Head Offi ce Legal Counsel Kennady Diamonds Inc. Max Pinsky Personal Law Corporation

Transcription

1 2013 Annual Report

2 Kennady Diamonds controls 100 percent of the Kennady North diamond project in the heart of Canada s diamond fields in the Northwest Territories. The Kennady Project comprises 16 federal leases and 58 mineral claims covering 61,000 ha and hosts four known kimberlites Kelvin, Faraday, Doyle and MZ as well as numerous kimberlite exploration targets. Exploration at the Kelvin and Faraday kimberlites in 2013, where 8,500 meters of drilling took place, resulted in some of the highest grade discoveries ever made in Canada. The Kelvin kimberlite was the focus of exploration in 2013, where drilling resulted in the recovery of 4.3 tonnes of kimberlite containing over 11,800 diamonds for a sample grade of 5.38 carats per tonne. A smaller 116kg sample from the Faraday kimberlite retuned a sample grade of carats per tonne. The three largest diamonds recovered from the Kelvin kimberlite in 2013 were a 2.48 carat off-white transparent octahedral (featured on the cover), 1.06 carat off-white broken aggregate and a 0.90 carat off-white transparent irregular. The recovery of diamonds of this size and quality from a 4.3 tonne sample is very encouraging. In addition, over 60 percent of the diamonds recovered are described as white, approximately 35 percent are off-white and about 2 percent are yellow. Most of the diamonds recovered are transparent, with few to no inclusions. Based on the extraordinary success of the 2013 drill program, a plus 10,000 meter drill program has been planned for the winter/spring of The primary focus remains the Kelvin Faraday kimberlite corridor, for which the Company expects to be able to declare a maiden resource statement by the end of Vision: to define a 5 million to 8 million tonne resource with a grade in excess of 2 carats per tonne. The shares of Kennady Diamonds trade on the TSX-V under the symbol KDI. There are currently approximately 23 million shares outstanding. Cover: Kelvin 2.48 carat diamond Kennady Diamonds

3 Management s Discussion and Analysis Financial Statements 2013 Annual Report

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5 MANAGEMENT S DISCUSSION AND ANALYSIS FOR THE YEAR ENDED DECEMBER 31, 2013 This Management s Discussion and Analysis ( MD&A ) provides a review of the financial performance of Kennady Diamonds Inc. (the Company or Kennady Diamonds or KDI ) and should be read in conjunction with the audited financial statements and the notes thereto as at December 31, 2013 and 2012 and for the year ended December 31, 2013 and for the period from incorporation on February 27, 2012 to December 31, The Company s audited financial statements have been prepared in accordance with International Financial Reporting Standards ( IFRS ) as issued by the International Accounting Standards Board ( IASB ). All amounts are expressed in Canadian dollars unless otherwise stated. Technical information included in this MD&A regarding the Company s mineral project has been reviewed by Carl Verley, a Director of the Company and a Qualified Person as defined by National Instrument Standards of Disclosure for Mineral Properties ( NI ). Additional information relevant to the Company s activities can be found on SEDAR at or at the Company s website, COMPANY HIGHLIGHTS On February 17, 2014, the Company announced that the two exploration camps at Kennady North (Bob Camp and Kelvin Camp) opened on February 7, 2014, with geophysics crews mobilized to site shortly afterwards. A range of geophysics programs, including ground penetrating radar and Ohmmapper, are currently underway at both the Kelvin and Faraday kimberlites aimed at better defining the extent of the kimberlite emplacement prior to the start of the 2014 drill program. The geophysics crews will move to new kimberlite targets as soon as the Kelvin/Faraday geophysics program is completed. All the planned geophysics at the Kelvin Faraday kimberlite corridor was completed in March. The Company also announced that it has acquired 100 percent control over an additional 59 leases and claims to the west and south of the Kennady North project, thereby increasing the Company s diamond exploration land position in the Kennady district to approximately 61,000 hectares. Two diamond bearing kimberlites, the Doyle kimberlite and MZ kimberlite, are located within the newly acquired exploration ground, which also hosts numerous untested kimberlite targets. On December 27, 2013, the Company announced the closing of the previously announced non brokered private placement of flow through common shares (the Placement ), for aggregate gross proceeds of $2,290,484. A finder s fee equal to 5 percent of the proceeds has been paid to the underwriters. The Company has issued 398,345 flow through common shares at a price of $5.75. The shares are subject to a four month hold period, expiring April 28, On December 16, 2013, the Company announced the results of the 2013 summer drill program. Approximately tonnes of kimberlite was recovered from 21 holes drilled at the northwest lobe of the Kelvin kimberlite, returning a sample grade of 4.56 carats per tonne. The Company also announced that in total approximately 4.3 tonnes of kimberlite was recovered from the kelvin kimberlite during the 2013 winter and summer drill programs, resulting in a total sample grade of 5.38 carats per tonne. Page 1

6 On October 25, 2013, the Company announced the closing of the previously announced brokered private placement of flow through common shares, for gross proceeds of $5.005 million. The Company issued 914,000 flow through common shares at a price of $5.50 per share. The shares are subject to a four month hold period, expiring on February 26, Proceeds of the private placement will be used for the Company s 2014 exploration program at the Kennady North project. The underwriters received a cash commission equal to 5.0% of the gross proceeds ($250,250) raised under the Offering. On October 22, 2013, the Company announced the closing of the previously announced non brokered private placement of flow through and non flow through common shares, for gross proceeds of $9 million. The Company has issued 247,100 flow through common shares at a price of $5.50 per share and 1,608,621 nonflow through common shares at a price of $4.75 per share. The shares are subject to a four month hold period, expiring on February 21, Proceeds of the private placement will be used primarily for the Company s 2014 exploration program at the Kennady North project and for general working capital. On September 18, 2013, the Company announced that approximately 3,454 kilograms of kimberlite recovered during the 2013 summer exploration program had been dispatched to the Geoanalytical Laboratories Diamond Services at the Saskatchewan Research Council for recovery of diamonds by caustic fusion. The kimberlite was recovered from the 3,848 meter summer drill program. Following the successful completion of the 2013 summer drill program, the Company also announced that preparations for the 2014 winter exploration program had commenced. This program is expected to include up to 10,000 meters of delineation and exploration drilling, including extraction of a mini bulk sample of approximately 25 tonnes from the Kelvin kimberlite. The drilling will be preceded by further geophysics over the Kelvin and Faraday kimberlites, as well as new exploration targets outside of the Kelvin Faraday kimberlite corridor. On August 21, 2013, the Company announced the closing of the previously announced non brokered private placement ( Placement ) of flow through and non flow through common shares, for gross proceeds of $1.5 million. The Company issued 34,300 flow through common shares at a price of $1.80 per share and 958,840 non flowthrough common shares at a price of $1.50 per share. The shares are subject to a four month hold period, expiring on December 15, Proceeds of the private placement will be used primarily for the Company s ongoing summer drill program at Kennady North and for working capital. On August 6, 2013, the Company announced exceptional diamond recovery results from a 1.1 tonne sample. A sample grade of 8.44 carats per tonne confirms that the Kelvin Faraday kimberlite cluster has a coarse diamond size distribution as well as the potential to host a high grade diamond resource. The largest three diamonds recovered were a 2.48 carat off white transparent octahedral, a 0.90 carat off white transparent irregular, and a 0.75 carat offwhite transparent octahedral. On July 23, 2013, the Company announced the terms of the non brokered private placement. The Company planned to raise up to $1.5M through a combination of common shares and flow through common shares. The common shares to be issued under the Placement were priced at $1.50 per share and the flow through common shares at $1.80 per share. On July 15, 2013, the Company announced that preparations for the 2013 summer exploration program were well advanced with a 2,500 meter drilling program scheduled to commence in mid July. The drill program focused both on land based infill drilling at the north west lobe of the Kelvin kimberlite as well as targeting approximately 10 geophysical targets identified to the northwest, west and east of the Kelvin Faraday kimberlite corridor. Page 2

7 On May 28, 2013, the Company announced the successful completion of the plus 5,000 meter Kennady North 2013 winter drill program. Kimberlite was intersected in 24 out of 26 infill drill holes completed at the Kelvin and Faraday kimberlites with most intercepts ranging from a few meters to approximately 100 meters. On March 26, 2013, the Company announced that a 5,000 meter winter drill program had commenced, focusing primarily on infill drilling along the Kelvin Faraday kimberlite corridor to further define the Hobbes, Kelvin and Faraday kimberlites to a level sufficient to prepare the first resource statements for Kennady North, as well as drill testing newly identified geophysical targets within the corridor. COMPANY OVERVIEW Kennady Diamonds is a Canadian diamond exploration Company that has its exploration activities in the Northwest Territories ( NWT ) of Canada. The Company was incorporated on February 27, 2012 to effect the transfer of Mountain Province Diamonds Inc. s ( Mountain Province ) Kennady North Project assets and operations to a new company under the Mountain Province Plan of Arrangement (the Arrangement ), which was completed on July 6, As part of the transaction, the Company issued 16,143,111 Kennady Diamonds common shares to Mountain Province shareholders, with one share held by Mountain Province, and in return received assets of $35,238, which were capitalized to mineral properties as well as $3,000,000 of cash from Mountain Province, as contemplated by the Arrangement. KENNADY NORTH DIAMOND PROJECT OVERVIEW The Kennady North diamond project comprises 16 federal leases and 58 claims located to the west and north of the four leases controlled by the Gahcho Kué Joint Venture ( Gahcho Kué JV ) between De Beers Canada (51%) and Mountain Province (49%) located approximately 300 kilometers north east of Yellowknife in Canada s Northwest Territories. At December 31, 2013, the Kennady North diamond project has an area of approximately 61,000 hectares. Exploration at Kennady North commenced in the late 1990 s and resulted in the discovery of the diamond bearing Kelvin, Faraday and Hobbes kimberlites. It has since been established that the Hobbes kimberlite is an extension of the Kelvin kimberlite. The number of diamonds recovered from these kimberlites and the size frequency distribution indicated that they may be of comparable grade to the 5034 (1.77 carats per tonne) and Hearne (2.10 carats per tonne) kimberlites at the Gahcho Kué JV. Exploration samples from Kelvin and Faraday returned a relatively large number of macro diamonds with the two largest being a 0.4 carat diamond from Faraday and a 0.09 carat diamond from Kelvin. The known kimberlites at Kennady North do not explain all the kimberlitic indicators previously recovered from glacial till sampling. Mountain Province recommenced exploration at Kennady North in 2011 with a 50 meter line spacing airborne gravity gradiometry ( AGG ) survey over the entire square kilometer project area. The survey identified 106 geophysical targets of which 39 were high priority targets identified through the AGG and magnetic field ground ( MAG ) surveys. DESKTOP STUDY The desktop study to compile and review all of the previous exploration work completed on Kennady North was conducted by Mountain Province in The results were used to design and implement the exploration program for Kennady North, commencing with the AGG survey. EXPLORATION In October, 2011, Mountain Province announced that the AGG survey was successfully completed, and included a total of 2,793 line kilometres flown over the Kennady North diamond project. In February, 2012, Mountain Province announced that the final analysis of the AGG survey resulted in the identification of 106 geophysical targets, and that a 560 line kilometre total magnetic field ground survey was commencing over the Page 3

8 geophysical targets identified by the AGG survey. The MAG survey was conducted at 20 metre line spacing, and the results enabled Mountain Province to prioritize the geophysical targets for drilling. The MAG survey was managed by Aurora Geosciences Ltd. ( Aurora ), and was completed in April In June, 2012, Mountain Province announced that Kennady Diamonds, its wholly owned subsidiary at the time, had received a Type A Land Use Permit from the Mackenzie Valley Land and Water Board in respect of the Kennady North diamond project, which cleared the way for Kennady Diamonds to commence the summer drill program at the Kennady North diamond project. Mountain Province further announced that Kennady Diamonds had retained Yellowknife based Northtech Drilling Ltd to conduct a 2,500 meter drill program. Two drill rigs were mobilized with the first rig focussed on infill drilling along the Kelvin Faraday kimberlite corridor where a number of high priority drill targets had been identified, and the second drill rig was to focus on approximately twelve mostly land based newly discovered kimberlite targets accessible in the summer. Summer Drill Program 2012 In July, 2012, the Company announced that drilling had commenced at the Company s 100% controlled Kennady North diamond project. In late July, 2012, the Company announced that it had entered into an Exploration Agreement with the Lutsel K e Dene First Nation ( Lutsel K e ). The Exploration Agreement established the basis for Kennady Diamonds and Lutsel K e to work collaboratively to advance the exploration at Kennady North. The Company announced that the Chief and Elders of Lutsel K e visited Kennady North on July 25, 2012 to gain an insight into the current work program and future prospects for the Kennady North project. Mr. Evans commented within the news release: Our success at Kennady North is dependent upon a mutually beneficial and respectful relationship. We are committed to working in partnership with the Lutsel K e. In August, 2012, the Company announced that seven geophysical targets the majority land based to the north and west of the Kelvin Faraday corridor were also tested but kimberlite was not intersected at any of those targets. More than twenty newly discovered geophysical targets remain to be tested. Most of these targets are lake based and can only be drilled from ice, which the Company plans for winter Kimberlite recovered during the Kennady North summer drill program was sent to the Saskatchewan Research Council analytical laboratory for microdiamond testing by caustic fusion. In October, 2012, the Company announced the diamond recovery results from samples of drill core from the Kelvin Faraday kimberlite cluster. The combined caustic fusion diamond results for samples taken from the Faraday, Faraday South and Kelvin kimberlites are summarized below in Table 1. Table 1 Total Numbers of Diamonds According to Sieve Size Fraction (mm) Total Weight (Kg) Diamonds ,889 Page 4

9 Diamond recoveries broken down for each of the three kimberlites are provided in Table 2 below. Table 2 Kimberlite Sample Weight (Kg) Macro Diamonds Recovered Micro Diamonds Recovered Macro Diamond Weight (carats) Kelvin Faraday South Faraday Total * 89 1, ** *Excludes approx kg s of country rock xenoliths **Total carat weight of the sample is 0.92 The above results compared favorably with results from earlier drilling at Kennady North when 444 diamonds were recovered from a 184 kg sample taken from Kelvin and 74 diamonds were recovered from a 40 kg sample taken from Faraday. After correcting for country rock xenoliths removed for cost efficiency purposes, all the diamond results to date indicated that the Kennady North kimberlites could have a grade of over 2 carats per tonne. The diamond recovery results confirmed that the Kelvin Faraday kimberlite cluster has a coarse diamond size distribution as well as the potential to host a high grade diamond resource. Besides the high diamond count, approximately 70 percent of the recovered diamonds were classified as white and transparent. Almost all the white diamonds had either no inclusions or only minor inclusions. In addition, approximately five percent of the diamonds were classified as yellow and transparent with either no or only minor inclusions. Together with grade, these characteristics are key value drivers. Based on these encouraging results, Kennady Diamonds commenced planning for a significantly larger 5,000 meter 2013 winter drill program at Kennady North. The program focused on infill drilling at the Kelvin Faraday kimberlite cluster as well as testing of newly discovered kimberlite targets. Winter Drill Program 2013 Since the completion of the 2012 summer drill program, the Company s geological and geophysical consultant, Aurora Geosciences, completed a comprehensive review and analysis of the exploration data for the Kennady North Project, which guided preparations for the Company s planned 5,000 meter winter drill program. Mobilization to a satellite exploration camp at Kennady North commenced in early February to complete ground geophysics, including ground gravity and horizontal loop electromagnetic (HLEM) surveys over the Kelvin Faraday kimberlite corridor. Data from these surveys assisted the Company in selecting final drill targets for the winter drill program. On March 26, 2013, as mentioned in the highlight section above, the Company announced that the 2013 winter drill program had commenced with drill targets selected using the results of the ground geophysics work completed over the previous month. The first phase of the planned 5,000 meter drill program focussed primarily on infill drilling along the Kelvin Faraday kimberlite corridor to further define the Kelvin and Faraday kimberlites to a level sufficient to prepare the first resource statements for Kennady North, as well as drill testing newly identified geophysical targets within the corridor. On May 28, 2013, as mentioned above, the Company announced the successful completion of the 5,000 meter Kennady North 2013 winter drill program. Kimberlite was intersected in 24 out of 26 infill drill holes completed at the Kelvin and Faraday kimberlites with most intercepts ranging from a few meters to approximately 100 meters. The results of the infill drill program provided the Company with a significant data set which enabled the Company to commence modeling of the Kelvin and Faraday kimberlites in preparation for a maiden geological resource statement. A preliminary interpretation of the drill results suggests the Kelvin kimberlite body and the Faraday kimberlite body should be treated separately. Both the Kelvin and Faraday kimberlites each have a strike of over 1 kilometer, trending southwest to the northeast, and appear to be steep dipping dyke structures. Page 5

10 Of significance in the main Kelvin kimberlite area were the broad intersections of meters, meters and 51.6 meters in three different holes (KDI , KDI and KDI , respectively). The geometry of this area had yet to be confirmed, but indications were that the wide intersections were due to possible blows along the dyke system or the main Kelvin kimberlite may be coincident with a small kimberlite pipe. The Faraday kimberlite contained two reasonable intersections of meters and 6.43 meters in KDI and KDI , respectively, both in the same central section. The geometry of the Faraday kimberlite is not yet as well understood as the Kelvin kimberlite. The full strike length of both the Kelvin and Faraday kimberlites has yet to be determined, but the results of the winter drill program aided in defining the strike length to a higher degree of confidence. Table 3 below summarizes the Kennady North 2013 Drill Results. Table 3 Drill hole Target Azimuth Inclination from Horizontal Kimberlite Intercepts (m) From To Intercept* End of Hole (m) KDI Kelvin KDI Kelvin KDI Kelvin KDI Kelvin KDI Kelvin KDI Kelvin KDI Kelvin KDI Kelvin KDI Faraday KDI Kelvin KDI Kelvin KDI Faraday KDI Kelvin KDI Faraday KDI Kelvin KDI Faraday KDI Kelvin Total kimberlite 3.23 KDI Kelvin KDI Faraday Hole abandoned 44 KDI Faraday Total kimberlite 2.31 KDI Kelvin Page 6

11 Total kimberlite 4.92 KDI Kelvin KDI * Faraday KDI a Faraday KDI Kelvin No kimberlite 200 KDI Kelvin KDI New No kimberlite 216 target KDI Kelvin KDI New target Hole abandoned due to moving ice *Not true widths *KDI stopped at 56m due to drifting. Re drilled as KDI a All but two of the above drill holes were infill holes designed to delinate the Kelvin Faraday kimberlite corridor. Two geophysical targets to the northwest of the Faraday kimberlite were selected for drill testing. The first drill hole (KDI ) did not intersect kimberlite. Drilling of the second target (KDI ) had to be abandoned on May 25, 2013, due to unstable ice conditions. Kimberlite recovered from the 2013 winter drill program was dispatched to the Saskatchewan Research Council Geoanalytical Laboratories for the recovery of diamonds by caustic fusion. The results of the analysis are summarized in tables 4 and 5 below. The recovery of diamonds from the kimberlite intersects was undertaken by caustic fusion methods performed at the Geoanalytical Laboratories Diamond Services of the Saskatchewan Research Council, which is accredited to the ISO/IEC standard by the Standards Council of Canada as a testing laboratory for diamond analysis using caustic fusion. The combined caustic fusion diamond results for samples taken from the Kelvin and Faraday kimberlites are summarized below in Table 4. Total Weight (Kg) Table 4 Number of Diamonds According to Sieve Size Fraction (mm) Total Diamonds 1,103 3,139 2,285 1, , Diamond recoveries for each of the kimberlites are provided in Table 5 below. Kimberlite Sample Weight (Kg) Macro Diamonds Recovered (>500 microns) Table 5 Micro Diamonds Recovered (<500 microns) Macro Diamonds Weight (carats) Sample Grade (carats/tonne) Kelvin , Faraday , Total 1, , * 8.44 *Total weight of the sample is carats Page 7

12 Summer Drill Program 2013 During the week of July 15, 2013 the Company commenced a 2,500 meter drill program focussing both on land based infill drilling at the north west lobe of the Kelvin kimberlite. Approximately 3,454 kilograms of kimberlite was recovered from 21 holes drilled at the Northwest Lobe of the Kelvin kimberlite. The kimberlite was processed at the Geoanalytical Laboratories Diamond Services at the Saskatchewan Research Council, which is accredited to the ISO/IEC standard by the Standards Council of Canada as a testing laboratory for diamond analysis using caustic fusion. The 2013 Kelvin summer drill program, with results summarized in Table 6 below, returned an average sample grade of 4.56 carats per tonne. Total Weight (Kg) Table 6 Number of Diamonds According to Sieve Size Fraction (mm) Total Diamonds ,314 3,753 3,219 1,996 1, ,824 *Total weight of sample carats *Sample grade: 4.56 carats per tonne A total of 4.3 tonnes of kimberlite was recovered from Kelvin containing more than 16,000 microdiamonds of which 474 are commercial size diamonds. The Kelvin summer drill program returned a sample grade of 4.56 carats per tonne and the winter program returned a sample grade of 8.13 carats per tonne, for a combined sample grade of 5.38 carats per tonne. These grades confirm that the Kelvin kimberlite has both a coarse diamond size distribution as well as the potential to host a high grade diamond resource. Table 7 below provides details of the number and weight of the plus 0.85mm commercial size diamonds recovered from the Kelvin summer drill program. Diamonds larger than 0.85mm can be sorted into categories with different price points and are considered, under Canadian Institute of Mining ( CIM ) guidelines, to have commercial characteristics. Number of Diamonds Table 7 Sieve Size Fraction (mm) Total Sample Grade (carats/ tonne) Weight (ct) *Total sample weight 3,314kg *Total sample grade 4.56 carats/tonne Table 8 below provides details of the characteristics of some of the largest diamonds recovered from the Kelvin 2013 summer drill program. Table 8 Weight (carats) Length (mm) Width (mm) Height (mm) Description Off white, transparent, broken aggregate, inclusions White/colorless, transparent, octahedral, broken, inclusions Off white, transparent, octahedral, no inclusions Off white, transparent, octahedral, minor inclusions Off white, transparent, octahedral, no inclusions A total of 362 commercial size diamonds were extracted from 3,314 kilograms of kimberlite from the Kelvin 2013 summer drill program. By comparison, 112 commercial size diamonds were recovered from approximately 1,000 kilograms from the Page 8

13 Kelvin 2013 winter drill program. This illustrates a high degree of consistency between the 2013 summer and winter samples of approximately one commercial size diamond for every nine kilograms of kimberlite. While the 362 commercial size diamonds from the 2013 Kelvin summer drill program were recovered from the Northwest Lobe of the Kelvin kimberlite, the 110 commercial size diamonds recovered from the 2013 winter program came from sixteen different drill holes across the approximate one kilometer strike of the Kelvin kimberlite. Based on this, it is apparent that the Kelvin kimberlite hosts commercial size diamonds across the length and breadth of the kimberlite. As announced on August 6, 2013, the 2013 Kelvin winter drill program (summarized in Table 9 below) returned a sample grade of 8.13 carats per tonne, which included a 2.48 carat diamond. Total Weight (Kg) Table 9 Number of Diamonds According to Sieve Size Fraction (mm) Total Diamonds 987 1,590 1, ,297 *Total weight of the sample 8.02 carats *Sample grade 8.13 carats/tonne Table 10 below provides details of the number and weight of the plus 0.85mm commercial size diamonds recovered from the 2013 Kelvin winter drill program. Number Diamonds of Table 10 Sieve Size Fraction (mm) Total Sample Grade (carats/ tonne) Weight (ct) *Total sample weight 987kg *Total sample grade 8.13 carats/tonne Table 11 below summarizes the total 2013 Kelvin diamond recovery results, combining the 2013 winter and summer results. Table 11 Number of Diamonds According to Sieve Size Fraction (mm) Total Total Diamonds Weight (Kg) ,301 5,343 4,262 2,664 1, ,121 *Total weight of sample carats *Total sample grade 5.38 carats/tonne Page 9

14 Table 12 below provides details of the total number and weight of the plus 0.85mm commercial size diamonds recovered in total during Table 12 Sieve Size Fraction (mm) Number of Diamonds Total Sample Grade (carats/tonne) Weight (ct) *Total sample weight 4,301kg *Total sample grade 5.38 carats/tonne Approximately 60 percent of the diamonds recovered from Kelvin during 2013 are classified as white and transparent. Most of the white diamonds have either no inclusions or only minor inclusions. Approximately 2 percent of the diamonds are classified as yellow and transparent with either no or only minor inclusions. The bulk of the remaining diamonds are classified as off white and transparent. OUTLOOK Based on the encouraging results from the 2012 and 2013 drilling programs, the Company commenced a 2014 winter program, which will include up to 10,000 meters of delineation and exploration drilling, including extraction of a mini bulk sample of approximately 25 tonnes from the Kelvin kimberlite. The drilling will be preceded by further geophysics over the Kelvin and Faraday kimberlites, as well as new exploration targets outside of the Kelvin Faraday kimberlite corridor. Depending on the results of the 2014 winter drill program, a follow up 2014 summer drill program will be planned. The Company expects to be able to publish a maiden resource statement for Kennady North by the end of FINANCIAL REVIEW For the Three and Twelve months ended December 31, 2013 compared to the three months ended December 31, 2012 and the period from February 27, 2012 (date of incorporation) to December 31, 2012 For the three and twelve months ended December 31, 2013, the Company recorded a net loss of $800,489 or $0.04 and $5,847,499 or $0.30 per share, compared to a net loss of $775,365 or $0.04 and $2,757,079 or $0.28 per share for the three months ended December 31, 2012 and the period from February 27, 2012 (date of incorporation) to December 31, Page 10

15 Quarterly financial information for the past quarters since incorporation is shown in Table 1. SUMMARY OF QUARTERLY RESULTS Table 1 Quarterly Financial Data Three months ended December 31 September 30 June 30 March 31 Unaudited $ $ $ $ Earnings and Cash Flow Interest and other income 24,237 11,852 5,943 69,193 Expenses (824,617) (2,041,124) (2,364,205) (728,561) Net loss for period (800,489) (2,029,380) (2,358,262) (659,368) Cash flow from operations (1,516,238) (868,669) (3,063,944) (575,744) Basic and diluted loss per share (0.04) (0.11) (0.13) (0.04) Investing activities (11,959,075) (156,466) 2,780, ,476 Financing activities 15,797,584 1,480,255 Balance Sheet Total assets 15,516,089 1,243,526 1,158,088 3,479,997 February 27, 2012 December 31 September 30 June 30 (Date of Incorporation Unaudited To March 31, 2012 $ $ $ $ Earnings and Cash Flow Interest and other income 5,900 3,510 Expenses (781,265) (1,985,224) Net loss for period (775,365) (1,981,714) Cash flow from operations (207,652) (1,789,354) Basic and diluted loss per share (0.04) (0.13) Investing activities (3,493,678) 3,510 Financing activities 2,938,080 3,000,000 Balance Sheet Total assets 4,117,733 1,357, COSTS AND EXPENSES The costs and expenses for the three and twelve months ended December 31, 2013 compared to the three months ended December 31, 2012 and the period from February 27, 2012 (date of incorporation) to December 31, 2012 are comparable except for the following: Exploration and evaluation expenses Exploration and evaluation expenses for the three and twelve months ended December 31, 2013 were $621,761 and $5,307,526 compared to $89,626 and $1,971,255 for the three months ended December 31, 2012 and the period from February 27, 2012 (date of incorporation) to December 31, During 2013, the Company conducted a winter and summer drill program on the Kennady North Project resulting in more than 8,848 meters of drilling. Page 11

16 Management fees Management fees for the three and twelve months ended December 31, 2013 were $22,500 and $152,500 compared to $60,000 and $120,000 for the three months ended December 31, 2012 and the period from February 27, 2012 (date of incorporation) to December 31, Effective, June 1, 2013, management fees were reduced as it was felt that certain costs should be charged directly to the Company and not indirectly through the management fee. Professional fees Professional fees for the three and twelve months ended December 31, 2013 were $3,651 and $52,732 compared to $30,229 and $30,229 for the three months ended December 31, 2012 and the period from February 27, 2012 (date of incorporation) to December 31, This is mainly due to audit and legal fees incurred in the current period. Share-based payment expense Share based payment expense for the three and twelve months ended December 31, 2013 were $19,061 and $116,479 compared to $587,400 and $587,400 for the three months ended December 31, 2012 and the period from February 27, 2012 (date of incorporation) to December 31, In the period ended December 31, 2012, 600,000 options were granted which vested immediately whereas in the year ended December 31, 2013, 150,000 options were granted of which one third vested immediately. Interest and other income Interest and other income for the three and twelve months ended December 31, 2013 was $24,237 and $111,225 compared to $5,900 and $9,410 for the three months ended December 31, 2012 and the period from February 27, 2012 (date of incorporation) to December 31, The increase in interest income at December 31, 2013 results from approximately $17.2 million net proceeds from the issuance of flow through and non flow through common shares, which closed in the last quarter of 2013, and the $3 million proceeds from the issuance of flow through and non flow through common shares in the last quarter of These proceeds were invested in short term investments providing interest income of $38,805 for the year ended December 31, Also during the year ended December 31, 2013, exploration expenditures were renounced relating to the flowthrough common shares from the November 2012, August 2013 and October 2013 private placements and as a result, the flow through premiums were recognized in the statement of comprehensive loss as other income totaling $72,420. INCOME AND RESOURCE TAXES The Company is subject to income taxes in Canada with the statutory income tax rate at 26.50%. No deferred tax asset has been recorded in the financial statements as a result of the uncertainty associated with the ultimate realization of these tax assets. The Company is subject to assessment by Canadian authorities, which may interpret tax legislation in a manner different from the Company. These differences may affect the final amount or the timing of the payment of taxes. When such differences arise the Company makes provision for such items based on management s best estimate of the final outcome of these matters. FINANCIAL POSITION AND LIQUIDITY Operating Cash Flow Cash flow used for operations for the three and twelve months ended December 31, 2013 was $1,516,238 and $6,024,595 compared with $200,632 and $1,989,986 for the comparative period for For the year ended December 31, 2013, $5,307,526 of exploration and evaluation expenses were incurred on the Kennady North Project. Page 12

17 Investing Activities Investing activities for the three months and twelve months ended December 31, 2013 amounted to $11,959,075 and $9,044,361 compared to $3,497,188 and $3,493,678 for the comparative period in For the year ended December 31, 2013, capital expenditures totaling $201,589 were incurred, which is mainly as a result of additional leases being acquired for the Kennady North Project. Also included in investing activities is an amount of $38,805 for income received from short term investments. Financing Activities During the three and twelve months ended December 31, 2013, cash from financing activities was $15,797,584 and $17,277,839 compared to $2,938,080 and $5,938,080 for the comparative period in During the period ended September 30, 2012, $3,000,000 was received as per the terms of the spin out arrangement. During 2013, the Company issued by way of a private placement 4,157,206 common shares for net proceeds of $17,277,839. Cash Resources and Liquidity At December 31, 2013, the Company reported working capital of $13,847,937 ($3,709,364 working capital as at December 31, 2012), including cash and short term investments of $15,017,965 ($3,957,505 at December 31, 2012). The short term investments reflected in the December 31, 2013 and 2012 figures were guaranteed investment certificates held with a major Canadian financial institution with nominal counter party credit risk associated with the bank. At December 31, 2013 and 2012, the Company had no long term debt. Since incorporation and until the effective date of the Arrangement, July 6, 2012, the Company s capital resources were minimal. On July 6, 2012, under the Arrangement, Kennady Diamonds was funded with $3,000,000 of cash from Mountain Province. Kennady Diamonds has no source of operating cash flows and has an ongoing requirement for investment to fund exploration of its mineral properties. The Company relies on the sale of equity securities to fund property acquisitions, exploration, capital investments and administrative expenses, among other things. The Company s primary mineral asset is in the exploration stage and, as a result, the Company has no source of revenues. The Company at April 23, 2014 has sufficient capital to finance its operations, including exploration, for the next twelve months. OFF-BALANCE SHEET ARRANGEMENTS The Company has no off balance sheet arrangements. SIGNIFICANT ACCOUNTING JUDGMENTS, ESTIMATES AND ASSUMPTIONS The preparation of the Company s audited financial statements requires management to make judgments, estimates and assumptions that affect the reported amounts of assets and liabilities at the date of the financial statements and reported amounts of expenses during the reporting period. Actual outcomes could differ from these estimates. These audited financial statements include estimates, which, by their nature, are uncertain and may require accounting adjustments based on future occurrences. Revisions to accounting estimates are recognized in the period in which the estimate is revised and future periods if the revision affects both current and future periods. These estimates are based on historical experience, current and future economic conditions, and other factors, including expectations of future events that are believed to be reasonable under the circumstances. i) Significant Judgments in Applying Accounting Policies The areas which require management to make significant judgments in applying the Company s accounting policies in determining carrying values include, but are not limited to: Page 13

18 a) Impairment analysis Mineral Properties The Company reviews its mineral properties for impairment based on results to date and when events and changes in circumstances indicate that the carrying value of the assets may not be recoverable. IFRS 6 Exploration for and evaluation of mineral resources and IAS 36 Impairment of assets ( IAS 36 ) requires the Company to make certain judgments in respect of such events and changes in circumstances, and in assessing their impact on the valuations of the affected assets. The Company s assessment is that as at December 31, 2013, there are no indicators of impairment in the carrying value of its mineral properties. ii) Significant Accounting Estimates and Assumptions The areas which require management to make significant estimates and assumptions in determining carrying values include, but are not limited to: a) Impairment analysis Mineral Properties The Company reviews its mineral properties for impairment based on results to date and when events and changes in circumstances indicate that the carrying value of the assets may not be recoverable. If indicators of impairment are identified, management will perform an impairment test in accordance with IAS 36. IAS 36 requires the Company to make certain judgments, assumptions, and estimates in determining the estimate of the net recoverable amount. Impairments are recognized when the carrying values exceed management s estimate of the net recoverable amounts associated with the affected assets. The values shown on the balance sheet for Mineral Properties represents the Company s assumption that the amounts are recoverable. As a result of the numerous variables associated with the Company s judgments and assumptions, the precision and accuracy of estimates of recoverable amount is subject to significant uncertainties, and may change significantly as additional information becomes known. b) Stock options The stock option pricing model requires the input of highly subjective assumptions including the expected life and volatility. Changes in the subjective input assumptions can materially affect the fair value estimate. STANDARDS, AMENDMENTS AND INTERPRETATIONS TO EXISTING STANDARDS THAT ARE NOT YET EFFECTIVE AND HAVE NOT BEEN ADOPTED EARLY BY THE COMPANY At the date of authorization of the Company s audited financial statements, certain new standards, amendments and interpretations to existing standards have been published but are not yet effective, and have not been adopted early by the Company. The Company anticipates that all relevant pronouncements will be adopted in the Company s accounting policy for the first period beginning after the effective date of the pronouncement. Information on new standards, amendments and interpretations that are expected to be relevant to the Company s financial statements is provided below. Certain other new standards and interpretations have been issued but are not expected to have a material impact on the Company s financial statements and are therefore not discussed below. IFRS 9 Financial Instruments The IASB issued IFRS 9 Financial Instruments ( IFRS 9 ) which proposes to replace IAS 39 Financial Instruments: recognition and measurement. The replacement standard has the following significant components: establishes two primary measurement categories for financial assets amortized cost and fair value; establishes criteria for classification of financial assets within the measurement category based on business model and cash flow characteristics; and eliminates existing held to maturity, available for sale, and loans and receivable categories. In November 2013, the IASB issued an amendment to IFRS 9 which includes a new hedge model that aligns accounting more closely with risk management, as well as enhancements to the disclosures about hedge accounting and risk management. Additionally as the impairment guidance in IFRS 9, as well as certain limited amendments to the classification and measurement requirements of IFRS 9 is not yet complete, the tentative required effective date to apply IFRS 9 is January 1, Page 14

19 2018. Entities may apply IFRS 9 before the IASB completes the amendments, but are not required to. The Company will evaluate the impact of the change to its financial statements based on the characteristics of its financial instruments at the time of adoption. FINANCIAL INSTRUMENTS The Company s financial instruments are described in Note 4 to the Company s accompanying audited financial statements. RELATED PARTY TRANSACTIONS In accordance with IAS 24 Related Parties, key management personnel are those persons having authority and responsibility for planning, directing and controlling the activities of the Company directly or indirectly, including any directors (executive and non executive) of the Company. The Company s related parties include its key management, the Company s directors, and their close family members. Mountain Province and the Gahcho Kué Joint Venture, in which Mountain Province holds an interest, are also related parties since the Company and Mountain Province have common members of key management and certain directors. The Company is charged a monthly management fee by Mountain Province which includes an allocation for the services of key management. None of the transactions with related parties incorporate special terms and conditions, and no guarantees were given or received. Related party transactions are recorded at their exchange amount, being the amount agreed to by the parties. Outstanding balances are generally settled in cash. The Company had the following transactions and balances with its related parties including key management personnel, Mountain Province and the Gahcho Kué Joint Venture which includes the monthly management fee charged by Mountain Province, and reimbursement of expenses incurred on the Company s behalf by Mountain Province and the Gahcho Kué Joint Venture. The transactions with key management personnel are in the nature of remuneration. December 31, December 31, The total of the transactions: Management fee and reimburseable expenses charged by Mountain Province $ 152,500 $ 120,940 Remuneration of key management personnel 233, ,400 The amount of outstanding balances: Fuel freight to be reimbursed to Gahcho Kue Joint Venture 165,000 The remuneration expense of key management personnel for the year ended December 31, 2013 and 2012 were as follows: For the period from Year ended February 27, 2012 December 31, (date of incorporation) 2013 to December 31, 2012 Consulting fees $ 117,205 $ Share based payments 116, ,400 $ 233,684 $ 587,400 Page 15

20 CONTRACTUAL OBLIGATIONS The Company has no contractual obligations at December 31, 2013 other than a management services agreement with Mountain Province, for an annual amount of approximately $90,000. The contract can be terminated at any time by either party without penalty. SUBSEQUENT EVENTS Subsequent to the year end, as detailed in the table below, stock options were granted by the Board of Directors. The fair values of the stock options has been estimated on the date of the grant using the Black Scholes option pricing model, using the assumptions below, and total $1,170,000. The expected volatility is calculated by reference to the weekly closing price for a period that reflects the expected life of the options, recalculated for each of the grants. Date of grant February 14, 2014 March 10, 2014 Number of options granted 250, ,000 Fair value per option $ $ Fair value total for grant $ 799,000 $ 369,800 Term of option 10 years 10 years Exercise price $ 4.10 $ 4.74 Expected volatility 73% 73% Expected option life 10 years 10 years Expected forfeiture none none Expected option cancellation none none Expected dividend yield 0% 0% Risk free interest rate 2.45% 2.52% OTHER MANAGEMENT DISCUSSION AND ANALYSIS REQUIREMENTS RISKS Kennady Diamond s business of exploring and developing mineral resources involves a variety of operational, financial and regulatory risks that are typical in the mining industry. The Company attempts to mitigate these risks and minimize their effect on its financial performance, but there is no guarantee that the Company will be profitable in the future, and investing in the Company s common shares should be considered speculative. Kennady Diamond s business of exploring and developing mineral properties is subject to a variety of risks and uncertainties, including, without limitation: risks and uncertainties relating to the interpretation of drill results, the geology, grade and continuity of mineral deposits; mining exploration risks, including risks related to accidents, equipment breakdowns or other unanticipated difficulties with or interruptions in production; the potential for delays in exploration activities or the completion of studies; risks related to the inherent uncertainty of exploration and cost estimates and the potential for unexpected costs and expenses; risks related to foreign exchange fluctuations and prices of diamonds; risks related to commodity price fluctuations; the uncertainty of profitability based upon the Company's limited life and resultant losses; risks related to failure of the Company to obtain adequate financing on a timely basis and on acceptable terms, particularly given recent volatility in the global financial markets; risks related to environmental regulation, permitting and liability; political and regulatory risks associated with mining and exploration; aboriginal rights and title; Page 16

21 failure of plant, equipment, processes and transportation services to operate as anticipated; possible variations in ore grade or recovery rates, permitting timelines, capital expenditures, reclamation activities, land titles, and social and political developments, and other risks of the mining industry; and other risks and uncertainties related to the Company's prospects, properties and business strategy. As well, there can be no assurance that any further funding required by the Company will become available to it, and if so, that it will be offered on reasonable terms, or that the Company will be able to secure such funding. Furthermore, there is no assurance that the Company will be able to secure new mineral properties or projects, or that they can be secured on competitive terms. DISCLOSURE OF OUTSTANDING SHARE DATA The Company s common shares are listed on the TSX Venture Exchange under the symbol KDI. There are an unlimited number of common shares without par value authorized to be issued by the Company. At April 23, 2014, there are 22,857,675 shares outstanding, and 1,100,000 options granted by the Company. DISCLOSURE CONTROLS AND PROCEDURES As a TSX Venture Issuer, the Chief Executive Officer and Chief Financial Officer of the Company will file a Venture Issuer Basic Certificate with respect to the financial information contained in the audited financial statements as at December 31, 2013, and this accompanying Management s Discussion and Analysis. In contrast to the certificates under National Instrument ( NI ) (Certification of Disclosure in an Issuer s Annual and Interim Filings), the Venture Issuer Basic Certification does not require representations relating to the establishment and maintenance of disclosure controls and procedures and internal control over financial reporting as defined in NI , and management has not completed such an evaluation. The inherent limitations on the ability of the certifying officers to design and implement disclosure controls and procedures and internal control over financial reporting as defined in NI for the issuer may result in additional risks to the quality, reliability, transparency and timeliness of interim and annual filings and other reports provided under securities legislation. CAUTIONARY NOTE ON FORWARD-LOOKING STATEMENTS Certain of the statements made and information contained herein is forward looking information within the meaning of the Ontario Securities Act. Forward looking information may include, but is not limited to, statements with respect to the success of exploration activities, future mineral exploration, permitting time lines, requirements for additional capital, sources and uses of funds, the estimation of mineral reserves and mineral resources, the realization of mineral reserve and mineral resource estimates, future remediation and reclamation activities, the timing of activities and the amount of estimated revenues and expenses. Forward looking information is based on various assumptions including, without limitation, the expectations and beliefs of management, the assumed long term price of diamonds; that the Company can access financing, appropriate equipment and sufficient labour and that the political environment where the Company operates will continue to support the development and operation of mining projects. Should underlying assumptions prove incorrect, or one or more of the risks and uncertainties described below materialize, actual results may vary materially from those described in forwardlooking statements. Accordingly, readers are advised not to place undue reliance on forward looking statements. Forward looking information is subject to a variety of risks and uncertainties which could cause actual events or results to differ from those reflected in the forward looking information, including, without limitation, risks and uncertainties relating to foreign currency fluctuations; risks inherent in mining including environmental hazards, industrial accidents, unusual or unexpected geological formations, ground control problems and flooding; delays or the inability to obtain necessary governmental permits or financing; risks associated with the estimation of mineral resources and reserves and the geology, grade and continuity of mineral deposits; the possibility that future exploration, development or mining results will not be consistent with the Company s expectations; the potential for and effects of labor disputes or other unanticipated difficulties with or shortages of labor or interruptions in production; failure of plant, equipment or processes to operate as anticipated; actual ore mined varying from estimates of grade, tonnage, dilution and metallurgical and other characteristics; the inherent uncertainty of production and cost estimates and the potential for unexpected costs and expenses, diamond price Page 17

22 fluctuations; uncertain political and economic environments; changes in laws or policies, and other risks and uncertainties, including those described under Risks. Historical results of operations and trends that may be inferred from the following discussions and analysis may not necessarily indicate future results from operations. The Company undertakes no obligation to publicly update or review the forward looking statements whether as a result of new information, future events or otherwise, other than as required under applicable securities laws. Cautionary Note to U.S. Investors Information Concerning Preparation of Resource Estimates This MD&A has been prepared in accordance with the requirements of the securities laws in effect in Canada, which differ from the requirements of United States securities laws. Unless otherwise indicated, all resource and reserve estimates included in this MD&A have been prepared in accordance with NI and the Canadian Institute of Mining and Metallurgy Classification System. NI is a rule developed by the Canadian Securities Administrators which establishes standards for all public disclosure an issuer makes of scientific and technical information concerning mineral projects. Canadian standards, including NI , differ significantly from the requirements of Industry Guide 7 promulgated by the United States Securities and Exchange Commission ( SEC ) under the United States Securities Act of 1933, as amended, and resource and reserve information contained herein may not be comparable to similar information disclosed by U.S. companies. In particular, and without limiting the generality of the foregoing, the term resource does not equate to the term reserves. Under U.S. standards, mineralization may not be classified as a reserve unless the determination has been made that the mineralization could be economically and legally produced or extracted at the time the reserve determination is made. The SEC's disclosure standards under Industry Guide 7 do not define the terms and normally do not permit the inclusion of information concerning measured mineral resources, indicated mineral resources or inferred mineral resources or other descriptions of the amount of mineralization in mineral deposits that do not constitute reserves by U.S. standards in documents filed with the SEC. U.S. Investors should also understand that inferred mineral resources have a great amount of uncertainty as to their existence and great uncertainty as to their economic and legal feasibility. It cannot be assumed that all or any part of an inferred mineral resource will ever be upgraded to a higher category. Under Canadian rules, estimated inferred mineral resources may not form the basis of feasibility or pre feasibility studies except in rare cases. Investors are cautioned not to assume that all or any part of an inferred mineral resource exists or is economically or legally mineable. Disclosure of contained ounces (or contained carats ) in a resource is permitted disclosure under Canadian regulations; however, the SEC normally only permits issuers to report mineralization that does not constitute reserves by SEC standards as in place tonnage and grade without reference to unit measures. The requirements of NI for identification of reserves are also not the same as those of the SEC s Industry Guide 7, and reserves reported by the Company in compliance with NI may not qualify as reserves under Industry Guide 7 standards. Accordingly, information concerning mineral deposits set forth herein may not be comparable with information made public by companies that report in accordance with U. S. standards. On behalf of the Board of Directors, Patrick Evans Patrick Evans President & CEO April 23, 2014 Page 18

23 KENNADY DIAMONDS INC. RESPONSIBILITY FOR FINANCIAL STATEMENTS The accompanying financial statements of Kennady Diamonds Inc. ( Kennady Diamonds or the Company ) are the responsibility of the Board of Directors. The financial statements have been prepared by management, on behalf of the Board of Directors, in accordance with the accounting policies disclosed in the notes to these financial statements. Where necessary, management has made informed judgments and estimates in accounting for transactions which were not complete at the balance sheet date. In the opinion of management, the financial statements have been prepared in accordance with International Financial Reporting Standards ( IFRS ) as issued by the International Accounting Standards Board ( IASB ) appropriate in the circumstances. Management has established processes, which are in place to provide sufficient knowledge to support management representations that it has exercised reasonable diligence that the financial statements fairly present in all material respects the financial condition, results of operations and cash flows of the Company, as of the date of and for the periods presented by the financial statements. The Board of Directors is responsible for reviewing and approving the financial statements together with other financial information of the Company and for ensuring that management fulfills its financial reporting responsibilities. An Audit Committee assists the Board of Directors in fulfilling this responsibility. The Audit Committee meets with management to review the financial reporting process and financial statements together with other financial information of the Company. The Audit Committee reports its findings to the Board of Directors for its consideration in approving the financial statements together with other financial information of the Company for issuance to the shareholders. Management recognizes its responsibility for conducting the Company s affairs in compliance with IFRS as issued by the IASB, and applicable laws and regulations, and for maintaining proper standards of conduct for its activities. Patrick C. Evans Patrick C. Evans President and Chief Executive Officer Bruce Ramsden Bruce Ramsden VP Finance and Chief Financial Officer Toronto, Canada April 23, 2014 Page 19

24 KENNADY DIAMONDS INC. INDEPENDENT AUDITORS REPORT To the Shareholders of Kennady Diamonds Inc. We have audited the accompanying financial statements of Kennady Diamonds Inc., which comprise the statements of financial position as at December 31, 2013 and December 31, 2012, the statements of comprehensive loss, equity and cash flows for the year ended December 31, 2013 and for the period from February 27, 2012 (date of incorporation) to December 31, 2012, and notes, comprising a summary of significant accounting policies and other explanatory information. Management s Responsibility for the Financial Statements Management is responsible for the preparation and fair presentation of these financial statements in accordance with International Financial Reporting Standards as issued by the International Accounting Standards Board, 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 our 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, we consider 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, the financial statements present fairly, in all material respects, the financial position of Kennady Diamonds Inc. as at December 31, 2013 and December 31, 2012, and its financial performance and its cash flows for the year ended December 31, 2013 and for the period from February 27, 2012 (date of incorporation) to December 31, 2012 in accordance with International Financial Reporting Standards as issued by the International Accounting Standards Board. Chartered Professional Accountants, Licensed Public Accountants Toronto, Canada April 23, 2014 Page 20

25 KENNADY DIAMONDS INC. Statements of Financial Position In Canadian dollars Notes December 31, 2013 December 31, 2012 ASSETS Current assets Cash 4 $ 2,663,300 $ 454,417 Short term investments 4 12,354,665 3,503,088 Amounts receivable 4 97, ,360 Advances and prepaid expenses 21,292 13,630 15,137,035 4,082,495 Reclamation deposit 5 30,000 Mineral properties 6 349,054 35,238 Total assets $ 15,516,089 $ 4,117,733 LIABILITIES AND SHAREHOLDERS' EQUITY Current liabilities Accounts payable and accrued liabilities 4 $ 125,606 $ 314,093 Deferred premium on flow through shares 7, 9(ii) 1,163,492 59,038 1,289, ,131 Decommissioning and restoration liability 8 112,444 Shareholders' equity: Share capital 9 22,015,246 5,914,281 Share based payments reserve 9 703, ,400 Deficit (8,604,578) (2,757,079) Total shareholders' equity 14,114,547 3,744,602 Total liabilities and shareholders' equity $ 15,516,089 $ 4,117,733 Subsequent event 9(iv) The notes to the financial statements are an integral part of these statements. On behalf of the Board: Patrick Evans Director Jonathan Comerford Director Page 21

26 KENNADY DIAMONDS INC. Statements of Comprehensive Loss In Canadian dollars For the period from February 27, 2012 Year Ended (date of incorporation) Notes December 31, 2013 to December 31, 2012 Expenses Exploration and evaluation expenses 11 $ (5,307,526) $ (1,971,255) Management fees 10 (152,500) (120,000) Share based payment expense 9, 10 (116,479) (587,400) Professional fees (52,786) (30,229) Promotion and investor relations (79,287) (25,785) Transfer agent & regulatory fees (45,732) (19,844) Consulting fees 10 (185,369) Office expenses (18,828) (11,976) Total expenses (5,958,507) (2,766,489) Accretion expense on decommissioning and restoration liability 8 (217) Interest and other income 4, 7 111,225 9,410 Net loss and comprehensive loss for the year $ (5,847,499) $ (2,757,079) Basic and diluted loss per share 9 (iii) $ (0.30) $ (0.28) Weighted average number of shares outstanding 19,643,642 9,777,829 The notes to the financial statements are an integral part of these statements. Page 22

27 KENNADY DIAMONDS INC. Statements of Equity In Canadian dollars Share based Notes Number of shares Share capital payments reserve Deficit Total Balance, February 27, 2012 (date of incorporation) 1 $ 1 $ $ $ 1 Net loss for the period (2,757,079) (2,757,079) Issuance of common shares per arrangement 6 16,143,111 3,035,238 3,035,238 Issuance of common shares private placement 9 2,557,357 2,879,042 2,879,042 Share based payment expense 9 587, ,400 Balance, December 31, ,700,469 $ 5,914,281 $ 587,400 $ (2,757,079) $ 3,744,602 Net loss for the year (5,847,499) (5,847,499) Issuance of common shares private placement 9 4,157,206 16,618,610 16,618,610 Share issue costs 9 (517,645) (517,645) Share based payment expense 9 116, ,479 Balance, December 31, ,857,675 $ 22,015,246 $ 703,879 $ (8,604,578) $ 14,114,547 The notes to the financial statements are an integral part of these statements. Page 23

28 KENNADY DIAMONDS INC. Statements of Cash Flows In Canadian dollars For the period from February 27, 2012 Year ended (date of incorporation) Notes December 31, 2013 to December 31, 2012 Cash provided by (used in): Operating activities: Net loss for the year $ (5,847,499) $ (2,757,079) Adjustments: Accretion expense on decomminissioning and restoration liability 217 Interest income (38,805) (9,410) Other income flow through premium (72,420) Share based payment expense 116, ,400 Changes in non cash operating working capital: Amounts receivable 13,582 (111,360) Advances and prepaid expenses (7,662) (13,630) Accounts payable and accrued liabilities (188,487) 314,093 (6,024,595) (1,989,986) Investing activities: Interest income 38,805 9,410 Reclamation deposit (30,000) Mineral properties (201,589) Purchase of short term investments (8,851,577) (3,503,088) (9,044,361) (3,493,678) Financing activities: Issuance of shares, net of share issue costs 9 17,277,839 2,938,080 Cash received per Arrangement 6 3,000,000 17,277,839 5,938,080 Increase in cash 2,208, ,416 Cash, beginning of year 454,417 1 Cash, end of year $ 2,663,300 $ 454,417 The notes to the financial statements are an integral part of these statements. Page 24

29 KENNADY DIAMONDS INC. Notes to Financial Statements As at December 31, 2013 and 2012, and For the year ended December 31, 2013 and the period from incorporation on February 27, 2012 to December 31, 2012 In Canadian Dollars 1. NATURE OF OPERATIONS Kennady Diamonds Inc. ( Kennady Diamonds or the Company ) was incorporated on February 27, 2012 under the Ontario Business Corporation Act to effect the transfer of Mountain Province Diamonds Inc. s ( Mountain Province ) Kennady North Project assets and operations to a new company as contemplated under a Mountain Province plan of arrangement (Note 6). Until the closing of the plan of arrangement, Kennady Diamonds was a wholly owned subsidiary of Mountain Province. The address of the Company s registered office and its principal place of business is 161 Bay Street, Suite 2315, PO Box 216, Toronto, ON, Canada, M5J 2S1. The Company s shares are listed on the TSX Venture Exchange under the symbol KDI. Kennady Diamonds is involved in the exploration, discovery and development of diamond properties in Canada s Northwest Territories. The underlying value and recoverability of amounts shown as Mineral Properties is dependent upon the ability of the Company to discover economically recoverable reserves, to have successful exploration, permitting and development, and upon future profitable production or proceeds from disposition of the Company s mineral properties. Failure to discover and develop economically recoverable reserves will require the Company to write off costs capitalized to date. Authorization of Financial Statements The audited financial statements for the year ended December 31, 2013 (including comparatives) were approved by the Board of Directors on April 23, BASIS OF PRESENTATION AND SIGNIFICANT ACCOUNTING POLICIES These financial statements have been prepared in accordance with International Financial Reporting Standards ( IFRS ) as issued by the International Accounting Standards Board ( IASB ). The policies set out below were consistently applied to the comparative period presented. (i) Basis of Preparation These financial statements have been prepared on a historical cost basis except for cash which has been measured at fair value. The Company has elected to present the Statement of Comprehensive Loss as a single financial statement with its Statement of Income, titled Statement of Comprehensive Loss. The significant accounting policies adopted in the preparation of these financial statements are set out below. (ii) Interest income Interest income from financial assets is recognized when it is probable that the economic benefits will flow to the Company and the amount of income can be measured reliably. Interest income is accrued on the basis of time that has passed by reference to the principal outstanding and at the effective interest rate. (iii) Mineral properties and exploration and evaluation costs Exploration and evaluation ( E&E ) costs are those costs required to find a mineral property and determine technical feasibility and commercial viability. E&E costs include costs to establish an initial mineral resource and determine whether inferred mineral resources can be upgraded to measured and indicated mineral resources, and whether measured and indicated mineral resources can be converted to proven and probable reserves. Page 25

30 KENNADY DIAMONDS INC. Notes to Financial Statements As at December 31, 2013 and 2012, and For the year ended December 31, 2013 and the period from incorporation on February 27, 2012 to December 31, 2012 In Canadian Dollars E&E costs consist of: gathering exploration data through topographical and geological studies; exploratory drilling, trenching and sampling; determining the volume and grade of the resource; test work on geology, metallurgy, mining, geotechnical and environmental; and conducting engineering, marketing and financial studies. Costs in relation to these activities are expensed as incurred until such time that technical feasibility and commercial viability are demonstrable. At such time, mineral properties are assessed for impairment, and an impairment loss, if any, is recognized. Capitalized acquisition costs included in Mineral Properties are transferred to capitalized costs within property, plant and equipment, or intangible assets, as appropriate. Determination of technical feasibility and commercial viability require management s judgment and include assessment of legal, environmental, social and governmental factors. The Company recognizes E&E costs as assets when acquired as part of a business combination, or asset purchase, or as a result of rights acquired relating to a mineral property. These assets are recognized at fair value or relative fair value if applicable. Acquired capitalized E&E consists of: interest in exploration properties, and amounts paid for acquired rights associated with exploration properties. (iv) Provisions A provision is recognized in the statements of financial position when the Company has a present legal or constructive obligation as a result of a past event, and it is probable that an outflow of economic benefits will be required to settle the obligation. Provisions are measured at the present value of the expected expenditures to settle the obligation, applying a risk free interest rate. The increase in the provision due to passage of time is recognized as accretion expense. The Company does not have any provisions as at December 31, 2013 other than the provision for decommissioning and restoration (Note 8) associated with its mineral properties. The Company s decommissioning and restoration liability arise from its obligations to undertake site reclamation and remediation in connection with its mineral properties. The estimated costs of reclamation are based management s best estimates of costs to date. Future changes to any regulations and standards, as well as changes resulting from operations may result in actual reclamation costs differing from the estimate. (v) Financial instruments Financial instruments are classified into one of the following four categories: loans and receivables; fair value through profit or loss; held to maturity; and available for sale. Financial assets are initially measured at fair value. Subsequent measurement and recognition of the changes in fair value of financial instruments depends upon their initial classifications, as follows: Financial assets and financial liabilities at fair value through profit and loss include financial assets and financial liabilities that are held for trading or designated upon initial recognition as at fair value through profit and loss. These financial instruments are measured at fair value with changes in fair values recognized in the Statement of Comprehensive Loss. Financial assets classified as available for sale are measured at fair value, with changes in fair values recognized as Other Comprehensive Income ( OCI ) in the Statement of Comprehensive Loss, except when there is objective evidence that the asset is impaired, at which point the cumulative loss that had been previously recognized in OCI is recognized within the Statement of Comprehensive Loss. Page 26

31 KENNADY DIAMONDS INC. Notes to Financial Statements As at December 31, 2013 and 2012, and For the year ended December 31, 2013 and the period from incorporation on February 27, 2012 to December 31, 2012 In Canadian Dollars Financial assets classified as held to maturity and loans and receivables are measured subsequent to initial recognition at amortized cost using the effective interest method. Financial liabilities, other than financial liabilities classified as fair value through profit and loss, are measured in subsequent periods at amortized cost using the effective interest method. The effective interest method is a method of calculating the amortized cost of a financial liability and of allocating interest expense over the relevant period. The effective interest rate is the rate that exactly discounts estimated future cash payments (including all fees and points paid or received that form an integral part of the effective interest rate, transaction costs and other premiums or discounts) through the expected life of the financial liability, or where appropriate, a short period, to the net carrying amount on initial recognition. The Company has classified its financial instruments as follows: Asset/Liability Classification Measurement Cash Fair Value through Profit and Loss Fair Value Short term investments Fair Value through Profit and Loss Fair Value Amounts receivable Loans and Receivables Amortized Cost Accounts payable and accrued liabilities Other Liabilities Amortized Cost The Company s cash consists of balances with banks. Short term investments are investments with original maturities of greater than three months when acquired (Note 4). The fair values of the Company's amounts receivable, and accounts payable and accrued liabilities approximate their carrying values because of the immediate or short term to maturity of these financial instruments. (vi) Flow through shares Under Canadian income tax legislation, a company is permitted to issue flow through shares whereby the Company agrees to incur qualifying expenditures and renounce the related income tax deductions to the investors. The proceeds from issuance of these shares are allocated between the offering of shares and the sale of tax benefits. The allocation is made based on the difference between the quoted price of the existing shares and the amount the investor pays for the flow through shares. A deferred premium liability is recognized for this difference. The Company renounces the deductions for tax purposes related to the eligible exploration and evaluation expenditures on the date the flow through shares are issued. The premium liability is reduced on a pro rata basis and recorded in other income based on the corresponding eligible expenditures that have been incurred. Where the Company has unused tax benefits on loss carry forwards and tax pools in excess of book value available for deduction against which a valuation allowance has been provided, the Company reduces its valuation allowance to offset the increase in deferred tax liabilities resulting in an offsetting recovery of deferred income taxes being recognized through profit or loss in the reporting period. (vii) 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 payment transactions are set out in Note 9. Page 27

32 KENNADY DIAMONDS INC. Notes to Financial Statements As at December 31, 2013 and 2012, and For the year ended December 31, 2013 and the period from incorporation on February 27, 2012 to December 31, 2012 In Canadian Dollars The fair value determined at the grant date of the equity settled share based payments is expensed to the Statement of Comprehensive Loss over the vesting period, if any, which is the period during which the employee becomes unconditionally entitled to equity instruments. At the end of each reporting period, the Company revises its estimate of the number of equity instruments expected to vest, if any. Equity settled share based payment transactions with parties other than employees, if any, 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. (viii) Loss per share Basic loss or earnings per share is calculated by dividing loss or earnings attributable to common shares by the weighted average number of shares outstanding during the year. Diluted loss or earnings per share is calculated using the denominator of the basic loss or earnings calculation described above adjusted to include the potentially dilutive effect of outstanding stock options. The denominator is increased by the total number of additional common shares that would have been issued by the Company assuming exercise of all stock options with exercise prices below the average market price for the year. (ix) Income Taxes and Deferred Taxes The income tax expense or benefit for the period consists of two components: current and deferred. Income tax expense or benefit is recognized in the Statement of Comprehensive Loss except to the extent it relates to a business combination or items recognized directly in equity. Current tax is the expected tax payable or receivable on the taxable profit or loss for the year. Current tax is calculated using tax rates and laws that were enacted or substantively enacted at the balance sheet date in each of the jurisdictions and includes any adjustments for taxes payable or recovery in respect of prior periods. Taxable profit or loss differs from profit or loss as reported in the Statement of Comprehensive Loss because of items of income or expense that are taxable or deductible in other years, and items that are never taxable or deductible. Deferred tax is recognized on temporary differences between the carrying amounts of assets and liabilities in the financial statements and the corresponding tax bases used in the computation of taxable profit. Deferred tax liabilities are generally recognized for all taxable temporary differences. Deferred tax assets are generally recognized for all deductible temporary differences, loss carryforwards and tax credit carryforwards to the extent that it is probable that taxable profits will be available against which they can be utilized. To the extent that the Company does not consider it to be probable that taxable profits will be available against which deductible temporary differences, loss carryforwards, and tax credit carryforwards can be utilized, a deferred tax asset is not recognized. Deferred tax assets and liabilities are not recognized if the temporary difference arises from the initial recognition (other than in a business combination) of other assets and liabilities in a transaction that affects neither the taxable profit nor the accounting profit. Deferred tax assets and liabilities are measured at the tax rates that are expected to apply in the period in which the liability is settled or the asset realized, based on tax rates (and tax laws) that have been enacted or substantively enacted by the end of the reporting period. The measurement of deferred tax liabilities and assets reflects the tax consequences that would Page 28

33 KENNADY DIAMONDS INC. Notes to Financial Statements As at December 31, 2013 and 2012, and For the year ended December 31, 2013 and the period from incorporation on February 27, 2012 to December 31, 2012 In Canadian Dollars follow from the manner in which the Company expects, at the end of the reporting period, to recover or settle the carrying amount of its assets and liabilities. 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. Current and deferred taxes are recognized in profit or loss, except when they relate to items that are recognized in other comprehensive income or directly into equity, in which case, the current and deferred taxes are also recognized in other comprehensive income or directly in equity respectively. (x) New accounting policy The Company adopted the following new standards and interpretations issues by the IASB as of January 1, IFRS 13 Fair Value Measurement IFRS 13 is a comprehensive standard for fair value measurement and disclosure requirements for use across all IFRS statements. The new standard clarifies that fair value is the price that would be received to sell an asset, or paid to transfer a liability in an orderly transaction between market participants, at the measurement date. It also establishes disclosures about fair value measurement. The disclosure required under IFRS 13 for the financial statements have been included in Note 4. (xi) Standards, amendments and interpretations to existing standards that are not yet effective and have not been adopted early by the Company At the date of authorization of these financial statements, certain new standards, amendments and interpretations to existing standards have been published but are not yet effective, and have not been adopted early by the Company. The Company anticipates that all of the relevant pronouncements will be adopted in the Company s accounting policy for the first period beginning after the effective date of the pronouncement. Information on new standards, amendments and interpretations that are expected to be relevant to the Company s financial statements is provided below. Certain other new standards and interpretations have been issued but are not expected to have a material impact on the Company s financial statements and are therefore not discussed below. IFRS 9 Financial Instruments The IASB issued IFRS 9 Financial Instruments ( IFRS 9 ) which proposes to replace IAS 39 Financial Instruments: recognition and measurement. The replacement standard has the following significant components: establishes two primary measurement categories for financial assets amortized cost and fair value; establishes criteria for classification of financial assets within the measurement category based on business model and cash flow characteristics; and eliminates existing held to maturity, available for sale, and loans and receivable categories. In November 2013, the IASB issued an amendment to IFRS 9 which includes a new hedge model that aligns accounting more closely with risk management, as well as enhancements to the disclosures about hedge accounting and risk management. Additionally as the impairment guidance in IFRS 9, as well as certain limited amendments to the classification and measurement requirements of IFRS 9 is not yet complete, the tentative required effective date to apply IFRS 9 is January 1, Entities may apply IFRS 9 before the IASB completes the amendments, but are not required to. The Company will evaluate the impact of the change to its financial statements based on the characteristics of its financial instruments at the time of adoption. Page 29

34 KENNADY DIAMONDS INC. Notes to Financial Statements As at December 31, 2013 and 2012, and For the year ended December 31, 2013 and the period from incorporation on February 27, 2012 to December 31, 2012 In Canadian Dollars 3. SIGNIFICANT ACCOUNTING JUDGMENTS, ESTIMATES AND ASSUMPTIONS The preparation of the Company s financial statements requires management to make judgments, estimates and assumptions that affect the reported amounts of assets and liabilities at the date of the financial statements and reported amounts of expenses during the reporting period. Actual outcomes could differ from these estimates. These financial statements include estimates, which, by their nature, are uncertain and may require accounting adjustments based on future occurrences. Revisions to accounting estimates are recognized in the period in which the estimate is revised and future periods if the revision affects both current and future periods. These estimates are based on historical experience, current and future economic conditions, and other factors, including expectations of future events that are believed to be reasonable under the circumstances. iii) Significant Judgments in Applying Accounting Policies The areas which require management to make significant judgments in applying the Company s accounting policies in determining carrying values include, but are not limited to: b) Impairment analysis Mineral Properties The Company reviews its mineral properties for impairment based on results to date and when events and changes in circumstances indicate that the carrying value of the assets may not be recoverable. IFRS 6 Exploration for and evaluation of mineral resources and IAS 36 Impairment of assets ( IAS 36 ) requires the Company to make certain judgments in respect of such events and changes in circumstances, and in assessing their impact on the valuations of the affected assets. The Company s assessment is that as at December 31, 2013, there are no indicators of impairment in the carrying value of its mineral properties. iv) Significant Accounting Estimates and Assumptions The areas which require management to make significant estimates and assumptions in determining carrying values include, but are not limited to: c) Impairment analysis Mineral Properties The Company reviews its mineral properties for impairment based on results to date and when events and changes in circumstances indicate that the carrying value of the assets may not be recoverable. If indicators of impairment are identified, management will perform an impairment test in accordance with IAS 36. IAS 36 requires the Company to make certain judgments, assumptions, and estimates in determining the estimate of the net recoverable amount. Impairments are recognized when the carrying values exceed management s estimate of the net recoverable amounts associated with the affected assets. The values shown on the balance sheet for Mineral Properties represents the Company s assumption that the amounts are recoverable. As a result of the numerous variables associated with the Company s judgments and assumptions, the precision and accuracy of estimates of the recoverable amount is subject to significant uncertainties, and may change significantly as additional information becomes known. d) Stock options The stock option pricing model requires the input of highly subjective assumptions including the expected life and volatility. Changes in the subjective input assumptions can materially affect the fair value estimate. Page 30

35 KENNADY DIAMONDS INC. Notes to Financial Statements As at December 31, 2013 and 2012, and For the year ended December 31, 2013 and the period from incorporation on February 27, 2012 to December 31, 2012 In Canadian Dollars 4. FAIR VALUE MEASUREMENT For financial instruments recorded at fair value, the Company categorizes each of its fair value measurements in accordance with a fair value hierarchy. The fair value hierarchy establishes three levels to classify the inputs to valuation techniques used to measure fair value. Level 1 inputs are quoted prices (unadjusted) in active markets for identical assets or liabilities. Level 2 inputs are quoted prices in markets that are not active, quoted prices for similar assets or liabilities in active markets, inputs other than quoted prices that are observable for the asset or liability (for example, interest rate and yield curves observable at commonly quoted intervals, forward pricing curves used to value currency and commodity contracts and volatility measurements used to value option contracts), or inputs that are derived principally from or corroborated by observable market data or other means. Level 3 inputs are unobservable (supported by little or no market activity). The fair value hierarchy gives the highest priority to Level 1 inputs and the lowest priority to Level 3 inputs. The Company s financial assets as at December 31, 2013 and December 31, 2012 measured at fair value are summarized in the following table: December 31, 2013 Level 1 Level 2 Level 3 Cash $ 2,663,300 $ $ Short term investments 12,354,665 December 31, 2012 Level 1 Level 2 Level 3 Cash $ 454,417 $ $ Short term investments 3,503,088 The short term investments at December 31, 2013 and December 31, 2012 are cashable guaranteed investment certificates ( GICs ) held with a major Canadian financial institution. GICs are measured using a discounted cash flow model, the future value of the GIC is discounted to the reporting period using the market interest rate. The short term investments at December 31, 2013 and December 31, 2012 were purchased with original maturities of less than one year. There is no restriction on the use of the short term investments. The fair values of the amounts receivable, and accounts payable and accrued liabilities approximate their carrying values due to the relatively short term maturity of these financial instruments. Page 31

36 KENNADY DIAMONDS INC. Notes to Financial Statements As at December 31, 2013 and 2012, and For the year ended December 31, 2013 and the period from incorporation on February 27, 2012 to December 31, 2012 In Canadian Dollars The carrying amounts by classification are: Financial assets December 31, December 31, The Company s interest income on its bank balances carried at fair value is presented on the Statements of Comprehensive Loss in the interest income line. Financial Instruments Risks The Company thoroughly examines the various financial instrument risks to which it is exposed and assesses the impact and likelihood of those risks. These risks may include credit risk, liquidity risk, market risk, foreign currency risk and interest rate risk. Credit risk Credit risk is the risk of financial loss to the Company if a customer or counterparty to a financial instrument fails to meet its obligations. At December 31, 2013, the Company does not have any allowance for doubtful accounts, and does not consider that any such allowance is necessary. All of the Company s cash and short term investments are held with a major Canadian financial institution and thus the exposure to credit risk is considered insignificant. The short term investments are in the form of GICs and are cashable in whole or in part, with interest, at any time to maturity. Management actively monitors the Company s exposure to credit risk under its financial instruments, including with respect to amounts receivable. The Company considers the risk of loss for its amounts receivable to be remote and significantly mitigated due to the financial strength of the party from whom the receivables are due the Canadian government for harmonized sales tax ( HST ) refunds receivable in the amount of $97,778 (December 31, 2012 $111,360). The Company s current policy is to invest excess cash in GICs. It periodically monitors the investments it makes and is satisfied with the credit ratings of its bank. Liquidity risk Fair Value Through Profit or Loss Cash $ 2,663,300 $ 454,417 Short term investments 12,354,665 3,503,088 Loans and receivables Amounts receivable 97, ,360 Financial liabilities Financial liabilities measured at amortized cost Accounts payable and accrued liabilities 125, ,093 Liquidity risk is the risk that the Company will not be able to meet its obligations associated with financial liabilities. The Company has a planning and budgeting process in place by which it anticipates and determines the funds required to support Page 32

37 KENNADY DIAMONDS INC. Notes to Financial Statements As at December 31, 2013 and 2012, and For the year ended December 31, 2013 and the period from incorporation on February 27, 2012 to December 31, 2012 In Canadian Dollars its operating requirements. The Company coordinates this planning and budgeting process with its financing activities through its capital management process. The Company s financial liabilities comprise its accounts payable and accrued liabilities, all of which are due within the next 12 month period. There are no operating lease commitments. The Company had working capital of $13,847,937 at December 31, 2013, including $15,017,965 of cash and short term investments; the Company has sufficient capital to finance its operations including exploration for the next twelve months. Interest rate sensitivity The Company has no significant exposure at December 31, 2013 to interest rate risk through its financial instruments. The short term investments are at fixed rates of interest that do not fluctuate during the remaining term. The Company has no interest bearing debt. 5. RECLAMATION DEPOSIT In the year ended December 31, 2013, the Company provided a reclamation deposit of $30,000 (December 31, 2012 Nil) to the Mackenzie Valley Land and Water Board for its mining project to secure clean up costs if the project is abandoned or closed (Note 8). 6. MINERAL PROPERTIES On March 12, 2012, Kennady Diamonds and Mountain Province entered into an arrangement agreement (the Arrangement ) pursuant to which Mountain Province would transfer its interest in the Kennady North Project, including permits, mining claims, rights and title, in the Northwest Territories in Canada, to Kennady Diamonds in exchange for one common share of Kennady Diamonds for every five common shares of Mountain Province outstanding, which would then be distributed to Mountain Province common shareholders. The transactions contemplated by the Arrangement were completed on July 6, Kennady Diamonds began trading on the TSX Venture Exchange on July 10, 2012 under the ticker symbol KDI. Upon completion of the Arrangement on July 6, 2012, the Company issued 16,143,111 Kennady Diamonds shares to Mountain Province which were distributed, along with the one share held by Mountain Province, to the Mountain Province shareholders, and the Company recorded receipt of the rights to the Kennady North Project and capitalized $35,238 as acquired mineral properties. The Company also received $3,000,000 of cash, as contemplated by the Arrangement. In the year ended December 31, 2013, the Company acquired additional mining leases and capitalized $149,999 as acquired mineral rights and claims. In addition, the Company staked grounds around the Kennady North Project and capitalized $51,590 to mineral properties. The continuity of the Mineral Properties is as follows: Balance, date of incorporation, February 27, 2012 $ Acquired mineral properties under Arrangement 35,238 Balance, December 31, 2012 $ 35,238 Acquired mineral rights and claims 201,589 Change in expected decommissioning and restoration liability (Note 8) 112,227 Balance, December 31, 2013 $ 349,054 Page 33

38 KENNADY DIAMONDS INC. Notes to Financial Statements As at December 31, 2013 and 2012, and For the year ended December 31, 2013 and the period from incorporation on February 27, 2012 to December 31, 2012 In Canadian Dollars 7. DEFERRED PREMIUM ON FLOW THROUGH SHARES The premium paid for flow through shares in excess of the fair value of common shares is initially recognized as a liability. The liability is reduced on a pro rata basis and recorded in other income based on the corresponding eligible expenditures that have been incurred. The value of flow through shares issued exceeded the fair value of the Company's common shares and therefore the deferred premium liability of $1,176,874 (2012 $59,038) on the flow through shares was recognized. $72,420 (2012 Nil) has been recognized in other income based on the corresponding eligible expenditures that have been incurred in the period. 8. DECOMMISSIONING AND RESTORATION LIABILITY The decommissioning and restoration liability was calculated using the following assumptions as at December 31, 2013 and 2012: December 31, December 31, Expected undiscounted cash flows $ 115,000 $ Discount rate 1.13% Periods between 2014 and 2015 The continuity of the decommissioning and restoration liability at December 31, 2013 and 2012 is follows: December 31, December 31, Balance, beginning of year $ $ Change in estimate of discounted cash flows for the period 112,227 Accretion recorded in the year 217 Balance, end of the year $ 112,444 $ 9. SHAREHOLDERS EQUITY i. Authorized share capital Unlimited common shares, without par value. Each common share entitles the holder to one shareholder vote. There is no other class of shares in the Company. ii. Share capital The number of shares issued and fully paid as at December 31, 2013 is 22,857,675. There are no shares issued but not fully paid. On December 27, 2013, the Company issued 398,345 flow through common shares at a price of $5.75 per share, for aggregate gross proceeds of $2,290,484. A finder s fee equal to 5 percent of the proceeds was paid to the underwriters. The shares are subject to a four month hold period, expiring April 28, An amount of $298,759 was recognized as the premium paid for flow through shares in excess of the fair value of the common shares was recognized as a liability. On October 25, 2013, the Company issued 910,000 flow through common shares at a price of $5.50 per share, for gross proceeds of $5 million. The underwriters received a cash commission of 5% of the gross proceeds. The shares were subject to Page 34

39 KENNADY DIAMONDS INC. Notes to Financial Statements As at December 31, 2013 and 2012, and For the year ended December 31, 2013 and the period from incorporation on February 27, 2012 to December 31, 2012 In Canadian Dollars a four month hold which expired on February 26, An amount of $682,500 was recognized as the premium paid for flow through shares in excess of the fair value of the common shares was recognized as a liability. On October 22, 2013, the Company issued 247,100 flow through common shares at a price of $5.50 per share and 1,608,621 non flow through common shares at a price of $4.75 per share, for gross proceeds of $9 million. The shares were subject to a four month hold period which expired on February 21, An amount of $185,325 was recognized as the premium paid for flow through shares in excess of the fair value of the common shares was recognized as a liability. On August 2013, the Company issued 34,300 flow through common shares at a price of $1.80 per share and 958,840 nonflow through common shares at a price of $1.50 per share, for gross proceeds of $1.5 million. An amount of $10,290 was recognized as the premium paid for flow through shares in excess of the fair value of the common shares was initially recognized as a liability. On November 7, 2012, the Company closed a non brokered private placement of flow through common shares and nonflow through common shares, at the prices of $1.45 per share and $1.15 per share, respectively. The Company issued 196,793 flow through common shares for gross proceeds of $285,350, and 2,360,564 non flow through common shares for gross proceeds of $2,714,649 as a result of the non brokered private placement. An amount of $59,038 was recognized as the premium paid for flow through shares in excess of the fair value of the common shares was initially recognized as a liability. Upon completion of the Arrangement on July 6, 2012 (see note 6), the Company issued 16,143,111 shares to Mountain Province which were distributed along with the one share held by Mountain Province to the Mountain Province shareholders. iii. Loss or earnings per share The following table sets forth the computation of basic and diluted loss or earnings per share: For the period from February 27, 2012 Year ended (date of incorporation) December 31, 2013 to December 31, 2012 Numerator Net loss for the year $ (5,847,499) $ (2,757,079) Denominator For basic weighted average number of shares outstanding 19,643,642 9,777,829 Effect of dilutive securities For diluted adjusted weighted average number of shares outstanding 19,643,642 9,777,829 Loss Per Share Basic Diluted $ (0.30) $ (0.28) (0.30) (0.28) The calculation for the weighted average number of shares outstanding is based on the number of shares outstanding on a daily basis in the year ended December 31, 2013, and for the period from incorporation on February 27, 2012 to December Page 35

40 KENNADY DIAMONDS INC. Notes to Financial Statements As at December 31, 2013 and 2012, and For the year ended December 31, 2013 and the period from incorporation on February 27, 2012 to December 31, 2012 In Canadian Dollars 31, Shares issuable on exercise of stock options totaling 650,000 on December 31, 2013 (600,000 December 31, 2012) were not included in the computation of diluted loss per share because the effect would have been anti dilutive. iv. Stock Options and Share based Payments Reserve The Company, through its Board of Directors and shareholders, adopted a stock option plan (the Plan ) which, among other things, allows for the maximum number of shares that may be reserved for issuance under the Plan to be 10% of the Company s issued and outstanding shares at the time of the grant. The Board of Directors has the authority and discretion to grant stock option awards within the limits identified in the Plan, which includes provisions limiting the issuance of options to insiders and significant shareholders to maximums identified in the Plan. The following table summarizes information about the stock options outstanding and exercisable at December 31, 2013 and December 31, 2012: December 31, 2013 Weighted average Number of options exercise price Balance at beginning of year 600, Granted during the year 150, Balance at end of the year 750,000 $ 1.28 Options exercisable at the end of the year 650,000 December 31, 2012 Weighted average Number of options exercise price Balance at beginning of period $ Granted during the period 600, Balance at end of the period 600,000 $ 1.27 Options exercisable at the end of the period 600,000 The fair value of the 150,000 (600,000 December 31, 2012) stock options granted in the year ended December 31, 2013 has been estimated on the date of grant using the Black Scholes option pricing model, using the assumptions below, and total $151,250 ($587,400 December 31, 2012). The options granted in the year ended December 31, 2013 vested one third immediately, one third on the first anniversary of the grant date, and the balance vests on the second anniversary of the grant date. The stock options granted in the period ended December 31, 2012 vested immediately. Expected volatility is calculated by reference to the weekly closing share price of similar companies in a similar stage of exploration for a period that reflects the expected life of the options (10 years). Year ended Period ended December 31, December 31, Exercise price $ $1.27 Expected volatility 72.76% 72.76% Expected option life 10 years 10 years Expected forfeiture none none Expected dividend yield 0% 0% Risk free interest rate 1.89% 1.99% 1.74% Page 36

41 KENNADY DIAMONDS INC. Notes to Financial Statements As at December 31, 2013 and 2012, and For the year ended December 31, 2013 and the period from incorporation on February 27, 2012 to December 31, 2012 In Canadian Dollars The following tables reflect the Black Scholes values, the number of stock options outstanding, the weighted average of options outstanding, and the exercise price of stock options outstanding at December 31, 2013 and December 31, At December 31, 2013 Black Scholes Number of Exercise Expiry Date Value Options Price November 6, 2022 $ 587, , January 31, , , March 17, ,550 50, $ 738, , At December 31, 2012 Black Scholes Number of Exercise Expiry Date Value Options Price November 6, 2022 $ 587, , The weighted average remaining contractual life of the options outstanding at December 31, 2013 is 8.90 years (December 31, years). Subsequent to the year end, as detailed in the table below, stock options were granted by the Board of Directors. The fair values of the stock options have been estimated on the date of the grant using the Black Scholes option pricing model, using the assumptions below, and total $1,168,800. The expected volatility is calculated by reference to the weekly closing price for a period that reflects the expected life of the options, recalculated for each of the grants. Date of grant February 14, 2014 March 10, 2014 Number of options granted 250, ,000 Fair value per option $ $ Fair value total for grant $ 799,000 $ 369,800 Term of option 10 years 10 years Exercise price $ 4.10 $ 4.74 Expected volatility 73% 73% Expected option life 10 years 10 years Expected forfeiture none none Expected option cancellation none none Expected dividend yield 0% 0% Risk free interest rate 2.45% 2.52% 10. RELATED PARTIES In accordance with IAS 24 Related Parties, key management personnel are those persons having authority and responsibility for planning, directing and controlling the activities of the Company directly or indirectly, including any directors (executive and non executive) of the Company. The Company s related parties include its key management, the Company s directors, and their close family members. Mountain Province and the Gahcho Kué Joint Venture, in which Mountain Province holds an interest, are also related parties Page 37

42 KENNADY DIAMONDS INC. Notes to Financial Statements As at December 31, 2013 and 2012, and For the year ended December 31, 2013 and the period from incorporation on February 27, 2012 to December 31, 2012 In Canadian Dollars since the Company and Mountain Province have common members of key management and certain directors. The Company is charged a monthly management fee by Mountain Province which includes an allocation for the services of key management. None of the transactions with related parties incorporate special terms and conditions, and no guarantees were given or received. Related party transactions are recorded at their exchange amount, being the amount agreed to by the parties. Outstanding balances are generally settled in cash. The Company had the following transactions and balances with its related parties including key management personnel, Mountain Province and the Gahcho Kué Joint Venture which includes the monthly management fee charged by Mountain Province, and reimbursement of expenses incurred on the Company s behalf by Mountain Province and the Gahcho Kué Joint Venture. The transactions with key management personnel are in the nature of remuneration. December 31, December 31, The total of the transactions: Management fee and reimburseable expenses charged by Mountain Province $ 152,500 $ 120,940 Remuneration of key management personnel 233, ,400 The amount of outstanding balances: Fuel freight to be reimbursed to Gahcho Kue Joint Venture 165,000 The remuneration expense of key management personnel for the year ended December 31, 2013 and 2012 were as follows: For the period from Year ended February 27, 2012 December 31, (date of incorporation) 2013 to December 31, 2012 Consulting fees $ 117,205 $ Share based payments 116, ,400 $ 233,684 $ 587, EXPLORATION AND EVALUATION EXPENSES For the period from February 27, 2012 Year ended (date of incorporation) December 31, 2013 to December 31, 2012 Lease payments $ 27,404 $ 12,891 Geological consultants 3,244,936 1,337,742 Drilling 1,528, ,978 Laboratory analysis 506,302 46,644 $ 5,307,526 $ 1,971,255 Page 38

43 KENNADY DIAMONDS INC. Notes to Financial Statements As at December 31, 2013 and 2012, and For the year ended December 31, 2013 and the period from incorporation on February 27, 2012 to December 31, 2012 In Canadian Dollars 12. INCOME TAXES Rate Reconciliation The provision for income tax differs from the amount that would have resulted by applying the combined Canadian statutory income tax rates of approximately 26.5% ( %): For the period from February 27, 2012 (date of incorporation) December 31, 2013 to December 31, 2012 Loss before income taxes $ (5,847,499) $ (2,757,079) 26.5% 26.5% Tax recovery calculated using statutory rates (1,549,587) (730,626) Expenses not deductible 11, ,661 Change in tax benefits not recognized 1,537, ,965 Income tax expenses (recovery) $ $ Unrecognized deferred tax assets Deductible temporary differences for which no deferred tax assets have been recognized are attributable to the following: December 31, 2013 December 31, 2012 Mineral properties $ 6,796,791 $ 1,926,255 Decommissionning and restoration liability 112,444 Loss carryforwards 820, ,808 Share issuance costs 451,267 49,535 Investment tax credits 436, ,336 As at December 31, 2013, the Company had the following non capital losses available for carryforward and certain other tax attributes as follows: Amounts Expiry Date Non capital losses $ 821, Investment tax credits 437, Tax basis of mineral properties 7,111,000 indefinite Share issuance cost 128,000 indefinite Page 39

44 KENNADY DIAMONDS INC. Notes to Financial Statements As at December 31, 2013 and 2012, and For the year ended December 31, 2013 and the period from incorporation on February 27, 2012 to December 31, 2012 In Canadian Dollars 13. CAPITAL MANAGEMENT The capital of Kennady Diamonds consists of its Shareholders Equity. The Company s objectives when managing capital are to safeguard Kennady Diamonds ability to continue as a going concern in order to pursue the exploration and evaluation of its mineral properties and to maintain optimal returns to shareholders and benefits for other stakeholders. The Company manages its capital structure and makes adjustments to it, in order to have the funds available to support the exploration of its mineral properties. The Company s main property, Kennady North, is in the exploration stage, and as such the Company is dependent on external equity financing to fund its activities. The Board of Directors does not establish quantitative return on capital criteria for management, but rather relies on the expertise of the Company s management to sustain future development of the business. The Company s capital consists of: December 31, December 31, Share capital $ 22,015,246 $ 5,914,281 Share based payments reserve 703, ,400 Deficit (8,604,578) (2,757,079) $ 14,114,547 $ 3,744,602 In order to carry out the planned management of the Company s properties and to pay for administrative costs, the Company will spend its existing working capital and raise additional amounts as needed. Management reviews its capital management approach on an on going 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, SEGMENTED REPORTING The Company has determined that it has only one operating segment. Page 40

45 Corporate Information Head Office Kennady Diamonds Inc. 161 Bay Street Suite 2315, P.O. Box 216 Toronto, Ontario M5J 2S1 T: Investor Relations Patrick Evans President and CEO T: Officers and Directors Jonathan Comerford, MBA Chairman Patrick Evans President, CEO and Director Legal Counsel Max Pinsky Personal Law Corporation Burrard Street Vancouver, B.C. V6C 3A6 Registrar & Transfer Agent Computershare Investor Services 100 University Avenue, 9th Floor Toronto, Ontario M5J 2Y1 T: E: Auditors KPMG LLP 333 Bay Street, Suite 4600 Toronto, Ontario M5H 2S5 Bruce Ramsden Vice President Finance and CFO Robert Parsons, CA Director Carl G. Verley, B.Sc., P.Geo. Director David Whittle, CA Director TSX-V: KDI

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