB and will replace IAS 39 Financial Instruments: Recognition and Measurement. IFRS 9 uses a single approach to determine whether a financial asset is measured at amortized cost or fair value, replacing the multiple rules in IAS 39. The approach in IFRS 9 is based on how an entity manages its financial instruments in the context of its business model and the contractual cash flow characteristics of the financial assets. Most of the requirements in IAS 39 for classification and measurement of financial liabilities were carried forward unchanged to IFRS 9. The new standard also requires a single impairment method to be used, replacing the multiple impairment methods in IAS 39. IFRS 9 also includes requirements relating to a new hedge accounting model, which represents a substantial overhaul of hedge accounting which will allow entities to better reflect their risk management activities in the financial statements. IFRS 9 is effective for annual periods beginning on or after January 1, Earlier application is permitted FRS 16 Leases sets out the principles for the recognition, measurement and disclosure of leases. IFRS 16 provides revised guidance on identifying a lease and for separating lease and non-lease components of a contract. IFRS 16 introduces a single accounting model for all lessees and requires a lessee to recognize rightof-use assets and lease liabilities for leases with terms of more than 12-months, unless the underlying asset is of low value. Under IFRS 16, lessor accounting for operating and finance leases will remain substantially unchanged. IFRS 16 is effective for annual periods beginning on or after January 1, 2019, with earlier application permitted for entities that apply IFRS 15 Revenue from Contracts with Customers. 4. CHANGE IN ACCOUNTING POLICY During the year ended December 31, 2015, the Company retrospectively changed its accounting policy for exploration and evaluation expenditures. Previously, the Company capitalized acquisition costs and deferred exploration and evaluation expenditures of mineral properties to the specific mineral properties, net of recoveries received. Under the new policy, acquisition costs and deferred exploration and evaluation expenditures incurred prior to the establishment of technical feasibility and commercial viability of extracting mineral resources and prior to a decision by the board of directors to proceed with mine development are charged to operations as incurred. As required by IAS 8 Accounting Policies, Changes in Accounting Estimates and Errors, the Company included the restated consolidated statement of financial position as at January 1, Management considers this accounting policy to provide more reliable and relevant information and more clearly represents the Company s activities. 14

15 4. CHANGE IN ACCOUNTING POLICY (continued): The financial statement impact as at January 1, 2014 is as follows: As previously reported Effect of change in accounting policy As restated STATEMENTS OF FINANCIAL POSITION Mineral properties 7,258,261 (7,258,261) - Total assets 7,474,910 (7,258,261) 216,649 Deficit (21,406,688) (7,258,261) (28,664,949) Total shareholders' equity 7,026,352 (7,258,261) (231,909) Total liabilities and shareholders' equity 7,474,910 (7,258,261) 216,649 The financial statement impact as at and for the year ended December 31, 2014 is as follows: As previously reported Effect of change in accounting policy As restated STATEMENTS OF FINANCIAL POSITION Mineral properties 2,667,758 (2,667,758) - Total assets 3,156,632 (2,667,758) 488,874 Deficit (26,412,988) (2,667,758) (29,080,746) Total shareholders' equity 2,471,812 (2,667,758) 195,946 Total liabilities and shareholders' equity 3,156,632 (2,667,758) 488,874 As previously reported Effect of change in accounting policy As restated STATEMENTS OF COMPREHENSIVE INCOME (LOSS) Corporate and office administration services 158, ,181 Stock-based compensation 60,780-60,780 Shareholder communication 50,106-50,106 Premises rent 16,168-16,168 Interest expense 9,301-9,301 Exploration and evaluation - 159, ,497 Write-off of mineral properties 4,750,000 (4,750,000) - Operating income/(loss) (5,044,536) 4,590,503 (454,033) Net income/(loss) for the year (5,044,536) 4,590,503 (454,033) Basic and diluted earnings/(loss) per share (0.18) 0.16 (0.02) STATEMENTS OF CASH FLOWS Net loss for the year (5,044,536) 4,590,503 (454,033) Write off of mineral properties 4,750,000 (4,750,000) - Cash used in operations (53,019) (159,497) (212,516) Cash used in investing activities (159,497) 159,497-15

16 5. FINANCIAL INSTRUMENTS: The Company manages its exposure to a number of different financial risks arising from operations as well as from the use of financial instruments, including market risks (foreign currency exchange rate and interest rate), credit risk and liquidity risk, through its risk management strategy. The objective of the strategy is to support the delivery of the Company's financial targets while protecting its future financial security and flexibility. Financial risks are primarily managed and monitored through operating and financing activities. The Company does not use derivative financial instruments. The financial risks are evaluated regularly with due consideration to changes in key economic indicators and to up-to-date market information. The Company s risk exposures and the impact on the Company s financial instruments are summarized below: Credit Risk The Company s credit risk is primarily attributable to cash and other receivable. The Company has no significant concentration of credit risk arising from operations. Cash consists of bank deposits that have been invested with a reputable financial institution (Canadian Schedule A Chartered Bank), from which management believes the risk of loss to be remote. Management believes that the credit risk concentration with respect to financial instruments included in other receivable is remote. Liquidity Risk Liquidity risk encompasses the risk that the Company cannot meet its financial obligations in full. The Company's main source of liquidity is its cash. These funds are primarily used to finance working capital, exploration expenditures, capital expenditures, and acquisitions. The Company manages its liquidity risk by regularly monitoring its cash flows from operating activities and holding adequate amounts of cash and cash equivalents. As at December 31, 2015, the Company has current assets of $60,025 to cover current liabilities of $692,460. Management is currently pursuing several financing alternatives to raise additional capital. (See Note 16) The contractual amounts maturing for the Company s financial obligation consists of the following: Financial liabilities < 1 year 1-2 years 3-5 years >5 years Accounts payable and accrued liabilities $ 769,339 $ - $ - $ - Long-term debt 12,692 14,021 32,600 57,488 $ 782,031 $ 14,021 $ 32,600 $ 57,488 16

17 5. FINANCIAL INSTRUMENTS (continued): Market Risk Market risk is the risk of uncertainty arising primarily from possible commodity market price movements and their impact on the future economic viability of the Company s projects and ability of the Company to raise capital. These market risks are evaluated by monitoring changes in key economic indicators and market information on an on-going basis and adjusting operating and exploration budgets accordingly. a) Interest rate risk Interest rate risk is the risk borne by an interest-bearing asset or liability as a result of fluctuations in interest rates. Financial assets and financial liabilities with variable interest rates expose the Company to cash flow interest rate risk. The Company's investment policy is to invest excess cash in highly liquid investments that earn interest at market rates. The Company has no significant exposure to interest rate cash flow risks, as there are no instruments that bear interest at a floating rate. Although the Company endeavours to maximize the interest income earned on excess funds, the Company's policy focuses on cash preservation, while maintaining the liquidity necessary to conduct operations on a day-to-day basis. The Company's policy limits the investing of excess funds to liquid term deposits, treasury bills and banker's acceptances. The Company is exposed to interest rate price risk to the extent that a portion of the long-term debt is at a fixed interest rate. b) Foreign currency exchange risk The Company has no significant exposure to foreign currency exchange risk as it has no significant transaction balances denominated in a foreign currency. c) Fair value The carrying value of cash, other receivables, accounts payable and accrued liabilities are considered to be representative of their fair value due to their short-term nature. The fair value of long-term debt is not considered to be materially different from its carrying value. 6. CAPITAL MANAGEMENT: The Company manages its capital structure and makes adjustments to it, based on the funds required and available to the Company, in order to support the acquisition, exploration and development of mineral properties. As at December 31, 2015, the company s capital consists of shareholder s equity in the amount of $27,470,668 (December 31, $27,294,645). The Board of Directors does not establish quantitative return on capital criteria for the Company, but rather relies on the expertise of the Company s management to sustain future development of the business. In this relatively formative stage of the Company s existence, it is likely that primary emphasis will continue to be placed on equity instruments, as funded debt is unlikely to be available to the Company. 17

18 6. CAPITAL MANAGEMENT (continued): The properties in which the Company currently has an interest are in the exploration stage; as such the Company is dependent on external financing to fund its activities. In order to carry out the planned exploration and pay for administrative costs, the Company intends to raise additional amounts of working capital. The Company may continue to assess new properties and seek to acquire an interest in additional properties if it feels there is sufficient geologic or economic potential and if it has adequate financial resources to do so. Management reviews its capital management approach on an ongoing basis and believes that this approach, given the relative size of the Company, is reasonable. There were no changes in the Company s approach to capital management during the year ended December 31, The Company is not subject to externally imposed capital requirements. 7. MINERAL PROPERTY: The Company has two project areas near Paulatuk, Northwest Territories and a third project in the James Bay area of Quebec. First Project Area: The Company holds 100% of the rights to a mineral concession covering all of the Paulatuk 7(1)(a) lands, and two claims adjacent to the concession in 7(1)(b) lands and Crown lands. The concession and claims cover an area that hosts base metal and diamond targets. The land classifications in the Paulatuk area are as follows: Inuvialuit 7(1)(a) lands- The Inuvialuit hold the mineral and surface rights. Inuvialuit 7(1)(b) lands- The Inuvialuit hold the surface rights and the Crown holds the mineral rights Crown lands - The Crown holds the mineral and surface rights. Second Project Area: The Company and Diadem Resources Ltd. Jointly hold six claims and eight leases on the Parry Peninsula northeast of Paulatuk in 7(1)(b) lands, where the focus is diamond exploration. Third Project Area: The Company has optioned a property in the James Bay Area of Quebec from Eastmain Resources Inc., where the focus is base metal exploration. The cumulative expenditures for each project as follows: December 31, 2014 Additions December 31, 2015 First Project Area $7,366,258 $8,510 $7,374,768 Second Project Area 1,500-1,500 Third Project Area 50, , ,000 Total expenditures $7,417,758 $620,286 $8,037,758 18

19 8. AGREEMENTS: AGREEMENTS WITH THE INUVIALUIT LAND CORPORATION ("INUVIALUIT") - relating to the First Project Area (see Note 7) On May 8, 2007, the Company announced an agreement in principal with the Inuvialuit (subject to the ratification by the members of the Paulatuk Community Corporation) regarding the terms of a new basemetals/diamond concession in the 7(1)(a) lands where the Inuvialuit own the subsurface and surface rights. The combined metals and diamonds concession agreement (the Concession ) was signed on December 22, 2009 for the 7(1)(a) lands to clarify the formal commitment. Prior to signing of the agreement, as a precondition, on December 29, 2009 the Company paid 50% ($626,268) of its outstanding commitments to the Inuvialuit Regional Corporation. According to the agreement, all activities and consequently all payments and required work commitments are divided into three stages: Exploration stage - valid for a 10-year period from December 22, 2009 and can be renewed for two more three-year periods for $150,000 for each renewal (adjusted for inflation). A contiguous 50% of the remaining land area of the Concession shall be dropped upon each extension, subject to any areas designated being excluded from the total land area from which 50% must be dropped. The start of the exploration stage is deemed to be the date of the signing of the agreement. Cash payments and work commitments in this stage are as follows: Cash payments Work commitment Work commitments met at December 31, $ 50,000 (paid) $ 2,000,000 $ 2,000, ,000 (paid) 2,000,000 2,000, ,000 (paid) 2,000,000 2,000, ,000 1,000, , ,000 1,000, , *125,000 1,000,000 8, *125,000 1,000, *125,000 1,000, *125,000 1,000, *125,000 1,000,000 - $ 875,000 $ 13,000,000 $ 6,704,928 * plus applicable access fees. 19

20 8. AGREEMENTS (continued): AGREEMENTS WITH THE INUVIALUIT LAND CORPORATION ("INUVIALUIT") relating to the First Project Area (see Note 7) On November 28, 2013, the Company was granted an extension to the 2013 work commitment. It was agreed that the shortfall (including $50,000 of cash payments) will be carried forward to future periods. On April 22, 2015, the Company requested a similar extension for the 2014 work commitment which was granted. The Company is currently seeking similar relief for the 2015 commitment. In any year, the work commitment is reduced by the percentage of lands that have been designated as project areas and preceded to the second stage of activities. For each renewal period the Company has to incur $1,000,000 in work commitments per year to maintain its concession rights. Any underperformed amount of work commitment in any year can be paid in cash. Project definition stage the Company defines project areas within the concession on which it will be conducting continuous exploration activities. The term is for 10 years with respect to metals from the time of designation and 6 years with respect to diamonds. The Company has an option to extend this stage for an additional 5 years for metals and 2 years for diamonds for $150,000 for each extension. During the project definition stage, the annual fee is $100,000 per year plus $48.00 per square kilometer, adjusted for inflation, and the same fees as in Exploration stage apply to any lands that are not designated. At this stage, the Company has to incur $10 per acre in the first five years and $20 per acre in subsequent years for minimum cumulative work of $500,000 on each project. Production stage the Company is entitled to the issuance of the mining lease, if it will be able to start production within 36 months of the issuance of the lease. The mining lease is valid for 15 years with respect to metals and 10 years with respect to diamonds. The amount of annual fees to be paid will be determined at the time of issuance of the mining lease. The Agreement is subject to a 6% NSR for both diamonds and metals paid to Inuvialuit. During each year of the mining lease, the minimum amount of the royalty should be $800,000. The Inuvialuit Mining Corporation has an option to a 10% participating interest in any mining lease by reimbursing the Company the proportionate amount of costs that have been incurred during the project definition stage. AGREEMENT WITH DIADEM RESOURCES LTD. ( DIADEM ) relating to the Second Project Area (see Note 7) Under an agreement (originally dated June 24, 2003) with Carnarvon Capital Corporation, the Company agreed to pursue a joint venture diamond exploration program near Paulatuk in the Inuvialuit Settlement Region ("Inuvialuit") in the Northwest Territories. The property encompassed mining claims held in the names of Darnley Bay Resources Limited and Diadem Resources Ltd. The principal terms of understanding between the parties were amended from time to time and exploration was conducted on the property. The claims that became jointly registered and exclusively located on the Parry Peninsula, were kept in good standing however, a formal joint venture arrangement was not agreed upon. As of December 31, 2012, the Company planned to focus on the First Project. On May 6, 2013, the Company entered into a purchase and sale agreement with Diadem providing for the purchase of the Company s interest in the diamond project. Under the terms of the agreement, Diadem would have exclusive rights to all diamonds in the Parry Peninsula. This agreement was intended to supersede all previous agreements entered into by the Company and Diadem, the most recent dated September 27,

21 8. AGREEMENTS (continued): AGREEMENT WITH DIADEM RESOURCES LTD. ( DIADEM ) relating to the Second Project Area (see Note 7) (continued) Consideration for the purchase by Diadem would consist of: 11,700,000 common shares; 11,700,000 warrants, each warrant entitling the Company to purchase one common share of Diadem at a price of $0.10 per share for a period of 30 months after the closing date of June 30, The Company would retain a 2% Net Smelter Royalty ( NSR ) on the sale of diamonds and all other minerals produced from the project. Diadem would have the right to purchase 1% of the NSR for $1.0 million in cash. Diadem agreed to reimburse the Company for up to $40,000 in costs associated with the 2010 drilling program. In addition, Diadem would grant the Company the right to purchase up to $40,000 worth of securities of Diadem, at the lowest price per security offered by Diadem to third party investors, in connections with the first equity financing completed by Diadem after the closing date. Diadem agreed to incur a minimum of $1,500,000 of expenditures with respect to the project within 24 months of the date of the agreement. In the event that Diadem fails to incur the expenditures within the 24 month period, then in addition to all of the compensation paid to the Company, Diadem will transfer 100% of its interest in the project to the Company in return for a two percent (2%) net smelter royalty from the sale of diamonds produced from the project. At December 31, 2015, there have been no transactions related to the terms of the May 6, 2013 agreement however, the parties are continuing to cooperate to advance exploration on the jointly held claims in On February 4, 2004, the Company and Diadem entered into an agreement with the Inuvialuit under which the Company and Diadem would enter into a Cooperation and Benefits Agreement with the Inuvialuit. The principal terms are as follows: The agreement would cover an area in the Inuvialuit Settlement Region around Paulatuk of about 57,000 square kilometers (excluding the area around Paulatuk in which the Inuvialuit own the mineral rights and excluding the Tuktut Nogait National Park). The agreement was for five years from January 1, 2004 with provisions for renewal and termination consistent with the joint venture's mining rights in the area. The Company/Diadem joint venture would be granted access to the Inuvialuit lands to conduct exploration, development and extraction operations for rough diamonds. The joint venture would be required to obtain all necessary permits and approvals, and would pay the fees and charges under the Inuvialuit Rules with a minimum amount payable each year of $50,000. The Inuvialuit was to receive a 2% diamond royalty on mining rights exploited by the joint venture. The Inuvialuit could hold certain claims in the area and obtain a 15-year deferral of Crown royalties. If the Inuvialuit did so, in such cases the Inuvialuit would receive an additional 4% royalty while the deferral applies. If the joint venture completes a positive feasibility, the Inuvialuit have the right to acquire up to a 10% participating interest by paying the corresponding percentage of the cost of preparing the feasibility study. Diamond exploration has continued under the principal terms set out by the 2004 agreement. 21