STORNOWAY DIAMOND CORPORATION

Transcription

1 STORNOWAY DIAMOND CORPORATION CONDENSED INTERIM CONSOLIDATED FINANCIAL STATEMENTS For the three months ended (Unaudited) YE 2015 v9 Date: June 14, 2015 Reviewed by: JCD, EC

2 Interim Consolidated Statements of Financial Position As at and December 31, Unaudited (expressed in thousands of Canadian dollars) Notes December 31 (audited) ASSETS Current Cash and cash equivalents 4 47,886 42,293 Short-term investments 5 24,195 43,695 Receivables 4,316 4,910 Inventories 6 44,528 39,777 Prepaid expenses and deposits 1,347 1, , ,912 Deferred transaction costs 11,783 12,013 Inventories 6 6,330 4,229 Property, plant and equipment 7 1,095,333 1,102,084 Other financial assets 11,175 9,068 Deferred income tax assets 49,484 52,307 1,174,105 1,179,701 1,296,377 1,311,613 LIABILITIES Current Payables and accrued liabilities 25,821 34,874 Current portion of long-term debt 8 18,490 17,798 Current portion of deferred revenue 10 24,981 26,100 Other liabilities ,524 79,112 Long-term debt 8 126, ,936 Convertible debentures 9 93, ,769 Deferred revenue , ,706 Asset retirement obligation 15,538 13,329 Deferred income tax liabilities 11,935 1, , , , ,072 EQUITY Share capital 865, ,868 Contributed surplus 40,858 39,526 Accumulated other comprehensive income 220 Deficit (217,828) (214,853) 688, ,541 1,296,377 1,311,613 ON BEHALF OF THE BOARD: Ebe Scherkus, Director Hume Kyle, Director See Accompanying Notes Page 2 of 20

3 Interim Consolidated Statements of Loss For the three months ended March 31 and Unaudited (expressed in thousands of Canadian dollars except for loss per share and weighted average number of shares outstanding) Notes Revenues 48,492 Cost of goods sold Operating expenses 13 22,162 Royalty expenses Depreciation 7 13,389 36,420 Income from mining operations 12,072 Selling, general and administrative expenses 13 5,120 2,408 Exploration expenses Income from operations 6,306 (3,017) Other (income) expenses Gain on sale of interests in exploration properties (400) Financial (income) expenses 14 (2,730) 26,193 Foreign exchange gain (1,019) (6,600) (4,149) 19,593 Net income (loss) before tax 10,455 (22,610) Deferred income tax 11 13,430 Net Loss (2,975) (22,610) Loss Per Share Basic Nil (0.03) Loss Per Share Diluted (0.01) (0.03) Weighted Average Number of Shares Outstanding Basic 828,454, ,552,015 Diluted 923,604, ,552,015 Interim Consolidated Statements of Comprehensive Loss For the three months ended March 31 and Unaudited (expressed in thousands of Canadian dollars) Net Loss (2,975) (22,610) Unrealized gain on available-for sale-investments 220 Comprehensive Loss (2,755) (22,610) See Accompanying Notes Page 3 of 20

4 Interim Consolidated Statements of Changes in Equity For the three months ended and Unaudited (expressed in thousands of Canadian dollars, except for the number of shares) Share Capital Number of shares Amount Contributed Surplus AOCI* Deficit Total Balance at January 1, 828,452, ,868 39,526 (214,853) 689,541 Net loss for the period (2,975) (2,975) Unrealized gain on availablefor-sale investments Total comprehensive loss for the period 220 (2,975) (2,755) Exercise of options 212, (75) 149 Share-based compensation 1,407 1,407 Balance at 828,664, ,092 40, (217,828) 688,342 Balance at January 1, 732,310, ,649 44,804 (234,494) 575,959 Net loss for the period (22,610) (22,610) Exercice of options 283, (99) 199 Exercice of warrants 640, (43) 576 Share-based compensation Balance at 733,233, ,566 44,874 (257,104) 554,336 * Accumulated Other Comprehensive Income Equity is solely attributable to shareholders of Stornoway Diamond Corporation See Accompanying Notes Page 4 of 20

5 Consolidated Statements of Cash Flows For the three months ended March 31 and Unaudited (expressed in thousands of Canadian dollars) Cash Flow Provided by (Used In) Notes Operating Activities Net loss (2,975) (22,610) Items not affecting cash Depreciation 7 13, Accretion 2, Capitalized interest 8b 841 Gain on sale of interests in exploration properties (400) Loss on investment 3 Amortization of deferred transaction costs 8f 211 Deferred income tax expenses 13,430 Foreign exchange gain (1,092) (6,833) (Gain) loss on fair value of derivatives (10,091) 25,868 Share-based compensation 12 1, Deferred revenue from Stream ,267 Amortization of deferred revenue from Stream 10 (6,785) Amortization of deferred transaction costs from Stream Changes in non-cash working capital Decrease (increase) in receivables 594 (5,183) Decrease (increase) in prepaid expenses and deposits 407 (174) Increase in inventory (2,847) (1,269) Increase in payables and accrued liabilities 18,330 2,693 26, ,924 Investing Activities Acquisition of property, plant and equipment 7, 16 (46,173) (103,443) Mining tax credit received 7 9,756 Proceeds from sale of fixed assets to be leased back 9,522 Increase in other financial assets (1,518) (1,740) Decrease in short-term investments, net 19,500 33,500 (18,435) (62,161) Financing Activities Options and warrants exercised Repayment of debt (2,876) (1,239) (2,727) (464) Effect of foreign exchange rate changes on cash and cash equivalents (51) (2,839) Net increase in cash and cash equivalents 5,593 43,460 Cash and cash equivalents Beginning of period 42,293 58,092 Cash and cash equivalents End of period 47, ,552 See supplemental schedule of non-cash investing and financing transactions (Note 16) See Accompanying Notes Page 5 of 20

6 For the three months ended and Nature of Operations Stornoway Diamond Corporation ( Stornoway or the Corporation ) is a diamond mining corporation existing under the Canada Business Corporations Act and listed on the Toronto Stock Exchange ( TSX - SWY). The Corporation s primary asset is the Renard Diamond Mine in Québec. Stornoway formally declared commercial production at Renard on January 1,. The head office and principal address of the Corporation is Suite 400, 1111 St.-Charles Street West, Longueuil, Quebec, J4K 5G4. The Corporation s condensed interim consolidated financial statements include Stornoway and the following wholly-owned subsidiaries : Ashton Mining of Canada Inc. ( Ashton ), Stornoway Diamond (Canada) Inc. ( SDCI ) and FCDC Sales and Marketing Inc. ( FCDC ). The condensed interim consolidated financial statements have been prepared on a going concern basis, which assumes that the Corporation will be able to realize its assets and discharge its liabilities in the normal course of business as they come due into the foreseeable future. The Corporation expects to draw from the $100 million Senior Secured Loan, Tranche A during the second quarter of. As the Corporation meets the conditions precedent to the Senior Secured Loan (see Note 8g), the Corporation anticipates that it has sufficient liquidity to meet its capital requirements up to the commencement of the underground mining operations. Should the Corporation not be able to draw from the Senior Secured Loan and in the event that the cash generated from operations are insufficient to complete construction and commissioning of the underground mine, the Corporation will need to complete further financing. Summary of Significant Accounting Policies Basis of Preparation These condensed interim consolidated financial statements have been prepared by the Corporation in accordance with International Accounting Standard 34, Interim Financial Reporting ( IAS 34 ), as issued by the International Accounting Standards Board ( IASB ), using the same accounting policies and methods of application as the audited consolidated financial statements of the Corporation as at and for the year ended December 31,. These condensed interim consolidated financial statements do not include all of the information and note disclosures required by International Financial Reporting Standards ( IFRS ) for annual financial statements of the Corporation and should therefore be read in conjunction with the audited consolidated financial statements of the Corporation as at and for the year ended December 31,, which have been prepared in accordance with IFRS. These condensed interim consolidated financial statements were approved for release by the Board of Directors on May 8,. Page 6 of 20

7 For the three months ended and Financial Instruments Fair value With the exception of the long-term debt and convertible debentures, the carrying values of the financial assets and financial liabilities presented in the table below approximate their fair values as at. The carrying value of cash and cash equivalents, short-term investments, receivables, other financial assets and payables and accrued liabilities approximate their fair values due to their immediate or short-term maturity. The Corporation defines fair value as the price that would be received to sell an asset or paid to transfer a liability in an arm s length transaction between market participants at the measurement date. When appropriate, the Corporation adjusts the valuation models to incorporate a measure of credit risk. The Corporation uses the following hierarchy for determining and disclosing the fair value of financial instruments by valuation technique: Level 1: based on quoted (unadjusted) prices in active markets for identical assets or liabilities; Level 2: based on inputs which have a significant effect on fair value that are observable, either directly or indirectly from market data; and Level 3: based on inputs which have a significant effect on fair value that are not observable from market data. The following table presents a comparison of the carrying value and estimated fair value for the debt. Carrying Value As at As at December 31, Fair Value Carrying Value Fair Value Long-Term Debt Unsecured debt facility # 1 (Level 3) (Note 8a) 17,537 18,846 18,533 20,000 Unsecured debt facility # 2 (Level 3) (Note 8b) 29,260 29,260 28,419 28,419 Other unsecured debt (Level 3) (Note 8c) 12,717 12,717 12,717 12,717 Renard Mine Road debt facility (Level 3) (Note 8d) 50,465 50,645 49,781 49,963 Obligations under finance leases (Level 3) (Note 8e) 35,243 35,243 37,284 37, , , , ,383 Convertible debentures Host (Level 3) (Note 9) 70,788 73,392 69,911 72,515 Derivative (Level 3) (Note 9) 22,446 22,446 32,858 32,858 93,234 95, , ,373 As at, the Corporation is committed to minimum future principal and interest payments for debt, as follows: Unsecured debt facility (# 1) (Note 8a) Unsecured debt facility (# 2) (Note 8b) Other unsecured debt (Note 8c) Renard mine road debt facility (Note 8d) Obligations under finance leases (Note 8e) ** Convertible debentures (Note 9) ** Total Year ending December 31, 4,481 30,110* 1,179 6,000 6,633 6,766 55,169 Year ending December 31, ,254 1,571 6,000 8,844 6,766 29,435 Year ending December 31, ,700 1,571 6,000 8,696 6,766 28,733 Year ending December 31, ,148 1,571 6,000 8,543 6,766 28,028 Year ending December 31, ,981 1,571 10,419 5, , ,961 Thereafter 9,430 56,505 1,167 67,102 23,564 30,110 16,893 90,924 39, , ,428 * Maturity of this debt will occur on the earlier of: i) closing of Tranche A of the Senior Secured Loan and ii) June 30, (see Note 8b for more details). ** Amounts in US dollars are subject to variable interest rates and are determined based on current spot rates at. Page 7 of 20

8 For the three months ended and Cash and Cash Equivalents December 31 Cash 24,743 7,034 Cash equivalents 23,143 35,259 47,886 42,293 As at, cash equivalents totalled $23.1 million (December 31, $35.3 million) consisting of banker s acceptances issued by Canadian banks with an average interest rate of 0.73%. These investments are immediately redeemable without penalty. As at, cash and cash equivalents included US$12.9 million or $17.1 million (December 31, - US$11.3 million or $15.2 million) held for future purchases of US dollar denominated property, plant and equipment. Short-Term Investments As at, short-term investments totalled $24.2 million (December 31, - $43.7 million) consisting of Guaranteed Investment Certificates issued by Canadian banks, with an average interest rate of 0.83%. These investments are immediately redeemable without penalty. Inventories December 31, Materials and supplies 11,205 10,456 Stockpile ore 18,234 15,766 Rough diamonds work in progress 11,881 2,912 Rough diamonds finished goods 9,538 14,872 50,858 44,006 Less: non-current portion 6,330 4,229 Current portion 44,528 39,777 The amount of depreciation included within inventory at is $4.0 million. The cost of inventory that was charged to expenses represents mostly mine operating expenses and essentially all of the depreciation of property, plant and equipment. Page 8 of 20

9 For the three months ended and Property, Plant and Equipment Buildings, Camp and Accommodations Roads & Leasehold Airstrip Improvements Exploration, Laboratory and Office Equipment Vehicles and Machinery (3) Mineral Properties Mine Under Constructilon Total Cost As at December 31, ,253 51, ,970 45, , , ,055 Additions , , ,223 Disposals (53) (53) Capitalized interest 25,588 25,588 Capitalized depreciation (2) 27,432 27,432 Pre-commercial production revenue (9,032) (9,032) Tax credit refund (500) (500) Transfer from Mine Under Construction (4) 426,201 8,728 2, ,427 (687,424) (11,477) As at December 31, 526,454 60, ,815 68, ,139 1,146,236 As at December 31, 526,454 60, ,815 68, ,139 1,146,236 Additions 4, ,615 13,983 20,423 Mining tax credit capitalized (9,756) (9,756) Capitalized depreciation (2) 7,278 7,278 As at 530,997 50, ,823 69, ,400 1,164,181 Accumulated depreciation As at December 31, ,775 4, ,677 4,579 16,625 Depreciation for the period (1) 13,658 3, ,812 3,717 27,532 Disposals (5) (5) As at December 31, 18,433 7, ,376 10,386 3,717 44,152 As at December 31, 18,433 7, ,376 10,386 3,717 44,152 Depreciation for the period 9,206 1, ,639 12,446 24,696 As at 27,639 8, ,740 12,025 16,163 68,848 Net book value As at December 31, 508,021 52, ,439 57, ,422 1,102,084 As at 503,358 41, ,083 57, ,237 1,095,333 (1) During the year ended December 31,, assets were commissioned as they had reached their intended use; depreciation started concurrently with commissioning. (2) A portion of the depreciation for the three-months ended, is recorded as a project development cost in Mineral Properties, as which it is representing the depreciation of the underground mine currently in development. (3) Included in vehicles and machinery are assets with a cost of $61.7 million acquired pursuant to a finance lease agreement (see Note 8e) For the threemonths ended,depreciation totalled $1.4 million (December 31, $5.1 million). (4) As assets at the Renard Diamond Mine were commissioned, the accumulated carrying value of each identifiable asset was transferred to the applicable category within property, plant and equipment. As at December 31,, the net transfers amounted to $11.5 million, which represents materials and supplies inventory, and prepayments that are no longer associated with the cost of bringing the Renard Diamond Mine to the condition necessary for it to be capable of operating in the manner intended by management. Page 9 of 20

10 For the three months ended and Long-Term Debt December 31, Unsecured Debt Facility #1 (Note 8a) 17,537 18,533 Unsecured Debt Facility #2 (Note 8b) 29,260 28,419 Other Unsecured Debt (Note 8c) 12,717 12,717 Renard Mine Road Debt Facility (Note 8d) 50,465 49,781 Obligations under finance leases (Note 8e) 35,243 37, , ,734 Less : current portion of long-term debt 18,490 17,798 Non-Current Long-Term Debt 126, ,936 a) Unsecured Debt Facility # 1 December 31, Opening balance 18,533 17,992 Accretion Principal repayment (1,154) 17,537 18,533 Less : current portion 4,615 4,231 Non-current portion 12,922 14,302 The Loan bears interest at a rate of 12% per annum, payable in cash and principal is to be repaid in equal monthly instalments of $0.4 million commencing one month following the date of commercial production which was February 1,. The loan matures May 3, b) Unsecured Debt Facility # 2 December 31, Opening balance 28,419 25,293 Capitalized interest 841 3,126 29,260 28,419 Less : current portion 2,030 2,030 Non-current portion 27,230 26,389 Page 10 of 20

11 For the three months ended and 8. Long-Term Debt continued b) Unsecured Debt Facility # 2 continued The loan maturity is the earlier of: a) closing of Tranche A of the Senior Secured Loan and b) June 30,. The loan is an unsecured obligation of the Corporation and is subordinated to the Corporation s senior secured obligations. The loan bears interest at 12% per annum. Upon closing of Tranche A of the Senior Secured Loan, the principal and all accumulated and unpaid interest will be rolled over into the Senior Secured Loan facility and be subject to the repayment schedule of the Senior Loan thereafter. As the Corporation expects to have the right to draw the Senior Secured Loan, and intends to do so, the current portion of the facility has been calculated using the repayment schedule of the Senior Secured Loan. c) Other Unsecured Debt December 31, Total debt 12,717 12,717 Less : current portion Non-current portion 11,765 11,994 The commencement of construction on July 10, 2014 triggered a liability of $12.7 million pursuant to the terms of an existing agreement between the Corporation and an arm s length third party. Under the terms of this agreement, the Corporation will pay interest at a rate of 5.5% per annum quarterly in arrears on the principal amount of the liability during the construction period. Principal repayments will be made quarterly, in arrears, starting with the first fiscal quarter commencing after the month during which the Renard Diamond Mine reaches commercial production, which is April 1,, and ending at maturity date, on October 1, d) Renard Mine Road Debt Facility December 31, Opening balance 49,781 50,677 Accretion* 684 2,485 Principal repayment (3,381) 50,465 49,781 Less : current portion 3,495 3,495 Non-current portion 46,970 46,286 * Calculated based on an effective interest rate of 10.0% The Government of Québec provided SDCI with $77 million of financing, with $70 million used to complete the road construction work and $7 million used to construct an airstrip, at an annual interest rate of 3.35% percent, for a term of 15 years, with annual repayments of principal and interest beginning 48 months following the first drawdown, which was December 19,, and ending on December 19, Page 11 of 20

12 For the three months ended and 8. Long Term Debt continued e) Obligations Under Finance Leases On July 25, 2014, SDCI and Caterpillar Financial Services Limited ( Caterpillar ) entered into an equipment finance facility of US$75 million for the purchase of CAT and non-cat equipment. Tranche A is a maximum amount of US$50 million, less upfront payments ranging from 15% to 50% based on the type of equipment financed (the estimated financing available under this facility after upfront deposits is expected to be approximately US$35 million); Tranche B is a maximum amount of US$25 million, less upfront payments ranging from 15% to 50% based on the type of equipment financed. The term of the facility is six years from the date of each drawdown and the facility is secured by the equipment financed. In addition, SDCI must place the lesser of US$3.0 million and 10% of the outstanding principal balance of the leases into an account for the benefit of Caterpillar until the first anniversary of completion of the Renard Diamond Mine (the debt service reserve account or DSRA ). Tranche A bears interest at the three-month London Inter-bank Offer Rate ( LIBOR ), plus 4%. Interest is payable quarterly. Covenants in the equipment finance facility include: i) a reserve tail ratio of 25% if there is any indebtedness under Tranche A of the facility (20% if the only amounts outstanding are under Tranche B); ii) historical and projected debt service coverage ratios greater than or equal to 1.15:1.0; and iii) a requirement for the Corporation, on a consolidated basis, to maintain a tangible net worth of $250 million. As at, the Corporation met these covenants. December 31, Opening balance 37,284 30,326 New debt obligations under finance leases (1) 13,986 Change in foreign exchange rate (319) (1,059) Principal repayment (1,722) (5,969) 35,243 37,284 Less: current portion 7,398 7,319 Non-current portion 27,845 29,965 (1) As at, a deposit of $4.0 million (US$3.0 million) has been set aside, and is recorded in Other Financial Assets as collateral until the total future obligations are fully settled (December 31, - $4.0 million (US$ 3.0 million)). Future minimum lease payments pursuant to SDCI s finance leases are as follows: Up to 1 year 1-5 years Over 5 years Total Minimum lease payments 8,844 29, ,119 Finance charges (1,446) (2,403) (27) (3,876) Total 7,398 27, ,243 Page 12 of 20

13 For the three months ended and 8. Long-Term Debt continued f) Deferred Transaction costs December 31, Opening Balance 12,013 17,742 Amortization (211) (5,216) Transfer to debt, equity or assets (19) (513) Ending Balance 11,783 12,013 Deferred transaction costs consist primarily of legal and advisory fees, regulatory filing fees and other financing expenses (see Note 8h). The balance of $11.8 million as at (December 31, - $12.0 million) relates mainly to the Financing Transactions which closed on July 8, Deferred transaction costs to be netted against the gross proceeds of the respective financing transaction to which they relate once funds are received with the exception of the finance leases (added to the cost of the asset when acquired) and the Stream, where the costs are accounted for as a deferred contract acquisition cost and are recognized as cost of goods sold. g) Financing Transactions Senior Secured Loan On July 8, 2014, SDCI and Diaquem, a wholly owned subsidiary of RQ, entered into the Senior Secured Loan Agreement that will provide for an initial $100 million (the Senior Secured Loan, Tranche A ) with the possibility, at the option of SDCI, to increase the loan by up to $20 million (the Senior Secured Loan, Tranche B ). The Senior Secured Loan will, at SDCI s option, bear interest at (i) a floating rate equal to the most common prime rate announced by Schedule I Canadian banks, plus (a) prior to Completion (which will occur upon the delivery to Diaquem of various certifications related to physical facilities, production, operating costs/efficiency, marketing, legal and financial matters), 4.75% per annum, and (b) after Completion, 4.25% per annum, or (ii) subject to availability, at a fixed rate based on the then available Government of Québec bonds for any applicable periods plus (a) prior to Completion, 5.75% per annum, and (b) after Completion, 5.25% per annum. Interest will be paid in arrears at the end of each quarter. Under the Senior Secured Loan Agreement, SDCI will have the option, upon prior notice, to convert advances bearing interest at the floating rate to a fixed rate as detailed above. Upfront fees equal to 2.75% of the principal amount of the Senior Secured Loan, Tranche A and the Senior Secured Loan, Tranche B, are payable by SDCI, 25% of which was paid on July 8, 2014, and the remaining 75% of which shall be payable upon the initial funding date of the Senior Secured Loan, Tranche A (based on the full amount of Senior Secured Loan). Semi-annyal repayments of principal and interests will begin on December 31,, with final payment at maturity date, on June 30, Page 13 of 20

14 For the three months ended and 8. Long-Term Debt continued g) Financing Transactions continued In addition, a standby fee of 1.75% per annum, is payable quarterly in arrears, on the daily undrawn principal amount of the Senior Secured Loan during the Availability Period (the Availability Period is the time between closing of the Financing Transactions and the first draw under the facility). SDCI must meet certain conditions precedent to be able to draw either Tranche A or Tranche B of the Senior Secured Loan, up to June 30,. As at, no amounts had been drawn under this facility. The Senior Secured Loan includes covenants customary for a transaction of this nature, including the following financial covenants: i) Maintaining a reserve tail ratio of at least 28%; ii) Maintaining a historical debt service coverage ratio in respect of the immediately preceding four-quarter period greater than or equal to 1.25:1.0 at all times following Completion; iii) Maintaining a projected debt service coverage ratio greater than or equal to 1.25:1.0 at all times following Completion; iv) Until the Parental Support Termination Date, which occurs when 50% of the principal amount borrowed is repaid, the Corporation must maintain a tangible net worth, on a consolidated basis, of $250 million; after the Parental Support Termination Date, SDCI must maintain a tangible net worth, on a consolidated basis, of $250 million. As at, the Corporation was in compliance with these covenants. h) Finance Costs In connection with the Financing Transactions described in Note 8g, the Corporation and SDCI have agreed to pay a 1.75% per annum standby fee that is payable upon the undrawn principal amount of the Senior Secured Loan. A standby fee is also payable upon undisbursed amounts under the equipment finance facility (see Note 8e). In addition, SDCI has agreed to pay an upfront fee of 2.75% of the Senior Secured Loan amount, 25% of which was paid on July 8, 2014 ($0.8 million) and the balance of which will be payable at the initial funding date of the Senior Secured Loan (anticipated to occur during the second quarter of ), and an arrangement fee pursuant to the terms of the equipment finance facility, 25% of which was paid at closing on July 25, 2014 ($0.4 million); the balance of $0.8 million was paid upon the first borrowing under the facility, which occurred in August For the three months ended, the Corporation and SDCI incurred a total of $0.5 million (March 31, - $0.6 million) in standby fees pursuant to the terms of the Financing Agreements. These expenses were recognized in the consolidated statements of loss as financial expenses, except for the Stream, which was recognized as a deduction of deferred revenue (see Note 10). For the three months ended, borrowing costs totalling $6.9 million have been expensed in financial expenses ( - $6.7 million capitalized in Property, Plant and Equipment). Page 14 of 20

15 For the three months ended and Convertible Debentures The Convertible Debentures will mature on July 8, 2021; there will be no principal repayments until the maturity date. Interest will accrue at a rate of 6.25% per annum from July 8, 2014, payable semi-annually on the last day of June and December of each year. In certain circumstances, the Corporation can satisfy the interest payment obligation through the issuance of common shares. The Convertible Debentures rank (i) subordinate in right of payment to the payments of all secured obligations including Stream Net Proceeds to the Stream Buyers under the Streaming Agreement and payments required under the Senior Secured Loan, and (ii) pari passu with all outstanding unsecured indebtedness for borrowed money of Stornoway. The Convertible Debentures are convertible at the holder s option into common shares of the Corporation at any time prior to the close of business on the earlier of the maturity date and the business day immediately preceding the date fixed for redemption thereof, at the Conversion Price, being US$ for one common share, subject to adjustment in certain limited circumstances. The number of Common Shares issuable upon conversion of the Convertible Debentures, which are denominated in US dollars, will be determined based on the Bank of Canada CAD/USD noon exchange rate on the business day prior to the date of conversion. The Convertible Debentures are a hybrid instrument, which are in their entirety regarded as a financial liability. The initial carrying amount of $48.8 million for the debt host represents the residual amount of the proceeds after separating out the $34.4 million initial fair value of the derivative, which represents the estimated fair value of the conversion option. Transaction costs were allocated on a pro-rata basis between the host and the derivative. The table below shows the change in the carrying value of the Convertible Debentures: Three months ended December 31, Host Derivative Total Opening balance 69,911 32, ,769 91,134 Change in fair value of derivative (10,091) (10,091) 8,858 Change in foreign exchange rate (534) (321) (855) (2,551) Accretion 1,411 1,411 5,328 70,788 22,446 93, ,769 The derivative was valued using a convertible bond valuation model. The following key assumptions were used in that model: As at As at December 31, Expected remaining life (years) Expected volatility 35.9% 36.7% Risk-free rate* 2.0% 1.9% Credit spread 11.8% 12.2% Change of control probability 0% 0% *The risk-free rate reflects the US dollar swap rate for the equivalent term based on the zero coupon curve. Page 15 of 20

16 For the three months ended and Deferred Revenue On July 8, 2014, FCDC entered into a diamond streaming agreement (the Stream ), pursuant to which FCDC shall sell to the Stream Buyers, and the Stream Buyers shall purchase from FCDC, a 20% undivided interest in each of the run of mine diamonds produced from certain kimberlite bodies over the life of the Renard Diamond Project. The Streaming Agreement provided for the Stream Buyers making up-front payments to FCDC, representing a prepayment of a portion of the purchase price payable for diamonds produced by the Renard Diamond Project, in an aggregate amount of US$250 million (the Deposit ), that was disbursed in three instalments. December 31 Opening Balance 322, ,104 Additions 116,557 Amortization to revenue (6,785) (565) Standby fees paid (290) Amortization of deferred transaction costs , ,806 Less: current portion 24,981 26,100 Non-current obligations 291, ,706 During the three months ended, the Corporation incurred standby fees related to the streaming agreement of $Nil (December 31, - $0.3 million). The standby fees are recognized as a deduction of deferred revenue in the consolidated statements of financial position. Income and Mining Tax During the three months ended, the Corporation incurred a tax expense of $13.4 million representing an effective tax rate of 129%, compared to the combined Canadian federal and provincial statutory income tax rate of 26.8%. The increase is due to a mining tax credit of $9.8 million that was received in the first quarter of, which relates to costs incurred towards the construction of the Route 167 Extension from November 1, 2012 to October 31, 2013 and was recognized as a credit against property, plant and equipment. As a result, a $9.8 million deferred income tax liability was recognized to reflect the relinquishing of future Quebec mining tax deductions. Page 16 of 20

17 For the three months ended and Stock Options and Warrants The Corporation s Stock Option Plan (the Plan ) establishes the terms and conditions upon which the directors of the Corporation may grant stock options. On October 21, 2014, the Corporation s shareholders approved the Plan for a further three-year period. A summary of the Corporation s outstanding stock options is as follows: Number of Stock Options Weighted Average Exercise Price (per share) Balance December 31, ,065, Granted 4,310, Expired (345,000) 1.37 Forfeited (1,792,501) 0.71 Exercised (2,529,165) 0.74 Balance December 31, 28,708, Granted 16,040, Expired (1,120,000) 1.04 Forfeited (120,000) 0.70 Exercised (212,500) 0.70 Balance 43,295, Number of stock options currently exercisable 17,234, As at, the Corporation had the following stock options outstanding: Range of Exercise Prices Number of Options Outstanding Weighted Average Exercise Price (per share/option) Weighted Average Remaining Contractual Life $0.51 $ ,640, years $0.73 $ ,655, years 43,295, years During the three months ended, the Corporation granted 16,040,000 stock options to directors, officers and employees, with an average exercise price of $0.85 per share, based on the share price at the time of the grant. These stock options expire five years from the grant date. The Corporation used the Black-Scholes Option Pricing Model to estimate a fair value of $5.5 million ($0.34 per option). 2,500,000 of the options granted vested immediately, while the remaining 13,540,000 options vest over a 3 year period. During the three months ended, the Corporation granted 150,000 stock options to employees with an average exercise price of $0.73 per share. These stock options will vest in thirds over a three year period, starting one year after the grant date for employees. All options granted expire five years from the grant date. For the three months ended, the Corporation used the Black-Scholes option pricing model to estimate a fair value of $0.05 million (or $0.31 per option). Page 17 of 20

18 For the three months ended and Stock Option and warrants continued The fair value of each stock option grant is estimated on the date of the grant using the Black-Scholes Option Pricing Model, with the following range of assumptions: Three months ended Three months ended Risk-free interest rate 1.2% 0.5% Expected dividend yield Nil Nil Forfeiture rate 0% 0% Expected stock price volatility (1) 45% 49% Expected option life in years 5 years 5 years (1) Expected volatility has been based on historical volatility of the Corporation s publicly traded shares. For the three months ended, the Corporation recognized share-based compensation of $1.4 million ( - $0.1 million and a further $0.1 million was capitalized to Mine Under Construction in Property, Plant and Equipment). Warrants A summary of the Corporation s outstanding warrants is as follows: Weighted Average Exercise Price Number of Warrants (per warrant) Balance December 31, ,300, Exercised (91,912,732) 0.90 Expired (2,387,268) 0.90 Balance December 31, 29,000, Balance 29,000, As at, the Corporation had the following warrants outstanding: Number of Warrants Exercise Price (per warrant) Expiry Date 15,000, May 3, 14,000, July 8, ,000, Page 18 of 20

19 For the three months ended and Expenses by Nature Cost of sales and selling, general and administrative expenses, as reported in the consolidated statement of loss, has been grouped by nature of expenses as follows: Three months ended March 31, Three months ended March 31, Consumables and spare parts 9,554 Salaries and employees benefits 11, Rental and subcontractors 5,852 Professional fees Changes in inventory (2,098) Other 1, ,282 2,408 Financial (Income) Expenses Three months ended March 31, Three months ended March 31, Interest income on cash, cash equivalents and short-term investments (95) (334) Interest expense 6,647 Convertible debentures Unrealized (loss) gain on fair value of derivatives (10,091) 25,868 Senior Secured loan Standby fees Amortization of deferred transaction costs (Note 8f) 211 Other Loss on investments 3 Accretion on asset retirement obligation Standby fees 78 (2,730) 26,193 Related Party Transactions The Corporation entered into the following transactions with related parties not otherwise disclosed in these financial statements: (i) For the three months ended, the Corporation incurred $1.9 million in interest and commitment fees, and $0.9 million in royalties ( - $2.0 million in interest and commitment fees) with Diaquem, Ressources Quebec ( RQ ) and Investissement Quebec ( IQ ). Collectively, as at, Diaquem, RQ and IQ own 25.3% of the Corporation s issued and outstanding common shares and therefore have significant influence over the Corporation; (ii) For the three months ended, the Corporation incurred interest and standby fees of $0.4 million ( - $0.7 million) payable to Orion. As at, Orion owns 17.3% of the Corporation s issued and outstanding common shares and US$20.5 million of the US$81.3 million Convertible Debentures issued and therefore has significant influence over the Corporation. Page 19 of 20

20 For the three months ended and Supplemental Schedule of Non-Cash Investing and Financing Activities December 31, Finance expense accrual 2, Property, plant and equipment included in accounts payable and accrued liabilities 2,210 29,593 Reconciliation of Property, Plant & Equipment Acquisitions: Balance, end of the period 1,095, ,036 Balance, beginning of the period 1,102, ,430 Change (6,751) 102,606 Add-back (subtract): Depreciation expense, net of capitalized depreciation 17,418 8 Mining tax credit capitalized 9,756 Acquisition of property, plant and equipment included in working capital 27,383 4,580 Interest expense capitalized (Note 8a) (754) Finance leases included in Property, Plant and Equipment Accretion (2,633) Asset retirement obligation (2,131) (707) Other (19) (111) Acquisition of Property, Plant & Equipment per Statements of Cash Flows 46, ,443 Page 20 of 20