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1 2015 Annual Report

2 Kennady Diamonds

3 Message to Shareholders Kennady Diamonds was incorporated four years ago to advance the Kennady North project that was acquired from Mountain Province Diamonds. At its outset, Kennady Diamonds established a comprehensive database of all the exploration information on the project. This data was reviewed by Aurora Geosciences Limited and formed the basis of the first NI technical report supporting the listing of Kennady Diamonds in mid A modest one-drill exploration program commenced during the summer of 2012 to test the Kelvin kimberlite. Based on encouraging results and additional geophysics, a more ambitious exploration program commenced during the winter of 2013, which led to the discovery of a pipe-like kimberlite at Kelvin. Each following season, exploration programs were ramped up based on previous program success and an improved understanding of the kimberlite emplacements nature. The Kelvin camp was established during 2014 to support year-round operations, particularly the first bulk sample of the Kelvin kimberlite in the winter of The Kelvin bulk sample returned an encouraging grade for the Kelvin Southeast Lobe of over 2 carats per tonne. A valuation of the bulk sample diamond parcel was undertaken in September 2015, a time of particular weakness in the diamond market. The results of this valuation were nonetheless sufficiently encouraging to support a second bulk sample of the Kelvin North Lobe in the winter of Following the Kelvin North Lobe bulk sample, it is anticipated that we will have a diamond parcel in excess of 2,000 carats to support accurate revenue modeling for the Kelvin kimberlite. Combined with the geological and grade modeling currently underway, this will support the maiden NI resource statement for the Kelvin kimberlite. In addition to the Kelvin kimberlite, three pipe-like kimberlites have been discovered at Faraday, and the potential exists for further discoveries within the Kelvin Faraday corridor. The current focus at the Faraday kimberlites is delineation drilling to determine the size and shape of the pipe-like bodies. Pending the success of this drill program, we anticipate commencing bulk sampling of the Faraday kimberlites during the winter of The past four years have been tremendously exciting for everyone involved in the Kennady North project and I would like to thank our employees, shareholders and business partners for their support. Patrick Evans President and CEO April 2016 Kennady Diamonds 1

4 Investing in Kennady North Under the supervision of Aurora Geosciences Ltd., the Kelvin bulk sample was recovered by Midnight Sun Drilling and processed at the Geoanalytical Laboratories Diamond Services of the Saskatchewan Research Council. The diamond valuation was conducted by WWW International Diamond Consultants in September Kelvin Southeast Lobe 2015 Bulk Sample Batch Sample Number of Diamonds According to Sieve Size Fraction (mm) Total Carats Sample Weight Diamonds Grade (tonnes) (c/t) +0.85mm Zone A ,307 3,563 1, , Zone B ,357 2, , Zone Bx , , Zone C , TOTAL ,649 7,793 2, , Modeled Diamond Values Geological Domain Zone A Zone B Zone Bx Zone C Modeled value (1mm cut-off) US$62 per carat US$78 per carat US$67 per carat Sample too small to model Highest Value Diamonds Recovered 4.22 carat white/colorless makeable stone valued at US$1,603 per carat 2.58 carat white/colorless sawable stone valued at US$1,366 per carat 2.38 carat white/colorless sawable stone valued at US$1,196 per carat 2 Kennady Diamonds

5 Investing in Diamond Exploration Global Exploration The discovery of the Ekati, Diavik and Gahcho Kué diamond mines in Canada in the early 1990s led to a boom in diamond exploration, both in Canada and around the word. Major mining companies such as BHP Billiton and Rio Tinto embarked on a period of aggressive diamond exploration. Together with De Beers, hundreds of millions of dollars were invested annually in diamond exploration in the hopes of making the next major discovery. Despite this massive investment, few new economic discoveries were made and all were relatively small. In the mid-2000s, Rio Tinto hailed the discovery of the Bunder deposit in India as the most significant discovery of the decade. If brought into production, Bunder is projected to produce less than 1 million carats a year in a global industry of 127 million carats. A lack of exploration success to support resource growth led the world s largest mining company, BHP Billiton, to sell its only diamond mine, and has also led mining giant Rio Tinto to undertake a strategic review of its diamond business. Global diamond exploration expenditures have been cut back severely, further reducing the likelihood of new discoveries. It is projected that less than US$100 million will be invested in global diamond exploration in After De Beers, which will invest US$50 million, Kennady Diamonds will support the second largest exploration program in Canada s Diamond Industry In 2015, global production was approximately 127 million carats, down from a peak of 177 million carats in Russia s ALROSA, the world diamond leader, produced 38.6 million carats in 2015, or 30% of world production. De Beers accounted for 22% and Rio Tinto 10%. Despite recent demand disruptions, long term rough diamond supply is projected to fall short of demand for at least the next 20 years in the absence of new major discoveries. Canada s two largest mines Diavik and Ekati depleted their open pit resources in 2012, and are now producing Global Diamond Production less at higher costs from underground. In the absence of new economic resources being brought into their mine plans, Ekati is projected to close within five years and Diavik within eight years. De Beers has already placed the unprofitable Snap Lake mine on care-and-maintenance and is expected to take the Victor mine to closure in a few years. If Canada is to maintain its position as the world s third largest diamond producer, investment in exploration is urgently required. Source: Macquarie Research, Company Disclosure, Kimberley Process, March 2016 Kennady Diamonds 3

6 Corporate Highlights Vision To define 13M to 16M tonne resource at Kelvin Faraday at 2 to 2.5 carats per tonne* To define resources at the MZ and Doyle kimberlites To discover additional kimberlites To build an economic mine at Kennady North *These estimates are based on the drilling completed to date. The potential quantities are conceptual in nature as there has been insufficient drilling to define a mineral resource, and it is uncertain if further exploration will result in the target being delineated as a mineral resource Business Plan Q1 2016: Kelvin North 500 tonne bulk sample Mid-2016: Kelvin NI resource statement Q3 2016: Preliminary economic assessment Q4 2016: Application for Class A water license Q4 2016: Commence feasibility study Below: rough diamonds from the 443 tonne 2015 Kelvin bulk sample 4 Kennady Diamonds

7 Management s Discussion and Analysis Financial Statements 2015 Annual Report

8 KENNADY DIAMONDS INC. MANAGEMENT S DISCUSSION AND ANALYSIS FOR THE YEAR ENDED DECEMBER 31, 2015 TABLE OF CONTENTS Page Company Overview 3 Highlights 3 Kennady North Diamond Project 4 Outlook 11 Selected Annual Information 11 Financial Review 12 Summary of Quarterly Results 12 Costs and Expenses 13 Income and Resource Taxes 14 Financial Position and Liquidity 14 Off Balance Sheet Arrangements 15 Significant Accounting Judgements, Estimates and Assumptions 15 Standards, Amendments and Interpretation to Existing Standards 16 Financial Instruments 16 Related Party Transactions 16 Contractual Obligations 17 Subsequent Events 17 Other Management Discussion and Analysis Requirements 18 Disclosure of Outstanding Share Data 19 Disclosure of Controls and Procedures 19 Cautionary Note on Forward Looking Statements 19 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 for the years ended December 31, 2015 and Financial filings and additional information relevant to the Company s activities can be found on SEDAR at or at the Company s website, 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 property has been reviewed by Tom McCandless, a Director of the Company and a Qualified Person as defined by National Instrument Standards of Disclosure for Mineral Properties ( NI ). 2

9 COMPANY OVERVIEW Kennady Diamonds is a Canadian resource company that was incorporated on February 27, 2012 under the laws of the Province of Ontario. Kennady Diamonds currently holds a 100% interest in 16 federal leases and 58 claims in the Kennady North diamond project. Drilling and bulk sampling is currently underway on the Company s properties. At this time the Company has not generated any revenue. Kennady Diamonds commenced trading on the TSX Venture Exchange on July 10, 2012 under the ticker symbol KDI. The Company s registered office and its principal place of business is 161 Bay Street, Suite 2315, P.O. Box 216, Toronto, ON, Canada, M5J 2S1. HIGHLIGHTS The Company has appointed Dr. Rory Moore to the position of president, CEO and director effective May 1, Dr. Moore brings more than 30 years of diamond experience to Kennady Diamonds having held a number of positions in the industry, including as CEO of the Mineral Services Group of Companies, president and CEO of Canabrava Diamond Corp. and manager of diamond exploration for BHP Minerals. Dr. Moore has a Ph.D. in Geochemistry from the University of Cape Town and is a registered professional geoscientist in the Province of British Columbia. In March 2016, the Company announced that exploration drilling at the Kennady North project has resulted in the discovery of a third kimberlite body (Faraday 3) at the high grade Faraday kimberlite cluster. In December 2015, the Company announced the successful conclusion of the 2015 field program with the completion of more than 33,400 meters of drilling. Highlights of the 2015 exploration program include the discovery of two pipe like kimberlites at Faraday 1 and Faraday 2, as well as confirmation of continuity of the strike of the Kelvin kimberlite beyond the current geological model. The following diamond recovery results were reported from core drilling and bulk sampling during the year ended December 31, 2015: At Kelvin South Lobe a 443 tonne bulk sample returned a sample grade of 2.05 carats per tonne for diamonds larger than 0.85mm; At Kelvin North Lobe 12.8 tonnes of kimberlite was recovered by core drilling and returned a sample grade of 2.79 carats per tonne for diamonds larger than 0.85mm; and At Faraday 2 a total of 6.43 tonnes was recovered by core drilling and returned a sample grade of 3.04 carats per tonne for diamonds larger than 0.85mm. The samples were processed at the Geoanalytical Laboratories Diamond Services of the Saskatchewan Research Council ( SRC ). In October 2015, the Company announced the results of a preliminary valuation of diamonds recovered from the Kelvin kimberlite. Four separate diamond parcels were valued by WWW International Diamond Consultants ( WWW ), representing Zone A ( carats), Zone B ( carats), Zone C (80.44 carats) and a small mixed parcel (16.79 carats). For Zone A, WWW has recommended using an average modeled price of US$56 per carat and for Zone B US$70 per carat. The parcel from Zone C was too small for WWW to create modeled values, so an average price of US$123 per carat was reported. It is not yet possible to report an average modeled value for the composite Kelvin kimberlite due to the small size of the Zone C parcel. The Company is currently proceeding with a second stage 500 tonne bulk sample from the Kelvin North Lobe, which is expected to be completed by mid

10 In the year ended December 31, 2015, the Company issued 23,279,795 common shares for total aggregate proceeds of $70,759,674 by way of five private placements completed in February, March, August, September and October. KENNADY NORTH DIAMOND PROJECT Overview The Kennady North diamond project is located approximately 300 kilometers north east of Yellowknife in Canada s Northwest Territories. The Kennady North diamond district 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, MZ and Doyle kimberlites occurrences. The number of diamonds recovered from the Kelvin and Faraday 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 In October 2011, an Airborne Gravity Gradiometry survey ( AGG ), which included a total of 2,793 line kilometres flown over the Kennady North diamond project. This survey resulted in the identification of 106 geophysical targets, resulting in a 560 line kilometre total magnetic field ground ( MAG ) survey over the 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 Kennady Diamonds has a Type A Land Use Permit from the Mackenzie Valley Land and Water Board in respect of the Kennady North diamond project, permits Kennady Diamonds conduct exploration drilling at the Kennady North diamond project. The Company has 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 exploration at Kennady North. The Company has completed a number of exploration and evaluation programs from the summer of 2012 through to December 2015 and at April 7, 2016 is conducting a winter/spring exploration program. Exploration and evaluation expenditure since 2012 is summarized below. Total December 31, 2015 December 31, 2014 December 31, 2013 December 31, 2012 Exploration and evaluation expenses $53,325,958 $28,631,737 $17,415,440 $5,307,526 $1,971,255 Meters drilled 71,816 33,423 27,258 8,648 2,488 Below are the highlights of the exploration programs from 2012 to December Summer Drill Program Based on the AGG survey results, exploration drilling at the Kennady North Project commenced in mid At that time it was unclear whether the Kelvin and Faraday kimberlites were contiguous or separate bodies. Land based drilling took place at both kimberlites and the core was sent to the the SRC for diamond recovery by caustic fusion. 4

11 The combined Kelvin/Faraday diamond results are summarized below in Table 1. Table 1 Kelvin/Faraday 2012 Summer Diamond Recovery Results Total Weight (Kg) Numbers of Diamonds According to Sieve Size Fraction (mm) Total Diamonds ,889 *Total carat weight of the sample is Winter Drill Program On May 28, 2013, the Company announced the successful completion of the 5,000 meter Kennady North winter drill program. Kimberlite was intersected in 24 out of 26 drill holes completed at the Kelvin and Faraday kimberlites with intercepts ranging from a few meters to approximately 100 meters. Kimberlite recovered from the 2013 winter drill program was dispatched to the SRC for the recovery of diamonds by caustic fusion. The results of the analysis are summarized in tables 2 and 3 below. Table 2 Kelvin/Faraday 2013 Winter Diamond Recovery Results Total Weight (Kg) Number of Diamonds According to Sieve Size Fraction (mm) Total Diamonds 1,103 3,139 2,285 1, ,708 Diamond recoveries for each of the kimberlites are provided in Table 3 below. Table 3 Kelvin/Faraday 2013 Winter Diamond Recovery Results Kimberlite Sample Weight (Kg) Macro Diamonds Recovered (>500 microns) Micro Diamonds Recovered (<500 microns) Macro Diamonds Weight (carats)* Sample Grade (carats/tonne) Kelvin , Faraday , *Total weight of the sample is carats On August 6, 2013, the Company announced that the Kelvin winter drill program (summarized in Table 4 below) returned a sample grade of 7.24 carats per tonne for diamonds greater than 0.85mm, which included a 2.48 carat diamond. Table 4 Kelvin 2013 Winter Diamond Recovery Results Total Weight (Kg) Number of Diamonds According to Sieve Size Fraction (mm) Total Diamonds 987 1,590 1, ,297 *Total weight of diamonds greater than 0.85mm 7.15 carats *Sample grade of diamonds greater than 0.85mm: 7.24 carats/tonne 2013 Summer Drill Program In July 2013, the Company commenced a 2,500 meter drill program focussing on land based drilling at the North Lobe of the Kelvin kimberlite. The 2013 Kelvin summer drill program, with results summarized in Table 5 below, returned an average sample grade of 3.64 carats per tonne for diamonds greater than 0.85mm

12 Table 5 Kelvin 2013 Summer Diamond Recovery Results Total Number of Diamonds According to Sieve Size Fraction (mm) Total Diamonds Weight (Kg) ,314 3,753 3,219 1,996 1, ,824 *Total weight of diamond greater than 0.85mm: carats *Sample grade of diamonds greater than 0.85mm: 3.64 carats per tonne Table 6 below summarizes the total 2013 Kelvin diamond recovery results, combining the 2013 winter and summer results. Table 6 Kelvin 2013 Winter and Summer Diamond Recovery Results Total Number of Diamonds According to Sieve Size Fraction (mm) Total Diamonds Weight (Kg) ,301 5,343 4,262 2,664 1, ,121 *Total weight of diamonds greater than 0.85mm: carats * Sample grade of diamonds greater than 0.85mm: 4.32 carats/tonne 2014 Winter Drill Program In February, 2014, the Company commenced its 2014 winter exploration program. A range of geophysics programs, including ground penetrating radar and Ohmmapper was completed at both the Kelvin and Faraday kimberlites prior to commencing the drill program. A total of approximately 10,200 meters of drilling was completed, resulting in the recovery of over 25 tonnes of kimberlite from Kelvin and over one tonne of kimberlite from Faraday. At this stage it was apparent that the Kelvin and Faraday kimberlites were separate bodies, but it was unclear whether the Faraday kimberlite occurrence represented one contiguous or separate bodies. It is now understood that Faraday 1 and Faraday 2 are two separate kimberlites. The one tonne kimberlite sample from Faraday was processed at the SRC. On August 5, 2014, the Company announced the diamond recovery results from the Faraday kimberlite, which are summarized in Table 7 below. Table 7 Faraday 2014 Winter Diamond Recovery Results Total Weight (Kg) Number of Diamonds According to Sieve Size Fraction (mm) Total Diamonds ,879 1, ,628 *Total weight of diamonds greater than 0.85mm: 3.62 carats *Sample grade of diamonds greater than 0.85mm: 3.88 carats per tonne The Kelvin 25 tonne mini bulk sample was shipped to Yellowknife where detailed logging and analysis took place under the guidance of SRK Consulting ( SRK ) prior to dispatch to the SRC for processing through the dense media separation (DMS) plant. Four distinct kimberlite phases were identified in the mini bulk sample core, which are described in Table 8 below. Table 8 Kelvin Kimberlite Phases Zone 1 Zone 2 Zone 3 Zone 4 Coherent pyroclastic kimberlite (PK) Pyroclastic kimberlite with small (1 3cm) and medium (1 8cm) xenoliths Pyroclastic kimberlite with rock flour and large (+10cm) xenoliths Coherent transitional pyroclastic kimberlite 6

13 On October 6, 2014, the Company announced the diamond recovery results from the Kelvin 25 tonne mini bulk sample from the winter/spring drill program. The sample was processed by dense media separation at the SRC. Table 9 below summarizes the diamond recovery results from the four Kelvin kimberlite phases and provides details of the total sample grade. Table 9 Kelvin 2014 Winter/Spring Diamond Recovery Results Batch Sample Weight (tonnes) Number of Diamonds According to Sieve Size Fraction (mm) Total Carats Sample Grade (c/t) Zone Zone Zone Zone Total* *Includes DMS and recovery cleanup 2014 Kelvin Summer/Fall Program mini bulk sample program In December 2014, the Company announced the diamond recovery results from the Kelvin summer/fall mini bulk sample program. The mini bulk sample was recovered by drilling at the north lobe of the Kelvin kimberlite and was processed by dense media separation at the SRC. Under the guidance of SRK three main zones of kimberlite emplacement were defined at the Kelvin kimberlite, described as zones A, B and C. Zone B was further subdivided. The thickness of the zones is variable along strike. Each of the zones was processed separately in order to understand the variability in diamond size and grade. The 2014 summer/fall mini bulk sample grade of 2.59 carats per tonne was approximately 40 percent higher than the 25 tonne mini bulk sample recovered in winter/spring of The summer/fall mini bulk sample was recovered from the north lobe of the Kelvin kimberlite, while the winter/spring sample was recovered from the shallower and partly outcropping southeast lobe. Table 10 below summarizes the diamond recovery results from the summer/fall mini bulk sample. Table 10 Kelvin 2014 Summer/Fall Diamond Recovery Results Batch Sample Weight (dry tonnes) Number of Diamonds According to Sieve Size Fraction (mm) Total Diamonds Carats Sample Grade (c/t) +0.85mm Zone A Zone B Zone B1(a) Zone B Zone B Zone B3(a) Zone C TOTAL *Includes DMS recovery cleanup Table 11 below describes the kimberlite zones present in the Kelvin kimberlite. Table 11 Kelvin kimberlite zones Zone Kimberlite textural classification Comments A Hypabyssal kimberlite with less common pyroclastic kimberlite B1 Pyroclastic kimberlite Less than 50% dilution B2/3 Pyroclastic kimberlite More than 50% dilution C Hypabyssal kimberlite and pyroclastic kimberlite 7

14 A total of approximately 27,200 meters was drilled at the Kelvin Faraday kimberlite corridor in 2014, resulting in the recovery of approximately 55 tonnes of kimberlite. In addition to the results from the mini bulk sample detailed above, approximately five tonnes of kimberlite from Kelvin was processed by caustic fusion at the SRC, and approximately one tonne was processed by caustic fusion at the Rio Tinto diamond laboratory in Thunder Bay, Ontario. Table 12 below summarizes the caustic fusion diamond recovery results from the Kelvin 2014 summer/fall sample. Table 12 Kelvin 2014 Summer/Fall Diamond Recovery Results Sample Weight (Dry tonnes) Number and Weight of Diamonds According to Sieve Size Fraction (mm) Totals Diamonds ,556 3,176 2,041 1, ,633 *Total weight of recovered diamonds greater than 0.85mm: carats *Sample grade of diamonds greater than 0.85mm: 2.57 carats per tonne On April 23, 2015, the Company announced further diamond recovery results from the Kelvin 2014 summer/fall core drilling program. Approximately 1.83 tonnes of kimberlite from the southern portion of the Kelvin North Lobe and kilograms from the Kelvin Sheet was processed by caustic fusion at SRC. Table 13 below summarizes the caustic fusion diamond recovery results from the Kelvin South Lobe. Sample Weight tonnes) Table 13 Kelvin South Lobe 2014 Caustic Fusion Diamond Recovery Results (dry Number and Weight of Diamonds According to Sieve Size Fraction (mm) ,679 1, ,431 *Total weight of recovered diamonds greater than 0.85mm: 6.68 carats *Sample grade of diamonds greater than 0.85mm: 3.64 carats per tonne Total diamonds Table 14 below summarizes the caustic fusion diamond recovery results from the Kelvin Sheet. Table 14 Kelvin Sheet 2014 Caustic Fusion Diamond Recovery Results Sample Weight (dry kilograms) Number and Weight of Diamonds According to Sieve Size Fraction (mm) *Total weight of recovered diamonds greater than 0.85mm: 0.28 carats *Sample grade of diamonds greater than 0.85mm: 5.95 carats per tonne Total diamonds 2015 Kelvin Winter drilling program On June 22, 2015 the Company announced the diamond recovery results from the Kelvin 2015 winter core drilling program. Approximately 2.7 tonnes of kimberlite from the Kelvin North Lobe was processed by caustic fusion at the SRC and returned a sample grade of 2.74 carats per tonne for diamonds greater than 0.85mm. Table 15 below summarizes the caustic fusion diamond recovery results from the Kelvin North Lobe 2015 winter drill program. 8

15 Sample Weight (dry tonnes) Table 15 Kelvin North Lobe 2015 Winter Caustic Fusion Diamond Recovery Results Number and Weight of Diamonds According to Sieve Size Fraction (mm) ,312 2,098 1, ,266 *Total weight of recovered diamonds greater than 0.85mm: 7.37 carats *Sample grade of diamonds greater than 0.85mm: 2.74 carats per tonne 2015 Kelvin Spring drilling program Total diamonds On October 5, 2015 the Company announced the diamond recovery results from the Kelvin 2015 spring core drilling program. Approximately 2.42 tonnes of kimberlite from the Kelvin North Lobe was processed by caustic fusion at the SRC and returned a sample grade of 2.60 carats per tonne for diamonds greater than 0.85mm. Table 16 below summarizes the caustic fusion diamond recovery results from the Kelvin North Lobe 2015 spring drill program. Table 16 Kelvin North Lobe 2015 Spring Caustic Fusion Diamond Recovery Results Sample Weight (dry tonnes) Number and Weight of Diamonds According to Sieve Size Fraction (mm) ,438 1,632 1, ,455 *Total weight of recovered diamonds greater than 0.85mm: 6.29 carats *Sample grade of diamonds greater than 0.85mm: 2.60 carats per tonne 2015 Kelvin Summer drilling program Total diamonds On December 7, 2015 the Company announced the diamond recovery results from the Kelvin North 2015 core drilling program. Approximately 2.67 tonnes of kimberlite from the Kelvin North Lobe was processed by caustic fusion at the SRC and returned a sample grade of 3.40 carats per tonne for diamonds greater than 0.85mm. Table 17 below summarizes the caustic fusion diamond recovery results from the Kelvin North Lobe 2015 summer drill program. Sample Weight (dry tonnes) Table 17 Kelvin North Lobe 2015 Spring Caustic Fusion Diamond Recovery Results Number and Weight of Diamonds According to Sieve Size Fraction (mm) ,608 1,811 1, ,124 *Total weight of recovered diamonds greater than 0.85mm: 9.10 carats *Sample grade of diamonds greater than 0.85mm: 3.40 carats per tonne Total diamonds On December 17, 2015 the Company announced the diamond recovery results from the Kelvin North 2015 core drilling program. Approximately 0.93 tonnes of kimberlite from the Kelvin North Lobe was processed by caustic fusion at the SRC and returned a sample grade of 3.55 carats per tonne for diamonds greater than 0.85mm. 9

16 Table 18 below summarizes the caustic fusion diamond recovery results from the Kelvin North Lobe 2015 summer drill program. Sample Weight (dry tonnes) Table 18 Kelvin North Lobe 2015 Summer Caustic Fusion Diamond Recovery Results Number and Weight of Diamonds According to Sieve Size Fraction (mm) , ,124 *Total weight of recovered diamonds greater than 0.85mm: 3.29 carats *Sample grade of diamonds greater than 0.85mm: 3.55 carats per tonne 2015 Faraday 2 Spring drilling program Total diamonds On July 15, 2015, the Company announced the diamond recovery results from the Faraday spring core drilling program. Approximately 0.93 tonnes of kimberlite from the Southeast Lobe of Faraday 2 was processed by caustic fusion at the SRC and returned a sample grade of 1.93 carats per tonne for diamonds greater than 0.85mm. Table 19 below summarizes the caustic fusion diamond recovery results from the Faraday 2 Southeast Lobe 2015 spring drill program. Table 19 Faraday 2 Southeast Lobe 2015 Spring Caustic Fusion Diamond Recovery Results Sample Weight (dry tonnes) Number and Weight of Diamonds According to Sieve Size Fraction (mm) , ,266 *Total weight of recovered diamonds greater than 0.85mm: 1.81 carats *Sample grade of diamonds greater than 0.85mm: 1.93 carats per tonne 2015 Kelvin Bulk Sample On August 26, 2015, the Company announced the diamond recovery results from the Kelvin 2015 bulk sample. The 443 tonne bulk sample was recovered by large diameter reverse circulation drilling at the Southeast Lobe of the Kelvin kimberlite and was processed by dense media separation at SRC. Total diamonds Table 20 below summarizes the caustic fusion diamond recovery results from the southeast lobe of the Kelvin kimberlite. Table 20 Kelvin 2015 Bulk Sample Diamond Recovery Results Batch Sample Weight (tonnes) Number of Diamonds According to Sieve Size Fraction (mm) Total Diamonds Carats Sample Grade (c/t) +0.85mm Zone A ,307 3,563 1, , Zone B ,357 2, , Zone Bx , , Zone C , TOTAL ,649 7,793 2, , The five largest diamonds recovered from the Kelvin bulk sample are described by the SRC as: 4.22 carat white/colorless, transparent macle with no inclusions; 3.95 carat brown, transparent aggregate with inclusions; 10

17 2.79 carat light brown, transparent aggregate with minor inclusions; 2.63 carat white/colorless, transparent octahedral with inclusions; and 2.59 carat white/colorless, transparent dodecahedron with no inclusions. A total of 35 diamonds larger than 1 carat were recovered from the bulk sample. On October 19, 2015, the Company announced the results of a preliminary valuation of diamonds recovered from the Kelvin kimberlite. Four separate diamond parcels were valued by WWW International Diamond Consultants ( WWW ), representing Zone A ( carats), Zone B ( carats), Zone C (80.44 carats) and a small mixed parcel (16.79 carats). For Zone A, WWW has recommended using an average modeled price of US$56 per carat and for Zone B US$70 per carat. The parcel from Zone C was too small for WWW to create modeled values, so an average price of US$123 per carat was reported. It is not yet possible to report an average modeled value for the composite Kelvin kimberlite due to the small size of the Zone C parcel. WWW noted that while there are only 88 diamonds greater than 0.66 carats per stone in the combined parcel, it is encouraging to see so many good colour white gem stones especially in the C sample, with five of the eight stones being good colour and gem quality. The three highest value diamonds are: carat diamond from Zone B valued at US$1,603 per carat; carat diamond from Zone C valued at US$1,366 per carat; and carat diamond from Zone C valued at US$1,196 per carat. OUTLOOK Drilling, sampling and modeling over the past three years has provided the data required for the Company to prepare the first NI resource statement for the Kelvin kimberlite, which is expected by mid Drilling, sampling and modeling of the Faraday 1 and Faraday 2 kimberlites continues with a view to being able to declare a NI resource statement for these kimberlites during Exploration drilling at the MZ and Doyle kimberlites commenced in the last quarter of 2015 and will continue in Testing of new kimberlite targets at the Kennady North project will also continue. SELECTED FINANCIAL INFORMATION December 31, 2015 December 31, 2014 Interest income $ 101,787 $ 107,675 Other income flow through shares 1,634,855 1,163,492 Operating expenses (31,536,109) (19,337,577) Other expenses (1,484) (1,271) Net loss for the period (29,800,951) (18,067,681) Basic and diluted loss per share (0.92) (0.78) Cash flow from operations (30,150,425) (17,274,367) Cash, end of year 41,068, ,808 Total assets 44,290,911 4,511,282 Long term liabilities 247, ,016 Dividend declared Nil Nil 11

18 FINANCIAL REVIEW For the three months and year ended December 30, 2015 compared to the three months and year ended December 31, 2014 For the three months and year ended December 31, 2015, the Company recorded a net loss of $3,628,290 or $0.08 per share and $29,800,951 or $0.92 per share, respectively, compared to a net loss of $4,112,267 or $0.18 and $18,067,681 or $0.78 per share for the same period in The increase over the year ended December 31, 2014 is mainly as a result of $28,631,737 being spent on exploration and evaluation expenses compared to $17,415,440 for the same period in During 2015 more drilling and bulk samples were undertaken than in 2014 resulting in the increase. The other notable increase was share based payment expenses, which increased from $1,200,381 in 2014 to $1,902,694 for the same period in Quarterly financial information for the past 8 quarters 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 851,045 2,830 11, ,133 Expenses (4,478,961) (8,388,064) (7,068,586) (11,600,498) Net loss for period (3,628,290) (8,385,608) (7,057,322) (10,729,731) Cash flow from operations (6,364,802) (7,724,352) (7,047,892) (9,013,379) Basic and diluted loss per share (0.08) (0.29) (0.25) (0.42) Investing activities 116,190 (61,308) (1,488,366) 1,873,895 Financing activities 33,080,623 18,649,472 18,540,916 Balance Sheet Total assets 44,290,911 18,554,705 6,488,826 13,894,156 Three months ended December 31 September 30 June 30 March 31 Unaudited $ $ $ $ Earnings and Cash Flow Interest and other income (9,304) 153, , ,443 Expenses (4,102,643) (5,787,313) (4,740,481) (4,707,140) Net loss for period (4,112,267) (5,634,538) (4,097,865) (4,223,011) Cash flow from operations (10,660,686) 1,249,998 (5,428,543) (2,435,136) Basic and diluted loss per share (0.18) (0.25) (0.18) (0.18) Investing activities 1,473,149 3,245,687 5,440,374 5,368 Financing activities 4,954,297 Balance Sheet Total assets 4,511,282 9,229,376 7,882,198 13,187,213 12

19 COSTS AND EXPENSES The costs and expenses for the three months and year ended December 31, 2015 compared to the three months and year ended December 31, 2014 are similar except for the following: Exploration and evaluation expenses Exploration and evaluation expenses for the three months and year ended December 31, 2015 were $4,136,295 and $28,620,904, respectively, compared to $3,842,968 and $17,415,440 for the same period in The increase in exploration and evaluation expenses is a result of an extensive winter/spring and summer drilling programs on the Kennady North Project. Three months ended Three months ended Year ended Year ended December 31, 2015 December 31, 2014 December 31, 2015 December 31, 2014 Lease payments $ 7,234 $ 6,584 $ 28,325 $ 27,949 Aircraft support 391, ,344 2,342,757 3,424,624 Fuel (44,884) 2,998 1,502,523 1,027,988 Geophysics 19,139 30, , ,304 Drilling support 137, , ,518 1,268,492 Exploration personnel and program support 650, ,013 3,587,393 1,512,858 Camp maintenance, supplies, mobilization, general costs 760, ,559 4,614,370 2,941,660 Site & logistical support 427,567 69,533 2,210, ,936 Environmental 63,987 13,609 82,160 48,379 Professional geological services 169,176 64, , ,895 Drilling 941, ,736 10,646,286 5,390,558 Technical consultant (1,831) 35, ,783 35,427 Laboratory analysis 544, ,091 1,896, ,370 Diamond valuation 23, ,145 Permitting 52,537 88,534 $ 4,142,795 $ 3,691,259 $ 28,620,904 $ 17,415,440 Professional fees Professional fees for the three months and year ended December 31, 2015 were $24,236 and $73,949, respectively, compared to $24,543 and $59,374 for the same period in This is mainly due to audit and legal fees incurred and are consistent with the prior period. Share-based payment expense Share based payment expense for the three months and year ended December 31, 2015 were $Nil and $1,902,694, respectively, compared to $6,353 and $1,200,381 for the same period in During the first quarter of 2015, 685,000 options were granted compared to 350,000 options granted for the same period in These options vested immediately. Interest income Interest income for the three months and year ended December 31, 2015 were $86,190 and $101,787, respectively, compared to ($9,304) and $107,675 for the same period in For the three months ended December 31, 2014 interest was over accrued at September 30, 2014 resulting in the reversal during the last quarter. The increase is a result of the significant fourth quarter average cash balance due to the September and October private placement equity raises. The annual interest income is consistent with the prior period. 13

20 Other income Other income for the three months and year ended December 31, 2015 were $764,855 and $1,634,855, respectively, compared to $Nil and $1,163,492 respectively for the same period in In 2015, exploration expenditures were renounced relating to the flow through common shares from the February, September and October 2015 private placements. In 2014, exploration expenditures were renounced relating to flow through common shares from the October 2013 and December 2013 private placements and as a result, the flow through premiums were recognized in the statement of comprehensive loss as other income. INCOME AND RESOURCE TAXES The Company is subject to mining and 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 Activities Cash used in operating activities for the year ended December 31, 2015 was $30,150,425 compared with $17,274,367 for the comparative period in This is a result of increased exploration and evaluation activities in Investing Activities Investing activities for the year ended December 31, 2015 amounted to $440,411 compared to $10,164,578 for the comparative period in During the year ended December 31, 2015, property and equipment totalling $1,694,138 was purchased. Offsetting this was the redemption of short term investments totalling $2,002,762, the return of a Reclamation deposit totalling $30,000 and interest income of $101,787 to fund operations. Financing Activities Financing activities for the year ended December 31, 2015 amounted to $70,271,011 compared to $4,954,297 for the comparative period in During the year ended December 31, 2015, the Company issued by way of private placements 20,986,560 commons shares and 2,293,235 flow through common shares for gross proceeds of $70,759,675. Share issuance costs of $488,664 were incurred in connection with all private placements during During the year ended December 31, 2014 the Company issued by way of a private placement 769,500 common shares for net proceeds of $4,954,297. Cash Resources and Liquidity At December 31, 2015, the Company reported a working capital of $40,391,535 ($1,641,205 at December 31, 2014). Included in working capital at December 31, 2015 was cash of $41,068,805 (cash and short term investments of $2,510,570 at December 31, 2014). The short term investments reflected in December 31, 2014 were held in guaranteed investment certificates ( GIC s ) with a major Canadian financial institution with nominal counter party credit risk associated with the bank. At December 31, 2015 and 2014, the Company had no long term debt. 14

21 The Company s budgeted expenditures for the H program is approximately $20 million. The $48 million raised during the third and fourth quarter is sufficient to fund the planned 2016 and 2017 exploration and evaluation programs and general and administrative expenses. OFF-BALANCE SHEET ARRANGEMENTS The Company has no off balance sheet arrangements. 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. The 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: 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 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, 2015, no indicators of an impairment in the carrying value of its mineral properties had occurred. 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 Impairment of assets ( 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. 15

22 c) Provision for decommissioning and restoration The decommissioning and restoration liability and the accretion recorded are based on estimates of future cash flows, discount rates, and assumptions regarding timing. The estimates are subject to change and the actual costs for the decommissioning and restoration liability may change significantly. d) Deferred taxes Deferred income tax assets and liabilities are determined based on differences between the financial reporting and tax bases of assets and liabilities and on unused losses carried forward, and are measured using the substantively enacted tax rates that are expected to be in effect when the differences are expected to reverse or losses are expected to be utilized. Deferred tax assets are recorded to recognize tax benefits only to the extent that, based on available evidence, including forecasts, it is probable that they will be realized. The Company has not recorded the benefit of any tax losses or deductible temporary differences. 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 this MD&A, 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. Financial instruments In July 2014, the IASB issued the final version of IFRS 9 Financial Instruments ( IFRS 9 ) bringing together the classification and measurement, impairment and hedge accounting phases of the IASB s project to replace IAS 39 Financial Instruments: Recognition and Measurement. IFRS 9 is effective for annual periods beginning on or after January 1, 2018, with early adoption permitted. The extent of the impact of adoption of IFRS 9 has not yet been determined. Leases On January 13, 2016, the IASB issued International Financial Reporting Standard 16, Leases ( IFRS 16 ). The new standard will replace existing lease guidance in IFRS and related interpretations, and requires companies to bring most leases on balance sheet. The new standard is effective for years beginning on or after January 1, The Company is currently assessing the impact of IFRS 16. FINANCIAL INSTRUMENTS The Company s financial instruments are described in Note 4 to the Company s 2015 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. 16

23 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 settled in cash. The Company had the following transactions and balances with its related parties including key management personnel, and Mountain Province which includes the monthly management fee charged by Mountain Province for the reimbursement of expenses incurred on the Company s behalf by Mountain Province. The transactions with key management personnel are in the nature of remuneration which are paid directly by the Company and are not included in the monthly management fee charged by Mountain Province. The balances as at December 31, 2015 and 2014 were as follows: December 31, December 31, Payable to key management personnel $ $ 100,000 Payable to Mountain Province 8,475 The transactions for the years ended December 31, 2015 and 2014 were as follows: Year ended Year ended December 31, 2015 December 31, 2014 The total of the transactions: Management fee and reimburseable expenses charged by Mountain Province $ 90,000 $ 90,000 Remuneration of key management personnel 2,364,213 1,457,887 The remuneration expense of directors and other members of key management personnel for the years ended December 31, 2015 and 2014 were as follows: Year ended Year ended December 31, 2015 December 31, 2014 Consulting fees $ 461,519 $ 257,506 Share based payments 1,902,694 1,200,381 $ 2,364,213 $ 1,457,887 CONTRACTUAL OBLIGATIONS The Company has no contractual obligations at December 31, 2015 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 have been estimated on the date of grant using the Black Scholes option pricing model, using the assumptions below, and total $1,357,290. The expected volatility is calculated by reference to the weekly closing price for a period that reflects the expected life of the options. 17

24 Date of grant January 1, 2016 January 13, 2016 March 1, 2016 April 6, 2016 Number of options granted 100, , , ,000 Fair value per option $ $ $ $ Fair value total for grant $230,100 $408,690 $214,100 $504,400 Term of option 10 years 10 years 10 years 10 years Vesting Immediate Immediate Immediate See below* Assumptions: Exercise price $3.00 $2.81 $2.80 $3.30 Expected volatility 72.76% 72.76% 72.76% 72.76% Expected option life (years) Expected forfeiture none none none none Expected option cancellation none none none none Expected dividend yield 0% 0% 0% 0% Risk free interest rate 1.40% 1.27% 1.18% 1.16% *50% of these options vest on May 1, 2016 and the remaining 50% vest on November 1, 2016 In March 2016, 100,000 stock options were exercised for gross proceeds of $127,000. 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; 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. 18

25 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 7, 2016, there are 47,006,970 shares outstanding, and 2,275,000 options granted by the Company. DISCLOSURE CONTROLS AND PROCEDURES Management has established processes to provide sufficient knowledge to support representations that it has exercised reasonable diligence that (i) the financial statements do not contain any untrue statement of material fact or omit to state a material fact required to be stated or that is necessary to make a statement not misleading in light of the circumstances under which it is made, as of the date of and for the periods presented by the financial statements, and (ii) the financial statements fairly present in all material respects the financial condition, results of operations and cash flow of the Company, as of the date of and for the periods presented. In contrast to the certificate required for non venture issuers under National Instrument , Certification of Disclosure in Issuers' Annual and Interim Filings ("NI "), the Venture Issuer Basic Certificate does not include representations relating to the establishment and maintenance of disclosure controls and procedures ("DC&P") and internal control over financial reporting ("ICFR"), as defined in NI In particular, the certifying officers filing this certificate are not making any representations relating to the establishment and maintenance of: (i) (ii) controls and other procedures designed to provide reasonable assurance that information required to be disclosed by the issuer in its annual filings, interim filings or other reports filed or submitted under securities legislation is recorded, processed, summarized and reported within the time periods specified in securities legislation; and a process to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with the issuer's GAAP. The issuer's certifying officers are responsible for ensuring that processes are in place to provide them with sufficient knowledge to support the representations they are making in the certificate. Investors should be aware that inherent limitations on the ability of certifying officers of a venture issuer to design and implement on a cost effective basis DC&P and ICFR as defined in NI 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 19

26 described below materialize, actual results may vary materially from those described in forward looking 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 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 20

27 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 7,

28 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. The 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 7,

29 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, 2015 and December 31, 2014, the statements of comprehensive loss, equity and cash flows for the years then ended, 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, 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 audit. We conducted our audit 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 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, 2015 and December 31, 2014, and its financial performance and its cash flows for the years ended December 31, 2015 and December 31, 2014 in accordance with International Financial Reporting Standards. Chartered Professional Accountants, Licensed Public Accountants April 7, 2016 Toronto, Canada 23

30 KENNADY DIAMONDS INC. Statements of Financial Position In Canadian dollars Notes December 31, 2015 December 31, 2014 ASSETS Current assets Cash 4 $ 41,068,805 $ 507,808 Short term investments 4 2,002,762 Amounts receivable 4 533, ,695 Prepaid expenses 5 228,925 1,026,662 41,831,183 3,803,927 Reclamation deposit 6 295, ,000 Equipment 7 1,683,305 Mineral properties 8 481, ,355 Total assets $ 44,290,911 $ 4,511,282 LIABILITIES AND SHAREHOLDERS' EQUITY Current liabilities Accounts payable and accrued liabilities 4 $ 1,103,900 $ 2,162,722 Deferred premium on flow through shares 9, 11(ii) 335,748 1,439,648 2,162,722 Decommissioning and restoration liability , ,016 Shareholders' equity: Share capital 11 95,269,951 26,969,543 Share based payments reserve 11 3,806,954 1,904,260 Deficit (56,473,210) (26,672,259) Total shareholders' equity 42,603,695 2,201,544 Total liabilities and shareholders' equity $ 44,290,911 $ 4,511,282 Subsequent events 11 (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 24

31 KENNADY DIAMONDS INC. Statements of Comprehensive Loss In Canadian dollars Year ended Year ended Notes December 31, 2015 December 31, 2014 Expenses Exploration and evaluation expenses 13 $ (28,620,904) $ (17,415,440) Management fees 12 (90,000) (90,000) Share based payment expense 11, 12 (1,902,694) (1,200,381) Professional fees (73,949) (59,374) Promotion and investor relations (101,462) (134,554) Director fees (40,644) (38,965) Transfer agent & regulatory fees (78,362) (68,529) Finance expenses (16,513) Consulting fees (552,846) (274,090) Office expenses (48,316) (32,094) Travel expenses (16,099) (7,637) Depreciation 7 (10,833) Total expenses (31,536,109) (19,337,577) Accretion expense on decommissioning and restoration liability 10 (1,484) (1,271) Interest income 101, ,675 Other income flow through shares 9 1,634,855 1,163,492 Net loss and comprehensive loss for the year $ (29,800,951) $ (18,067,681) Basic and diluted loss per share 11 (iii) $ (0.92) $ (0.78) Weighted average number of shares outstanding 32,390,279 23,049,523 The notes to the financial statements are an integral part of these statements. 25

32 KENNADY DIAMONDS INC. Statements of Equity In Canadian dollars Share based Notes Number of shares Share capital payments reserve Deficit Total Balance, January 1, ,857,675 $ 22,015,246 $ 703,879 $ (8,604,578) $ 14,114,547 Net loss for the year (18,067,681) (18,067,681) Issuance of common shares private placement ,500 5,001,750 5,001,750 Share issue costs (47,453) (47,453) Share based payment expense 11 1,200,381 1,200,381 Balance, December 31, ,627,175 $ 26,969,543 $ 1,904,260 $ (26,672,259) $ 2,201,544 Net loss for the year (29,800,951) (29,800,951) Issuance of common shares private placement 11 23,279,795 68,789,072 68,789,072 Share issue costs (488,664) (488,664) Share based payment expense 11 1,902,694 1,902,694 Balance, December 31, ,906,970 $ 95,269,951 $ 3,806,954 $ (56,473,210) $ 42,603,695 The notes to the financial statements are an integral part of these statements. 26

33 KENNADY DIAMONDS INC. Statements of Cash Flows In Canadian dollars Year ended Year ended Notes December 31, 2015 December 31, 2014 Cash provided by (used in): Operating activities: Net loss for the year $ (29,800,951) $ (18,067,681) Adjustments: Accretion expense on decomminissioning and restoration liability 1,484 1,271 Depreciation 10,833 Interest income (101,787) (107,675) Other income flow through premium (1,634,855) (1,163,492) Share based payment expense 1,902,694 1,200,381 Changes in non cash operating working capital: Amounts receivable (266,758) (168,917) Prepaid expenses 797,737 (1,005,370) Accounts payable and accrued liabilities (1,058,822) 2,037,116 (30,150,425) (17,274,367) Investing activities: Interest income 101, ,675 Reclamation refund (deposit) 30,000 (295,000) Purchase of property and equipment (1,694,138) Redemption of short term investments 2,002,762 10,351, ,411 10,164,578 Financing activities: Issuance of shares, net of share issue costs 11 70,271,011 4,954,297 70,271,011 4,954,297 Increase (decrease) in cash 40,560,997 (2,155,492) Cash, beginning of year 507,808 2,663,300 Cash, end of year $ 41,068,805 $ 507,808 The notes to the financial statements are an integral part of these statements. 27

34 KENNADY DIAMONDS INC. Notes to Financial Statements For the Years Ended December 31, 2015 and 2014 In Canadian Dollars 1. NATURE OF OPERATIONS Kennady Diamonds Inc. was incorporated on February 27, 2012 under the Ontario Business Corporation Act. 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, evaluation 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, 2015 (including comparatives) were approved by the Board of Directors on April 7, 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. 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. 28

35 KENNADY DIAMONDS INC. Notes to Financial Statements For the Years Ended December 31, 2015 and 2014 In Canadian Dollars 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) Equipment Equipment is stated at cost less accumulated amortization and accumulated impairment losses. Cost comprises the fair value of consideration given to acquire an asset and includes direct charges associated with bringing the asset to the location and condition necessary to put the asset into use, as well as future cost of dismantling and removing the asset. When parts of an item of property and equipment have different useful lives, they are accounted for as separate items (major components) of property and equipment. Replacement cost, including major inspection and overhaul expenditures are capitalized for components of property and equipment, which are accounted for separately. Equipment are amortized over their useful lives. Amortization is calculated so as to allocate the cost of each asset over its expected useful life to its estimated residual value. The estimated useful lives, residual values and amortization method are reviewed at the end of each annual reporting period. Earthmoving equipment is amortized on a straight line basis over its estimated useful life of ten years. Assets under construction are not amortized. (v) 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 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. (vi) 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 29

36 KENNADY DIAMONDS INC. Notes to Financial Statements For the Years Ended December 31, 2015 and 2014 In Canadian Dollars 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. 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 Liabilties 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. 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. (vii) 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 flowthrough 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 for which no deferred tax asset is recognized, the Company recognizes the deferred tax benefit of such amounts 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. (viii) 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. 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 30

37 KENNADY DIAMONDS INC. Notes to Financial Statements For the Years Ended December 31, 2015 and 2014 In Canadian Dollars 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. (ix) 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 period. 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 period. (x) 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 period. 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 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. 31

38 KENNADY DIAMONDS INC. Notes to Financial Statements For the Years Ended December 31, 2015 and 2014 In Canadian Dollars 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. (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 audited 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. Financial instruments In July 2014, the IASB issued the final version of IFRS 9 Financial Instruments ( IFRS 9 ) bringing together the classification and measurement, impairment and hedge accounting phases of the IASB s project to replace IAS 39 Financial Instruments: Recognition and Measurement. IFRS 9 is effective for annual periods beginning on or after January 1, 2018, with early adoption permitted. The extent of the impact of adoption of IFRS 9 has not yet been determined. Leases On January 13, 2016, the IASB issued International Financial Reporting Standard 16, Leases ( IFRS 16 ). The new standard will replace existing lease guidance in IFRS and related interpretations, and requires companies to bring most leases onbalance sheet. The new standard is effective for years beginning on or after January 1, The Company is currently assessing the impact of IFRS 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 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: 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 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, 2015, no indicators of an impairment in the carrying value of its mineral properties had occurred. 32

39 KENNADY DIAMONDS INC. Notes to Financial Statements For the Years Ended December 31, 2015 and 2014 In Canadian Dollars 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 Impairment of assets ( 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 statement of financial position 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. 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. c) Provision for decommissioning and restoration The decommissioning and restoration liability and the accretion recorded are based on estimates of future cash flows, discount rates, and assumptions regarding timing. The estimates are subject to change and the actual costs for the decommissioning and restoration liability may change significantly. d) Deferred taxes Deferred income tax assets and liabilities are determined based on differences between the financial reporting and tax bases of assets and liabilities and on unused losses carried forward, and are measured using the substantively enacted tax rates that are expected to be in effect when the differences are expected to reverse or losses are expected to be utilized. Deferred tax assets are recorded to recognize tax benefits only to the extent that, based on available evidence, including forecasts, it is probable that they will be realized. The Company has not recorded the benefit of tax losses or deductible temporary differences. 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. 33

40 KENNADY DIAMONDS INC. Notes to Financial Statements For the Years Ended December 31, 2015 and 2014 In Canadian Dollars The Company s financial assets are measured at fair value and are summarized in the following table: December 31, 2015 Level 1 Level 2 Level 3 Cash $ 41,068,805 $ $ December 31, 2014 Level 1 Level 2 Level 3 Cash $ 507,808 $ $ Short term investments 2,002,762 The short term investments at December 31, 2014 are cashable guaranteed investment certificates ( GICs ) purchased with original maturities of less than one year held with a major Canadian financial institution. There is no restriction on the use of the short term investments. 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 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. The carrying amounts by classification are: Financial assets December 31, December 31, Fair Value Through Profit or Loss Cash $ 41,068,805 $ 507,808 Short term investments 2,002,762 Loans and receivables Amounts receivable 533, ,695 Financial liabilities Financial liabilities measured at amortized cost Accounts payable and accrued liabilities 1,103,900 2,162,722 The Company s interest income on its bank balances carried at fair value is presented on the Statements of Comprehensive Loss in the interest 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 and market risk. 34

41 KENNADY DIAMONDS INC. Notes to Financial Statements For the Years Ended December 31, 2015 and 2014 In Canadian Dollars 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, 2015 and 2014, 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 $503,453 (December 31, 2014 $266,695). The Company s current policy is to hold excess cash in high interest bank accounts. It periodically monitors the investment income it makes and is satisfied with the credit ratings of its bank. Liquidity risk 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 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. Market risk Market risk primarily relates to the risk of loss that results from change in commodity prices, foreign exchange and interest rates. The Company does not have commodity price risk or foreign exchange risk. The Company has no significant exposure at December 31, 2015 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. PREPAID EXPENSES December 31, December 31, Prepaid expenses $ 28,925 $ 26,662 Prepaid drilling expense 200,000 1,000,000 $ 228,925 $ 1,026, RECLAMATION DEPOSIT At December 31, 2015, the Company had provided a total reclamation deposit of $295,000 (December 31, 2014 $325,000) 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 10). 35

42 KENNADY DIAMONDS INC. Notes to Financial Statements For the Years Ended December 31, 2015 and 2014 In Canadian Dollars 7. EQUIPMENT The Company s equipment as at December 31, 2015: Earthmoving Assets under equipment construction* Total Cost At January 1, 2015 $ $ $ Additions 130,000 1,564,138 $ 1,694,138 At December 31, 2015 $ 130,000 $ 1,564,138 $ 1,694,138 Accumulated depreciation At January 1, 2015 $ $ $ Depreciation (10,833) (10,833) At December 31, 2015 $ (10,833) $ $ (10,833) Carrying amounts At December 31, 2015 $ 119,167 $ 1,564,138 $ 1,683,305 *Assets under construction represents an exploration camp that is currently in storage and is not in use. The asset will be shipped on site during the winter of Further costs will be required in bringing the asset to the location and condition necessary to put the asset into use. 8. MINERAL PROPERTIES Mineral properties represent the Company s claim to the Kennady North Project. The continuity of the Mineral Properties is as follows: Balance, January 1, 2014 $ 349,054 Change in expected decommissioning and restoration liability 33,301 Balance, December 31, 2014 $ 382,355 Change in expected decommissioning and restoration liability 99,068 Balance, December 31, 2015 $ 481, 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. December 31, December 31, Balance, beginning of year $ $ Deferred premium liability recognized on flow through issuances 1,970,603 1,163,492 Income recognized based on corresponding eligible expenditures (1,634,855) (1,163,492) Balance, end of year $ 335,748 $ 36

43 KENNADY DIAMONDS INC. Notes to Financial Statements For the Years Ended December 31, 2015 and 2014 In Canadian Dollars 10. DECOMMISSIONING AND RESTORATION LIABILITY The decommissioning and restoration liability was calculated using the following assumptions as at December 31, 2015 and 2014: December 31, December 31, Expected undiscounted cash flows $ 250,000 $ 150,000 Discount rate 0.49% 1.01% Periods 2018 between 2016 and 2017 The continuity of the decommissioning and restoration liability at December 31, 2015 and 2014 is as follows: December 31, December 31, Balance, beginning of year $ 147,016 $ 112,444 Change in estimate of discounted cash flows for the year 99,068 33,301 Accretion recorded in the year 1,484 1,271 Balance, end of the year $ 247,568 $ 147, 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, 2015 is 46,906,970. On October 8, 2015, the Company closed a non brokered private placement of flow through common shares and non flowthrough common shares, at the prices of $3.40 per share and $2.75 per share, respectively. The Company issued a total of 11,731,105 non flow through common shares for gross proceeds of $32,260,539, and 300,000 flow through common shares for gross proceeds of $1,020,000. An amount of $195,000 was recognized as the premium paid for flow through shares in excess of the fair value of the common shares and was initially recognized as a liability. Share issuance costs of $202,646 were incurred in connection with the private placement. On September 30, 2015, the Company closed a non brokered private placement of flow through common shares and nonflow through common shares, at the prices of $3.40 per share and $2.75 per share, respectively. The Company issued 1,393,235 flow through common shares for gross proceeds of $4,736,999, and 3,672,773 non flow through common shares for gross proceeds of $10,100,126 as a result of the non brokered private placement. An amount of $905,603 was recognized as the premium paid for flow through shares in excess of the fair value of the common shares and was initially recognized as a liability. Share issuance costs of $150,042 were incurred in connection with the private placement. On August 12, 2015, the Company closed a non brokered private placement and issued a total of 1,176,735 common shares at a price of $3.40 per share, for aggregate gross proceeds of $4,000,899. Share issuance costs of $35,780 were incurred in connection with the private placement. 37

44 KENNADY DIAMONDS INC. Notes to Financial Statements For the Years Ended December 31, 2015 and 2014 In Canadian Dollars On March 10, 2015, the Company closed the final tranche of the non brokered private placement and issued a total of 4,405,947 common shares at a price of $3.55 per share, for aggregate gross proceeds of $15,641,112. Share issuance costs of $100,196 were incurred in connection with the private placement. On February 25, 2015, the Company issued 600,000 flow through common shares at a price of $5.00 per share, for aggregate gross proceeds of $3,000,000. An amount of $870,000 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 1, 2014, the Company issued 769,500 common shares at a price of $6.50 per share, for aggregate gross proceeds of $5,001,750. iii. Loss or earnings per share The following table sets forth the computation of basic and diluted loss or earnings per share: Year ended Year ended December 31, 2015 December 31, 2014 Numerator Net loss for the year $ (29,800,951) $ (18,067,681) Denominator For basic weighted average number of shares outstanding 32,390,279 23,049,523 Effect of dilutive securities For diluted adjusted weighted average number of shares outstanding 32,390,279 23,049,523 Loss Per Share Basic Diluted $ (0.92) $ (0.78) (0.92) (0.78) The calculation for the weighted average number of shares outstanding is based on the number of shares outstanding on a daily basis in the years ended December 31, 2015 and Shares issuable on exercise of stock options totaling 1,785,000 on December 31, 2015 (1,050,000 December 31, 2014) were not included in the computation of diluted loss per share because the effect would have been anti dilutive. 38

45 KENNADY DIAMONDS INC. Notes to Financial Statements For the Years Ended December 31, 2015 and 2014 In Canadian Dollars 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, 2015 and 2014: December 31, 2015 Weighted average Number of options exercise price Balance at beginning of year 1,100, Granted during the year 685, Balance at end of the year 1,785,000 $ 2.76 Options exercisable at the end of the year 1,785,000 December 31, 2014 Weighted average Number of options exercise price Balance at beginning of year 750,000 $ 1.27 Granted during the year 350, Balance at end of the year 1,100,000 $ 2.23 Options exercisable at the end of the year 1,050,000 The fair value of the 685,000 (350,000 December 31, 2014) stock options granted in the year ended December 31, 2015 has been estimated on the date of grant using the Black Scholes option pricing model, using the assumptions below, and total $1,899,505 ($1,168,800 December 31, 2014). The stock options granted in the years ended December 31, 2015 and 2014 vested immediately. December 31, December 31, Exercise price $3.61 $ 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 1.48% 2.45% 2.52% 39

46 KENNADY DIAMONDS INC. Notes to Financial Statements For the Years Ended December 31, 2015 and 2014 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, 2015 and At December 31, 2015 Black Scholes Number of Exercise Expiry Date Value Options Price November 6, 2022 $ 587, , January 31, , , March 17, ,550 50, February 13, , , March 9, , , March 12, ,899, , $ 3,806,954 1,785, At December 31, 2014 Black Scholes Number of Exercise Expiry Date Value Options Price November 6, 2022 $ 587, , January 31, , , March 17, ,550 50, February 13, , , March 9, , , $ 1,907,450 1,100, The weighted average remaining contractual life of the options outstanding at December 31, 2015 is 8.03 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 grant using the Black Scholes option pricing model, using the assumptions below, and total $1,357,290. The expected volatility is calculated by reference to the weekly closing price for a period that reflects the expected life of the options. Date of grant January 1, 2016 January 13, 2016 March 1, 2016 April 6, 2016 Number of options granted 100, , , ,000 Fair value per option $ $ $ $ Fair value total for grant $230,100 $408,690 $214,100 $504,400 Term of option 10 years 10 years 10 years 10 years Vesting Immediate Immediate Immediate See below* Assumptions: Exercise price $3.00 $2.81 $2.80 $3.30 Expected volatility 72.76% 72.76% 72.76% 72.76% Expected option life (years) Expected forfeiture none none none none Expected option cancellation none none none none Expected dividend yield 0% 0% 0% 0% Risk free interest rate 1.40% 1.27% 1.18% 1.16% *50% of the options vest on May 1, 2016 and the remaining 50% vest on November 1, 2016 In March 2016, 100,000 stock options were exercised for gross proceeds of $127,

47 KENNADY DIAMONDS INC. Notes to Financial Statements For the Years Ended December 31, 2015 and 2014 In Canadian Dollars 12. 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 since the Company and Mountain Province have common members of key management and certain directors. 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 settled in cash. The Company had the following transactions and balances with its related parties including key management personnel, and Mountain Province which includes the monthly management fee charged by Mountain Province for the reimbursement of expenses incurred on the Company s behalf by Mountain Province. The transactions with key management personnel are in the nature of remuneration which are paid directly by the Company and are not included in the monthly management fee charged by Mountain Province. The balances as at December 31, 2015 and 2014 were as follows: December 31, December 31, Payable to key management personnel $ $ 100,000 Payable to Mountain Province 8,475 The transactions for the years ended December 31, 2015 and 2014 were as follows: Year ended Year ended December 31, 2015 December 31, 2014 The total of the transactions: Management fee and reimburseable expenses charged by Mountain Province $ 90,000 $ 90,000 Remuneration of key management personnel 2,364,213 1,457,887 The remuneration expense of key management personnel for the years ended December 31, 2015 and 2014 were as follows: Year ended Year ended December 31, 2015 December 31, 2014 Consulting fees $ 461,519 $ 257,506 Share based payments 1,902,694 1,200,381 $ 2,364,213 $ 1,457,887 41

48 KENNADY DIAMONDS INC. Notes to Financial Statements For the Years Ended December 31, 2015 and 2014 In Canadian Dollars 13. EXPLORATION AND EVALUATION EXPENSES Year ended Year ended December 31, 2015 December 31, 2014 Lease payments $ 28,325 $ 27,949 Aircraft support 2,342,757 3,424,624 Fuel 1,502,523 1,027,988 Geophysics 139, ,304 Drilling support 475,518 1,268,492 Exploration personnel and program support 3,587,393 1,512,858 Camp maintenance, supplies, mobilization, general costs 4,614,370 2,941,660 Site & logistical support 2,210, ,936 Environmental 82,160 48,379 Professional geological services 732, ,895 Drilling 10,646,286 5,390,558 Technical consultant 119,783 35,427 Laboratory analysis 1,896, ,370 Diamond valuation 155,145 Permitting 88,534 $ 28,620,904 $ 17,415, INCOME TAXES Rate Reconciliation The provision for income tax differs from the amount that would have resulted by applying the combined Canadian Federal and Ontario statutory income tax rates of approximately 26.5% ( %): December 31, 2015 December 31, 2014 Loss before income taxes $ (29,800,951) $ (18,067,681) 26.5% 26.5% Tax recovery calculated using statutory rates (7,897,252) (4,787,935) Expenses not deductible 1,926,206 9,776 Change in tax benefits not recognized 5,971,046 4,778,159 Income tax expenses (recovery) $ $ 42

49 KENNADY DIAMONDS INC. Notes to Financial Statements For the Years Ended December 31, 2015 and 2014 In Canadian Dollars Unrecognized deferred tax assets Deductible temporary differences for which no deferred tax assets have been recognized are attributable to the following: December 31, 2015 December 31, 2014 Property and equipment $ 10,833 $ Mineral properties 44,128,904 15,571,832 Decommissionning and restoration liability 247, ,016 Loss carryforwards 2,682,949 1,560,004 Share issuance costs 638, ,317 Investment tax credits 436, ,854 Income tax attributes As at December 31, 2015, the Company had the following non capital losses available for carry forward and certain other tax attributes as follows: Amounts Expiry Date Non capital losses $ 2,682, Investment tax credits 436, Tax basis of mineral properties 44,575,090 indefinite Tax basis of property and equipment 1,694,138 indefinite Share issuance cost 638,844 indefinite 15. 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 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 $ 95,269,951 $ 26,969,543 Share based payments reserve 3,806,954 1,904,260 Deficit (56,473,210) (26,672,259) $ 42,603,695 $ 2,201,544 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. 43

50 KENNADY DIAMONDS INC. Notes to Financial Statements For the Years Ended December 31, 2015 and 2014 In Canadian Dollars 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. 44

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53 Kennady Diamonds

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