MOUNTAIN PROVINCE DIAMONDS INC. Annual Information Form For the Year Ended December 31, 2016

Transcription

1 MOUNTAIN PROVINCE DIAMONDS INC. Annual Information Form For the Year Ended December 31, 2016 March 28, 2017

2 MOUNTAIN PROVINCE DIAMONDS INC. TABLE OF CONTENTS CORPORATE STRUCTURE... 2 NAME, ADDRESS AND INCORPORATION... 2 INTERCORPORATE RELATIONSHIPS... 3 GENERAL DEVELOPMENT OF THE BUSINESS... 3 THREE YEAR HISTORY... 3 DESCRIPTION OF THE BUSINESS... 5 GENERAL... 5 Competitive Conditions... 5 Employees...6 Specialized Skills and Knowledge... 6 Environmental Protection... 6 MINERAL PROPERTIES (The Gahcho Kué Diamond Mine)...6 Technical Report.6 Property Location, Access and Infrastructure...6 Overall Site Plan..8 History...8 Mineral Tenure and Royalties 8 Permits and Agreements...9 Mineral Reserve and Mineral Resource Estimates...9 Mining Method.10 Capital and Operating Costs.12 Capital Cost Estimate...12 Operating Cost Estimate.12 Other Relevant Data and Information...13 Social and Environmental Policies...13 Social and Environmental Licenses and Policies at the GK Diamond Mine...13 Aboriginal Issues and Local Resources at the GK Diamond Mine...13 Environmental Requirements for the GK Diamond Mine...13 RISKS FACTORS...14 DIVIDENDS.19 DESCRIPTION OF CAPITAL STRUCTURE...19 MARKET FOR SECURITIES...19 DIRECTORS AND OFFICERS...21 AUDIT COMMITTEE...25 LEGAL PROCEEDINGS...26 INTEREST OF MANAGEMENT AND OTHERS IN MATERIAL TRANSACTIONS...26 TRANSFER AGENT AND REGISTRAR...26 INTERESTS OF EXPERTS...26 MATERIAL CONTRACTS...27 ADDITIONAL INFORMATION...27 APPENDIX 1: AUDIT COMMITTEE CHARTER...27 APPENDIX 2: GLOSSARY OF TERMS USED FREQUENTLY IN THIS DOCUMENT...31

3 Currency Unless otherwise specified, all dollar references are to Canadian dollars. On March 27, 2017, one Canadian dollar was worth approximately $0.748 in United States currency, based on the noon exchange rate of the Bank of Canada. Caution Regarding Forward Looking Information Certain information included in this Annual Information Form ( AIF ) constitutes forward looking information within the meaning of Canadian and United States securities laws. Forward looking information can generally be identified by the use of terms such as may, will, should, could, expect, plan, anticipate, foresee, appears, believe, intend, estimate, predict, potential, continue, objective, modeled, hope, forecast or other similar expressions concerning matters that are not historical facts. Forward looking information relates to management s future outlook and anticipated events or results, and can include statements or information regarding plans, timelines and targets for mining, development, production and exploration activities at the Company s mineral properties, projected capital expenditure requirements, liquidity and working capital requirements, estimated reserves and resources at, and production from, the Gahcho Kué Diamond Mine ( GK Diamond Mine ), and expectations concerning the diamond industry, and expected cost of sales and cash operating costs. Forward looking information included in this AIF includes the current production forecast for GK Diamond Mine, estimated reserves and resources at the GK Diamond Mine, plans, timelines and targets for mining, development, permitting and production. Forward looking information is based on certain factors and assumptions described below and elsewhere in this AIF, among other things, the current mine plan for the GK Diamond Mine; currency exchange rates; required operating and capital costs, labour and fuel costs, world and United States economic conditions, future diamond prices, and the level of worldwide diamond production. While the Company considers these assumptions to be reasonable based on the information currently available to it, they may prove to be incorrect. Forward looking information is subject to certain factors, including risks and uncertainties, which could cause actual results to differ materially from what the Company currently expects. These factors include, among other things, the uncertain nature of mining activities, including risks associated with underground construction and mining operations, risks associated with joint venture operations, the risk that the operator of the GK Diamond Mine may make changes to the mine plan and other risks arising because of the nature of joint venture activities, risks associated with the remote location of and harsh climate at the Company s mineral property site, variations in mineral resource and mineral reserve estimates, grade estimates or expected recovery rates, failure of plant, equipment or processes to operate as anticipated, risks resulting from the Eurozone financial crisis, Brexit, risks associated with regulatory requirements and the ability to obtain all necessary regulatory approvals, the risk that diamond price assumptions may prove to be incorrect, modifications to existing practices so as to comply with any future permit conditions that may be imposed by regulators, delays in obtaining regulatory approvals and lease renewals, the risk of fluctuations in diamond prices and changes in the United States and world economic conditions, uncertainty as to whether dividends will be declared by the Company s board of directors or the Company s dividend policy will be maintained, the risk of fluctuations in the Canadian/US dollar exchange rate and cash flow and liquidity risks. Please see page 14 of this AIF for a discussion of these and other risks and uncertainties involved in the Company s operations. Actual results may vary from the forward looking information. Readers are cautioned not to place undue importance on forward looking information, which speaks only as of the date of this AIF, and should not rely upon this information as of any other date. Due to assumptions, risks and uncertainties, including the assumptions, risks and uncertainties identified above and elsewhere in this AIF, actual events may differ materially from current expectations. The Company uses forward looking statements because it believes such statements provide useful information with respect to the currently expected future operations and financial performance of the Company, and 1

4 cautions readers that the information may not be appropriate for other purposes. While the Company may elect to, it is under no obligation and does not undertake to update or revise any forward looking information, whether as a result of new information, future events or otherwise at any particular time, except as required by law. United States investors should read the Cautionary Note to United States Investors Concerning Disclosure of Mineral Reserves and Mineral Resources found on page 9. Name, Address and Incorporation CORPORATE STRUCTURE Mountain Province Diamonds Inc., formerly Mountain Province Mining Inc., was formed on November 1, 1997 by the amalgamation of Mountain Province Mining Inc. ("Old MPV") and B.C. Ltd. ("444965"). The Company changed its name from Mountain Province Mining Inc. to Mountain Province Diamonds Inc. effective October 16, It commenced trading under its new name on the TSX on October 25, Pursuant to an arrangement agreement (the "Arrangement") with Glenmore Highlands Inc. ( Glenmore ) dated May 10, 2000, Glenmore was amalgamated with a wholly owned subsidiary of the Company to form a new wholly owned subsidiary ("Mountain Glen") of the Company. Glenmore had two wholly owned subsidiaries, Baltic Minerals BV, incorporated in the Netherlands, and Baltic Minerals Finland OY, incorporated in Finland. Pursuant to the Arrangement Agreement, these companies became whollyowned subsidiaries of the Company. Pursuant to an Assignment and Assumption Agreement dated March 25, 2004 between the Company and Mountain Glen, Mountain Glen distributed its property and assets in specie to the Company. Mountain Glen was voluntarily dissolved on August 4, Baltic Minerals BV and its subsidiary Baltic Minerals Finland OY were voluntarily dissolved in On September 20, 2005, the Company continued incorporation under the Business Corporations Act (Ontario). On October 1, 2014, Camphor Ventures Inc. (formerly Sierra Madre Resources Inc.) and the Company were amalgamated under the name Mountain Province Diamonds Inc. On October 2, 2014, Ontario Inc. was incorporated as a wholly owned subsidiary of the Company. At the request of the project debt facility lenders, the participating interest of the Company in the Gahcho Kué Project was transferred to Ontario Inc. in exchange for common shares of Ontario Inc. On October 3, 2014, Ontario Inc. was incorporated as a wholly owned subsidiary of the Company. On October 3, 2014, the Company transferred the shares of Ontario Inc. to Ontario Inc. in exchange for common shares of Ontario Inc. The names of the Company's subsidiaries, their dates of incorporation and the jurisdictions in which they were incorporated as at the date of filing of this Annual Report, are as follows: Name of Subsidiary Date of Incorporation Juridiction of Incorporation Ontario Inc. October 2, 2014 Ontario Canada Ontario Inc. October 3, 2014 Ontario Canada 2

5 The Company's registered, records, administrative, and executive office is at 161 Bay Street, Suite 1410, PO Box 216, Toronto, Ontario, Canada M5J 2S1, the telephone number is (416) , and the fax number is (416) The Company is a reporting issuer in every province of Canada other than Quebec, and the common shares of the Company are listed and posted for trading on the Toronto Stock Exchange and NASDAQ under the symbol MPVD. Intercorporate Relationships As at March 28, 2017, Mountain Province s corporate structure was as follows: Mountain Province Diamonds Inc Ontario Inc Ontario Inc. GENERAL DEVELOPMENT OF THE BUSINESS Mountain Province Diamonds Inc. is focused on the mining and marketing of rough diamonds to the global market. The Company supplies rough diamonds to the global market from its 49% ownership interest in the GK Diamond Mine. The GK Diamond Mine is located in Canada s Northwest Territories. The Company acquired its interest in the mineral claims and properties that were developed into the GK Diamond Mine in August The GK Diamond Mine was built and is operated by a joint venture (the Gahcho Kué Joint Venture ) in which the Company has an undivided 49% interest. The other joint venture participant, De Beers Canada Inc. ( De Beers ), has an undivided 51% interest. Three Year History Fiscal 2014 In 2013 the Gahcho Kué Joint Venture received approval for the development of the GK Diamond Mine from the Mackenzie Valley Environmental Impact Review Board (MVEIRB), the Canadian Federal Minister of Aboriginal Affairs and Northern Development and the Mackenzie Valley Land and Water Board. In May 2014, the 2014 Technical Report (see Mineral Properties Technical Report on page 6) was filed on SEDAR and EDGAR under Form 6K. The authors of the Report concluded that the Gahcho Kué Project was economically viable, technically credible, and environmentally sound. On August 12, 2014, De Beers and the Company announced that the Mackenzie Valley Land and Water Board had issued a Type A Land Use Permit and sent the Type A Water License for final approval to the Minister of Environment and Natural Resources of the Government of the Northwest Territories. 3

6 On September 25, 2014, De Beers and the Company announced that the Gahcho Kué Project had received approval of the Type A Water License by the Minister of Environment and Natural Resources of the Government of the Northwest Territories. Fiscal 2015 On April 2, 2015, the Company through its subsidiary, Ontario Inc. entered into a Loan Facility of US$370 million with a syndicate of lenders led by Natixis S.A., Scotiabank and Nedbank Ltd. and including ING Capital LLC, Export Development Canada and the Bank of Montreal. On April 29, 2015, Société Générale joined the lender syndicate. The term of the Loan Facility is seven years and the interest rate is U.S. dollar LIBOR plus 5.5 percent. The Loan Facility agreement can be viewed at filed on March 28, 2016 under Material contracts Credit agreements. The Loan Facility was used to fund the Company s share of the remaining construction cost of the GK Diamond Mine, associated fees, operating costs, working capital during the build up to commercial production, as defined below, general and administrative costs, interest costs and the repayment of $10 million of sunk costs, which becomes payable to De Beers based on achieving and maintaining 30 days running at 70% of designed production capacity, which is approximately 5,833.1 tonnes of ore processed per day. This was achieved on March 1, 2017 and De Beers will be paid at the end of March, At March 28, 2017, the Company has drawn US$357 million against the US$370 million Loan Facility. On April 8, 2015, the Company deposited $93,345,000 into a restricted cost overrun account in Ontario Inc. These funds are in addition to, and as partial security for repayment of, the Loan Facility. On April 7, 2015, the Company entered into U.S. dollar interest rate swaps ( IRS ) to manage interest rate risk associated with the U.S. dollar variable rate Loan Facility and entered into foreign currency forward strip contracts to mitigate the risk that a devaluation of the U.S. dollar against the Canadian dollar would reduce the Canadian dollar equivalent to the U.S. dollar Loan Facility and the Company would not have sufficient Canadian dollar funds to develop the GK Diamond Mine. On July 10, 2015, the Company entered into additional foreign currency forward strip contracts from August 4, 2015 to February 1, Fiscal 2016 During 2016, the construction of the GK Diamond Mine was substantially completed and during June 2016 the Company announced that the GK Diamond Mine had achieved mechanical completion of the primary crusher and that commissioning of the process plant was progressing well. On August 3, 2016, the Company announced that commissioning of the Gahcho Kué diamond plant had been completed ahead of schedule, that ramp up to commercial production had commenced and that the GK Diamond Mine remained on track to achieve commercial production on schedule during the first quarter of On March 2, 2017, the Company announced that it had declared commercial production on March 1, During 2016, the Company through its subsidiary Ontario Inc. signed agreements with Diamond Manufacturing Management and Consultancy Ltd. ( DMMC ), a company incorporated in Mauritius, Worldwide Diamond Manufacturers Pvt Ltd. ( WDM ), a company incorporated in India, and with Bonas Couzyn (Antwerp) N.V. ( Bonas ), a Company incorporated in Belgium to provide consultancy, cleaning and sorting services and marketing of the diamonds respectively. DMMC is a diamond consulting company and has technical experts who are assisting in overseeing the sorting and pricing of the rough diamonds before they are sent to WDM to be cleaned and sorted into saleable parcels. On completion of the cleaning and sorting the rough diamonds are sent to Bonas based in Antwerp where they will be presented to purchasers selected by Bonas and Ontario Inc. for sale by open tender. 4

7 Fiscal Year 2017 On March 1, 2017, De Beers as Operator of the GK Diamond Mine declared that over a 30 day period, approximately 70% of the designed production capacity among other criteria had been achieved, and commercial production was declared. It is expected that during 2017 the GK Diamond Mine will recover approximately 4.4 million carats of diamonds on a 100% basis and that the Company will receive its 49% share of approximately 2.2 million carats. During 2017, the Company expects to sell approximately 2 million carats of diamonds, including pre commercial production sales. An update to 2017 production is expected to be completed by mid year. The first sale of diamonds took place during January 2017 and at the date of this report sales had taken place in February and March The Company expects to conduct ten sales during Under the Gahcho Kué Joint Venture Agreement (see Mineral Properties History on page 8), commercial production for sunk cost repayment purposes is based on the first day after 30 days (excluding maintenance days) of achieving and maintaining 70% of designed production capacity. For royalty purposes for the Government of the Northwest Territories, commercial production is based on the first day after 90 days of achieving 60% of designed production capacity. DESCRIPTION OF THE BUSINESS General The Company is focused on the mining and marketing of rough diamonds to the global market. The Company s participation in the mining sector of the diamond industry is through its ownership interest in Ontario Inc., which is a 49% participant in the Gahcho Kué Joint Venture which owns and operates the GK Diamond Mine in the Northwest Territories. Competitive Conditions The Global Diamond Report 2016 published by Bain & Company Inc., reported that restocking by midstream buyers of rough diamonds, following their inventory sell off in late 2015, produced growth of around 20% in rough diamond sales during the first half of However, continued strong roughdiamond sales in 2016 may again lead to overstocked midstream inventories if retail demand does not strengthen proportionately. Declining sales at major jewelry retailers in the first half of 2016 indicate a possible demand slowdown in the U.S. and China. Also, the global diamond industry is facing disruption that could stretch through the first half of 2017, as a result of Indian government s radical move to abolish most of the nation s bank notes overnight. In the western Indian city of Surat craftsmen cut and polish approximately 80 percent of the world s diamonds, a business dependent on cash and the demonetization of the high value banknotes from November 8, 2016 has prevented most of the manufacturing industry from operating. Thousands of diamond brokers in the area are also doing little business which had negatively impacted the demand and price for rough diamonds. WWW International Diamond Consultants report that for the period from January to November 2016 average rough diamond prices increased by approximately 9 percent. This was driven by mid market restocking. 5

8 Employees As at March 28, 2017, the Company had 5 employees and retained 5 part time consultants. Persons employed at the GK Diamond Mine are employees of De Beers, the operator of the GK Diamond Mine. Specialized Skills and Knowledge The Company s success at marketing diamonds is dependent on the services of key executives and skilled employees, and the continuance of key relationships with certain third parties, such as diamantaires for the marketing of rough diamonds. The Company competes for these skilled employees with other diamond producers. De Beers, as operator of the GK Diamond Mine, is responsible for ensuring that it has the mining engineers and skilled miners required to mine the diamonds and process the diamond production from the GK Diamond Mine. De Beers competes for these skilled employees with other mines in the Northwest Territories and elsewhere in Canada. The Company is not responsible for the hiring or retention of these skilled employees. Environmental Protection The Company is not the operator of the GK Diamond Mine and is only responsible for the sorting and marketing of its share of production from the GK Diamond Mine. The production from the GK Diamond Mine is sorted at Diavik Diamond Mines (2012) Inc. ( DDMI ), which owns and operates a diamond product splitting facility located at 102 Archibald Street, Yellowknife, Northwest Territories for cleaning and basic sorting its rough diamond products, where ancillary activities related to mining royalty valuation and expediting of rough diamonds are also performed. These sorting operations include the cleaning and washing of rough diamonds using an acid bath. Mineral Properties The Gahcho Kué Diamond Mine The Company has no other mineral properties other than its 49% undivided interest in the GK Diamond Mine. Technical Report The most recent technical report on the GK Diamond Mine, referred to herein as the 2014 Technical Report, is the Gahcho Kué Project, 2014 Feasibility Study Report NI Technical Report dated May 13, 2014 as amended May 27, 2014 (with information effective as of March 31, 2014) as prepared and completed by JDS Energy and Mining Inc. and Hatch Ltd, and filed by the Company on SEDAR on May 28, 2014 and concurrently on EDGAR under Form 6K. Property Location, Access and Infrastructure The GK Diamond Mine is located in the Northwest Territories (NWT) of Canada, in the District of Mackenzie, 300 km east northeast of Yellowknife and 80 km east southeast of the Snap Lake Mine (owned by De Beers and currently on care and maintenance). The site lies on the edge of the continuous permafrost zone in an area known as the barren lands. The surface is characterised as heath/tundra, with occasional knolls, bedrock outcrops, and localised surface depressions interspersed with lakes. A thin 6

9 discontinuous cover of organic and mineral soil overlies primarily bedrock, which, occurs typically within a few metres of surface. Some small stands of stunted spruce are found in the area. There are myriad lakes in the area. Kennady Lake, under which the kimberlite pipes lie, is a local headwater lake with a minimal catchment area. A winter road connects Yellowknife to the Snap Lake, Ekati, and Diavik mines during February and March each year (Figure 1 1). The road is operated under a Licence of Occupation by the winter road joint venture partners who operate the Ekati, Diavik, and Snap Lake mines (Snap Lake ceased operations in December 2015). The GK Diamond Mine became a winter road joint venture partner in The road passes within 70 km of the GK Diamond Mine, at Mackay Lake. A 120 km winter road spur has been established from Mackay Lake to the project site, and was open in 1999, 2001, 2002, 2006, 2013, 2014, 2015 and The 120 km winter road spur will be constructed each year to support the mine construction and operation. The GK Diamond Mine is typical of many northern Canadian mining operations that lack local and regional infrastructure such as permanent road access, navigable shipping routes and ports, and external utilities. Therefore, the Gahcho Kué site requires extensive infrastructure to sustain operations, including power generation, sewage and water treatment, personnel accommodation for 478 people, storage facilities for materials delivered on the limited annual winter ice road, and a 1600 meter long gravel airstrip that can be accessed in both summer and winter months with small and large aircrafts during the day and at night to provide year round cargo, food and passenger aircraft access. 7

10 Overall Site Plan History In August 1992, the Company acquired a 100% interest in the mineral properties upon which the GK Diamond Mine is situated. During 2002, the Company entered into the Gahcho Kué Joint Venture Agreement with De Beers and Camphor Ventures Inc. This agreement provided that De Beers could have earned up to a 55% interest in the project by funding and completing a positive definitive feasibility study. The agreement also provided that De Beers could have earned up to a 60% interest in the project by funding development and construction of a commercial scale mine. This Gahcho Kué Joint Venture Agreement was amended and restated in July 2009, in which De Beers owns 51% of the GK Diamond Mine and the Company 49%. Mineral Tenure and Royalties A royalty is payable to the government of the Northwest Territories (the NWT Royalty ). The NWT Royalty is equal to the lesser of either (i) 13% of the output value of the mine, or (ii) an amount calculated based on a sliding scale of royalty rates dependent upon the value of output of the mine, that can range from 0% to 14%. 8

11 Permits and Agreements Exploration programs to date were conducted under the permits obtained from the appropriate authority, including: Indian and Northern Affairs Canada Type A Land Use Permit Indian and Northern Affairs Canada Type B Water Licence Workers Compensation Board (WCB), Mine Health and Safety Drilling Authorization Indian and Northern Affairs Canada Quarry Permit Indian and Northern Affairs Canada Registration of Fuel Storage Tanks Prince of Wales Northern Heritage Centre Archaeology. On August 12, 2014, De Beers and the Company announced that the Mackenzie Valley Land and Water Board had issued the Gahcho Kué Type A Land Use Permit and sent the Type A Water License for final approval to the Minister of Environment and Natural Resources (of the Government of the Northwest Territories. On September 25, 2014, De Beers and the Company announced that the Gahcho Kué Project had received approval of the Type A Water License by the Minister of Environment and Natural Resources of the Government of the Northwest Territories. Mineral Reserve and Mineral Resources Estimates Summarized from the 2014 Technical Report (less production up to December 31, 2016): Table 1.1 Mineral Reserve/Resource Summary (as of December 31, 2016) (Presented on a 100% basis) Tonnes Carats Grade Kimberlite Deposit Classification Mt Mct cpht 5034 Hearne Tuzo Probable Reserve Inferred Resource Probable Reserve Inferred Resource Probable Reserve Inferred Resource Summary Probable Reserves Notes: Inferred Resources (1) Mineral Reserves/Resources are reported at a bottom cut off of 1.0 mm. (2) Mineral Resources are not Mineral Reserves and do not have demonstrated economic viability. (3) Tonnes and carats are rounded to the nearest 100,000. (4) Tuzo tonnes exclude 0.6 Mt of a granite raft and CRX_BX. (5) Resources and Reserves have been reported in this report to remain consistent with previous technical reports. (6) Probable Reserves for 5034 are net of production that occurred in (7) Mt = Metric tonnes, Mct = Million carats, Cpht = Carats per hundred tonnes 9

12 The economic viability presented in Sections 13 to 15 of the 2014 Technical Report confirms that the probable reserve estimates meet and comply with CIM definitions and NI standards. The authors of the 2014 Technical Report concluded that the project is economically viable using current diamond prices and prevailing long term price estimates. Detailed mine planning and economic evaluation have been performed on a sub set of the results summarised in Table 1.2. This 2014 Technical Report did not identify any mining, metallurgical, infrastructure or other relevant factors that may materially affect the estimates of the mineral reserves or potential production. Cautionary Note to United States Investors Concerning Disclosure of Mineral Reserves and Resources: The Company is organized under the laws of Canada. The mineral reserves and resources described herein are estimates, and have been prepared in compliance with NI The definitions of proven and probable reserves used in NI differ from the definitions in the United States Securities and Exchange Commission ( SEC ) Industry Guide 7. In addition, the terms mineral resource, measured mineral resource, indicated mineral resource and inferred mineral resource are defined in and required to be disclosed by NI ; however, these terms are not defined terms under SEC Industry Guide 7, and normally are not permitted to be used in reports and registration statements filed with the SEC. Accordingly, information contained in this AIF containing descriptions of the GK Diamond Mine s mineral deposits may not be comparable to similar information made public by US companies subject to the reporting and disclosure requirements under the United States federal securities laws and the rules and regulations thereunder. United States investors are cautioned not to assume that all or any part of Measured or Indicated Mineral Resources will ever be converted into Mineral Reserves. United States investors are also cautioned not to assume that all or any part of an Inferred Mineral Resource exists, or is economically or legally mineable. Inferred resources are not considered to have sufficient geological confidence to be converted into any reserve classification regardless of economic merit. Mining Method Open Pit Mining The mine design and consequent mine plan considers probable and mineral reserves of the 5034, Hearne, and Tuzo kimberlite pipes. Conventional truck/shovel mining utilising 29 m3 bucket diesel hydraulic front shovels, a 17 m3 front end loader and 218 t class haulage trucks are being employed to mine the kimberlite and waste quantities. This large fleet is augmented by 12 m3 bucket front end loaders and excavators and 90 t haul trucks. Pit designs were developed using optimised Whittle shells as a basis, and these were used to develop the mine production plan and schedule. The plans were optimised to smooth waste stripping requirements, while ensuring adequate kimberlite exposure to meet kimberlite feed requirements, as well as waste storage considerations within the Hearne and 5034 pits throughout the mine life. Pre stripping began on land in the northern half of the 5034 pit in 2014, with the majority of the granite waste used for road, dyke and infrastructure pad construction. Unsuitable overburden material will be placed in the South mine rock pile. Mining continued in the 5034 pit during 2015 & All kimberlite ore is currently sourced from the 5034 pit (for 2016 & 2017). Pre stripping/pioneering of Hearne pit is scheduled to start in late 2017/early Approximately 40% of the kimberlite production will be sourced from Hearne for the period 2018 to 2019, slowing in 2021 as Hearne reaches the final deepest benches. Priority has been placed on mining Hearne in these years in 10

13 order to open up waste storage capacity within the pit as soon as it has been completed. Hearne will be mined with no internal phases. During 2019, equipment will begin stripping the first phase of Tuzo. Processed kimberlite will be diverted to the mined out Hearne pit in In 2024, the 5034 pit is scheduled to be completed. From this point on, mine rock from Tuzo will be placed in the mined out 5034 pit. Tuzo mining will continue until Recovery Methods The GK Diamond Mine will mine kimberlite resources from three different deposits: 5034, Hearne, and Tuzo. In the process plant, this material will be treated via crushing, screening, dense media separation and x ray sorting, to produce a diamond rich concentrate that will be hand sorted on site with the resulting diamond product sent to Yellowknife for final cleaning and Northwest Territories Government valuation. The processing plant is targeting the recovery of liberated diamonds in the 1 to 28 mm size range. The processing plant is designed for efficient diamond recovery over the plant s 12 year life. The Gahcho Kué Plant processes will be automated to allow high quality production with minimal human intervention. Underground Mining Underground mining is not currently part of the mine plan. GK Diamond Mine The GK Diamond Mine mineral claims and mining leases are contained within four claim blocks. However, only the 5034 block of the Gahcho Kué property is currently under development and considered to be material to the Company. The Company filed the 2014 Technical Report, is the Gahcho Kué Project, 2014 Feasibility Study Report NI Technical Report dated May 13, 2014 as amended May 27, 2014 (with information effective as of March 31, 2014) as prepared and completed by JDS Energy and Mining Inc. and Hatch Ltd, and filed by the Company on SEDAR on May 28, 2014 and concurrently on EDGAR under Form 6K. The scientific and technical information on the GK Diamond Mine included in this AIF was prepared by JDS Energy & Mining Inc., under the supervision of Daniel Johnson, Principal Advisor, and a Qualified Person within the meaning of NI Mining Operations The GK Diamond Mine operates 24 hours per day, 365 days of the year. Crews are resident on site while they work 12 hour shifts for 14 days, then rotate home for 14 days. Four rotating crews cover 12 hour dayshifts, 12 hour nightshifts, on site and off site rotation. One pipe is currently in production: 5034, and expected to be in 2017, 2018 and 2019, and approximately 40% of the kimberlite production will be sourced from Hearne for the period 2018 to Mine operation began in August 2016 with open pit mining. 11

14 Capital and Operating Costs Capital Cost Estimate The table below summarizes the original capital cost budget by Work Breakdown Structure (WBS) to construct the GK Diamond Mine prepared as at March 2014 compared to actual costs incurred and accrued to February 2017: Capital Forecast by WBS WBS Description CAD (M) ORIGINAL BUDGET CAD (M) ACTUAL 1000 Mine Operations Site Development & Roadworks Process Facilities Utilities Ancillary Buildings Waste & Water Management Off site Facilities Subtotal Direct Costs = 8000 Owner s Management Costs Indirect Costs Subtotal Owners + Indirect Costs = 9900 Contingency Total Projects 1, ,056.6 Management Out of scope and foreign exchange _ 37.0 Reserve Total Projects and Management Reserve 1, ,093.6 Operating Cost Estimate Operating cost estimate inputs were provided by De Beers, based on operating experience at the Snap Lake Mine in the NWT and the Victor Mine in Northern Ontario. The operating cost estimates use the labour classification and wage scales currently employed by Victor, and much of the G&A cost estimate details were derived from actual cost data from the Snap Lake mine. The average annual operating cost estimate and average LOM unit costs for the Gahcho Kué Diamond Mine are summarised in the table are 2016 Canadian dollars. WBS Description Operating Cost Forecast Summary in 2016 Canadian dollars Average Annual Cost ($) Average Mined ($/t) Average Processed ($/t) A Mine 92,397, B Process 19,842, C Power 22,859, D Freight 16,986, E G&A 82,486, F Management Fee 7,904, G Sorting Costs 2,894, Total 245,368, *At December 31, 2016, the GK Diamond Mine was still ramping up and had not declared commercial production. 12

15 Other Relevant Data and Information A full time environmental staff is responsible for monitoring, directing and reporting environmental matters. The GK Diamond Mine has at all times since inception been in compliance with all permits and there are no outstanding liabilities or charges known at this time. Ore produced from the mine is brought to the ore processing plant on site which has operated continuously since the beginning and kept pace with demands. The processing plant uses no chemicals or reagents. Gravity based methods rely on the relatively heavier weight of diamonds to separate them. The process involves crushing, screening, separation in dense media (ferro silicon) and x ray sorting. The recovered diamonds are separated and packaged by size, weighed, secured in a vault to await transport, packed into a special container and flown discreetly to the high security sorting facility in the city of Yellowknife. In Yellowknife, the diamonds are cleaned, sorted and split into the Company s 49% share and De Beer s 51% share. The cleaning and sorting facility s quality management earned ISO 9001 certification. The Company s share of the diamonds is transported from Yellowknife to WDM in India where the rough diamonds are cleaned and sorted into saleable packages before being sent to Bonas in Antwerp where the diamonds are sold into international markets. Social and Environmental Policies Aboriginal Issues and Local Resources at the GK Diamond Mine Employment Gahcho Kué Mine employees approximately 360 full time employees (excluding long term contractors), 45% of whom reside in the north. Approximately 20% of the total are Aboriginal. Ni Hadi Xa, the Aboriginal led environmental monitoring agreement for the Gahcho Kué Mine, is in its third year of operations. The group is comprised of 5 Aboriginal parties (LKDFN, DKFN, NWTMN, NSMA, and TG) and De Beers. There are 4 employees including an on site Environmental Monitor, a Technical Coordinator, a Traditional Knowledge Administrator, and a Traditional Knowledge Monitor. 75% of NHX employees are Aboriginal and 100% are Northern residents. In 2016, NHX constructed a Traditional Knowledge cabin on the northern end of Fletcher Lake, approximately 30 km north of the mine. The cabin serves as the base for the Full time Traditional Knowledge monitors to observe the effects of the mine on the environment. In 2017, NHX will launch the Family Culture Program, which involves community members from each of the 5 Aboriginal Parties travelling to the cabin during the ice free season to practice traditional methods of watching over the land. All observations collected will be shared with De Beers in an effort to ensure traditional knowledge is incorporated into mine planning and operations. Environmental Requirements for the GK Diamond Mine The GK Diamond Mine is subject to environmental requirements and conditions of operation contained in several statutes and administered by Canadian federal and Northwest Territorial authorities. In addition to federal and territorial requirements, the GK Diamond Mine must also comply with the Environmental Agreements. These requirements and conditions may change from time to time, and a breach of legislation may result in the imposition of fines or other penalties. Environmental legislation continues to evolve in a manner such that standards, enforcement, fines and other penalties for non compliance are becoming stricter. Environmental assessments of proposed projects carry a heightened degree of responsibility for companies, directors, officers and employees. The cost of compliance with changes in government regulations has the potential to reduce the profitability of future operations. To the best of 13

16 the Company s knowledge, the GK Diamond Mine is in compliance with environmental laws and regulations currently in effect in the Northwest Territories applicable to its operations. Federal requirements are administered by Environment Canada, Fisheries and Oceans, the Department of Indian Affairs and Northern Development, Natural Resources Canada and Transport Canada. Environmental laws and regulations that have a potential impact on the GK Diamond Mine include those that protect air quality, water quality, archeological sites, migratory birds, animals and fish. Other important laws and regulations applicable to the GK Diamond Mine are those that regulate mine development, land use, water use and waste disposal, release of contaminants, water spills, spill responses, transportation of dangerous goods, explosives use and the maintenance of navigable channels. As a result of Devolution, responsibility for the administration and management of public lands, water, mineral and other natural resources in the Northwest Territories transferred from the Government of Canada to the Government of Northwest Territories ( GNWT ) effective as of April 1, The GNWT became responsible for the management of onshore lands, the issuance of rights and interests with respect to onshore minerals, and collection of royalties in the Northwest Territories. The Government of Canada will retain responsibility for the remediation of existing contaminated waste sites, the administration of offshore lands and the negotiation of Aboriginal Rights agreements. Northwest Territories requirements are administered by the various territorial government departments and Workers Safety and Compensation Commission Prevention Services as well as by co management Boards charged with regulating land and water use in designated areas. Laws and regulations that might impact the GK Diamond Mine include those that protect heritage resources, wildlife and the environment and those that regulate workplace safety, mine safety, training in the handling of dangerous materials, road transportation, air quality, and the use of hazardous substances and pesticides. De Beers holds a number of permits and licenses to address each of these areas and regularly reports on compliance obligations to the respective government departments or regulator. The primary environmental permits were issued on August 11, 2014 (Land Use Permit) and September 24, 2014 (Water License), respectively by the Mackenzie Valley Land and Water Board allowing for the construction and operation of the Gahcho Kué Diamond Mine. The Environmental Agreement relating to the GK Diamond Mine requires that security be provided to cover estimated reclamation and remediation costs. During 2014, the Company reached an agreement with De Beers, the Operator of the Joint Venture whereby the Company was required to post its proportionate share of the security deposit used to secure the reclamation obligations for the GK Diamond Mine. Currently, De Beers, on behalf of the Joint Arrangement has provided letters of credit in the amount of $47,794,132 million (100%) to the GNWT as security for the reclamation obligations for the GK Diamond Mine. The Company pays De Beers a fee of 3% on its proportionate share of reclamation obligation. Requirements in the Environmental Agreement are monitored by the Environmental Monitoring Advisory Board ( EMAB ), which was established as part of the agreement. EMAB includes board members from each of the signatories to the Environmental Agreement and operates at arm s length and independent of the parties to the Environmental Agreement as a public watchdog of the regulatory process and implementation of the Environmental Agreement. Risk Factors The Company is subject to a number of risks and uncertainties as a result of its operations. Readers should give careful consideration to the following risks, each of which could have a material adverse effect on the Company s business prospects or financial condition. 14

17 Nature of Mining The Company s mining operation is subject to risks inherent in the mining industry, including variations in grade and other geological differences, unexpected problems associated with required water retention dikes, water quality, surface and underground conditions, processing problems, equipment performance, accidents, labour disputes, risks relating to the physical security of the diamonds, force majeure risks and natural disasters. The Company s mineral properties, because of their remote northern location and access only by winter road or by air, are subject to special climate and transportation risks. These risks include the inability to operate or to operate efficiently during periods of extreme cold, the unavailability of materials and equipment, and increased transportation costs due to the late opening and/or early closure of the winter road. Such factors can add to the cost of mine development, production and operation and/or impair production and mining activities, thereby affecting the Company s profitability. Joint Ventures The Company s participation in the mining sector of the diamond industry is through its ownership interest in the GK Diamond Mine group of mineral claims. The GK Diamond Mine is a joint arrangement between De Beers (51%) and the Company (49%). The Company s joint venture interest in the GK Diamond Mine is subject to the risks normally associated with the conduct of joint ventures, including: (i) disagreement with a joint venture partner about how to develop, operate or finance operations; (ii) that a joint venture partner may not comply with the underlying agreements governing the joint ventures and may fail to meet its obligations thereunder to the Company or to third parties; (iii) that a joint venture partner may at any time have economic or business interests or goals that are, or become, inconsistent with the Company s interests or goals; (iv) the possibility that a joint venture partner may become insolvent; and (v) the possibility of litigation with a joint venture partner. Diamond Prices and Demand for Diamonds The profitability of the Company is dependent upon the Company s mineral properties and the worldwide demand for and price of diamonds. Diamond prices fluctuate and are affected by numerous factors beyond the control of the Company, including worldwide economic trends, worldwide levels of diamond discovery and production, and the level of demand for, and discretionary spending on, luxury goods such as diamonds. Low or negative growth in the worldwide economy, renewed or additional credit market disruptions, natural disasters or the occurrence of terrorist attacks or similar activities creating disruptions in economic growth could result in decreased demand for luxury goods such as diamonds, thereby negatively affecting the price of diamonds. Similarly, a substantial increase in the worldwide level of diamond production or the release of stocks held back during recent periods of lower demand could also negatively affect the price of diamonds. In each case, such developments could have a material adverse effect on the Company s results of operations. Cash Flow and Liquidity The Company s liquidity requirements fluctuate from quarter to quarter and year to year depending on, among other factors, the seasonality of production at the GK Diamond Mine, the seasonality of mine operating expenses, exploration expenses, capital expenditure programs, the number of rough diamond sales events conducted during the quarter, and the volume, size and quality distribution of rough diamonds delivered from the Company s mineral properties and sold by the Company in each quarter. 15

18 The Company s principal working capital needs include investments in inventory, prepaid expenses and other current assets, and accounts payable and income taxes payable and interest and loan repayments. Commencing on March 31, 2017, the Company is subject to maintaining a cash call reserve account balance based upon certain budgeted amounts which will vary over the term of the Loan Facility. Approximately US$27.9 million was originally required to be deposited in the cash call reserve account on March 31, On March 27, 2017, the Company received a waiver deferring the requirement to fund the cash call reserve account to May 31, As conditions of the waiver, certain information must be furnished to the lenders by May 31, 2017 including: an updated financial model and life of mine plan; a diamond pricing valuation comparison between production to date and historic samples from April 2011 to be prepared by the lender s independent diamond consultant; and a reconciliation of cumulative diamond production including a statistical comparison of total diamond carats, size and quality. The failure to comply with any of the requirements of the waiver constitutes an event of default. Under the terms of the Loan Facility Agreement, the Company is also required to fund reserve accounts (Note 9 in the financial statements) estimated as follows for the period from January 1, 2017 to December 31, 2017: Date additional funding is required requirements September 2017 US $ 100,100,000 December ,900,000 At September 30, 2017, the Company can use the remaining balance available in the restricted cost overrun account (Note 6 in the financial statements) to fund a portion of the above reserve accounts. Based on the delay in achieving commercial production and current market prices in the diamond industry, management believes the Company will not be able to comply with the requirement to fully fund these reserve accounts and may not comply with the other financial covenants in the Loan Facility. Management expects the Company will seek additional waivers or amendments from the lenders as to the timing and amount of all of these funding requirements. There are no assurances the lenders will accommodate further waivers or amendments the Company will seek. If the Company is unable to fully fund the required reserve accounts, or is unable to comply with other financial covenants, and is not successful in obtaining suitable waivers or amendments, it would result in an event of default, and the Loan Facility outstanding balance would become payable on demand. Further, management may seek alternative sources of financing. These conditions indicate the existence of a material uncertainty that results in substantial doubt as to the Company s ability to continue as a going concern. The financial statements do not include the adjustments to the amounts and classification of assets and liabilities that would be necessary should the Company be unable to continue as a going concern. These adjustments may be material. There can be no assurance that the Company will be able to meet each or all of its liquidity requirements. A failure by the Company to meet its liquidity requirements could result in the Company failing to meet its joint venture commitments, or in the Company being in default of a contractual obligation, each of which could have a material adverse effect on the Company s business prospects or financial condition. Event of Default The Company s Loan Facility Agreement is subject to various terms and conditions. If any of the terms and conditions are not met, it could result in an event of default which could affect the Company s ability to continue as a going concern. 16

19 Economic Environment The Company s financial results are tied to the global economic conditions and their impact on levels of consumer confidence and consumer spending. The global markets have experienced the impact of a significant United States and international economic downturn since autumn A return to a recession or a weak recovery, due to recent disruptions in financial markets in the United States, the Eurozone with Brexit or elsewhere, budget policy issues in the United States, political upheavals in the Middle East and Ukraine, economic sanctions against Russia, and demonetization in India could cause the Company to experience revenue declines due to deteriorated consumer confidence and spending, and a decrease in the availability of credit, which could have a material adverse effect on the Company s business prospects or financial condition. The credit facilities essential to the diamond polishing industry are partially underwritten by European banks that are currently under stress. The withdrawal or reduction of such facilities could also have a material adverse effect on the Company s business prospects or financial condition. The Company monitors economic developments in the markets in which it operates and uses this information in its continuous strategic and operational planning in an effort to adjust its business in response to changing economic conditions. Synthetic Diamonds Synthetic diamonds are diamonds that are produced by artificial processes (e.g., laboratory grown), as opposed to natural diamonds, which are created by geological processes. An increase in the acceptance of synthetic gem quality diamonds could negatively affect the market prices for natural stones. Although significant questions remain as to the ability of producers to produce synthetic diamonds economically within a full range of sizes and natural diamond colours, and as to consumer acceptance of synthetic diamonds, synthetic diamonds are becoming a larger factor in the market. Should synthetic diamonds be offered in significant quantities or consumers begin to readily embrace synthetic diamonds on a large scale, demand and prices for natural diamonds may be negatively affected. Additionally, the presence of undisclosed synthetic diamonds in jewelry would erode consumer confidence in the natural product and negatively impact demand. Currency Risk Currency fluctuations may affect the Company s financial performance. Diamonds are sold throughout the world based principally on the US dollar price, and the Company reports its financial results in Canadian dollars. A majority of the costs and expenses of the GK Diamond Mine are incurred in Canadian dollars. From time to time, the Company may use derivative financial instruments to manage its foreign currency exposure. Licences and Permits The Company s mining operations require licences and permits from the Canadian and Northwest Territories governments, and the process for obtaining, amending and renewing such licences and permits often takes an extended period of time and is subject to numerous delays and uncertainties. Such licences and permits are subject to change in various circumstances. Failure to comply with applicable laws and regulations may result in injunctions, fines, criminal liability, suspensions or revocation of permits and licences, and other penalties. There can be no assurance that De Beers, as the operator of the GK Diamond Mine, will be at all times in compliance with all such laws and regulations and with their applicable licences and permits, or that De Beers will be able to obtain on a timely basis or maintain in the future all necessary licences and permits. 17