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STORNOWAY DIAMOND CORPORATION

CONDENSED INTERIM CONSOLIDATED FINANCIAL STATEMENTS

For the three and nine months ended September 30, 2017 (Unaudited)

YE 2015 v9 Date: June 14, 2015

Reviewed by: JCD, EC

of 24 – See Accompanying Notes –

Stornoway Diamond Corporation Interim Consolidated Statements of Financial Position As at September 30, 2017 and December 31, 2016 Unaudited (expressed in thousands of Canadian dollars)

Notes

September 30, 2017

December 31, 2016

ASSETS

Current

Cash and cash equivalents 3 43,430 42,293

Short-term investments 4 9,217 43,695

Receivables 2,953 4,910

Inventories 5 63,073 39,777

Prepaid expenses and deposits 933 1,237

Derivative financial instruments 6 1,056 –

120,662 131,912

Deferred transaction costs 8 9,085 12,013

Inventories 5 1,094 4,229

Property, plant and equipment 7 1,105,449 1,102,084

Other financial assets 12,595 9,068

Deferred income tax assets 51,728 52,307

1,179,951 1,179,701

1,300,613 1,311,613

LIABILITIES

Current

Payables and accrued liabilities 32,997 34,874

Current portion of long-term debt 8 23,319 17,798

Current portion of deferred revenue 10 22,539 26,100

Other liabilities 47 340

Derivative financial instruments 6 934 –

79,836 79,112

Long-term debt 8 134,271 128,936

Convertible debentures 9 83,744 102,769

Deferred revenue 10 282,399 296,706

Asset retirement obligation 15,489 13,329

Deferred income tax liabilities 14,576 1,220

530,479 542,960

610,315 622,072

EQUITY

Share capital 12 866,321 864,868

Contributed surplus 42,286 39,526

Accumulated other comprehensive income 254 ─

Deficit (218,563) (214,853)

690,298 689,541

1,300,613 1,311,613

ON BEHALF OF THE BOARD:

“Ebe Scherkus”, Director

“Hume Kyle”, Director


Stornoway Diamond Corporation Interim Consolidated Statements of Income (Loss) and Comprehensive Income (Loss) For the three and nine months ended September 30, 2017 and 2016 Unaudited (expressed in thousands of Canadian dollars except for loss per share and weighted average number of shares outstanding)

For the three months ended For the nine months ended

Notes

September 30, 2017

September 30, 2016

September 30, 2017

September 30, 2016

Revenues 49,977 ─ 141,019 ─

Cost of goods sold

Operating expenses 13 29,561 ─ 73,193 ─

Royalty expenses 15 938 ─ 2,606 ─

Depreciation 7 18,666 ─ 43,679 ─

49,165 ─ 119,478 ─

Income from mining operations 812 ─ 21,541 ─

Selling, general and administrative

expenses 13 4,281 3,151 13,604 8,811

Exploration expenses 179 432 1,760 2,341

Income (loss) from operations (3,648) (3,583) 6,177 (11,152) Other (income) expenses

Gain on sale of interests in exploration properties – ─ (400) ─

Financial expenses 14 5,410 11,069 4,891 25,461

Foreign exchange (gain) loss (4,312) 896 (8,572) (4,234)

1,098 11,965 (4,081) 21,227

Net income (loss) before tax (4,746) (15,548) 10,258 (32,379)

Current income tax (recovery) 11 256 ─ 381 (1,100)

Deferred income tax (recovery) 11 (1,929) ─ 13,587 1,100

(1,673) ─ 13,968 ─

Net (loss) (3,073) (15,548) (3,710) (32,379)

Loss per share – Basic and Diluted 12c Nil (0.02) Nil (0.04)

Other comprehensive income (loss):

Items that may be reclassified to net income (loss) Unrealized gain on available-for-sale

investments 20 ─ 100 ─ Net gain (loss) on change in fair value of

derivative financial instruments designated as cash flow hedges 6 (220) ─ 209 ─

Deferred income tax 6,11 59 ─ (55) ─

(161) ─ 154 ─

(141) 254

Comprehensive loss (3,214) (15,548) (3,456) (32,379)


Stornoway Diamond Corporation Interim Consolidated Statements of Changes in Equity For the nine months ended September 30, 2017 and 2016 Unaudited (expressed in thousands of Canadian dollars, except for the number of shares)

Share capital

Number of

shares Amount Contributed Surplus Accumulated Other

Comprehensive Income Deficit Total

Balance at January 1, 2017 828,452,337 864,868 39,526 ─ (214,853) 689,541

Net loss for the period ─ ─ ─ ─ (3,710) (3,710) Other comprehensive income ─ ─ ─ 254 ─ 254

Total comprehensive income (loss) for the period ─ ─ ─ 254 (3,710) (3,456) Exercise of options 1,447,500 1,453 (433) ─ ─ 1,020 Share-based compensation ─ ─ 3,193 ─ ─ 3,193

Balance at September 30, 2017 829,899,837 866,321 42,286 254 (218,563) 690,298

Balance at January 1, 2016 732,310,440 765,649 44,804 ─ (234,494) 575,959

Net loss for the period ─ ─ ─ ─ (32,379) (32,379) Exercice of warrants 91,912,732 88,954 (6,232) ─ ─ 82,722 Exercice of options 1,324,999 1,443 (488) ─ ─ 955 Share-based compensation ─ ─ 1,511 ─ ─ 1,511

Balance at September 30, 2016 825,548,171 856,046 39,595 ─ (266,873) 628,768

Equity is solely attributable to shareholders of Stornoway Diamond Corporation


Stornoway Diamond Corporation Interim Consolidated Statements of Cash Flows For the three and nine months ended September 30, 2017 and 2016 Unaudited (expressed in thousands of Canadian dollars)


Cash Flow Provided By (Used In) Notes September 30,

2017 September 30,

2016 September 30,

2017 September 30,

2016

Operating Activities

Net income (loss) (3,073) (15,548) (3,710) (32,379)

Items not affecting cash

Depreciation 7 18,688 27 43,746 74

Accretion 2,706 57 7,536 166

Capitalized interest 8b – ─ 1,672 ─ Gain on sale of interests in exploration

properties – ─ (400) ─

Gain on investment – ─ – (15)

Loss on disposal of assets 71 38 71 38

Amortization of deferred transaction costs – 869 – 869

Deferred income tax expenses (recovery) (1,929) ─ 13,587 1,100

Foreign exchange (gain) loss (4,355) 908 (8,460) (4,314)

(Gain) loss on fair value of derivatives (1,900) 9,879 (16,843) 23,699

Share-based compensation 12 601 281 2,418 1,068

Deferred revenue from Stream 10 – ─ – 116,267

Amortization of deferred revenue from Stream 10 (5,965) ─ (17,868) ─ Amortization of deferred transaction costs

from Stream 8g 173 ─ 532 ─

Changes in non-cash working capital

Decrease in receivables 1,196 7,130 1,957 8,318 Decrease (increase) in prepaid expenses and

deposits 110 278 (213) (38)

Increase in inventory (584) (18,418) (9,651) (24,556)

Increase in payables and accrued liabilities 9,637 8,804 23,611 9,236

15,376 (5,695) 37,985 99,533

Investing Activities

Property, plant and equipment 7, 16 (20,785) (51,734) (89,640) (242,036)

Mining tax credit received 7 – ─ 9,756 ─ Proceeds from sale of fixed assets to be leased

back 1,317 528 3,202 10,050

Increase in other financial assets (1,033) (809) (3,311) (2,560) Decrease (increase) in short-term investments,

net 10,500 (5,485) 34,478 68,959

(10,001) (57,500) (45,515) (165,587)

Financing Activities

Options and warrants exercised 12 702 72,502 1,020 83,677

Proceeds from long-term debt, net of issue costs – ─ 47,525 ─

Deferred transaction costs – ─ (247) ─

Repayment of debt (3,116) (1,561) (39,357) (4,287)

(2,414) 70,941 8,941 79,390

Effect of foreign exchange rate changes on cash and cash equivalents (250) 212 (274) (2,611)

Net increase in cash and cash equivalents 2,711 7,958 1,137 10,725

Cash and cash equivalents – Beginning of Period 40,719 60,859 42,293 58,092

Cash and cash equivalents – End of Period 43,430 68,817 43,430 68,817

See supplemental schedule of non-cash investing and financing transactions (Note 16)

Stornoway Diamond Corporation Notes to Consolidated Financial Statements For the three and nine months ended September 30, 2017 and 2016 (tabular amounts expressed in thousands of Canadian dollars, unless otherwise stated)

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Nature of Operations

Stornoway Diamond Corporation (“Stornoway” or the “Corporation”) is a diamond mining corporation existing under the Canada Business Corporations Act and listed on the Toronto Stock Exchange (“TSX” - SWY). The Corporation’s primary asset is the Renard Diamond Mine in Québec. Stornoway formally declared commercial production at Renard on January 1, 2017. The head office and principal address of the Corporation is Suite 400, 1111 St.-Charles Street West, Longueuil, Québec, J4K 5G4. The Corporation’s condensed interim consolidated financial statements include Stornoway and the following wholly-owned subsidiaries : Ashton Mining of Canada Inc. (“Ashton”), Stornoway Diamonds (Canada) Inc. (“SDCI”) and FCDC Sales and Marketing Inc. (“FCDC”). The condensed interim consolidated financial statements have been prepared on a going concern basis, which assumes that the Corporation will be able to realize its assets and discharge its liabilities in the normal course of business as they come due into the foreseeable future.

Summary of Significant Accounting Policies

Basis of Preparation

These condensed interim consolidated financial statements have been prepared by the Corporation in accordance with International Financial Reporting Standards (“IFRS”), as issued by the International Accounting Standards Board (“IASB”), including International Accounting Standard 34, Interim Financial Reporting (“IAS 34”), using the same accounting policies and methods of application as the audited consolidated financial statements of the Corporation as at and for the year ended December 31, 2016, with the exception of the accounting policies adopted in the current quarter and described below. These condensed interim consolidated financial statements do not include all of the information and note disclosures required by IFRS for the annual consolidated financial statements and should therefore be read in conjunction with the audited consolidated financial statements of the Corporation as at and for the year ended December 31, 2016, which have been prepared in accordance with IFRS. These condensed interim consolidated financial statements were approved for release by the Board of Directors on November 1, 2017.

New accounting policies adopted in the current year

Derivatives and hedging activities

Derivatives are initially recognized at fair value on the date a derivative contract is entered into and are subsequently remeasured to their fair value at the end of each reporting period. The accounting for subsequent changes in fair value depends on whether the derivative is designated as a hedging instrument, and if so, the nature of the item being hedged. The Corporation designates certain derivatives as either:

• Fair value hedges: hedges of the fair value of recognized assets or liabilities or a firm commitment;

• Cash flow hedges: hedges of a particular risk associated with the cash flows of recognized assets and liabilities and highly probable forecast transactions; or

• Net investment hedges: hedges of a net investment in a foreign operation.


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Summary of Significant Accounting Policies – Continued –

Derivatives and hedging activities – Continued – For the three and nine months ended September 30, 2017, the derivatives entered into by the Corporation were all designated as cash flow hedges. The Corporation documents at the inception of the hedging transaction the relationship between hedging instruments and hedged items, as well as its risk management objective and strategy for undertaking various hedge transactions. The Corporation also documents its assessment, both at hedge inception and on an ongoing basis, of whether the derivatives that are used in hedging transactions have been and will continue to be highly effective in offsetting changes in fair values or cash flows of hedged items.

The fair values of derivative financial instruments used for hedging purposes are disclosed in Note 6 – Fair Value. Movements in the hedging reserve presented in accumulated other comprehensive income are shown in the consolidated statements of income (loss) and comprehensive income (loss). The full fair value of a hedging derivative is classified as a non-current asset or liability when the remaining maturity of the hedged item is more than 12 months; it is classified as a current asset or liability when the remaining maturity of the hedged item is less than 12 months. Cash flow hedges

The effective portion of changes in the fair value of derivatives that are designated and qualify as cash flow hedges is recognized in other comprehensive income and accumulated other comprehensive income in equity. The gain or loss relating to the ineffective portion is recognized immediately in Interim Consolidated Statement of Income (Loss) and Comprehensive Income (Loss) within Other (income) expenses.

Amounts in accumulated other comprehensive income are reclassified to net income (loss) in the same periods that the hedged item are reported in net income (loss). The gain or loss relating to the effective portion of forward foreign exchange contracts hedging foreign currency denominated sales is recognized in Interim Consolidated Statement of Income (Loss) and Comprehensive Income (Loss) within revenues.

When a hedging instrument expires or is sold or terminated, or when a hedge no longer meets the criteria for hedge accounting, any cumulative gain or loss existing in accumulated other comprehensive income at that time remains in equity and is recognized when the forecast transaction is ultimately recognized in net income (loss). When a forecast transaction is no longer expected to occur, the cumulative gain or loss that was reported in accumulated other comprehensive income is immediately reclassified to net income (loss). Derivatives that do not qualify for hedge accounting When certain derivative instruments do not qualify for hedge accounting, changes in the fair value of any derivative instrument that does not qualify for hedge accounting are recognized immediately in net income (loss) and are included in Other (income) expenses.


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Cash and Cash Equivalents

September 30,

2017 December 31

2016

Cash 32,595 7,034

Cash equivalents 10,835 35,259

43,430 42,293

As at September 30, 2017, cash equivalents totalled $10.8 million (December 31, 2016 – $35.3 million) consisting of banker’s acceptances issued by Canadian banks with an average interest rate of 0.88%. These investments are immediately redeemable without penalty. As at September 30, 2017, cash and cash equivalents included US$ 22.3 million or $ 27.8 million (December 31, 2016 - US$11.3 million or $15.2 million) denominated in USD.

Short-Term Investments

As at September 30, 2017, short-term investments totalled $9.2 million (December 31, 2016 - $43.7 million) consisting of guaranteed investment certificates issued by Canadian banks, with an average interest rate of 0.96%. These investments are immediately redeemable without penalty.

Inventories

September 30,

2017 December 31,

2016

Materials and supplies 11,988 10,456

Stockpile ore 10,531 15,766

Rough diamonds – work in progress 12,442 2,912

Rough diamonds – finished goods 29,206 14,872

64,167 44,006

Less: non-current portion 1,094 4,229

Current portion 63,073 39,777

The amount of depreciation included within inventory at September 30, 2017 is $10.1 million. The cost of inventory that was charged to cost of goods sold represents mostly mine operating expenses and depreciation of property, plant and equipment.


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Financial Instruments and Risk Management

Fair value

The carrying value of cash and cash equivalents, short-term investments, receivables, other financial assets (excluding available-for-sale investments), and payables and accrued liabilities approximate their fair values due to their immediate or short-term maturity.

The Corporation defines fair value as the price that would be received to sell an asset or paid to transfer a liability in an arm’s length transaction between market participants at the measurement date. When appropriate, the Corporation adjusts the valuation models to incorporate a measure of credit risk.

The Corporation uses the following hierarchy for determining and disclosing the fair value of financial instruments by valuation technique:

• Level 1: based on quoted (unadjusted) prices in active markets for identical assets or liabilities;

• Level 2: based on inputs which have a significant effect on fair value that are observable, either directly or indirectly from market data; and

• Level 3: based on inputs which have a significant effect on fair value that are not observable from market data.

The following tables present a comparison of carrying and fair values for available-for-sale investments presented in other financial assets, long-term debt and the convertible debentures, with reference to the fair-value hierarchy level in which they have been classified:

As at September 30, 2017 As at December 31, 2016

Level Carrying Value Fair Value Carrying Value Fair Value

Other Financial Assets

Available-for-sale investments Level 1 500 500 – –

Long-Term Debt

Unsecured debt facility # 1 (Note 8a) Level 3 15,503 16,538 18,533 20,000

Unsecured debt facility # 2 (Note 8b) Level 3 – – 28,419 28,419

Other unsecured debt (Note 8c) Level 3 12,219 12,219 12,717 12,717

Renard Mine Road debt facility (Note 8d) Level 3 51,833 52,009 49,781 49,963

Senior Secured Loan (Note 8e) Level 3 45,288 50,000 – –

Obligations under finance leases (Note 8f) Level 3 32,747 32,747 37,284 37,284

157,590 163,513 146,734 148,383

Convertible debentures

Host (Note 9) Level 3 69,284 71,888 69,911 72,515

Derivative (Note 9) Level 3 14,460 14,460 32,858 32,858

83,744 86,348 102,769 105,373

The fair values for derivative financial instruments designated as hedges is as follows:

As at September 30, 2017 As at December 31, 2016

Level Financial

assets Financial liabilities

Financial assets

Financial

liabilities

Foreign currency options Level 2 1,056 934 – –


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Financial Instruments and Risk Management – continued –

Financial risk management

The Corporation is exposed to a variety of financial risks by virtue of its activities: market risk (foreign exchange risk and interest rate risk), credit risk and liquidity risk. The Corporation’s objective with respect to risk management is to manage these risks within acceptable tolerance levels in order to reduce potential adverse effects on the Corporation’s ability to develop and operate the Renard Diamond Mine and to have sufficient financial resources to meet its financial obligations, including repayment of debt and convertible debentures as they become due. Management is responsible for establishing controls and procedures to ensure that financial risks are mitigated to acceptable levels. The Corporation uses derivative financial instruments solely to hedge certain financial exposures. Market risk (i) Foreign exchange risk Currency risk is the risk that future cash flows or fair value of a financial instrument will fluctuate because of changes in foreign exchange rates. The Corporation is exposed to foreign currency risk principally as a result of its revenues being denominated in US dollars, while the majority of the Corporation’s current and anticipated capital and operating expenditures are denominated in Canadian dollars. Additionally, a portion of the Corporation’s financial assets, its convertible debentures and obligations under capital leases are denominated in US dollars. Excluding the currency options described furher below, the Corporation’s statement of financial position had the following foreign currency exposures at period-end:

September 30,

2017 December 31,

2016

(US$) (US$) USD financial instruments measured at amortized cost:

Cash, cash equivalents and short-term investments 22,305 11,314 Other financial assets 3,000 3,000 Obligations under finance leases (26,248) (27,773) Convertible debentures – host portion (55,516) (52,067)

(56,459) (65,526) USD financial instruments measured at fair-value through net income (loss):

Convertible debentures – Derivative (11,586) (24,471)

Net exposure (68,045) (89,997)

As at September 30, 2017, management estimates that a 10% depreciation of the Canadian dollar relative to the US dollar, assuming all other variables remained constant, would have impacted net loss by a loss of approximately $8.5 million (December 31, 2016 – loss of $12.1 million), while a 10% appreciation of the Canadian dollar relative to the U.S. dollar would have yielded an equal but opposite effect on net loss. The Corporation’s risk management program policy authorizes hedging up to 75% of its foreign currency exposure, on a rolling 24-month basis. From time to time, the Corporation mitigates its foreign exchange exposure to US dollar denominated sales by entering into forward foreign exchange and option contracts. The


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Financial risk management – continued –

(i) Foreign exchange risk – continued –

Corporation has designated these contracts as a cash flow hedge of highly probable future revenue. Below is a summary of derivative financial contracts entered into:

As at September 30, 2017

Exchange rate

range Maturity Notional amount Fair value (CA$)

Derivatives designated as cash flow hedges (revenues): Currency option collars to sell (US$ for CA$) 1.3250 – 1.3500 0 to 12 months US$ 7,500 584 Currency option collars to sell (US$ for CA$) 1.2425 – 1.2660 0 to 12 months US$ 7,500 35 Currency option collars to sell (US$ for CA$) 1.2000 – 1.2650 0 to 12 months US$ 35,000 (318) Forward contracts to sell (US$ for CA$) 1.2360 0 to 12 months US$ 17,500 (179)

As at December 31, 2016, the Corporation had not entered into foreign exchange forward contracts or currency option instruments.

The fair values of forward foreign exchange and option contracts, as applicable, are determined using the discounted value of the difference between the value of the contract at expiry calculated using the contracted exchange rate and the exchange rate a financial institution would use if it renegotiated the same contract under the same conditions as at the consolidated balance sheet date. The discount rates are adjusted for the credit risk of the Corporation or of the counterparty, as applicable. When determining credit risk adjustments, the Corporation considers master netting agreements, if applicable.

The following table represents the movement in accumulated other comprehensive income:

September 30,

2017 December 31,

2016

Accumulated other comprehensive income, beginning of year – – Net gain on derivatives designated as cash flow hedges, effective portion 666 – Amounts reclassified from accumulated other comprehensive income to net

loss, and included in Revenue (457)

Deferred tax (55) –

Accumulated other comprehensive income 154 –

(ii) Interest rate risk

Interest rate risk is the risk that the future cash flow or fair value of a financial instrument will fluctuate due to changes in market interest rates. Financial assets and liabilities with variable interest rates expose the Corporation to interest rate risk with respect to its cash flow. The risk that the Corporation will realize a loss as a result of a decline in the fair value of any short-term securities included in cash and cash equivalents and short-term investments is limited because these investments, although readily convertible into cash, are generally held-to-maturity.

The Corporation’s exposure to interest rate risk related to its financial liabilities is limited to its floating rate equipment financing facility (note 8f)) and senior secured loan (note 8e)). All other long-term debt is based on fixed interest rates. As of September 30, 2017, management estimates that if interest rates on long-term debt had been 100 basis points higher throughout the period, assuming all other variables remained constant, impact for the three and nine month period ended September 30, 2017 would have been a loss of approximately $0.2 and $0.4 million, while a decrease by 100 basis points would have yielded an equal but opposite effect on net loss.


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Financial risk management – continued – Credit Risk

Credit risk is the risk of financial loss to the Corporation if a customer or counterparty to a financial instrument fails to meet its contractual obligations. The Corporation manages this risk by investing its cash in highly rated short-term securities. The maximum exposure to credit risk at the reporting date is the carrying value of the Corporation’s financial assets. As at September 30, 2017, the Corporation was holding $52.6 million (December 31, 2016 – $86.0 million) of cash, cash equivalents and short-term investments (see Notes 3 and 4). The credit risk associated with forward foreign exchange and option contracts arises from the possibility that a counterparty to such derivative contracts, in which the Corporation has an unrealized gain, fails to perform according to the terms of the arrangement. The credit risk, however, is not related to the notional amount; it is rather limited to the change in foreign exchange rates attributable to such notional amount. Liquidity Risk

Liquidity risk is the risk that an entity will encounter difficulty in meeting obligations associated with financial liabilities that are settled by delivering cash or another financial asset. On June 28, 2017, the Corporation drew $50 million on the Senior Secured Loan. The proceeds were mainly used for the repayment of Unsecured Debt Facility #2 (see Note 8b) which carried a higher interest rate. The Corporation, if needed, could also draw from the remaining available balance of $80.1 million from the Senior Secured Loan. As long as the Corporation continues to meet the conditions and covenants related to the Senior Secured Loan, the Corporation anticipates that it has sufficient liquidity to meet its capital requirements up to the commencement of the underground mining operations. Longer-term risks associated with satisfying its contractual obligations in respect of its debt and convertible debentures remain and are dependent on the Corporation’s ability to generate future cash flows. The Corporation manages its liquidity risk by forecasting cash flow requirements for its planned operating activities as well as its investing and financing activities. As at September 30, 2017, the Corporation had current monetary assets of $52.6 million to settle current monetary liabilities of $56.3 million, which includes payables and accrued liabilities, and the current portion of long-term debt. The Corporation’s trade and other payables have contractual maturities of less than 30 days and are subject to normal trade terms. The Corporation regularly evaluates its available liquidity to ensure it has sufficient cash resources to meet its operating and capital requirements. At September 30, 2017, the Corporation is committed to minimum future principal and interest payments for debt, as follows:

Unsecured debt facility

(# 1) (Note 8a)

Other unsecured

debt (Note 8c)

Renard mine road

debt facility (Note 8d)

Senior

Secured Loan

(Note 8e)

Obligations under

finance leases

*(Note 8f)

Convertible debentures

*(Note 9) Total

Year ending December 31, 2017 1,649 393 6,000 4,573 2,297 3,169 18,081 Year ending December 31, 2018 6,254 1,571 6,000 10,691 9,152 6,338 40,006 Year ending December 31, 2019 5,700 1,571 6,000 10,123 8,946 6,338 38,678 Year ending December 31, 2020 5,148 1,571 6,000 9,555 8,734 6,338 37,346 Year ending December 31, 2021 1,979 1,571 10,419 8,987 5,526 104,691 133,173 Thereafter – 9,430 56,505 19,984 2,181 – 88,100

20,730 16,107 90,924 63,913 36,836 126,874 355,384

* Amounts in US dollars are subject to variable interest rates and are determined based on the current spot rate at September 30, 2017.


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Property, Plant and Equipment

Buildings, Camp and

Accommo-dations

Roads & Airstrip

Leasehold Improvements

Exploration, Laboratory and Office

Equipment Vehicles and Machinery (3)

Mineral Properties

Mine Under Constructilon Total

Cost

As at December 31, 2015 100,253 51,417 371 3,970 45,611 246,425 400,008 848,055

Additions ─ ─ ─ 180 21,828 787 243,428 266,223

Disposals ─ ─ ─ ─ (53) ─ ─ (53)

Capitalized interest ─ ─ ─ ─ ─ ─ 25,588 25,588

Capitalized depreciation(2) ─ ─ ─ ─ ─ ─ 27,432 27,432 Pre-commercial production

revenue ─ ─ ─ ─ ─ ─ (9,032) (9,032)

Tax credit refund ─ ─ ─ ─ ─ (500) ─ (500) Transfer from Mine Under

Construction (4) 426,201 8,728 ─ 2,665 926 237,427 (687,424) (11,477)

As at December 31, 2016 526,454 60,145 371 6,815 68,312 484,139 ─ 1,146,236

As at December 31, 2016 526,454 60,145 371 6,815 68,312 484,139 ─ 1,146,236

Additions 29,825 336 ─ 7 9,335 27,516 ─ 67,019

Disposals ─ ─ ─ ─ (92) ─ ─ (92)

Tax credit refund ─ (9,756) ─ ─ ─ ─ ─ (9,756)

Capitalized depreciation(2) ─ ─ ─ ─ ─ 19,402 ─ 19,402

As at September 30, 2017 556,279 50,725 371 6,822 77,555 531,057 ─ 1,222,809

Accumulated depreciation

As at December 31, 2015 4,775 4,361 233 2,677 4,579 ─ ─ 16,625

Depreciation for the period(1) 13,658 3,602 44 699 5,812 3,717 ─ 27,532

Disposals ─ ─ ─ ─ (5) ─ ─ (5)

As at December 31, 2016 18,433 7,963 277 3,376 10,386 3,717 ─ 44,152

As at December 31, 2016 18,433 7,963 277 3,376 10,386 3,717 ─ 44,152

Depreciation for the period 27,704 2,868 33 982 5,019 36,623 ─ 73,229

Disposals ─ ─ ─ ─ (21) ─ ─ (21)

As at September 30, 2017 46,137 10,831 310 4,358 15,384 40,340 ─ 117,360

Net book value

As at December 31, 2016 508,021 52,182 94 3,439 57,926 480,422 ─ 1,102,084

As at September 30, 2017 510,142 39,894 61 2,464 62,171 490,717 ─ 1,105,449

(1) During the year ended December 31, 2016, assets were commissioned as they had reached their intended use; depreciation started concurrently with commissioning.

(2) A portion of the depreciation for the three and nine months ended September 30, 2017, is recorded as a project development cost in Mineral Properties, as it represents costs directly attributable to the underground mine currently in development.

(3) Included in vehicles and machinery are assets with a cost of 65.5 million acquired pursuant to a finance lease agreement (see Note 8f). For the nine months ended September 30, 2017, depreciation of these assets totalled $4.2 million (December 31, 2016 – $5.1 million).

(4) As assets at the Renard Diamond Mine were commissioned, the accumulated carrying value of each identifiable asset was transferred to the applicable category within property, plant and equipment. As at December 31, 2016, the net transfers amounted to $11.5 million, which represents materials and supplies inventory, and prepayments that are no longer associated with the cost of bringing the Renard Diamond Mine to the condition necessary for it to be capable of operating in the manner intended by management.


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Long-Term Debt

September 30, 2017

December 31, 2016

Unsecured Debt Facility #1 (Note 8a) 15,503 18,533 Unsecured Debt Facility #2 (Note 8b) – 28,419 Other Unsecured Debt (Note 8c) 12,219 12,717 Renard Mine Road Debt Facility (Note 8d) 51,833 49,781 Senior Secured Loan (Note 8e) 45,288 – Obligations under finance leases (Note 8f) 32,747 37,284

157,590 146,734 Less : current portion of long-term debt 23,319 17,798

Non-Current Long-Term Debt 134,271 128,936

a) Unsecured Debt Facility # 1

September 30,

2017 December 31,

2016

Opening balance 18,533 17,992 Accretion 432 541 Principal repayment (3,462) –

15,503 18,533 Less : current portion 4,231 4,231

Non-current portion 11,272 14,302

The loan bears interest at a rate of 12% per annum, payable in cash and principal is to be repaid in equal monthly instalments of $0.4 million commencing one month following the date of commercial production which was February 1, 2017. The loan matures May 3, 2021. b) Unsecured Debt Facility # 2

September 30,

2017 December 31,

2016

Opening balance 28,419 25,293 Capitalized interest 1,672 3,126 Repayment (30,091) –

– 28,419 Less : current portion – 2,030

Non-current portion – 26,389

On June 28, 2017, the Corporation drew on tranche A of the Senior Secured Loan (see Note 8e), and fully repaid the Unsecured Debt Facility #2 with the proceeds received in accordance with the Senior Loan agreement.


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Long-Term Debt – continued –

c) Other Unsecured Debt

September 30,

2017 December 31,

2016

Opening balance 12,717 12,717 Repayment (498) –

12,219 12,717 Less : current portion 918 723


The commencement of construction on July 10, 2014 triggered a liability of $12.7 million pursuant to the terms of an existing agreement between the Corporation and an arm’s length third party. Under the terms of this agreement, the Corporation will pay interest at a rate of 5.5% per annum quarterly in arrears on the principal amount of the liability during the construction period. Principal repayments will be made quarterly, in arrears, starting with the first fiscal quarter commencing after the month during which the Renard Diamond Mine reaches commercial production, which is April 1, 2017, and ending at maturity date, on October 1, 2027. d) Renard Mine Road Debt Facility

September 30,

2017 December 31,

2016

Opening balance 49,781 50,677 Accretion* 2,052 2,485 Principal repayment – (3,381)

51,833 49,781 Less : current portion 3,496 3,495


* Calculated based on an effective interest rate of 10.0%

The Government of Québec provided SDCI with $77 million of financing, with $70 million used to complete the road construction work and $7 million used to construct an airstrip, at an annual interest rate of 3.35% percent, for a term of 15 years, with annual repayments of principal and interest beginning 48 months following the first drawdown, which was December 19, 2016, and ending on December 19, 2027. e) Senior Secured Loan

September 30,

2017 December 31,

2016

Opening balance – –

Proceeds received 50,000 – Transaction costs (including $2,540 reclassified from

deferred transaction costs) (5,015) –

Accretion 303 –

45,288 –

Less : current portion 7,143 –

Non-current portion 38,145 –


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On July 8, 2014, SDCI and Diaquem, a wholly owned subsidiary of RQ, entered into the Senior Secured Loan Agreement that provide SDCI the right to borrow up to $100 million (the “Senior Secured Loan, Tranche A”).

On June 28, 2017, the Corporation borrowed $50 million under the Senior Secured Loan. The loan bears interest at prime rate of 3.20% plus applicable margin of 4.75% for a three years term. Interest will be paid in arrears at the end of each quarter. Under the Senior Secured Loan Agreement, SDCI will have the option, at the end of the availability period (earlier of full drawdown of the Senior Loan or first payment date which is December 31, 2017) and upon prior notice, to convert advances bearing interest at the floating rate to a fixed rate.

Upfront fees equal to 2.75% of the principal amount of the Senior Secured Loan are payable by SDCI, 25% of which was paid on July 8, 2014, and the remaining 75% was paid on the draw date of June 28, 2017. Semi-annual repayments of principal will begin on December 31, 2017, with final payment at maturity date, on June 30, 2024.

In addition, a standby fee of 1.75% per annum is payable quarterly in arrears, on the daily undrawn principal amount of the Senior Secured Loan during the availability period.

The Senior Secured Loan includes covenants customary for a transaction of this nature, including the following financial covenants:

i) Maintaining a reserve tail ratio of at least 28%; ii) Maintaining a historical debt service coverage ratio in respect of the immediately preceding four-quarter

period greater than or equal to 1.25:1.0 at all times following Completion; iii) Maintaining a projected debt service coverage ratio greater than or equal to 1.25:1.0 at all times

following Completion; iv) Until the Parental Support Termination Date, which occurs when 50% of the principal amount borrowed

is repaid, the Corporation must maintain a tangible net worth, on a consolidated basis, of $250 million; after the Parental Support Termination Date, SDCI must maintain a tangible net worth, on a consolidated basis, of $250 million.

As at September 30, 2017, the Corporation was in compliance with all of its debt covenants.


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f) Obligations Under Finance Leases On July 25, 2014, SDCI and Caterpillar Financial Services Limited (“Caterpillar”) entered into an equipment finance facility of US$75 million for the purchase of CAT and non-CAT equipment. Tranche A is a maximum amount of US$50 million, less upfront payments ranging from 15% to 50% based on the type of equipment financed. On June 28, 2017, the Corporation and Caterpillar agreed to closed Tranche A. The total amount financed under Tranche A before upfront payments was US$48.3 million. Tranche B, now available, provide for an additional maximum amount of US$25 million, less upfront payments ranging from 10% to 30% based on the type of equipment financed, for the purchase of CAT and non-CAT equipment up to December 31, 2018. An arrangement fee of 0.75% of the Tranche B facility was paid on June 28, 2017, and recorded as a deferred transaction costs. The term of the facility is six years from the date of each drawdown and the facility is secured by the equipment financed. In addition, SDCI must place the lesser of US$3.0 million and 10% of the outstanding principal balance of the leases into an account for the benefit of Caterpillar until the first anniversary of completion of the Renard Diamond Mine (the “debt service reserve account” or “DSRA”). Tranche A and B bear interest at the three-month London Inter-bank Offer Rate (“LIBOR”), plus 4%. Interest is payable quarterly. Covenants in the equipment finance facility include: i) a reserve tail ratio of 25% if there is any indebtedness under Tranche A of the facility (20% if the only amounts outstanding are under Tranche B); ii) historical and projected debt service coverage ratios greater than or equal to 1.15:1.0; and iii) a requirement for the Corporation, on a consolidated basis, to maintain a tangible net worth of $250 million. As at September 30, 2017, the Corporation met these covenants.

September 30, 2017

December 31,

2016

Opening balance 37,284 30,326 New debt obligations under finance leases (1) 3,202 13,986 Change in foreign exchange rate (2,433) (1,059) Principal repayment (5,306) (5,969)

32,747 37,284 Less: current portion 7,531 7,319


(1) As at September 30, 2017, a deposit of $3.7 million (US$3.0 million) has been set aside, and is recorded in Other Financial Assets as collateral until the total future obligations are fully settled (December 31, 2016 - $4.0 million (US$ 3.0 million)).

Future minimum lease payments pursuant to SDCI’s finance leases are as follows:

Up to 1 year 1-5 years Over 5 years Total

Minimum lease payments 9,167 26,934 725 36,826 Finance charges (1,636) (2,423) (20) (4,079)

Total 7,531 24,511 705 32,747


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g) Deferred Transaction costs

September 30,

2017 December 31,

2016

Opening Balance 12,013 17,742 Additions 247 – Amortization (532) (5,216) Transfer to debt, equity or assets (2,643) (513)

Ending Balance 9,085 12,013

Deferred transaction costs consist primarily of legal and advisory fees, regulatory filing fees and other financing expenses (see Note 8h). The balance of $9.1 million as at September 30, 2017 (December 31, 2016 - $12.0 million) relates mainly to the Financing Transactions which closed on July 8, 2014 and the June 28, 2017 arrangement fee payment on Tranche B of the equipment finance facility. Deferred transaction costs to be netted against the gross proceeds of the respective financing transaction to which they relate once funds are received with the exception of the finance leases (added to the cost of the asset when acquired) and the Stream, where the costs are accounted for as a deferred contract acquisition cost and are recognized as cost of goods sold.

h) Finance Costs For the three and nine months ended September 30, 2017, the Corporation and SDCI incurred a total of $0.4 million and $1.4 million respectively (September 30, 2016 - $0.6 million and $1.8 million respectively) in standby fees pursuant to the terms of the Financing Agreements. These expenses were recognized in the consolidated statements of income (loss) and comprehensive income (loss) as financial expenses, except for the Stream, which was recognized as a deduction of deferred revenue (see Note 10). For the three and nine months ended September 30, 2017, borrowing costs totalling $6.9 million and $20.4 million respectively, have been expensed in financial expenses (September 30, 2016 - $7.1 million and $20.9 million respectively, capitalized in Property, Plant and Equipment).


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Convertible Debentures

The Convertible Debentures will mature on July 8, 2021; there will be no principal repayments until the maturity date. Interest will accrue at a rate of 6.25% per annum from July 8, 2014, payable semi-annually on the last day of June and December of each year. In certain circumstances, the Corporation can satisfy the interest payment obligation through the issuance of common shares. The Convertible Debentures rank (i) subordinate in right of payment to the payments of all secured obligations including Stream Net Proceeds to the Stream Buyers under the Streaming Agreement and payments required under the Senior Secured Loan, and (ii) pari passu with all outstanding unsecured indebtedness for borrowed money of Stornoway. The Convertible Debentures are convertible at the holder’s option into common shares of the Corporation at any time prior to the close of business on the earlier of the maturity date and the business day immediately preceding the date fixed for redemption thereof, at the Conversion Price, being US$0.8863 for one common share, subject to adjustment in certain limited circumstances. The number of Common Shares issuable upon conversion of the Convertible Debentures, which are denominated in US dollars, will be determined based on the Bank of Canada CAD/USD noon exchange rate on the business day prior to the date of conversion. The Convertible Debentures are a hybrid instrument, which are in their entirety regarded as a financial liability. The initial carrying amount of $48.8 million for the debt host represents the residual amount of the proceeds after separating out the $34.4 million initial fair value of the derivative, which represents the estimated fair value of the conversion option. Transaction costs were allocated on a pro-rata basis between the host and the derivative. The table below shows the change in the carrying value of the Convertible Debentures:

For the nine months ended September 30, 2017 December 31, 2016 Host Derivative Total

Opening balance 69,911 32,858 102,769 91,134

Change in fair value of derivative – (16,843) (16,843) 8,858

Change in foreign exchange rate (5,117) (1,555) (6,672) (2,551)

Accretion 4,490 – 4,490 5,328

69,284 14,460 83,744 102,769

The derivative was valued using a convertible bond valuation model. The following key assumptions were used in that model:

September 30, 2017

December 31, 2016

Expected remaining life (years) 3.75 4.5 Expected volatility 32.9% 36.7% Risk-free rate* 1.9% 1.9% Credit spread 10.1% 12.2% Change of control probability 0% 0%

*The risk-free rate reflects the US dollar swap rate for the equivalent term based on the zero coupon curve.


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Deferred Revenue On July 8, 2014, FCDC entered into a diamond streaming agreement (the “Stream”), pursuant to which FCDC shall sell to the Stream Buyers, and the Stream Buyers shall purchase from FCDC, a 20% undivided interest in each of the run of mine diamonds produced from certain kimberlite bodies over the life of the Renard Diamond Project. The Streaming Agreement provided for the Stream Buyers making up-front payments to FCDC, representing a prepayment of a portion of the purchase price payable for diamonds produced by the Renard Diamond Project, in an aggregate amount of US$250 million (the “Deposit”), that was disbursed in three instalments.

September 30,

2017 December 31,

2016

Opening Balance 322,806 207,104 Additions – 116,557 Amortization to revenue (17,868) (565) Standby fees paid – (290)

304,938 322,806 Less: current portion 22,539 26,100

Non-current obligations 282,399 296,706

Income and Mining Tax During the three and nine months ended September 30, 2017, the Corporation incurred a tax (recovery) expense of $(1.7) million and $14.0 million representing an effective tax rate of 35% and 136%, compared to the combined Canadian federal and provincial statutory income tax rate of 26.5%. The difference in the effective tax rate from the three months ended September 30, 2017 to the nine months ended September 30, 2017 is due to a mining tax credit of $9.8 million that was received in the first quarter of 2017, which relates to costs incurred towards the construction of the Route 167 Extension from November 1, 2012 to October 31, 2013 and was recognized as a credit against property, plant and equipment. As a result, a $9.8 million deferred income tax liability was recognized in the three months ended March 31, 2017 to reflect the relinquishing of future Quebec mining tax deductions.


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Share Capital a) Stock Options The Corporation’s Stock Option Plan (the “Plan”) establishes the terms and conditions upon which the directors of the Corporation may grant stock options. On October 21, 2014, the Corporation’s shareholders approved the Plan for a further three-year period. A summary of the Corporation’s outstanding stock options is as follows:

Number of Stock

Options

Weighted Average Exercise Price

(per share)

Balance December 31, 2015 29,065,000 0.73

Granted 4,310,000 1.02

Expired (345,000) 1.37

Forfeited (1,792,501) 0.71 Exercised (2,529,165) 0.74


Granted 16,040,000 0.85

Expired (3,020,000) 0.85

Forfeited (540,000) 0.80

Exercised (1,447,500) 0.70

Balance September 30, 2017 39,740,834 0.80

Number of stock options currently exercisable 16,546,666 0.70

As at September 30, 2017, the Corporation had the following stock options outstanding:

Range of Exercise Prices Number of Options

Outstanding

Weighted Average Exercise Price

(per share/option)

Weighted Average Remaining

Contractual Life

$0.51 – $0.71 17,735,834 0.70 1.84 years $0.73 – $1.11 22,005,000 0.88 4.11 years

39,740,834 0.80 3.09 years

During the nine months ended September 30, 2017, the Corporation granted, all during the first quarter, 16,040,000 stock options to directors, officers and employees, with an average exercise price of $0.85 per share, based on the share price at the time of the grant. These stock options expire five years from the grant date. The Corporation used the Black-Scholes Option Pricing Model to estimate a fair value of $5.5 million ($0.34 per option). A total of 2,500,000 options granted vested immediately, while the remaining 13,540,000 options vest over a 3 year period. During the three and nine months ended September 30, 2016, the Corporation granted 510,000 and 4,310,000 stock options respectively, to directors, officers and employees with an average exercise price of $1.06 and $1.02 per share respectively. These stock options will vest in thirds over a three year period, starting one year after the grant date for employees. All options granted expire five years from the grant date. For the three and nine months ended September 30, 2016, the Corporation used the Black-Scholes option pricing model to estimate a fair value of $0.2 million and $1.9 million respectively (or $0.45 and $0.44 per option respectively).


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Share Capital – continued – a) Stock Options – continued – The fair value of each stock option grant is estimated on the date of the grant using the Black-Scholes Option Pricing Model, with the following range of assumptions:

For the nine months ended

September 30,

2017 September 30,

2016

Risk-free interest rate 1.2% 0.6% - 0.7% Expected dividend yield Nil Nil Forfeiture rate 0% 0% Expected stock price volatility (1) 45% 49% Expected option life in years 5 years 5 years

(1) Expected volatility has been based on historical volatility of the Corporation’s publicly traded shares.

For the three and nine months ended September 30, 2017, the Corporation recognized share-based compensation of $0.7 million and $2.5 million respectively (September 30, 2016 - $0.3 million and $1.1 million respectively), and a further $ 0.2 million and $ 0.8 million respectively was capitalized to inventory and Mineral Properties in property, plant and equipment (September 30, 2016 – $0.1 million and $0.4 million respectively was capitalized to Mine Under Construction in property, plant and equipment). b) Warrants A summary of the Corporation’s outstanding warrants is as follows:

Number of

Warrants

Weighted Average Exercise Price (per warrant)

Balance December 31, 2015 123,300,000 0.94 Exercised (91,912,732) 0.90 Expired (2,387,268) 0.90


Expired (15,000,000) 1.21

Balance September 30, 2017 14,000,000 0.95

The outstanding warrants as at September 30, 2017 expire on July 8, 2019.


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Share Capital – continued – c) Loss per Share


September 30,

2017 September 30,

2016 September 30,

2017 September 30,

2016

Basic loss per share:

Net loss (3,073) (15,548) (3,710) (32,379)

Weighted average number of shares outstanding 829,373,170 818,368,724 828,866,844 763,353,755

Basic and diluted loss per share Nil (0.02) Nil (0.04)

Expenses by Nature

Cost of good sold and selling, general and administrative expenses, as reported in the consolidated statements of loss and comprehensive loss, have been grouped by nature of expenses as follows:


September 30,

2017 September 30,

2016 September 30,

2017 September 30,

2016

Consumables and spare parts 10,104 – 29,184 –

Salaries and employees benefits 13,387 2,096 37,815 5,016

Rental and subcontractors 7,274 – 19,780 –

Professional fees 1,796 555 3,471 2,465

Insurance and property taxes 524 – 1,322 –

Changes in inventory (208) – (8,548) –

Other 965 500 3,773 1,330

33,842 3,151 86,797 8,811

Financial Expenses (Income)


September 30,

2017 September 30,

2016 September 30,

2017 September 30,

2016

Interest income on cash, cash equivalents and

short-term investments (126) (342) (361) (1,067)

Interest expense 6,942 – 20,400 – Convertible debentures - Unrealized (gain) loss on

fair value of derivatives (1,900) 9,879 (16,843) 23,699

Senior Secured loan – Standby fees 384 529 1,418 1,577 Amortization of deferred transaction costs (Note

8g) – 869 – 869

Other

(Gain) loss on investments – – – (15)

Accretion on asset retirement obligation 97 57 259 166

Standby fees 13 77 18 232

5,410 11,069 4,891 25,461


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Related Party Transactions

The Corporation entered into the following transactions with related parties not otherwise disclosed in these financial statements:

(i) For the three and nine months ended September 30, 2017, the Corporation incurred interest and commitment fees of $1.5 million and $4.5 million, respectively, and $ 0.9 and $ 2.6 million in royalties (three and nine months ended September 30, 2016 - $2.1 million and $5.9 million respectively, in interest and commitment fees) with Diaquem, Ressources Quebec (“RQ”) and Investissement Quebec (“IQ”). Collectively, as at September 30, 2017, Diaquem, RQ and IQ own 25.3% of the Corporation’s issued and outstanding common shares and therefore have significant influence over the Corporation;

(ii) For the three and nine months ended September 30, 2017, the Corporation incurred interest of $0.4 million and $1.3 million, respectively (three and nine months ended September 30, 2016 - $0.4 million and $1.2, milllion respectively) payable to Orion. As at September 30, 2017, Orion owns 17.2% of the Corporation’s issued and outstanding common shares and US$20.5 million of the US$81.3 million Convertible Debentures issued and therefore has significant influence over the Corporation.

Supplemental Schedule of Non-Cash Investing and Financing Activities

September 30,

2017 December 31,

2016

Finance expense accrual 3,951 590

Property, plant and equipment included in accounts payable and accrued liabilities 4,105 29,593

Reconciliation of investment in Property, Plant & Equipment :


September 30,

2017 September 30,

2016 September 30,

2017 September 30,

2016

Balance, end of the period 1,105,449 1,073,349 1,105,449 1,073,349 Balance, beginning of the period 1,103,048 1,021,496 1,102,084 831,430

Change 2,401 51,853 3,365 241,919 Add-back (subtract):

Depreciation expense, net of capitalized depreciation 19,023 – 53,827 –

Tax credit refund – – 9,756 – Property, plant and equipment included in

working capital (1,541) 6,086 24,971 17,872 Interest expense capitalized (Note 8b) – (808) – (2,317) Finance leases included property, plant and

equipment – (1,818) – (3,109) Accretion – (2,744) – (8,112) Loss on disposal of property, plant and

equipment 71 (38) 71 (38) Asset retirement obligation 1,003 (252) (1,901) (3,415) Other (172) (545) (449) (764)

Property, Plant & Equipment per Statements of Cash Flows 20,785 51,734 89,640 242,036

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