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

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1 SUPERIOR COURT Commercial Division (Sitting as a court designated pursuant to the Companies Creditors Arrangement Act, R.S.C. 1985, c. C-36, as amended) N o : IN THE MATTER OF THE PLAN OF COMPROMISE OR ARRANGEMENT OF: QUÉBEC LITHIUM INC., a corporation incorporated pursuant to the laws of Québec, having its head office at 1 Place Ville-Marie, Suite 4000, Montreal, and its principal place of business at 500 Route Québec Lithium, La Corne, Québec. -and- QLI MÉTAUX INC., a corporation incorporated pursuant to the laws of Québec, having its head office at 1 Place Ville-Marie, Suite 4000, Montreal, Québec. -and- RB ENERGY INC., a corporation incorporated pursuant to the laws of Canada, having its head office at 401 Bay Street, Suite 2010, Toronto, Ontario. -and- SIROCCO MINING INC., a corporation incorporated pursuant to the laws of British Columbia, having its head office at Three Bentall Centre, 595 Burrard Street, Suite 2600, Vancouver, British Columbia. -and- Petitioners KPMG INC., a corporation incorporated pursuant to the laws of Canada, having a place of business at Tour KPMG, 600 de Maisonneuve Boulevard West, Suite 1500, Montreal, Québec. Monitor SIXTH REPORT OF THE MONITOR, KPMG INC. MAY 7, 2015

2 TABLE OF CONTENTS INTRODUCTION AND PURPOSE OF THE MONITOR S REPORT... 2 REPORT RESTRICTIONS AND SCOPE LIMITATIONS... 5 RECEIPTS AND DISBURSEMENTS FOR THE PERIOD ENDED MAY 2, PROPOSED TERMINATION OF THE CCAA PROCEEDINGS AND APPOINTMENT OF A RECEIVER... 7 DISCUSSIONS BETWEEN THE INTERIM LENDER AND INVESTISSEMENT QUÉBEC.. 9 STATUS OF THE PETITIONERS CHILEAN ASSETS QLI ENVIRONMENTAL MATTERS SUMMARY OF THE MONITOR S ACTIVITIES IN THESE CCAA PROCEEDINGS MONITOR S OBSERVATIONS AND RECOMMENDATIONS

3 INTRODUCTION AND PURPOSE OF THE MONITOR S REPORT 1. KPMG Inc. ( KPMG or the Monitor ) was appointed as Monitor pursuant to the order issued by this Honourable Court on October 14, 2014 (the Filing Date ) in respect of the motion (the October 14 Motion ) filed by Québec Lithium Inc. ( QLI ), QLI Métaux Inc. ( Metals ), RB Energy Inc. ( RBE ) and Sirocco Mining Inc. ( Sirocco, together with QLI, Metals and RBE, the Petitioners ) under the Companies' Creditors Arrangement Act, R.S.C. 1985, c. C-36, as amended (the CCAA ). On October 15, 2014, this Honourable Court issued the Amended and Restated Initial Order (the Initial Order ) granting, inter alia, a stay of proceedings (the Stay ) until November 13, The proceedings brought by the Petitioners under the CCAA will be referred to herein as the CCAA Proceedings. 2. On October 14, 2014, KPMG filed the Pre-Filing Report of the Proposed Monitor (the Monitor s Pre-Filing Report ) which described certain of the Petitioners background information, the cash flow forecast, proposed interim financing arrangements (the Interim Facility ) with Hale Capital Partners L.P. (the Interim Lender ), the Key Employee Retention Plan (the KERP ) as well as the Petitioners preliminary restructuring plans. 3. On October 29, 2014, this Honourable Court granted the Second Amended and Restated Initial Order (the Amended Initial Order ) which, amongst other things, granted priority (the CCAA Charge Priority ) to each of the CCAA Charges (as defined in the Amended Initial Order) ahead of certain legal hypothecs (including any and all legal hypothecs arising from the construction or renovation of an immovable of the Petitioners) registered against the Petitioners property. 4. On November 12, 2014, the Monitor filed its First Report to the Court (the Monitor s First Report ) which described the Monitor s activities to date, the Petitioners actual receipts and disbursements against forecast, the Petitioners updated cash flow forecast for the 26-week period ending May 2, 2015, the proposed sale and investor solicitation process (the SISP ), the selection of Rothschild Inc. as the Petitioners financial advisor and investment banker (the Sales Advisor ), and other matters. 2

4 5. On November 13, 2014, this Honourable Court issued an order which, amongst other things, extended the Stay to April 30, 2015 (the Stay Period ) and approved both the SISP and the engagement of the Sales Advisor. 6. On January 8, 2015, the Monitor filed its Second Report to the Court (the Monitor s Second Report ) which provided an update in respect of the status of the Petitioners interim financing, the SISP, actual cash flows for the eight-week period ended December 27, 2014, and other matters. 7. On February 3, 2015, the Monitor filed its Third Report to the Court (the Monitor s Third Report ) which provided an update in respect of the status of the SISP, the Petitioners actual cash flows for the 12-week period ended January 24, 2015, their updated cash flow forecast for the 14-week period ending May 2, 2015, and other matters. 8. On April 2, 2015, the Monitor filed its Fourth Report to the Court (the Monitor s Fourth Report ) which provided an update with respect to the status of the SISP and the Petitioners amended sales process (the Amended Sales Process ), the Petitioners actual cash flows for the eight-week period ended March 21, 2015, the potential recoveries for QLI from certain outstanding Quebec Investment Tax Credits, the resignation of certain directors and other matters. 9. On April 7, 2015 and April 13, 2015, this Honourable Court issued a total of thirteen orders, pursuant to certain motions filed by the Petitioners creditors (as discussed in the Monitor s Fourth Report), as follows: a. On April 7, 2015, an order lifting the Stay as against Caterpillar Financial Services Ltd. ( CAT ) to enable it to terminate certain equipment leases and repossess certain equipment at the earliest of May 29, 2015, or a date mutually agreed with QLI (the CAT Termination Order ); b. On April 7, 2015, six orders lifting the Stay as against six holders of construction liens for the sole purpose of allowing the service and registration of a prior notice of the exercise of a hypothecary right in respect of each of the six claimants ( Lien Claimant Orders ); and c. On April 13, 2015, an additional six Lien Claimant Orders. 3

5 10. On April 16, 2015, the Monitor filed its Fifth Report to the Court (the Monitor s Fifth Report ) which provided an update on the status of the SISP and the Amended Sales Process as well as that of the Interim Financing Term Sheet (as defined in the Amended Initial Order) and the Petitioners request for an extension of the Stay Period until May 29, 2015 and the anticipated activities during that period, the Petitioners actual cash flows for the ten-week period ended April 4, 2015 and the Petitioners updated cash flow forecast for the eight-week period ending May 30, 2015 (the Updated Cash Flow Forecast ). 11. On April 17, 2015, this Honourable Court issued an order which, amongst other things, extended the Stay to May 29, 2015 (the Extended Stay Period ), approved the termination of the SISP, and authorized the Petitioners to use the remaining cash on hand from advances under the Interim Facility in accordance with the Updated Cash Flow Forecast, subject to the right of the Interim Lender to return to Court prior to May 29, 2015, subject to the five business days notice provided for in the Amended Initial Order, to seek the appointment of a receiver or other relief the Interim Lender considers appropriate and the Court may grant. 12. The purpose of this sixth report of the Monitor is to provide this Honourable Court with information regarding the following: a. The actual cash flows of the Petitioners for the 29-week period ended May 2, 2015, as compared to the same period of the Petitioners previous cash flow forecasts including the Updated Cash Flow Forecast; b. The Interim Lender s application to appoint a receiver over all of the assets, undertakings and property of the Petitioners (the Receivership Motion ), and the Petitioners application to terminate the CCAA Proceedings (the CCAA Termination Motion ); c. Recent discussions between the Interim Lender and Investissement Québec ( IQ ) in respect of dealing with the Petitioners assets; d. An update on the status of the Petitioners indirectly-owned iodine mine located in Chile (the Chilean Operations ) and efforts to realize upon the Chilean Operations; e. A QLI environmental matter which has recently arisen; f. A summary of the activities of the Monitor during the CCAA Proceedings; and g. The Monitor s observations and recommendations with respect to the Interim Lender s request to appoint a receiver and the Petitioners request to terminate the CCAA Proceedings. 4

6 13. The Monitor s reports and further information regarding these CCAA Proceedings can be found on the Monitor s website at REPORT RESTRICTIONS AND SCOPE LIMITATIONS 14. In preparing this report, the Monitor has been provided with, and has relied upon, unaudited financial information, books and records and financial information prepared by senior management of the Petitioners ( Senior Management ) (collectively, the Information ). The Monitor has reviewed the Information for reasonableness, internal consistency and use in the context in which it was provided. However, the Monitor has not audited or otherwise attempted to verify the accuracy or completeness of the Information in a manner that would wholly or partially comply with Canadian Auditing Standards ( CASs ) pursuant to the Chartered Professional Accountants Canada Handbook and, accordingly, the Monitor expresses no opinion or other form of assurance contemplated under the CASs in respect of the Information. 15. Some of the information referred to in this report consists of forecasts and projections. An examination or review of the financial forecasts and projections, as outlined in the Chartered Professional Accountants Canada Handbook, has not been performed. Future oriented financial information referred to in this report was prepared based on Senior Management's estimates and assumptions. Readers are cautioned that since projections are based upon assumptions about future events and conditions that are not ascertainable, the actual results will vary from the projections, even if the assumptions materialize, and the variations could be significant. 16. The information contained in this report is not intended to be relied upon by any prospective purchaser or investor in any transaction with the Petitioners. 17. Unless otherwise stated, all monetary amounts contained in this report are expressed in Canadian dollars, which is the Petitioners common reporting currency. 5

7 RECEIPTS AND DISBURSEMENTS FOR THE PERIOD ENDED MAY 2, During the 29-week period ended May 2, 2015 (the Reporting Period ), there was a cumulative positive aggregate cash flow variance of $249,000, and cash on hand as at May 2, 2015 was $3.3 million. Tabled below are the Petitioners actual receipts and disbursements for the Reporting Period as compared to the Updated Cash Flow Forecast: RB Energy Inc. and Québec Lithium Inc. (excluding Sirocco and Metals) Actual versus Forecast Cash Flow for the 29-Week Period Ended May 2, 2015 (Note 1) Unaudited (CAD $000) Actual Forecast Combined Variance RBE QLI Combined (Note 2) Cash Inflow Receipts from lithium deliveries Management services Total Cash Inflow Cash Outflow Quebec energy costs (306) (306) (306) - Quebec site admin and maintenance - (1,025) (1,025) (1,176) 151 Corporate head office costs (663) - (663) (686) 23 Employee and management compensation (703) (2,922) (3,625) (3,590) (35) Directors fees & benefits (148) (148) (148) - Insurance (859) - (859) (923) 64 Ivory Coast exploration care and maintenance (37) - (37) (37) - Professional fees (5,320) (66) (5,386) (5,398) 12 KERP payments (299) (260) (559) (559) - DIP facility fees and interest (1,021) - (1,021) (1,169) 148 Impact of foreign exchange (114) Total Cash Outflow (8,498) (4,556) (13,054) (13,303) 249 Net Cash Flow, before Intercompany Transfers (8,217) (4,396) (12,613) (12,862) 249 Intercompany transfers (3,882) 3, DIP advances (in CAD equivalent, see Note 3) 14,913-14,913 14,913 - Net Cash Flow 2,814 (514) 2,300 2, Cash, beginning of period (October 14, 2014) Cash, end of period (May 2, 2015) 3, ,257 3, Note 1: Readers are cautioned to read the "Report Restrictions and Scope Limitations" section of this report. Note 2: The comparative forecast numbers include actual results up to and including the week ended April 4, 2015 (a 25- week period) and forecast cash flow through May 2, 2015 (a four-week period), as extracted from the Updated Cash Flow Forecast. The original cash flow forecast (filed with the Petitioners' CCAA application) was not used as its period extended to only January 10, Note 3: US$13 million DIP advance converted by Senior Management to Canadian Dollars over the Reporting Period at an average foreign exchange rate of C$1.147/US$. 6

8 19. Overall, the Petitioners actual cash receipts and disbursements were generally comparable to the forecast receipts and disbursements, with a cumulative $149,000 negative impact from foreign exchange differences and employee compensation having been offset by a total of $398,000 of positive differences resulting from lower than expected costs for the Lithium Project, corporate head office, professional fees and interest payable on the Interim Facility for the month of April Senior Management expects that these differences are all the result of differences in the timing of receipt of various invoices. PROPOSED TERMINATION OF THE CCAA PROCEEDINGS AND APPOINTMENT OF A RECEIVER 20. As discussed in the Monitor s Fifth Report, the Interim Facility matured on April 15, Due to the failure of the SISP and the Amended Sales Process to generate any Binding Offers for either the Lithium Project or the Chilean Operations that were capable of constituting Qualified Offers, the Petitioners did not have the cash resources with which to repay the approximately US$13 million (before any interest, fees and expenses that may be payable) owing to the Interim Lender under the Interim Financing Term Sheet. The Petitioners failure to repay the Interim Facility on April 15, 2015 constituted an Event of Default under the Interim Financing Term Sheet. 21. The Amended Initial Order provides that the Interim Lender shall not take any enforcement steps under the Interim Financing Documents or the Interim Lender Charge without providing at least five business days written notice of a default thereunder to the Petitioners, the Monitor and to creditors whose rights are registered or published at the appropriate registers or requesting a copy of such notice. 22. On April 20, 2015, the Interim Lender served a five business day notice of its intention to enforce its Interim Lender Charge (as defined in the Amended Initial Order) on all of the property of the Petitioners. 7

9 23. On May 5, 2015, the Interim Lender served the Receivership Motion returnable on May 8, 2015 seeking an order (the Receivership Order ), amongst other things: a. Appointing Duff & Phelps Canada Restructuring Inc. as receiver (the Receiver ) of the Petitioners; b. Authorizing the Receiver to take possession of all of the Petitioners property, excluding amounts which are to be retained by the Petitioners (the Retained Amount ) in order to permit the payment of certain accrued but unpaid wages and vacation pay and to allow outstanding cheques which were issued by the Petitioners prior to the date on which the Receiver is appointed to clear the Petitioners bank accounts (collectively, the Property ); c. Authorizing the Receiver to take steps to realize on the Property, including seeking authorization to sell all or any part thereof, or to sell property without further authorization from this Honourable Court, if the price and value does not exceed $200,000 for any part or $5 million in aggregate, subject to the rights of lessors under equipment leases; and d. Granting the Receiver the power to borrow up to $5,000,000 to fund the Receiver s activities and creating a priority charge (the Receiver s Borrowing Charge ) against the property of the Petitioners in the amount of $7.5 million as security for the repayment of such loans. 24. Pursuant to the Amended Initial Order, the Interim Lender Charge was established in the aggregate amount of $22 million as security for all amounts owing to the Interim Lender (including principal, interest, fees and expenses, fees and disbursements of counsel and all other advisors to or agents of the Interim Lender on a full indemnity basis) under or in connection with the Interim Financing Term Sheet. The Monitor understands that these expenses are intended to include potential costs of realization. 25. The net amount of the Interim Lender s claims as at May 8, 2015 is approximately US$13 million plus any interest, fees and expenses that are payable in connection therewith. The Monitor notes that total claims against the Property of the Petitioners, including potential costs of realization, secured by the Interim Lender Charge and the Receiver s Borrowing Charge, could exceed $22 million. 8

10 26. On May 7, 2015, the Petitioners served the CCAA Termination Motion returnable on May 8, 2015 (the CCAA Termination Date ), seeking an order (the CCAA Termination Order ), amongst other things: a. Terminating the CCAA Proceedings; b. Terminating all employees of RBE; c. Directing the Receiver to pay obligations incurred or accrued by the Petitioners prior to the CCAA Termination Date; d. Requiring the Receiver to establish a cash reserve to fund the future payment of accrued vacation pay (up to the CCAA Termination Date) for the remaining QLI employees as at the CCAA Termination Date; e. Discharging the Monitor effective as of the CCAA Termination Date; f. Approving all of the Monitor s reports filed with this Honourable Court in the CCAA Proceedings and the actions, conduct and activities of the Monitor described therein; g. Continuing the Administration Charge, the Interim Lender Charge, the Directors Charge and the KERP Charge (the CCAA Charges, all as defined in the Amended Initial Order), pending further order from this Honourable Court, provided that all CCAA Charges shall be subordinated to any charges created under the Receivership Order and restricting the Administration Charge to the retainers held by the professionals; and h. Providing that the rights granted to CAT pursuant to the CAT Termination Order are exercisable against the Receiver and may be exercised immediately rather than on May 29, DISCUSSIONS BETWEEN THE INTERIM LENDER AND INVESTISSEMENT QUÉBEC 27. From its own recent discussions with IQ, the Monitor understands that IQ and the Interim Lender recently reengaged in discussions regarding the Interim Lender s intention to appoint the Receiver. The Monitor understands that, in part because the Lithium Project is situated in Quebec, IQ was exploring alternatives whereby it may seek to obtain control over that asset, including potentially repaying the Interim Facility, thereby preventing the Interim Lender from taking further steps to enforce its Interim Lender Charge, including the currently proposed appointment of a receiver. 9

11 28. The discussions between IQ and the Interim Lender, as well as related discussions between the Monitor and IQ, are ongoing as at the date of this report. The Monitor will continue to monitor these discussions and will update this Honourable Court if there are any further developments in respect of these discussions, including, if necessary, reporting in person at the upcoming hearing for the appointment of a receiver and termination of the CCAA Proceedings. STATUS OF THE PETITIONERS CHILEAN ASSETS 29. As at March 31, 2015, AMC had approximately US$39.2 million of third party debt, including US$34.3 million of bank and finance loans. In addition, AMC has approximately US$84.0 million of unsecured related party debt owed to Chempro Finance Ltd. ( Chempro ), a direct subsidiary of Sirocco. 30. As discussed in the Monitor s Fifth Report, according to the Initial Order, the Interim Lender has a priority charge over all of the Property of the Petitioners, including Sirocco. However, it appears that the Interim Lender does not enjoy priority over the shares of Boron Chemical Holdings Ltd. ( Boron Holdings ), the wholly-owned subsidiary of Sirocco and the indirect parent of Atacama Minerals Chile S.C.M. ( AMC ), the owner of the Chilean Operations. Tianjin Products and Energy Resources Development Co., Ltd. ( Tewoo ) is owed approximately US$11 million by QLI. Sirocco guaranteed QLI s debt and granted Tewoo security in the form of a mortgage over the shares of Boron Holdings (the Tewoo Security ). In the Receivership Motion, the Interim Lender stated that it does not assert priority over the Tewoo Security. 31. Therefore, any sale proceeds resulting from the sale of the shares of AMC that are passed by way of dividend up through the corporate chain to Boron Holdings would be payable to Tewoo up to the amount of the QLI debt to Tewoo, but the related party debt to Chempro would remain. However, any sale of the assets of AMC could result in the repayment of the related party debt to Chempro and would appear to bypass the Tewoo Security. 10

12 32. Tewoo retained Canadian counsel shortly before the Petitioners last motion terminating the SISP. The Monitor has reached out to counsel to Tewoo. The Monitor is advised that Tewoo and the Interim Lender have engaged in a dialogue regarding options for the Chilean Operations. As at the date of this report, Tewoo has not filed any materials with this Honourable Court and it is uncertain whether it intends to take any position with respect to either of the motions before this Honourable Court. 33. The Monitor understands that the Chilean Operations are self-sufficient and do not require financing from the Petitioners and that the Interim Lender intends to retain two members from Senior Management, Mr. Alessandro Bitelli and Mr. Kevin Ross, as consultants to assist in managing AMC. 34. It is unclear to the Monitor whether or when the Interim Lender will take steps to realize on the equity interest or intercompany debt related to the Chilean Operations and what will ultimately happen in respect of this indirectly-owned asset of the Petitioners. QLI ENVIRONMENTAL MATTERS 35. On April 29, 2015, Environment Canada ( EC ) served the Petitioners with a Notice of Intent to Issue A Direction Pursuant to the Fisheries Act (the Notice ), including a draft Fisheries Act Direction. 36. Pursuant to a discussion between the Petitioners and EC on April 30, 2015, a revised notice and Draft Direction (the Draft Direction ) were delivered to the Petitioners on May 4, 2015, reflecting EC s agreement to extend certain timelines stated in each of the original documents. 37. According to the Draft Direction, EC identified, during an inspection at the Lithium Project during November 2014, that wastewater was overflowing from up to four wastewater collecting ponds into a fish-bearing stream and that this wastewater contained deleterious substances. The Draft Direction also noted that the Petitioners failure to deliver to EC, as required within one year after April 16, 2014, a first study design concerning the Environmental Effects Monitoring was an offence under the Fisheries Act. 11

13 38. Pursuant to the Draft Direction, EC requires the Petitioners to take certain measures including, but not limited to, preventing without delay the further release of deleterious substances into the fish-bearing stream, investigating by no later than June 15, 2015 the wastewater release issue, and delivering a report to EC on the results of these investigations by no later than June 30, EC has provided the Petitioners until May 8, 2015 to advise whether they intend to make an oral response to the Draft Direction and/or the allegations provided therein. SUMMARY OF THE MONITOR S ACTIVITIES IN THESE CCAA PROCEEDINGS 40. In its prior reports to this Honourable Court, the Monitor has described many of the activities it has been engaged in since the commencement of these CCAA Proceedings. A summary of the Monitor s more significant activities during the pendency of the CCAA Proceedings to date is summarized below: a. Reviewed all pleadings, affidavits and other materials in preparation for the initial application of the CCAA Proceedings and prepared the Monitor s Pre-filing Report; b. Established a website and posted updates and court materials with respect to the CCAA Proceedings; c. Assisted the Petitioners with the preparation of their cash flow forecasts, including the Updated Cash Flow Forecast as well as all forecasts previously filed with this Honourable Court; d. Monitored the Petitioners cash flow and business affairs, including reviewing and approving disbursements, in accordance with the terms of the Initial Order as well as those of the Interim Financing Term Sheet; e. Provided ongoing consultation and input to Senior Management with respect to various matters through the period of the CCAA Proceedings; f. Facilitated the timely flow of information to both the Agent and the Interim Lender including, amongst other activities, arranging and convening weekly conference calls between Senior Management and, separately, the Agent and Interim Lender; g. Reviewed various documents related to the SISP and the engagement of the Sales Advisor, including the review of non-binding offers, and engaged in extensive review and discussions of same with the Sales Advisor, Senior Management, the Agent and the Interim Lender; 12

14 h. Monitored the status of the Petitioners care and maintenance activities at the Lithium Project on an ongoing basis; i. Monitored and engaged in review and discussions with Senior Management and its counsel and advisors during the Petitioners process to seek alternate interim financing (as discussed in the Monitor s Second Report); j. Engaged in the review and discussions with QLI and its tax advisor in respect of QLI s pursuit of potential tax refunds (as discussed in the Monitor s Fourth Report); k. Dealt with inquiries from various of the Petitioners creditors and other stakeholders with respect to matters pertaining to the CCAA Proceedings; l. Prepared various reports to this Honourable Court and attended at related hearings to respond to its inquiries about a number of matters; and m. Attended to various other matters which are normal and customary in proceedings of this nature. MONITOR S OBSERVATIONS AND RECOMMENDATIONS 41. The Monitor concurs that, considering that the SISP did not result in any binding offers being submitted for either the Lithium Project or the Chilean Operations, the appointment of a receiver is a reasonable option for dealing with the Petitioners assets. Accordingly, the Monitor supports the appointment of a receiver. If a receiver is appointed, the CCAA Proceedings do not need to continue. 42. The Monitor recommends that this Honourable Court approve both the termination of the CCAA Proceedings, in accordance with the terms of the CCAA Termination Order, and the Monitor s activities during the CCAA Proceedings, as set out in this report. All of which is respectively submitted to this Honourable Court this 7 th day of May, KPMG Inc., in its capacity as Monitor of Québec Lithium Inc., QLI Métaux Inc., RB Energy Inc. and Sirocco Mining Inc. Per: Philip J. Reynolds Per: Anthony Tillman Senior Vice President Senior Vice President 13