Exhibit 99.2
NOTICES OF MEETING
and
JOINT MANAGEMENT INFORMATION CIRCULAR
for the
SPECIAL MEETING OF SHAREHOLDERS OF
MOUNTAIN
PROVINCE DIAMONDS INC.
and the
SPECIAL MEETING OF SHAREHOLDERS OF
KENNADY
DIAMONDS INC.
each to be held on
April 9, 2018
DATED AS OF March 5, 2018
YOUR VOTE
IS IMPORTANT. PLEASE VOTE TODAY.
| These materials are important and require your immediate attention. If you have questions or require assistance with voting your shares, you may contact our proxy solicitation agent: |
| Laurel Hill Advisory Group |
| North American Toll-Free Number: 1-877-452-7184 |
| Collect Calls Outside North America: 416-304-0211 |
| Email:
assistance@laurelhill.com |
March 5, 2018
Dear Shareholders of Mountain Province Diamonds
Inc.:
It is my pleasure to extend to you, on behalf
of the board of directors (the “Mountain Province Board”) of Mountain Province Diamonds Inc. (“Mountain
Province”), an invitation to attend the special meeting (the “Mountain Province Meeting”) of the shareholders
of Mountain Province (the “Mountain Province Shareholders”) to be held at the Terminal City Club, 837 West Hastings
Street, Vancouver, British Columbia, Canada V6C 1B4 at 2:30 p.m. (Pacific Standard Time) on Monday, April 9, 2018.
The Arrangement
On January 28, 2018, Mountain Province entered
into a definitive arrangement agreement (the “Arrangement Agreement”) with Kennady Diamonds Inc. (“Kennady”),
whereby, subject to the terms and conditions of the Arrangement Agreement, Mountain Province will acquire all of the issued and
outstanding common shares of Kennady (the “Kennady Shares”) pursuant to a statutory plan of arrangement (the “Arrangement”)
under Section 182 of the Business Corporations Act (Ontario) (the “OBCA”).
Under the terms of the Arrangement, shareholders
of Kennady (the “Kennady Shareholders”) (other than Mountain Province and any Kennady Shareholders validly exercising
dissent rights) will receive 0.975 of a common share of Mountain Province (each such whole share, a “Mountain Province
Share”) in exchange for each Kennady Share held at the effective time of the Arrangement.
On January 28, 2018, concurrently with the
Arrangement Agreement, Kennady entered into an agreement with Mountain Province pursuant to which Mountain Province will provide
financing to Kennady of up to $10,000,000 via an equity private placement of 4,000,000 Kennady Shares at $2.50 per Kennady Share
in four equal tranches designed to coincide with the budget for Kennady’s current work program. The completion of the equity private
placement is not conditional upon the completion of the Arrangement.
Shareholder Vote
At the Mountain Province Meeting, Mountain
Province Shareholders will be asked to consider and, if deemed advisable, pass an ordinary resolution approving the issuance of
up to 54,673,383 Mountain Province Shares (subject to variation due to rounding of fractional interests) in connection with the
Arrangement, composed of up to 54,673,383 Mountain Province Shares to be issued to Kennady Shareholders (other than Mountain Province
and any Kennady Shareholders validly exercising dissent rights) in exchange for their Kennady Shares pursuant to the Arrangement
(the “Share Issuance Resolution”). To be effective, the Share Issuance Resolution must be approved at the Mountain
Province Meeting by (i) at least a majority of the votes cast on the Share Issuance Resolution by the Mountain Province Shareholders
present in person or represented by proxy and entitled to vote at the Mountain Province Meeting, and (ii) at least a majority
of the votes cast on the Share Issuance Resolution by the Minority Mountain Province Shareholders (as defined in the accompanying
Circular (as defined herein)) present in person or represented by proxy and entitled to vote at the Mountain Province Meeting.
The accompanying notice of special meeting
of Mountain Province Shareholders (the “Mountain Province Notice of Meeting”) and accompanying joint management
information circular dated March 5, 2018 (the “Circular”) provide a description of the Arrangement, and include
certain additional information to assist you in considering how to vote on the Share Issuance Resolution. You are urged to read
this information carefully and, if you require assistance, to consult your tax, financial, legal or other professional advisors.
Mountain Province Shareholders holding, in
the aggregate, approximately 24.3% of the outstanding Mountain Province Shares as of January 28, 2018 have entered into voting
and support agreements with Kennady agreeing to support the Arrangement and vote their Mountain Province Shares in favour of the
Share Issuance Resolution, subject to certain exceptions.
Mountain Province Special Committee Recommendation
After careful consideration, including a thorough
review of the Arrangement Agreement and receiving the oral fairness opinion (subsequently confirmed in writing) of RBC Capital
Markets delivered to the special committee of independent directors of Mountain Province (the “Mountain Province Special
Committee”), as well as a thorough review of other matters, including those discussed in the accompanying Circular, the
Mountain Province Special Committee unanimously determined that the Arrangement is in the best long-term interests of Mountain
Province. Accordingly, the Mountain Province Special Committee unanimously recommended that the Mountain Province Board approve
the Arrangement and enter into the Arrangement Agreement.
Mountain Province Board Recommendation
After careful consideration, the Mountain Province
Board (other than Mr. Comerford, who, having declared a potential conflict of interest in the matters being considered, was not
present and did not vote on the Arrangement) has determined, upon the recommendation of the Mountain Province Special Committee
and consultation with its legal and financial advisors, and based in part on an oral fairness opinion (subsequently confirmed in
writing) received by the Mountain Province Special Committee from RBC Capital Markets as described in the accompanying Circular,
that the Arrangement is in the best long-term interests of Mountain Province and the Mountain Province Shareholders, and unanimously
recommends that Mountain Province Shareholders vote FOR the Share Issuance Resolution. The determination of the Mountain
Province Board (other than Mr. Comerford, who, having declared a potential conflict of interest in the matters being considered,
was not present and did not vote on the Arrangement) is based on various factors described more fully in the accompanying Mountain
Province Notice of Meeting and Circular.
We recommend that you review in detail the
full reasons for the Mountain Province recommendation and the Kennady recommendation, which are set out in the accompanying Circular
under the headings “Reasons for the Mountain Province and Mountain Province Special Committee Recommendations”
and “Reasons for the Kennady Board and Kennady Special Committee Recommendations”.
Vote your Mountain Province Shares Today
FOR the Share Issuance Resolution.
Your vote is very important regardless of the
number of Mountain Province Shares you own. If you are a registered Mountain Province Shareholder (i.e., your name appears on the
register of the Mountain Province Shares maintained by or on behalf of Mountain Province) and you are unable to attend the Mountain
Province Meeting in person, we encourage you to complete, sign, date and return the accompanying Mountain Province Proxy so that
your Mountain Province Shares can be voted at the Mountain Province Meeting (or at any adjournments or postponements thereof) in
accordance with your instructions. To be effective, the enclosed Mountain Province Proxy must be received by Mountain Province’s
transfer agent, Computershare Investor Services Inc. (according to the instructions on the proxy), not later than 2:30 p.m. (Pacific
Standard Time) on Thursday, April 5, 2018, or not later than 48 hours (other than a Saturday, Sunday or holiday) immediately preceding
the time of the Mountain Province Meeting (as it may be adjourned or postponed from time to time). The deadline for the deposit
of proxies may be waived or extended by the Chair of the Mountain Province Meeting at their discretion, without notice.
If you hold Mountain Province Shares through
a broker, custodian, nominee or other intermediary, you should follow the instructions provided by your intermediary to ensure
your vote is counted at the Mountain Province Meeting.
Conditions
Subject to obtaining the requisite approvals
of the Mountain Province Shareholders, the Kennady Shareholders and the Ontario Superior Court of Justice (Commercial List), it
is anticipated that the Arrangement will be completed as soon as practicable following receipt of the final order of the Ontario
Superior Court of Justice (Commercial List),
which is expected to be obtained on or about
April 11, 2018, and following the satisfaction or waiver of all other conditions precedent to the Arrangement.
The accompanying Circular contains a detailed
description of the Arrangement, as well as detailed information regarding Mountain Province and Kennady and certain pro forma
and other information regarding the combined company after giving effect to the Arrangement.
Shareholder Questions
If you have any questions or need assistance
in your consideration of the Share Issuance Resolution, or with the completion and delivery of your proxy, please contact Laurel
Hill Advisory Group, the proxy solicitation agent, by telephone at: 1-877-452-7184 (North American Toll Free) or 416-304-0211 (Collect
Outside North America); or by email at: assistance@laurelhill.com.
On behalf of Mountain Province, I would like to thank all Mountain
Province Shareholders for their continuing support.
Yours truly,
“David Whittle”
David Whittle
Director, Interim President and Chief Executive Officer
|
Vote using the following methods prior to the Meeting.
Registered Shareholders
Shares held in own name and represented
by a physical certificate.
Beneficial Shareholders
Shares held with a broker, bank
or other intermediary. |
|
Internet
www.investorvote.com
www.proxyvote.com |
|
Telephone or Fax
Telephone: 1-866-732-8683
Fax: 1-866-249-7775
Call or fax to the number(s) listed on your
voting instruction form |
|
Mail
Return the form of proxy in the enclosed postage
paid envelope.
Return the voting instruction form in the postage
paid enclosed envelope. |
March 5, 2018
Dear Shareholders of Kennady Diamonds Inc.:
It is my pleasure to extend to you, on behalf
of the board of directors (the “Kennady Board”) of Kennady Diamonds Inc. (“Kennady”), an invitation
to attend the special meeting (the “Kennady Meeting”) of the shareholders of Kennady (the “Kennady Shareholders”)
to be held at the Terminal City Club, 837 West Hastings Street, Vancouver, British Columbia, Canada V6C 1B4, at 1:00 p.m. (Pacific
Standard Time) on Monday, April 9, 2018.
The Arrangement
On January 28, 2018, Mountain Province Diamonds
Inc. (“Mountain Province”) entered into a definitive arrangement agreement (the “Arrangement Agreement”)
with Kennady, whereby, subject to the terms and conditions of the Arrangement Agreement, Mountain Province will acquire all of
the issued and outstanding common shares of Kennady (the “Kennady Shares”) pursuant to a statutory plan of arrangement
(the “Arrangement”) under Section 182 of the Business Corporations Act (Ontario) (the “OBCA”).
Under the terms of the Arrangement, shareholders
of Kennady (the “Kennady Shareholders”) (other than Mountain Province and any Kennady Shareholders validly exercising
dissent rights) will receive 0.975 of a common share of Mountain Province (the “Arrangement Consideration”) (each
such whole share, a “Mountain Province Share”) in exchange for each Kennady Share held.
The Arrangement Consideration represents consideration
to Kennady Shareholders of $3.46 per Kennady Share based on the pre-announcement closing price of $3.55 per Mountain Province Share
on the TSX as at January 26, 2018 (being the last trading day prior to the announcement of the Arrangement). This value implies
an approximate 26% premium to the pre-announcement closing price of Kennady Shares on January 26, 2018, and an approximate 15%
premium to Kennady Shares based on the 20-day volume weighed average price of Mountain Province Shares on the TSX and Kennady Shares
on the TSXV ending January 26, 2018.
On January 28, 2018, concurrently with the
Arrangement Agreement, Kennady entered into an agreement with Mountain Province pursuant to which Mountain Province will provide
financing to Kennady of up to $10,000,000 via an equity private placement of 4,000,000 Kennady Shares at $2.50 per Kennady Share
in four equal tranches designed to coincide with Kennady’s budget for the current work program. The completion of the equity private
placement is not conditional upon the completion of the Arrangement.
Shareholder Vote
At the Kennady Meeting, the Kennady Shareholders
will be asked to consider and, if deemed advisable, pass a special resolution approving the Arrangement (the “Arrangement
Resolution”). To be effective, the Arrangement Resolution must be approved at the Kennady Meeting by (i) at least 66
⅔% of the votes cast on the Arrangement Resolution by the Kennady Shareholders present in person or represented by proxy
and entitled to vote at the Kennady Meeting, and (ii) at least a majority of the votes
cast on the Arrangement Resolution by the Minority Kennady Shareholders (as defined in the accompanying joint management information
circular dated March 5, 2018 (the “Circular”)) present in person or represented by proxy and entitled to vote
at the Kennady Meeting.
Kennady Shareholders holding, in the aggregate,
approximately 28.6% of the outstanding Kennady Shares as of January 28, 2018 have entered into voting and support agreements with
Mountain Province agreeing to support the Arrangement and vote their Kennady Shares in favour of the Arrangement Resolution, subject
to certain exceptions.
The accompanying notice of special meeting
of Kennady Shareholders (the “Kennady Notice of Meeting”) and accompanying Circular provide a description of the
Arrangement and include certain additional information to assist you in considering how to vote on the Arrangement Resolution.
You are urged to read this information carefully and, if you require assistance, to consult your tax, financial, legal or other
professional advisors.
Kennady Special Committee Recommendation
After careful consideration, including a thorough
review of the Arrangement Agreement and receiving the oral fairness opinion (subsequently confirmed in writing) of Haywood Securities
Inc. delivered to the special committee of independent directors of Kennady (the “Kennady Special Committee”),
as well as a thorough review of other matters, including those discussed in the accompanying Circular, the Kennady Special Committee
unanimously determined that the Arrangement is in the best interests of Kennady. Accordingly, the Kennady Special Committee unanimously
recommended that the Kennady Board approve the Arrangement and enter into the Arrangement Agreement and that the Kennady Board
recommend that Kennady Shareholders vote in favour of the Arrangement Resolution.
Kennady Board Recommendation
After careful consideration, the Kennady Board
(other than Mr. Comerford and Dr. Moore, who, having declared a potential conflict of interest in the matters being considered,
were not present and did not vote on the Arrangement) has determined, upon the recommendation of the Kennady Special Committee
and consultation with its legal and financial advisors, and based in part on an oral fairness opinion (subsequently confirmed in
writing) received by the Kennady Special Committee from Haywood Securities Inc., as described in the accompanying Circular, that
the Arrangement is in the best interests of Kennady and unanimously recommends that Kennady Shareholders vote FOR
the Arrangement Resolution. The determination of the Kennady Board (other than Mr. Comerford and Dr. Moore, who, having declared
a potential conflict of interest in the matters being considered, were not present and did not vote on the Arrangement) is based
on various factors described more fully in the accompanying Kennady Notice of Meeting and the accompanying Circular.
Vote Your Kennady Shares Today FOR
the Arrangement Resolution
Your vote is very important regardless of the
number of Kennady Shares you own. If you are a registered Kennady Shareholder (i.e., your name appears on the register of the Kennady
Shares maintained by or on behalf of Kennady) and you are unable to attend the Kennady Meeting in person, we encourage you to complete,
sign, date and return the accompanying Kennady Proxy so that your Kennady Shares can be voted at the Kennady Meeting (or at any
adjournments or postponements thereof) in accordance with your instructions. To be effective, the enclosed Kennady Proxy must be
received by Kennady’s transfer agent, Computershare Investor Services Inc. (according to the instructions on the proxy), not later
than 1:00 p.m. (Pacific Standard Time) on Thursday, April 5, 2018, or not later than 48 hours (other than a Saturday, Sunday or
holiday) immediately preceding the time of the Kennady Meeting (as it may be adjourned or postponed from time to time). The deadline
for the deposit of proxies may be waived or extended by the Chair of the Kennady Meeting at his discretion, without notice.
If you hold Kennady Shares through a broker,
custodian, nominee or other intermediary, you should follow the instructions provided by your intermediary to ensure your vote
is counted at the Kennady Meeting and should arrange for your intermediary to complete the necessary steps to ensure that you receive
payment for your securities as soon as possible following completion of the Arrangement.
If you are a Registered Kennady Shareholder
(as defined in the accompanying Circular), we encourage you to complete, sign, date and return the enclosed Letter of Transmittal
(printed on YELLOW PAPER) (the “Letter of Transmittal”) in accordance with the instructions set out therein and
in the Circular, together with the certificate(s) representing your Kennady Shares, if applicable, to the Depositary (as defined
in the accompanying Circular) at the address specified in the Letter of Transmittal. The Letter of Transmittal contains other procedural
information relating to the Arrangement and should be reviewed carefully.
Conditions
Subject to obtaining the requisite approvals
of the Kennady Shareholders, the Kennady Shareholders and the Ontario Superior Court of Justice (Commercial List), it is anticipated
that the Arrangement will be completed as soon as practicable following receipt of the final order of the Ontario Superior Court
of Justice (Commercial List), which is expected to be obtained on or about April 11, 2018, and following the satisfaction or waiver
of all other conditions precedent to the Arrangement.
The accompanying Circular contains a detailed
description of the Arrangement, as well as detailed information regarding Kennady and Mountain Province and certain pro forma
and other information regarding the combined company after giving effect to the Arrangement (as defined in the accompanying Circular).
It also includes certain risk factors relating to Kennady, Mountain Province and the combined company assuming the completion of
the Arrangement, and the potential consequences of a Kennady Shareholder exchanging Kennady Shares for Mountain Province Shares
in connection with the Arrangement.
Shareholder Questions
If you have any questions or need assistance
in your consideration of the Arrangement Resolution, or with the completion and delivery of your proxy, please contact Laurel
Hill Advisory Group, the proxy solicitation agent, by telephone at: 1-877-452-7184 (North American Toll Free) or 416-304-0211
(Collect Outside North America); or by email at: assistance@laurelhill.com.
On behalf of Kennady, I would like to thank all Kennady Shareholders
for their continuing support.
Yours truly,
“Rory Moore”
Dr. Rory Moore
Director, President and Chief Executive Officer
|
Vote using the following methods prior to the Meeting.
Registered Shareholders
Shares held in own name and represented
by a physical certificate.
Beneficial Shareholders
Shares held with a broker, bank
or other intermediary. |
|
Internet
www.investorvote.com
www.proxyvote.com |
|
Telephone or Fax
Telephone: 1-866-732-8683
Fax: 1-866-249-7775
Call or fax to the number(s) listed on your
voting instruction form |
|
Mail
Return the form of proxy in the enclosed postage
paid envelope.
Return the voting instruction form in the postage
paid enclosed envelope. |
NOTICE OF SPECIAL MEETING OF MOUNTAIN PROVINCE SHAREHOLDERS
NOTICE IS HEREBY GIVEN that a special
meeting (the “Mountain Province Meeting”) of shareholders (“Mountain Province Shareholders”)
of Mountain Province Diamonds Inc. (“Mountain Province”) will be held at 2:30 p.m. (Pacific Standard Time) on
Monday, April 9, 2018 at the Terminal City Club, 837 West Hastings Street, Vancouver, British Columbia, Canada V6C
1B4, for the following purposes:
| (a) | to consider and, if deemed advisable, to pass, with or without variation, an ordinary resolution
(the “Share Issuance Resolution”), the full text of which is set out in Schedule “B” – “Resolutions
to be Approved at the Mountain Province Meeting” to the accompanying joint management information circular dated March
5, 2018 (the “Circular”), to authorize and approve the issuance of up to 54,673,383 common shares of Mountain
Province (“Mountain Province Shares”) (subject to variation due to rounding of fractional interests) in connection
with the proposed acquisition by Mountain Province of all of the outstanding common shares (the “Kennady Shares”)
of Kennady Diamonds Inc. (“Kennady”) in connection with the proposed plan of arrangement under Section 182 of
the Business Corporations Act (Ontario) (the “Arrangement”) involving Mountain Province and Kennady to
be completed pursuant to the terms and subject to the conditions of the arrangement agreement dated January 28, 2018 between Mountain
Province and Kennady; and |
| (b) | to transact such other business as may properly be brought before the Mountain Province Meeting
or any adjournment thereof. |
Specific details of the matters proposed to
be put before the Mountain Province Meeting are set forth in the Circular that accompanies this Notice of Meeting. The full text
of the Share Issuance Resolution (being item (a) set out above) is set out in Schedule “B” – “Resolutions
to be Approved at the Mountain Province Meeting” to the accompanying Circular. If the Arrangement is not completed,
the Mountain Province Shares referred to in the Share Issuance Resolution will not be issued even if the Share Issuance Resolution
is approved at the Mountain Province Meeting.
At the Mountain Province Meeting, Mountain
Province Shareholders will be asked to consider and, if deemed advisable, pass the Share Issuance Resolution approving the issuance
of up to 54,673,383 Mountain Province Shares (subject to variation due to rounding of fractional interests) in connection with
the Arrangement, composed of up to 54,673,383 Mountain Province Shares to be issued to the holders of Kennady Shares (“Kennady
Shareholders”) (other than Mountain Province and any Kennady Shareholders validly exercising dissent rights) in exchange
for their Kennady Shares pursuant to the Arrangement.
Upon the recommendation of the special committee
of independent directors of Mountain Province, the board of directors of Mountain Province (the “Mountain Province Board”)
(other than Mr. Comerford, who, having declared a potential conflict of interest in the matters being considered, was not present
and did not vote on the Arrangement) unanimously recommends that Mountain Province Shareholders vote in favour of the Share Issuance
Resolution. It is a condition to the completion of the Arrangement that the Share Issuance Resolution be approved at the Mountain
Province Meeting.
The record date (the “Mountain Province
Record Date”) for determination of Mountain Province Shareholders entitled to receive notice of and to vote at the Mountain
Province Meeting is the close of business on March 5, 2018. Only Mountain Province Shareholders whose names have been entered in
the register of holders of Mountain Province
Shares on the close of business on the Mountain
Province Record Date are entitled to receive notice of and to vote at the Mountain Province Meeting. Each Mountain Province Share
entitled to be voted on each resolution at the Mountain Province Meeting will entitle the holder to one vote at the Mountain Province
Meeting on all matters to come before the Mountain Province Meeting. The Share Issuance Resolution must be approved by (i) at least
a majority of the votes cast on the Share Issuance Resolution by the Mountain Province Shareholders present in person or represented
by proxy and entitled to vote at the Mountain Province Meeting, and (ii) at least a majority of the votes cast on the Share Issuance
Resolution by the Minority Mountain Province Shareholders (as defined in the Circular) present in person or represented by proxy
and entitled to vote at the Mountain Province Meeting.
A Mountain Province Shareholder may attend
the Mountain Province Meeting in person or may be represented by proxy. Mountain Province Shareholders who are unable to attend
the Mountain Province Meeting or any adjournment thereof in person are requested to date, sign and return the accompanying form
of proxy (the “Mountain Province Proxy”) printed on WHITE PAPER for use at the Mountain Province Meeting or any adjournment
thereof. To be effective, the proxy must be received by our transfer agent, Computershare Investor Services Inc., by mail: Computershare
Investor Services Inc., Toronto Office, Proxy Department, at 100 University Avenue, 8th Floor, Toronto, Ontario, Canada, M5J 2Y1;
by telephone: 1-866-732-8683; or online: www.investorvote.com not later than 2:30 p.m. (Pacific Standard Time) on Thursday,
April 5, 2018 or 48 hours (other than a Saturday, Sunday or holiday) prior to the time to which the Mountain Province Meeting may
be adjourned. Notwithstanding the foregoing, the Chair of the Mountain Province Meeting has the discretion to accept proxies received
after such deadline.
If a Mountain Province Shareholder receives
more than one form of proxy because such holder owns Mountain Province Shares registered in different names or addresses, each
form of proxy should be completed and returned.
If you are a non-registered holder of Mountain
Province Shares and have received these materials through your broker, custodian, nominee or other intermediary, please complete
and return the form of proxy or voting instruction form provided to you by your broker, custodian, nominee or other intermediary
in accordance with the instructions provided therein.
The Mountain Province Proxy confers discretionary
authority with respect to: (i) amendments or variations to the matters of business to be considered at the Mountain Province Meeting;
and (ii) other matters that may properly come before the Mountain Province Meeting. As of the date hereof, management of Mountain
Province knows of no amendments, variations or other matters to come before the Mountain Province Meeting other than the matters
set forth in this Mountain Province Notice of Meeting. Mountain Province Shareholders who are planning on returning the accompanying
Mountain Province Proxy are encouraged to review the accompanying Circular carefully before submitting the proxy form. It is the
intention of the persons named in the enclosed Mountain Province Proxy, if not expressly directed to the contrary in such proxy,
to vote in favour of the Share Issuance Resolution.
If you have any questions or require any assistance
in completing your proxy or voting instruction form, please contact Laurel Hill Advisory Group, the proxy solicitation agent, by
telephone at: 1-877-452-7184 (North American Toll Free) or 416-304-0211 (Collect Outside North America); or by email at: assistance@laurelhill.com.
DATED at Toronto, Ontario, Canada, this 5th
day of March, 2018.
| |
BY ORDER OF THE BOARD OF DIRECTORS |
| |
|
| |
/s/ David Whittle |
| |
David Whittle |
| |
Director, Interim President and Chief Executive |
| |
Officer |
| |
Mountain Province Diamonds Inc. |
NOTICE OF SPECIAL MEETING OF KENNADY SHAREHOLDERS
NOTICE IS HEREBY GIVEN that in accordance
with the interim order of the Ontario Superior Court of Justice (Commercial List) (the “Court”) rendered March
5, 2018, as may be further varied and amended (the “Interim Order”), a special meeting (the “Kennady Meeting”)
of shareholders (“Kennady Shareholders”) of Kennady Diamonds Inc. (“Kennady”) will be held at
1:00 p.m. (Pacific Standard Time) on Monday, April 9, 2018 at the Terminal City Club, 837 West Hastings Street, Vancouver,
British Columbia, Canada V6C 1B4, for the following purposes:
| (a) | to consider, pursuant to the Interim Order and, if deemed advisable, to pass, with or without variation,
a special resolution (the “Arrangement Resolution”), the full text of which is set out in Schedule “C”
– “Resolutions to be Approved at the Kennady Meeting” to the accompanying joint management information circular
dated March 5, 2018 (the “Circular”), to authorize and approve a plan of arrangement under Section 182 of the
Business Corporations Act (Ontario) (the “Plan of Arrangement’’) involving Kennady and Mountain Province Diamonds
Inc. (“Mountain Province”), whereby, subject to the terms and conditions of the arrangement agreement dated January
28, 2018 between Mountain Province and Kennady (the “Arrangement Agreement”), Mountain Province will acquire all
of the outstanding common shares in the capital of Kennady (“Kennady Shares”), as more particularly described
in the accompanying Circular; and |
| (b) | to transact such other business as may properly be brought before the Kennady Meeting or any adjournment
thereof. |
Specific details of the matters proposed to
be put before the Kennady Meeting are set forth in the accompanying Circular.
The record date for determining the Kennady
Shareholders entitled to receive notice of and vote at the Kennady Meeting is the close of business on March 5, 2018 (the “Kennady
Record Date”). A Kennady Shareholder may attend the Kennady Meeting in person or may be represented by proxy. Kennady
Shareholders who are unable to attend the Kennady Meeting or any adjournment thereof in person are requested to complete, date,
and sign the accompanying form of proxy (the “Kennady Proxy”) printed on BLUE PAPER and deliver it in accordance
with the instructions set out in the Kennady Proxy and in the accompanying Circular.
To be effective, the Kennady Proxy must
be received by our transfer agent, Computershare Investor Services Inc., not later than 1:00 p.m. (Pacific Standard Time) on Thursday,
April 5, 2018 or 48 hours (other than a Saturday, Sunday or holiday) prior to the time to which the Kennady Meeting may be adjourned.
Notwithstanding the foregoing, the Chair of the Kennady Meeting has the discretion to accept proxies received after such deadline.
If you are a non-registered holder of Kennady
Shares and have received these materials through your broker, custodian, nominee or other intermediary, please complete and return
the form of proxy or voting instruction form provided to you by your broker, custodian, nominee or other intermediary in accordance
with the instructions provided therein.
The Kennady Proxy confers discretionary authority
with respect to: (i) amendments or variations to the matters of business to be considered at the Kennady Meeting; and (ii) other
matters that may properly come before the Kennady Meeting. As of the date hereof, management of Kennady knows of no amendments,
variations or other matters to come before the Kennady Meeting other than the matters set forth in this Kennady Notice of Meeting.
Kennady Shareholders who are planning on returning the accompanying Kennady Proxy are encouraged to review the accompanying Circular
carefully before submitting the Kennady Proxy. It is the intention of the persons named in the
enclosed Kennady Proxy, if not expressly directed
to the contrary in such proxy, to vote in favour of the Arrangement Resolution.
Pursuant to and in accordance with the Interim
Order and the relevant provisions of Section 185 of the Business Corporations Act (Ontario) (“OBCA”) (as
may be modified or supplemented by the Plan of Arrangement, the Interim Order and any other order of the Court), each registered
Kennady Shareholder has been granted the right to dissent in respect of the Arrangement Resolution and the dissent rights are
described in the accompanying Circular. To exercise such right, registered Kennady Shareholders must (i) deliver a written notice
of dissent to the Arrangement Resolution to Kennady, by mail to: Kennady Diamonds Inc. c/o Bruce Ramsden, Chief Financial Officer,
161 Bay Street, Suite 1410, P.O. Box 216, Toronto, Ontario, Canada, M5J 2S1; or by facsimile transmission to: 416 640-3335, by
5:00 p.m. (Eastern Standard Time) on Thursday, April 5, 2018, or two Business Days (as defined in the accompanying Circular) prior
to any adjournment of the Kennady Meeting, (ii) not have voted in favour of the Arrangement Resolution, and (iii) have
otherwise complied with the provisions of Section 185 of the OBCA, as modified and supplemented by the Plan of Arrangement, the
Interim Order and any other order of the Court. The right to dissent is described in the accompanying Circular and the texts of
the Plan of Arrangement, Interim Order and Section 185 of the OBCA are set forth in Schedule “D” – “Plan
of Arrangement”, Schedule “G” – “Interim Order” and Schedule “H” – “Dissent
Rights Under the OBCA”, respectively, to the accompanying Circular.
Persons who are beneficial owners of Kennady
Shares registered in the name of a broker, custodian, nominee or other intermediary who wish to dissent should be aware that only
registered holders of Kennady Shares are entitled to dissent. Accordingly, a beneficial owner of Kennady Shares desiring to exercise
this right must make arrangements for the Kennady Shares beneficially owned by such person to be registered in his, her or its
name prior to the time the written notice of dissent to the Arrangement Resolution is required to be received by Kennady or, alternatively,
make arrangements for the registered holder of Kennady Shares to dissent on his, her or its behalf. Holders of securities convertible
into or exchangeable for Kennady Shares are not entitled to exercise dissent rights.
Failure to strictly comply with the requirements
set forth in Section 185 of the OBCA, as may be modified and supplemented by the Plan of Arrangement, the Interim Order and any
other order of the Court, will result in the loss of any right of dissent.
If you have any questions or require any assistance
in completing your proxy or voting instruction form, please contact Laurel Hill Advisory Group, the proxy solicitation agent,
by telephone at: 1-877-452-7184 (North American Toll Free) or 416-304-0211 (Collect Outside North America); or by email at: assistance@laurelhill.com.
DATED at Toronto, Ontario, Canada, this 5th
day of March, 2018.
| |
BY ORDER OF THE BOARD OF DIRECTORS |
| |
|
| |
/s/ Rory Moore |
| |
Dr. Rory Moore |
| |
Director, President and Chief Executive Officer |
| |
Kennady Diamonds Inc. |
TABLE OF CONTENTS
| |
Page |
| |
|
| JOINT MANAGEMENT INFORMATION CIRCULAR |
1 |
| |
|
| CAUTIONARY STATEMENT REGARDING FORWARD-LOOKING STATEMENTS |
1 |
| |
|
| NOTE TO U.S. SECURITYHOLDERS |
2 |
| |
|
| GENERAL MATTERS |
4 |
| Reporting Currencies and Accounting Principles |
4 |
| Exchange Rate Data |
4 |
| Information Contained in this Circular |
5 |
| Information Contained in this Circular Regarding Mountain Province |
5 |
| Information Contained in this Circular Regarding Kennady |
5 |
| |
|
| SUMMARY OF CIRCULAR |
7 |
| The Meetings |
7 |
| Purpose of the Meetings |
7 |
| Parties to the Arrangement |
8 |
| Effects of the Arrangement |
8 |
| Mountain Province Shareholder Approval |
10 |
| Kennady Shareholder Approval |
10 |
| The Arrangement |
10 |
| Opinion of RBC Capital Markets |
17 |
| Opinion of Haywood Securities Inc. |
18 |
| The Arrangement Agreement |
18 |
| The Voting and Support Agreements |
18 |
| Court Approval of the Arrangement |
19 |
| Procedure for Exchange of Kennady Shares |
19 |
| Dissent Rights |
20 |
| Income Tax Considerations |
20 |
| Canadian Securities Laws |
20 |
| U.S. Securities Laws |
21 |
| Unaudited Pro Forma Condensed Consolidated Financial Information |
21 |
| Interests of Certain Persons in the Arrangement |
21 |
| |
|
| MOUNTAIN PROVINCE SHAREHOLDERS – QUESTIONS AND ANSWERS ABOUT THE ARRANGEMENT |
22 |
| |
|
| GENERAL PROXY INFORMATION – MOUNTAIN PROVINCE SHAREHOLDERS |
27 |
| Date, Time and Place of Mountain Province Meeting |
27 |
| Purpose of the Mountain Province Meeting |
27 |
| Mountain Province Shareholders Entitled to Vote |
27 |
| Voting By Registered Mountain Province Shareholders |
28 |
| Voting By Non-Registered Mountain Province Shareholders |
30 |
| Solicitation of Proxies |
31 |
| Questions |
31 |
| Approvals Under TSX Company Manual |
32 |
| |
|
| KENNADY SHAREHOLDERS – QUESTIONS AND ANSWERS ABOUT THE ARRANGEMENT |
33 |
| |
|
| GENERAL PROXY INFORMATION – KENNADY SHAREHOLDERS |
40 |
| Date, Time and Place of Kennady Meeting |
40 |
| Kennady Shareholders Entitled to Vote |
40 |
| Voting By Registered Kennady Shareholders |
41 |
| Voting By Non-Registered Kennady Shareholders |
42 |
| Solicitation of Proxies |
43 |
| Questions |
44 |
TABLE OF CONTENTS
(continued)
| |
Page |
| |
|
| THE ARRANGEMENT |
45 |
| Background to the Arrangement |
45 |
| Recommendation of the Mountain Province Special Committee |
49 |
| Recommendation of the Mountain Province Board |
49 |
| Recommendation of the Kennady Special Committee |
49 |
| Recommendation of the Kennady Board |
50 |
| Reasons for the Mountain Province Board and Mountain Province Special Committee |
|
| Recommendations |
50 |
| Reasons for the Kennady Board and Kennady Special Committee Recommendations |
52 |
| Opinion of RBC Capital Markets |
55 |
| Opinion of Haywood Securities Inc. |
56 |
| Effects of the Arrangement |
56 |
| Description of the Arrangement |
57 |
| Securityholder and Court Approvals |
59 |
| Dissent Rights |
61 |
| |
|
| THE ARRANGEMENT AGREEMENT |
63 |
| Representations and Warranties |
64 |
| Covenants |
64 |
| Conditions Precedent to the Arrangement |
66 |
| Non-Solicitation |
69 |
| Notification of Acquisition Proposals |
70 |
| Responding to Acquisition Proposals |
70 |
| Right to Match |
71 |
| Termination |
71 |
| Termination Fee |
73 |
| Amendment and Waiver |
74 |
| |
|
| THE VOTING AND SUPPORT AGREEMENTS |
74 |
| Mountain Province Voting and Support Agreements |
75 |
| Kennady Voting and Support Agreements |
76 |
| |
|
| PROCEDURE FOR EXCHANGE OF KENNADY SHARES |
77 |
| Letter of Transmittal |
77 |
| Exchange Procedure |
77 |
| Cancellation of Rights after Six Years |
78 |
| Fractional Interest |
79 |
| Withholding Rights |
79 |
| |
|
| SECURITIES LAW MATTERS |
79 |
| Canadian Securities Laws |
79 |
| U.S. Securities Laws |
82 |
| |
|
| REGULATORY MATTERS |
83 |
| |
|
| PRINCIPAL CANADIAN FEDERAL INCOME TAX CONSIDERATIONS |
84 |
| Principal Canadian Federal Income Tax Considerations |
84 |
| Holders Resident in Canada |
85 |
| Holders Not Resident in Canada |
87 |
| Eligibility for Investment |
89 |
| |
|
| CERTAIN U.S. FEDERAL INCOME TAX CONSIDERATIONS FOR U.S. HOLDERS |
90 |
| U.S. Federal Income Tax Considerations Relating to the Arrangement |
91 |
| U.S. Federal Income Tax Considerations Relating to the Mountain Province Shares |
93 |
TABLE OF CONTENTS
(continued)
| |
Page |
| |
|
| NOTICE TO NON-CANADIAN KENNADY SHAREHOLDERS |
96 |
| |
|
| INTERESTS OF DIRECTORS AND OFFICERS OF MOUNTAIN PROVINCE IN THE ARRANGEMENT |
96 |
| Kennady Shares |
96 |
| Kennady Options and Kennady RSUs |
97 |
| |
|
| INTERESTS OF DIRECTORS AND OFFICERS OF KENNADY IN THE ARRANGEMENT |
98 |
| Kennady Shares |
98 |
| Kennady Options and Kennady RSUs |
99 |
| Benefits of Directors and Executive Officers of Kennady |
100 |
| Continuing Insurance Coverage for Directors and Executive Officers of Kennady |
100 |
| |
|
| THE KENNADY PRIVATE PLACEMENT |
101 |
| |
|
| RISK FACTORS |
101 |
| Risk Factors Relating to the Arrangement |
102 |
| Risk Factors Related to the Combined Company |
104 |
| Risk Factors Related to the Operations of Mountain Province |
111 |
| Risk Factors Related to the Operations of Kennady |
111 |
| |
|
| RESCISSION RIGHTS |
111 |
| |
|
| INFORMATION CONCERNING MOUNTAIN PROVINCE |
111 |
| |
|
| INFORMATION CONCERNING KENNADY |
111 |
| |
|
| INFORMATION CONCERNING THE COMBINED COMPANY |
112 |
| |
|
| INTEREST OF INFORMED PERSONS IN MATERIAL TRANSACTIONS |
112 |
| |
|
| MANAGEMENT CONTRACTS |
112 |
| |
|
| AUDITORS |
112 |
| |
|
| LEGAL MATTERS |
112 |
| |
|
| ADDITIONAL INFORMATION |
113 |
| |
|
| OTHER MATTERS |
113 |
| |
|
| MOUNTAIN PROVINCE BOARD APPROVAL |
114 |
| |
|
| KENNADY BOARD APPROVAL |
115 |
| |
|
| CONSENT OF RBC CAPITAL MARKETS |
116 |
| |
|
| CONSENT OF HAYWOOD SECURITIES INC. |
117 |
| SCHEDULE “A” GLOSSARY OF TERMS |
|
| SCHEDULE “B” RESOLUTIONS TO BE APPROVED AT THE MOUNTAIN PROVINCE MEETING SCHEDULE “C” RESOLUTIONS TO BE APPROVED AT THE KENNADY MEETING |
|
| SCHEDULE “D” PLAN OF ARRANGEMENT |
|
| SCHEDULE “E” FAIRNESS OPINION OF RBC CAPITAL MARKETS SCHEDULE “F” FAIRNESS OPINION OF HAYWOOD SECURITIES INC. SCHEDULE “G” INTERIM ORDER |
|
| SCHEDULE “H” DISSENT RIGHTS UNDER THE OBCA SCHEDULE “I” NOTICE OF APPLICATION FOR FINAL ORDER |
|
| SCHEDULE “J” INFORMATION CONCERNING MOUNTAIN PROVINCE SCHEDULE “K” INFORMATION CONCERNING KENNADY SCHEDULE “L” FINANCIAL STATEMENTS OF KENNADY |
|
| SCHEDULE “M” MANAGEMENT’S DISCUSSION AND ANALYSIS OF KENNADY |
|
TABLE OF CONTENTS
(continued)
| |
Page |
| SCHEDULE “N” INFORMATION CONCERNING THE COMBINED COMPANY |
|
| SCHEDULE “O” UNAUDITED PRO FORMA CONDENSED CONSOLIDATED FINANCIAL |
|
| STATEMENTS OF MOUNTAIN PROVINCE |
|
JOINT MANAGEMENT INFORMATION CIRCULAR
This Circular is furnished in connection with
the solicitation of proxies by or on behalf of the management of Mountain Province for use at the Mountain Province Meeting to
be held at the Terminal City Club, 837 West Hastings Street, Vancouver, British Columbia, Canada V6C 1B4, at 2:30 p.m. (Pacific
Standard Time) on Monday, April 9, 2018 and at any adjournment(s) or postponement(s) thereof for the purposes set
forth in the accompanying notice of special meeting of Mountain Province Shareholders (the “Mountain Province Notice of
Meeting”).
This Circular is also furnished in connection
with the solicitation of proxies by or on behalf of the management of Kennady for use at the Kennady Meeting to be held at the
Terminal City Club, 837 West Hastings Street, Vancouver, British Columbia, Canada V6C 1B4, at 1:00 p.m. (Pacific Standard Time)
on Monday, April 9, 2018 and at any adjournment(s) or postponement(s) thereof for the purposes set forth in the accompanying
notice of special meeting of Kennady Shareholders (the “Kennady Notice of Meeting”).
CAUTIONARY STATEMENT REGARDING FORWARD-LOOKING
STATEMENTS
Except for the statements of historical fact
contained herein, the information presented in this Circular and the information incorporated by reference herein, constitutes
“forward-looking statements” within the meaning of the United States Private Securities Litigation Reform Act of 1995
and “forward-looking information” within the meaning of applicable Canadian Securities Laws (together, “forward-looking
statements”) concerning the business, operations, plans and financial performance and condition of each of Mountain Province,
Kennady and the Combined Company (as defined herein). Often, but not always, forward-looking statements can be identified by words
such as “pro forma”, “plans”, “expects”, “may”, “should”, “could”,
“will”, “budget”, “scheduled”, “estimates”, “forecasts”, “intends”,
“anticipates”, “believes”, or variations including negative variations thereof of such words and phrases that
refer to certain actions, events or results that may, could, would, might or will occur or be taken or achieved.
Forward-looking statements involve known and
unknown risks, uncertainties and other factors which may cause the actual plans, results, performance or achievements of Mountain
Province, Kennady or the Combined Company to differ materially from any future plans, results, performance or achievements expressed
or implied by the forward- looking statements. Such factors include, among others, the timing, closing or non-completion of the
Arrangement, including due to the Parties failing to receive, in a timely manner and on satisfactory terms, the necessary Court,
securityholder, stock exchange and Regulatory Approvals or the inability of the Parties to satisfy or waive in a timely manner
the other conditions to the closing or the conditions precedent, as applicable, of the Arrangement; receipt of a Superior Proposal
by Kennady; receipt of a Superior Proposal by Mountain Province; inability to achieve the benefits or synergies anticipated from
the Arrangement; actual operating cash flows, operating costs, free cash flows, mineral resources, total cash, transaction costs,
and administrative costs of Mountain Province, Kennady or the Combined Company differing materially from those anticipated; project
infrastructure requirements, anticipated processing methods or exploration expenditures differing materially from those anticipated;
risks related to partnership or other joint operations; actual results of current exploration activities; variations in mineral
resources, mineral production, grades or recovery rates or optimization efforts and sales; delays in obtaining governmental approvals
or financing or in the completion of development or construction activities; uninsured risks, including, but not limited to, pollution,
cave ins or hazards for which insurance cannot be obtained; regulatory changes; defects in title; availability or integration of
personnel, materials and equipment; inability to recruit or retain management and key personnel; the composition of the board of
the Combined Company differing from the anticipated composition; performance of facilities, equipment and processes relative to
specifications and expectations; unanticipated environmental impacts on operations; market prices; production, construction and
technological risks related to Mountain Province, Kennady or the Combined Company; capital requirements and operating risks associated
with the operations or an expansion of the operations of Mountain Province and Kennady; dilution due to future equity financings,
fluctuations in diamond and other metal prices and currency exchange rates; uncertainty relating to future production, and cash
resources; inability to successfully complete new development projects, planned expansions or other projects within the timelines
anticipated; adverse changes to market, political and general economic conditions or laws, rules and regulations applicable to
Mountain Province, Kennady or the Combined Company; changes in project parameters; the possibility of project cost overruns or
unanticipated costs and expenses; accidents, labour disputes, community and stakeholder protests and other risks of the mining
industry; failure of plant, equipment or processes to operate as anticipated; risk of an undiscovered defect in title or other
adverse claim; factors discussed under the heading “Risk Factors”; those
risks set out in Schedule “K” –
“Information Concerning Kennady” to this Circular; and those risks set out in Schedule “J” –
Information Concerning Mountain Province” to this Circular, and the Mountain Province AIF and other Mountain Province
documents incorporated by reference herein, which are available on SEDAR under Mountain Province’s issuer profile at www.sedar.com.
In addition, forward-looking and pro forma
information herein is based on certain assumptions and involves risks related to the consummation or non-consummation of the Arrangement
and the business and operations of Mountain Province, Kennady and the Combined Company. Forward-looking and pro forma information
contained herein is based on certain assumptions including that Mountain Province Shareholders including Minority Mountain Province
Shareholders will vote in favour of the Share Issuance Resolution, that Kennady Shareholders including Minority Kennady Shareholders
will vote in favour of the Arrangement Resolution, that the Court will approve the Arrangement and that all other conditions to
the Arrangement are satisfied or waived and that the Arrangement will be completed. Other assumptions include, but are not limited
to, interest and exchange rates; the price of diamonds and other metals; competitive conditions in the mining industry; synergies
between Mountain Province and Kennady; title to mineral properties; financing and funding requirements; general economic, political
and market conditions; and changes in laws, rules and regulations applicable to Mountain Province and Kennady.
Although Mountain Province and Kennady have
attempted to identify important factors that could cause plans, actions, events or results to differ materially from those described
in forward-looking statements in this Circular, and the documents incorporated by reference herein, there may be other factors
that cause plans, actions, events or results not to be as anticipated, estimated or intended. There is no assurance that such statements
will prove to be accurate as actual plans, results and future events could differ materially from those anticipated in such statements
or information. Accordingly, readers should not place undue reliance on forward-looking statements in this Circular, nor in the
documents incorporated by reference herein. All of the forward-looking statements made in this Circular, including all documents
incorporated by reference herein, are qualified by these cautionary statements.
Certain of the forward-looking statements and
other information contained herein concerning the mining industry and Mountain Province’s and Kennady’s general expectations concerning
the mining industry, Mountain Province, Kennady and the Combined Company are based on estimates prepared by Mountain Province and
Kennady using data from publicly available industry sources as well as from market research and industry analysis and on assumptions
based on data and knowledge of this industry which Mountain Province and Kennady believe to be reasonable. However, although generally
indicative of relative market positions, market shares and performance characteristics, this data is inherently imprecise. While
Mountain Province and Kennady are not aware of any misstatement regarding any industry data presented herein, the mining industry
involves risks and uncertainties that are subject to change based on various factors.
Mountain Province Shareholders and Kennady
Shareholders are cautioned not to place undue reliance on forward- looking statements. Mountain Province and Kennady undertake
no obligation to update any of the forward-looking statements in this Circular or incorporated by reference herein, except as
required by law.
NOTE TO U.S. SECURITYHOLDERS
THE ARRANGEMENT AND THE SECURITIES ISSUABLE
IN CONNECTION WITH THE ARRANGEMENT HAVE NOT BEEN APPROVED OR DISAPPROVED BY THE UNITED STATES SECURITIES AND EXCHANGE COMMISSION
(THE “SEC”) OR THE SECURITIES REGULATORY AUTHORITIES OF ANY STATE IN THE UNITED STATES, NOR HAS THE SEC OR THE SECURITIES
REGULATORY AUTHORITIES OF ANY STATE IN THE UNITED STATES PASSED UPON THE FAIRNESS OR MERITS OF THE ARRANGEMENT OR UPON THE ADEQUACY
OR ACCURACY OF THIS CIRCULAR. ANY REPRESENTATION TO THE CONTRARY IS A CRIMINAL OFFENSE.
The Mountain Province Shares to be issued to
Kennady Shareholders pursuant to the Arrangement have not been and will not be registered under the U.S. Securities Act of 1933,
as amended (the “U.S. Securities Act”) or the securities laws of any state of the United States, and are being
issued in reliance on the exemption from registration provided by Section 3(a)(10) of the U.S. Securities Act and exemptions provided
under the securities laws of each state of the United States in which the holders of Kennady Shares that reside in the United States
(the “Kennady U.S.
Shareholders”) reside. Section
3(a)(10) of the U.S. Securities Act exempts from the general registration requirements under the U.S. Securities Act securities
issued in exchange for one or more bona fide outstanding securities where the terms and conditions of the issuance and exchange
are approved by a court of competent jurisdiction that is expressly authorized by Law to grant such approval, after a hearing upon
the fairness of such terms and conditions of such issuance and exchange at which all persons to whom the securities will be issued
in such exchange have the right to appear and receive timely notice thereof. The Court will be advised prior to the hearing of
the application for the Final Order that if the terms and conditions of the Arrangement are approved by the Court, the Mountain
Province Shares to be issued to Kennady Shareholders pursuant to the Arrangement have not been and will not be registered under
the U.S. Securities Act and will be issued in reliance on the exemption from registration provided by Section 3(a)(10) thereunder
and that the Final Order will constitute the basis for such exemption. See “The Arrangement – Securityholder and
Court Approvals – Court Approval of the Arrangement”.
The Mountain Province Shares to be issued to
Kennady Shareholders pursuant to the Arrangement will be freely tradable under the U.S. Securities Act, except by persons who are
“affiliates” (as defined in Rule 144 under the U.S. Securities Act) of Mountain Province after the Arrangement or were
affiliates of Mountain Province within 90 days prior to completion of the Arrangement. Any resale of such Mountain Province Shares
by such an affiliate (or, if applicable, former affiliate) may be subject to the registration requirements of the U.S. Securities
Act, absent an exemption therefrom. See “Securities Law Matters – U.S. Securities Laws”.
Kennady Shareholders who are U.S. Holders
(as defined herein under the heading “Certain U.S. Federal Income Tax Considerations for U.S. Holders”) or otherwise
resident in the United States should be aware that the Arrangement described herein may have tax consequences both in the United
States and in Canada. Such consequences for Kennady Shareholders may not be described fully herein. For a general discussion of
the principal Canadian federal income tax considerations to investors who are resident in the United States, see “Principal
Canadian Federal Income Tax Considerations – Holders Not Resident in Canada”. For a general discussion of certain
U.S. federal income tax considerations to investors who are U.S. Holders, see “Certain U.S. Federal Income Tax Considerations
for U.S. Holders”. Kennady Shareholders who are U.S. Holders or otherwise resident in the United States are urged to consult
their own tax advisors with respect to such Canadian and U.S. federal income tax consequences and the applicability of any federal,
state, local, foreign and other tax laws.
Each of Mountain Province and Kennady is a
“foreign private issuer” within the meaning of Rule 405 under the U.S. Securities Act and Rule 3b-4 under the United
States Securities Exchange Act of 1934, as amended (the “U.S. Exchange Act”). The solicitation of proxies
from Kennady Shareholders is not subject to the proxy requirements of Section 14(a) of the U.S. Exchange Act by virtue of an exemption
for foreign private issuers. Accordingly, the solicitation contemplated herein is being made to Kennady U.S. Shareholders only
in accordance with Canadian Securities Laws and Canadian corporate laws, and this Circular has been prepared in accordance with
the disclosure requirements of Canadian Securities Laws. Kennady U.S. Shareholders should be aware that, in general, such Canadian
disclosure requirements are different from those applicable to proxy statements, prospectuses or registration statements prepared
in accordance with U.S. laws.
The financial statements and information included
or incorporated by reference in this Circular have been prepared in accordance IFRS and are subject to Canadian auditing and auditor
independence standards and thus may not be comparable to financial statements prepared in accordance with U.S. GAAP and auditor
independence standards.
Information regarding mineral reserve and mineral
resource estimates in this Circular or in the documents incorporated by reference herein concerning the properties, operations
and royalty interests of Mountain Province and Kennady has been prepared in accordance with the requirements of securities laws
in effect in Canada, which may differ in material respects from the requirements of U.S. Securities Laws applicable to U.S. companies.
Mountain Province and Kennady are required to describe mineral reserves associated with the properties in which Mountain Province
and Kennady hold royalty interests utilizing Canadian Institute of Mining, Metallurgy and Petroleum (“CIM”) definitions
of “proven” or “probable”, which categories of mineral reserves are recognized by NI 43-101, but which differ
from those definitions in the disclosure requirements promulgated by the SEC and contained in Industry Guide 7. In addition, under
NI 43-101 Mountain Province and Kennady are required to describe mineral resources associated with their respective properties
utilizing CIM definitions of “measured”, “indicated” or “inferred”, which categories of mineral resources
are recognized by Canadian regulations but are not defined terms under Industry Guide 7 and are
generally not permitted to be used in reports
and registration statements of U.S. companies filed with the SEC. Accordingly, information contained in this Circular regarding
the mineral deposits of Mountain Province and Kennady and the owners and operators of properties in which Mountain Province and
Kennady hold royalty interests may not be comparable to similar information disclosed by U.S. companies in reports filed with the
SEC. U.S. investors are cautioned not to assume that all or any part of measured mineral resources or indicated mineral resources
will ever be converted into mineral reserves. “Inferred resources” have an even greater amount of uncertainty as to their
existence, and great uncertainty as to their economic and legal feasibility. It cannot be assumed that all or any part of an inferred
mineral resource will ever be upgraded to a higher category. Under Canadian rules, estimates of inferred mineral resources may
not form the basis of feasibility or pre-feasibility studies, except in rare cases. U.S. readers are cautioned not to assume that
all or any part of an inferred resource exists, or is economically or legally mineable.
The enforcement by investors of civil liabilities
under the U.S. Securities Laws may be affected adversely by the fact that each of Mountain Province and Kennady is organized under
the laws of a jurisdiction other than the U.S., that some or all of their respective officers and directors are residents of countries
other than the U.S., that some or all of the experts named in this Circular and the documents incorporated by reference herein
may be residents of countries other than the U.S., and that all or a substantial portion of the assets of Mountain Province and
Kennady and such persons are located outside the U.S. As a result, it may be difficult or impossible for Mountain Province Shareholders
or Kennady Shareholders resident in the U.S. to effect service of process within the U.S. upon Mountain Province or Kennady, their
respective officers and directors or the experts named in this Circular and any documents incorporated by reference herein, or
to realize, against them, upon judgments of courts in the U.S. predicated upon civil liabilities under U.S. Securities Laws. In
addition, Mountain Province Shareholders and Kennady Shareholders resident in the U.S. should not assume that Canadian courts:
(a) would enforce judgments of U.S. courts obtained in actions against such persons predicated upon civil liabilities under U.S.
Securities Laws or the state-specific “blue sky” securities laws of any state within the U.S.; or (b) would enforce,
in original actions, liabilities against such persons predicated upon civil liabilities under U.S. Securities Laws or “blue
sky” laws of any state within the U.S.
GENERAL MATTERS
Reporting Currencies and Accounting Principles
Unless otherwise indicated, all references
to “$” or “C$” in this Circular refer to Canadian dollars.
The financial statements of Mountain Province
that are incorporated by reference in this Circular are reported in Canadian dollars and are prepared in accordance with IFRS.
The financial statements of Kennady that are included in Schedule “L” – “Financial Statements of Kennady”
and Schedule “M” – “Management’s Discussion and Analysis of Kennady” to this Circular are reported
in Canadian dollars and are prepared in accordance with IFRS. The pro forma financial statements of Mountain Province that
are included in Schedule “O” – “Unaudited Pro Forma Condensed Consolidated Financial Statements of Mountain
Province” to this Circular are reported in Canadian dollars.
Exchange Rate Data
The following table sets out: (i) the rates of exchange for one U.S. dollar expressed in Canadian dollars in
effect at the end of the periods indicated; (ii) the average rates of exchange for such periods; and (iii) the highest and lowest
rates of exchange during such periods, based on the noon rate or daily average exchange rate, as applicable, provided by the Bank
of Canada.
| |
Year ended December 31 |
| 2015 |
2016 |
2017 |
| Low |
1.1728 |
1.2544 |
1.2128 |
| High |
1.3990 |
1.4589 |
1.3743 |
| Average |
1.2787 |
1.3248 |
1.2986 |
| Year end |
1.3840 |
1.3427 |
1.2545 |
On January 1, 2017, the Bank of Canada began
a transition period to change its procedure for publishing exchange rate information. As of April 28, 2017, the Bank of Canada
no longer produces noon and closing daily exchange rates, instead publishing daily average exchange rates.
On March 5, 2018, the average daily exchange
rate for one United States dollar expressed in Canadian dollars as reported by the Bank of Canada was C$1.2977.
Information Contained in this Circular
The information contained in this Circular
is given as at March 5, 2018, except where otherwise noted and except that information in documents incorporated by reference is
given as of the dates noted therein. No person has been authorized to give any information or to make any representation in connection
with the Arrangement and other matters described herein other than those contained in this Circular and, if given or made, any
such information or representation should be considered not to have been authorized by Mountain Province or Kennady.
This Circular does not constitute the solicitation
of an offer to purchase, or the making of an offer to sell, any securities or the solicitation of a proxy by any person in any
jurisdiction in which such solicitation or offer is not authorized or in which the person making such solicitation or offer is
not qualified to do so or to any person to whom it is unlawful to make such solicitation or offer.
Information contained in this Circular should
not be construed as legal, tax or financial advice. Mountain Province Shareholders and Kennady Shareholders are urged to consult
with their own professional advisors to obtain legal, tax or financial advice.
Descriptions in this Circular of the terms
of the Arrangement Agreement, the Plan of Arrangement, and the Voting and Support Agreements are summaries of the terms of those
documents and are qualified in their entirety by such terms. Mountain Province Shareholders and Kennady Shareholders should refer
to the full text of each of the Arrangement Agreement, the Plan of Arrangement, and the Voting and Support Agreements for complete
details of those documents. The full text of the Arrangement Agreement is available on SEDAR under Mountain Province’s issuer profile
at www.sedar.com. The Plan of Arrangement is attached as Schedule “D” – “Plan of Arrangement”
to this Circular.
Information Contained in this Circular
Regarding Mountain Province
Certain information in this Circular pertaining
to Mountain Province has been furnished by Mountain Province, including, but not limited to (i) information pertaining to Mountain
Province in Schedule “J” – “Information Concerning Mountain Province” to this Circular, (ii) the
historical management’s discussion and analysis of Mountain Province incorporated by reference in this Circular, (iii) the historical
financial statements of Mountain Province incorporated by reference in this Circular, and (iv) information relating to Mountain
Province in the unaudited pro forma condensed consolidated financial statements in Schedule “O” – “Unaudited
Pro Forma Condensed Consolidated Financial Statements of Mountain Province” to this Circular. With respect to this information,
the Kennady Board has relied exclusively upon Mountain Province, without independent verification by Kennady. Although Kennady
does not have any knowledge that would indicate that such information is untrue or incomplete, neither Kennady nor any of its directors
or officers assumes any responsibility for the accuracy or completeness of such information including any of Mountain Province’s
financial statements, or for the failure by Mountain Province to disclose events or information that may affect the completeness
or accuracy of such information. For further information regarding Mountain Province, please refer to Mountain Province’s filings
with the Securities Authorities, which is available on SEDAR under Mountain Province’s issuer profile at www.sedar.com.
See Schedule “J” – “Information Concerning Mountain Province” to this Circular.
Information Contained in this Circular
Regarding Kennady
Certain information in this Circular pertaining
to Kennady has been furnished by Kennady, including, but not limited to (i) information pertaining to Kennady in Schedule “K”
– “Information Concerning Kennady” to this Circular, (ii) the historical financial statements of Kennady
included in Schedule “L” – “Financial Statements of Kennady” to this
Circular, (iii) management’s discussion and
analysis of Kennady included in Schedule “M” – “Management’s Discussion and Analysis of Kennady”
to this Circular, (iv) information pertaining to Kennady included in Schedule “N” – “Information Concerning
The Combined Company” to this Circular, and (v) information relating to Kennady in the unaudited pro forma condensed
consolidated financial statements attached as Schedule “O” – “Unaudited Pro Forma Condensed Consolidated
Financial Statements of Mountain Province” to this Circular. With respect to this information, the Mountain Province Board
has relied exclusively upon Kennady, without independent verification by Mountain Province. Although Mountain Province does not
have any knowledge that would indicate that such information is untrue or incomplete, neither Mountain Province nor any of its
directors or officers assumes any responsibility for the accuracy or completeness of such information including any of Kennady’s
financial statements, or for the failure by Kennady to disclose events or information that may affect the completeness or accuracy
of such information. For further information regarding Kennady, please refer to Kennady’s filings with the Securities Authorities,
which is available on SEDAR under Kennady’s issuer profile at www.sedar.com. See Schedule “K” – “Information
Concerning Kennady” to this Circular.
SUMMARY OF CIRCULAR
This Summary should be read together with
and is qualified in its entirety by the more detailed information and financial data and statements contained elsewhere in this
Circular, including the Schedules hereto and documents incorporated into this Circular by reference. Capitalized terms in this
Summary have the meanings set out in Schedule “A” – “Glossary of Terms” or as set out in this Summary.
The full text of the Arrangement Agreement, which is incorporated by reference in this Circular, may be viewed on SEDAR under Mountain
Province’s and Kennady’s issuer profiles, respectively, at www.sedar.com.
The Meetings
The Mountain Province Meeting
The Mountain Province Meeting will be held at the Terminal
City Club, 837 West Hastings Street, Vancouver, British Columbia, Canada V6C 1B4, at 2:30 p.m. (Pacific Standard Time) on Monday,
April 9, 2018.
The record date for determining the Mountain
Province Shareholders entitled to receive notice of and to vote at the Mountain Province Meeting is March 5, 2018. Only Mountain
Province Shareholders of record as of the close of business (5:00 p.m. (Eastern Standard Time)) on the Mountain Province Record
Date are entitled to receive notice of and to vote at the Mountain Province Meeting.
The Kennady Meeting
The Kennady Meeting will be held at the Terminal
City Club, 837 West Hastings Street, Vancouver, British Columbia, Canada V6C 1B4, at 1:00 p.m. (Pacific Standard Time) on Monday,
April 9, 2018.
The record date for determining the Kennady
Shareholders entitled to receive notice of and to vote at the Kennady Meeting is March 5, 2018. Only Kennady Shareholders of record
as of the close of business (5:00 p.m. (Eastern Standard Time)) on the Kennady Record Date are entitled to receive notice of and
to vote at the Kennady Meeting.
Purpose of the Meetings
Purpose of the Mountain Province Meeting
The purpose of the Mountain Province Meeting
is for Mountain Province Shareholders to consider and vote upon the Share Issuance Resolution, the full text of which is set out
in Schedule “B” – “Resolutions to be Approved at the Mountain Province Meeting” to this Circular.
Particulars of the subject matter relating to the Arrangement are described in this Circular under the heading “The Arrangement”.
If the Share Issuance Resolution does not
receive the requisite approval, the Arrangement will not proceed.
Management of Mountain Province and the
Mountain Province Board recommend that Mountain Province Shareholders vote FOR the Share Issuance Resolution.
Purpose of the Kennady Meeting
The purpose of the Kennady Meeting is for Kennady
Shareholders to consider and vote upon the Arrangement Resolution, the full text of which is set out in Schedule “C”
– “Resolutions to be Approved at the Kennady Meeting” to this Circular. Particulars of the subject matter
relating to the Arrangement are described in this Circular under the heading “The Arrangement”.
If the Arrangement Resolution does not receive
the requisite approval, the Arrangement will not proceed.
Management of Kennady and the Kennady Board
recommend that Kennady Shareholders vote FOR the Arrangement Resolution.
Parties to the Arrangement
Mountain Province is a corporation continued
under the OBCA. Mountain Province’s head office and registered office is located at 161 Bay Street, Suite 1410, P.O. Box 216, Toronto,
Ontario, Canada, M5J 2S1. The Mountain Province Shares are listed for trading on the TSX and Nasdaq under the symbol “MPVD”.
Kennady is a corporation incorporated under
the OBCA. Kennady’s head office is located at 1199 West Hastings Street, Suite 700, Vancouver, British Columbia, V6E 3T5 and its
registered office is located at 161 Bay Street, Suite 1410, P.O. Box 216, Toronto, Ontario, M5J 2S1. The Kennady Shares are listed
for trading on the TSXV under the symbol “KDI”.
See Schedule “J” – “Information
Concerning Mountain Province” to this Circular for a description of Mountain Province. See Schedule “K” –
“Information Concerning Kennady” to this Circular for a description of Kennady. See Schedule “N” –
“Information Concerning the Combined Company” to this Circular for a description of Mountain Province after giving
effect to the Arrangement.
Effects of the Arrangement
The purpose of the Arrangement is to effect
the business combination of Mountain Province and Kennady. The Arrangement is to be carried out pursuant to the Arrangement Agreement
and the Plan of Arrangement. Upon completion of the Arrangement, Mountain Province will acquire all of the issued and outstanding
Kennady Shares and Kennady will become a wholly-owned subsidiary of Mountain Province.
Corporate Structure
The Arrangement will result in Kennady becoming
a wholly-owned subsidiary of Mountain Province. The following diagram sets out the corporate structure of the Combined Company
following the completion of the Arrangement.
See Schedule “N” – “Information Concerning
the Combined Company” to this Circular.
Mountain Province Shareholders
If the Arrangement is completed, up to 54,673,383
Mountain Province Shares (subject to variation due to rounding of fractional interests in accordance with the terms of the Plan
of Arrangement) will be issuable, representing approximately 34.1% of the number of issued and outstanding Mountain Province Shares
as of the date of this Circular.
See “The Arrangement – Effects
of the Arrangement – Mountain Province Shareholders”.
Kennady Shareholders
Pursuant to the Arrangement, in connection
with the acquisition by Mountain Province of Kennady, each Kennady Shareholder (other than Mountain Province and any Dissenting
Shareholders) immediately prior to the Effective Time will receive 0.975 of a Mountain Province Share in exchange for each Kennady
Share held. See “The Arrangement – Description of the Arrangement”.
Immediately following the completion of the
Arrangement, Former Kennady Shareholders are expected to own approximately 23.7% of the Mountain Province Shares on an undiluted
basis, based on the number of Mountain Province Shares and Kennady Shares outstanding as of the date of this Circular and assuming
that (i) there are no Dissenting Shareholders, (ii) no Kennady Shares held by Mountain Province between the Kennady Record Date
and the Effective Date are converted pursuant to the Arrangement, and (iii) no Kennady Options or Kennady RSUs are exercised prior
to the Effective Time.
See “The Arrangement – Effects
of the Arrangement – Kennady Shareholders” and “Procedure for Exchange of Kennady Shares” and “The
Arrangement – Description of the Arrangement”.
Holders of Kennady Options and Kennady RSUs
Those outstanding Kennady Options that are
“in-the-money” and Kennady RSUs will be cashed out in accordance with the terms and conditions of the Kennady Long Term
Equity Incentive Plan and all such outstanding Kennady Options and Kennady RSUs will be treated in the same fashion. The Kennady
Long Term Equity Incentive Plan provides that in the event of a change of control (a “CoC”) of Kennady, all vesting
and exercise criteria of the Kennady Options and Kennady RSUs shall be deemed to have been satisfied and each participant shall
be entitled to receive, in full settlement, a cash payment equal to (a) in the case of a Kennady RSU, the Special Value (as defined
below), and (b) in the case of a Kennady Option, the difference between the Special Value and the option price in respect of such
Kennady Option.
As used herein, the term “Special Value”
means (i) if any Kennady Shares are sold as part of the transaction constituting the CoC, the weighted average of the prices paid
for such shares by the acquirer, provided that if any portion of the consideration is paid in property other than cash, then the
Kennady Board shall determine the fair market value of such property as of the date of the CoC for purposes of determining the
Special Value; and (ii) if no Kennady Shares are sold, the market price of a Kennady Share on the day immediately preceding the
date of the CoC. As the Kennady Shareholders are receiving the Arrangement Consideration and no cash consideration, the Kennady
Board will determine the fair market value of the Arrangement Consideration the day immediately preceding the Effective Date for
purposes of determining the Special Value.
Kennady Options and Kennady RSUs that are not
cashed out in accordance with the terms and conditions of the Kennady Long Term Equity Incentive Plan (including Kennady Options
that are “out-of-the-money”) will, pursuant to the terms of the Kennady Long Term Equity Incentive Plan, be cancelled
at the Effective Time.
See “The Arrangement – Effects
of the Arrangement – Holders of Kennady Options and Kennady RSUs” and “The Arrangement – Description
of the Arrangement”.
Mountain Province Shareholder Approval
Share Issuance Resolution
At the Mountain Province Meeting, Mountain
Province Shareholders will be asked to consider and, if deemed advisable, pass an ordinary resolution approving the issuance of
up to 54,673,383 Mountain Province Shares (subject to variation due to rounding of fractional interests in accordance with the
terms of the Plan of Arrangement) in connection with the Arrangement, composed of up to 54,673,383 Mountain Province Shares to
be issued to Kennady Shareholders (other than Mountain Province and any Dissenting Shareholders) in exchange for their Kennady
Shares pursuant to the Arrangement.
To be effective, the Share Issuance Resolution
must be approved at the Mountain Province Meeting by (i) at least a majority of the votes cast on the Share Issuance Resolution
by the Mountain Province Shareholders present in person or represented by proxy and entitled to vote at the Mountain Province Meeting
(in accordance with the requirements of Section 611(c) of the TSX Company Manual), and (ii) at least a majority of the votes cast
on the Share Issuance Resolution by the Minority Mountain Province Shareholders (i.e., excluding votes attached to Kennady Shares
held by any other person described in items (a) through (d) of Section 8.1(2) of MI 61-101) present in person or represented by
proxy and entitled to vote at the Mountain Province Meeting. The complete text of the Share Issuance Resolution to be presented
to the Mountain Province Meeting is set out in Schedule “B” – “Resolutions to be Approved at the Mountain
Province Meeting” to this Circular.
The Arrangement Agreement provides that the
Share Issuance Resolution must be approved as a condition precedent to the implementation of the Arrangement. See “The
Arrangement – Securityholder and Court Approvals”.
Kennady Shareholder Approval
Arrangement Resolution
At the Kennady Meeting, the Kennady Shareholders
will be asked to consider and, if deemed advisable, pass a special resolution approving the Arrangement Resolution set forth in
Schedule “C” – “Resolutions to be Approved at the Kennady Meeting” to this Circular to approve
the Arrangement.
To be effective, the Arrangement Resolution
must be approved at the Kennady Meeting by (i) at least 66 ⅔% of the votes cast on the Arrangement Resolution by the Kennady
Shareholders present in person or represented by proxy and entitled to vote at the Kennady Meeting, and (ii) at least a majority
of the votes cast on the Arrangement Resolution by Minority Kennady Shareholders (i.e., excluding votes attached to Kennady Shares
held by any other person described in items (a) through (d) of Section 8.1(2) of MI 61-101) present in person or represented by
proxy and entitled to vote at the Kennady Meeting. See “Securities Law Matters – Multilateral Instrument 61-101”.
The Arrangement Resolution must be approved
in order for Kennady to seek the Final Order and implement the Arrangement on the Effective Date. See “The Arrangement
– Securityholder and Court Approvals”.
The Arrangement
Background to the Arrangement
The Arrangement and the provisions of the Arrangement
Agreement are the result of arm’s length negotiations conducted between representatives of the Mountain Province Special Committee
and the Kennady Special Committee. A summary of the material events leading up to the negotiation of the Arrangement Agreement
and the material meetings, negotiations and discussions between the Parties that preceded the execution and public announcement
of the Arrangement Agreement is included in this Circular under the heading “The Arrangement – Background to the
Arrangement”.
Recommendation of the Mountain Province Special
Committee
The Mountain Province Special Committee was
formed to review and evaluate the Arrangement, oversee and supervise the process carried out by Mountain Province in negotiating
and entering into the Arrangement Agreement and to make recommendations to the Mountain Province Board with respect to any such
proposed transaction. Scotiabank was retained to act as financial advisors to the Mountain Province Special Committee.
After careful consideration, including a thorough
review of the Arrangement Agreement and receiving the oral fairness opinion of RBC Capital Markets delivered to the Mountain Province
Special Committee (subsequently confirmed in writing), as well as a thorough review of other matters, including those discussed
below under the heading “Reasons for the Mountain Province Board and Mountain Province Special Committee Recommendations”,
the Mountain Province Special Committee unanimously determined that the Arrangement is in the best long-term interests of Mountain
Province. Accordingly, the Mountain Province Special Committee unanimously recommended that the Mountain Province Board approve
the Arrangement and enter into the Arrangement Agreement.
See “The Arrangement – Recommendation
of the Mountain Province Special Committee”.
Recommendation of the Mountain Province Board
After careful consideration, including a thorough
review of the Arrangement Agreement, the Mountain Province Board (other than Mr. Comerford, who, having declared a potential conflict
of interest in the matters being considered, was not present and did not vote on the Arrangement) determined, upon the recommendation
of the Mountain Province Special Committee and consultation with its legal and financial advisors, and based in part on an oral
fairness opinion (subsequently confirmed in writing) received by the Mountain Province Special Committee from RBC Capital Markets,
that the Arrangement is in the best long-term interests of Mountain Province and the Mountain Province Shareholders. Accordingly,
the Mountain Province Board unanimously approved the Arrangement Agreement and unanimously recommends that Mountain Province Shareholders
vote FOR the Share Issuance Resolution.
See “The Arrangement – Recommendation
of the Mountain Province Board”.
Recommendation of the Kennady Special Committee
The Kennady Special Committee was formed to
consider potential transactions involving the sale of all or substantially all of the shares or assets of Kennady, evaluate the
Arrangement, pursue strategic alternatives to the Arrangement, oversee and supervise the process carried out by Kennady in negotiating
and entering into the Arrangement Agreement and to make recommendations to the Kennady Board with respect to any such proposed
transaction.
After careful consideration, including a thorough
review of the Arrangement Agreement and receiving the oral fairness opinion of Haywood Securities Inc. delivered to the Kennady
Special Committee (subsequently confirmed in writing), as well as a thorough review of other matters, including those discussed
below under the heading “Reasons for the Kennady Board and Kennady Special Committee Recommendations”, the Kennady
Special Committee unanimously determined that the Arrangement is in the best interests of Kennady. Accordingly, the Kennady Special
Committee unanimously recommended that the Kennady Board approve the Arrangement and enter into the Arrangement Agreement and that
the Kennady Board recommend that Kennady Shareholders vote in favour of the Arrangement Resolution.
See “The Arrangement – Recommendation
of the Kennady Special Committee”.
Recommendation of the Kennady Board
After careful consideration, including a thorough
review of the Arrangement Agreement and receiving the fairness opinion of Haywood Securities Inc. delivered to the Kennady Special
Committee, as well as a thorough review of other matters, the Kennady Board (other than Mr. Comerford and Dr. Moore, who, having
declared a potential conflict of interest in the matters being considered, were not present and did not vote on the Arrangement),
upon the unanimous recommendation of the Kennady Special Committee, unanimously determined that the Arrangement is in the best
interests of Kennady. Accordingly, the Kennady Board unanimously approved the Arrangement Agreement and unanimously recommends
that Kennady Shareholders vote FOR the Arrangement Resolution.
See “The Arrangement – Recommendation
of the Kennady Board”.
Reasons for the Mountain Province Board and Special
Committee Recommendations
In making their respective recommendations,
the Mountain Province Special Committee and the Mountain Province Board consulted with Mountain Province’s management, its financial
advisor, Scotiabank, and its legal counsel and performed financial, technical and legal due diligence with the help of its advisors
and experts and considered a number of factors, including those listed below. The following includes forward-looking information
and readers are cautioned that actual results may vary.
In making their respective determinations and
recommendations, the Mountain Province Special Committee and the Mountain Province Board considered and relied upon a number of
substantive factors, including, among others:
| · | Addition of Significant and 100% Owned Resources. Kennady owns two 100%-owned diamondiferous
bodies which contain indicated resources of 13.62 million carats and inferred resources of 5.02 million carats. The Kelvin kimberlite
has indicated resources of 13.62 million carats at an average grade of 1.60 carats per tonne and average value of U.S.$63 per carat
as estimated by bulk samples completed in 2015 and 2016. The Faraday kimberlites have inferred resources of 5.02 million carats
at an average grade of 1.54 carats per tonne and average value of U.S.$98 per carat as estimated by a 2017 bulk sample. The size
and grade of Kelvin and Faraday add to the total number of carats owned by Mountain Province for future production and the addition
of these two bodies also opens up new mine planning opportunities that could deliver optimized revenue realization and operating
cost control. |
| · | Upside to Grow Resources. Mountain Province believes there is upside potential to
grow resources at both Kelvin and Faraday and develop potential resources at the Doyle and MZ kimberlites. |
| · | Extensive Land Package. Kennady possesses 67,164 hectares of highly prospective and
100%-owned exploration ground strategically surrounding the GK Diamond Mine. |
| · | Complementary Assets. The Combined Company is expected to benefit from the complementary
assets held by Mountain Province and Kennady. Kennady controls the bulk of the prospective kimberlite belt and Mountain Province
owns 49% of the belt’s operating mine. Upon completion of the Arrangement, the Combined Company will be uniquely positioned to
either add the Kennady assets to the Gahcho Kué Joint Venture (subject to agreement with De Beers) or advance exploration,
building 100%-owned value that can be combined with the Gahcho Kué Joint Venture at a later date. On a combined basis, this
will have the potential to significantly reduce pre-production capital expenditures, transportation costs and operating expenses. |
| ○ | Potential to Displace Lower-Grade Tuzo Ore. From 2023-2025, the Gahcho Kué
Joint Venture is scheduled to mine lower-grade ore from the Tuzo pipe. Should the Kennady assets be integrated into the Gahcho
Kué Joint Venture there is the potential to partially displace this lower-grade Tuzo ore with higher-grade ore from Kelvin
or Faraday. Given the early stage of the Kennady assets, time is needed to develop and permit the assets before they are ready
to be mined. |
| ○ | Full Control over Kennady’s 2018 Exploration Program. Kennady’s 2017 summer drilling
program highlighted key opportunities to grow the current Faraday resource and the 2018 plan is in place to explore other key value
enhancing targets. Upon completion of the Arrangement, Mountain Province will be in a position to fully control Kennady’s 2018
drill program. Managing Kennady’s drilling program is not expected to meaningfully detract from Mountain Province’s other capital
management objectives, including those related to debt servicing and dividend payments. |
| · | Fairness Opinion. The Mountain Province Special Committee received the RBC Fairness
Opinion that concluded, as at the date thereof and subject to the assumptions, limitations and qualifications contained therein,
that the Arrangement Consideration to be paid by Mountain Province pursuant to the Arrangement is fair, from a financial point
of view, to Mountain Province. |
| · | Experienced Leadership Team. The Combined Company will have an experienced management
team with a proven track record of generating shareholder value and with knowledge of all stages of the mine development cycle,
including discovery, development and production. |
The Mountain Province Special Committee and
Mountain Province Board also considered a variety of risks and other potentially negative factors relating to the Arrangement including
those matters described under the heading “Risk Factors Relating to the Arrangement”. The Mountain Province Special
Committee and Mountain Province Board believed that, overall, the anticipated benefits of the Arrangement to Mountain Province
outweighed these risks and negative factors.
In making their respective determinations and
recommendations, the Mountain Province Special Committee and the Mountain Province Board also observed that a number of procedural
safeguards were and are present to permit the Mountain Province Special Committee and the Mountain Province Board to represent
effectively the interests of Mountain Province and the Mountain Province Shareholders and Mountain Province’s other stakeholders,
including, among others:
| · | Role of the Mountain Province Special Committee. The evaluation and negotiation
process was conducted by the Mountain Province Special Committee, being members of the Mountain Province Board who are independent
of management and the Significant Shareholder. The Mountain Province Special Committee met regularly with Mountain Province’s advisors
and management and retained its own independent legal, financial and technical advisors. |
| · | Unanimous recommendation of the Mountain Province Special Committee, consisting entirely
of independent directors. The Arrangement was approved by the independent directors of Mountain Province, in accordance
with MI 61-101. |
| · | Key Shareholder Support. Shareholders of each of Mountain Province and Kennady holding,
in the aggregate, approximately 24.3% of the outstanding Mountain Province Shares and approximately 28.6% of the outstanding Kennady
Shares, respectively, as at January 28, 2018, have entered into Voting and Support Agreements pursuant to which they have agreed,
among other things, to vote in favour of the Share Issuance Resolution and the Arrangement Resolution, respectively. |
| · | Shareholder Approval. In addition to majority approval by the Mountain Province Shareholders
present in person or represented by proxy and entitled to vote at the Mountain Province Meeting, the Share Issuance Resolution
must also be approved by at least a majority of the votes cast on the Share Issuance Resolution by Minority Mountain Province Shareholders
present in person or represented by proxy and entitled to vote at the Mountain Province Meeting, providing protection for Minority
Mountain Province Shareholders. |
| · | Independent Mountain Province Fairness Opinion. Mountain Province retained
RBC Capital Markets to provide the RBC Fairness Opinion. The fee payable to RBC Capital Markets is not contingent on the completion
of the Arrangement and such fee is payable to RBC Capital Markets in respect of the RBC Fairness Opinion irrespective of the substance
or conclusions of the RBC Fairness Opinion. See “The Arrangement – RBC Fairness Opinion” and Schedule “E”
– “Fairness Opinion of RBC Capital Markets”. |
| · | Experienced financial and legal advisors. The process undertaken by the Mountain
Province Special Committee included the retention of Miller Thomson LLP as its independent legal advisor and the retention of Scotiabank
as its independent financial advisor. |
| · | Reasonable Termination Fee. Mountain Province is able to terminate the Arrangement
Agreement in specified circumstances, including to accept a Superior Proposal on payment of the Termination Fee of $6,000,000.
This provides further assurance to the Mountain Province Board that it would have a reasonable opportunity to consider a potential
superior unsolicited alternative transaction if one is subsequently proposed. |
Reasons for the Kennady Board and Kennady Special
Committee Recommendations
In making their respective recommendations,
the Kennady Special Committee and the Kennady Board consulted with Kennady’s management, legal counsel to the Kennady Special Committee,
technical advisors and Minvisory Corp., reviewed a significant amount of information and considered a number of factors, including
those listed below. The following includes forward-looking information and readers are cautioned that actual results may vary.
In making their respective determinations and
recommendations, the Kennady Special Committee and the Kennady Board considered and relied upon a number of substantive factors,
including, among others:
| · | Increased diversification. Kennady Shareholders who retain the Mountain Province
Shares they receive in connection with the Arrangement will have the opportunity to continue to participate in value created by
Kennady’s exploration activities, while exposure to exploration risk is mitigated through participation in a producing asset, the
GK Diamond Mine. |
| · | Premium to Kennady Shareholders. The Arrangement will provide Kennady Shareholders
with a premium of approximately 26% to Kennady’s closing price and a premium of 15% based on the 20-day volume weighted-average-price
of Mountain Province Shares on the TSX and Kennady Shares on the TSXV, both as of close on January 26, 2018, the last trading day
prior to the public announcement of the Arrangement Agreement by Kennady and Mountain Province. |
| · | Providing Kennady Shareholders with greater liquidity. Mountain Province Shares have
historically been, and are expected at the Effective Time to be, significantly more liquid securities than Kennady Shares. The
Arrangement will provide Kennady Shareholders with the opportunity to hold shares in a company with significantly greater share
liquidity, which should provide more immediate liquidity to any Former Kennady Shareholders should they wish to sell the Mountain
Province Shares they receive under the Arrangement. The Arrangement will also provide Kennady Shareholders with the opportunity
to hold shares in a company with significantly greater analyst coverage, market capitalization, improved ability to obtain financing
and broader institutional following than currently enjoyed by Kennady. |
| · | Fairness Opinion. The Kennady Special Committee received the Haywood Fairness
Opinion that concluded, as at the date thereof and subject to the assumptions, limitations and qualifications contained therein,
that the Arrangement Consideration to be received by the Kennady Shareholders pursuant to the Arrangement is fair, from a financial
point of view, to the Kennady Shareholders. |
| · | Increased ability to advance the Kennady assets. The Arrangement will provide Kennady
Shareholders with access to Mountain Province’s development, production and marketing expertise and financial strength to enhance
the advancement of the Kennady North Project, generating enhanced exploration upside for the combined assets. |
| · | Avoiding Risk of Kennady being a stranded asset. The completion of the Arrangement
with Mountain Province will mitigate risks relating to any future commercialization of Kennady’s mineral properties, including
the risk of becoming stranded assets due to, amongst other factors, Kennady’s dependence on the infrastructure of surrounding mines,
potential issues with access to such mines in order to exploit the Kennady North Project resources, availability of financing and
the current market conditions. |
| · | Consideration of strategic alternatives. The Kennady Special Committee asked Minvisory
Corp. to reach out to other potential buyers and parties that might be willing to provide financing to Kennady prior to entering
into exclusive negotiations with Mountain Province. Minvisory Corp. proceeded to contact potential buyers and parties that may
be willing to provide financing to Kennady. Following Minvisory Corp.’s discussions with such parties, Minvisory Corp. was advised
by such parties that advancing an acquisition or financing transaction, as applicable, was not possible at the current time. Thereafter,
the Kennady Special Committee decided to focus on negotiating a transaction with Mountain Province. |
| · | Tax Deferred Rollover for Canadian and US Shareholders. Kennady Shareholders who
are resident in Canada or the US and who receive Mountain Province Shares as Consideration under the Arrangement will generally
be entitled to an automatic tax deferred rollover to defer Canadian or US taxation on any capital gains arising from the disposition
of their Kennady Shares. See “Principal Canadian Federal Income Tax Considerations” and “Certain U.S.
Federal Income Tax Considerations for U.S Holders”. |
| · | Low Execution Risk. There are no material regulatory issues that are expected to
arise in connection with the Arrangement that would prevent its completion, and all required regulatory clearances and approvals
are expected to be obtained. There are a limited number of conditions, beyond the Kennady Shareholder Approval and the Mountain
Province Shareholder Approval, required for the completion of the Arrangement, which the Kennady Board expects to have satisfied
or waived in due course. In addition, the Significant Shareholder and all of the directors and officers of Kennady have entered
into Kennady Voting and Support Agreements pursuant to which, and subject to the terms of which, they have agreed, among other
things, to vote their Kennady Shares in favour of the Arrangement Resolution. |
| · | Experienced Leadership Team. The Combined Company will have an experienced management
team with a proven track record of generating shareholder value and with knowledge of all stages of the mine development cycle,
including discovery, development and production. |
The Kennady
Special Committee and Kennady Board also considered a variety of risks and other potentially negative factors relating to the Arrangement
including those matters described under the heading “Risk Factors Relating to the Arrangement”. The Kennady Special
Committee and Kennady Board believed that, overall, the anticipated benefits of the Arrangement to Kennady outweighed these risks
and negative factors.
In making their
respective determinations and recommendations, the Kennady Special Committee and the Kennady Board also observed that a number
of procedural safeguards were and are present to permit the Kennady Special Committee and the Kennady Board to represent effectively
the interests of Kennady and the Kennady Shareholders and Kennady’s other stakeholders, including, among others:
| · | Role of the Kennady Special Committee. The evaluation and negotiation process was
conducted by the Kennady Special Committee, being members of the Kennady Board who are independent of management and the Significant
Shareholder. The Kennady Special Committee met regularly with Kennady’s advisors and management and retained its own independent
legal and financial advisors. |
| · | Ability to respond to Superior Proposals. Notwithstanding the limitations contained
in the Arrangement Agreement on Kennady’s ability to solicit interest from third parties, the Arrangement Agreement allows the
Kennady Board to engage in discussions or negotiations with respect to an unsolicited written bona fide Acquisition Proposal at
any time prior to the approval of the Arrangement Resolution by Kennady Shareholders and after the Kennady Board determines, in
good faith, that such Acquisition Proposal would be reasonably likely to result in a Superior Proposal. |
| · | Unanimous
recommendation of the Kennady Special Committee, consisting entirely of independent directors.
The Arrangement was approved by the independent directors of Kennady, in accordance with
MI 61-101. |
| · | Independent Kennady Fairness Opinion. The Kennady Special Committee retained
Haywood Securities Inc. to provide the Haywood Fairness Opinion. The fee payable to Haywood Securities Inc. is not contingent on
the completion of the Arrangement and such fee is payable to Haywood Securities Inc. in respect of the |
Haywood Fairness Opinion irrespective
of the substance or conclusions of the Haywood Fairness Opinion. See “The Arrangement – Kennady Fairness Opinion”
and Schedule “F” – “Fairness Opinion of Haywood Securities Inc.”.
| · | Experienced financial and legal advisors. The process undertaken by the Kennady Special
Committee included the retention of Fasken Martineau DuMoulin LLP as its independent legal advisor and the retention of Minvisory
Corp. as its independent financial advisor. |
| · | Reasonable Termination Fee. Kennady is able to terminate the Arrangement Agreement
in specified circumstances, including to accept a Superior Proposal on payment of the Termination Fee of $6,000,000. This provides
further assurance to the Kennady Board that it would have a reasonable opportunity to consider a potential superior unsolicited
alternative transaction if one is subsequently proposed. |
| · | Required Shareholder and Court Approvals. The requirement for the following shareholder
and Court approvals protect Kennady Shareholders: |
| ○ | To be effective, the Arrangement Resolution must be approved, with or without variation, by the affirmative vote of: |
| (i) | at least two-thirds of the votes cast on the Arrangement Resolution by Kennady Shareholders, present
in person or represented by proxy and entitled to vote at the Kennady Meeting; and |
| (ii) | a majority of the votes cast on the Arrangement Resolution by Kennady Shareholders present in person
or represented by proxy and entitled to vote at the Kennady Meeting, excluding for this purpose votes attached to the Kennady Shares
held by the Significant Shareholder and any other person described in items (a) through (d) of Section 8.1(2) of MI 61-101; and |
| ○ | The Arrangement must be approved by the Court, which will consider, among other things, the substantive and procedural fairness
of the terms and conditions of the Arrangement. |
| · | Dissent Rights. The terms of the Plan of Arrangement provide that any Registered
Kennady Shareholders who oppose the Arrangement may, upon compliance with certain conditions, exercise Dissent Rights and, if ultimately
successful, receive the fair value of their Kennady Shares in accordance with the Arrangement. |
See “The Arrangement – Reasons
for the Mountain Province and Mountain Province Special Committee Recommendations”, “The Arrangement – Reasons
for the Kennady Board and Kennady Special Committee Recommendations”, “The Arrangement – Opinion of RBC
Capital Markets”, “The Arrangement – Opinion of Haywood Securities Inc.”.
The Mountain Province Board’s, Mountain Province
Special Committee’s, Kennady Board’s and Kennady Special Committee’s reasons for recommending the Arrangement include certain assumptions
relating to forward-looking information, and such information and assumptions are subject to various risks. See “Cautionary
Statement Regarding Forward-Looking Statements” and “Risk Factors – Risk Factors Relating to the Arrangement”
in this Circular.
Description of the Arrangement
The following description of the Arrangement
is qualified in its entirety by reference to the full text of the Plan of Arrangement, a copy of the form of which is attached
as Schedule “D” – “Plan of Arrangement” of this Circular.
If approved, the Arrangement will become effective
at the Effective Time and will be binding at and after the Effective Time on each of Kennady, Mountain Province and Former Kennady
Shareholders.
Commencing at the Effective Time, the following
events or transactions shall occur and shall be deemed to occur in the following sequence without any further act or formality:
| 1. | each Kennady Share held by a Dissenting Shareholder shall, and shall be deemed to be, transferred
by the holder thereof, without any further act or formality on its part, free and clear of all liens, to Kennady and Kennady shall
thereupon be obligated to pay the amount therefor determined and payable in accordance with Article 4 of the Plan of Arrangement
(Rights of Dissent), and the name of each such holder shall be removed from the securities register as a holder of Kennady Shares;
and |
| 2. | all Kennady Shares (other than Kennady Shares held by Mountain Province or Dissenting Shareholders)
shall be transferred to Mountain Province, free and clear of any liens, and: (i) the holders thereof shall receive, in exchange
for each Kennady Share so transferred, 0.975 of a Mountain Province Share; (ii) each holder of Kennady Shares shall cease to be
the holder of such shares and such holder’s name shall be removed from the securities register of Kennady with respect to such
shares; (iii) Mountain Province shall be entered in the securities register of Kennady as the holder thereof; and (iv) Former Kennady
Shareholders (other than Dissenting Shareholders) shall be entered in the securities register of Mountain Province as holders of
Mountain Province Shares received by them in exchange for their Kennady Shares. |
Notwithstanding any provision in the Plan of
Arrangement, in no event shall any Former Kennady Shareholder be entitled to a fractional Mountain Province Share. Where the aggregate
number of Mountain Province Shares to be issued to a Former Kennady Shareholder as consideration under the Arrangement would result
in a fraction of a Mountain Province Share being issuable, the number of Mountain Province Shares to be issued to a Former Kennady
Shareholder as consideration under the Arrangement shall be: (i) rounded down to the nearest whole Mountain Province Share in the
event that the fractional Mountain Province Share is equal to or less than 0.5; and (ii) rounded up to the nearest whole Mountain
Province Share in the event that the fractional Mountain Province Share is greater than 0.5 and less than 1.0.
See “The Arrangement – Description
of the Arrangement – Exchange of Kennady Shares for the Arrangement Consideration” and the Plan of Arrangement attached
as Schedule “D” – “Plan of Arrangement” for additional information.
Kennady Shareholders who exchange their Kennady
Shares for Mountain Province Shares pursuant to the Arrangement, and who provide Mountain Province with a letter of representation
in a form satisfactory to Mountain Province acting reasonably that such Kennady Shareholder does not hold their Kennady Shares
as capital property for purposes of the Tax Act, may be entitled to make an income tax election with Mountain Province, pursuant
to subsection 85(1) or 85(2) of the Tax Act, as applicable (and the analogous provisions of provincial income tax law) with respect
to the exchange of their Kennady Shares. See “The Arrangement – Description of the Arrangement – Tax Election
for Certain Kennady Shareholders”.
Opinion of RBC Capital Markets
RBC Capital Markets was retained to deliver
to the Mountain Province Special Committee an opinion as to the fairness to Mountain Province, from a financial point of view,
of the Arrangement Consideration to be paid by Mountain Province pursuant to the Arrangement Agreement. RBC Capital Markets has
delivered the RBC Fairness Opinion concluding that, as at the date thereof and subject to the assumptions, limitations and qualifications
contained therein, the Arrangement Consideration to be paid by Mountain Province pursuant to the Arrangement Agreement is fair,
from a financial point of view, to Mountain Province. The full text of the RBC Fairness Opinion, setting out the assumptions made,
matters considered and limitations and qualifications on the review undertaken in connection with the RBC Fairness Opinion, is
attached as Schedule “E” – “Fairness Opinion of RBC Capital Markets” to this Circular.
The summary of the RBC Fairness Opinion described
in this Circular is qualified in its entirety by reference to the full text of the RBC Fairness Opinion. The RBC Fairness Opinion
is not a recommendation to any Mountain Province Shareholder as to how to vote or act on any matter relating to the Arrangement.
The RBC Fairness Opinion was one of a number of factors taken into consideration by the Mountain Province Special Committee in
making its
determination that the Arrangement is in the
best long-term interests of Mountain Province, and unanimously recommending that the Mountain Province Board approve the Arrangement
and enter into the Arrangement Agreement.
See “The Arrangement – Opinion
of RBC Capital Markets”.
Opinion of Haywood Securities Inc.
Haywood Securities Inc. was retained to deliver
to the Kennady Special Committee an opinion as to the fairness to the Kennady Shareholders, from a financial point of view, of
the Arrangement Consideration to be received by Kennady Shareholders pursuant to the Arrangement. Haywood Securities Inc. has delivered
the Haywood Fairness Opinion concluding that, as at the date thereof and subject to the assumptions, limitations and qualifications
contained therein, the Arrangement Consideration to be received by the Kennady Shareholders pursuant to the Arrangement is fair,
from a financial point of view, to the Kennady Shareholders. The full text of the Haywood Fairness Opinion, setting out the assumptions
made, matters considered and limitations and qualifications on the review undertaken in connection with the Haywood Fairness Opinion,
is attached as Schedule “F” – “Fairness Opinion of Haywood Securities Inc.” to this Circular.
The summary of the Haywood Fairness Opinion
described in this Circular is qualified in its entirety by reference to the full text of the Haywood Fairness Opinion. The Haywood
Fairness Opinion is not a recommendation to any Kennady Shareholder as to how to vote or act on any matter relating to the Arrangement.
The Haywood Fairness Opinion was one of a number of factors taken into consideration by the Kennady Special Committee in making
its determination that the Arrangement is in the best interests of Kennady, and unanimously recommending that the Kennady Board
approve the Arrangement and enter into the Arrangement Agreement.
See “The Arrangement – Opinion
of Haywood Securities Inc.”.
The Arrangement Agreement
The Arrangement will be effected in accordance
with the Arrangement Agreement, the full text of which may be viewed on SEDAR under Mountain Province’s and Kennady’s issuer profiles,
respectively, at www.sedar.com. A summary of the material terms of the Arrangement Agreement (including a summary of the
Termination Fee payable by Kennady to Mountain Province or by Mountain Province to Kennady, as applicable, in the event that the
Arrangement is not completed under certain circumstances) is set out under the heading “The Arrangement Agreement”
in this Circular and is subject to and qualified in its entirety by the full text of the Arrangement Agreement, which is incorporated
by reference in this Circular.
The Voting and Support Agreements
Mountain Province Voting and Support Agreements
The Supporting Mountain Province Shareholders
have entered into Mountain Province Voting and Support Agreements with Kennady in respect of Mountain Province Shares representing,
in the aggregate, approximately 24.3% of the outstanding Mountain Province Shares as at January 28, 2018. The Mountain Province
Voting and Support Agreements set forth, among other things and subject to certain exceptions, the agreement of such Supporting
Mountain Province Shareholders to vote their Subject Mountain Province Securities in favour of the Share Issuance Resolution at
the Mountain Province Meeting and any actions required for the consummation of the transactions contemplated by the Arrangement
Agreement.
The full text of the Mountain Province Voting
and Support Agreements may be viewed on SEDAR under Kennady’s issuer profile at www.sedar.com. A summary of the key terms
of the Mountain Province Voting and Support Agreements is included under the heading “The Voting Agreements – Mountain
Province Voting and Support Agreements”.
Kennady Voting and Support Agreements
The Supporting Kennady Shareholders have entered
into Kennady Voting and Support Agreements with Mountain Province in respect of Kennady Shares representing, in the aggregate,
approximately 28.6% of the outstanding Kennady Shares as at January 28, 2018. The Kennady Voting and Support Agreements set forth,
among other things and subject to certain exceptions, the agreement of such Supporting Kennady Shareholders to vote their Subject
Kennady Securities in favour of the Arrangement Resolution at the Kennady Meeting and any actions required for the consummation
of the transactions contemplated by the Arrangement Agreement.
The full text of the Kennady Voting and Support
Agreements may be viewed on SEDAR under Mountain Province’s issuer profile at www.sedar.com. A summary of the key terms
of the Kennady Voting and Support Agreements is included under the heading “The Voting Agreements – Kennady Voting
and Support Agreements”.
Court Approval of the Arrangement
An arrangement under the OBCA requires approval
by the Court.
On March 5, 2018, Kennady obtained the Interim
Order providing for the calling and holding of the Kennady Meeting, Dissent Rights and certain other procedural matters. The full
text of the Interim Order is set out in Schedule “G” – “Interim Order” to this Circular. Subject
to the terms of the Arrangement Agreement, and provided that the Share Issuance Resolution is approved at the Mountain Province
Meeting and the Arrangement Resolution is approved at the Kennady Meeting in the manner required by the Interim Order, Kennady
will re-attend before the Court for the issuance of the Final Order.
See “The Arrangement – Securityholder
and Court Approvals – Court Approval of the Arrangement”.
Procedure for Exchange of Kennady Shares
Letter of Transmittal
A Letter of Transmittal is being mailed, together
with this Circular, to each person (other than Mountain Province) who was a Registered Kennady Shareholder on the Kennady Record
Date. Each person who is a Registered Kennady Shareholder immediately prior to the Effective Time must forward a properly completed
and signed Letter of Transmittal, along with the accompanying Kennady Share certificate(s), if applicable, and such other documents
as the Depositary may require, to the Depositary in order to receive the Arrangement Consideration to which such Kennady Shareholder
is entitled under the Arrangement. It is recommended that Registered Kennady Shareholders complete, sign and return the Letter
of Transmittal, along with the accompanying Kennady Share certificate(s), if applicable, to the Depositary as soon as possible.
Kennady Shareholders whose Kennady Shares are registered in the name of a nominee (bank, trust company, securities broker or other
nominee) should contact that nominee for assistance in depositing their Kennady Shares.
See “Procedure for Exchange of Kennady
Shares – Letter of Transmittal”.
Cancellation of Rights after Six Years
To the extent that a Former Kennady Shareholder
has not complied with the provisions of the Arrangement described under the heading “Procedure for Exchange of Kennady
Shares – Exchange Procedure” on or before the date that is six years after the Effective Date, then any Mountain
Province Shares which such Former Kennady Shareholder was entitled to receive shall be automatically cancelled without any repayment
of capital in respect thereof and the certificates representing such Mountain Province Shares shall be delivered to Mountain Province
by the Depositary for cancellation and shall be cancelled by Mountain Province, and the interest of the Former Kennady Shareholder
in such Mountain Province Shares to which it was entitled shall be terminated as of such Final Proscription Date.
See “Procedure for Exchange of Kennady
Shares – Cancellation of Rights after Six Years”.
Fractional Interest
No fractional Mountain Province Shares shall
be issued to Former Kennady Shareholders in connection with the Plan of Arrangement. The total number of Mountain Province Shares
to be issued to any Former Kennady Shareholder shall, without additional compensation, be rounded up or down to the nearest whole
Mountain Province Share (in accordance with the terms of the Plan of Arrangement) in the event that a Former Kennady Shareholder
would otherwise be entitled to a fractional share.
See “Procedure for Exchange of Kennady
Shares – Fractional Interest” and the Plan of Arrangement attached as Schedule “D” – “Plan
of Arrangement” for additional information.
Dissent Rights
Registered Kennady Shareholders have Dissent
Rights with respect to the Arrangement.
Registered Kennady Shareholders who wish to
exercise their Dissent Rights must: (i) deliver a written notice of dissent to the Arrangement Resolution to Kennady, by mail to:
Kennady Diamonds Inc. c/o Bruce Ramsden, Chief Financial Officer, 161 Bay Street, Suite 1410, P.O. Box 216, Toronto, Ontario, Canada,
M5J 2S1; or by facsimile transmission to: 416 640-3335, by 5:00 p.m. (Eastern Standard Time) on Thursday, April 5, 2018, or two
Business Days prior to any adjournment of the Kennady Meeting; (ii) not have voted in favour of the Arrangement Resolution; and
(iii) otherwise have complied with the provisions of Section 185 of the OBCA, as modified and supplemented by the Plan of Arrangement,
the Interim Order and any other order of the Court.
A Non-Registered Kennady Shareholder who wishes
that Dissent Rights be exercised in respect of its Kennady Shares should immediately contact the nominee (bank, trust company,
securities brokers or other nominee) with whom the Non-Registered Kennady Shareholder deals.
A Registered Kennady Shareholder’s failure
to strictly comply with the procedures set forth in Section 185 of the OBCA, as modified or supplemented by the Plan of Arrangement,
Interim Order and any other order of the Court, will result in the loss of such Registered Kennady Shareholder’s Dissent Rights.
See “The Arrangement – Dissent
Rights”.
Income Tax Considerations
Kennady Shareholders should consult their own tax advisors about
the applicable Canadian or U.S. federal, provincial, state and local tax, and other foreign tax, consequences of the Arrangement.
See “Principal Canadian Federal Income Tax Considerations”
and “Certain U.S. Federal Income Tax Considerations for U.S. Holders”.
Canadian Securities Laws
Each Kennady Shareholder is urged to consult
such shareholder’s professional advisors to determine the Canadian conditions and restrictions applicable to trades in the
Mountain Province Shares issuable pursuant to the Arrangement.
Kennady is a reporting issuer in the provinces
of British Columbia, Alberta, Saskatchewan, Manitoba, Ontario, New Brunswick, Nova Scotia, Prince Edward Island and Newfoundland.
The Kennady Shares are currently listed on the TSXV. Following completion of the Arrangement, Kennady will be a wholly-owned subsidiary
of Mountain Province and it is anticipated that Mountain Province will apply to the applicable Canadian securities regulators to
have Kennady cease to be a reporting issuer and have the Kennady Shares delisted from the TSXV.
Mountain Province has applied to list the Mountain
Province Shares issuable under the Arrangement on the TSX. It is a condition of closing that the TSX shall have conditionally approved
the listing thereon, subject only to satisfying
the customary listing conditions of the TSX,
of the issuance of the Mountain Province Shares issuable pursuant to the Arrangement. See “The Arrangement Agreement –
Conditions Precedent to the Arrangement”. TSX conditional approval has been obtained for the listing of the Mountain Province
Shares to be issued to Kennady Shareholders (other than Mountain Province and any Dissenting Shareholders) in exchange for their
Kennady Shares under the Arrangement.
The issuance of Mountain Province Shares pursuant
to the Arrangement will constitute a distribution of securities that is exempt from the prospectus requirements of applicable Canadian
Securities Laws. Mountain Province Shares issued pursuant to the Arrangement may be resold in each province and territory of Canada
provided that certain conditions are met.
See “Securities Law Matters –
Canadian Securities Laws”.
U.S. Securities Laws
A general overview of certain requirements
of U.S. Securities Laws that may be applicable to Kennady Shareholders is set out in this Circular under the heading “Securities
Law Matters – U.S. Securities Laws”. All holders of Kennady Shares are urged to obtain legal advice to ensure that
their resale of Mountain Province Shares complies with applicable U.S. Securities Laws. Further information applicable to the holders
of such securities resident in the United States is disclosed in this Circular under the heading “Note to U.S. Securityholders”.
See “Securities Law Matters –
U.S. Securities Laws”.
Mountain Province has applied to list the Mountain
Province Shares issuable under the Arrangement on the Nasdaq. It is a condition of closing that the Nasdaq shall have conditionally
approved the listing thereon, subject to official notice of issuance, of the Mountain Province Shares issuable pursuant to the
Arrangement as of the Effective Date. See “The Arrangement Agreement – Conditions Precedent to the Arrangement”.
Unaudited Pro Forma Condensed
Consolidated Financial Information
The unaudited pro forma condensed consolidated
financial statements of Mountain Province, including its respective pro forma consolidated balance sheet as at September
30, 2017 and pro forma consolidated statement of comprehensive income (loss) for the year ended December 31, 2016 and the
nine month period ended September 30, 2017, are set out in Schedule “O” – “Unaudited Pro Forma Condensed
Consolidated Financial Statements of Mountain Province”.
Interests of Certain Persons in the Arrangement
In considering the recommendation of the Kennady
Board, Kennady Shareholders should be aware that members of the Kennady Board and the officers of Kennady have interests in the
Arrangement or may receive benefits that may differ from, or be in addition to, the interests of Kennady Shareholders generally.
All benefits received, or to be received, by
directors or officers of Kennady as a result of the Arrangement are, and will be, solely in connection with their services as directors
or employees of Kennady. No benefit has been, or will be, conferred for the purpose of increasing the value of consideration payable
to any such person for Kennady Shares, nor is it, or will it be, conditional on the person supporting the Arrangement.
See “Interests of Directors and Officers
of Kennady in the Arrangement”.
MOUNTAIN PROVINCE SHAREHOLDERS –
QUESTIONS AND ANSWERS ABOUT THE ARRANGEMENT
The following is a summary of certain information
contained in or incorporated by reference into this Circular, together with some of the questions that you, as a Mountain Province
Shareholder, may have and answers to those questions. You are urged to read the remainder of this Circular and the enclosed Mountain
Province Proxy carefully, because the information contained below is of a summary nature, and is qualified in its entirety by the
more detailed information contained elsewhere in or incorporated by reference into this Circular, the Mountain Province Proxy and
the attached schedules to this Circular, all of which are important and should be reviewed carefully. Capitalized terms in this
summary have the meanings set out under Schedule “A” – “Glossary of Terms”.
|
This Circular is provided to you
in connection with the solicitation by or on behalf of management of Mountain Province of proxies to be used at the Mountain
Province Meeting to be held at the Terminal City Club, 837 West Hastings Street, Vancouver, British Columbia, Canada V6C
1B4, at 2:30 p.m. (Pacific Standard Time) on Monday, April 9, 2018 for the purposes indicated in
the Mountain Province Notice of Meeting.
Your vote is very important. We encourage
you to exercise your right to vote by proxy if:
1) you
cannot attend the Mountain Province Meeting; or
2) you
plan to attend the Mountain Province Meeting but prefer the convenience of voting in advance.
The questions and answers below give general
guidance for voting your Mountain Province Shares and related matters. Unless otherwise noted, all answers relate to both Registered
Mountain Province Shareholders and Non- Registered Mountain Province Shareholders. If you have any questions, please feel free
to contact Laurel Hill Advisory Group, the proxy solicitation agent, by telephone at: 1-877-452-7184 (North American Toll Free)
or 416- 304-0211 (Collect Outside North America); or by email at: assistance@laurelhill.com. |
Does the Mountain Province Board support the Arrangement?
Yes. The Mountain Province Board, on the recommendation
of the Mountain Province Special Committee and based upon its own investigations, has unanimously determined (i) that the Arrangement
is in the best long-term interests of Mountain Province and the Mountain Province Shareholders, (ii) that Mountain Province should
enter into the Arrangement Agreement, and (iii) to recommend that the Mountain Province Shareholders vote FOR the
Share Issuance Resolution.
In making its recommendation, the Mountain
Province Board considered a number of factors as described in this Circular under the heading “The Arrangement –
Reasons for the Mountain Province Board and Mountain Province Special Committee Recommendations”, including the recommendation
of the Mountain Province Special Committee after having received an oral fairness opinion from RBC Capital Markets (subsequently
confirmed in writing). The RBC Fairness Opinion determined that, subject to the assumptions, limitations and qualifications contained
therein, the Arrangement Consideration to be paid by Mountain Province pursuant to the Arrangement Agreement is fair, from a financial
point of view, to Mountain Province. See “The Arrangement – Background to the Arrangement”, “The
Arrangement – Recommendation of the Mountain Province Board” and “The Arrangement – Reasons for the
Mountain Province Board and Mountain Province Special Committee Recommendations”.
Am I entitled to vote?
You are entitled to vote if you were a holder
of Mountain Province Shares as of the close of business on March 5, 2018. Each Mountain Province Shareholder is entitled to one
vote per Mountain Province Share held on all matters to come before the Mountain Province Meeting, including the Share Issuance
Resolution. Holders of Mountain Province Options are not entitled to vote in respect of their Mountain Province Options on any
matters at the Mountain Province Meeting.
| Vote
Your Shares Today. |
| Shareholders
who have questions or require assistance with voting may contact Laurel Hill Advisory Group toll free at, |
| 1-877-452-7184
or 416-304-0211 (Collect Outside North America); or by email at assistance@laurelhill.com |
What am I voting on?
If you are a holder of Mountain Province Shares,
you are voting to approve the Share Issuance Resolution, the full text of which is set out in Schedule “B” – “Resolutions
to be Approved at the Mountain Province Meeting” to this Circular. At the Mountain Province Meeting, Mountain Province
Shareholders will be asked to consider and, if deemed advisable, pass an ordinary resolution approving the issuance of up to 54,673,383
Mountain Province Shares (subject to variation due to rounding of fractional interests in accordance with the terms of the Plan
of Arrangement) pursuant to the Arrangement, composed of up to 54,673,383 Mountain Province Shares to be issued to Kennady Shareholders
(other than Mountain Province and any Dissenting Shareholders) in exchange for their Kennady Shares. To be effective, the Share
Issuance Resolution must be approved at the Mountain Province Meeting by (i) at least a majority of the votes cast on the Share
Issuance Resolution by the Mountain Province Shareholders present in person or represented by proxy and entitled to vote at the
Mountain Province Meeting (in accordance with the requirements of Section 611(c) of the TSX Company Manual), and (ii) at least
a majority of the votes cast on the Share Issuance Resolution by the Minority Mountain Province Shareholders (i.e., excluding votes
attached to Kennady Shares held by any other person described in items (a) through (d) of Section 8.1(2) of MI 61-101) present
in person or represented by proxy and entitled to vote at the Mountain Province Meeting. If the Arrangement is not completed,
the Mountain Province Shares referred to in the Share Issuance Resolution will not be issued even if the Share Issuance Resolution
is approved at the Mountain Province Meeting.
What if amendments are made to these
matters or if other business matters are brought before the Mountain Province Meeting?
If you attend the Mountain Province Meeting
in person, you may vote on the business matters as you choose.
If you have completed and returned a proxy
form, the persons named in the proxy form will have discretionary authority to vote on amendments or variations to the business
matters identified in the Mountain Province Notice of Meeting, and on other matters that may properly come before the Mountain
Province Meeting. As of the date of this Circular, management of Mountain Province is not aware of any amendments, variations or
additional matters to come before the Mountain Province Meeting.
Am I a Registered Mountain Province Shareholder
and how do I vote?
You are a Registered Mountain Province Shareholder
if you hold any Mountain Province Shares in your own name, as recorded in the shareholder register of Mountain Province maintained
by Computershare Investor Services Inc.
You can inspect a list of Registered Mountain
Province Shareholders on request during usual business hours, at Mountain Province’s registered and head office located at 161
Bay Street, Suite 1410, P.O. Box 216, Toronto, Ontario, Canada, M5J 2S1. This list will also be available at the Mountain Province
Meeting.
If you are a Registered Mountain Province Shareholder,
you can vote your Mountain Province Shares by (i) voting in person at the Mountain Province Meeting; or (ii) signing and returning
the enclosed Mountain Province Proxy (printed on WHITE PAPER) appointing the named persons or some other person you choose, who
need not be a Mountain Province Shareholder, to represent you as proxyholder and vote your Mountain Province Shares at the Mountain
Province Meeting.
Am I a Non-Registered Mountain Province
Shareholder (also commonly referred to as a beneficial shareholder) and how do I vote?
You are a Non-Registered Mountain Province
Shareholder if your Mountain Province Shares are held in an account in the name of a nominee (bank, trust company, securities broker
or other nominee).
If you are a Non-Registered Mountain Province
Shareholder, you will have received voting instructions from your nominee or intermediary. Typically, intermediaries will use a
service company to forward such materials to Non- Registered Mountain Province Shareholders. The majority of intermediaries now
delegate responsibility for obtaining
| Vote
Your Shares Today. |
| Shareholders
who have questions or require assistance with voting may contact Laurel Hill Advisory Group toll free at, |
| 1-877-452-7184
or 416-304-0211 (Collect Outside North America); or by email at assistance@laurelhill.com |
instructions from clients to Broadridge Financial
Solutions Inc. (“Broadridge”). Mountain Province may utilize the Broadridge QuickVote™ service to assist
Mountain Province Shareholders with voting their Mountain Province Shares. Certain Non-Registered Mountain Province Shareholders
who have not objected to Mountain Province knowing who they are (non-objecting beneficial owners) may be contacted by Laurel Hill
Advisory Group to conveniently obtain a vote directly over the telephone.
If I am a Non-Registered Mountain Province
Shareholder, can I vote in person at the Mountain Province Meeting?
Yes. To vote in person at the Mountain Province
Meeting, print your own name in the space provided on the proxy form or the voting instruction form sent to you by your nominee
and return it by following the instructions included. In doing so you are instructing your nominee to appoint you as a proxyholder.
Please register with Mountain Province’s transfer agent, Computershare Investor Services Inc., when you arrive at the Mountain
Province Meeting. As we have no access to the names of the Non-Registered Mountain Province Shareholders, if you attend the meeting
without following this procedure, we will have no record of your shareholdings or entitlement to vote.
Who is soliciting my proxy?
Whether or not you plan to attend the Mountain
Province Meeting, management of Mountain Province, with the support of the Mountain Province Board, requests that you fill out
your form of proxy or proxies to ensure your votes are cast at the Mountain Province Meeting. This solicitation of your proxy or
proxies (your vote) is made on behalf of management of Mountain Province.
It is expected that the solicitation of proxies
will be made primarily by mail, but proxies may also be solicited personally or by telephone, email, internet, or other electronic
or other means of communication by directors, officers, employees, agents or other representatives of Mountain Province. In addition,
Mountain Province and Kennady have engaged Laurel Hill Advisory Group, the Proxy Solicitation Agent, to assist in the solicitation
of proxies with respect to the matters to be considered at the Mountain Province Meeting and the Kennady Meeting. Mountain Province
and Kennady will bear the costs of solicitation of their respective shareholders.
Who votes my Mountain Province Shares
and how will they be voted if I return a proxy form?
By properly completing and returning a proxy
form, you are authorizing the persons named in that form to attend the Mountain Province Meeting and to vote your Mountain Province
Shares. You can use the applicable enclosed Mountain Province Proxy, or any other proper proxy form, to appoint your proxyholder.
The Mountain Province Shares represented by
your proxy must be voted as you instruct in the proxy form. If you properly complete and return your proxy but do not specify how
you wish the votes cast, your proxyholder will vote your Mountain Province Shares as they see fit.
NOTE TO MOUNTAIN PROVINCE SHAREHOLDERS:
Unless you provide contrary instructions, Mountain Province Shares represented by proxies that management receives will be voted
FOR the Share Issuance Resolution.
Can I appoint someone other than those named in the enclosed
proxy form to vote my Mountain Province Shares?
Yes. You have the right to appoint another
person of your choice. They do not need to be a Mountain Province Shareholder to attend and act on your behalf at the Mountain
Province Meeting. To appoint someone who is not named in the enclosed Mountain Province Proxy, strike out those printed names appearing
on the proxy form and print in the space provided the name of the person you choose.
| Vote
Your Shares Today. |
| Shareholders
who have questions or require assistance with voting may contact Laurel Hill Advisory Group toll free at, |
| 1-877-452-7184
or 416-304-0211 (Collect Outside North America); or by email at assistance@laurelhill.com |
NOTE TO MOUNTAIN PROVINCE SHAREHOLDERS:
It is important for you to ensure that any other person you appoint will attend the Mountain Province Meeting and know you have
appointed them. On arriving at the Mountain Province Meeting, proxyholders must present themselves to a representative of Computershare
Investor Services Inc.
Can I revoke a proxy or voting instruction?
Yes. If you are a Registered Mountain Province
Shareholder and have returned a proxy form, you may revoke it by:
| i. | completing and signing another proxy form with a later date and delivering it at the offices of
Computershare Investor Services Inc., Toronto Office, Proxy Department, at 100 University Avenue, 8th Floor, Toronto, Ontario,
Canada, M5J 2Y1, before: (a) 2:30 p.m. (Pacific Standard Time) on Thursday, April 5, 2018; or (b) if the Mountain Province Meeting
is adjourned, 48 hours (excluding Saturdays, Sundays and holidays) before the day to which the Mountain Province Meeting is adjourned; |
| ii. | delivering a written statement revoking the original proxy or voting instruction, signed by you
or your authorized representative, to: |
| a. | Computershare Investor Services Inc., Toronto Office, Proxy Department, at 100 University Avenue,
8th Floor, Toronto, Ontario, Canada, M5J 2Y1, at any time up to and including the last Business Day preceding the day of the Mountain
Province Meeting or, if the Mountain Province Meeting is adjourned, up to the close of business on the last Business Day before
the day to which the Mountain Province Meeting is adjourned; or |
| b. | the Chair of the Mountain Province Meeting before the Mountain Province Meeting begins or, if the
Mountain Province Meeting is adjourned, before the adjourned Mountain Province Meeting begins; or |
| iii. | any other manner permitted by law. |
If you are a Non-Registered Mountain Province
Shareholder and you wish to change your vote you must, in sufficient time in advance of the Mountain Province Meeting, arrange
for your respective intermediary to change your vote and, if necessary, revoke your proxy in accordance with the revocation procedures
set out above.
How many Mountain Province Shares are
entitled to be voted?
The Mountain Province Board has fixed March
5, 2018 as the Mountain Province Record Date for determining the Mountain Province Shareholders who are entitled to receive notice
of and vote at the Mountain Province Meeting. Only Registered Mountain Province Shareholders whose names have been entered in the
registers of Mountain Province as at the close of business (5:00 p.m. (Eastern Standard Time)) on the Mountain Province Record
Date will be entitled to receive notice of and vote at the Mountain Province Meeting. No other Mountain Province Shareholders are
entitled to vote at the Mountain Province Meeting.
As at March 5, 2018, the Mountain Province
Record Date, 160,253,501 Mountain Province Shares were issued and outstanding. Each Mountain Province Share outstanding on the
Mountain Province Record Date carries the right to one vote. As of March 5, 2018, 122,145,410 Mountain Province Shares were held
by the Minority Mountain Province Shareholders.
Other than as disclosed in this Circular under
the heading “General Proxy Information – Mountain Province Shareholders – Mountain Province Shareholders Entitled
to Vote”, the directors and officers of Mountain Province know of no person who beneficially owns or exercises control
or direction over Mountain Province Shares carrying 10% or more of the aggregate voting rights of Mountain Province Shares.
| Vote
Your Shares Today. |
| Shareholders
who have questions or require assistance with voting may contact Laurel Hill Advisory Group toll free at, |
| 1-877-452-7184
or 416-304-0211 (Collect Outside North America); or by email at assistance@laurelhill.com |
Should I send in my proxy now?
Yes. To ensure your vote is counted, you need
to complete and submit the enclosed Mountain Province Proxy or, if applicable, provide your nominee (bank, trust company, securities
broker or other nominee) with voting instructions. You are encouraged to vote well in advance of the proxy cut-off at 2:30 p.m.
(Pacific Standard Time) on Thursday, April 5, 2018 (or at least 48 hours (excluding Saturdays, Sundays and holidays) prior to any
reconvened Mountain Province Meeting in the event of an adjournment of the Mountain Province Meeting).
What approvals are required to be given
by Kennady Shareholders at the Kennady Meeting?
Completion of the Arrangement is also
conditional upon approval of the Arrangement Resolution, which must be approved, with or without variation, by the
affirmative vote of: (i) at least 66 ⅔% of the votes cast on the Arrangement Resolution by the Kennady Shareholders
present in person or represented by proxy and entitled to vote at the Kennady Meeting, and (ii) at least a majority of the
votes cast on the Arrangement Resolution by Minority Kennady Shareholders (i.e., excluding votes attached to Kennady Shares
held by any other person described in items (a) through (d) of Section 8.1(2) of MI 61-101) present in person or represented
by proxy and entitled to vote at the Kennady Meeting. See “Securities Law Matters – Multilateral Instrument
61-101”.
The Kennady Meeting is scheduled to be held
at the Terminal City Club, 837 West Hastings Street, Vancouver, British Columbia, Canada V6C 1B4, at 1:00 p.m. (Pacific Standard
Time) on Monday, April 9, 2018.
What will happen if the Arrangement Resolution is not approved
by Kennady Shareholders or the Arrangement is not completed for any reason?
If the Arrangement Resolution is not approved
or the Arrangement is not completed for any reason, the Arrangement Agreement may be terminated. In certain circumstances, Mountain
Province will be required to pay to Kennady a termination payment in the amount of $6,000,000 in connection with such termination.
See “The Arrangement Agreement —Termination Fee”.
Do I have Dissent Rights?
No. Mountain Province Shareholders are not entitled to exercise
dissent rights in respect of the Share Issuance Resolution.
What if I have other questions?
If you have any questions regarding the meeting, please contact:
| Mountain Province Proxy Solicitation Agent: |
Laurel Hill Advisory Group |
| |
1-877-452-7184 (North American Toll Free)
416-304-0211 (Collect Outside North America)
assistance@laurelhill.com |
| Vote
Your Shares Today. |
| Shareholders
who have questions or require assistance with voting may contact Laurel Hill Advisory Group toll free at, |
| 1-877-452-7184
or 416-304-0211 (Collect Outside North America); or by email at assistance@laurelhill.com |
GENERAL PROXY INFORMATION – MOUNTAIN
PROVINCE SHAREHOLDERS
Date, Time and Place of Mountain Province Meeting
The Mountain Province Meeting will be held at the Terminal City
Club, 837 West Hastings Street, Vancouver, British Columbia, Canada V6C 1B4, at 2:30 p.m. (Pacific Standard Time) on Monday,
April 9, 2018.
Purpose of the Mountain Province Meeting
The purpose of the Mountain Province Meeting
is for Mountain Province Shareholders to consider and vote upon the Share Issuance Resolution, the full text of which is set out
in Schedule “B” – “Resolutions to be Approved at the Mountain Province Meeting” to this Circular.
Particulars of the subject matter relating to the Arrangement are described in this Circular under the heading “The Arrangement”.
At the Mountain Province Meeting, Mountain
Province Shareholders will be asked to consider and, if deemed advisable, pass an ordinary resolution approving the issuance of
up to 54,673,383 Mountain Province Shares (subject to variation due to rounding of fractional interests in accordance with the
terms of the Plan of Arrangement) in connection with the Arrangement, composed of up to 54,673,383 Mountain Province Shares to
be issued to Kennady Shareholders (other than Mountain Province and any Dissenting Shareholders) in exchange for their Kennady
Shares pursuant to the Arrangement. To be effective, the Share Issuance Resolution must be passed, with or without variation, at
the Mountain Province Meeting by (i) at least a majority of the votes cast on the Share Issuance Resolution by the Mountain Province
Shareholders present in person or represented by proxy and entitled to vote at the Mountain Province Meeting (in accordance with
the requirements of Section 611(c) of the TSX Company Manual), and (ii) at least a majority of the votes cast on the Share Issuance
Resolution by the Minority Mountain Province Shareholders (i.e., excluding votes attached to Kennady Shares held by any other person
described in items (a) through (d) of Section 8.1(2) of MI 61-101) present in person or represented by proxy and entitled to vote
at the Mountain Province Meeting. If the Share Issuance Resolution does not receive the requisite approval, the Arrangement
will not proceed.
The complete text of the Share Issuance Resolution
to be presented to the Mountain Province Meeting is set out in Schedule “B” – “Resolutions to be Approved
at the Mountain Province Meeting” to this Circular.
Management of Mountain Province and the
Mountain Province Board recommend that Mountain Province Shareholders vote FOR the Share Issuance Resolution. In the
absence of instructions to the contrary, the persons whose names appear in the Mountain Province Proxy accompanying this Circular
intend to VOTE FOR the Share Issuance Resolution.
Important information relating to the Share
Issuance Resolution, including the details relating to the Arrangement, are found in this Circular. Mountain Province Shareholders
are urged to closely review the information in this Circular.
Mountain Province Shareholders Entitled
to Vote
At the Mountain Province Meeting, Mountain
Province Shareholders are entitled to vote on the Share Issuance Resolution, either present in person or represented by proxy.
The Mountain Province Board has fixed March 5, 2018 as the Mountain Province Record Date for determining the Mountain Province
Shareholders who are entitled to receive notice of and vote at the Mountain Province Meeting. Only Registered Mountain Province
Shareholders whose names have been entered in the registers of Mountain Province as at the close of business (5:00 p.m. (Eastern
Standard Time)) on the Mountain Province Record Date will be entitled to receive notice of and vote at the Mountain Province Meeting.
No other Mountain Province Shareholders are entitled to vote at the Mountain Province Meeting.
As at March 5, 2018, the Mountain Province
Record Date, 160,253,501 Mountain Province Shares were issued and outstanding. Each Mountain Province Share outstanding on the
Mountain Province Record Date carries the right to one vote. As at March 5, 2018, 122,145,410 Mountain Province Shares were held
by the Minority Mountain Province Shareholders.
| Vote
Your Shares Today. |
| Shareholders
who have questions or require assistance with voting may contact Laurel Hill Advisory Group toll free at, |
| 1-877-452-7184
or 416-304-0211 (Collect Outside North America); or by email at assistance@laurelhill.com |
To the knowledge of the directors and officers
of Mountain Province, as of the Mountain Province Record Date, no person beneficially owned, directly or indirectly, or exercised
control or direction over, more than 10% of the Mountain Province Shares, other than as set out below:
| Name of Shareholder |
Number
of Common Shares(1)(2) |
Percentage
of Common Shares(1)(2) |
| Dermot
Fachtna Desmond(3)(4) |
37,951,887 |
23.7% |
Notes:
| (1) | The information as to Mountain Province Shares beneficially owned, controlled or directed, not
being within the knowledge of Mountain Province, has been obtained by Mountain Province from publicly-disclosed information and/or
furnished by the Mountain Province Shareholder listed above. |
| (2) | Calculated on a non-diluted basis on the basis of 160,253,501 issued and outstanding Mountain Province
Shares as at the Mountain Province Record Date. |
| (3) | Represents holdings beneficially owned or controlled by Mr. Dermot Fachtna Desmond. Mr. Desmond
owns 15,598,167 Mountain Province Shares directly and owns an additional 22,353,720 Mountain Province Shares beneficially through
Bottin (International) Investments Ltd., which he controls. |
| (4) | Mr. Desmond and Bottin (International) Investments Ltd. are not Minority Mountain Province Shareholders
in respect of the Share Issuance Resolution. As a result, the Mountain Province Shares held by Mr. Desmond and Bottin (International)
Investments Ltd. are not entitled to be voted in respect of the minority approval required of the Share Issuance Resolution under
MI 61-101. |
Each Registered Mountain Province Shareholder
has the right to appoint as proxyholder a person or company other than the persons designated by management of Mountain Province
(the “Mountain Province Management Proxyholders”) in the enclosed Mountain Province Proxy and to attend and act on the
Mountain Province Shareholder’s behalf at the Mountain Province Meeting or any adjournment or postponement thereof, by striking
out the names of the Mountain Province Management Proxyholders and by inserting the desired person’s name in the blank space provided
or by executing a proxy in a form similar to the enclosed Mountain Province Proxy.
Voting By Registered Mountain Province
Shareholders
The following instructions are for Registered
Mountain Province Shareholders only. If you are a Non-Registered Mountain Province Shareholder, please read the information under
the heading “General Proxy Information – Voting by Non-Registered Mountain Province Shareholders” below
and follow your nominee’s (bank, trust company, securities broker or other nominee) instructions on how to vote your Mountain Province
Shares.
Voting in Person
Registered Mountain Province Shareholders who
attend the Mountain Province Meeting may vote in person. If you are a Registered Mountain Province Shareholder, to ensure your
vote is counted, you should complete and return the enclosed Mountain Province Proxy as soon as possible even if you plan to attend
the Mountain Province Meeting in person. Even if you return a proxy, you can still attend the Mountain Province Meeting and vote
in person, in which case you will need to instruct the scrutineer at the Mountain Province Meeting to cancel your proxy.
Voting by Proxy
If you are a Registered Mountain Province Shareholder
but do not plan to attend the Mountain Province Meeting, you may vote by using a proxy to appoint someone to attend the Mountain
Province Meeting as your proxyholder. Registered Mountain Province Shareholders should carefully read and consider the information
contained in this Circular. Registered Mountain Province Shareholders should then complete, sign and date the enclosed Mountain
Province Proxy (on WHITE PAPER) and return the form in the enclosed return envelope as indicated in the Mountain Province Proxy
as soon as possible so that your Mountain Province Shares may be represented at the Mountain Province Meeting. Alternatively, Registered
Mountain Province Shareholders may vote by telephone or online at: www.investorvote.com using the control number found on
the Mountain Province Proxy.
| Vote
Your Shares Today. |
| Shareholders
who have questions or require assistance with voting may contact Laurel Hill Advisory Group toll free at, |
| 1-877-452-7184
or 416-304-0211 (Collect Outside North America); or by email at assistance@laurelhill.com |
Appointment of Proxies
A proxy is a document that authorizes another
person to attend the Mountain Province Meeting and cast votes at the Mountain Province Meeting on behalf of a Registered Mountain
Province Shareholder. If you are a Registered Mountain Province Shareholder, you can use the Mountain Province Proxy accompanying
this Circular. You may also use any other legal form of proxy.
If you are a Registered Mountain Province Shareholder,
you can either return a duly completed and executed Mountain Province Proxy to the Mountain Province Transfer Agent not later than
2:30 p.m. (Pacific Standard Time) on Thursday, April 5, 2018, or not later than 48 hours (other than a Saturday, Sunday or holiday)
immediately preceding the time of the Mountain Province Meeting (as it may be adjourned or postponed from time to time). Alternatively,
Registered Mountain Province Shareholders may vote over the telephone at: 1-866-732-8683; or online at: www.investorvote.com.
The deadline for the deposit of proxies may be waived or extended by the Chair of the Mountain Province Meeting at their discretion,
without notice.
Exercise of Discretion by Proxies
Where a choice is specified on the Mountain
Province Proxy on how you wish to vote on a particular issue (by checking FOR, or AGAINST, as applicable),
your proxyholder must vote your Mountain Province Shares as instructed.
If you do NOT mark on the Mountain Province
Proxy how you want to vote on a particular matter, your proxyholder will have the discretion to vote your Mountain Province Shares
as he or she sees fit. If your proxy does not specify how to vote on the Share Issuance Resolution and you have authorized the
persons named in the accompanying Mountain Province Proxy (who are officers and/or directors of Mountain Province) to act as your
proxyholder, your Mountain Province Shares will be voted at the Mountain Province Meeting FOR the Share Issuance Resolution.
If any amendments are proposed to the Share
Issuance Resolution, or if any other matters properly arise at the Mountain Province Meeting in relation to the Share Issuance
Resolution, your proxyholder will have the discretion to vote your Mountain Province Shares as he or she sees fit.
To ensure the Share Issuance Resolution is
passed, you should complete and submit the applicable enclosed Mountain Province Proxy or, if applicable, provide your nominee
(bank, trust company, securities broker or other nominee) with voting instructions. See “General Proxy Information –
Voting by Registered Mountain Province Shareholders – Voting by Proxy”.
Revocation of Proxies
Any Registered Mountain Province Shareholder who has returned a
Mountain Province Proxy may revoke it by:
| i. | completing and signing another proxy form with a later date and delivering it at the offices of
Computershare Investor Services Inc., Toronto Office, Proxy Department, at 100 University Avenue, 8th Floor, Toronto, Ontario,
Canada, M5J 2Y1, before: (a) 2:30 p.m. (Pacific Standard Time) on Thursday, April 5, 2018; or (b) if the Mountain Province Meeting
is adjourned, 48 hours (excluding Saturdays, Sundays and holidays) before the day to which the Mountain Province Meeting is adjourned; |
| ii. | delivering a written statement revoking the original Mountain Province Proxy or voting instruction,
signed by you or your authorized representative, to: |
| a. | Computershare Investor Services Inc., Toronto Office, Proxy Department, at 100 University Avenue,
8th Floor, Toronto, Ontario, Canada, M5J 2Y1, at any time up to and including the last Business Day preceding the day of the Mountain
Province Meeting or, if |
| Vote
Your Shares Today. |
| Shareholders
who have questions or require assistance with voting may contact Laurel Hill Advisory Group toll free at, |
| 1-877-452-7184
or 416-304-0211 (Collect Outside North America); or by email at assistance@laurelhill.com |
| | the Mountain Province Meeting is adjourned, up to the close of business
on the last Business Day before the day to which the Mountain Province Meeting is adjourned; or |
| b. | the Chair of the Mountain Province Meeting before the Mountain Province Meeting begins or, if the
Mountain Province Meeting is adjourned, before the adjourned Mountain Province Meeting begins; or |
| iii. | any other manner permitted by law. |
If you are a Non-Registered Mountain Province
Shareholder and you wish to change your vote you must, in sufficient time in advance of the Mountain Province Meeting, arrange
for your respective intermediary to change your vote and, if necessary, revoke your proxy in accordance with the revocation procedures
set out above.
Voting By Non-Registered Mountain Province
Shareholders
You are a Non-Registered Mountain Province
Shareholder (as opposed to a Registered Mountain Province Shareholder) if your Mountain Province Shares are held on your behalf,
or for your account, by a nominee (bank, trust company, securities broker or other nominee). In accordance with Securities Laws,
Mountain Province has distributed copies of the Mountain Province Notice of Meeting and this Circular to the clearing agencies
and intermediaries for onward distribution to Non-Registered Mountain Province Shareholders. Intermediaries are required to forward
the Mountain Province Notice of Meeting and this Circular to Non-Registered Mountain Province Shareholders unless a Non-Registered
Mountain Province Shareholder has waived the right to receive them. Typically, intermediaries will use a service company to forward
such materials to Non-Registered Mountain Province Shareholders. The majority of intermediaries now delegate responsibility for
obtaining instructions from clients to Broadridge.
Non-Registered Mountain Province Shareholders
will receive from an intermediary either voting instruction forms or, less frequently, forms of proxy. The purpose of these forms
is to permit Non-Registered Mountain Province Shareholders to direct the voting of the Mountain Province Shares they beneficially
own. Non-Registered Mountain Province Shareholders should follow the procedures set out below, depending on which type of form
they receive. Mountain Province will reimburse intermediaries for permitted reasonable out-of-pocket costs and expenses incurred
by them in mailing proxy materials to Non-Registered Mountain Province Shareholders of Mountain Province. Mountain Province has
elected to pay for the delivery of Mountain Province Meeting materials to “objecting beneficial owners” of Mountain Province
Shares.
Voting Instruction Form
In most cases, a Non-Registered Mountain Province
Shareholder will receive, as part of the materials for the Mountain Province Meeting, a voting instruction form. If the Non-Registered
Mountain Province Shareholder does not wish to attend and vote at the Mountain Province Meeting in person (or have another person
attend and vote on the Non- Registered Mountain Province Shareholder’s behalf), the voting instruction form must be completed,
signed and returned in accordance with the directions on the form. If a Non-Registered Mountain Province Shareholder wishes to
attend and vote at the Mountain Province Meeting in person (or have another person attend and vote on the Non- Registered Mountain
Province Shareholder’s behalf), the Non-Registered Mountain Province Shareholder must complete, sign and return the voting instruction
form in accordance with the directions provided.
Mountain Province may utilize the Broadridge
QuickVote™ service to assist Non-Registered Mountain Province Shareholders with voting their Mountain Province Shares. Certain
Non-Registered Mountain Province Shareholders who have not objected to Mountain Province knowing who they are (non-objecting beneficial
owners) may be contacted by Laurel Hill Advisory Group to conveniently obtain a vote directly over the telephone.
Forms of Proxy
Less frequently, a Non-Registered Mountain
Province Shareholder will receive, as part of the materials for the Mountain Province Meeting, forms of proxy that have already
been signed by the intermediary (typically by facsimile
| Vote
Your Shares Today. |
| Shareholders
who have questions or require assistance with voting may contact Laurel Hill Advisory Group toll free at, |
| 1-877-452-7184
or 416-304-0211 (Collect Outside North America); or by email at assistance@laurelhill.com |
transmission, stamped signature) which is restricted
as to the number of Mountain Province Shares beneficially owned by the Non-Registered Mountain Province Shareholder but which is
otherwise uncompleted. If the Non-Registered Mountain Province Shareholder does not wish to attend and vote at the Mountain Province
Meeting in person (or have another person attend and vote on the Non-Registered Mountain Province Shareholder’s behalf), the Non-Registered
Mountain Province Shareholder must complete a form of proxy and deliver it to the Mountain Province Transfer Agent, Computershare
Investor Services Inc., not later than 2:30 p.m. (Pacific Standard Time) on Thursday, April 5, 2018, or not later than 48 hours
(other than a Saturday, Sunday or holiday) immediately preceding the date of the Mountain Province Meeting (as it may be adjourned
or postponed from time to time). The time limit for the deposit of proxies may be waived or extended by the Chair of the Mountain
Province Meeting at their discretion, without notice.
Only Registered Mountain Province Shareholders
or the persons they appoint as their proxies are permitted to vote at the Mountain Province Meeting. If a Non-Registered Mountain
Province Shareholder wishes to attend and vote at the Mountain Province Meeting in person (or have another person attend and vote
on the Non-Registered Mountain Province Shareholder’s behalf), the Non-Registered Mountain Province Shareholder must strike out
the names of the persons named in the form of proxy and insert the Non-Registered Mountain Province Shareholder’s (or such other
person’s) name in the blank space provided and return the form of proxy in accordance with the instructions provided by the intermediary.
Non-Registered Mountain Province Shareholders
should follow the instructions on the forms they receive and contact their intermediaries or Laurel Hill Advisory Group, the Proxy
Solicitation Agent, by telephone at: 1- 877-452-7184 (North American Toll Free) or 416-304-0211 (Collect Outside North America);
or by email at: assistance@laurelhill.com.
Solicitation of Proxies
Whether or not you plan to attend the Mountain
Province Meeting, management of Mountain Province, with the support of the Mountain Province Board, requests that you fill out
your form of proxy or proxies to ensure your votes are cast at the Mountain Province Meeting. This solicitation of your proxy or
proxies (your vote) is made on behalf of management of Mountain Province.
It is expected that the solicitation of proxies
will be made primarily by mail, but proxies may also be solicited personally or by telephone, email, internet, or other electronic
or other means of communication by directors, officers, employees, agents or other representatives of Mountain Province. Mountain
Province and Kennady have retained Laurel Hill Advisory Group, the Proxy Solicitation Agent, to assist in the solicitation of proxies
and may also retain other persons as it deems necessary to aid in the solicitation of proxies with respect to the Mountain Province
Meeting and the Kennady Meeting. Costs related to the Proxy Solicitation Agent and the printing and mailing of this Circular in
connection with the Mountain Province Meeting and Kennady Meeting, which are expected to be nominal, will be borne by each of Mountain
Province and Kennady in connection with their respective shareholders. Mountain Province and the Proxy Solicitation Agent have
entered into an engagement agreement with customary terms and conditions, which provides that the Proxy Solicitation Agent will
be paid a fee of approximately $30,000 plus out-of- pocket expenses for each of the Mountain Province Meeting and the Kennady Meeting.
Questions
Mountain Province Shareholders who would like
additional copies, without charge, of this Circular or have additional questions about the Arrangement, including the procedures
for voting Mountain Province Shares, should contact their nominee (bank, trust company, securities broker or other nominee) or
Laurel Hill Advisory Group as indicated below. In addition, Laurel Hill Advisory Group is available to answer any questions you
might have in respect of the information contained in this Circular.
Interested Mountain Province Shareholders may
contact Laurel Hill Advisory Group, the proxy solicitation agent, by telephone at: 1-877-452-7184 (North American Toll Free) or
416-304-0211 (Collect Outside North America); or by email at: assistance@laurelhill.com.
| Vote
Your Shares Today. |
| Shareholders
who have questions or require assistance with voting may contact Laurel Hill Advisory Group toll free at, |
| 1-877-452-7184
or 416-304-0211 (Collect Outside North America); or by email at assistance@laurelhill.com |
Approvals Under TSX Company Manual
Pursuant to Section 611(c) of the TSX Company
Manual, Mountain Province is required to obtain the approval of the Mountain Province Shareholders in respect of the Mountain Province
Shares issuable under the Arrangement, as the number of Mountain Province Shares issued or issuable in payment of the purchase
price under the Arrangement exceeds 25% of the Mountain Province Shares outstanding on a non-diluted basis. In accordance with
Section 611(c) of the TSX Company Manual, Mountain Province is therefore seeking the approval of the Share Issuance Resolution
for the issuance of up to 54,673,383 Mountain Province Shares issuable under the Arrangement.
| Vote
Your Shares Today. |
| Shareholders
who have questions or require assistance with voting may contact Laurel Hill Advisory Group toll free at, |
| 1-877-452-7184
or 416-304-0211 (Collect Outside North America); or by email at assistance@laurelhill.com |
KENNADY SHAREHOLDERS –
QUESTIONS AND ANSWERS ABOUT THE ARRANGEMENT
The following is a summary of certain information
contained in or incorporated by reference into this Circular, together with some of the questions that you, as a Kennady Shareholder,
may have and answers to those questions. You are urged to read the remainder of this Circular, the enclosed Kennady Proxy and the
Letter of Transmittal carefully, because the information contained below is of a summary nature, and is qualified in its entirety
by the more detailed information contained elsewhere in or incorporated by reference into this Circular, the Kennady Proxy and
the Letter of Transmittal and the attached schedules to this Circular, all of which are important and should be reviewed carefully.
Capitalized terms in this summary have the meanings set out Schedule “A” – “Glossary of Terms”.
|
This Circular is provided to you
in connection with the solicitation by or on behalf of management of Kennady of proxies to be used at the Kennady Meeting
to be held at the Terminal City Club, 837 West Hastings Street, Vancouver, British Columbia, Canada V6C 1B4, at 1:00
p.m. (Pacific Standard Time) on Monday, April 9, 2018 and any adjournment(s) or postponement(s) thereof
for the purposes indicated in the Kennady Notice of Meeting.
Your vote is very important. We encourage you to exercise your
right to vote by proxy if:
1) you cannot
attend the Kennady Meeting; or
2) you plan to
attend the Kennady Meeting but prefer the convenience of voting in advance.
The questions and answers below give general
guidance for voting your Kennady Shares and other matters related to the proposed Arrangement involving Kennady and Mountain Province.
Unless otherwise noted, all answers relate to both Registered Kennady Shareholders and Non-Registered Kennady Shareholders. If
you have any questions, please feel free to contact Laurel Hill Advisory Group, the proxy solicitation agent, by telephone at:
1- 877-452-7184 (North American Toll Free) or 416-304-0211 (Collect Outside North America); or by email at: assistance@laurelhill.com. |
Does the Kennady Board support the Arrangement?
Yes. The Kennady Board, on the recommendation
of the Kennady Special Committee and based upon its own investigations, has unanimously determined (i) that the Arrangement is
in the best interests of Kennady (ii) that Kennady should enter into the Arrangement Agreement, and (iii) to recommend that the
Kennady Shareholders vote FOR the Arrangement Resolution.
In making its recommendation, the Kennady Board
considered a number of factors as described in this Circular under the heading “The Arrangement – Reasons for the
Kennady Board and Kennady Special Committee Recommendations”, including the recommendation of the Kennady Special Committee
after having received an oral fairness opinion from Haywood Securities Inc. (subsequently confirmed in writing), which determined
that, subject to the assumptions, limitations and qualifications contained therein, the Arrangement Consideration to be received
by Kennady Shareholders pursuant to the Arrangement is fair, from a financial point of view, to the Kennady Shareholders. See “The
Arrangement – Background to the Arrangement” and “The Arrangement – Reasons for the Mountain Province
Board and Kennady Board Recommendations”.
What will I receive for my Kennady Shares
under the Arrangement?
If the Arrangement is completed, Kennady Shareholders
(other than Mountain Province and any Dissenting Shareholders) immediately prior to the Effective Time will receive 0.975 of a
Mountain Province Share in exchange for each Kennady Share held. Where the aggregate number of Mountain Province Shares to which
a Kennady Shareholder is otherwise entitled under the Arrangement includes a fractional share, the number of Mountain Province
Shares to be received by such Kennady Shareholder will be rounded up or down to the nearest whole number of Mountain Province Shares.
| Vote
Your Shares Today. |
| Shareholders
who have questions or require assistance with voting may contact Laurel Hill Advisory Group toll free at, |
| 1-877-452-7184
or 416-304-0211 (Collect Outside North America); or by email at assistance@laurelhill.com |
Am I entitled to vote?
You are entitled to vote if you were a holder
of Kennady Shares as of the close of business on March 5, 2018. Each Kennady Shareholder is entitled to one vote per Kennady Share
held on all matters to come before the Kennady Meeting, including the Arrangement Resolution. Holders of Kennady Options are not
entitled to vote in respect of their Kennady Options on any matters at the Kennady Meeting.
What am I voting on?
If you are a holder of Kennady Shares, you
are voting to approve the Arrangement Resolution, the full text of which is set out in Schedule “C” – “Resolutions
to be Approved at the Kennady Meeting” to this Circular, providing for the proposed Arrangement involving Kennady and
Mountain Province pursuant to Section 182 of the OBCA. Under the proposed Arrangement, Mountain Province will acquire all of the
outstanding Kennady Shares.
What if amendments are made to these
matters or if other business matters are brought before the Kennady Meeting?
If you attend the Kennady Meeting in person,
you may vote on the business matters as you choose.
If you have completed and returned a proxy
form, the persons named in the proxy form will have discretionary authority to vote on amendments or variations to the business
matters identified in the Kennady Notice of Meeting, and on other matters that may properly come before the Kennady Meeting. As
of the date of the Circular, management of Kennady is not aware of any amendments, variations or additional matters to come before
the Kennady Meeting.
Am I a Registered Kennady Shareholder
and how do I vote?
You are a Registered Kennady Shareholder if
you hold any Kennady Shares in your own name, as recorded in the shareholder register of Kennady maintained by Computershare Investor
Services Inc.
You can inspect a list of Registered Kennady
Shareholders on request during usual business hours, at 161 Bay Street, Suite 1410, P.O. Box 216, Toronto, Ontario, M5J 2S1. This
list will also be available at the Kennady Meeting.
If you are a Registered Kennady Shareholder,
you can vote your Kennady Shares: (1) by voting in person at the Kennady Meeting; or by signing and returning the enclosed Kennady
Proxy (printed on BLUE PAPER) appointing the named persons or some other person you choose, who need not be a Kennady Shareholder,
to represent you as proxyholder and vote your Kennady Shares at the Kennady Meeting.
Am I a Non-Registered Kennady Shareholder
(also commonly referred to as a beneficial shareholder) and how do I vote?
You are a Non-Registered Kennady Shareholder
if your Kennady Shares are held in an account in the name of a nominee (bank, trust company, securities broker or other nominee).
If you are a Non-Registered Kennady Shareholder,
you will have received voting instructions from your nominee or intermediary. Typically, intermediaries will use a service company
to forward such materials to Non-Registered Kennady Shareholders. The majority of intermediaries now delegate responsibility for
obtaining instructions from clients to Broadridge. Kennady may utilize the Broadridge QuickVote™ service to assist Non-Registered
Kennady Shareholders with voting their Kennady Shares. Certain Non-Registered Kennady Shareholders who have not objected to Kennady
knowing who they are (non-objecting beneficial owners) may be contacted by Laurel Hill Advisory Group to conveniently obtain a
vote directly over the telephone.
If I am a Non-Registered Kennady Shareholder,
can I vote in person at the Kennady Meeting?
Yes. To vote in person at the Kennady Meeting, print your own name
in the space provided on the proxy form or the voting instruction form sent to you by your nominee and return it by following the
instructions included. In doing so
| Vote
Your Shares Today. |
| Shareholders
who have questions or require assistance with voting may contact Laurel Hill Advisory Group toll free at, |
| 1-877-452-7184
or 416-304-0211 (Collect Outside North America); or by email at assistance@laurelhill.com |
you are instructing your nominee to appoint
you as a proxyholder. Please register with Kennady’s transfer agent, Computershare Investor Services Inc., when you arrive at the
Kennady Meeting as we have no access to the names of Non-Registered Kennady Shareholders. If you attend the Kennady Meeting without
following this procedure, we will have no record of your shareholdings or entitlement to vote.
Who is soliciting my proxy?
Whether or not you plan to attend the Kennady
Meeting, management of Kennady, with the support of the Kennady Board, requests that you fill out your form of proxy or proxies
to ensure your votes are cast at the Kennady Meeting. This solicitation of your proxy or proxies (your vote) is made on behalf
of management of Kennady.
It is expected that the solicitation of proxies
will be made primarily by mail, but proxies may also be solicited personally or by telephone, email, internet, or other electronic
or other means of communication by directors, officers, employees, agents or other representatives of Kennady. In addition, Kennady
and Mountain Province have engaged Laurel Hill Advisory Group, the Proxy Solicitation Agent, to assist in the solicitation of proxies
with respect to the matters to be considered at the Kennady Meeting and the Mountain Province Meeting. Kennady and Mountain Province
will bear the costs of solicitation of their respective shareholders.
Who votes my Kennady Shares and how will
they be voted if I return a proxy form?
By properly completing and returning a proxy
form, you are authorizing the persons named in that form to attend the Kennady Meeting and to vote your Kennady Shares. You can
use the applicable enclosed Kennady Proxy, or any other proper proxy form, to appoint your proxyholder.
The Kennady Shares represented by your proxy
must be voted as you instruct in the proxy form. If you properly complete and return your proxy but do not specify how you wish
the votes cast, your proxyholder will vote your Kennady Shares as they see fit.
NOTE TO KENNADY SHAREHOLDERS: Unless
you provide contrary instructions, Kennady Shares represented by proxies that management receives will be voted FOR the
Arrangement Resolution.
Can I appoint someone other than those named in the enclosed
proxy forms to vote my Kennady Shares?
Yes. You have the right to appoint another
person of your choice. They do not need to be a Kennady Shareholder to attend and act on your behalf at the Kennady Meeting. To
appoint someone who is not named in the enclosed Kennady Proxy, strike out those printed names appearing on the proxy form and
print in the space provided the name of the person you choose.
NOTE TO KENNADY SHAREHOLDERS: It is
important for you to ensure that any other person you appoint will attend the Kennady Meeting and know you have appointed them.
On arriving at the Kennady Meeting, proxyholders must present themselves to a representative of Computershare Investor Services
Inc.
Can I revoke a proxy or voting instruction?
Yes. If you are a Registered Kennady Shareholder and have returned
a proxy form, you may revoke it by:
| i. | completing and signing another proxy form with a later date and delivering it at the offices of
Computershare Investor Services Inc., Toronto Office, Proxy Department, at 100 University Avenue, 8th Floor, Toronto, Ontario,
Canada, M5J 2Y1, before: (a) 1:00 p.m. (Pacific Standard Time) on Thursday, April 5, 2018; or (b) if the Kennady Meeting is adjourned,
48 hours (excluding Saturdays, Sundays and holidays) prior to the time of the Kennady Meeting; |
| ii. | delivering a written statement revoking the original proxy or voting instruction, signed by you
or your authorized representative, to |
| Vote
Your Shares Today. |
| Shareholders
who have questions or require assistance with voting may contact Laurel Hill Advisory Group toll free at, |
| 1-877-452-7184
or 416-304-0211 (Collect Outside North America); or by email at assistance@laurelhill.com |
| a. | Computershare Investor Services Inc., Toronto Office, Proxy Department, at 100 University Avenue,
8th Floor, Toronto, Ontario, Canada, M5J 2Y1, at any time up to and including the last Business Day preceding the day of the Kennady
Meeting, or if the Kennady Meeting is adjourned, up to the close of business on the last Business Day before the day to which the
Kennady Meeting is adjourned; or |
| b. | the Chair of the Kennady Meeting before the Kennady Meeting begins or, if the Kennady Meeting is
adjourned, before the adjourned Kennady Meeting begins; or |
| iii. | any other manner permitted by law. |
If you are a Non-Registered Kennady Shareholder
and you wish to change your vote you must, in sufficient time in advance of the Kennady Meeting, arrange for your respective intermediary
to change your vote and, if necessary, revoke your proxy in accordance with the revocation procedures set out above.
How many Kennady Shares are entitled
to vote?
The Kennady Board has fixed March 5, 2018
as the Kennady Record Date for determining the Kennady Shareholders who are entitled to receive notice of and vote at the Kennady
Meeting. Only Registered Kennady Shareholders whose names have been entered in the registers of Kennady as at the close of business
(5:00 p.m. (Eastern Standard Time)) on the Kennady Record Date will be entitled to receive notice of and vote at the Kennady Meeting.
No other Kennady Shareholders are entitled to vote at the Kennady Meeting.
As at March 5, 2018, the Kennady Record
Date, 52,912,599 Kennady Shares were issued and outstanding. Each Kennady Share outstanding on the Kennady Record Date carries
the right to one vote. As at March 5, 2018, 35,827,607 Kennady Shares were held by the Minority Kennady Shareholders.
Other than as disclosed in this Circular
under the heading “General Proxy Information – Kennady Shareholders – Kennady Shareholders Entitled to Vote”,
the directors and officers of Kennady know of no person who beneficially owns or exercises control or direction over Kennady Shares
carrying 10% or more of the aggregate voting rights of Kennady Shares.
What do I need to do now in order
to vote on the Arrangement Resolution?
You should carefully read and consider
the information contained in this Circular. Registered Kennady Shareholders should then vote by completing the enclosed Kennady
Proxy or, alternatively, by telephone, or over the internet, in each case in accordance with the enclosed instructions. A proxy
will not be valid for use at the Kennady Meeting unless the completed form of proxy is received by Computershare Investor Services
Inc., by 1:00 p.m. (Pacific Standard Time) on Thursday, April 5, 2018 (or, if the Kennady Meeting is adjourned, at least 48 hours
(excluding Saturdays, Sundays and holidays) prior to any reconvened Kennady Meeting in the event of an adjournment of the Kennady
Meeting). Kennady reserves the right to accept late proxies and to waive the proxy cut-off, with or without notice, but is under
no obligation to accept or reject any particular late proxy. See “General Proxy Information – Kennady Shareholders”.
If you hold your Kennady Shares through
a nominee (bank, trust company, securities broker or other nominee), please follow the instructions including any deadlines and
where the voting instructions forms should be submitted, provided by such nominee to ensure that your vote is counted at the Kennady
Meeting. See “General Proxy Information – Kennady Shareholders – Voting by Non-Registered Kennady Shareholders”.
Should I send in my Letter of Transmittal
and Kennady Share certificates?
Yes. Although you are not required to send
your Kennady Share certificate(s) to validly cast your vote in respect of the Arrangement Resolution, it is recommended that all
Registered Kennady Shareholders complete, sign and return the Letter of Transmittal, along with the accompanying Kennady Share
certificate(s), if applicable, to the Depositary as soon as possible.
| Vote
Your Shares Today. |
| Shareholders
who have questions or require assistance with voting may contact Laurel Hill Advisory Group toll free at, |
| 1-877-452-7184
or 416-304-0211 (Collect Outside North America); or by email at assistance@laurelhill.com |
Kennady Shareholders whose Kennady Shares
are registered in the name of a nominee (bank, trust company, securities broker or other nominee) should contact that nominee for
assistance in depositing their Kennady Shares and should follow the instructions of such nominee in order to deposit their Kennady
Shares.
Should I send in my proxy now?
Yes. To ensure your vote is counted, you
need to complete and submit the enclosed Kennady Proxy or, if applicable, provide your nominee (bank, trust company, securities
broker, investment dealer or other nominee) with voting instructions. You are encouraged to vote well in advance of the proxy cut-off
at 1:00 p.m. (Pacific Standard Time) on Thursday, April 5, 2018 (or at least 48 hours (excluding Saturdays, Sundays and holidays)
prior to any reconvened Kennady Meeting in the event of an adjournment of the Kennady Meeting).
What approvals are required to be
given by Kennady Shareholders at the Kennady Meeting?
Completion of the Arrangement is conditional
upon approval of the Arrangement Resolution, which must be approved, with or without variation, by the affirmative vote of: (i)
at least 66 ⅔% of the votes cast on the Arrangement Resolution by the Kennady Shareholders present in person or represented
by proxy and entitled to vote at the Kennady Meeting, and (ii) at least a majority of the votes cast on the Arrangement Resolution
by Minority Kennady Shareholders (i.e., excluding votes attached to Kennady Shares held by any other person described in items
(a) through (d) of Section 8.1(2) of MI 61-101) present in person or represented by proxy and entitled to vote at the Kennady Meeting.
See “Securities Law Matters – Multilateral Instrument 61-101”.
The Kennady Meeting is scheduled to be
held at the Terminal City Club, 837 West Hastings Street, Vancouver, British Columbia, Canada V6C 1B4, at 1:00 p.m. (Pacific Standard
Time) on Monday, April 9, 2018.
| Vote
Your Shares Today. |
| Shareholders
who have questions or require assistance with voting may contact Laurel Hill Advisory Group toll free at, |
| 1-877-452-7184
or 416-304-0211 (Collect Outside North America); or by email at assistance@laurelhill.com |
What other approvals are required for the Arrangement?
Completion of the Arrangement is also conditional
on the Share Issuance Resolution being approved at the Mountain Province Meeting
The Arrangement must also be approved by
the Court. The Court will be asked to make an order approving the Arrangement and to determine that the Arrangement is fair to
the Kennady Shareholders. Kennady will apply to the Court for this order provided the Share Issuance Resolution is approved at
the Mountain Province Meeting and the Kennady Shareholders approve the Arrangement Resolution at the Kennady Meeting. See “The
Arrangement — Securityholder and Court Approvals”.
What will happen to Kennady if the
Arrangement is completed?
If the Arrangement is completed, Mountain
Province will acquire all of the Kennady Shares and Kennady will become a wholly-owned subsidiary of Mountain Province. It is anticipated
that Mountain Province will apply to the applicable Canadian securities regulators to have Kennady cease to be a reporting issuer
and have the Kennady Shares delisted from the TSXV immediately following completion of the Arrangement.
What will happen if the Arrangement
Resolution is not approved or the Arrangement is not completed for any reason?
If the Arrangement Resolution is not approved
or the Arrangement is not completed for any reason, the Arrangement Agreement may be terminated. In certain circumstances, Kennady
will be required to pay to Mountain Province a termination payment of $6,000,000 in connection with such termination. See “The
Arrangement Agreement — Termination” and “The Arrangement Agreement –Termination Fee”.
When will the Arrangement become
effective?
Subject to obtaining the requisite approvals
of the Mountain Province Shareholders, the Kennady Shareholders, the Court, the TSX, the Nasdaq, the TSXV and the regulatory authorities
described above, it is anticipated that the Arrangement will be completed as soon as practicable following receipt of the Final
Order, which is expected to be obtained on or about April 11, 2018, and following the satisfaction or waiver of all other conditions
precedent to the Arrangement.
Do I have Dissent Rights?
Only Registered Kennady Shareholders have
Dissent Rights in respect of the Arrangement. Registered Kennady Shareholders who wish to exercise their Dissent Rights must:
| i. | deliver a written notice of dissent to the Arrangement Resolution to Kennady, by mail to: Kennady
Diamonds Inc. c/o Bruce Ramsden, Chief Financial Officer, 161 Bay Street, Suite 1410, P.O. Box 216, Toronto, Ontario, Canada, M5J
2S1; or by facsimile transmission to: 416 640-3335, by 5:00 p.m. (Eastern Standard Time) on Thursday, April 5, 2018, or two Business
Days prior to any adjournment of the Kennady Meeting; |
| ii. | not have voted in favour of the Arrangement Resolution; and |
| iii. | otherwise have complied with the provisions of Section 185 of the OBCA, as modified and supplemented
by the Plan of Arrangement, the Interim Order and any other order of the Court. |
A Non-Registered Kennady Shareholder who
wishes that Dissent Rights be exercised in respect of its Kennady Shares should immediately contact the nominee (bank, trust company,
securities brokers or other nominee) with whom the Non-Registered Kennady Shareholder deals. See “The Arrangement –
Dissent Rights”.
| Vote
Your Shares Today. |
| Shareholders
who have questions or require assistance with voting may contact Laurel Hill Advisory Group toll free at, |
| 1-877-452-7184
or 416-304-0211 (Collect Outside North America); or by email at assistance@laurelhill.com |
What if I have other questions?
If you have any questions regarding the Kennady Meeting, please
contact:
| Kennady Proxy Solicitation Agent: |
Laurel Hill Advisory Group |
| |
1-877-452-7184 (North American Toll Free) |
| |
416-304-0211 (Collect outside North America) |
| |
assistance@laurelhill.com |
| Vote
Your Shares Today. |
| Shareholders
who have questions or require assistance with voting may contact Laurel Hill Advisory Group toll free at, |
| 1-877-452-7184
or 416-304-0211 (Collect Outside North America); or by email at assistance@laurelhill.com |
GENERAL PROXY INFORMATION – KENNADY
SHAREHOLDERS
Date, Time and Place of Kennady Meeting
The Kennady Meeting will be held at the Terminal City Club,
837 West Hastings Street, Vancouver, British Columbia, Canada V6C 1B4, at 1:00 p.m. (Pacific Standard Time) on Monday, April
9, 2018.
Purpose of the Kennady Meeting
The purpose of the Kennady Meeting is for
Kennady Shareholders to consider and vote upon the Arrangement Resolution, the full text of which is set out in Schedule “C”
– “Resolutions to be Approved at the Kennady Meeting” to this Circular. Particulars of the subject matter
relating to the Arrangement are described in this Circular under the heading “The Arrangement”. If the Arrangement
Resolution does not receive the requisite approval, the Arrangement will not proceed.
Management of Kennady and the Kennady
Board recommend that Kennady Shareholders vote FOR the Arrangement Resolution. In the absence of instructions to the
contrary, the persons whose names appear in the Kennady Proxy sent to Kennady Shareholders accompanying this Circular intend to
VOTE FOR the Arrangement Resolution.
Important information relating to the
Arrangement Resolution, including the details relating to the Arrangement are found in this Circular. Kennady Shareholders are
urged to closely review the information in this Circular.
Kennady Shareholders Entitled to
Vote
At the Kennady Meeting, Kennady Shareholders
are entitled to vote on the Arrangement Resolution either in present person or represented by proxy. The Kennady Board has fixed
March 5, 2018 as the Kennady Record Date for determining the Kennady Shareholders who are entitled to receive notice of and vote
at the Kennady Meeting. Only Registered Kennady Shareholders whose names have been entered in the registers of Kennady as at the
close of business (5:00 p.m. (Eastern Standard Time)) on the Kennady Record Date will be entitled to receive notice of and vote
at the Kennady Meeting. No other Kennady securityholders are entitled to vote at the Kennady Meeting.
As at March 5, 2018, the Kennady Record
Date, 52,912,599 Kennady Shares were issued and outstanding. Each Kennady Share outstanding on the Kennady Record Date carries
the right to one vote. As at March 5, 2018, 35,827,607 Kennady Shares were held by the Minority Kennady Shareholders.
To the knowledge of the directors and officers
of Kennady, as of the Kennady Record Date, no person beneficially owned, directly or indirectly, or exercised control or direction
over, more than 10% of the Kennady Shares, other than as set out below:
| Name of Shareholder |
Number
of Common Shares(1)(2) |
Percentage
of Common Shares(1)(2) |
| Dermot
Fachtna Desmond(3)(4) |
14,485,797 |
27.4% |
Notes:
| (1) | The information as to Kennady Shares beneficially owned, controlled or directed, not being within the knowledge of Kennady,
has been obtained by Kennady from publicly-disclosed information and/or furnished by the Kennady Shareholder listed above. |
| (2) | Calculated on a non-diluted basis on the basis of 52,912,599 issued and outstanding Kennady Shares as at the Kennady Record
Date. |
| (3) | Represents holdings beneficially owned or controlled by Mr. Dermot Fachtna Desmond. Mr. Desmond owns 5,038,000 Kennady Shares
directly and owns an additional 9,447,797 Kennady Shares beneficially through Bottin (International) Investments Ltd., which he
controls. |
| (4) | Mr. Desmond and Bottin (International) Investments Ltd. are not Minority Kennady Shareholders in respect of the Arrangement
Resolution. As a result, the Kennady Shares held by Mr. Desmond and Bottin (International) Investments Ltd. are not entitled to
be voted in respect of the minority approval required of the Arrangement Resolution under MI 61-101. |
| Vote
Your Shares Today. |
| Shareholders
who have questions or require assistance with voting may contact Laurel Hill Advisory Group toll free at, |
| 1-877-452-7184
or 416-304-0211 (Collect Outside North America); or by email at assistance@laurelhill.com |
Each Registered Kennady Shareholder
has the right to appoint as proxyholder a person or company other than the persons designated by management of Kennady (the “Kennady
Management Proxyholders”) in the enclosed Kennady Proxy and to attend and act on the Kennady Shareholder’s behalf at the Kennady
Meeting or any adjournment or postponement thereof, by striking out the names of the Kennady Management Proxyholders and by inserting
the desired person’s name in the blank space provided or by executing a proxy in a form similar to the enclosed Kennady Proxy.
Voting By Registered Kennady Shareholders
The following instructions are for Registered
Kennady Shareholders only. If you are a Non-Registered Kennady Shareholder, please read the information under the heading “General
Proxy Information – Voting by Non-Registered Kennady Shareholders” below and follow your nominee’s (bank, trust
company, securities broker or other nominee) instructions on how to vote your Kennady Shares.
Voting in Person
Registered Kennady Shareholders who attend
the Kennady Meeting may vote in person. If you are a Registered Kennady Shareholder, to ensure your vote is counted, you should
complete and return the enclosed Kennady Proxy as soon as possible even if you plan to attend the Kennady Meeting in person. Even
if you return a proxy, you can still attend the Kennady Meeting and vote in person, in which case you will need to instruct the
scrutineer at the Kennady Meeting to cancel your proxy.
Voting by Proxy
If you are a Registered Kennady Shareholder
but do not plan to attend the Kennady Meeting, you may vote by using a proxy to appoint someone to attend the Kennady Meeting
as your proxyholder. The person you appoint does not need to be a Kennady Shareholder to attend and act on your behalf at the
Kennady Meeting. Registered Kennady Shareholders should carefully read and consider the information contained in this Circular.
Registered Kennady Shareholders should then complete, sign, date and return the enclosed Kennady Proxy (on BLUE PAPER) in the
enclosed return envelope as indicated in the Kennady Proxy as soon as possible so that your Kennady Shares may be represented
at the Kennady Meeting. Alternatively, Registered Kennady Shareholders may vote over the telephone at: 1-866-732-8683 (North American
Toll Free); or online at: www.investorvote.com using the control number found on the Kennady Proxy.
Appointment of Proxies
A proxy is a document that authorizes another
person to attend the Kennady Meeting and cast votes at the Kennady Meeting on behalf of a Registered Kennady Shareholder. If you
are a Registered Kennady Shareholder, you can use the Kennady Proxy accompanying this Circular. You may also use any other legal
form of proxy.
If you are a Registered Kennady Shareholder,
you can either return a duly completed and executed Kennady Proxy to the Kennady Transfer Agent not later than 1:00 p.m. (Pacific
Standard Time) on Thursday, April 5, 2018, or not later than 48 hours (other than a Saturday, Sunday or holiday) immediately preceding
the time of the Kennady Meeting (as it may be adjourned or postponed from time to time). Alternatively, Registered Kennady Shareholders
may submit their Kennady Proxy by mail to: Computershare Investor Services Inc., Toronto Office, Proxy Department, at 100 University
Avenue, 8th Floor, Toronto, Ontario, Canada, M5J 2Y1; by telephone: 1-866-732-8683; or online: www.investorvote.com. The
deadline for the deposit of proxies may be waived or extended by the Chair of the Kennady Meeting at his discretion, without notice.
Exercise of Discretion by Proxies
Where a choice is specified on the Kennady Proxy on how you
wish to vote on the Arrangement Resolution, your proxyholder must vote your Kennady Shares as instructed.
| Vote
Your Shares Today. |
| Shareholders
who have questions or require assistance with voting may contact Laurel Hill Advisory Group toll free at, |
| 1-877-452-7184
or 416-304-0211 (Collect Outside North America); or by email at assistance@laurelhill.com |
If you do NOT mark on the Kennady Proxy
how you want to vote on a particular matter, your proxyholder will have the discretion to vote your Kennady Shares as he or she
sees fit. If your proxy does not specify how to vote on the Arrangement Resolution and you have authorized the persons named in
the accompanying Kennady Proxy (who are officers and/or directors of Kennady) to act as your proxyholder, your Kennady Shares will
be voted at the Kennady Meeting FOR the approval of such matters.
If any amendments are proposed to the Arrangement
Resolution, or if any other matters properly arise at the Kennady Meeting, your proxyholder will have the discretion to vote your
Kennady Shares as he or she sees fit.
To ensure the Arrangement Resolution is
passed, you should complete and submit the applicable enclosed Kennady Proxy or, if applicable, provide your nominee (bank, trust
company, securities broker or other nominee) with voting instructions. See “General Proxy Information – Voting by
Registered Kennady Shareholders – Voting by Proxy”.
Revocation of Proxies
Any Registered Kennady Shareholder who
has returned a Kennady Proxy may revoke it by:
| i. | completing and signing another proxy form with a later date and delivering it to Computershare
Investor Services Inc., Toronto Office, Proxy Department, at 100 University Avenue, 8th Floor, Toronto, Ontario, Canada, M5J 2Y1,
before: (a) 1:00 p.m. (Pacific Standard Time) on Thursday, April 5, 2018; or (b) if the Kennady Meeting is adjourned, 48 hours
(excluding Saturdays, Sundays and holidays) prior to the time of the Kennady Meeting; |
| ii. | delivering a written statement revoking the original proxy or voting instruction, signed by you
or your authorized representative, to |
| a. | Computershare Investor Services Inc., Toronto Office, Proxy Department, at 100 University Avenue,
8th Floor, Toronto, Ontario, Canada, M5J 2Y1, at any time up to and including the last Business Day preceding the day of the Kennady
Meeting, or if the Kennady Meeting is adjourned, up to the close of business on the last Business Day before the day to which the
Kennady Meeting is adjourned; or |
| b. | the Chair of the Kennady Meeting before the Kennady Meeting begins or, if the Kennady Meeting is
adjourned, before the adjourned Kennady Meeting begins; or |
| iii. | any other manner permitted by law. |
If you are a Non-Registered Kennady Shareholder
and you wish to change your vote you must, in sufficient time in advance of the Kennady Meeting, arrange for your respective intermediary
to change your vote and, if necessary, revoke your proxy in accordance with the revocation procedures set out above.
Voting By Non-Registered Kennady
Shareholders
You are a Non-Registered Kennady Shareholder
(as opposed to a Registered Kennady Shareholder) if your Kennady Shares are held on your behalf, or for your account, by a nominee
(bank, trust company, securities broker or other nominee). In accordance with Securities Laws, Kennady has distributed copies of
the Kennady Notice of Meeting and this Circular to the clearing agencies and intermediaries for onward distribution to Non-Registered
Kennady Shareholders. Intermediaries are required to forward the Kennady Notice of Meeting and this Circular to Non- Registered
Kennady Shareholders unless a Non-Registered Kennady Shareholder has waived the right to receive them. Typically, intermediaries
will use a service company to forward such materials to Non-Registered Kennady Shareholders. The majority of intermediaries now
delegate responsibility for obtaining instructions from clients to Broadridge.
Non-Registered Kennady Shareholders will
receive from an intermediary either voting instruction forms or, less frequently, forms of proxy. The purpose of these forms is
to permit Non-Registered Kennady Shareholders to direct
| Vote
Your Shares Today. |
| Shareholders
who have questions or require assistance with voting may contact Laurel Hill Advisory Group toll free at, |
| 1-877-452-7184
or 416-304-0211 (Collect Outside North America); or by email at assistance@laurelhill.com |
the voting of the Kennady Shares they beneficially
own. Non-Registered Kennady Shareholders should follow the procedures set out below, depending on which type of form they receive.
Kennady will send directly to “non-objecting beneficial owners” of Kennady Shares the Kennady Meeting materials. Kennady
has elected to pay for the delivery of Kennady Meeting materials to “objecting beneficial owners” of Kennady Shares.
Voting Instruction Form
In most cases, a Non-Registered Kennady
Shareholder will receive, as part of the materials for the Kennady Meeting, a voting instruction form. If the Non-Registered Kennady
Shareholder does not wish to attend and vote at the Kennady Meeting in person (or have another person attend and vote on the Non-Registered
Kennady Shareholder’s behalf), the voting instruction form must be completed, signed and returned in accordance with the directions
on the form. If a Non-Registered Kennady Shareholder wishes to attend and vote at the Kennady Meeting in person (or have another
person attend and vote on the Non-Registered Kennady Shareholder’s behalf), the Non-Registered Kennady Shareholder must complete,
sign and return the voting instruction form in accordance with the directions provided.
Kennady may utilize the Broadridge QuickVote™
service to assist Non-Registered Kennady Shareholders with voting their Kennady Shares. Certain Non-Registered Kennady Shareholders
who have not objected to Kennady knowing who they are (non-objecting beneficial owners) may be contacted by Laurel Hill Advisory
Group to conveniently obtain a vote directly over the telephone.
Forms of Proxy
Less frequently, a Non-Registered Kennady
Shareholder will receive, as part of the materials for the Kennady Meeting, forms of proxy that have already been signed by the
intermediary (typically by a facsimile transmission, stamped signature) which is restricted as to the number of Kennady Shares
beneficially owned by the Non-Registered Kennady Shareholder but which is otherwise uncompleted. If the Non-Registered Kennady
Shareholder does not wish to attend and vote at the Kennady Meeting in person (or have another person attend and vote on the Non-Registered
Kennady Shareholder’s behalf), the Non-Registered Kennady Shareholder must complete a form of proxy and deliver it to the Kennady
Transfer Agent, Computershare Investor Services Inc., not later than 1:00 p.m. (Pacific Standard Time) on Thursday, April 5, 2018,
or not later than 48 hours (other than a Saturday, Sunday or holiday) immediately preceding the date of the Kennady Meeting (as
it may be adjourned or postponed from time to time). The time limit for the deposit of proxies may be waived or extended by the
Chair of the Kennady Meeting at his discretion, without notice.
Only Registered Kennady Shareholders or
the persons they appoint as their proxies are permitted to vote at the Kennady Meeting. If a Non-Registered Kennady Shareholder
wishes to attend and vote at the Kennady Meeting in person (or have another person attend and vote on the Non-Registered Kennady
Shareholder’s behalf), the Non- Registered Kennady Shareholder must strike out the names of the persons named in the form of proxy
and insert the Non-Registered Kennady Shareholder’s (or such other person’s) name in the blank space provided and return the form
of proxy in accordance with the instructions provided by the intermediary.
Non-Registered Kennady Shareholders
should follow the instructions on the forms they receive and contact their intermediaries or Laurel Hill Advisory Group, the proxy
solicitation agent, by telephone at: 1-877-452- 7184 (North American Toll Free) or 416-304-0211 (Collect Outside North America);
or by email at: assistance@laurelhill.com.
Solicitation of Proxies
Whether or not you plan to attend the Kennady
Meeting, management of Kennady, with the support of the Kennady Board, requests that you fill out your form of proxy or proxies
to ensure your votes are cast at the Kennady Meeting. This solicitation of your proxy or proxies (your vote) is made on behalf
of management of Kennady.
It is expected that the solicitation of
proxies will be made primarily by mail, but proxies may also be solicited personally or by telephone, email, internet, or other
electronic or other means of communication by directors, officers, employees, agents or other representatives of Kennady. Kennady
and Mountain Province have retained Laurel Hill Advisory Group, the Proxy Solicitation Agent, to assist in the solicitation of
proxies and may also retain other persons
| Vote
Your Shares Today. |
| Shareholders
who have questions or require assistance with voting may contact Laurel Hill Advisory Group toll free at, |
| 1-877-452-7184
or 416-304-0211 (Collect Outside North America); or by email at assistance@laurelhill.com |
as it deems necessary to aid in the solicitation
of proxies with respect to the Kennady Meeting and the Mountain Province Meeting. Costs related to the Proxy Solicitation Agent
and the printing and mailing of this Circular in connection with the Kennady Meeting and Mountain Province Meeting, which are expected
to be nominal, will be borne by each of Kennady and Mountain Province in connection with their respective shareholders.
Questions
Kennady Shareholders who would like additional
copies, without charge, of this Circular or have additional questions about the Arrangement, including the procedures for voting
Kennady Shares, should contact their nominee (bank, trust company, securities broker or other nominee) or Laurel Hill Advisory
Group as indicated below. In addition, Laurel Hill Advisory Group is available to answer any questions you might have in respect
of the information contained in this Circular.
Interested Kennady Shareholders may contact
Laurel Hill Advisory Group, the proxy solicitation agent, by telephone at: 1-877-452-7184 (North American Toll Free) or 416-304-0211
(Collect Outside North America); or by email at: assistance@laurelhill.com.
| Vote
Your Shares Today. |
| Shareholders
who have questions or require assistance with voting may contact Laurel Hill Advisory Group toll free at, |
| 1-877-452-7184
or 416-304-0211 (Collect Outside North America); or by email at assistance@laurelhill.com |
THE ARRANGEMENT
Background to the Arrangement
The terms of the Arrangement and the
provisions of the Arrangement Agreement are the result of arm’s length negotiations conducted between representatives of the Kennady
Special Committee and the Mountain Province Special Committee and their respective advisors. The following is a summary of the
principal meetings, discussions and activities that preceded the execution of the Arrangement Agreement, and the subsequent public
announcement of the Arrangement.
In December 2016, the Mountain Province
Board initiated a process to investigate the potential for a transaction involving the acquisition of the shares or assets of Kennady
in order to evaluate the possibility of securing potential expansion ground for the GK Diamond Mine. To this end, the Mountain
Province Special Committee was established consisting of Mr. Bruce Dresner (Chair), Mr. Peeyush Varshney and Mr. Carl Verley, each
of whom was and is free from any interest and any business or other relationship with Kennady or Mountain Province that could,
or could reasonably be perceived to, materially interfere with his ability to act with a view to the best interests of Mountain
Province. The Mountain Province Special Committee was given a broad mandate to investigate and negotiate a potential transaction
to acquire Kennady, with authority to retain financial and legal advisors.
In March 2017, the Mountain Province Special
Committee engaged Miller Thomson LLP to act as its legal counsel in connection with a possible transaction to acquire the shares
of Kennady. Miller Thomson LLP provided advice to the members of the Mountain Province Special Committee with respect to their
fiduciary duties, related party transactions analysis under MI 61-101, and the process to be followed by the Mountain Province
Special Committee in connection with a proposed transaction. In evaluating the potential for a transaction, the Mountain Province
Special Committee considered, among other things, the prevailing market and diamond industry circumstances, the interests of the
Mountain Province Shareholders and Mountain Province’s obligations to a group of secured lenders and sought input from management
of Mountain Province.
The Mountain Province Special Committee
communicated its interest in exploring a transaction with Kennady in early March 2017, at which time the Kennady Board determined
that it would be appropriate for the directors of Kennady, excluding interested directors, to consider potential transactions involving
the sale of all or substantially all of the shares or assets of Kennady. Accordingly, the Kennady Special Committee was established
consisting of Ms. Claudia Tornquist (Chair), Mr. Robert Parsons and Dr. Tom McCandless, each of whom was and is free from any interest
and any business or other relationship with Kennady or Mountain Province that could, or could reasonably be perceived to, materially
interfere with his or her ability to act with a view to the best interests of Kennady. In connection with its mandate, the Kennady
Special Committee engaged Fasken Martineau DuMoulin LLP to act as legal counsel to the Kennady Special Committee and Minvisory
Corp. to act as financial advisor in connection with a possible transaction involving Kennady. Fasken Martineau DuMoulin LLP provided
advice to the members of the Kennady Special Committee with respect to their fiduciary duties, related party transactions analysis
under MI 61-101 and the process to be followed by the Kennady Special Committee in connection with a proposed transaction.
Throughout March 2017, discussions occurred
between representatives of Kennady and Mountain Province regarding the possibility of a transaction and related terms. On March
22, 2017, Mountain Province presented Kennady with a letter of intent setting out the terms of a proposed share exchange transaction.
The Kennady Special Committee reviewed the terms of the letter of intent and following discussions with its legal and financial
advisors, Kennady advised Mountain Province that the Kennady Special Committee would not support a transaction on the terms set
out in Mountain Province’s letter of intent. The Kennady Special Committee suggested that representatives of each of Kennady and
Mountain Province meet in person to discuss what might be an acceptable exchange ratio and other terms for a potential transaction.
Representatives of Kennady and Mountain Province then met to discuss the possibility of a transaction between Kennady and Mountain
Province.
In late March 2017, the Mountain Province
Special Committee reflected on the information received from the meeting with representatives of Kennady, as well as other factors
affecting Mountain Province, and concluded that under the circumstances, including a decline in the market price for the Mountain
Province Shares relative the market price of
Kennady Shares, it was not the time for
the Mountain Province Special Committee to make a revised proposal to the Kennady Special Committee.
The Mountain Province Special Committee
instructed legal counsel to prepare a draft mutual confidentiality agreement to facilitate the due diligence process, in the event
that the Mountain Province Special Committee should determine that the circumstances changed sufficiently to re-engage in discussions
regarding a potential transaction. The draft mutual confidentiality agreement was sent to Kennady but was not signed.
Throughout April and May 2017, discussions
continued and the Kennady Special Committee met frequently to receive updates from management until the end of May 2017, when Kennady
and Mountain Province determined that, because of market and industry conditions, it was impractical to continue discussions regarding
a transaction. Discussions regarding a possible transaction were halted.
In early November 2017, representatives
of Kennady and Mountain Province re-engaged in discussions regarding a possible transaction to combine the two companies.
In November 2017, the Mountain Province
Special Committee met with representatives of Scotiabank to discuss the process for a potential transaction but thereafter discontinued
negotiations and all communications regarding a potential transaction as it focused on completion of a debt financing by Mountain
Province.
After completion in mid-December 2017 of
a private note offering and concurrent debt financing to refinance certain secured indebtedness, the Mountain Province Special
Committee determined to re-engage in discussions regarding a possible transaction to acquire Kennady. The Mountain Province Special
Committee resolved to engage Scotiabank as the financial advisor and JDS Energy & Mining Inc. as the technical advisor to the
Mountain Province Special Committee.
Following discussions with financial and
legal advisors, the Mountain Province Special Committee prepared a letter of intent outlining the proposed terms and conditions
for an acquisition of all of the shares of Kennady, an interim financing for Kennady and a revised draft mutual confidentiality
agreement.
On December 19, 2017, a meeting of the
Mountain Board (excluding Mr. Comerford, due to his potential for conflict arising from his employment position with a firm founded
and beneficially owned by Mr. Desmond, as well as his position on the Kennady Board) was convened to receive a recommendation from
the Mountain Province Special Committee concerning a proposal to acquire Kennady. The Mountain Province Special Committee, with
advice from Scotiabank, concluded that an exchange ratio should not be fixed until a due diligence process was initiated and near
completion.
On December 21, 2017, Mountain Province
presented Kennady with a letter of intent outlining the proposed terms and conditions for an acquisition of all of the shares of
Kennady and a mutual confidentiality agreement. Following receipt of the letter of intent from Mountain Province, which contained
provisions requiring exclusive negotiations between Kennady and Mountain Province, the Kennady Special Committee considered the
proposal and alternative transactions including financing options. The Kennady Special Committee also met with its advisors and
considered the advice from such advisors on possible alternative transactions and financing options.
The Kennady Special Committee considered
the implications of entering into a letter of intent containing exclusivity provisions on potential discussions with other parties
regarding the acquisition of Kennady or a possible financing transaction.
In connection with these considerations,
the Kennady Special Committee asked Minvisory Corp. to reach out to other potential buyers and parties that might be willing to
provide financing to Kennady prior to entering into exclusive negotiations with Mountain Province. Minvisory Corp. proceeded to
contact potential buyers and parties that might be willing to provide financing to Kennady. Following Minvisory Corp.’s discussions
with such parties, Minvisory Corp. was advised by such parties that advancing an acquisition or financing transaction, as applicable,
was not possible at the current time. Thereafter, the Kennady Special Committee decided to focus on negotiating a transaction with
Mountain Province.
On December 30, 2017, the Kennady Special
Committee sent a counter-proposal to Mountain Province. Mountain Province did not formally respond to the proposal, but both parties
saw that there was likely scope for a transaction, and that detailed due diligence could help determine an acceptable exchange
ratio.
In early January 2018, the Mountain Province
Special Committee met to consider the Kennady counter-proposal and to receive an update from Scotiabank concerning their communications
with Minvisory Corp., the financial advisor to the Kennady Special Committee.
The parties executed a mutual confidentiality
agreement on January 3, 2018 (the “Confidentiality Agreement”) so that a more complete exchange of confidential
information could occur and broader discussion could ensue. Following the execution of the Confidentiality Agreement, Kennady and
Mountain Province conducted reciprocal due diligence. Discussions also ensued between the parties with respect to transaction terms
as well as financial terms, including negotiations with respect to the exchange ratio.
Following the Kennady Special Committee’s
meeting on January 4, 2018, the Kennady Special Committee invited potential candidates to submit proposals to the Kennady Special
Committee in respect of providing a fairness opinion to the Kennady Special Committee. After reviewing and assessing the proposals,
the Kennady Special Committee retained Haywood Securities Inc. on January 8, 2018 to provide the Haywood Fairness Opinion.
On January 5, 2018, Kennady retained SRK
Consulting as its technical advisor to assist with the evaluation of Mountain Province’s assets and due diligence regarding the
Gahcho Kué Joint Venture.
Between January 3, 2018 and January 28,
2018, negotiations continued between Kennady and Mountain Province, with input from their respective financial and legal advisors.
Both the Kennady Special Committee and the Mountain Special Committee received periodic updates from their respective management
teams on the progress of discussions and negotiations.
On January 11, 2018, the Mountain Province
Special Committee met to receive a report from Scotiabank concerning the progress of their review of Kennady information, to receive
an initial legal due diligence report from Miller Thomson LLP, and resolved to engage RBC Capital Markets to prepare a fairness
opinion in connection with the potential acquisition of Kennady. A meeting of the Mountain Board (excluding Mr. Comerford) was
convened to receive a recommendation from the Mountain Province Special Committee concerning a range of share exchange ratios and
authorized the Mountain Province Special Committee to negotiate a transaction within the recommended range.
In early January 2018, legal counsel for
the Mountain Province Special Committee prepared a draft of the definitive Arrangement Agreement and the Plan of Arrangement, which,
following comments from the Mountain Province Special Committee and Scotiabank, were provided to legal counsel to the Kennady Special
Committee.
On January 13, 2018, Mountain Province
made a revised proposal to Kennady.
The Kennady Special Committee met frequently
with its legal and financial advisors to discuss the offer from Mountain Province. On January 17, 2018, the Kennady Special Committee
also met with Haywood Securities Inc. to discuss its financial analysis to date and the Kennady Special Committee was given the
opportunity to ask any questions regarding Haywood Securities Inc.’s initial analysis.
The Mountain Province Special Committee
also met frequently with its legal and financial advisors to discuss the status of RBC Capital Markets’ preparations to deliver
a fairness opinion and legal due diligence. On January 24, 2018, the Mountain Province Special Committee met to consider a revised
recommendation to the Mountain Province Board. A meeting of the Mountain Board (excluding Mr. Comerford) was convened to receive
a revised recommendation from the Mountain Province Special Committee concerning the share exchange ratio and authorized the Mountain
Province Special Committee to negotiate a transaction within the recommended range.
Mountain Province submitted a revised offer
on January 24, 2018, with a proposed exchange ratio of 0.975. The Kennady Special Committee met with its legal and financial advisors
on January 25, 2018 to consider Mountain Province’s revised offer. Haywood Securities
Inc. was also invited to a portion of this meeting and was asked to summarize for the Kennady Special Committee its analysis to
date on Mountain Province’s offer.
Negotiations continued between the Chairs
of the respective special committees resulting in an agreement in principle on the proposed exchange ratio included in the January
24, 2018 offer. Upon reaching this agreement, Mr. Jonathan Comerford and Mr. Dermot Fachtna Desmond (who had both been excluded
from the process to date) were informed of the proposed exchange ratio and were requested to provide voting and support agreements.
After further discussions between the parties, in light of the considerable negotiation and work by both sides that had occurred
to date, ultimately Mr. Comerford and Mr. Desmond determined to support the transaction as negotiated by the respective special
committees.
On January 27, 2018, the Kennady Special
Committee met with its legal and financial advisors. At the request of the Kennady Special Committee, Haywood Securities Inc. made
a detailed presentation to the Kennady Special Committee on the basis of the January 24, 2018 revised offer which included a summary
of its approach to fairness and financial analysis. The Kennady Special Committee was given an opportunity to ask Haywood Securities
Inc. questions.
On January 27, 2018, the Mountain Province
Special Committee and independent director Karen Goracke met with its legal and financial advisors to discuss a range of issues
concerning the potential transaction and the status of the Arrangement Agreement. At the request of the Mountain Province Special
Committee, RBC Capital Markets joined the meeting, made a detailed presentation to the Mountain Province Special Committee concerning
their approach to fairness and financial analysis and provided their oral fairness opinion (subsequently confirmed in writing)
that, on the basis of the assumptions, limitations and qualifications to be set forth in the written RBC Fairness Opinion subsequently
delivered by them, as of the date of the opinion, the Arrangement Consideration to be paid by Mountain Province pursuant to the
Arrangement is fair, from a financial point of view, to Mountain Province. The Mountain Province Special Committee was given an
opportunity to ask RBC Capital Markets questions, and resolved to consider the matter for 24 hours before making a final recommendation
to the Mountain Province Board.
On January 28, 2018, the Kennady Special
Committee met again with its legal and financial advisors to consider the Arrangement. Haywood Securities Inc. provided the Kennady
Special Committee with a detailed presentation to assist the Kennady Special Committee in understanding the basis for the Haywood
Fairness Opinion. The Kennady Special Committee discussed in detail the merits of the potential transaction including the risks
of not doing a transaction, governance matters, negotiations and the exchange ratio in respect of the potential transaction. The
Kennady Special Committee’s legal advisors provided an overview of the obligations and duties of the Kennady Board and Kennady
Special Committee in the circumstances, of the proposed terms and conditions of the proposed transaction and of the Arrangement
Agreement, including the Plan of Arrangement. Haywood Securities Inc. provided its oral fairness opinion (subsequently confirmed
in writing) that, on the basis of the assumptions, limitations and qualifications to be set forth in the written Haywood Fairness
Opinion subsequently delivered by them, as of the date of the opinion, the Arrangement Consideration to be received by the Kennady
Shareholders pursuant to the Arrangement is fair, from a financial point of view, to the Kennady Shareholders. The Kennady Special
Committee then considered, discussed and finalized its recommendation to the Kennady Board.
The independent directors of the Kennady
Board (without Mr. Comerford and Dr. Moore due to his potential for conflict arising from the termination payment provisions triggered
by a change of control contained in his employment agreement) then met and considered the material terms and conditions of the
Arrangement, the merits of the proposed transaction, the recommendation of the Kennady Special Committee (having received an oral
fairness opinion from Haywood Securities Inc. (subsequently confirmed in writing)), the Arrangement Consideration to be received
by Kennady Shareholders and the impact of the transaction on the Kennady Shareholders and other stakeholders of Kennady and the
Kennady Board (without Dr. Moore and Mr. Comerford) unanimously determined that the Arrangement was in the best interests of Kennady.
On January 28, 2018, the Mountain Province
Special Committee and independent director Karen Goracke met with the legal and financial advisors, including representatives of
RBC Capital Markets, to discuss any issues or questions arising from the RBC Fairness Opinion. The Mountain Province Special Committee
then considered, discussed and finalized its recommendation to the Mountain Province Board. A meeting of the Mountain Province
Board (excluding Mr. Comerford) was convened with legal and financial advisors, including representatives of RBC Capital Markets.
During the meeting, the Mountain Province
Board was informed that an agreement in principle had been reached between Mountain Province and Kennady, and a summary of the
final terms and conditions of the proposed transaction and the Arrangement Agreement, including the Plan of Arrangement, were provided
by management and legal counsel to the Mountain Province Board.
In light of the advice, reports and opinions
it had received (including the oral fairness opinion from RBC Capital Markets), and following further discussion, the Mountain
Province Board (without Mr. Comerford) unanimously determined that the Arrangement was in the best interests of Mountain Province
and recommended that the Mountain Province Shareholders vote in favour of the Share Issuance Resolution. The Mountain Province
Board (without Mr. Comerford) also authorized Mountain Province to (i) enter into the Arrangement Agreement; and (ii) call and
hold a special meeting of Mountain Province Shareholders to consider the Share Issuance Resolution.
At the time of the public announcement
of the transaction, Kennady Shareholders holding approximately 28.6% of the issued and outstanding Kennady Shares had executed
Kennady Voting and Support Agreements. In addition, Mountain Province Shareholders holding approximately 24.3% of the issued and
outstanding Mountain Province Shares had executed Mountain Province Voting and Support Agreements.
On the morning of January 29, 2018, prior
to the opening of the TSX and TSXV, the Arrangement Agreement and other related documents were executed by the parties and a joint
press release was issued announcing the transaction and the Kennady Private Placement.
Recommendation of the Mountain Province
Special Committee
The Mountain Province Special Committee
was formed to review and evaluate the Arrangement, oversee and supervise the process carried out by Mountain Province in negotiating
and entering into the Arrangement Agreement and to make recommendations to the Mountain Province Board with respect to any such
proposed transaction.
After careful consideration, including
a thorough review of the Arrangement Agreement and receiving the oral fairness opinion of RBC Capital Markets delivered to the
Mountain Province Special Committee (subsequently confirmed in writing), as well as a thorough review of other matters, the Mountain
Province Special Committee unanimously determined that the Arrangement is in the best long-term interests of Mountain Province.
Accordingly, the Mountain Province Special Committee unanimously recommended that the Mountain Province Board approve the Arrangement
and enter into the Arrangement Agreement.
Recommendation of the Mountain Province
Board
After careful consideration, including
a thorough review of the Arrangement Agreement, the Mountain Province Board (other than Mr. Comerford, who, having declared a potential
conflict of interest in the matters being considered, was not present and did not vote on the Arrangement) determined, upon the
recommendation of the Mountain Province Special Committee and consultation with its legal and financial advisors, and based in
part on an oral fairness opinion (subsequently confirmed in writing) received by the Mountain Province Special Committee from RBC
Capital Markets, that the Arrangement is in the best long-term interests of Mountain Province and the Mountain Province Shareholders.
Accordingly, the Mountain Province Board unanimously approved the Arrangement Agreement and unanimously recommends that Mountain
Province Shareholders vote FOR the Share Issuance Resolution.
Recommendation of the Kennady Special Committee
The Kennady Special Committee was formed
to consider potential transactions involving the sale of all or substantially all of the shares or assets of Kennady, evaluate
the Arrangement, pursue strategic alternatives to the Arrangement, oversee and supervise the process carried out by Kennady in
negotiating and entering into the Arrangement Agreement and to make recommendations to the Kennady Board with respect to any such
proposed transaction.
After careful consideration, including
a thorough review of the Arrangement Agreement and receiving the oral fairness opinion of Haywood Securities Inc. delivered to
the Kennady Special Committee (subsequently confirmed in writing), as well as a thorough review of other matters, including those
discussed below under the heading “Reasons for the
Kennady Board and Kennady Special Committee
Recommendations”, the Kennady Special Committee unanimously determined that the Arrangement is in the best interests of
Kennady. Accordingly, the Kennady Special Committee unanimously recommended that the Kennady Board approve the Arrangement and
enter into the Arrangement Agreement and that the Kennady Board recommend that Kennady Shareholders vote in favour of the Arrangement
Resolution.
Recommendation of the Kennady Board
After careful consideration, including
a thorough review of the Arrangement Agreement, as well as a thorough review of other matters, the Kennady Board (other than Dr.
Moore and Mr. Comerford, who, having declared a potential conflict of interest in the matters being considered, were not present
and did not vote on the Arrangement), upon the unanimous recommendation of the Kennady Special Committee, unanimously determined
that the Arrangement is in the best interests of Kennady. Accordingly, the Kennady Board unanimously approved the Arrangement
Agreement and unanimously recommends that Kennady Shareholders vote FOR the Arrangement Resolution.
Reasons for the Mountain Province Board and Mountain Province
Special Committee Recommendations
In making their respective recommendations,
the Mountain Province Special Committee and the Mountain Province Board consulted with Mountain Province’s management, its financial
advisor, Scotiabank, and its legal counsel and performed financial, technical and legal due diligence with the help of its advisors
and experts and considered a number of factors, including those listed below. The following includes forward-looking information
and readers are cautioned that actual results may vary.
In making their respective determinations
and recommendations, the Mountain Province Special Committee and the Mountain Province Board considered and relied upon a number
of substantive factors, including, among others:
| · | Addition of Significant and 100% Owned Resources. Kennady owns two 100%-owned diamondiferous
bodies which contain indicated resources of 13.62 million carats and inferred resources of 5.02 million carats. The Kelvin kimberlite
has indicated resources of 13.62 million carats at an average grade of 1.60 carats per tonne and average value of U.S.$63 per carat
as estimated by bulk samples completed in 2015 and 2016. The Faraday kimberlites have inferred resources of 5.02 million carats
at an average grade of 1.54 carats per tonne and average value of U.S.$98 per carat as estimated by a 2017 bulk sample. The size
and grade of Kelvin and Faraday add to the total number of carats owned by Mountain Province for future production and the addition
of these two bodies also opens up new mine planning opportunities that could deliver optimized revenue realization and operating
cost control. |
| · | Upside to Grow Resources. Mountain Province believes there is upside potential
to grow resources at both Kelvin and Faraday and develop potential resources at the Doyle and MZ kimberlites. |
| · | Extensive Land Package. Kennady possesses 67,164 hectares of highly prospective and
100%-owned exploration ground strategically surrounding the GK Diamond Mine. |
| · | Complementary Assets. The Combined Company is expected to benefit from the
complementary assets held by Mountain Province and Kennady. Kennady controls the bulk of the prospective kimberlite belt and
Mountain Province owns 49% of the belt’s operating mine. Upon completion of the Arrangement, the Combined Company will be
uniquely positioned to either add the Kennady assets to the Gahcho Kué Joint Venture (subject to agreement with De
Beers) or advance exploration, building 100%-owned value that can be combined with the Gahcho Kué Joint Venture at a
later date. On a combined basis, this will have the potential to significantly reduce pre-production capital expenditures,
transportation costs and operating expenses. |
| ○ | Potential to Displace Lower-Grade Tuzo Ore. From 2023-2025, the Gahcho Kué Joint Venture is scheduled
to mine lower-grade ore from the Tuzo pipe. Should the Kennady assets be integrated into the |
Gahcho Kué Joint Venture
there is the potential to partially displace this lower-grade Tuzo ore with higher-grade ore from Kelvin or Faraday. Given the
early stage of the Kennady assets, time is needed to develop and permit the assets before they are ready to be mined.
| ○ | Full Control over Kennady’s 2018 Exploration Program. Kennady’s 2017 summer drilling program highlighted key
opportunities to grow the current Faraday resource and the 2018 plan is in place to explore other key value enhancing targets.
Upon completion of the Arrangement, Mountain Province will be in a position to fully control Kennady’s 2018 drill program. Managing
Kennady’s drilling program is not expected to meaningfully detract from Mountain Province’s other capital management objectives,
including those related to debt servicing and dividend payments. |
| · | Fairness Opinion. The Mountain Province Special Committee received the RBC Fairness
Opinion that concluded, as at the date thereof and subject to the assumptions, limitations and qualifications contained therein,
that the Arrangement Consideration to be paid by Mountain Province pursuant to the Arrangement is fair, from a financial point
of view, to Mountain Province. |
| · | Experienced Leadership Team. The Combined Company will have an experienced
management team with a proven track record of generating shareholder value and with knowledge of all stages of the mine
development cycle, including discovery, development and production. |
The Mountain Province Special Committee
and Mountain Province Board also considered a variety of risks and other potentially negative factors relating to the Arrangement
including those matters described under the heading “Risk Factors Relating to the Arrangement”. The Mountain Province
Special Committee and Mountain Province Board believed that, overall, the anticipated benefits of the Arrangement to Mountain Province
outweighed these risks and negative factors.
In making their respective determinations
and recommendations, the Mountain Province Special Committee and the Mountain Province Board also observed that a number of procedural
safeguards were and are present to permit the Mountain Province Special Committee and the Mountain Province Board to represent
effectively the interests of Mountain Province and the Mountain Province Shareholders and Mountain Province’s other stakeholders,
including, among others:
| · | Role of the Mountain Province Special Committee. The evaluation and negotiation
process was conducted by the Mountain Province Special Committee, being members of the Mountain Province Board who are independent
of management and the Significant Shareholder. The Mountain Province Special Committee met regularly with Mountain Province’s advisors
and management and retained its own independent legal, financial and technical advisors. |
| · | Unanimous recommendation of the Mountain Province Special Committee, consisting entirely
of independent directors. The Arrangement was approved by the independent directors of Mountain Province, in accordance
with MI 61-101. |
| · | Key Shareholder Support. Shareholders of each of Mountain Province and Kennady
holding, in the aggregate, approximately 24.3% of the outstanding Mountain Province Shares and approximately 28.6% of the
outstanding Kennady Shares, respectively, as at January 28, 2018, have entered into Voting and Support Agreements pursuant to
which they have agreed, among other things, to vote in favour of the Share Issuance Resolution and the Arrangement
Resolution, respectively. |
| · | Shareholder Approval. In addition to majority approval by the Mountain Province Shareholders
present in person or represented by proxy and entitled to vote at the Mountain Province Meeting, the Share Issuance Resolution
must also be approved by at least a majority of the votes cast on the Share Issuance Resolution by Minority Mountain Province Shareholders
present in person or represented by proxy and entitled to vote at the Mountain Province Meeting, providing protection for Minority
Mountain Province Shareholders. |
| · | Independent Mountain Province Fairness Opinion. Mountain Province
retained RBC Capital Markets to provide the RBC Fairness Opinion. The fee payable to RBC Capital Markets is not contingent
on the
completion of the Arrangement and such fee is payable to RBC Capital Markets in respect of the RBC Fairness Opinion
irrespective of the substance or conclusions of the RBC Fairness Opinion. See “The Arrangement – RBC Fairness
Opinion” and Schedule “E” – “Fairness Opinion of RBC Capital Markets”. |
| · | Experienced financial and legal advisors. The process undertaken by the
Mountain Province Special Committee included the retention of Miller Thomson LLP as its independent legal advisor and the
retention of Scotiabank as its independent financial advisor. |
| · | Reasonable Termination Fee. Mountain Province is able to terminate the
Arrangement Agreement in specified circumstances, including to accept a Superior Proposal on payment of the Termination Fee
of $6,000,000. This provides further assurance to the Mountain Province Board that it would have a reasonable opportunity to
consider a potential superior unsolicited alternative transaction if one is subsequently proposed. |
The Mountain Province Special Committee’s
and the Mountain Province Board’s reasons for recommending the Arrangement include certain assumptions relating to forward-looking
information, and such information and assumptions are subject to various risks. See “Cautionary Statement Regarding Forward-Looking
Statements” and “Risk Factors – Risk Factors Relating to the Arrangement” in this Circular.
The foregoing summary of the information
and factors considered by the Mountain Province Board is not intended to be exhaustive. In view of the variety of factors and the
amount of information considered in connection with its evaluation of the Arrangement, the Mountain Province Board did not find
it practical to, and did not, quantify or otherwise attempt to assign any relative weighting to each specific factor considered
in reaching its respective conclusion and recommendation. In addition, individual members of the Mountain Province Board may have
assigned different weightings to different factors.
The Mountain Province Board (other than
Mr. Comerford) was present at the January 28, 2018 meeting at which the Arrangement Agreement was approved and the Mountain Province
Board was unanimous in its recommendation. The recommendation of the Mountain Province Board was made after considering all of
the above-noted factors and in light of the Mountain Province Board’s knowledge of the business, financial condition and prospects
of Mountain Province, the unanimous recommendation of the Mountain Province Special Committee and was also based on the advice
of financial advisors and legal advisors to the Mountain Province Board.
Reasons for the Kennady Board and
Kennady Special Committee Recommendations
In making their respective recommendations,
the Kennady Special Committee and the Kennady Board consulted with Kennady’s management, legal counsel to the Kennady Special Committee,
technical advisors and Minvisory Corp., reviewed a significant amount of information and considered a number of factors, including
those listed below. The following includes forward-looking information and readers are cautioned that actual results may vary.
In making their respective determinations
and recommendations, the Kennady Special Committee and the Kennady Board considered and relied upon a number of substantive factors,
including, among others:
| · | Increased diversification. Kennady Shareholders who retain the Mountain
Province Shares they receive in connection with the Arrangement will have the opportunity to continue to participate in value
created by Kennady’s exploration activities, while exposure to exploration risk is mitigated through participation in a
producing asset, the GK Diamond Mine. |
| · | Premium to Kennady Shareholders. The Arrangement will provide Kennady Shareholders
with a premium of approximately 26% to Kennady’s closing price and a premium of 15% based on the 20-day volume weighted-average-price
of Mountain Province Shares on the TSX and Kennady Shares on the TSXV, both as of close on January 26, 2018, the last trading day
prior to the public announcement of the Arrangement Agreement by Kennady and Mountain Province. |
| · | Providing Kennady Shareholders with greater liquidity. Mountain Province
Shares have
historically been, and are expected at the Effective Time to be, significantly more liquid securities than Kennady
Shares. The Arrangement will provide Kennady Shareholders with the opportunity to hold shares in a company with
significantly
greater share liquidity, which should provide more immediate liquidity to any Former Kennady Shareholders should they wish
to sell the
Mountain Province Shares they receive under the Arrangement. The Arrangement will also provide Kennady Shareholders
with the opportunity to hold shares in a company with significantly greater analyst coverage, market capitalization,
improved
ability to obtain financing and broader institutional following than currently enjoyed by Kennady. |
| · | Fairness Opinion. The Kennady Special Committee received the Haywood
Fairness Opinion that concluded, as at the date thereof and subject to the assumptions, limitations and qualifications
contained therein, that the Arrangement Consideration to be received by the Kennady Shareholders pursuant to the Arrangement
is fair, from a financial point of view, to the Kennady Shareholders. |
| · | Increased ability to advance the Kennady assets. The Arrangement will provide
Kennady Shareholders with access to Mountain Province’s development, production and marketing expertise and financial
strength to enhance the advancement of the Kennady North Project, generating enhanced exploration upside for the combined
assets. |
| · | Avoiding Risk of Kennady being a stranded asset. The completion of the Arrangement
with Mountain Province will mitigate risks relating to any future commercialization of Kennady’s mineral properties, including
the risk of becoming stranded assets due to, amongst other factors, Kennady’s dependence on the infrastructure of surrounding mines,
potential issues with access to such mines in order to exploit the Kennady North Project resources, availability of financing and
the current market conditions. |
| · | Consideration of strategic alternatives. The Kennady Special Committee asked
Minvisory Corp. to reach out to other potential buyers and parties that might be willing to provide financing to Kennady
prior to entering into exclusive negotiations with Mountain Province. Minvisory Corp. proceeded to contact potential buyers
and parties that may be willing to provide financing to Kennady. Following Minvisory Corp.’s discussions with such parties,
Minvisory Corp. was advised by such parties that advancing an acquisition or financing transaction, as applicable, was not
possible at the current time. Thereafter, the Kennady Special Committee decided to focus on negotiating a transaction with
Mountain Province. |
| · | Tax Deferred Rollover for Canadian and US Shareholders. Kennady Shareholders who
are resident in Canada or the US and who receive Mountain Province Shares as Consideration under the Arrangement will generally
be entitled to an automatic tax deferred rollover to defer Canadian or US taxation on any capital gains arising from the disposition
of their Kennady Shares. See “Principal Canadian Federal Income Tax Considerations” and “Certain U.S.
Federal Income Tax Considerations for U.S Holders”. |
| · | Low Execution Risk. There are no material regulatory issues that are expected
to arise in connection with the Arrangement that would prevent its completion, and all required regulatory clearances and
approvals are expected to be obtained. There are a limited number of conditions, beyond the Kennady Shareholder Approval and
the Mountain Province Shareholder Approval, required for the completion of the Arrangement, which the Kennady Board expects
to have satisfied or waived in due course. In addition, the Significant Shareholder and all of the directors and officers of
Kennady have entered into Kennady Voting and Support Agreements pursuant to which, and subject to the terms of which, they
have agreed, among other things, to vote their Kennady Shares in favour of the Arrangement Resolution. |
| · | Experienced Leadership Team. The Combined Company will have an experienced
management team with a proven track record of generating shareholder value and with knowledge of all stages of the mine
development cycle, including discovery, development and production. |
The Kennady Special Committee and Kennady
Board also considered a variety of risks and other potentially negative factors relating to the Arrangement including those matters
described under the heading “Risk Factors Relating to the
Arrangement”. The Kennady Special
Committee and Kennady Board believed that, overall, the anticipated benefits of the Arrangement to Kennady outweighed these risks
and negative factors.
In making their respective determinations
and recommendations, the Kennady Special Committee and the Kennady Board also observed that a number of procedural safeguards were
and are present to permit the Kennady Special Committee and the Kennady Board to represent effectively the interests of Kennady
and the Kennady Shareholders and Kennady’s other stakeholders, including, among others:
| · | Role of the Kennady Special Committee. The evaluation and negotiation process
was conducted by the Kennady Special Committee, being members of the Kennady Board who are independent of management and the
Significant Shareholder. The Kennady Special Committee met regularly with Kennady’s advisors and management and retained its
own independent legal and financial advisors. |
| · | Ability to respond to Superior Proposals. Notwithstanding the limitations
contained in the Arrangement Agreement on Kennady’s ability to solicit interest from third parties, the Arrangement Agreement
allows the Kennady Board to engage in discussions or negotiations with respect to an unsolicited written bona fide
Acquisition Proposal at any time prior to the approval of the Arrangement Resolution by Kennady Shareholders and after the
Kennady Board determines, in good faith, that such Acquisition Proposal would be reasonably likely to result in a Superior
Proposal. |
| · | Unanimous recommendation of the Kennady Special Committee,
consisting entirely of independent directors. The Arrangement was approved by the independent directors of Kennady,
in accordance with MI 61-101. |
| · | Independent Kennady Fairness Opinion. The Kennady Special Committee retained
Haywood Securities Inc. to provide the Haywood Fairness Opinion. The fee payable to Haywood Securities Inc. is not contingent on
the completion of the Arrangement and such fee is payable to Haywood Securities Inc. in respect of the Haywood Fairness Opinion
irrespective of the substance or conclusions of the Haywood Fairness Opinion. See “The Arrangement – Kennady Fairness
Opinion” and Schedule “F” – “Fairness Opinion of Haywood Securities Inc.”. |
| · | Experienced financial and legal advisors. The process undertaken by the Kennady Special
Committee included the retention of Fasken Martineau DuMoulin LLP as its independent legal advisor and the retention of Minvisory
Corp. as its independent financial advisor. |
| · | Reasonable Termination Fee. Kennady is able to terminate the Arrangement Agreement
in specified circumstances, including to accept a Superior Proposal on payment of the Termination Fee of $6,000,000. This provides
further assurance to the Kennady Board that it would have a reasonable opportunity to consider a potential superior unsolicited
alternative transaction if one is subsequently proposed. |
| · | Required Shareholder and Court Approvals. The requirement for the following shareholder
and Court approvals protect Kennady Shareholders: |
| ○ | To be effective, the Arrangement Resolution must be approved, with or without variation, by the
affirmative vote of: |
| (i) | at least two-thirds of the votes cast on the Arrangement Resolution by Kennady Shareholders, present
in person or represented by proxy and entitled to vote at the Kennady Meeting; and |
| (ii) | a majority of the votes cast on the Arrangement Resolution by Kennady Shareholders present in person
or represented by proxy and entitled to vote at the Kennady Meeting, excluding for this purpose votes attached to the Kennady Shares
held by the Significant Shareholder and any other person described in items (a) through (d) of Section 8.1(2) of MI 61-101; and |
| ○ | The Arrangement must be approved by the Court, which will consider, among other things, the substantive
and procedural fairness of the terms and conditions of the Arrangement. |
| · | Dissent Rights. The terms of the Plan of Arrangement provide that any Registered
Kennady Shareholders who oppose the Arrangement may, upon compliance with certain conditions, exercise Dissent Rights and, if ultimately
successful, receive the fair value of their Kennady Shares in accordance with the Arrangement. |
The Kennady Special Committee’s and the
Kennady Board’s reasons for recommending the Arrangement include certain assumptions relating to forward-looking information, and
such information and assumptions are subject to various risks. See “Cautionary Statement Regarding Forward-Looking Statements”,
“Risk Factors – Risk Factors Relating to the Arrangement” and “Risk Factors – Risk Factors
Relating to the Operations of Kennady” in this Circular.
The foregoing summary of the information
and factors considered by the Kennady Board is not intended to be exhaustive. In view of the variety of factors and the amount
of information considered in connection with its evaluation of the Arrangement, the Kennady Board did not find it practical to,
and did not, quantify or otherwise attempt to assign any relative weighting to each specific factor considered in reaching its
respective conclusion and recommendation. In addition, individual members of the Kennady Board may have assigned different weightings
to different factors.
The independent directors of the Kennady
Board (without Dr. Moore and Mr. Comerford) met on January 28, 2018, unanimously determining that the Arrangement was in the best
interest of Kennady and that the Arrangement Consideration to be received by Kennady Shareholders and the impact of the transaction
on the Kennady Shareholders and other stakeholders of Kennady was in the best interests of Kennady Shareholders and other Kennady
stakeholders. The recommendation of the Kennady Board was made after considering all of the above-noted factors and in light of
the Kennady Board’s knowledge of the business, financial condition and prospects of Kennady, the unanimous recommendation of the
Kennady Special Committee and was also based on the advice of financial advisors and legal advisors to the Kennady Board.
Opinion of RBC Capital Markets
RBC Capital Markets was retained to deliver
to the Mountain Province Special Committee an opinion as to the fairness to Mountain Province, from a financial point of view,
of the Arrangement Consideration to be paid by Mountain Province pursuant to the Arrangement Agreement. RBC Capital Markets has
delivered the RBC Fairness Opinion concluding that, as at the date thereof and subject to the assumptions, limitations and qualifications
contained therein, the Arrangement Consideration to be paid by Mountain Province pursuant to the Arrangement Agreement is fair,
from a financial point of view, to Mountain Province. The full text of the RBC Fairness Opinion, setting out the assumptions made,
matters considered and limitations and qualifications on the review undertaken in connection with the RBC Fairness Opinion, is
attached as Schedule “E” – “Fairness Opinion of RBC Capital Markets” to this Circular. The summary
of the RBC Fairness Opinion described in this Circular is qualified in its entirety by reference to the full text of the RBC Fairness
Opinion.
Under the engagement letter with the RBC,
Mountain Province has agreed to pay a fee to RBC Capital Markets for its services. The fee payable to RBC Capital Markets is not
contingent on the completion of the Arrangement and such fee is payable to RBC Capital Markets in respect of the RBC Fairness Opinion
irrespective of the substance or conclusions of the RBC Fairness Opinion. Mountain Province has also agreed to reimburse RBC Capital
Markets for certain out-of-pocket expenses and to indemnify RBC Capital Markets and certain related parties against certain liabilities
in connection with their engagement.
The RBC Fairness Opinion is not a recommendation
to any Mountain Province Shareholder as to how to vote or act on any matter relating to the Arrangement. The RBC Fairness Opinion
was one of a number of factors taken into consideration by the Mountain Province Special Committee in making its determination
that the Arrangement is in the best long-term interests of Mountain Province, and unanimously recommending that the Mountain Province
Board approve the Arrangement and enter into the Arrangement Agreement.
The Mountain Province Special Committee
urges Mountain Province Shareholders to read the RBC Fairness Opinion carefully and in its entirety. See Schedule “E”
– “Fairness Opinion of RBC Capital Markets” to this Circular for the RBC Fairness Opinion.
Opinion of Haywood Securities Inc.
Haywood Securities Inc. was retained to
deliver to the Kennady Special Committee an opinion as to the fairness to the Kennady Shareholders, from a financial point of view,
of the Arrangement Consideration to be received by Kennady Shareholders pursuant to the Arrangement. Haywood Securities Inc. has
delivered the Haywood Fairness Opinion concluding that, as at the date thereof and subject to the assumptions, limitations and
qualifications contained therein, the Arrangement Consideration to be received by the Kennady Shareholders pursuant to the Arrangement
is fair, from a financial point of view, to the Kennady Shareholders. The full text of the Haywood Fairness Opinion, setting out
the assumptions made, matters considered and limitations and qualifications on the review undertaken in connection with the Haywood
Fairness Opinion, is attached as Schedule “F” – “Fairness Opinion of Haywood Securities Inc.” to
this Circular. The summary of the Haywood Fairness Opinion described in this Circular is qualified in its entirety by reference
to the full text of the Haywood Fairness Opinion.
Under the engagement letter with Haywood
Securities Inc., Kennady has agreed to pay certain fees to Haywood Securities Inc. for its services, including fees in connection
with the delivery of the Haywood Fairness Opinion. The fee payable to Haywood Securities Inc. is not contingent on the completion
of the Arrangement and such fee is payable to Haywood Securities Inc. in respect of the Haywood Fairness Opinion irrespective of
the substance or conclusions of the Haywood Fairness Opinion. Kennady has also agreed to reimburse Haywood Securities Inc. for
certain out-of- pocket expenses and to indemnify Haywood Securities Inc. and certain related parties against certain liabilities
in connection with their engagement.
The Haywood Fairness Opinion is not a recommendation
to any Kennady Shareholder as to how to vote or act on any matter relating to the Arrangement. The Haywood Fairness Opinion was
one of a number of factors taken into consideration by the Kennady Special Committee in making its determination that the Arrangement
is in the best interests of Kennady, and unanimously recommending that the Kennady Board approve the Arrangement and enter into
the Arrangement Agreement.
The Kennady Board urges Kennady Shareholders
to read the Haywood Fairness Opinion carefully and in its entirety. See Schedule “F” – “Fairness Opinion
of Haywood Securities Inc.” to this Circular for the Haywood Fairness Opinion.
Effects of the Arrangement
The purpose of the Arrangement is to effect
the business combination of Mountain Province and Kennady. The Arrangement is to be carried out pursuant to the Arrangement Agreement
and the Plan of Arrangement. Upon completion of the Arrangement, Mountain Province will acquire all of the issued and outstanding
Kennady Shares and Kennady will become a wholly-owned subsidiary of Mountain Province.
Corporate Structure
The Arrangement will result in Kennady
becoming a wholly-owned subsidiary of Mountain Province. See Schedule “N” – “Information Concerning the
Combined Company” to this Circular.
Mountain Province Shareholders
If the Arrangement is completed, up to
54,673,383 Mountain Province Shares (subject to variation due to rounding of fractional interests in accordance with the terms
of the Plan of Arrangement) will be issuable, composed of up to 54,673,383 Mountain Province Shares to be issued to Kennady Shareholders
(other than Mountain Province and any Dissenting Shareholders) in exchange for their Kennady Shares pursuant to the Arrangement,
representing approximately 34.1% of the number of issued and outstanding Mountain Province Shares as of the date of this Circular.
Kennady Shareholders
Pursuant to the Arrangement, in connection
with the acquisition by Mountain Province of Kennady, each Kennady Shareholder (other than Mountain Province and any Dissenting
Shareholder) immediately prior to the Effective Time
will receive 0.975 of a Mountain Province
Share in exchange for each Kennady Share held. See “The Arrangement – Description of the Arrangement”.
For greater certainty, Mountain Province
will not receive the Arrangement Consideration in respect of the Kennady Shares owned by Mountain Province (if any) at the Effective
Time.
Holders of Kennady Options and Kennady RSUs
Those outstanding Kennady Options that
are “in-the-money” and Kennady RSUs will be cashed out in accordance with the terms and conditions of the Kennady Long
Term Equity Incentive Plan and all such outstanding Kennady Options and Kennady RSUs will be treated in the same fashion. The Kennady
Long Term Equity Incentive Plan provides that in the event of a CoC of Kennady, all vesting and exercise criteria of the Kennady
Options and Kennady RSUs shall be deemed to have been satisfied and each participant shall be entitled to receive, in full settlement,
a cash payment equal to (a) in the case of a Kennady RSU, the Special Value, and (b) in the case of a Kennady Option, the difference
between the Special Value and the option price in respect of such Kennady Option.
The term Special Value means (i) if any
Kennady Shares are sold as part of the transaction constituting the CoC, the weighted average of the prices paid for such shares
by the acquirer, provided that if any portion of the consideration is paid in property other than cash, then the Kennady Board
shall determine the fair market value of such property as of the date of the CoC for purposes of determining the Special Value;
and (ii) if no Kennady Shares are sold, the market price of a Kennady Share on the day immediately preceding the date of the CoC.
As the Kennady Shareholders are receiving the Arrangement Consideration and no cash consideration, the Kennady Board will determine
the fair market value of the Arrangement Consideration the day immediately preceding the Effective Date for purposes of determining
the Special Value.
Kennady Options and Kennady RSUs that are
not cashed out in accordance with the terms and conditions of the Kennady Long Term Equity Incentive Plan (including Kennady Options
that are “out-of-the-money”) will, pursuant to the terms of the Kennady Long Term Equity Incentive Plan, be cancelled
at the Effective Time.
Description of the Arrangement
The following description of the
Arrangement is qualified in its entirety by reference to the full text of the Plan of Arrangement, a copy of the form of
which is attached as Schedule “D” – “Plan of Arrangement” of this Circular.
If approved, the Arrangement will become effective at the Effective
Time and will be binding at and after the Effective Time on each of Kennady, Mountain Province and Former Kennady Shareholders.
Exchange of Kennady Shares for the Arrangement
Consideration
Commencing at the Effective Time, the following events or transactions
shall occur and shall be deemed to occur in the following sequence without any further act or formality:
| 1. | Each Kennady Share held by a Dissenting Shareholder shall, and shall be deemed to be, transferred
by the holder thereof, without any further act or formality on its part, free and clear of all liens, to Kennady for cancellation,
and Kennady shall thereupon be obligated to pay the amount therefor determined and payable in accordance with Article 4 of the
Plan of Arrangement (Rights of Dissent), and the name of each such holder shall be removed from the securities register as a holder
of Kennady Shares; and |
| 2. | All Kennady Shares (other than Kennady Shares held by Mountain Province or Dissenting Shareholders)
shall be transferred to Mountain Province, free and clear of any liens, and: (i) the holders thereof shall receive, in exchange
for each Kennady Share so transferred, 0.975 of a Mountain Province Share; (ii) each holder of Kennady Shares shall cease to be
the holder of such shares and such holder’s name shall be removed from the securities register of Kennady with respect to such
shares; (iii) Mountain Province shall be entered in the securities register of Kennady as the |
holder thereof; and (iv) Former
Kennady Shareholders (other than Dissenting Shareholders) shall be entered in the securities register of Mountain Province as holders
of Mountain Province Shares received by them in exchange for their Kennady Shares.
Notwithstanding any provision in the Plan
of Arrangement, in no event shall any Former Kennady Shareholder be entitled to a fractional Mountain Province Share. Where the
aggregate number of Mountain Province Shares to be issued to a Former Kennady Shareholder as consideration under the Arrangement
would result in a fraction of a Mountain Province Share being issuable, the number of Mountain Province Shares to be issued to
a Former Kennady Shareholder as consideration under the Arrangement shall be: (i) rounded down to the nearest whole Mountain Province
Share in the event that the fractional Mountain Province Share is equal to or less than 0.5; and (ii) rounded up to the nearest
whole Mountain Province Share in the event that the fractional Mountain Province Share is greater than 0.5 and less than 1.0.
See the Plan of Arrangement attached as
Schedule “D” – “Plan of Arrangement” for additional information.
Tax Election for Certain Kennady Shareholders
Former Kennady Shareholders who exchange
their Kennady Shares for Mountain Province Shares pursuant to the Arrangement, and who provide Mountain Province with a letter
of representation in a form satisfactory to Mountain Province acting reasonably that such Former Kennady Shareholder does not hold
their Kennady Shares as capital property for purposes of the Tax Act, shall be entitled to make an income tax election with Mountain
Province, pursuant to subsection 85(1) or 85(2) of the Tax Act, as applicable (and the analogous provisions of provincial income
tax law) with respect to the exchange of their Kennady Shares. The election can be made by providing two signed copies of the necessary
election forms to Mountain Province within 90 days following the Effective Date, duly completed including the details of the number
of Kennady Shares transferred and the applicable agreed amounts for the purposes of such elections. Any such election forms received
by Mountain Province within the period noted will, subject to the election forms complying with the provisions of the Tax Act (or
applicable provincial income tax law), be signed by Mountain Province and returned to such Former Kennady Shareholders within 60
days after the receipt thereof by Mountain Province for filing with the Canada Revenue Agency (or the applicable provincial taxing
authority). Mountain Province may, in its sole discretion, choose to sign and return an election form received by it more than
90 days following the Effective Date, but has no obligation to do so. See the Plan of Arrangement attached as Schedule “D”
– “Plan of Arrangement” for additional information.
The discussion of the principal Canadian
federal income tax considerations generally applicable to holders of Kennady Shares in connection with the exchange of their Kennady
Shares for Mountain Province Shares pursuant to the Arrangement under the heading “Principal Canadian Federal Income Tax
Considerations” only applies to Kennady Shareholders who hold their Kennady Shares as capital property (or are deemed
to hold their Kennady Shares as capital property), and therefore does not consider or discuss the election referred to above.
Kennady Shareholders who do not hold their Kennady Shares as capital property should consult their own tax advisors regarding
the potential Canadian federal income tax considerations applicable to them in their particular circumstances, including eligibility
for the election and the potential consequences to them of making the election.
Mountain Province will not be responsible
for the proper completion of any election form and, except for the obligation of Mountain Province to sign and return duly completed
election forms which are received by Mountain Province within 90 days of the Effective Date as described above, Mountain Province
will have no other obligation with respect to any such election and will not be responsible for any taxes, interest, penalties
or losses whatsoever resulting from the failure by a Kennady Shareholder to make the election or to properly complete or file the
election forms in the form and manner and within the time prescribed by the Tax Act (and any applicable provincial legislation).
Securityholder and Court Approvals
Mountain Province Shareholder Approval of Arrangement
At the Mountain Province Meeting, Mountain
Province Shareholders will be asked to consider and, if deemed advisable, pass an ordinary resolution approving the issuance of
up to 54,673,383 Mountain Province Shares (subject to variation due to rounding of fractional interests in accordance with the
terms of the Plan of Arrangement) in connection with the Arrangement, composed of up to 54,673,383 Mountain Province Shares to
be issued to Kennady Shareholders (other than Mountain Province and any Dissenting Shareholders) in exchange for their Kennady
Shares pursuant to the Arrangement.
To be effective, the Share Issuance Resolution
must be approved at the Mountain Province Meeting by (i) at least a majority of the votes cast on the Share Issuance Resolution
by the Mountain Province Shareholders present in person or represented by proxy and entitled to vote at the Mountain Province Meeting
(in accordance with the requirements of Section 611(c) of the TSX Company Manual), and (ii) at least a majority of the votes cast
on the Share Issuance Resolution by the Minority Mountain Province Shareholders (i.e., excluding votes attached to Kennady Shares
held by any other person described in items (a) through (d) of Section 8.1(2) of MI 61-101) present in person or represented by
proxy and entitled to vote at the Mountain Province Meeting. The complete text of the Share Issuance Resolution to be presented
to the Mountain Province Meeting is set out in Schedule “B” – “Resolutions to be Approved at the Mountain
Province Meeting” to this Circular.
The Mountain Province Board and management,
as applicable, recommend that Mountain Province Shareholders VOTE FOR the Share Issuance Resolution. In the absence of instructions
to the contrary, the persons whose names appear in the attached Mountain Province Proxy intend to VOTE FOR the Share Issuance
Resolution.
If the Share Issuance Resolution does not
receive the requisite approval, the Arrangement will not proceed.
Kennady Shareholder Approval of Arrangement
At the Kennady Meeting, the Kennady Shareholders
will be asked to consider and, if deemed advisable, pass a special resolution approving the Arrangement Resolution set forth in
Schedule “C” – “Resolutions to be Approved at the Kennady Meeting” hereto to approve the Arrangement.
To be effective, the Arrangement Resolution
must be approved at the Kennady Meeting by (i) at least 66 ⅔% of the votes cast on the Arrangement Resolution by the Kennady
Shareholders present in person or represented by proxy and entitled to vote at the Kennady Meeting, and (ii) at least a majority
of the votes cast on the Arrangement Resolution by Minority Kennady Shareholders (i.e., excluding votes attached to Kennady Shares
held by any other person described in items (a) through (d) of Section 8.1(2) of MI 61-101) present in person or represented by
proxy and entitled to vote at the Kennady Meeting. See “Securities Law Matters – Multilateral Instrument 61-101”.
The Kennady Board and management, as
applicable, recommend that Kennady Shareholders VOTE FOR the Arrangement Resolution. In the absence of instructions to the
contrary, the persons whose names appear in the attached Kennady Proxy intend to VOTE FOR the Arrangement Resolution.
If the Arrangement Resolution does not
receive the requisite approval, the Arrangement will not proceed. Reference is made to the section “Dissent Rights”
in this Circular for information concerning the rights of Registered Kennady Shareholders to dissent in respect of the Arrangement
Resolution.
Court Approval of the Arrangement
The Arrangement requires approval by the
Court under Section 182 of the OBCA. On March 5, 2018, Kennady obtained the Interim Order providing for the calling, holding and
conducting of the Kennady Meeting and other procedural matters and a Notice of Application for the Final Order to approve the Arrangement
has been filed. A copy
of the Interim Order and the Notice
of Application for the Final Order are attached as Schedule “G” – “Interim Order” and
Schedule “I” – “Notice of Application for Final Order”, respectively, to this Circular.
The Court hearing in respect of the
Final Order is expected to take place at 10:00 a.m. (Eastern Standard Time), on April 11, 2018, or as soon thereafter as
counsel for Kennady may be heard, at the Ontario Superior Court of Justice (Commercial List), located at 330 University
Avenue, Toronto, Ontario, Canada, M5G 1R7. At the hearing, the Court will consider, among other things, the fairness of the
terms and conditions of the Arrangement and the rights and interests of every person affected. Kennady has been advised by
its legal counsel that the Court has broad discretion under the OBCA when making orders with respect to a plan of arrangement
and that the Court will consider, among other things, the fairness and reasonableness of the Arrangement, both from a
substantive and procedural point of view. The Court may approve the Arrangement in any manner the Court may direct, subject
to compliance with such terms and conditions, if any, as the Court deems fit. The Court will be advised prior to the hearing
of the application for the Final Order that if the terms and conditions of the Arrangement are approved by the Court, the
Mountain Province Shares to be issued to Kennady Shareholders pursuant to the Arrangement will not be registered under the
U.S. Securities Act and will be issued in reliance on the exemption from
registration provided by Section 3(a)(10) thereunder and that the Final Order will constitute the basis for such exemption.
Depending on the nature of any required amendments, Kennady or Mountain Province may determine not to proceed with the
Arrangement.
Under the terms of the Interim Order, each
Kennady Shareholder will have the right to appear and make submissions at the application for the Final Order. Any person desiring
to appear at the hearing of the application for the Final Order may do so but must comply with certain procedural requirements
described in the Interim Order and in the Notice of Application for the Final Order, including filing an appearance with the Court
registry and serving same on Kennady’s counsel, as applicable, at the address set out below, no later than 5:00 p.m. (Eastern Standard
Time) on April 6, 2018, a written contestation supported as to the facts alleged by affidavit(s), and exhibit(s), if any:
to Kennady’s counsel:
Fasken Martineau DuMoulin LLP
Bay Adelaide Centre
333 Bay Street, Suite 2400, P.O. Box 20
Toronto, ON M5H 2T6
| |
Attention: |
Brad Moore |
| |
|
bmoore@fasken.com |
| |
Tel: |
(416) 865-4550 |
| |
Facsimile: |
(416) 364-7813 |
with a copy to:
Bennett Jones LLP
3400 One First Canadian Place, P.O. Box 130
Toronto, ON M5X 1A4
| |
Attention: |
Robert W. Staley / William Bortolin |
| |
|
staleyr@bennettjones.com |
| |
|
bortolinw@bennettjones.com |
| |
Tel: |
(416) 777-4857 |
| |
|
(416) 777 6126 |
| |
Facsimile: |
(416) 863-1716 |
Kennady Shareholders who wish to participate
in or be represented at the Court hearing for the Final Order should consult their legal advisors as to the necessary requirements.
Dissent Rights
Under applicable Canadian Laws, Mountain
Province Shareholders are not entitled to dissent rights with respect to the Share Issuance Resolution.
If you are a Registered Kennady Shareholder,
you are entitled to dissent from the Arrangement Resolution in the manner provided in accordance with Section 185 of the OBCA,
as modified or supplemented by the Plan of Arrangement, the Interim Order and any other order of the Court.
Condition of the Arrangement
Under the Arrangement Agreement, it is
a condition of the Arrangement that Kennady Shareholders holding no more than 5% of the outstanding Kennady Shares, shall have
exercised Dissent Rights (and not withdrawn such exercise).
OBCA Rights of Dissent in Respect of the Arrangement
Resolution
If you are a Registered Kennady Shareholder
you are entitled to dissent from the Arrangement Resolution in the manner provided in Section 185 of the OBCA, as modified or supplemented
by the Plan of Arrangement, the Interim Order and any other order of the Court, provided that, notwithstanding Subsection 185(6)
of the OBCA, the written objection to the Arrangement Resolution must be received by Kennady not later than 5:00 p.m. (Eastern
Standard Time) on the date that is two Business Days immediately prior to the Kennady Meeting, or any date to which such meeting
may be postponed or adjourned.
Kennady Shareholders who wish to dissent
should take note that the procedures for dissenting to the Arrangement Resolution require strict compliance with the applicable
Dissent Procedures.
The following description of the rights
of Registered Kennady Shareholders to dissent from the Arrangement Resolution is not a comprehensive statement of the procedures
to be followed by a Dissenting Shareholder who seeks payment of the fair value of their Kennady Shares. A Registered Kennady Shareholder’s
failure to follow exactly the procedures set forth in Section 185 of the OBCA, as modified or supplemented by the Plan of Arrangement,
the Interim Order and any other order of the Court, will result in the loss of such Registered Kennady Shareholder’s Dissent Rights.
If you are a Registered Kennady Shareholder and wish to dissent in respect of the Arrangement Resolution, you should obtain your
own legal advice and carefully read the Plan of Arrangement, the Interim Order, and the provisions of Section 185 of the OBCA,
which are attached to this Circular as Schedule “D” – “Plan of Arrangement”, Schedule “G”
– “Interim Order” and Schedule “H” – “Dissent Rights Under the OBCA”, respectively.
In addition to any other restrictions under Sections 185 of the OBCA (as modified or supplemented by the Plan of Arrangement, the
Interim Order and any other order of the Court), holders of securities convertible into Kennady Shares are not entitled to exercise
dissent rights.
A Registered Kennady Shareholder is entitled
to be paid the fair value of the Kennady Shares held by such holder in accordance with Section 185 of the OBCA, as modified by
the Plan of Arrangement, the Interim Order and any other order of the Court, if such holder exercises Dissent Rights in respect
of such Kennady Shares and the Arrangement becomes effective.
Anyone who is a beneficial owner of Kennady
Shares registered in the name of an intermediary and who wishes to dissent should be aware that only Registered Kennady Shareholders
are entitled to exercise Dissent Rights. A Registered Kennady Shareholder who holds Kennady Shares as an intermediary for one or
more beneficial owners, one or more of whom wish to exercise Dissent Rights, must exercise such Dissent Rights on behalf of such
holder(s). In such case, the notice should specify the number of Kennady Shares held by the intermediary for such beneficial owner.
A Dissenting Shareholder may dissent only with respect to all of the Kennady Shares held on behalf of any particular beneficial
owner that are registered in the name of the Dissenting Shareholder.
A brief summary of the provisions of Section
185 of the OBCA, as modified by the Plan of Arrangement and the Interim Order, is set out below. This summary is qualified in its
entirety by the provisions of Section 185 of the OBCA, the full text of which is set forth in Schedule “H” – “Dissent
Rights Under the OBCA” to this Circular, as well as by
the Plan of Arrangement and the Interim
Order. In addition, the Court hearing the application for the Final Order has the discretion to alter the Dissent Rights described
herein.
Kennady Shareholders who exercise Dissent
Rights and who:
| (a) | are ultimately entitled to be paid fair value for their Kennady Shares, which fair value shall
be determined immediately prior to the approval of the Arrangement Resolution, shall be paid an amount equal to such fair value
by Kennady and shall be deemed to have transferred their Kennady Shares to Kennady for cancellation in accordance with the Plan
of Arrangement; or |
| (b) | are ultimately not entitled, for any reason, to be paid fair value for their Kennady Shares shall
be deemed to have participated in the Arrangement as of the Effective Time, on the same basis as non- Dissenting Shareholders and
shall be entitled to receive only the consideration that such holders would have received pursuant to the Arrangement if such holders
had not exercised Dissent Rights, |
but in no case shall Kennady, Mountain
Province or any other person be required to recognize Kennady Shareholders who exercise Dissent Rights as Kennady Shareholders
after the Effective Time, and the names of such Kennady Shareholders who exercise Dissent Rights shall be removed from the applicable
register of shareholders as at the Effective Time. There can be no assurance that a Dissenting Shareholder will receive consideration
for its Kennady Shares of equal or greater value to the consideration that such Dissenting Shareholder would have received under
the Arrangement if such holder had not exercised Dissent Rights.
Section 185 of the OBCA
Section 185 of the OBCA, as modified by
the Plan of Arrangement and the Interim Order, provides that Registered Kennady Shareholders who dissent to the Arrangement may
exercise a right of dissent and require Kennady to purchase the Kennady Shares held by such shareholders at the fair value of such
shares.
The exercise of Dissent Rights does not
deprive a Registered Kennady Shareholder of the right to vote at the Kennady Meeting. However, a Kennady Shareholder is not entitled
to exercise Dissent Rights in respect of the Arrangement Resolution if such holder votes any of the Kennady Shares beneficially
held by such holder in favour of the Arrangement Resolution.
A Dissenting Shareholder is required to
send a written objection to the Arrangement Resolution to Kennady prior to the Kennady Meeting. A vote against the Arrangement
Resolution or not voting on the Arrangement Resolution does not constitute a written objection for purposes of the right to dissent
under Section 185 of the OBCA. Within 10 days after the Arrangement Resolution is approved by the Kennady Shareholders, Kennady
must send to each Dissenting Shareholder a notice that the Arrangement Resolution has been adopted, setting out the rights of the
Dissenting Shareholder and the procedures to be followed on exercise of those rights. The Dissenting Shareholder is then required,
within 20 days after receipt of such notice (or if such Kennady Shareholder does not receive such notice, within 20 days after
learning of the adoption of the applicable Arrangement Resolution), to send to Kennady a written notice containing the Dissenting
Shareholder’s name and address, the number of Kennady Shares in respect of which the Dissenting Shareholder dissents and a demand
for payment of the fair value of such Kennady Shares and, within 30 days after sending such written notice, to send to Kennady
or their respective transfer agents the appropriate share certificate or certificates representing the Kennady Shares in respect
of which the Dissenting Shareholder has exercised Dissent Rights. A Dissenting Shareholder who fails to send to Kennady, within
the required periods of time, the required notices or the certificates representing the Kennady Shares in respect of which the
Dissenting Shareholder has dissented may forfeit its Dissent Rights.
If the matters provided for in the Arrangement
Resolution become effective, then Kennady will be required to send, not later than the seventh day after the later of (i) the Effective
Date, and (ii) the day the demand for payment is received, to each Dissenting Shareholder whose demand for payment has been received,
a written offer to pay for the Kennady Shares of such Dissenting Shareholder in such amount as the directors of Kennady consider
to be the fair value thereof accompanied by a statement showing how the fair value was determined unless there are reasonable grounds
for believing that Kennady is, or after the payment would be, unable to pay its liabilities as they become due
or the realizable value of Kennady’s assets,
as applicable, would thereby be less than the aggregate of its liabilities. Kennady must pay for the Kennady Shares of a Dissenting
Shareholder within 10 days after an offer made as described above has been accepted by a Dissenting Shareholder, but any such offer
lapses if Kennady does not receive an acceptance thereof within 30 days after such offer has been made.
If such offer is not made or accepted within
50 days after the Effective Date, Kennady may apply to a court of competent jurisdiction to fix the fair value of such shares.
There is no obligation of Kennady to apply to the Court. If Kennady fails to make such an application, a Dissenting Shareholder
has the right to so apply within a further 20 days.
Address for Notice
All notices to Kennady of dissent to the
Arrangement Resolution pursuant to Section 185 of the OBCA should be addressed to the attention of the individual set out below
and be sent not later than 5:00 p.m. (Eastern Standard Time) on the date that is two Business Days immediately prior to the Kennady
Meeting, or any date to which the Kennady Meeting may be postponed or adjourned,
Kennady Diamonds Inc.
c/o Bruce Ramsden, Chief Financial Officer
161 Bay Street
Suite 1410, P.O. Box 216
Toronto, Ontario
Canada M5J 2S1
| (ii) | by facsimile transmission to: |
Attention: Bruce Ramsden, Chief Financial Officer
Facsimile: 416 640-3335
Strict Compliance with Dissent Provisions Required
The foregoing summary does not purport
to provide comprehensive statements of the procedures to be followed by a Dissenting Shareholder under Section 185 of the OBCA,
as modified by the Plan of Arrangement and the Interim Order, and reference should be made to the specific provisions of Section
185 of the OBCA, the Plan of Arrangement and the Interim Order, as applicable. The OBCA requires strict adherence to the procedures
regarding the exercise of rights established therein. The failure to adhere to such procedures may result in the loss of all rights
of dissent. Accordingly, each Kennady Shareholder who wishes to exercise Dissent Rights with respect to the Arrangement Resolution
should carefully consider and comply with the provisions of Section 185 of the OBCA, as modified by the Plan of Arrangement and
the Interim Order, and consult a legal advisor. A copy of Section 185 of the OBCA is set out in Schedule “H” –
“Dissent Rights Under the OBCA”.
THE ARRANGEMENT AGREEMENT
The Arrangement will be effected in accordance
with the Arrangement Agreement. The following is a summary of the principal terms of the Arrangement Agreement. This summary
does not purport to be complete and is qualified in its entirety by reference to the Arrangement Agreement, the full text of which
may be viewed on SEDAR under Mountain Province’s and Kennady’s issuer profiles, respectively at www.sedar.com, and
to the Plan of Arrangement, the full text of which is attached as Schedule “D” – “Plan of Arrangement”
to this Circular. Mountain Province Shareholders and Kennady Shareholders are encouraged to read each of the Arrangement Agreement
and the Plan of Arrangement in their entirety.
On January 28, 2018, Kennady and Mountain
Province entered into the Arrangement Agreement, pursuant to which Kennady and Mountain Province agreed that, subject to the terms
and conditions set forth in the Arrangement Agreement, Mountain Province will acquire all of the issued and outstanding Kennady
Shares. Pursuant to the
Arrangement, each Kennady Shareholder (other
than Mountain Province and any Dissenting Shareholder) will receive 0.975 of a Mountain Province Share in exchange for each Kennady
Share held. The terms of the Arrangement Agreement are the result of arm’s length negotiation between Kennady and Mountain Province
and their respective advisors.
Representations and Warranties
The Arrangement Agreement contains representations
and warranties made by Kennady to Mountain Province and representations and warranties made by Mountain Province to Kennady. These
representations and warranties were made solely for purposes of the Arrangement Agreement and may be subject to important qualifications
and limitations agreed to by the parties in connection with negotiating the terms of the Arrangement Agreement. In addition, some
of these representations and warranties are made as of specified dates, are subject to a contractual standard of materiality or
material adverse effect different from that generally applicable to public disclosure of Mountain Province or Kennady, or are used
for the purpose of allocating risk between the parties to the Arrangement Agreement. For the foregoing reasons, you should not
rely on the representations and warranties contained in the Arrangement Agreement as statements of factual information at the time
they were made or otherwise.
The Arrangement Agreement contains certain
representations and warranties of Kennady, relating to, among other things: organization and qualification; authority to enter
into the Arrangement Agreement and performance of obligations thereunder; conflict, required filings and consent; subsidiaries;
compliance with laws; authorizations; capitalization and listing; shareholder and similar agreements; reports; financial statements;
undisclosed liabilities; interest in mineral rights; operational matters; employment matters; absence of certain changes and events;
litigation; taxes; books and records; insurance; non-arm’s length transactions; benefit plans; environmental matters; restrictions
on business activities; material contracts; relationships with customers, suppliers, distributors and sales representatives; brokers;
reporting issuer status; stock exchange compliance; expropriation; and corrupt practices legislation.
The Arrangement Agreement also contains
certain representations and warranties of Mountain Province, relating to, among other things: organization and qualification; authority
to enter into the Arrangement Agreement and performance of obligations thereunder; conflict, required filings and consent; subsidiaries;
compliance with laws; authorizations; capitalization and listing; shareholder and similar agreements; reports; financial statements;
undisclosed liabilities; interest in mineral rights; operational matters; employment matters; absence of certain changes or events;
litigation; taxes; books and records; insurance; non-arm’s length transactions; environmental matters; restrictions on business
activities; material contracts; relationships with customers, suppliers, distributors and sales representatives; brokers; reporting
issuer status; stock exchange compliance; expropriation; corrupt practices legislation; disclosure of project terms; project documents;
and joint venture and project assets.
Covenants
Covenants Regarding the Arrangement
Each of Kennady and Mountain Province has
given to the other party the usual and customary covenants for an agreement of the nature of the Arrangement Agreement, including
using commercially reasonable efforts to satisfy all conditions precedent to the extent that same are within a Party’s control;
using commercially reasonable efforts to obtain and assist the other Party in obtaining required Regulatory Approvals; using commercially
reasonable efforts to obtain third party consents and stock exchange approvals; defending lawsuits challenging or affecting the
Arrangement Agreement or the consummation of the transactions contemplated thereby; making available certain information; and keeping
Transferred Information confidential.
In addition, Kennady has covenanted that
it will: use commercially reasonable efforts to complete the Arrangement; use commercially reasonable efforts to assist in effecting
the resignations of Kennady’s directors (subject to customary releases) and cause them to be replaced as of the Effective Date
by persons nominated by Mountain Province.
Kennady has also covenanted that, after
the Effective Time, it will terminate the employment of certain employees and Mountain Province has covenanted that it will cause
Kennady to pay the severance, any vacation pay and change of control payment due to such employees upon such termination, such
payment to be made on the Effective Date.
Covenants of Kennady Regarding the Conduct of
Business
Kennady has covenanted that, except as
contemplated or permitted by the Arrangement Agreement, it will conduct its business only in, not take any action except in, and
maintain its facilities, in the ordinary course of business consistent with past practice and to use commercially reasonable efforts
to preserve intact its present business organization, assets and goodwill. In addition, Kennady has covenanted that, unless required
by Law or a Governmental Entity or with the written consent of Mountain Province, Kennady will not, directly or indirectly: (i)
issue, sell, grant, award, pledge, dispose of, encumber or agree to issue, sell, grant, award, pledge, dispose of or encumber
any Kennady Shares, any Kennady Options, any Kennady RSUs, any Kennady DSUs, any Kennady SARs or any warrants, calls, conversion
privileges or rights of any kind to acquire any Kennady Shares or other securities, other than pursuant to the exercise of existing
Kennady Options; (ii) sell, pledge, lease, or otherwise dispose of any assets having a value greater than $1,000,000 in the aggregate;
(iii) amend or propose to amend the articles, by-laws or other constating documents or the terms of any securities of Kennady;
(iv) split, combine or reclassify any outstanding Kennady Shares; (v) redeem, purchase or offer to purchase or redeem any Kennady
Shares or other securities of Kennady; (vi) declare, set aside or pay any dividend or other distribution in respect of any Kennady
Shares; (vii) reorganize, amalgamate or merge Kennady with any other Person; (viii) reduce the stated capital of the shares of
Kennady; (ix) acquire or agree to acquire any Person, or purchase any property, interests, business or assets that have a value
greater than $1,000,000 in the aggregate; (x) prepay any long-term indebtedness before its scheduled maturity; (xi) become liable
for any indebtedness for borrowed money or any other liability in amounts exceeding $250,000 individually and $1,000,000 in the
aggregate; (xii) adopt a plan of liquidation or resolutions providing for the liquidation or dissolution of Kennady; (xiii) pay
or release any claims, liabilities or obligations except in the ordinary course of business consistent with past practice in amounts
exceeding $250,000 individually and $1,000,000 in the aggregate; (xiv) relinquish any contractual right, except in the ordinary
course of business consistent with past practice; (xv) waive or modify any existing contractual rights in respect of any Kennady
Mineral Rights or any other material legal rights or claims; (xvi) waive, release, grant or transfer any rights of value or modify
or change in any material respect any existing licence, lease, contract or other document; (xvii) take any action or fail to take
any action which would result in the material loss of any material benefit under or revocation or limitation of rights under,
any material Permits; (xviii) incur business expenses exceeding $250,000 individually and $1,000,000 in the aggregate; (xix) take
any action or fail to take any action that would impede the ability of Kennady to consummate the Arrangement or the other transactions
contemplated by the Arrangement Agreement; (xx) increase the benefits payable to its directors or officers or grant any bonuses,
salary increases, severance or termination pay to, any officer of Kennady or member of the Kennady Board, except in the ordinary
course of business consistent with past practice; (xxi) make any loan to any employee, consultant, director or officer of Kennady;
(xxii) settle, pay, discharge, satisfy, compromise, waive, assign or release any action, claim or proceeding brought against Kennady
and/or any of its Subsidiaries in excess of $1,000,000 or any action, claim or proceeding holder of its securities in connection
with the Arrangement Agreement or the Plan of Arrangement; or (xxiii) in the case of employees, take any action with respect to
the grant of any bonuses, salary increases, severance or termination pay, except in the ordinary course of business consistent
with past practice.
Further, Kennady has covenanted that it
will: (i) not establish, adopt, enter into or amend any arrangement for the benefit or welfare of any directors, officers, current
or former employees of Kennady except as expressly contemplated or permitted by the Arrangement Agreement; (ii) use commercially
reasonable efforts to cause its current insurance (or re-insurance) policies not to be cancelled or lapsed unless simultaneously
replacement policies for substantially similar premiums are in full force and effect; (iii) use its commercially reasonable best
efforts to maintain and preserve all of its rights under each of its Kennady Mineral Rights and under each of its Authorizations;
(iv) not take any action, which would render, or which reasonably may be expected to render, any representation or warranty made
by it in the Arrangement Agreement untrue in any material respect; (v) provide Mountain Province with prompt written notice of
any change which has resulted in or would reasonably be expected to result in a Kennady Material Adverse Effect or the occurrence
of any facts which would be likely to cause a breach by Kennady of the Arrangement Agreement in any material respect; (vi) not
enter into any binding obligation of containing any limitation or restriction on the ability of Kennady or Mountain Province to
engage in any type of activity or manner or location of conducting business, (vii) duly and timely file all Tax Returns required
to be filed by it under applicable Laws on or after the date hereof and all
such Tax Returns will be true, complete
and correct in all material respects; and (vii) duly and timely deduct, withhold, collect, remit and pay all Taxes to the extent
due and payable.
Covenants of Mountain Province Regarding the
Conduct of Business
Mountain Province has covenanted
that, except as contemplated in the Arrangement Agreement, it will conduct its business only in, not take any action except
in, and maintain its facilities, in the ordinary course of business consistent with past practice and to use commercially
reasonable efforts to preserve intact its present business organization, assets and goodwill. In addition, Mountain Province
has covenanted that, unless required by Law or a Governmental Entity or with the written consent of Kennady, Mountain
Province will not, directly or indirectly: (i) issue, sell, grant, award, pledge, dispose of, encumber or agree to issue,
sell, grant, award, pledge, dispose of or encumber any Mountain Province Shares, any Mountain Province Awards or any
warrants, calls, conversion privileges or rights of any kind to acquire any Mountain Province Shares, other than pursuant to
the exercise of existing Mountain Province Awards and warrants; (ii) sell, pledge, lease, or otherwise dispose of assets of
Mountain Province having a value greater than $4,000,000 in the aggregate; (iii) amend or propose to amend the articles,
by-laws or other constating documents or the terms of any securities of Mountain Province; (iv) split, combine or reclassify
any outstanding Mountain Province Shares; (v) redeem, purchase or offer to purchase or redeem any Mountain Province Shares or
other securities of Mountain Province; (vi) declare, set aside or pay any dividend or other distribution in respect of any
Mountain Province Shares; (vii) reorganize, amalgamate or merge Mountain Province with any other Person; (viii) acquire or
agree to acquire any Person or assets that have a value greater than $4,000,000 in the aggregate; (ix) reduce the stated
capital of the shares of Mountain Province; (x) adopt a plan of liquidation or resolutions providing for the liquidation or
dissolution of Mountain Province; (xi) relinquish any contractual right, except in the ordinary course of business consistent
with past practice; (xii) waive or modify in any material respect any existing contractual rights in respect of any Mountain
Province Mineral Rights or any other material legal rights or claims; (xiii) waive or modify in any material respect any
existing licence, lease, contract or other document; (xiv) take any action or fail to take any action which would result
in the material loss or the loss of any material benefit under, or revocation or limitation of rights under, any material
Permits; or (xv) take any action or fail to take any action that would reasonably be expected to, individually or in the
aggregate, prevent, materially delay or materially impede the ability of Mountain Province to consummate the Arrangement or
the other transactions contemplated by the Arrangement Agreement.
Further, Mountain Province has covenanted
that it will: (i) use commercially reasonable efforts to cause its current insurance policies not to be cancelled or lapsed, unless
simultaneously replacement policies for substantially similar premiums are in full force and effect; (ii) use its commercially
reasonable best efforts to maintain and preserve all of its rights under each of its Mountain Province Mineral Rights and under
each of its Authorizations; (iii) not take any action which would render, or which reasonably may be expected to render, any representation
or warranty made by it in the Arrangement Agreement untrue in any material respect; (iv) provide Kennady with prompt written notice
of any change which has resulted in or would reasonably be expected to result in a Mountain Province Material Adverse Effect or
the occurrence of any facts which would be likely to cause a breach by Mountain Province of the Arrangement Agreement in any material
respect; and (v) not enter into any binding obligation containing any limitation or restriction on the ability of Mountain Province
to engage in any type of activity or manner or location of conducting business.
Conditions Precedent to the Arrangement
Mutual Conditions
The obligations of Kennady and Mountain
Province to complete the transactions contemplated by the Arrangement Agreement are subject to the fulfillment of each of the following
conditions precedent on or before the Effective Time, each of which may only be waived with the mutual consent of Kennady and Mountain
Province:
| · | the Arrangement Resolution shall have been approved and adopted by the Kennady Shareholders at
the Kennady Meeting by not less than the vote required by the Kennady Shareholder Approval in accordance with the Interim Order
and applicable Laws; |
| · | the Share Issuance Resolution shall have been approved and adopted by the Mountain Province Shareholders
at the Mountain Province Meeting by not less than the vote required by the Mountain Province Shareholder Approval in accordance
with applicable Laws; |
| · | the Interim Order and the Final Order shall each have been obtained on terms consistent with the
Arrangement Agreement, and shall not have been set aside or modified in a manner unacceptable to Kennady and Mountain Province,
acting reasonably, on appeal or otherwise; |
| · | no Governmental Entity shall have enacted, issued, promulgated, enforced or entered any Law, judgment,
decision, order or decree which is then in effect and has the effect of making the Arrangement illegal or otherwise preventing
or prohibiting consummation of the Arrangement; |
| · | all Regulatory Approvals shall have been obtained on terms and conditions satisfactory to each
of Kennady and Mountain Province, acting reasonably; |
| · | Kennady TSXV Approval shall have been obtained; |
| · | Mountain Province TSX Approval shall have been obtained; |
| · | Mountain Province Nasdaq Approval shall have been obtained; |
| · | the Consideration Shares to be issued under the Arrangement shall be exempt from the registration
requirements of the U.S. Securities Act pursuant to Section 3(a)(10) thereof; |
| · | the distribution of the securities pursuant to the Arrangement shall be exempt from the prospectus
requirements of applicable Securities Laws either by virtue of exemptive relief from the securities regulatory authorities of each
of the provinces of Canada or by virtue of applicable exemptions under Securities Laws and shall not be subject to resale restrictions
under applicable Securities Laws (other than as applicable to control persons or pursuant to Section 2.6 of the National Instrument
45-102 – Resale of Securities); and |
| · | the Arrangement Agreement shall not have been terminated. |
Additional Conditions in Favour of Kennady
The obligation of Kennady to complete the
transactions contemplated by the Arrangement Agreement is also subject to the fulfillment of each of the following conditions precedent
on or before the Effective Time, each of which is for the exclusive benefit of Kennady and may only be waived in whole or in part
by Kennady:
| · | all covenants of Mountain Province under the Arrangement Agreement to be performed on or before
the Effective Time which have not been waived by Kennady shall have been duly performed by Mountain Province in all material respects
and Kennady shall have received a certificate of Mountain Province, addressed to Kennady and dated the Effective Date, signed on
behalf of Mountain Province by two senior executive officers of Mountain Province (on Mountain Province’s behalf and without personal
liability), confirming the same as of the Effective Time; |
| · | the representations and warranties of Mountain Province set forth in the Arrangement Agreement
shall be true and correct in all respects, without regard to any materiality or Mountain Province Material Adverse Effect qualifications
contained in them as of the Effective Time, as though made on and as of the Effective Time (except for representations and warranties
made as of a specified date, the accuracy of which shall be determined as of that specified date), except where the failure or
failures of all such representations and warranties to be so true and correct in all respects would not reasonably be expected
to have a Mountain Province Material Adverse Effect, provided that the representations and warranties of Mountain Province with
respect to Interests in Mineral Rights and Corrupt Practices Legislation in the Arrangement Agreement shall be true and correct
in all material respects as of the Effective Time, and Kennady shall have received a certificate of Mountain Province addressed
to Kennady and dated the Effective Date, signed on behalf of |
Mountain Province by two senior
executive officers of Mountain Province (on Mountain Province’s behalf and without personal liability), confirming the same as
at the Effective Time;
| · | Mountain Province shall have complied with its obligations to deposit a sufficient number of Mountain
Province Shares to issue the aggregate Consideration Shares as the Arrangement Consideration, and the Depositary shall have confirmed
receipt of the aggregate Consideration Shares; and |
| · | since the date of the Arrangement Agreement, there shall not have occurred a Mountain Province
Material Adverse Effect and Kennady shall have received a certificate signed on behalf of Mountain Province by the chief executive
officer and chief financial officer of Mountain Province (on Mountain Province’s behalf and without personal liability) to such
effect. |
Additional Conditions in Favour of Mountain
Province
The obligation of Mountain Province to
complete the Arrangement and the transactions contemplated by this Agreement is subject to the fulfillment of each of the following
conditions precedent on or before the Effective Time, each of which is for the exclusive benefit of Mountain Province and may be
waived in whole or in part by Mountain Province:
| · | all covenants of Kennady under the Arrangement Agreement to be performed on or before the Effective
Time which have not been waived by Mountain Province shall have been duly performed by Kennady in all material respects and Mountain
Province shall have received a certificate of Kennady addressed to Mountain Province and dated the Effective Date, signed on behalf
of Kennady by two senior executive officers of Kennady (on Kennady’s behalf and without personal liability), confirming the same
as at the Effective Time; |
| · | the representations and warranties of Kennady set forth in the Arrangement Agreement shall be true
and correct in all respects, without regard to any materiality or Kennady Material Adverse Effect qualifications contained in them
as of the Effective Time, as though made on and as of the Effective Time (except for representations and warranties made as of
a specified date, the accuracy of which shall be determined as of that specified date), except where the failure or failures of
all such representations and warranties to be so true and correct in all respects would not reasonably be expected to have a Kennady
Material Adverse Effect, provided that the representations and warranties of Kennady set forth with respect to Interests in Mineral
Rights and Corrupt Practices Legislation in the Arrangement Agreement shall be true and correct in all material respects as of
the Effective Time, and Mountain Province shall have received a certificate of Kennady addressed to Mountain Province and dated
the Effective Date, signed on behalf of Kennady by two senior executive officers of Kennady (on Kennady’s behalf and without personal
liability), confirming the same as at the Effective Date; |
| · | there shall not be pending or threatened in writing any suit, action or proceeding by any Governmental
Entity or any other Person but excluding any action or proceeding initiated by a Kennady Shareholder (in its capacity as a Kennady
Shareholder) in respect of the Arrangement, that is reasonably likely to result in a: |
| ○ | prohibition or restriction on the acquisition by Mountain Province of any Kennady Shares, restriction
or prohibition of the consummation of the Arrangement or a Person obtaining from Kennady or Mountain Province any material damages
directly or indirectly in connection with the Arrangement; |
| ○ | prohibition or material limit on the ownership by Mountain Province of Kennady or any material
portion of its business; or |
| o | imposition of limitations on the ability of Mountain Province to acquire or hold, or exercise full
rights of ownership of, any Kennady Shares, including the right to vote the Kennady Shares to be acquired by it on all matters
properly presented to the Kennady Shareholders; |
| · | since the date of the Arrangement Agreement, there shall not have occurred a Kennady Material Adverse
Effect, and Mountain Province shall have received a certificate signed on behalf of Kennady by the chief |
executive officer and the chief financial officer
of Kennady (on Kennady’s behalf and without personal liability) to such effect; and
| · | holders of no more than 5% of the Kennady Shares shall have exercised Dissent Rights. |
Non-Solicitation
Each of Kennady and Mountain Province has
covenanted with the other that neither it nor any of its Subsidiaries will, directly or indirectly, through any of its Representatives
or Subsidiaries, or otherwise, and shall not permit or authorize any such Person to do so on its behalf:
| · | solicit, assist, initiate, encourage or otherwise facilitate any inquiry, proposal or offer that
constitutes or may reasonably be expected to constitute or lead to, an Acquisition Proposal; |
| · | enter into or otherwise engage or participate in any discussions or negotiations with any Person
(other than the other Party to the Arrangement Agreement) regarding any inquiry, proposal or offer that constitutes or may reasonably
be expected to constitute or lead to, an Acquisition Proposal; |
| · | in the case of Kennady, make a Kennady Change in Recommendation other than following the occurrence
of any Mountain Province Material Adverse Effect, and in the case of Mountain Province, make a Mountain Change in Recommendation,
other than following the occurrence of any Kennady Material Adverse Effect; |
| · | accept, approve, endorse or recommend, or publicly propose to accept, approve, endorse or recommend,
or take no position or remain neutral with respect to, any Acquisition Proposal; or |
| · | accept or enter into or publicly propose to accept or enter into any agreement, understanding or
arrangements in respect of an Acquisition Proposal. |
In addition, each of Kennady and Mountain
Province has covenanted with the other that it shall, and shall cause its Subsidiaries and its Representatives to immediately cease
and terminate, and cause to be terminated, any solicitation, encouragement, discussion, negotiation, or other activities commenced
prior to the date of this Agreement with any Person (other than the other Party to the Arrangement Agreement) with respect to any
inquiry, proposal or offer that constitutes, or may reasonably be expected to constitute or lead to, an Acquisition Proposal, and
in connection therewith, each Party will:
| · | immediately discontinue access to and disclosure of all information, including any data room and
any confidential information, properties, facilities, books and records of such Party or of any of its Subsidiaries; and |
| · | within two Business Days, request, and exercise all rights it has to require (i) the return or
destruction of all copies of any non-public confidential information regarding such Party or any of its Subsidiaries provided to
any Person, and (ii) the destruction of all material including or incorporating or otherwise reflecting such confidential information
regarding such Party or any of its Subsidiaries, using its commercially reasonable efforts to ensure that such requests are fully
complied with in accordance with the terms of such rights or entitlements. |
Each Party has also represented that, it
has not, in the year prior to the date of the Arrangement Agreement, waived any confidentiality, standstill or similar agreement
or restriction to which such Party or any of its Subsidiaries is a party, and each Party further has covenanted and agreed (i)
that, except in respect of an unsolicited Acquisition Proposal made on a non-public basis to such Party as contemplated by the
Arrangement Agreement, such Party shall take all necessary action to enforce each confidentiality, standstill, nondisclosure, non-solicitation,
use, business purpose or similar agreement, restriction or covenant to which such Party or any of its Subsidiaries is a party,
and (ii) that neither it, nor any of its Subsidiaries or any of their respective Representatives have or will, without the prior
written consent of the other Party (which may be withheld or delayed in the other Party’s sole and absolute discretion), release
any Person from, or waive, amend, suspend or otherwise modify such Person’s obligations respecting such
Party, or any of its Subsidiaries, under
any confidentiality, standstill, non-disclosure, non-solicitation, use, business purpose or similar agreement, restriction or covenant
to which such Party or any of its Subsidiaries is a party; provided, however, that the Parties acknowledge and agree that the automatic
termination or release of any such agreement, restriction or covenant in accordance with their terms shall not be a violation of
the terms of the Arrangement Agreement.
Notification of Acquisition Proposals
In the event that a Party or any of its
Subsidiaries or any of their respective Representatives, receives an Acquisition Proposal after the date of the Arrangement Agreement,
or any request for copies of, access to, or disclosure of, confidential information relating to such Party or any Subsidiary in
connection with such an Acquisition Proposal, such Party shall as soon as practicable and in any event within 24 hours of the receipt
thereof notify the other Party of such Acquisition Proposal or request. Such notice shall include a description of its material
terms and conditions of such Acquisition Proposal or request and the identity of all Persons making the Acquisition Proposal or
request and shall provide the other Party with copies of all written documents, correspondence or other material received in respect
of, from or on behalf of any such Person. The Party receiving the Acquisition Proposal shall keep the other Party fully informed
on a current basis of the status of material or substantive developments and (to the extent such Party is permitted by the Arrangement
Agreement to enter into discussions or negotiations), the status of discussions and negotiations with respect to any such Acquisition
Proposal.
Responding to Acquisition Proposals
Notwithstanding the covenants respecting
non-solicitation, if at any time prior to obtaining its respective shareholder approval with respect to the Arrangement, a Party
receives a bona fide written Acquisition Proposal, such Party may engage in or participate in discussions or negotiations regarding
such Acquisition Proposal, and may provide copies of, access to or disclosure of information, properties, facilities, books or
records of it or its Subsidiaries to the Person making such Acquisition Proposal, if and only if:
| · | such Party’s board of directors first determines in good faith, after consultation with its financial
advisors and its outside legal counsel, that such Acquisition Proposal constitutes or could reasonably be expected to constitute
or lead to a Superior Proposal; |
| · | such Party has been, and continues to be, in compliance with its obligations under the Arrangement
Agreement; |
| · | prior to providing any such copies, access, or disclosure, such Party enters into a confidentiality
and standstill agreement with such Person substantially in the same form as the Confidentiality Agreement and any such copies,
access or disclosure provided to such Person shall have already been (or will simultaneously be) provided to the other Party; and |
| · | such Party promptly provides the other Party with (i) written notice stating its intention to participate
in such discussions or negotiations and to provide such copies, access or disclosure; and (ii) prior to providing any such copies,
access or disclosure, a true, complete and final executed copy of the confidentiality and standstill agreement described in the
Arrangement Agreement. |
Subject to the right to match provisions
set forth in the Arrangement Agreement, if, at any time following the date of the Arrangement Agreement and prior to obtaining
Kennady Shareholder Approval in the case of Kennady or obtaining Mountain Province Shareholder Approval in the case of Mountain
Province, either Kennady or Mountain Province receives an Acquisition Proposal that did not result from a breach of the non-solicitation
covenants and which its board of directors concludes in good faith constitutes a Superior Proposal, it may, subject to compliance
with the termination procedures and payment of the Termination Fee, terminate the Arrangement Agreement to enter into a definitive
agreement with respect to such Superior Proposal.
Right to Match
If a Party (the “Receiving Party”)
receives an Acquisition Proposal that constitutes a Superior Proposal prior to obtaining its respective shareholder approval with
respect to the Arrangement, the Receiving Party may, subject to compliance with Article 8 of the Arrangement Agreement, enter into
a definitive agreement with respect to such Superior Proposal, if and only if:
| · | the Receiving Party that has received the Acquisition Proposal that constitutes a Superior Proposal
has been, and continues to be, in compliance with its obligations under Article 7 of the Arrangement Agreement; |
| · | the Receiving Party has delivered to the other Party (the “Matching Party”) a
written notice of the determination of the Receiving Party’s board of directors that such Acquisition Proposal constitutes a Superior
Proposal and of the intention of the Receiving Party’s board of directors to enter into a definitive agreement with respect to
such Superior Proposal (the “Superior Proposal Notice”); |
| · | the Receiving Party has provided the Matching Party a copy of the proposed definitive agreement
for the Superior Proposal and all supporting materials, including any financing documents supplied to the Receiving Party in connection
therewith; |
| · | at least five Business Days (the “Matching Period”) have elapsed from the date
that is the later of the date on which the Matching Party received the Superior Proposal Notice and the date on which such other
Party received all of the materials set forth in Section 7.5(a)(iii) of the Arrangement Agreement; |
During the Matching Period, the Matching
Party has the right, but not the obligation, to offer to amend the Arrangement Agreement and the Arrangement. The board of directors
of the Receiving Party must review any such offer by the Matching Party to determine whether the Acquisition Proposal to which
the Matching Party is responding would continue to be a Superior Proposal when assessed against the Arrangement Agreement and the
Plan of Arrangement as they are proposed in writing by the Matching Party to be amended. If the board of directors of the Terminating
Party determines that the Acquisition Proposal no longer constitutes a Superior Proposal when assessed against the Arrangement
Agreement and the Plan of Arrangement as they are proposed to be amended by the Matching Party, the board of directors of the Receiving
Party will cause it to enter into an amendment to the Arrangement Agreement with the Matching Party incorporating the amendments
to the Arrangement Agreement and the Plan of Arrangement as set out in the written offer to amend, and will promptly reaffirm its
recommendation of the Arrangement by the prompt issuance of a press release to that effect. If the board of directors of the Receiving
Party determines that the Acquisition Proposal continues to be a Superior Proposal, it may recommend that holders of its securities
accept such Superior Proposal provided that before doing so the Receiving Party terminates the Arrangement Agreement and pays,
or causes to be paid, the Termination Fee, as the case may be, in order to accept or enter into an agreement, understanding or
arrangement to proceed with the Superior Proposal.
Each successive amendment to any Acquisition
Proposal that results in an increase in, or modification of, the consideration (or value of such consideration) to be received
by the holders of the Receiving Party’s securities constitutes a new Acquisition Proposal and the Matching Party will be afforded
a new three Business Day Matching Period and the rights associated with such Matching Period in respect of each such Acquisition
Proposal.
Termination
The Arrangement Agreement may be terminated and the Arrangement
may be abandoned at any time prior to the Effective Time:
| · | by mutual written agreement of Kennady and Mountain Province; |
| · | by either Kennady or Mountain Province if: |
| ○ | the Effective Time shall not have occurred on or before the Outside Date, except that the right
to terminate the Arrangement Agreement shall not be available to any Party whose failure to fulfill any of |
its obligations or breach of
any of its representations and warranties under the Arrangement Agreement has been the cause of, or resulted in, the failure of
the Effective Time to occur by the Outside Date;
| ○ | after the date of the Arrangement Agreement, there shall be enacted or made any applicable Law,
inunction or court order that makes consummation of the Arrangement illegal or otherwise prohibits or enjoins Kennady or Mountain
Province from consummating the Arrangement and such applicable Law, injunction or court order shall have become final and non-appealable; |
| ○ | the Arrangement Resolution shall have failed to obtain the Kennady Shareholder Approval at the
Kennady Meeting in accordance with the Interim Order; or |
| ○ | the Share Issuance Resolution shall have failed to obtain the Mountain Province Shareholder Approval
at the Mountain Province Meeting; |
| · | by Mountain Province if: |
| ○ | prior to obtaining the Kennady Shareholder Approval, there is a Kennady Change in Recommendation
or the Kennady Board (or any committee thereof) accepts, approves, endorses or recommends, or publicly proposes to accept, approve,
endorse or recommend any Acquisition Proposal; |
| ○ | prior to obtaining Mountain Province Shareholder Approval, the Mountain Province Board authorizes
Mountain Province, subject to complying with the terms of the Arrangement Agreement, to enter into an agreement with respect to
a Superior Proposal provided that, concurrently with such termination, Mountain Province pays the Termination Fee payable pursuant
to the Arrangement Agreement; |
| ○ | subject to the notice and cure provisions set forth in the Arrangement Agreement, a breach of any
representation or warranty or failure to perform any covenant or material obligations on the part of Kennady set forth in the Arrangement
Agreement (other than the non-solicitation, right to match, and superior proposal covenants set forth in the Arrangement Agreement)
shall have occurred; |
| ○ | Kennady is in breach or default of its non-solicitation, right to match, and superior proposal
obligations or covenants set forth in the Arrangement Agreement; |
| ○ | the Kennady Meeting has not occurred on or before the Meeting Deadline, provided that (a) the failure
of the Kennady Meeting to occur on or before such date is not the result of the failure by Mountain Province to fulfill any obligation
under the Arrangement Agreement; and (b) the Share Issuance Resolution was passed at the Mountain Province Meeting; |
| ○ | Kennady provides Mountain Province with a Superior Proposal Notice; |
| ○ | after the date of the Arrangement Agreement there occurs a Kennady Material Adverse Effect; or |
| ○ | holders of more than 5% of the Kennady Shares have exercised Dissent Rights. |
| ○ | prior to obtaining the Mountain Province Shareholder Approval, there is a Mountain Change in Recommendation
or the Mountain Province Board (or any committee thereof) accepts, approves, endorses or recommends, or publicly proposes to accept,
approve, endorse or recommend any Acquisition Proposal; |
| ○ | prior to obtaining Kennady Shareholder Approval, the Kennady Board authorizes Kennady, subject
to complying with the terms of the Arrangement Agreement, to enter into an agreement with respect to a Superior Proposal provided
that, concurrently with such termination, Kennady pays the Termination Fee payable pursuant to the Arrangement Agreement; |
| ○ | subject to the notice and cure provisions set forth in the Arrangement Agreement, a breach of any
representation or warranty or failure to perform any covenant or material obligations on the part of Mountain Province set forth
in the Arrangement Agreement (other than the non-solicitation, right to match, and superior proposal covenants set forth in the
Arrangement Agreement) shall have occurred; |
| ○ | the Mountain Province Meeting has not occurred on or before the Meeting Deadline, provided that
the failure of the Mountain Province Meeting to occur on or before such date is not the result of the failure by Kennady to fulfill
any obligation under the Arrangement Agreement; |
| ○ | Mountain Province provides Kennady with a Superior Proposal Notice; |
| ○ | Mountain Province is in breach or default of its non-solicitation, right to match, and superior
proposal obligations or covenants set forth in the Arrangement Agreement; |
| ○ | Mountain Province fails to deposit in escrow the Arrangement Consideration; or |
| ○ | after the date of the Arrangement Agreement there occurs a Mountain Province Material Adverse Effect. |
Termination Fee
Kennady must pay to Mountain Province the Termination Fee ($6,000,000)
upon the termination of the Arrangement Agreement:
| · | by Mountain Province pursuant to a Kennady Change in Recommendation (except where the Kennady Change
in Recommendation was the result of a Superior Proposal Notice by Mountain Province or a Mountain Province Material Adverse Effect); |
| · | by Kennady in order for Kennady to enter into a Superior Proposal; or |
| · | by Mountain Province, because Kennady is in breach or in default of the non-solicitation covenants
set forth in the Arrangement Agreement; the Kennady Meeting has not occurred before the Meeting Deadline; the Effective Time has
not occurred on or before the Outside Date or by either party because the Arrangement Resolution failed to obtain the Kennady Shareholder
Approval at the Kennady Meeting in accordance with the Interim Order if, in either case, prior to the earlier of the termination
of the Arrangement Agreement or the holding of the Kennady Meeting, a bona fide Acquisition Proposal, or the intention to make
an Acquisition Proposal, with respect to Kennady shall have been made to Kennady or publicly announced by any Person (other than
Mountain Province or any of its affiliates) and not withdrawn prior to the Kennady Meeting and within nine months following the
date of such termination the announced Acquisition Proposal is consummated by Kennady or Kennady enters into a definitive agreement
in respect of, or the Kennady Board approves or recommends, the announced Acquisition Proposal which is subsequently consummated
at any time thereafter, provided that, for such purposes all references to “20%” in the definition of “Acquisition
Proposal” shall be deemed to be references to “50%”. |
Mountain Province must pay to Kennady the Termination Fee ($6,000,000)
upon the termination of the Arrangement Agreement:
| · | by Kennady pursuant to a Mountain Change in Recommendation (except where the Mountain Change in
Recommendation was the result of a Superior Proposal Notice by Kennady or a Kennady Material Adverse Effect); |
| · | by Mountain Province in order for Mountain Province to enter into a Superior Proposal; or |
| · | by Kennady, because Mountain Province is in breach or in default of the non-solicitation covenants
set forth in the Arrangement Agreement; the Mountain Province Meeting has not occurred before the Meeting Deadline; the Effective
Time has not occurred on or before the Outside Date or by either party because the |
Share Issuance Resolution failed
to obtain the Mountain Province Shareholder Approval at the Mountain Province Meeting in accordance with the Interim Order if,
in either case, prior to the earlier of the termination of the Arrangement Agreement or the holding of the Mountain Province Meeting,
a bona fide Acquisition Proposal, or the intention to make an Acquisition Proposal, with respect to Mountain Province shall have
been made to Mountain Province or publicly announced by any Person (other than Kennady or any of its affiliates) and not withdrawn
prior to the Mountain Province Meeting and within nine months following the date of such termination the announced Acquisition
Proposal is consummated by Mountain Province or Mountain Province enters into a definitive agreement in respect of, or the Mountain
Province Board approves or recommends, the announced Acquisition Proposal which is subsequently consummated at any time thereafter,
provided that, for such purposes all references to “20%” in the definition of “Acquisition Proposal” shall
be deemed to be references to “50%”.
Amendment and Waiver
The Arrangement Agreement and the Plan
of Arrangement may be amended by mutual written agreement of Kennady and Mountain Province prior to the Effective Date, and any
such amendment may, subject to the Interim Order and the Final Order and applicable Law, without limitation:
| · | change the time for performance of any of the obligations or acts of the Parties; |
| · | waive any inaccuracies or modify any representation or warranty contained in the Arrangement Agreement
or in any document delivered pursuant to the Arrangement Agreement; |
| · | waive compliance with or modify any of the covenants contained in the Arrangement Agreement and
waive or modify performance of any of the obligations of the Parties; and/or |
| · | waive compliance with or modify any mutual conditions precedent contained in the Arrangement Agreement. |
Furthermore, any Party may:
| · | extend the time for the performance of any of the obligations or acts of the other Party; |
| · | waive compliance, except as provided in the Arrangement Agreement, with any of the other Party’s
agreements or the fulfillment of any conditions to its own obligations contained in the Arrangement Agreement; or |
| · | waive inaccuracies in any of the other Party’s representations or warranties contained in the Arrangement
Agreement or in any document delivered by the other Party; |
provided, however, that any such extension
or waiver shall be valid only if set forth in an instrument in writing signed on behalf of such Party and, unless otherwise provided
in the written waiver, will be limited to the specific breach or condition waived.
THE VOTING AND SUPPORT AGREEMENTS
The following description of certain
provisions of the Voting and Support Agreements is a summary only. The summary of certain provisions of the Voting and Support
Agreements below and in this Circular is not comprehensive and is qualified in its entirety by reference to the full text of the
forms of Voting and Support Agreement, the full text of which may be viewed on SEDAR under Kennady and Mountain Province’s issuer
profiles at www.sedar.com. This summary may not contain all of the information about the Voting and Support Agreements
that is important to Mountain Province Shareholders or Kennady Shareholders. Mountain Province Shareholders and Kennady Shareholders
are encouraged to read the forms of Voting and Support Agreement carefully and in their entirety.
Mountain Province Voting and Support Agreements
The Supporting Mountain Province Shareholders
have entered into Mountain Province Voting and Support Agreements with Kennady in respect of Mountain Province Shares representing,
in the aggregate, approximately 24.3% of the outstanding Mountain Province Shares as at January 28, 2018.
The Mountain Province Voting and Support
Agreements set forth, among other things and subject to certain exceptions, the agreement of such Supporting Mountain Province
Shareholders to vote their Subject Mountain Province Securities in favour of the Share Issuance Resolution at the Mountain Province
Meeting and any actions required for the consummation of the transactions contemplated by the Arrangement Agreement.
In addition, the Supporting Mountain Province
Shareholders have agreed, subject to the terms and conditions of the Mountain Province Voting and Support Agreements, among other
things, to:
| (a) | vote or cause to be voted (in person or by proxy) their Subject Mountain Province Securities against
any: merger, reorganization, consolidation, amalgamation, arrangement, business combination, or share exchange, liquidation, dissolution,
recapitalization, or similar transaction involving Mountain Province; sale, lease or transfer of any significant part of the assets
of Mountain Province; Acquisition Proposal; or material change in the capitalization of Kennady or the corporate structure or constating
documents of Mountain Province; |
| (b) | vote or cause to be voted (in person or by proxy) their Subject Mountain Province Securities against,
and not tender or cause to be tendered their Subject Mountain Province Securities to any action that is reasonably likely to impede,
interfere with or delay the Arrangement or that would result in a Mountain Province Material Adverse Effect; |
| (c) | not sell, transfer, gift, assign, convey, pledge, hypothecate, encumber, option, grant a security
interest in or otherwise dispose of any right or interest in (including by way of deposit or tender under any take-over bid) any
of the Subject Mountain Province Securities, other than the exercise, exchange or conversion of Mountain Province Options or redemption
of any Mountain Province RSUs, as applicable, in accordance with their terms for Mountain Province Shares that will become subject
to the Mountain Province Voting and Support Agreement as if they were Subject Mountain Securities owned by the Mountain Province
Shareholder on the date of the Mountain Province Voting and Support Agreement, or enter into any agreement, arrangement or understanding
in connection therewith (whether by actual disposition or effective economic disposition due to cash settlement or otherwise),
other than pursuant to the Arrangement Agreement, without having first obtained the prior written consent of Kennady; |
| (d) | not, other than as set in the Mountain Province Voting and Support Agreement, grant any proxies
or powers of attorney, deposit any Subject Mountain Province Securities into a voting trust, in any way transfer any of the voting
rights associated with any of the Subject Mountain Province Securities, or enter into a voting agreement, understanding or arrangement
with respect to the right to vote, call meetings of Mountain Province Shareholders or give consents or approval of any kind with
respect to any Subject Mountain Province Securities; and |
| (e) | waive any rights of appraisal or rights of dissent that the Supporting Mountain Province Shareholder
may have arising from the transactions contemplated by the Arrangement Agreement; and not exercise any securityholder rights or
remedies available at common law or pursuant to applicable securities legislation or take any other action of any kind, in each
case which might reasonably be regarded as likely to reduce the success of, or delay or interfere with the completion of, the transactions
contemplated by the Arrangement Agreement. |
| (f) | The obligations of each Mountain Province Supporting Shareholder under the Mountain Province Voting
and Support Agreements automatically terminate upon the earliest of, amongst other things: (i) the Effective Time; (ii) the mutual
written agreement of the Supporting Mountain Province |
Shareholder and Kennady; (iii) the termination of the
Arrangement Agreement in accordance with its terms; or (iv) the Outside Date.
Kennady Voting and Support Agreements
The Supporting Kennady Shareholders have
entered into Kennady Voting and Support Agreements with Mountain Province in respect of Kennady Shares representing, in the aggregate,
approximately 28.6% of the outstanding Kennady Shares as at January 28, 2018.
The Kennady Voting and Support Agreements
set forth, among other things and subject to certain exceptions, the agreement of such Supporting Kennady Shareholders to vote
their Subject Kennady Securities in favour of the Arrangement Resolution at the Kennady Meeting and any actions required for the
consummation of the transactions contemplated by the Arrangement Agreement.
In addition, the Supporting Kennady Shareholders
have agreed, subject to the terms and conditions of the Kennady Voting and Support Agreements, among other things, to:
| (a) | vote or cause to be voted (in person or by proxy) their Subject Kennady Securities against any:
merger, reorganization, consolidation, amalgamation, arrangement, business combination, or share exchange, liquidation, dissolution,
recapitalization, or similar transaction involving Kennady; sale, lease or transfer of any significant part of the assets of Kennady;
Acquisition Proposal; or material change in the capitalization of Kennady or the corporate structure or constating documents of
Kennady; |
| (b) | vote or cause to be voted (in person or by proxy) their Subject Kennady Securities against, and
not tender or cause to be tendered their Subject Kennady Securities to any action that is reasonably likely to impede, interfere
with or delay the Arrangement, or that would result in a Kennady Material Adverse Effect; |
| (c) | not sell, transfer, gift, assign, convey, pledge, hypothecate, encumber, option, grant a security
interest in or otherwise dispose of any right or interest in (including by way of deposit or tender under any take-over bid) any
of the Subject Kennady Securities, other than the exercise, exchange or conversion of Kennady Options or redemption of any Kennady
RSUs, as applicable, in accordance with their terms for Kennady Shares that will become subject to the Kennady Voting and Support
Agreement as if they were Subject Kennady Securities owned by the Kennady Shareholder on the date of the Kennady Voting and Support
Agreement, or enter into any agreement, arrangement or understanding in connection therewith (whether by actual disposition or
effective economic disposition due to cash settlement or otherwise), other than pursuant to the Arrangement Agreement, without
having first obtained the prior written consent of Mountain Province; |
| (d) | not, other than as set in the Kennady Voting and Support Agreement, grant any proxies or powers
of attorney, deposit any Subject Kennady Securities into a voting trust, in any way transfer any of the voting rights associated
with any of the Subject Kennady Securities, or enter into a voting agreement, understanding or arrangement with respect to the
right to vote, call meetings of Kennady Shareholders or give consents or approval of any kind with respect to any Subject Kennady
Securities; and |
| (e) | waive any rights of appraisal or rights of dissent that the Supporting Kennady Shareholder may
have arising from the transactions contemplated by the Arrangement Agreement; and not exercise any securityholder rights or remedies
available at common law or pursuant to applicable securities legislation or take any other action of any kind, in each case which
might reasonably be regarded as likely to reduce the success of, or delay or interfere with the completion of, the transactions
contemplated by the Arrangement Agreement. |
The obligations of each Kennady Supporting
Shareholder under the Kennady Voting and Support Agreements automatically terminate upon the earliest of, amongst other things:
(i) the Effective Time; (ii) the mutual written agreement of the Supporting Kennady Shareholder and Mountain Province; (iii) the
termination of the Arrangement Agreement in accordance with its terms; or (iv) the Outside Date.
PROCEDURE FOR EXCHANGE OF KENNADY SHARES
Letter of Transmittal
A Letter of Transmittal is being mailed,
together with this Circular, to each person (other than Mountain Province) who was a Registered Kennady Shareholder on the Kennady
Record Date. Each person who is a Registered Kennady Shareholder immediately prior to the Effective Time must forward a properly
completed and signed Letter of Transmittal, along with the accompanying Kennady Share certificate(s), if applicable, and such other
documents as the Depositary may require, to the Depositary in order to receive the Arrangement Consideration to which such Kennady
Shareholder is entitled under the Arrangement. It is recommended that Registered Kennady Shareholders complete, sign and return
the Letter of Transmittal, along with the accompanying Kennady Share certificate(s), if applicable, to the Depositary as soon as
possible. Kennady Shareholders whose Kennady Shares are registered in the name of a nominee (bank, trust company, securities broker
or other nominee) should contact that nominee for assistance in depositing their Kennady Shares.
Exchange Procedure
Registered Kennady Shareholders
In order to receive the Arrangement Consideration
to which a Registered Kennady Shareholder (other than Mountain Province and any Dissenting Shareholder) is entitled if the Arrangement
is completed, a Registered Kennady Shareholder must complete, sign, date and return the enclosed Letter of Transmittal in accordance
with the instructions set out therein and in this Circular. The Letter of Transmittal is also available from the Depositary by
telephone at: 1- 800-564-6253 (North American Toll Free) or 1-514-982-7555 (Outside North America); or on SEDAR under Kennady’s
issuer profile at www.sedar.com.
On or immediately prior to the Effective
Date, Mountain Province will deposit with the Depositary share certificates for Mountain Province Shares representing the aggregate
Arrangement Consideration payable pursuant to the Arrangement. The Depositary will act as the agent of Registered Kennady Shareholders
who have deposited Kennady Shares pursuant to the Arrangement for the purpose of receiving the Arrangement Consideration and transmitting
certificates representing the Mountain Province Shares issuable to such persons, and receipt by the Depositary of the aggregate
Arrangement Consideration payable by Mountain Province under the Arrangement will be deemed to constitute receipt of payment by
Registered Kennady Shareholders depositing Kennady Shares.
Upon surrender to the Depositary of the
certificate(s) that immediately prior to the Effective Time represented Kennady Shares, and a duly completed Letter of Transmittal
and such other documents as the Depositary may require, a Former Kennady Shareholder (other than Mountain Province and any Dissenting
Shareholder) will be entitled to receive in exchange therefor, and as soon as practicable after the Effective Time the Depositary
will deliver to such Former Kennady Shareholder, certificates representing the number of Mountain Province Shares which such Former
Kennady Shareholder is entitled to receive under the Arrangement.
In the event of a transfer of ownership
of Kennady Shares which is not registered in the transfer records of Kennady, a certificate representing the proper number of Kennady
Shares shall be delivered to a transferee if the certificate formerly representing such Kennady Shares is presented to the Depositary
at its offices, accompanied by the foregoing documents together with all other documents required to evidence and effect such transfer.
Until surrendered, each certificate that
immediately prior to the Effective Time represented Kennady Shares will, subject to certain exceptions, be deemed at any time after
the Effective Time to represent only the right to receive upon surrender (a) the aggregate Arrangement Consideration which the
holder is entitled to receive in accordance with the Plan of Arrangement, and (b) any dividends or distributions with a record
date on or after the Effective Date that
are paid or payable prior to the date of
surrender on any Mountain Province Shares comprising the Arrangement Consideration which the holder of such Kennady Shares was
entitled to receive under the Arrangement.
The Letter of Transmittal contains complete
instructions on how to exchange the certificate(s) representing Kennady Shares and how Registered Kennady Shareholders will receive
the Arrangement Consideration payable to them under the Arrangement. Registered Kennady Shareholders should return properly completed
documents, including the Letter of Transmittal, to Computershare Investor Services Inc., by mail to P.O. Box 7021, 31 Adelaide
Street East, Toronto, Ontario Canada M5C 3H2 Attention: Corporation Actions, and by registered mail, hand or courier to 100 University
Avenue, 8th Floor, Toronto, Ontario, Canada M5J 2Y1 Attention: Corporation Actions. Kennady
Shareholders with questions regarding the deposit of Kennady Shares should contact the Depositary by telephone at: 1-800-564-6253
(North American Toll Free) or 1-514-982-7555 (Outside North America). Further information with respect to the Depositary is set
forth in the Letter of Transmittal.
In order for Registered Kennady Shareholders
to receive the Arrangement Consideration payable to them under the Arrangement as soon as possible after the closing of the Arrangement,
Registered Kennady Shareholders should submit their Kennady Shares and the Letter of Transmittal as soon as possible.
Registered Kennady Shareholders will not
actually receive their Mountain Province Shares until the Arrangement is completed and they have returned their properly completed
documents, including the Letter of Transmittal and certificates representing their Kennady Shares, if applicable, to the Depositary.
In the event any certificate which immediately
before the Effective Time represented one or more outstanding Kennady Shares in respect of which the holder was entitled to receive
the Arrangement Consideration pursuant to the Arrangement is lost, stolen or destroyed, upon the making of an affidavit by the
holder claiming such certificate to be lost, stolen or destroyed, the Depositary will deliver in exchange for such lost, stolen
or destroyed certificate, the Arrangement Consideration to which such holder is entitled pursuant to the Arrangement. When authorizing
such delivery of the Arrangement Consideration which such holder is entitled to receive in exchange for such lost, stolen or destroyed
certificate, the holder to whom such Arrangement Consideration is to be delivered shall, as a condition precedent to the delivery
of such Arrangement Consideration, give a bond satisfactory to Mountain Province and the Depositary in such amount as Mountain
Province may direct, or otherwise indemnify Mountain Province and the Depositary in a manner satisfactory to Mountain Province
and the Depositary, against any claim that may be made against Mountain Province or the Depositary with respect to the certificate
alleged to have been lost, stolen or destroyed and shall otherwise take such actions as may be required by the articles of Mountain
Province.
Where a certificate representing Kennady
Shares has been destroyed, lost or stolen, the Registered Kennady Shareholder of that certificate should immediately contact the
Depositary by telephone at: 1-800-564-6253 (North American Toll Free) or 1-514-982-7555 (Outside North America); or by email at:
corporateactions@computershare.com.
Non-Registered Kennady Shareholders
The exchange of Kennady Shares for the
Arrangement Consideration in respect of Non-Registered Kennady Shareholders is expected to be made with the Non-Registered Kennady
Shareholder’s nominee (bank, trust company, securities broker or other nominee) account through the procedures in place for such
purposes between CDS and such nominee. Non-Registered Kennady Shareholders should contact their intermediary if they have any questions
regarding this process and to arrange for their nominee to complete the necessary steps to ensure that they receive payment for
their Kennady Shares as soon as possible following completion of the Arrangement.
Cancellation of Rights after Six
Years
To the extent that a Former Kennady Shareholder
has not complied with the provisions of the Arrangement described under the heading “Procedure for Exchange of Kennady
Shares – Exchange Procedure” on or before the date that is six years after the Effective Date (the “Final
Proscription Date”), then any Mountain Province Shares which such Former Kennady Shareholder was entitled to receive shall
be automatically cancelled without any repayment of capital in respect thereof and the certificates representing such Mountain
Province Shares shall be delivered to Mountain
Province by the Depositary for cancellation
and shall be cancelled by Mountain Province, and the interest of the Former Kennady Shareholder in such Mountain Province Shares
to which it was entitled shall be terminated as of such Final Proscription Date.
Fractional Interest
No fractional Mountain Province Shares
shall be issued to Former Kennady Shareholders in connection with the Plan of Arrangement. The total number of Mountain Province
Shares to be issued to any Former Kennady Shareholder shall, without additional compensation, be rounded up or down to the nearest
whole Mountain Province Share (in accordance with the terms of the Plan of Arrangement) in the event that a Former Kennady Shareholder
would otherwise be entitled to a fractional share.
The foregoing information is a summary
only. For further details of procedures, see the Plan of Arrangement attached as Schedule “D” – “Plan of
Arrangement” to this Circular.
Withholding Rights
Pursuant to the terms of the Plan of Arrangement,
Kennady, Mountain Province and the Depositary shall be entitled to deduct and withhold from any consideration payable or otherwise
deliverable to any Person under the Plan of Arrangement, and from all dividends or other distributions otherwise payable to any
Former Kennady Shareholder, such amounts as Kennady, Mountain Province or the Depositary are required to deduct and withhold with
respect to such payment under the Tax Act, the United States Internal Revenue Code of 1986 or any provision of any applicable federal,
provincial, state, local or foreign tax Laws, in each case, as amended. To the extent that amounts are so withheld, such withheld
amounts shall be treated for all purposes as having been paid to the relevant Person in respect of which such deduction and withholding
was made, provided that such withheld amounts are remitted to the appropriate Governmental Entity.
SECURITIES LAW MATTERS
The following is a brief summary of the
Canadian and U.S. securities law considerations applying to the transactions contemplated herein not discussed elsewhere in this
Circular.
Canadian Securities Laws
Each Kennady Shareholder is urged to consult
such shareholder’s professional advisors to determine the Canadian conditions and restrictions applicable to trades in the Mountain
Province Shares issuable pursuant to the Arrangement.
Listing and Resale of Mountain Province Shares
Kennady is a reporting issuer in the provinces
of British Columbia, Alberta, Saskatchewan, Manitoba, Ontario, New Brunswick, Nova Scotia, Prince Edward Island and Newfoundland.
The Kennady Shares are currently listed on the TSXV. Following completion of the Arrangement, Kennady will be a wholly-owned subsidiary
of Mountain Province and it is anticipated that Mountain Province will apply to the applicable Canadian securities regulators to
have Kennady cease to be a reporting issuer and have the Kennady Shares delisted from the TSXV.
Mountain Province has applied to list the
Mountain Province Shares issuable under the Arrangement on the TSX and Nasdaq. It is a condition of closing that both the TSX and
Nasdaq shall have conditionally approved the listing thereon, subject only to satisfying the customary listing conditions of the
TSX and Nasdaq, respectively, of the issuance of the Mountain Province Shares issuable pursuant to the Arrangement. See “The
Arrangement Agreement – Conditions Precedent to the Arrangement”. TSX conditional approval has been obtained for
the listing of the Mountain Province Shares issuable to Kennady Shareholders in exchange for their Kennady Shares under the Arrangement.
The issuance of Mountain Province Shares
pursuant to the Arrangement will constitute distributions of securities that are exempt from the prospectus requirements of applicable
Canadian Securities Laws. Mountain Province Shares issued pursuant to the Arrangement may be resold in each province and territory
of Canada, provided that: (i) Mountain
Province is a reporting issuer in a jurisdiction
of Canada for the four months immediately preceding the trade; (ii) the trade is not a “control distribution” as defined
in NI 45-102; (iii) no unusual effort is made to prepare the market or create a demand for those securities; (iv) no extraordinary
commission or consideration is paid in respect of that trade; and (v) if the selling security holder is an “insider”
or “officer” of Mountain Province (as such terms are defined by applicable Canadian Securities Laws), the insider or
officer has no reasonable grounds to believe that Mountain Province is in default of applicable Canadian Securities Laws.
Multilateral Instrument 61-101
Kennady – Business Combination
As a reporting issuer in certain of the
provinces of Canada that have adopted MI 61-101 (being Alberta, Manitoba, Ontario and New Brunswick) and an issuer listed on the
TSXV (and therefore subject to TSXV Policy 5.9), Kennady is subject to the requirements of MI 61-101. MI 61-101 is intended to
regulate certain transactions to ensure the protection and fair treatment of minority shareholders.
MI 61-101 regulates transactions that raise
the potential for conflicts of interest, including an “issuer bid”, an “insider bid”, a “related party
transaction” and a “business combination” (each as defined in MI 61-101). The Arrangement does not constitute an
“issuer bid”, an “insider bid” or a “related party transaction” for Kennady. However, the Arrangement
does constitute a “business combination” for purposes of MI 61-101, because it involves an arrangement, as a consequence
of which the interest of a holder of equity security of Kennady may be terminated without the holder’s consent, regardless of whether
the equity security is replaced with another security.
Minority Approval and Valuation Exemption
Under the terms of the Interim Order, the
Arrangement must be approved by at least 66 ⅔% of the votes cast on the Arrangement Resolution by the Kennady Shareholders
present in person or represented by proxy and entitled to vote at the Kennady Meeting. As a “business combination”, the
Arrangement will also need to be approved by at least a majority of the votes cast on the Arrangement Resolution by the Minority
Kennady Shareholders (i.e., excluding votes attached to Kennady Shares held by any person described in items (a) through (d) of
Section 8.1(2) of MI 61-101) present in person or represented by proxy and entitled to vote at the Kennady Meeting.
As of the Kennady Record Date, Kennady
estimates that 17,084,992 Kennady Shares, which are owned or controlled by Mountain Province, the Significant Shareholder and certain
directors and officers of Mountain Province (as described in greater detail in the table below), representing approximately 32.3%
of the outstanding Kennady Shares on a non-diluted basis, will be excluded in determining whether minority approval of the Arrangement
Resolution is obtained. The up to 2,000,000 Kennady Shares expected to be issued to Mountain Province following the Kennady Record
Date will also be excluded in determining whether minority approval of the Arrangement Resolution is obtained.
| Name |
Kennady Shares
(#) |
Kennady Shares(1)
(%) |
| Mountain
Province(2) |
2,000,000 |
3.8% |
|
Dermot Fachtna Desmond(3)
10% Security Holder of Kennady and Mountain Province |
14,485,797 |
27.4% |
|
Jonathan Comerford
Chair and Director, Mountain Province |
23,455 |
<0.1% |
|
David Whittle
Director, Interim President and Chief Executive Officer, Mountain
Province |
70,120 |
0.1% |
| Name |
Kennady Shares
(#) |
Kennady Shares(1)
(%) |
|
Bruce Dresner
Director, Mountain Province |
500,120 |
0.9% |
|
Carl Verley
Director, Mountain Province |
5,500 |
<0.1% |
Notes:
| (1) | Based
on the number of issued and outstanding Kennady Shares as of the Kennady Record Date,
being 52,912,599. |
| (2) | Kennady expects to issue an additional
2,000,000 Kennady Shares to Mountain Province subsequent to the Kennady Record Date and
prior to the Effective Date. |
| (3) | Represents holdings beneficially
owned or controlled by Dermot Fachtna Desmond. Mr. Dermot Fachtna Desmond owns 5,038,000
Kennady Shares directly and owns an additional 9,447,797 Kennady Shares beneficially
through Bottin (International) Investments Ltd., which he controls. |
Kennady is not aware of any “prior
valuation” in respect of the subject matter of, or that is otherwise relevant to, the Arrangement that has been made in the
24 months before the date of this Circular.
In the absence of an exemption, a “business
combination” also requires the issuer to obtain a formal valuation. However, because Kennady is an issuer listed on the TSXV,
Kennady is exempt from the formal valuation requirements under Section 4.4(1)(a) of MI 61-101.
Mountain Province – Related Party Transaction
As a reporting issuer in certain of the
provinces of Canada that have adopted MI 61-101 (being Alberta, Manitoba, Ontario and New Brunswick), Mountain Province is also
subject to the requirements of MI 61-101.
The Arrangement does not constitute an
“issuer bid”, an “insider bid” or a “business combination” for Mountain Province, but is a “related
party transaction” for purposes of MI 61-101, because (i) Kennady is a “related party” of Mountain Province by virtue
of the Significant Shareholder being a “control person” (as defined in section 1(1) of the Securities Act) of both Mountain
Province and Kennady, and (ii) the Arrangement will result in Mountain Province acquiring Kennady through an arrangement.
Minority Approval and Valuation Exemption
In the absence of an exemption, a “related
party transaction” requires Mountain Province to obtain (i) a “formal valuation” of the non-cash consideration offered
under the Arrangement and the Kennady Shares acquired under the Arrangement, and (ii) “minority approval” of the Arrangement
(each as defined in MI 61-101).
Mountain Province is exempt from the requirement
to obtain a “formal valuation” in respect of the non-cash consideration offered under the Arrangement and the Kennady
Shares acquired under the Arrangement in reliance on section 6.3(2) of MI 61-101, as (i) both the Mountain Province Shares and
the Kennady Shares trade on a “published market” (within the meaning of MI 61-101), (ii) neither Mountain Province nor,
to the knowledge of Mountain Province after reasonable inquiry, Kennady or the Significant Shareholder, has knowledge of any material
information concerning Mountain Province or Kennady, or concerning the securities of Mountain Province or Kennady, that has not
been generally disclosed, and (iii) this Circular includes a description of the effect of the distribution on the direct and indirect
voting interests of the “related party”.
Mountain Province must, however, obtain
“minority approval” of the Arrangement under MI 61-101. Therefore, at the Mountain Province Meeting, Mountain Province
will seek Minority Mountain Province Shareholder approval of the Share Issuance Resolution, which shall exclude any Mountain Province
Shares held by a Mountain Province Shareholder that meets the criteria set forth in section 8.1(2) of MI 61-101. As of the Mountain
Province Record Date, Mountain Province estimates that 38,108,091 Mountain Province Shares, which are owned or controlled by the
Significant Shareholder together with any
other “related party” of Kennady (as described in greater detail in the table below), representing approximately 23.8%
of the outstanding Mountain Province Shares on a non-diluted basis, will be excluded in determining whether minority approval of
the Share Issuance Resolution is obtained.
Mountain Province is not aware of any “prior
valuation” in respect of the subject matter of, or that is otherwise relevant to, the Arrangement that has been made in the
24 months before the date of this Circular.
See below for a description of (i) the
interest in the Arrangement of every interested party and of the related parties and associated entities of the interested parties,
and (ii) the anticipated effects of the Arrangement on the percentage of securities of Mountain Province, or of an affiliated entity
of Mountain Province, beneficially owned or controlled by each person referred to in (i).
| |
Prior
to the Arrangement |
Mountain
Province Shares
Received under
Arrangement(1) |
After
the Arrangement |
|
Mountain
Province
Shares Held |
Kennady
Shares Held |
|
|
Pro
Forma Mountain
Province Shares Held(2) |
Kennady
Shareholder |
Insider
Relationship |
(#) |
(%)(3) |
(#) |
(%)(3) |
(#) |
(%) |
(#) |
(%) |
| Jonathan Comerford |
Director of Kennady |
145,204 |
0.1% |
23,455 |
<0.1% |
22,869 |
<0.1% |
168,073 |
<0.1% |
| Dermot
Fachtna Desmond(4) |
10% Security Holder
of Kennady and Mountain Province |
37,951,887 |
23.7% |
14,485,797 |
27.4% |
14,123,652 |
8.8% |
52,075,539 |
24.8% |
| Tom
McCandless |
Director of Kennady |
0 |
0.0% |
200 |
<0.1% |
195 |
<0.1% |
195 |
<0.1% |
| Rory
Moore |
Director of Kennady;
Senior Officer of Kennady |
0 |
0.0% |
25,500 |
<0.1% |
24,862 |
<0.1% |
24,862 |
<0.1% |
| Robert
Brian Parsons |
Director of Kennady |
11,000 |
<0.1% |
15,400 |
<0.1% |
15,015 |
<0.1% |
26,015 |
<0.1% |
| Bruce
Ramsden |
Senior Officer of Kennady |
0 |
0.0% |
0 |
0.0% |
0 |
0.0% |
0 |
0.0% |
| Claudia
Tornquist |
Director of Kennady |
0 |
0.0% |
10,000 |
<0.1% |
9,750 |
<0.1% |
9,750 |
<0.1% |
| |
|
38,108,091 |
23.8%(5) |
14,560,352 |
27.5%(5) |
14,196,343 |
8.9%(5) |
52,304,434 |
24.9%(5) |
Notes:
| (1) | Based on an exchange ratio of 0.975
of a Mountain Province Share for each Kennady Share. Percentage figures based on the
number of issued and outstanding Mountain Province Shares as of March 5, 2018, being
160,253,501. |
| (2) | Based on the number of issued and
outstanding Mountain Province Shares and Kennady Shares (excluding Kennady Shares held
by Mountain Province) as of March 5, 2018, being 160,253,501 Mountain Province Shares
and 50,912,599 Kennady Shares. |
| (3) | Based on the number of issued and
outstanding Mountain Province Shares and Kennady Shares as of March 5, 2018, being 160,253,501
Mountain Province Shares and 52,912,599 Kennady Shares. |
| (4) | The holdings of Dermot Fachtna Desmond
and Bottin (International) Investments Ltd. have been aggregated as Mr. Desmond controls
Bottin (International) Investments Ltd. |
| (5) | Figures may not sum due to rounding. |
U.S. Securities Laws
The following discussion is only a general
overview of certain requirements of U.S. Securities Laws that may be applicable to Kennady Shareholders. All holders of Kennady
Shares are urged to obtain legal advice to ensure that their resale of Mountain Province Shares complies with applicable U.S. Securities
Laws. Further information applicable to the holders of such securities resident in the United States is disclosed in this Circular
under the heading “Note to U.S. Securityholders”.
Exemption from U.S. Registration
The Mountain Province Shares to be issued
to Kennady Shareholders pursuant to the Arrangement have not been and will not be registered under the U.S. Securities Act or the
securities laws of any state of the United States, and are being issued in reliance on the exemption from registration provided
by Section 3(a)(10) of the U.S. Securities Act and exemptions provided under the securities laws of each state of the United States
in which the Kennady U.S. Shareholders reside. Section 3(a)(10) of the U.S. Securities Act exempts from the general registration
requirements under the U.S. Securities Act securities issued in exchange for one or more bona fide outstanding securities where
the terms and conditions of the issuance and exchange are approved by a court of competent jurisdiction that is expressly authorized
by Law to grant such approval, after a hearing upon the fairness of such terms and conditions of such issuance and exchange at
which all persons to whom the securities will be issued in such exchange have the right to appear and receive timely notice thereof.
Accordingly, the Final Order of the Court will, if granted, constitute the basis for the exemption under Section 3(a)(10) from
the registration requirements of the U.S. Securities Act with respect to the Mountain Province Shares to be issued to Kennady Shareholders
pursuant to the Arrangement.
Resales of Mountain Province Shares within the
United States after the Completion of the Arrangement
The Mountain Province Shares to be issued
to Kennady Shareholders pursuant to the Arrangement will be freely tradable under the U.S. Securities Act, except by persons who
are “affiliates” of Mountain Province after the Arrangement or were affiliates of Mountain Province within 90 days prior
to completion of the Arrangement. Persons who may be deemed to be “affiliates” of an issuer include individuals or entities
that control, are controlled by, or are under common control with, the issuer, whether through ownership of voting securities,
by contract or otherwise, and generally include executive officers and directors of the issuer as well as principal shareholders
of the issuer.
Any resale of such Mountain Province Shares
by such an affiliate (or, if applicable, former affiliate) may be subject to the registration requirements of the U.S. Securities
Act, absent an exemption therefrom. Subject to certain limitations, such affiliates (and former affiliates) may immediately resell
such Mountain Province Shares outside the United States without registration under the U.S. Securities Act pursuant to and in accordance
with Regulation S under the U.S. Securities Act. Such Mountain Province Shares may also be resold in transactions completed in
accordance with Rule 144 under the U.S. Securities Act, if available.
The foregoing discussion is only a general
overview of certain requirements of the U.S. Securities Act applicable to the resale of the Mountain Province Shares to be issued
to Kennady Shareholders pursuant to the Arrangement. All holders of such securities are urged to consult with counsel to ensure
that the resale of their securities complies with applicable securities legislation.
REGULATORY MATTERS
The Arrangement is proposed to be carried
out pursuant to Section 182 of the OBCA. Other than obtaining Kennady Shareholder Approval at the Kennady Meeting and Mountain
Province Shareholder Approval at the Mountain Province Meeting, receipt of the Final Order and the approval of the TSXV, TSX and
Nasdaq, Kennady and Mountain Province do not anticipate being required to seek any material approval, consent or other action from
any federal, provincial, state or foreign government or any administrative or regulatory agency in order to complete the Arrangement.
In the event that any such approvals or consents are determined to be required, such approvals or consents will be sought, although
any such additional requirements could delay the Effective Date or prevent the completion of the Arrangement. While there can be
no assurance that any regulatory consents or approvals that are determined to be required will be obtained, Kennady and Mountain
Province currently anticipate that any such consents and approvals that are determined to be required will have been obtained or
otherwise resolved by the Effective Date.
PRINCIPAL CANADIAN FEDERAL INCOME TAX
CONSIDERATIONS
Principal Canadian Federal Income Tax Considerations
The following is, as of the date of this
Circular, a summary of the principal Canadian federal income tax considerations generally applicable under the Tax Act to Kennady
Shareholders who exchange their Kennady Shares for Mountain Province Shares pursuant to the Arrangement and who, at all relevant
times, for purposes of the Tax Act: (a) deal at arm’s length with Kennady and Mountain Province; (b) are not “affiliated”
(within the meaning of the Tax Act) with Kennady or Mountain Province; (c) hold their Kennady Shares as capital property; and (d)
will hold their Mountain Province Shares as capital property (a “Holder”). Generally, Kennady Shares and Mountain
Province Shares will be considered to be capital property to the holder thereof provided that they are not held in the course of
carrying on a business of buying and selling securities and have not been acquired in one or more transactions considered to be
an adventure or concern in the nature of trade. Certain Kennady Shareholders who might not otherwise be considered to hold their
Kennady Shares or Mountain Province Shares as capital property may, in certain circumstances, be entitled to have their Kennady
Shares and Mountain Province Shares, and any other “Canadian security” (as defined in the Tax Act), owned by such holders
in the taxation year in which the election is made, and in all subsequent taxation years, treated as capital property by making
the irrevocable election permitted by subsection 39(4) of the Tax Act. Kennady Shareholders should consult their own tax advisors
regarding the potential application and consequences of this election in their particular circumstances.
This summary is not applicable to a Holder:
(i) that is a “financial institution” (as defined in the Tax Act for the purposes of the mark-to-market rules), (ii)
an interest in which is a “tax shelter investment” (as defined in the Tax Act), (iii) that is a “specified financial
institution” (as defined in the Tax Act), (iv) that has made a “functional currency” election under section 261
of the Tax Act, (v) that has received, or receives, Kennady Shares or Mountain Province Shares upon exercise of a stock option,
(vi) that has entered into, or enters into, a “derivative forward agreement” (as defined in the Tax Act) with respect
to its Kennady Shares or Mountain Province Shares, or (vii) that receives dividends on Mountain Province Shares under or as part
of a “dividend rental arrangement” (as defined in the Tax Act). Such holders should consult their own tax advisors.
This summary also does not address the
tax election discussed in this Circular under the heading “The Arrangement – Description of the Arrangement –
Tax Election for Certain Kennady Shareholders” that may be available to holders of Kennady Shares who do not hold (and
are not deemed to hold) their Kennady Shares as capital property. Such Kennady Shareholders should consult their own tax advisors
regarding the potential Canadian federal income tax considerations applicable to them in their particular circumstances, including
eligibility for the election and the potential consequences to them of making the election.
This summary is based upon the provisions
of the Tax Act in force on the date of this Circular and the current published administrative policies and assessing practices
of the CRA publicly available prior to the date of this Circular. This summary takes into account all specific proposals to amend
the Tax Act which have been publicly announced by or on behalf of the Minister of Finance (Canada) prior to the date of this Circular
(the “Proposed Amendments”) and assumes that the Proposed Amendments will be enacted in their current form. There
can be no assurance that any of the Proposed Amendments will be implemented in their current form or at all. Except for the Proposed
Amendments, this summary does not otherwise take into account or anticipate any changes in law, whether by legislative, governmental
or judicial decision or action, or changes in the administrative or assessing practices and policies of the CRA. In addition, this
summary does not take into account other federal or any provincial, territorial or foreign tax legislation or considerations, which
may differ significantly from the Canadian federal income tax considerations discussed in this Circular.
This summary is not exhaustive of all
possible Canadian federal income tax considerations applicable to a Holder in respect of the transactions described herein. The
income or other tax consequences will vary depending on the particular circumstances of the Holder, including the province or provinces
in which the Holder resides or carries on business. Accordingly, this summary is of a general nature only and is not intended to
be, nor should it be construed to be, legal or tax advice or representations to any particular Holder. Moreover, no advance income
tax ruling has been applied for or obtained from the CRA to confirm the tax consequences of any of the transactions described herein.
Holders should consult their own legal and tax
advisors for advice with respect to the tax consequences
of the transactions described in this Circular based on their particular circumstances.
Holders Resident in Canada
The following portion of this summary is
generally applicable to a Holder who at all relevant times, for purposes of the Tax Act, is or is deemed to be resident in Canada
(a “Resident Holder”). The following portion of this summary, other than the portion under the heading “Principal
Canadian Federal Income Tax Considerations – Holders Resident in Canada – Dissenting Shareholders”, applies
to Resident Holders that are not Dissenting Shareholders.
Exchange of Kennady Shares for Mountain Province Shares
A Resident Holder that receives Mountain
Province Shares in exchange for its Kennady Shares pursuant to the Arrangement will generally be eligible to treat the exchange
as an automatic tax-deferred rollover under the provisions of section 85.1 of the Tax Act, with the result that such Resident Holder
will be deemed to have disposed of its Kennady Shares for proceeds of disposition equal to the adjusted cost base of such shares
immediately before the disposition, and to have acquired the Mountain Province Shares received by it pursuant to the Arrangement
at a cost equal to such adjusted cost base. A Resident Holder’s cost of Mountain Province Shares received pursuant to the Arrangement
will be averaged with the adjusted cost base of all other Mountain Province Shares held by such Resident Holder as capital property
immediately prior to the Effective Time for purposes of determining the adjusted cost base of each Mountain Province Share held
by such Resident Holder immediately after the Effective Time.
The automatic tax-deferral treatment described
above in connection with a Resident Holder’s exchange of Kennady Shares for Mountain Province Shares pursuant to the Arrangement
will not apply where the Resident Holder has, in its income tax return for the taxation year in which the exchange takes place,
included in computing its income for the year any portion of the gain or loss otherwise determined from the disposition of such
exchanged Kennady Shares. A Resident Holder that includes in income any portion of the gain or loss otherwise determined in respect
of the disposition of its Kennady Shares in exchange for Mountain Province Shares pursuant to the Arrangement will be deemed to
have disposed of such exchanged Kennady Shares for proceeds of disposition equal to the fair market value of the Mountain Province
Shares received in exchange therefor, and to have acquired such Mountain Province Shares at a cost equal to the fair market value
of such exchanged Kennady Shares.
For a description of the treatment of capital
gains and capital losses, see “Principal Canadian Federal Income Tax Considerations – Holders Resident in Canada
– Taxation of Capital Gains and Capital Losses”.
Taxation of Capital Gains and Capital Losses
Generally, one-half of any capital gain
(a “taxable capital gain”) realized by a Resident Holder in a taxation year must be included in the Resident Holder’s
income for the year, and one-half of any capital loss (an “allowable capital loss”) realized by a Resident Holder
in a taxation year must be deducted from taxable capital gains realized by the Resident Holder in that year. Allowable capital
losses for a taxation year in excess of taxable capital gains for that year may generally be carried back and deducted in any of
the three preceding taxation years, or carried forward and deducted in any subsequent taxation year, against net taxable capital
gains realized in such years, to the extent and under the circumstances described in the Tax Act.
The amount of any capital loss realized
by a Resident Holder that is a corporation on the disposition of its Kennady Shares may be reduced by the amount of dividends received
by it on its Kennady Shares, to the extent and under the circumstances described in the Tax Act. Similar rules may apply where
a corporation is a member of a partnership or a beneficiary of a trust that receives and disposes of Kennady Shares, directly or
indirectly, through a partnership or a trust. Such Resident Holders should consult their own tax advisors.
Resident Holders that, throughout the taxation
year, are “Canadian-controlled private corporations” (as defined in the Tax Act) may be liable for an additional tax
(refundable in certain circumstances) in respect of taxable capital gains realized on the disposition of their Kennady Shares.
Capital gains realized by a Resident
Holder that is an individual (including certain trusts) on the disposition of Kennady Shares may increase the Resident Holder’s
liability for alternative minimum tax.
Dividends on Mountain Province Shares
A Resident Holder that receives Mountain
Province Shares pursuant to the Arrangement will be required to include in computing its income for a taxation year any dividends
received by it or deemed to be received by it in the year on such shares.
In the case of a Resident Holder that
is an individual, the amount of any such dividend will be subject to the normal dividend gross-up and tax credit rules generally
applicable to dividends received from a taxable Canadian corporation, including the enhanced gross-up and dividend tax credit if
such dividends are properly designated as “eligible dividends” by Mountain Province. Taxable dividends received by
a Resident Holder that is an individual (including certain trusts) may increase such Resident Holder’s liability for alternative
minimum tax.
In the case of a Resident Holder that
is a corporation, the amount of any taxable dividend included in the Resident Holder’s income for the taxation year generally will
be deductible in computing the Resident Holder’s taxable income. In certain circumstances, subsection 55(2) of the Tax Act may
deem a taxable dividend received by a Resident Holder that is a corporation to be proceeds of disposition or a capital gain. A
Resident Holder that is a “private corporation” (as defined in the Tax Act) or any other corporation resident in Canada
controlled, whether because of a beneficial interest in one or more trusts or otherwise, by or for the benefit of an individual
(other than a trust) or a related group of individuals (other than trusts), may be liable to pay tax (refundable in certain circumstances)
under Part IV of the Tax Act on any taxable dividend to the extent such dividend is deductible in computing the Resident Holder’s
taxable income for the year.
Disposition of Mountain Province Shares
On the disposition or deemed disposition
by a Resident Holder of its Mountain Province Shares acquired pursuant to the Arrangement (other than a disposition to Mountain
Province), the Resident Holder will generally realize a capital gain (or capital loss) equal to the amount by which the Resident
Holder’s proceeds of disposition, net of any reasonable costs of disposition, exceed (or are less than) the aggregate of the adjusted
cost base to the Resident Holder of those shares immediately before the disposition. Any such capital gain or capital loss will
be treated in the same manner as described above with respect to the Kennady Shares under the heading “Principal Canadian
Federal Income Tax Considerations – Holders Resident in Canada – Taxation of Capital Gains and Capital Losses”.
Dissenting Shareholders
The following portion of this summary
applies to Resident Holders that are Dissenting Shareholders.
A Resident
Holder who, as a result of the exercise of Dissent Rights, is entitled to be paid the fair market value of its Kennady Shares by
Kennady will be deemed to have received a dividend equal to the amount, if any, by which the payment received exceeds the “paid-up
capital” (determined for purposes of the Tax Act) attributable to such shares immediately before their surrender to Kennady
pursuant to the Arrangement. The amount of any such deemed dividend will be included in calculating such Dissenting Shareholder’s
income for the taxation year and will reduce the proceeds of disposition for purposes of computing the Dissenting Shareholder’s
capital gain or capital loss on the disposition of its Kennady Shares. Any such capital gain or capital loss realized by
a dissenting Resident Holder will be subject to the same tax treatment as described above under the heading “Principal
Canadian Federal Income Tax Considerations – Holders Resident in Canada – Taxation of Capital Gains and Capital Losses”.
Interest, if any, awarded by the
Court to a Resident Holder who is a Dissenting Shareholder will be included in the Resident Holder’s income for the purposes of
the Tax Act. In addition, a Resident Holder who is a Dissenting Shareholder that, throughout the relevant taxation year, is a “Canadian-controlled
private corporation” as defined in the Tax Act may be liable for an additional tax (refundable in certain circumstances)
in respect of such interest.
Under the Plan of Arrangement, Kennady
Shareholders who for any reason are not entitled to be paid the fair value of their Kennady Shares will be treated as if they had
participated in the Arrangement on the same basis as non- dissenting Kennady Shareholders. The principal Canadian federal income
tax considerations generally applicable to such Kennady Shareholders who are Resident Holders in connection with their Kennady
Shares will be the same as those described above in connection with Resident Holders who do not exercise Dissent Rights.
Holders Not Resident in Canada
The following portion of this summary
is generally applicable to a Holder who at all relevant times, for purposes of the Tax Act, (i) is not resident in Canada or is
deemed not to be resident in Canada, (ii) does not use or hold and is not deemed to use or hold its Kennady Shares (and any Mountain
Province Shares) in, or in the course of carrying on, a business in Canada, (iii) is not a person who carries on an insurance business
in Canada and elsewhere, (iv) is not an “authorized foreign bank” (as defined in the Tax Act), and (v) is not a “foreign
affiliate” (as defined in the Tax Act) of a person resident in Canada at the end of the Holder’s taxation year in which the
Effective Time occurs (a “Non- Resident Holder”). The following portion of this summary, other than the portion
under the heading “Principal Canadian Federal Income Tax Considerations – Holders Not Resident in Canada –
Dissenting Shareholders”, applies to Non- Resident Holders that are not Dissenting Shareholders.
Exchange of Kennady Shares for Mountain Province
Shares
A Non-Resident Holder will not be subject
to tax under the Tax Act in respect of any gain realized on the disposition of its Kennady Shares pursuant to the Arrangement unless
the Kennady Shares constitute “taxable Canadian property” (as defined in the Tax Act) of the Non-Resident Holder and
the Non-Resident Holder is not entitled to relief under an applicable income tax treaty or convention.
A Kennady Share will generally only
be “taxable Canadian property” of a Non-Resident Holder if, at any time during the 60-month period immediately preceding
the disposition of such Kennady Share, (i) the Non-Resident Holder, either alone or together with persons with whom the Non-Resident
Holder did not deal at arm’s length or with any partnership in which the Non-Resident Holder or persons with whom the Non-Resident
Holder did not deal at arm’s length held a membership interest directly or indirectly through one or more partnerships, owned 25%
or more of the issued shares of any class of Kennady, and (ii) more than 50% of the fair market value of the Kennady Shares was
derived directly or indirectly from one or any combination of real or immovable property situated in Canada, “Canadian resource
properties” or “timber resource properties” (each as defined in the Tax Act) or an option in respect of, interests
in, or civil law rights in, any such properties. A Kennady Share may be deemed to be “taxable Canadian property” in
certain other circumstances. Non-Resident Holders should consult their own tax advisors as to whether their Kennady Shares constitute
“taxable Canadian property”.
Even if the Kennady Shares are “taxable
Canadian property” to a Non-Resident Holder, such Non-Resident Holder may be exempt from Canadian tax on the disposition
of such Kennady Shares by virtue of an applicable income tax treaty or convention. Non-Resident Holders whose Kennady Shares constitute
“taxable Canadian property” should consult their own tax advisors in this regard.
If the Kennady Shares are “taxable
Canadian property” to a Non-Resident Holder and such Non-Resident Holder is not exempt from Canadian tax in respect of the
disposition of such Kennady Shares pursuant to an applicable income tax treaty or convention, the tax consequences to such Non-Resident
Holder arising on the exchange of their Kennady Shares for Mountain Province Shares pursuant to the Arrangement will be similar
to those described above under the heading “Principal Canadian Federal Income Tax Considerations – Holders Resident
in Canada – Exchange of Kennady Shares for Mountain Province Shares”, including eligibility for the tax-deferred
rollover under section 85.1 of the Tax Act.
Dividends on Mountain Province Shares
A Non-Resident Holder that receives
Mountain Province Shares pursuant to the Arrangement will be subject to Canadian withholding tax on the amount of any dividends
received by it, or deemed to be received by it, on such Mountain Province Shares. Under the Tax Act, the rate of withholding is
25% of the gross amount of the dividend.
The withholding rate may be reduced
pursuant to the provisions of an applicable income tax treaty or convention. Under the Canada–United States Tax Convention
(1980), as amended (the “Canada–US Tax Treaty”), the withholding rate on any such dividend beneficially
owned by a Non-Resident Holder that is a resident of the United States for purposes of the Canada–US Tax Treaty and fully
entitled to the benefits of such treaty is generally reduced to 15%.
Non-Resident Holders who wish to claim
a reduced withholding tax rate under an applicable income tax treaty or convention on any dividends paid on Mountain Province
Shares received by them pursuant to the Arrangement will be required to submit a duly completed and signed copy of CRA form NR301
– “Declaration of Eligibility for Benefits Under a Tax Treaty for a Non-Resident Taxpayer” (or form NR302 or
NR303, as applicable) to the Depositary. Non- Resident Holders should consult their own tax advisors to determine their entitlement
to relief under any applicable income tax treaty or convention and for assistance in completing their required form, if any.
Disposition of Mountain Province Shares
A Non-Resident Holder will not be subject
to Canadian tax in respect of any capital gain realized on the disposition of its Mountain Province Shares acquired pursuant to
the Arrangement unless such shares constitute “taxable Canadian property” (as defined in the Tax Act) of the Non-Resident
Holder at the time of disposition and the Non-Resident Holder is not entitled to relief under an applicable income tax treaty or
convention.
Subject to the immediately following
paragraph, provided that the Mountain Province Shares are listed on a Designated Stock Exchange (which currently includes the
TSX) at the time they are disposed of by the Non-Resident Holder, the considerations applicable to determining whether the Mountain
Province Shares constitute “taxable Canadian property” of the Non-Resident Holder, and the resultant Canadian income
tax consequences if such Mountain Province Shares are “taxable Canadian property”, are similar to those discussed
above with respect to a Non-Resident Holder’s Kennady Shares under the heading “Principal Canadian Federal Income Tax
Considerations – Holders Not Resident in Canada – Exchange of Kennady Shares for Mountain Province Shares”.
If (i) the Kennady Shares transferred
by a Non-Resident Holder to Mountain Province pursuant to the Arrangement in exchange for Mountain Province Shares constitute “taxable
Canadian property” of the Non-Resident Holder at the time of the exchange, such that the Canadian tax consequences applicable
to the Non-Resident Holder in respect of the exchange are similar to those applicable to a Resident Holder with respect to the
exchange of Kennady Shares for Mountain Province Shares pursuant to the Arrangement as discussed above under the heading “Principal
Canadian Federal Income Tax Considerations – Holders Resident in Canada – Exchange of Kennady Shares for Mountain Province
Shares”, including being eligible for the tax-deferred rollover under section 85.1 of the Tax Act in respect of such
exchange, and (ii) the Non-Resident Holder does not elect out of the tax-deferred rollover under section 85.1 of the Tax Act in
respect of such exchange, then the Mountain Province Shares received by the Non-Resident Holder pursuant to the Arrangement will
be deemed to be “taxable Canadian property” of the Non-Resident Holder for a period of 60 months following the Effective
Date.
If the Mountain Province Shares are
not listed on a Designated Stock Exchange at the time they are disposed of by a Non-Resident Holder, such shares will constitute
“taxable Canadian property” of the Non-Resident Holder if, at any time in the 60-month period immediately preceding
the disposition, more than 50% of the fair market value of such shares was derived directly or indirectly from one or any combination
of real or immovable property situated in Canada, “Canadian resource properties” or “timber resource properties”
(each as defined in the Tax Act), or an option in respect of, or interests in, or for civil law rights in, any such properties.
Even if the Mountain Province Shares
are “taxable Canadian property” of a Non-Resident Holder, such Non-Resident Holder may be exempt from Canadian tax
on any capital gain realized on the disposition of such shares by virtue of an applicable income tax treaty or convention to which
Canada is a signatory. Non-Resident Holders should consult their own tax advisors in this regard. If the Mountain Province Shares
constitute “taxable Canadian property” of a Non-Resident Holder and such Non-Resident Holder is not eligible for relief
pursuant to an applicable income tax treaty or convention, the Non-Resident Holder will be required to include one-half of any
capital gain realized on the disposition of such shares in income as a taxable capital gain.
Dissenting Shareholders
The following portion of this summary
applies to Non-Resident Holders that are Dissenting Shareholders.
A Non-Resident
Holder who, as a result of the exercise of Dissent Rights, is entitled to be paid the fair market value of its Kennady Shares by
Kennady will be deemed to have received a dividend equal to the amount, if any, by which such payment exceeds the “paid-up
capital” (determined for purposes of the Tax Act) attributable to such shares immediately
before their surrender to Kennady pursuant to the Arrangement. Any such deemed dividend will be subject to non-resident withholding
tax under the Tax Act at a rate of 25% of the gross amount of the dividend, unless the rate is reduced by an applicable income
tax treaty or convention.
The amount
of any such deemed dividend will reduce the proceeds of disposition for purposes of computing the Dissenting Shareholder’s capital
gain or capital loss on the disposition of its Kennady Shares. Any such capital gain or capital loss will be subject to
the same considerations and tax treatment as a capital gain or capital loss realized on the disposition of Kennady Shares pursuant
to the Plan of Arrangement by a Non-Resident Holder who is not a Dissenting Shareholder, as described above under the heading “Principal
Canadian Federal Income Tax Considerations – Holders Not Resident in Canada – Exchange of Kennady Shares for Mountain
Province Shares”.
Interest, if any, awarded by the Court
to a Non-Resident Holder who is a Dissenting Shareholder will not be subject to Canadian withholding tax.
Under the Plan of Arrangement, Kennady
Shareholders who for any reason are not entitled to be paid the fair value of their Kennady Shares will be treated as if they had
participated in the Arrangement on the same basis as non- dissenting Kennady Shareholders. The principal Canadian federal income
tax considerations generally applicable to such Kennady Shareholders who are Non-Resident Holders in connection with their Kennady
Shares will be the same as those described above in connection with Non-Resident Holders who do not exercise Dissent Rights.
Eligibility for Investment
Based on the provisions of the Tax
Act in force on the date of this Circular, the Mountain Province Shares received by Kennady Shareholders pursuant to the Arrangement
will be “qualified investments” under the Tax Act at a particular time for a trust governed by a registered retirement
savings plan (“RRSP”), registered retirement income fund (“RRIF”), deferred profit sharing
plan, registered education savings plan (“RESP”), registered disability savings plan (“RDSP”)
and tax-free savings account (“TFSA”) (all as defined in the Tax Act) (collectively, “Registered Plans”),
provided that, at the particular time, the Mountain Province Shares are listed on a Designated Stock Exchange (which currently
includes the TSX) or Mountain Province is a “public corporation” (within the meaning of the Tax Act);
Notwithstanding that the Mountain Province
Shares may be “qualified investments” under the Tax Act for Registered Plans as described above, an annuitant under
a RRSP or RRIF, a holder of a RDSP or TFSA, or a subscriber of a RESP that holds Mountain Province Shares will be subject to a
penalty tax if such shares or warrants are a “prohibited investment” for such RRSP, RRIF, RDSP, TFSA or RESP under
the Tax Act. Mountain Province Shares will not be a “prohibited investment” for a RRSP, RRIF, RDSP, TFSA or RESP held
by a particular annuitant, holder or subscriber provided the annuitant, holder or subscriber deals at arm’s length with Mountain
Province for purposes of the Tax Act and does not have a “significant interest” (as defined in the Tax Act) in Mountain
Province. In addition, Mountain Province Shares will generally not be a “prohibited investment” if they are “excluded
property” (as defined in subsection 207.01(1) of the Tax Act).
Annuitants under a RRSP or RRIF,
holders of a RDSP or TFSA, and subscribers of a RESP should consult their own tax advisors as to whether Mountain Province Shares
will be a “prohibited investment”, including whether they will be “excluded property”, in their particular
circumstances.
CERTAIN U.S. FEDERAL INCOME TAX CONSIDERATIONS FOR U.S.
HOLDERS
The following discussion summarizes
certain U.S. federal income tax consequences generally applicable to U.S. Holders (as defined below) of Kennady Shares relating
to the exchange of Kennady Shares for Mountain Province Shares pursuant to the Arrangement and to the ownership and disposition
of Mountain Province Shares received pursuant to the Arrangement. Except as expressly provided otherwise below, this discussion
applies only to U.S. Holders that hold their Kennady Shares and will hold their Mountain Province Shares received pursuant to
the Arrangement as capital assets (generally, property held for investment purposes). This section does not apply to holders subject
to special rules, including brokers, dealers in securities or currencies, traders in securities that elect to use a mark-to-market
method of accounting for securities holdings, tax-exempt organizations, insurance companies, banks, thrifts and other financial
institutions, persons liable for alternative minimum tax, persons that own or have owned, directly, indirectly or constructively,
10% or more (by vote or value) of Kennady’s or Mountain Province’s equity, persons that own or will own, directly, indirectly
or constructively, 5% or more (by vote or value) of Mountain Province’s equity after the Arrangement, persons that hold an interest
in an entity that holds Kennady Shares or Mountain Province Shares, persons that hold Kennady Shares or Mountain Province Shares
as part of a hedging, integration, conversion or constructive sale transaction or a straddle, or persons whose functional currency
is not the U.S. dollar.
This discussion does not purport to
be a complete analysis of all of the potential U.S. federal income tax considerations that may be relevant to U.S. Holders in light
of their particular circumstances. Furthermore, it does not address any aspect of non-U.S., state, local or estate or gift taxation.
Each holder should consult its own tax advisor as to the U.S. federal, state, local, non-U.S. and any other tax consequences of
the Arrangement and the ownership and disposition of Mountain Province Shares. This discussion is based on the U.S. Internal Revenue
Code of 1986, as amended (the “Code”), its legislative history, administrative pronouncements of the U.S. Internal
Revenue Service (the “IRS”), existing and proposed U.S. Treasury regulations, published rulings and court decisions,
and the Canada-United States Income Tax Convention (1980) (the “Convention”), all as in effect as of the date
of this Circular, and any of which may be repealed, revoked or modified (possibly with retroactive effect) so as to result in U.S.
federal income tax consequences different from those discussed below.
If a partnership or other pass-through
entity holds Kennady Shares or Mountain Province Shares, the U.S. federal income tax treatment of a partner, beneficiary or other
stakeholder will generally depend on the status of that person and the tax treatment of the pass-through entity. A partner, beneficiary
or other stakeholder in a pass-through entity holding Kennady Shares or Mountain Province Shares should consult its own tax advisor
with regard to the U.S. federal income tax treatment of the Arrangement and the ownership and disposition of Mountain Province
Shares.
A “U.S. Holder”
is a beneficial owner of Kennady Shares or Mountain Province Shares who, for U.S. federal income tax purposes, is a citizen or
individual resident of the United States, a corporation (or other entity classified as a corporation for U.S. federal income tax
purposes), that is created or organized in or under the laws of the United States, or any political subdivision thereof or therein,
an estate whose income is subject to U.S. federal income tax regardless of its source, or a trust (i) if a U.S. court can exercise
primary supervision over the trust’s administration and one or more U.S. persons are authorized to control all substantial decisions
of the trust, or (ii) that validly elects to be treated as a U.S. person for U.S. federal income tax purposes.
The following discussion is for general
information purposes only, does not discuss all aspects of U.S. federal income taxation that may be relevant to a particular U.S.
Holder in light of such holder’s circumstances and income tax situation, and is not intended to be, nor should it be construed
to be, legal or tax advice to any U.S. Holder. No opinion or representation with respect to the U.S. federal income tax consequences
to any such U.S. Holder is made. Each U.S. Holder is urged to consult its own tax advisor regarding the particular tax consequences
to it of the transactions contemplated by the Arrangement, including the application of U.S. federal, state and local tax laws,
as well as any applicable non-U.S. tax laws, to a U.S. Holder’s particular situation, and of any change in applicable tax laws.
U.S. Federal Income Tax Considerations Relating to
the Arrangement
Exchange of Kennady Shares for Mountain Province
Shares in the Arrangement
Tax-Free Treatment of the Arrangement
Although the matter is not free
from doubt, it is anticipated that the exchange of Kennady Shares for Mountain Province Shares will qualify as a reorganization
within the meaning of Section 368(a) of the Code (a “Reorganization”). Because the determination of whether
the Arrangement qualifies as a Reorganization depends on the resolution of complex issues and facts, some of which will not be
known until the closing of the Arrangement, there can be no assurance that the Arrangement will qualify as a Reorganization. In
order for the Arrangement to qualify as a Reorganization, among other things, the consideration paid by Mountain Province to a
holder of Kennady Shares must consist solely of Mountain Province Shares. Thus, qualification of the Arrangement as a Reorganization
will depend, among other things, on the absence of any payment of non-qualifying consideration (e.g., cash) to holders of Kennady
Shares. In the Arrangement, if Kennady Shares are purchased from holders exercising Dissent Rights with cash received either directly
or indirectly from Mountain Province, it will be treated as an indirect acquisition of Kennady Shares by Mountain Province for
cash and thereby prevent the Arrangement from qualifying as a Reorganization. At the time of this Circular, Kennady does not know
whether there will be any holders of Kennady Shares exercising Dissent Rights. If there are holders of Kennady Shares exercising
Dissent Rights, Kennady anticipates that it will have sufficient cash, independent of any cash it receives from Mountain Province,
to satisfy the claims of such holders.
Subject to the discussion below
regarding the application of the passive foreign investment company (“PFIC”) rules to the Arrangement, and assuming
the exchange of Kennady Shares for Mountain Province Shares qualifies as a reorganization under Section 368(a) of the Code, a U.S.
Holder of Kennady Shares will not recognize any gain or loss on the exchange of its shares for Mountain Province Shares. The aggregate
basis of the Mountain Province Shares received in the exchange should be the same as the aggregate basis of the Kennady Shares
for which they are exchanged. The holding period of Mountain Province Shares received in the exchange will include the holding
period of the Kennady Shares for which they are exchanged. If a U.S. Holder holds different blocks of Kennady Shares (generally
as a result of having acquired different blocks of shares at different times or at different costs), such U.S. Holder’s tax basis
and holding period in its Mountain Province Shares may be determined with reference to each block of Kennady Shares for which they
are exchanged. The IRS could challenge a U.S. Holder’s treatment of the Arrangement as a reorganization under Section 368(a) of
the Code. If this treatment were successfully challenged, the Arrangement would be treated as a taxable transaction, with the consequences
described immediately below.
Treatment if the Arrangement
is a Taxable Transaction
Subject to the discussion below
regarding the application of the PFIC rules to the Arrangement, if the exchange of Kennady Shares for Mountain Province Shares
does not qualify as a reorganization under Section 368(a) of the Code, a U.S. Holder of Kennady Shares will recognize gain or loss
on the exchange of its shares for Mountain Province Shares equal to the difference between the fair market value of the Mountain
Province Shares received and the adjusted basis in the Kennady Shares surrendered. For this purpose, U.S. Holders of Kennady Shares
must calculate gain or loss separately for each identified block of Kennady Shares exchanged (that is, Kennady Shares acquired
at the same cost in a single transaction). The basis of each of the Mountain Province Shares received in the exchange will equal
its fair market value on the date of the exchange, and the holding period for the Mountain Province Shares will begin on the day
after the exchange. Any gain or loss described in this paragraph will be capital gain or loss, and will be long-term capital gain
or loss if such Kennady Shares were held for more than one year. Preferential tax rates apply to long-term capital gains of a U.S.
Holder that is an individual, estate, or trust. There are currently no preferential tax rates for long-term capital gains of a
U.S. Holder that is a corporation. Deductions for capital losses are subject to significant limitations under the Code.
Gain on the disposition of stock
in a corporation treated as a PFIC with respect to a U.S. Holder is subject to special adverse U.S. federal income tax rules, discussed
more fully below under the heading “U.S. Federal Income Tax Considerations Relating to the Mountain Province Shares”,
unless such holder has timely made certain elections. Kennady likely may be, or may have been, classified as a PFIC.
Passive Foreign Investment Company
Rules
A non-U.S. corporation is a PFIC for
each tax year in which either (i) 75% or more of its gross income is passive income (as defined for U.S. federal income tax purposes)
or (ii) 50% or more of the value of its assets either produce passive income or are held for the production of passive income,
based on the quarterly average of the fair market value of such assets. For purposes of the PFIC provisions, “passive income”
generally includes dividends, interest, certain royalties and rents, certain gains from the sale of stock and securities, and certain
gains from commodities transactions. In determining whether or not it is a PFIC, a non-U.S. corporation is required to take into
account its pro rata portion of the income and assets of each corporation in which it owns, directly or indirectly, at least a
25% interest (by value).
Based on the nature of Kennady’s income,
assets and activities, it is likely that Kennady may be or may have been classified as a PFIC. Because the PFIC determination is
made annually at the close of the taxable year in question on the basis of facts and circumstances that may be beyond Kennady’s
control, and because the principles and methodology for applying the PFIC tests are not entirely clear, there can be no assurance
that Kennady will not be a PFIC in the current taxable year.
Based on the nature of Mountain Province’s
income, assets and activities, it is likely that Mountain Province will be classified as a PFIC in the current and future taxable
years. However, because the PFIC determination is made annually at the close of the taxable year in question on the basis of facts
and circumstances that may be beyond Mountain Province’s control, and because the principles and methodology for applying the PFIC
tests are not entirely clear, there can be no assurance that Mountain Province will not be a PFIC in the current or subsequent
taxable years.
Application of the Passive Foreign
Investment Company Rules to the Arrangement
Under proposed U.S. Treasury regulations
(the “Proposed PFIC Regulations”), a Non-Electing Shareholder (as defined below) does not recognize gain (beyond
gain that would otherwise be recognized under the applicable non- recognition rules) on the disposition of stock in a PFIC if the
disposition results from a non-recognition transfer in which the stock of the PFIC is exchanged solely for stock of another corporation
that qualifies as a PFIC for its taxable year that includes the day after the non-recognition transfer. If finalized in their current
form, the Proposed PFIC Regulations would be effective for transactions occurring on or after April 11, 1992, including the Arrangement.
If Mountain Province and Kennady are
both classified as PFICs, as is likely, under the Proposed PFIC Regulations, a Non-Electing Shareholder would not recognize gain
(beyond gain that would otherwise be recognized under the applicable non-recognition rules) on the exchange of Kennady Shares.
However, the proposed U.S. Treasury regulations have not been adopted in final form and there is no assurance they will be adopted
in final form and with the effective date proposed. It is uncertain whether the IRS would consider the proposed U.S. Treasury regulations
to be effective for purposes of determining the U.S. federal income tax treatment of the Arrangement.
If Kennady were treated as a PFIC with
respect to a U.S. Holder but either (i) Mountain Province were not treated as PFIC for the current taxable year, and if the Proposed
PFIC Regulations were finalized in their current form and made applicable to the Arrangement (even if such finalization occurs
after completion of the Arrangement) or (ii) the Arrangement was otherwise treated as a taxable transaction, then the exchange
of Kennady Shares for Mountain Province Shares would be a fully taxable transaction for such U.S. Holder. Any gain realized would
be subject to the rules described below under the heading “U.S. Federal Income Tax Considerations Relating to the Mountain
Province Shares--PFIC Rules Related to the Ownership and Disposition of Mountain Province Shares.”
The PFIC rules are complex, and the
implementation of certain aspects of the PFIC rules requires the issuance of U.S. Treasury regulations which in many instances
have not been promulgated and which, when promulgated, may have retroactive effect. U.S. Holders should consult their own tax advisors
about the potential applicability of the PFIC rules to the Arrangement, including the application of any information reporting
requirements related to the ownership and disposition of shares of a PFIC.
U.S. Holders Exercising Dissent
Rights Pursuant to the Arrangement
A U.S. Holder of the Kennady Shares
that exercises Dissent Rights in the Arrangement and is paid cash in exchange for all of its Kennady Shares generally will recognize
gain or loss in an amount equal to the difference, if any, between (a) amount of cash received pursuant to the Arrangement and
(b) the U.S. Holder’s adjusted tax basis in such Kennady Shares. Such gain or loss would be long-term capital gain or loss if
the U.S. Holder’s holding period for such Kennady Shares was more than one year at the time of the exchange. Preferential tax
rates for long-term capital gains are generally applicable to a U.S. Holder that is an individual, estate or trust. There are
currently no preferential tax rates for long-term capital gains applicable to a U.S. Holder that is a corporation. Deductions
for capital losses are subject to significant limitations. Notwithstanding the foregoing, if Kennady has been a PFIC at any time
during which a U.S. Holder has held the Shares, which is likely, such gain, if any, will be taxable in the manner described above
under “U.S. Federal Income Tax Considerations Relating to the Mountain Province Shares.”
U.S. Federal Income Tax Considerations
Relating to the Mountain Province Shares
PFIC Rules Related to the Ownership
and Disposition of Mountain Province Shares
Assuming Mountain Province were classified
as a PFIC, a U.S. Holder who does not make a QEF election or a Mark- to-Market Election, as discussed below, would be required
to report any gain on the disposition of any Mountain Province Shares as ordinary income, rather than as capital gain, and to compute
the tax liability on the gain and any “Excess Distribution” (as defined below) received in respect of the Mountain
Province Shares as if such items had been earned ratably over each day in the U.S. Holder’s holding period (or a portion thereof)
for the Mountain Province Shares. The amounts allocated to the taxable year of disposition and to years before Mountain Province
became a PFIC would be taxed as ordinary income. The amount allocated to each other taxable year would be subject to tax at the
highest rate in effect for that taxable year for individuals or corporations, as appropriate, and an interest charge would be imposed
on the tax attributable to the allocated amount. An “Excess Distribution” is the amount by which distributions
received by a U.S. Holder during a taxable year in respect of its Mountain Province Shares exceed 125% of the average amount of
distributions in respect thereof received during the three preceding taxable years (or, if shorter, the U.S. Holder’s holding period
for the Mountain Province Shares). For purposes of these rules, gifts, exchanges pursuant to corporate reorganizations and use
of the Mountain Province Shares as security for a loan may be treated as a taxable disposition of the Mountain Province Shares.
Certain additional adverse tax rules
will apply to a U.S. Holder for any taxable year in which Mountain Province is treated as a PFIC with respect to such U.S. Holder
and any of Mountain Province’s subsidiaries is also treated as a PFIC (a “Subsidiary PFIC”). In such a case,
the U.S. Holder will generally be deemed to own its proportionate interest (by value) in any Subsidiary PFIC and be subject to
the PFIC rules described above with respect to the Subsidiary PFIC regardless of such U.S. Holder’s percentage ownership in Mountain
Province.
The tax consequences described above
may be mitigated if a U.S. Holder of Mountain Province Shares makes a timely “qualified electing fund” election (a
“QEF election”) with respect to its interest in the PFIC provided Mountain Province provides the necessary information
regarding its ordinary earnings and net capital gain. Consequently, if Mountain Province is classified as a PFIC, it would likely
be advantageous for a U.S. Holder to elect to treat Mountain Province as a “qualified electing fund” (a “QEF”)
with respect to such U.S. Holder in the first year in which it holds Mountain Province Shares. If a U.S. Holder makes a timely
QEF election with respect to Mountain Province, the electing U.S. Holder would be required in each taxable year that Mountain Province
is considered a PFIC to include in gross income (i) as ordinary income, the U.S. Holder’s pro rata share of the ordinary earnings
of Mountain Province and (ii) as capital gain, the U.S. Holder’s pro rata share of the net capital gain (if any) of Mountain Province,
whether or not the ordinary earnings or net capital gain are distributed. An electing U.S. Holder’s basis in Mountain Province
Shares will be increased to reflect the amount of any taxed but undistributed income. Distributions of income that had previously
been taxed will result in a corresponding reduction of basis in the Mountain Province Shares and will not be taxed again as distributions
to the U.S. Holder. Each U.S. Holder is urged to consult its own tax advisor regarding the availability of, and procedure for making,
a QEF election. A U.S. Holder that does not make a timely QEF election is referred to in this summary as a “Non-Electing
Shareholder.”
A QEF election made with respect
to Mountain Province will not apply to any Subsidiary PFIC; a QEF election must be made separately for each Subsidiary PFIC (in
which case the treatment described above would apply to such
Subsidiary PFIC). If a U.S. Holder
makes a timely QEF election with respect to a Subsidiary PFIC, it would be required in each taxable year to include in gross income
its pro rata share of the ordinary earnings and net capital gain of such Subsidiary PFIC, but may not receive a distribution of
such income. Such a U.S. Holder may, subject to certain limitations, elect to defer payment of current U.S. federal income tax
on such amounts, subject to an interest charge (which would not be deductible for U.S. federal income tax purposes if the U.S.
Holder were an individual).
The U.S. federal income tax on any
gain from the disposition of Mountain Province Shares or from the receipt of Excess Distributions may be greater than the tax would
be if a timely QEF election is made. U.S. Holders are urged to consult their own tax advisors regarding the advisability and availability
of making a QEF election with respect to Mountain Province and any Subsidiary PFIC.
Alternatively, a U.S. Holder of Mountain
Province Shares is not subject to the excess distribution regime if the U.S. Holder has made a timely and effective election to
mark the Mountain Province Shares to market, provided the Mountain Province Shares are treated as regularly traded on a qualified
exchange or other market within the meaning of the applicable U.S. Treasury regulations (a “Mark-to-Market Election”).
In the case of any U.S. Holder that has timely made an effective Mark-to-Market Election, gain realized by such holder from the
sale of Mountain Province Shares generally would be taxed at ordinary income tax rates. A U.S. Holder makes the Mark-to-Market
Election by filing IRS Form 8621 with its tax return.
In addition to the rules described
above, in any year in which Mountain Province is a PFIC, a U.S. Holder may be required to file an annual report on IRS Form 8621
containing such information as U.S. Treasury regulations and/or other IRS guidance may require. U.S. Holders are urged to consult
their own tax advisors regarding the tax consequences which would arise if Mountain Province were treated as a PFIC for any taxable
year.
The Mountain Province Shares – Distributions
on the Mountain Province Shares
Subject to the PFIC rules discussed
above, a U.S. Holder that receives a distribution, including a constructive distribution, with respect to a Mountain Province Share
will be required to include the amount of such distribution in gross income as a dividend (without reduction for any Canadian income
tax withheld from such distribution) to the extent of the current or accumulated “earnings and profits” of Mountain
Province, as computed for U.S. federal income tax purposes. To the extent that a distribution exceeds the current and accumulated
“earnings and profits” of Mountain Province, such distribution will generally be treated first as a tax-free return
of capital to the extent of a U.S. Holder’s tax basis in the Mountain Province Shares (causing a reduction in the adjusted basis
of the Mountain Province Shares, thereby increasing the amount of gain or decreasing the amount of loss that a U.S. Holder would
recognize on a subsequent disposition of Mountain Province Shares) and thereafter as a capital gain from the sale or exchange of
such Mountain Province Shares (see “The Mountain Province Shares – Sale, Exchange or Other Taxable Disposition
of Mountain Province Shares” below). However, Mountain Province may not maintain the calculations of earnings and profits
in accordance with U.S. federal income tax principles, and each U.S. Holder should therefore assume that any distribution by Mountain
Province with respect to the Mountain Province Shares will constitute ordinary dividend income. Dividends received on Mountain
Province Shares generally will not constitute dividend income eligible for the “dividends received deduction”.
If Mountain Province is eligible
for the benefits of the Convention or the Mountain Province Shares are readily tradable on a U.S. securities market, dividends
paid by Mountain Province to non-corporate U.S. Holders, including individuals, generally will be eligible for preferential tax
rates, provided certain holding period requirements are met and certain other conditions are satisfied, including that Mountain
Province not be classified as a PFIC in the tax year of distribution or in the preceding tax year.
If a U.S. Holder is not eligible
for the preferential tax rates discussed above, or the PFIC rules apply, a dividend paid by Mountain Province to a U.S. Holder
generally will be taxed at ordinary income tax rates. The dividend rules are complex, and each U.S. Holder is urged to consult
its own tax advisor regarding the application of such rules.
The amount of any dividend paid
in Canadian dollars (including amounts withheld to pay Canadian withholding taxes) will equal the U.S. dollar value of the Canadian
dollars calculated by reference to the exchange rate in effect on the date the dividend is actually or constructively received
by the U.S. Holder, regardless of whether the Canadian dollars are converted into U.S. dollars. A U.S. Holder will have a tax basis
in the Canadian dollars equal to their U.S. dollar
value on the date of receipt. If the
Canadian dollars received are not converted into U.S. dollars on the date of receipt, a U.S. Holder may recognize foreign currency
gain or loss on a subsequent conversion or other disposition of the Canadian dollars. Such gain or loss will be treated as U.S.
source ordinary income or loss.
A U.S. Holder may be entitled to deduct
or credit Canadian withholding tax imposed on dividends paid to a U.S. Holder, subject to applicable limitations in the Code. For
purposes of calculating a U.S. Holder’s foreign tax credit, dividends received by such U.S. Holder with respect to the equity of
a foreign corporation generally constitute foreign source income. The rules governing the foreign tax credit are complex. U.S.
Holders are urged to consult their own tax advisors regarding the availability of the foreign tax credit under their particular
circumstances.
The Mountain Province Shares – Sale, Exchange
or Other Taxable Disposition of the Mountain Province Shares
A U.S. Holder will recognize gain
or loss on the sale, exchange or other taxable disposition of the Mountain Province Shares in an amount equal to the difference
between the amount realized for the Mountain Province Shares and the U.S. Holder’s adjusted tax basis in such Mountain Province
Shares. Subject to the PFIC rules discussed above, the gain or loss will generally be a capital gain or loss. Capital gains of
non-corporate U.S. Holders derived with respect to capital assets held for more than one year are eligible for reduced rates of
taxation. The deductibility of capital losses is subject to significant limitations. Any capital gain or loss recognized by a
U.S. Holder generally will be treated as U.S. source gain or loss for U.S. foreign tax credit purposes, although special rules
apply to U.S. Holders who have a fixed place of business outside the United States to which the gain is attributable.
Additional Tax on Net Investment Income
Certain U.S. Holders that are individuals,
estates or trusts are subject to a 3.8% tax on all or a portion of their “net investment income,’’ which may include all or a
portion of their income arising from a distribution with respect to the Mountain Province Shares and net gain from the sale, exchange
or other disposition of the Mountain Province Shares. Each U.S. Holder is urged to consult its own tax advisor regarding the application
of this tax.
Information Reporting, Backup Withholding and Other
Reporting Requirements
U.S. Holders of the Mountain Province
Shares who receive cash proceeds upon the disposition of the Mountain Province Shares may be subject to information reporting and
may be subject to backup withholding (at a 24% rate) on any cash payments received in exchange for the Mountain Province Shares.
Backup withholding generally will not
apply, however, to a U.S. Holder who: furnishes a correct taxpayer identification number and certifies that he, she or it is not
subject to backup withholding on IRS Form W-9 (or substitute form), or is otherwise exempt from backup withholding.
Backup withholding is not an additional
tax. Any amounts withheld from a payment to a holder under the backup withholding rules may be credited against the holder’s U.S.
federal income tax liability, and a holder may obtain a refund of any excess amounts withheld by filing the appropriate claim for
refund with the IRS in a timely manner and furnishing any required information. Each U.S. Holder is urged to consult its own tax
advisor regarding the information reporting and backup withholding rules in their particular circumstances and the availability
of and procedures for obtaining an exemption from backup withholding.
The discussion of reporting requirements
set forth above is not intended to constitute an exhaustive description of all reporting requirements that may apply to a U.S.
Holder. A failure to satisfy certain reporting requirements may result in an extension of the time period during which the IRS
can assess a tax, and under certain circumstances, such an extension may apply to assessments of amounts unrelated to any unsatisfied
reporting requirement. Each U.S. Holder is urged to consult its own tax advisor regarding applicable reporting requirements and
the information reporting and backup withholding rules.
The foregoing discussion of certain
U.S. federal income tax considerations is for general information only and is not intended to constitute a complete analysis of
all tax consequences arising from the receipt of cash pursuant to the
Arrangement. U.S. Holders are urged
to consult their own tax advisors concerning the tax consequences applicable to their particular situations.
NOTICE TO NON-CANADIAN KENNADY
SHAREHOLDERS
It is strongly recommended that
all Kennady Shareholders who are not Resident Holders consult their own legal and tax advisors with respect to the income tax consequences
applicable in their place of residency in connection with the disposition of their Kennady Shares or, following completion of the
Arrangement, their Mountain Province Shares.
INTERESTS OF DIRECTORS AND OFFICERS
OF MOUNTAIN PROVINCE IN THE ARRANGEMENT
Except as otherwise disclosed in
this Circular, Mountain Province is not aware of any director or officer of Mountain Province having any interest in the Arrangement.
Kennady Shares
As of January 28, 2018, the directors
and executive officers of Mountain Province (excluding former directors and officers of Mountain Province) beneficially owned,
or exercised control or direction, directly or indirectly, over 599,195 Kennady Shares representing in the aggregate approximately
1.2% of all of the issued and outstanding Kennady Shares at that time. All of the Kennady Shares held by such directors and executive
officers of Mountain Province will be treated in the same fashion under the Arrangement as Kennady Shares held by all other Kennady
Shareholders.
The chart below sets out for each director
and executive officer of Mountain Province the number of Kennady Shares, beneficially owned, directly or indirectly, by such director
and executive officer and the number of Mountain Province Shares to be received by each director and executive officer under the
Arrangement.
| Name and Last Position Held |
Number of
Kennady Shares |
%
of Kennady
Shares(12) |
Number of
Mountain
Province Shares
to be issued |
%
of Mountain
Province
Shares(13) |
|
Jonathan Comerford(1)
Chair and Director |
23,455 |
<0.1% |
22,869 |
<0.1% |
|
David Whittle(2)
Director, Interim President and Chief Executive Officer |
70,120 |
0.1% |
68,367 |
<0.1% |
|
Perry Ing(3)
Vice-President Finance and Chief Executive Officer |
Nil |
0.0% |
Nil |
0.0% |
|
Reid Mackie(4)
Vice-President Diamond Marketing |
Nil |
0.0% |
Nil |
0.0% |
|
Bruce Dresner(5)
Director |
500,120 |
0.9% |
487,617 |
0.3% |
|
Peeyush Varshney(6)
Director |
Nil |
0.0% |
Nil |
0.0% |
| Name and Last Position Held |
Number of
Kennady Shares |
%
of Kennady
Shares(12) |
Number of
Mountain
Province Shares
to be issued |
%
of Mountain
Province
Shares(13) |
|
Karen Goracke(7)
Director |
Nil |
0.0% |
Nil |
0.0% |
|
Carl Verley(8)
Director |
5,500 |
<0.1% |
5,362 |
<0.1% |
|
Patrick Evans(9)
Former Director, President and Chief Executive Officer |
387,424(10) |
0.7% |
377,738 |
0.2% |
|
Bruce Ramsden(11)
Former VP Finance, Chief Financial Officer and Corporate Secretary |
Nil |
0.0% |
Nil |
0.0% |
Notes:
| (1) | Mr.
Comerford currently holds 145,204 Mountain Province Shares, 525,000 Mountain Province
Options and 55,000 Mountain Province RSUs. |
| (2) | Mr.
Whittle currently holds 164,106 Mountain Province Shares, 350,000 Mountain Province Options
and 80,000 Mountain Province RSUs. |
| (3) | Mr.
Ing currently holds nil Mountain Province Shares, 200,000 Mountain Province Options and
30,000 Mountain Province RSUs. |
| (4) | Mr.
Mackie currently holds 30,000 Mountain Province Shares, 200,000 Mountain Province Options
and 55,000 Mountain Province RSUs. |
| (5) | Mr.
Dresner currently holds 381,111 Mountain Province Shares, 400,000 Mountain Province Options
and 55,000 Mountain Province RSUs. |
| (6) | Mr.
Varshney currently holds 97,022 Mountain Province Shares, 350,000 Mountain Province Options
and 55,000 Mountain Province RSUs. |
| (7) | Ms.
Goracke currently holds nil Mountain Province Shares, 200,000 Mountain Province Options
and 55,000 Mountain Province RSUs. |
| (8) | Mr.
Verley currently holds 295,335 Mountain Province Shares, 350,000 Mountain Province Options
and 46,665 Mountain Province RSUs. |
| (9) | On
June 8, 2017, Mountain Province announced that Mr. Evans had ceased his role as president
and chief executive officer of Mountain Province. On July 20, 2017, Mountain Province
announced that Mr. Evans had resigned as a director of Mountain Province. As of the date
Mr. Evans ceased to be an insider of Mountain Province, Mr. Evans held 1,467,194 Mountain
Province Shares. The information as to Mountain Province Shares beneficially owned, controlled
or directed by Patrick Evans, not being within the knowledge of Mountain Province, has
been obtained by Mountain Province from publicly-disclosed information. Mr. Evans’ current
holdings of Mountain Province Shares are not within the knowledge of Mountain Province. |
| (10) | Mr.
Evans resigned his role as director and chief executive officer of Kennady on April 30,
2016. The information as to Kennady Shares beneficially owned, controlled or directed
by Mr. Evans, not being within the knowledge of Mountain Province, has been obtained
by Mountain Province from publicly-disclosed information and is presented as of the date
Mr. Evans ceased to be an insider of Kennady. Mr. Evans’ current holdings of Kennady
Shares are not within the knowledge of Mountain Province. |
| (11) | Mr.
Ramsden resigned his role as VP Finance, Chief Financial Officer and Corporate Secretary
of Mountain Province effective January 31, 2017. Mr. Ramsden currently holds nil Mountain
Province Shares. |
| (12) | Based
on the number of issued and outstanding Kennady Shares as of the Kennady Record Date,
being 52,912,599. |
| (13) | Based
on the number of issued and outstanding Mountain Province Shares as of the Mountain Province
Record Date, being 160,253,501. |
Kennady Options and Kennady RSUs
As of January 28, 2018, the directors
and executive officers of Mountain Province owned an aggregate of 250,000 Kennady Options granted pursuant to the Kennady Long
Term Equity Incentive Plan, representing, in the aggregate, approximately 22.5% of all outstanding Kennady Options. All 250,000
of the above noted Kennady Options were held by Mr. Comerford. All outstanding “in-the-money” Kennady Options will
be cashed out in accordance with the terms and conditions of the Kennady Long Term Equity Incentive Plan and all such outstanding
Kennady Options will be treated in the same fashion.
As of January 28, 2018, the directors
and executive officers of Mountain Province owned an aggregate of 33,333 Kennady RSUs granted pursuant to the Kennady Long Term
Equity Incentive Plan, representing, in the aggregate, approximately 21.8% of all outstanding Kennady RSUs. All 33,333 of the above
noted Kennady RSUs were held by
Mr. Comerford. All outstanding RSUs
will be redeemed in accordance with the terms and conditions of the Kennady Long Term Equity Incentive Plan and all such outstanding
Kennady RSUs will be treated in the same fashion.
The Kennady Long Term Equity Incentive
Plan provides that in the event of a CoC of Kennady, all vesting and exercise criteria of the Kennady Options and Kennady RSUs
shall be deemed to have been satisfied and each participant shall be entitled to receive, in full settlement, a cash payment equal
to (a) in the case of a Kennady RSU, the Special Value (as defined below), and (b) in the case of a Kennady Option, the difference
between the Special Value and the option price in respect of such Kennady Option.
The term Special Value means (i)
if any Kennady Shares are sold as part of the transaction constituting the CoC, the weighted average of the prices paid for such
shares by the acquirer, provided that if any portion of the consideration is paid in property other than cash, then the Kennady
Board shall determine the fair market value of such property as of the date of the CoC for purposes of determining the Special
Value; and (ii) if no Kennady Shares are sold, the market price of a Kennady Share on the day immediately preceding the date of
the CoC. As the Kennady Shareholders are receiving the Arrangement Consideration and no cash consideration, the Kennady Board will
determine the fair market value of the Arrangement Consideration the day immediately preceding the Effective Date for purposes
of determining the Special Value.
INTERESTS OF DIRECTORS AND OFFICERS OF KENNADY IN
THE ARRANGEMENT
In considering the recommendation
of the Kennady Board, Kennady Shareholders should be aware that members of the Kennady Board and the executive officers of Kennady
have interests in the Arrangement or may receive benefits that may differ from, or be in addition to, the interests of Kennady
Shareholders generally. These interests and benefits are described below.
Except as otherwise disclosed in
this Circular, all benefits received, or to be received, by directors or executive officers of Kennady as a result of the Arrangement
are, and will be, solely in connection with their services as directors or employees of Kennady. No benefit has been, or will be,
conferred for the purpose of increasing the value of consideration payable to any such person for Kennady Shares, nor is it, or
will it be, conditional on the person supporting the Arrangement.
Kennady Shares
As of January 28, 2018, the directors
and executive officers of Kennady beneficially owned, or exercised control or direction, directly or indirectly, over, 74,555 Kennady
Shares representing in the aggregate approximately 0.1% of all issued and outstanding Kennady Shares at that time. All of the Kennady
Shares held by such directors and executive officers of Kennady will be treated in the same fashion under the Arrangement as Kennady
Shares held by all other Kennady Shareholders.
The chart below sets out for each director
and executive officer of Kennady the number of Kennady Shares, beneficially owned, directly or indirectly, by such director and
executive officer and the number of Mountain Province Shares to be received by each director and executive officer under the Arrangement.
| Name and Last Position Held |
Number of
Kennady
Shares |
%
of Kennady
Shares(3) |
Number of
Mountain
Province
Shares to be
issued |
%
of Mountain
Province
Shares(4) |
|
Rory O. Moore
President, Chief Executive Officer and Director |
25,500 |
0.1% |
24,862 |
<0.1% |
|
Jonathan Comerford(1)
Director |
23,455 |
<0.1% |
22,869 |
<0.1% |
|
Tom McCandless
Director |
200 |
<0.1% |
195 |
<0.1% |
|
Claudia Tornquist
Director |
10,000 |
<0.1% |
9,750 |
<0.1% |
|
Robert Brian Parsons(2)
Director |
15,400 |
<0.1% |
15,015 |
<0.1% |
|
Bruce Ramsden
Vice President, Finance, Chief Financial Officer and Corporate Secretary |
Nil |
0.0% |
Nil |
0.0% |
Notes:
| (1) | Mr.
Comerford currently holds 145,204 Mountain Province Shares. |
| (2) | Mr.
Parsons currently holds 11,000 Mountain Province Shares. |
| (3) | Based
on the number of issued and outstanding Kennady Shares as of the Kennady Record Date,
being 52,912,599. |
| (4) | Based
on the number of issued and outstanding Mountain Province Shares as of the Mountain Province
Record Date, being 160,253,501. |
Kennady Options and Kennady RSUs
As of January 28, 2018, the directors
and executive officers of Kennady owned an aggregate of 935,000 Kennady Options granted pursuant to the Kennady Long Term Equity
Incentive Plan, representing, in the aggregate, approximately 87% of all outstanding Kennady Options. All outstanding “in-the-money”
Kennady Options will be cashed out in accordance with the terms and conditions of the Kennady Long Term Equity Incentive Plan and
all such outstanding Kennady Options will be treated in the same fashion.
As of January 28, 2018, the directors
and executive officers of Kennady owned an aggregate of 141,666 Kennady RSUs granted pursuant to the Kennady Long Term Equity Incentive
Plan, representing, in the aggregate, approximately 93% of all outstanding Kennady RSUs. All outstanding Kennady RSUs will be redeemed
in accordance with the terms and conditions of the Kennady Long Term Equity Incentive Plan and all such outstanding Kennady RSUs
will be treated in the same fashion.
The Kennady Long Term Equity Incentive
Plan provides that in the event of a CoC of Kennady, all vesting and exercise criteria of the Kennady Options and Kennady RSUs
shall be deemed to have been satisfied and each participant shall be entitled to receive, in full settlement, a cash payment equal
to (a) in the case of a Kennady RSU, the Special Value (as defined below), and (b) in the case of a Kennady Option, the difference
between the Special Value and the option price in respect of such Kennady Option.
The term Special Value means (i)
if any Kennady Shares are sold as part of the transaction constituting the CoC, the weighted average of the prices paid for such
shares by the acquirer, provided that if any portion of the consideration is paid in property other than cash, then the Kennady
Board shall determine the fair market value of such property as of the date of the CoC for purposes of determining the Special
Value; and (ii) if no Kennady Shares are sold, the market price of a Kennady Share on the day immediately preceding the date of
the CoC. As the Kennady Shareholders are receiving the Arrangement Consideration and no cash consideration, the Kennady Board will
determine the fair market value of the Arrangement Consideration the day immediately preceding the Effective Date for purposes
of determining the Special Value.
Benefits of Directors and
Executive Officers of Kennady
All benefits received, or to be
received, by directors or executive officers of Kennady as a result of the Arrangement are, and will be, solely in connection with
their services as directors or employees of Kennady or as securityholders. No benefit has been, or will be, conferred for the purpose
of increasing the value of consideration payable to any such person for Kennady Shares, nor is it, or will it be, conditional on
the person supporting the Arrangement.
Kennady has employment agreements
(and a consulting agreement in the case of Mr. Bruce Ramsden) with certain of its executive officers as set out below. Such agreements
provide for payments upon termination or resignation of the employment of such officers following a “change of control”
of Kennady. The employment agreement with Dr. Rory O. Moore provides that as a result
of a change of control of Kennady, Dr. Moore is entitled to receive two years of base salary and benefits (benefits do not include
vacation pay or discretionary cash bonuses payable pursuant to Dr. Moore’s employment agreement). The consulting agreement with
a corporation controlled by Bruce Ramsden, for the provision of the services of Mr. Ramsden as VP Finance, Chief Financial Officer
and Corporate Secretary, provides that as a result of a change of control of Kennady, Mr. Ramsden is entitled to receive one year
of fees and benefits.
Completion of the Arrangement will
constitute a “change of control” of Kennady under the respective agreements. Pursuant to the terms of the respective
agreements, as of March 31, 2018 the estimated payments would be as follows:
| Officer |
Position |
Entitlement
(before statutory
withholding taxes) |
| Rory O. Moore |
President and Chief Executive Officer |
$619,200 |
| Bruce Ramsden |
Vice President, Finance, Chief Financial Officer and Corporate Secretary |
$104,850 |
| Total |
$724,050 |
Continuing Insurance Coverage for Directors and Executive
Officers of Kennady
Prior to the Effective Date, Kennady
will purchase customary “tail” or “run-off” policies of directors’ and officers’ liability insurance providing
protection no less favourable in the aggregate to the protection provided by the policies maintained by Kennady which are in effect
immediately prior to the Effective Date and providing protection in respect of claims arising from facts or events which occurred
on or prior to the Effective Date. Upon the completion of the Arrangement, Mountain Province will, or will cause Kennady to maintain
such tail policies in effect without any reduction in scope or coverage for six years from the Effective Date; provided, that Mountain
Province shall not be required to pay any amounts in respect of such coverage prior to the Effective Time and provided, further,
that the cost of such policy shall not exceed 200% of Kennady’s current annual aggregate premium for policies currently maintained
by Kennady.
In addition, from and after the Effective
Time, Mountain Province will, or will cause Kennady to, indemnify and hold harmless, all past and present directors, officers and
employees of Kennady to the greatest extent such persons are
indemnified by Kennady as of the date
of the Arrangement Agreement pursuant to the articles and by-laws of Kennady and any indemnity agreements between Kennady and such
individuals in existence as of the date of the Arrangement Agreement, for acts or omissions occurring on or prior to the Effective
Time.
THE KENNADY PRIVATE PLACEMENT
On January 28, 2018, concurrently with
the Arrangement Agreement, Kennady entered into an agreement with Mountain Province pursuant to which Mountain Province will provide
financing to Kennady of up to $10,000,000 via an equity private placement (the “Kennady Private Placement”)
of 4,000,000 Kennady Shares at $2.50 per Kennady Share in four equal tranches (the “Tranches”) designed to coincide
with Kennady’s budget for the current work program. The Tranches are as follows:
| · | 1,000,000 Kennady Shares on or about February 2, 2018
for a purchase price of $2,500,000; |
| · | 1,000,000 Kennady Shares on or about February 28, 2018 for a purchase price of $2,500,000; |
| · | 1,000,000 Kennady Shares on or about March 30, 2018 for a purchase price of $2,500,000; and |
| · | 1,000,000 Kennady Shares on or about April 15, 2018 for a purchase price of $2,500,000. |
The Kennady Private Placement was
announced on January 29, 2018, concurrently with the announcement of the entering into of the Arrangement Agreement.
Pursuant to MI 61-101, the Kennady
Private Placement constitutes a “related party transaction” for Kennady, as Mountain Province is a “related party”
(as defined in MI 61-101) of Kennady by virtue of the Significant Shareholder being a “control person” (as defined
in Section 1(1) of the Securities Act) of Kennady and Mountain Province. Kennady is exempt from the “formal valuation”
and “minority approval” requirements of MI 61-101 because the fair market value of the Kennady Private Placement is
not more than 25% of the market capitalization of Kennady.
Pursuant to MI 61-101, the Kennady
Private Placement constitutes a “related party transaction” for Mountain Province, as Kennady is a “related party”
(as defined in MI 61-101) of Mountain Province by virtue of the Significant Shareholder being a “control person” (as
defined in Section 1(1) of the Securities Act) of Mountain Province and Kennady. Mountain Province is exempt from the “formal
valuation” and “minority approval” requirements of MI 61- 101 because the fair market value of the Kennady Private
Placement is not more than 25% of the market capitalization of Mountain Province.
The completion of the Kennady Private
Placement is not conditional upon the completion of the Arrangement.
All securities issued pursuant to
the Kennady Private Placement are, pursuant to applicable securities laws in Canada, subject to a hold period that will expire
four months and one day from the closing date of the respective Tranche in which the security was issued. The Kennady Private Placement
is subject to receipt of regulatory approvals, including the final approval of the TSXV, as well as the satisfaction of customary
closing conditions. Kennady intends to use the proceeds from the Kennady Private Placement to fund its current work program.
This Circular does not constitute
an offer to sell or the solicitation of an offer to purchase Kennady Shares pursuant to the Kennady Private Placement in any jurisdictions,
including the United States.
RISK FACTORS
The following risk factors, which
relate to the Arrangement and the Combined Company, should be considered by Kennady Shareholders in evaluating whether to approve
the Arrangement Resolution and by the Mountain Province Shareholders in evaluating whether to approve the Share Issuance Resolution.
These risk factors should be considered in conjunction with the risks described in Schedule “J” – “Information
Concerning Mountain Province”, Schedule “K” – “Information Concerning Kennady”,
and Schedule “N” – “Information Concerning the Combined Company” to this
Circular, as well as the risks described
in the Mountain Province AIF and in Kennady’s filings with the Securities Authorities, which are available on SEDAR under Mountain
Province’s and Kennady’s issuer profiles, respectively, at www.sedar.com, together with all other information contained
in, or incorporated by reference into, this Circular.
Risk Factors Relating to the Arrangement
Because the market price of the
Mountain Province Shares and the Kennady Shares will fluctuate and the Exchange Ratio for the Arrangement Consideration is fixed,
Kennady Shareholders cannot be certain of the market value of the Mountain Province Shares they will receive for their Kennady
Shares under the Arrangement.
The Exchange Ratio for the Arrangement
Consideration is fixed and will not increase or decrease due to fluctuations in the market price of Mountain Province Shares or
Kennady Shares. The market price of Mountain Province Shares or Kennady Shares could each fluctuate significantly prior to the
Effective Date in response to various factors and events, including, without limitation, the differences between Mountain Province’s
and Kennady’s actual financial or operating results and those expected by investors and analysts, changes in analysts’ projections
or recommendations, changes in general economic or market conditions, and broad market fluctuations. As a result of such fluctuations,
historical market prices are not indicative of future market prices or the market value of the Mountain Province Shares that Kennady
Shareholders may receive on the Effective Date. There can be no assurance that the market value of any Mountain Province Shares,
and thus the Arrangement Consideration, that the holders of Kennady Shares may receive on the Effective Date will equal or exceed
the market value of the Kennady Shares held by such Kennady Shareholders prior to the Effective Date. There can also be no assurance
that the trading price of the Mountain Province Shares will not decline following the completion of the Arrangement.
There can be no certainty that
all conditions precedent to the Arrangement will be satisfied or waived. Failure to complete the Arrangement could negatively impact
the market price of Mountain Province Shares and Kennady Shares.
The Arrangement is subject to certain
conditions that may be outside the control of the Parties, including, without limitation, the approval of the Share Issuance Resolution,
the approval of the Arrangement Resolution and the receipt of the Final Order. There can be no certainty, nor can either party
provide any assurance, that these conditions will be satisfied or waived, or, if satisfied or waived, when they will be satisfied
or waived. If the Arrangement is not completed, the market price of Mountain Province Shares and Kennady Shares may decline to
the extent that the market price reflects a market assumption that the Arrangement will be completed. If the Arrangement is not
completed and the Mountain Province Board or the Kennady Board, as the case may be, decides to seek another merger or business
combination, there can be no assurance that Kennady will be able to find a party willing to pay an equivalent or more attractive
price than the Arrangement Consideration payable pursuant to the Arrangement, or that Mountain Province will be able to undertake
a business combination on equivalent or more attractive terms than those under the Arrangement Agreement.
There can be no assurance that
the TSX, the TSXV and the Nasdaq will accept the Arrangement.
Completion of the Arrangement is
subject to the acceptance of the TSX. If such acceptance of the TSX is not obtained, there can be no guarantee of the successful
completion of the Arrangement since the acceptance of the TSX, subject to standard listing conditions, is a condition of closing
the Arrangement. Completion of the Arrangement is also subject to the acceptance of the TSXV. If such acceptance of the TSXV is
not obtained, there can be no guarantee of the successful completion of the Arrangement since the acceptance of the TSXV, subject
to standard listing conditions, is a condition of closing the Arrangement. Completion of the Arrangement is further subject to
the acceptance of the Nasdaq. If such acceptance of the Nasdaq is not obtained, there can be no guarantee of the successful completion
of the Arrangement since the acceptance of the Nasdaq, subject to standard listing conditions, is a condition of closing the Arrangement.
The Arrangement Agreement
may be terminated by Mountain Province or Kennady in certain circumstances.
Each of Mountain Province and Kennady
has the right to terminate the Arrangement Agreement and not complete the Arrangement in certain circumstances. There is no certainty,
nor can either Party provide any assurance, that the
Arrangement Agreement will not be terminated
by either Mountain Province or Kennady, as the case may be, before the completion of the Arrangement. See “The Arrangement
Agreement — Termination”.
In addition, completion of the Arrangement
is subject to a number of conditions precedent, certain of which are outside the control of Kennady and/or Mountain Province. There
is no certainty, nor can either Party provide any assurance, that these conditions will be satisfied or waived.
The Termination Fee provided
under the Arrangement Agreement may discourage other parties from proposing a significant business transaction with Mountain Province
or Kennady.
Under the Arrangement Agreement, Mountain
Province is required to pay a Termination Fee of $6,000,000 to Kennady in the event the Arrangement Agreement is terminated in
certain circumstances. Similarly, under the Arrangement Agreement, Kennady is required to pay a Termination Fee of $6,000,000 to
Mountain Province in the event the Arrangement Agreement is terminated in certain circumstances. These termination payments may
discourage other parties from attempting to propose a significant business transaction to Mountain Province or Kennady, as the
case may be, even if a different transaction could provide better value than the Arrangement to the Mountain Province Shareholders
or the Kennady Shareholders, as the case may be.
Potential payments to Kennady
Shareholders who exercise Dissent Rights could have an adverse effect on the Combined Company’s financial condition
or prevent the completion of the Arrangement.
Kennady Shareholders have the right
to exercise Dissent Rights and demand payment equal to the fair value of their Kennady Shares in cash. If Dissent Rights are exercised
in respect of a significant number of Kennady Shares, a substantial cash payment may be required to be made to such Kennady Shareholders,
which could have an adverse effect on the Combined Company’s financial condition and cash resources. Further, Mountain Province’s
obligation to complete the Arrangement is conditional upon Kennady Shareholders holding no more than 5% of the outstanding Kennady
Shares having exercised Dissent Rights. Accordingly, the Arrangement may not be completed if Kennady Shareholders exercise Dissent
Rights in respect of more than 5% of the outstanding Kennady Shares.
The unaudited pro forma condensed
consolidated financial statements of Mountain Province are presented for illustrative purposes only and may not be an indication
of the Combined Company’s financial condition or results of operations following the Arrangement.
The unaudited pro forma condensed
consolidated financial statements contained in this Circular are presented for illustrative purposes only as of their respective
dates and may not be an indication of the financial condition or results of operations of the Combined Company following the Arrangement
for several reasons. For example, the unaudited pro forma condensed consolidated financial statements have been derived
from the respective historical financial statements of Mountain Province and Kennady, and certain adjustments and assumptions made
as of the dates indicated therein and have been made to give effect to the Arrangement and the other respective relevant transactions.
The information upon which these adjustments and assumptions have been made is preliminary, and these kinds of adjustments and
assumptions are difficult to make with complete accuracy. See “Cautionary Statement Regarding Forward-Looking Statements”.
Other than publicly-available
information, Kennady has relied on information made available by Mountain Province.
Other than publicly-available information,
all historical information relating to Mountain Province presented in this Circular has been provided in exclusive reliance on
the information made available by Mountain Province and their respective representatives. Although Kennady has no reason to doubt
the accuracy or completeness of the information provided herein by Mountain Province, any inaccuracy or omission in such information
contained in this Circular could result in unanticipated liabilities or expenses, increase the cost of integrating the Combined
Company or adversely affect the operational plans of the Combined Company and its result of operations and financial condition.
Other than publicly-available
information, Mountain Province has relied on information made available by Kennady.
Other than publicly-available information,
all historical information relating to Kennady presented in this Circular has been provided in exclusive reliance on the information
made available by Kennady and their respective representatives. Although Mountain Province has no reason to doubt the accuracy
or completeness of the information provided herein by Kennady, any inaccuracy or omission in such information contained in this
Circular could result in unanticipated liabilities or expenses, increase the cost of integrating the Combined Company or adversely
affect the operational plans of the Combined Company and its result of operations and financial condition.
Risk Factors Related to the Combined
Company
Mountain Province may be unable
to successfully integrate the businesses of Mountain Province and Kennady and realize the anticipated benefits of the Arrangement.
Mountain Province and Kennady are
proposing to complete the Arrangement to strengthen the position of each entity in the diamond mining, exploration and marketing
industry and, among other things, combine the assets of both companies to realize certain benefits, including those set forth
in this Circular under the headings “The Arrangement – Reasons for the Mountain Province and Mountain Province
Special Committee Recommendations” and “The Arrangement – Reasons for the Kennady Board and Kennady Special
Committee Recommendations”. Achieving the benefits of the Arrangement depends in part on the ability of the Combined
Company to (i) effectively fund and develop the Combined Company’s key projects at the GK Diamond Mine and the Kennady North
Project even as market conditions remain challenging for diamond exploration and development companies, (ii) capitalize on its
scale, (iii) realize the anticipated capital and operating synergies, (iv) profitably sequence the growth prospects of its asset
base, (v) maximize the potential of its improved growth opportunities, and (vi) maximize capital funding opportunities. A variety
of factors, including those risk factors set forth in this Circular and in the documents incorporated by reference herein, may
adversely affect the ability of Mountain Province and Kennady to achieve the anticipated benefits of the Arrangement.
There are risks related to the
integration of the existing businesses of Mountain Province and Kennady.
The ability to realize the benefits
of the Arrangement including, among other things, those set forth in this Circular under the headings “The Arrangement
– Reasons for the Mountain Province and Mountain Province Special Committee Recommendations” and “The
Arrangement – Reasons for the Kennady Board and Kennady Special Committee Recommendations”, will depend in part
on successfully consolidating functions and integrating operations, procedures and personnel in a timely and efficient manner.
This integration will require the dedication of substantial management effort, time and resources which may divert management’s
focus and resources from other strategic opportunities of the Combined Company following completion of the Arrangement, and from
operational matters during this process.
The mineral resource and mineral
reserve estimates on the properties of the Combined Company may not be realizable.
The figures provided in connection
with mineral reserves and resources in respect of the properties in which Mountain Province and Kennady hold interests are estimates,
and have not been verified to be accurate, and no assurance can be given that full recovery of the anticipated carats will be achieved
or that any indicated level of recovery will be realized from the properties of the Combined Company. The estimation of mineral
reserves and resources is a subjective process. Forecasts are based on geological and engineering data, projected future rates
of production, the timing of future expenditures and assumed diamond prices, all of which are subject to numerous uncertainties
and various interpretations.
Estimates made at a given time may
change significantly in the future when new information becomes available. Estimates of reserves and resources are expected to
change to reflect updated information as well as to reflect depletion due to production. Mineral reserve and resource estimates
may be revised upward or downward based on the results of current and future drilling, testing or production levels, and on changes
in mine design. In addition, market
fluctuations in the price of diamonds
or increases in the costs to recover diamonds from the GK Diamond Mine may render previously disclosed estimates of mineral reserves
and resources uneconomical.
The Combined Company will face
competition for mineral interest acquisitions and the mining industry is competitive in all stages.
The diamond industry is intensely competitive
in all of its phases, and the Combined Company will compete with many companies possessing greater financial resources and experience
in diamond marketing and sales. Competition could adversely affect the ability of the Combined Company to market and sell its diamonds
at competitive prices or at all.
The Combined Company’s mining
operations will involve a number of risks inherent in the mining industry, many of which will be outside of its control.
The Combined Company’s mining operations
will be 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, pit wall failures or
similar geotechnical events, processing problems, equipment performance, accidents, labour disputes, risks relating to the physical
security of the diamonds, force majeure risks and natural disasters. Such risks could result in personal injury or fatality; damage
to or destruction of mining properties, processing facilities or equipment; environmental damage or harm to plants or animals,
including endangered or protected species; increased costs; delays, suspensions or permanent reductions in mining production; monetary
losses; and possible legal liability. For example, during the GK Diamond Mine’s first winter of operations, extreme cold conditions
affected the mine’s conveyor systems which resulted in downtime and lowered throughput.
The Combined Company’s mineral properties,
because of their remote northern location and access only by winter road or by air, will continue to be 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 a failure to open or 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 our profitability.
The diamond industry may be adversely
affected by the discovery of an alternative method of producing synthetic gem-quality diamonds and increased consumer demand for
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. 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.
The Combined Company will be
subject to various risks related to fuel requirements.
The expected fuel needs for the GK
Diamond Mine are purchased in February and March each year and transported to the mine site by way of the winter road. These costs
will increase if transportation by air freight is required due to a shortened “winter road season” or unexpected high
fuel usage. The cost of the fuel purchased is based on the then prevailing price and expensed into operating costs on a usage basis.
The GK Diamond Mine currently has no hedges for future anticipated fuel consumption.
The Combined Company’s joint
venture interest in the GK Diamond Mine will be subject to certain risks associated with the conduct of joint ventures.
Mountain Province’s participation in
the mining sector of the diamond industry is through its ownership interest in the Gahcho Kué Joint Venture that owns the
GK Diamond Mine group of mineral claims. The GK Diamond Mine is a joint venture between De Beers (51%) and Mountain Province (49%).
The Combined Company’s joint venture
interest in the GK Diamond Mine will be subject to the risks normally associated with the conduct of joint ventures, including:
(i) disagreement with De Beers about how to develop, operate or finance operations; (ii) that De Beers may not comply with the
underlying agreements governing the joint venture and may fail to meet its obligations thereunder to the Combined Company or to
third parties; (iii) that De Beers may at any time have economic or business interests or goals that are, or become, inconsistent
with the Combined Company’s interests or goals; (iv) the possibility that De Beers may become insolvent; and (v) the possibility
of litigation with De Beers.
The Combined Company will
hold a minority interest in, and not be the operator of, the GK Diamond Mine and it will not exercise control of the GK Diamond
Mine. Removing De Beers as operator of the GK Diamond Mine could be a disruptive, costly and lengthy process.
The Combined Company will be subject
to additional risks because it will hold a minority interest in the GK Diamond Mine and De Beers is the operator of the GK Diamond
Mine and the majority interest holder of the Gahcho Kué Joint Venture. Although major operating and budget decisions and
certain significant changes affecting the GK Diamond Mine will require the Combined Company’s approval under the Joint Venture
Agreement, De Beers, as the operator of and the holder of a majority interest in the GK Diamond Mine, will continue to manage the
operations at the GK Diamond Mine and controls most day-to-day decisions affecting the GK Diamond Mine and its operating activities.
The Combined Company will not control De Beers and at any time De Beers may have economic or business interests or goals that are,
or become inconsistent with, the Combined Company’s economic or business interests or goals. As a holder of a minority interest
in the GK Diamond Mine, the Combined Company will be unable to exert control over day-to-day decisions relating to the GK Diamond
Mine, except in certain limited cases as provided by the Joint Venture Agreement. Additionally, because De Beers operates the GK
Diamond Mine, the Combined Company will be highly dependent on the operational expertise of De Beers, as well as impacted by De
Beers’ own corporate priorities and its financial condition. The Combined Company will also be reliant on De Beers complying with
its information delivery obligations under the Joint Venture Agreement in order to gain knowledge about any events at, or updates
with respect to, the GK Diamond Mine. As a result, the Combined Company’s results will be subject to additional risks associated
with the operational expertise, financial condition and corporate priorities of De Beers, and if De Beers is unable to successfully
operate the GK Diamond Mine, the Combined Company’s business and results of operations will be materially adversely affected.
De Beers may resign as operator
at any time by giving notice to the management committee, but removing De Beers as operator without De Beers’ consent could be
a lengthy and resource-intensive process. Under the Joint Venture Agreement, unanimous agreement of both parties to the Joint Venture
Agreement is required for removal of the operator, even removal of the operator for cause. Although the operator is required to
resign if it is in material breach of its obligations to the Gahcho Kué Joint Venture, in order to trigger this obligation
the participants to the Joint Venture Agreement must agree that the operator is in material breach and provide notice of the same
to the operator. Any dispute between the parties regarding whether the operator is in material breach of its obligations must be
resolved through the standard dispute resolution mechanisms under the Joint Venture Agreement, which requires negotiation, binding
mediation and determination by an independent expert before any party may seek a court order with respect to the dispute. This
process could significantly disrupt the operations of the GK Diamond Mine, negatively impact the relationship of the Gahcho Kué
Joint Venture partners and be very costly to the Combined Company.
If the Combined Company is
in default under the Joint Venture Agreement, it will be prohibited from participating in the management committee and will not
receive its share of diamonds during the continuance of such default and De Beers may reduce or sell the Combined Company’s participating
interest in the Gahcho Kué Joint Venture or sell a portion or all of its share of diamonds.
If the Combined Company defaults
under the Joint Venture Agreement and fails to remedy such default within the prescribed cure period, it may not attend management
committee meetings or direct the management committee, may not transfer its participating interest in the Gahcho Kué Joint
Venture and have no rights to delivery of its share of diamonds until such default is cured.
In addition, if such default is a default
in payment of the Combined Company’s share of Gahcho Kué Joint Venture expenses, De Beers has the option to pay such defaulted
expenses to the operator and either (a) reduce the Combined Company’s participating interest in the Gahcho Kué Joint Venture
accordingly, which would permanently reduce the Combined Company’s share of diamond production in the same proportion, or (b) sell
a portion or all of the Combined Company’s diamonds in such a manner as De Beers shall determine or, with prior notice, sell all
or a portion of the Combined Company’s participating interest in the Gahcho Kué Joint Venture, and apply the proceeds of
such sale to the defaulted expenses until such expenses, and interest on such expenses, are paid in full. Upon application of either
of these remedies, the payment default would be cured and the Combined Company would resume its full participation and diamond
delivery rights under the Joint Venture Agreement. If the Combined Company’s participating interest in the Gahcho Kué Joint
Venture is reduced or sold in part, its share of diamond production would be permanently reduced to match its then existing participating
interest, and this could impact its ability to pay interest or principal on the Notes when due or to make other required payments
when due under other agreements or obligations, which could result in a subsequent default under the Mountain Province Indenture,
the Revolving Credit Agreement or other agreements or obligations. In addition, reduction of the Combined Company’s participating
interest below 40% will constitute an event of default under the Revolving Credit Agreement, which may result in a cross-default
under the Mountain Province Indenture that governs the Notes.
The Combined Company will be
dependent on the GK Diamond Mine for future operating revenue.
Mountain Province’s only economic
interest is its indirect 100% equity ownership interest in 2435386, which is a 49% participant in the Gahcho Kué Joint Venture,
which owns and operates the GK Diamond Mine. As a result, Mountain Province is solely dependent upon its interest in the GK Diamond
Mine for its revenue and profits. In addition, production and operating costs are difficult to predict and may render further production
at the GK Diamond Mine financially unfeasible. If commercial production and operation of the GK Diamond Mine becomes financially
unfeasible, for engineering, technical, economic, political, legal or other reasons, the Combined Company’s business and financial
position will be materially and adversely affected. In addition, the book value of Mountain Province’s interest in the GK Diamond
Mine is subject to certain accounting assumptions. If such assumptions prove to be incorrect, then the book value of Mountain Province’s
interest in the GK Diamond Mine could be impaired, which could have a material adverse effect on Mountain Province or the Combined
Company.
There can be no assurance
that the Combined Company will be able to extend the mine life beyond 2028.
Mountain Province is currently exploring
options to potentially extend the mine life beyond 2028 through resource conversion and deep mining of the Tuzo kimberlite. Additional
exploration and resource delineation is required to assess the viability of these prospects at Tuzo. A transition to underground
mining generally increases per unit costs and can limit the annual volumes that can be economically extracted from such orebodies.
There is no assurance that the Combined Company will be able to extend the mine life beyond 2028 through resource conversion or
deep mining.
The volatility of diamond
prices is significant and unpredictable and the demand for diamonds is unpredictable. Many factors that affect diamond prices and
demand for diamonds will be outside the Combined Company’s control.
The Combined Company’s profitability
will be dependent upon its mineral properties and the worldwide demand for and price of diamonds. Diamond prices fluctuate and
are affected by numerous factors beyond the Combined Company’s control, 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 Combined Company’s results of
operations. In addition, prices for the higher value and lower value market segments can move independently of one another, depending
on relative demand. For example, strengthening prices in one market segment can offset weakening prices in another, or synchronize
with strengthening prices in another, which increases the unpredictability of diamond prices.
Currency fluctuations may affect
the Combined Company’s financial performance.
Currency fluctuations may affect the
Combined Company’s financial performance. Diamonds are sold throughout the world based principally on the U.S. dollar price, and
the Combined Company is expected to report its financial results in Canadian dollars. A majority of the costs and expenses of the
GK Diamond Mine are incurred in Canadian dollars. As a consequence, fluctuations in exchange rates may have a significant effect
on the Combined Company’s cash flows and operating results. From time to time, the Combined Company may use derivative financial
instruments to manage its foreign currency exposure.
The Combined Company will be
dependent upon the operator obtaining and maintaining the necessary licenses and permits.
Mountain Province’s mining operations
require licences and permits from the Canadian and Northwest Territories governments, which are all held by De Beers as operator.
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 its 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 that may be required to maintain
continued operations.
Mining operations are subject
to extensive regulations, including environmental regulations, which could have a material adverse effect on the costs and levels
of production at the GK Diamond Mine.
The operations of the GK Diamond Mine
are subject to various laws, regulations and agreements governing the protection of the environment, exploration, development,
production, taxes, labour standards, occupational health, waste disposal, mine safety and other matters. New laws and regulations,
amendments to existing laws and regulations, or more stringent implementation or changes in enforcement policies under existing
laws and regulations could have a material adverse effect on the Combined Company by increasing costs and/or causing a reduction
in levels of production from the GK Diamond Mine.
Mining is subject to potential risks
and liabilities associated with pollution of the environment and the disposal of waste products occurring as a result of mining
operations. To the extent that the GK Diamond Mine is subject to uninsured environmental liabilities, the payment of such liabilities
could have a material adverse effect on the GK Diamond Mine.
Compliance with climate change
initiatives could have a material adverse effect on the Combined Company’s results of operations.
The Canadian government has established
a number of policy measures in response to concerns relating to climate change. While the impact of these measures cannot be quantified
at this time, the likely effect will be to increase costs for fossil fuels, electricity and transportation; restrict industrial
emission levels; impose added costs for emissions in excess of permitted levels; and increase costs for monitoring and reporting.
Compliance with these initiatives could have a material adverse effect on the Combined Company’s results of operations.
In October 2016, Canada’s federal government
announced that it intends to establish a national price on carbon, to be implemented by 2018 through either a carbon tax or a cap
and trade system, applicable in each province except those that enact their own comparable carbon pricing mechanism by such time.
In June 2017, the Government of the Northwest Territories announced that it intends to implement a carbon tax, designed to be comparable
to the federal approach, effective January 2019. The details of the announced carbon pricing system and the resulting impact on
the GK Diamond Mine are uncertain at this time.
Insurance does not cover all
potential risks.
The business of the Gahcho Kué
Joint Venture is subject to a number of risks and hazards, including adverse environmental conditions, industrial accidents, labour
disputes, unusual or unexpected geological conditions, risks relating to the physical security of diamonds held as inventory or
in transit, changes in the regulatory environment, and natural phenomena such as inclement weather conditions. Such occurrences
could result in damage to the GK Diamond Mine, harm to plants and animals, personal injury or death, environmental damage to the
GK Diamond Mine, delays in mining, monetary losses, fines, penalties and possible legal liability.
Although insurance is maintained to
protect against certain risks in connection with the GK Diamond Mine and our diamonds held as inventory or in transit, the insurance
in place will not cover all potential risks. It may not be possible to maintain insurance to cover insurable risks at economically
feasible premiums. In addition, all insurance policies for the GK Diamond Mine are held and maintained by De Beers as operator.
Therefore, the Combined Company will have no control over the acquisition, maintenance or levels of insurance with respect to the
GK Diamond Mine.
The production and marketing
of diamonds depend on skilled employees and key relationships with certain third parties.
Production at the GK Diamond Mine is
dependent upon the efforts of certain skilled employees. The loss of these employees or the inability to attract and retain additional
skilled employees may adversely affect the level of diamond production. De Beers hires and employs all employees at the GK Diamond
Mine and therefore the Combined Company will have no control over the hiring, retention or qualifications of these employees.
The Combined Company’s success in sorting,
valuing and marketing its 49% share of the rough diamonds will be dependent on the services of key executives and skilled employees
and consultants, as well as the continuance of key relationships with certain third parties, such as diamantaires, gem quality
diamond manufacturers and master cutters. The loss of these persons or the Combined Company’s inability to attract and retain additional
skilled employees and consultants or to establish and maintain relationships with required third parties may adversely affect the
Combined Company’s business and future operations in marketing diamonds.
Restrictive covenants in the
Mountain Province Indenture and the Revolving Credit Agreement may restrict the Combined Company’s ability to operate its business.
The Combined Company’s failure to comply with these covenants, including as a result of events beyond its control, could result
in an event of default that could materially and adversely affect its business, results of operations and financial condition.
The Mountain Province Indenture and
the Revolving Credit Agreement contain negative covenants restricting, among other things, Mountain Province’s ability to:
| · | incur or guarantee additional indebtedness and issue
certain preferred stock; |
| · | make certain payments, including dividends or other distributions, with respect to the shares of a particular entity; |
| · | create or incur certain liens; |
| · | prepay or redeem subordinated or unsecured debt or equity; |
| · | make certain investments; |
| · | sell, lease or transfer certain assets, including stock of restricted subsidiaries; |
| · | create encumbrances or restrictions on the payment of dividends or other distributions, loans or advances to, and on the transfer
of, assets to a particular entity; |
| · | engage in certain transactions with affiliates; |
| · | consolidate, merge or transfer all or substantially all of Mountain Province’s assets and the assets of its Subsidiaries on
a consolidated basis; |
| · | change the business Mountain Province conducts; and |
| · | consent to or conduct certain activities of the Gahcho Kué Joint Venture. |
All of these limitations are subject
to significant exceptions and qualifications. The covenants to which the Combined Company will be subject could limit its ability
to finance its future operations and capital needs and its ability to pursue business opportunities and activities that may be
in its interest.
In addition, the Revolving Credit
Agreement will require the Combined Company to comply with certain affirmative covenants and financial maintenance covenants, including
total leverage ratio, interest coverage ratio and total net worth ratio. The restrictions contained in the Mountain Province Indenture
and the Revolving Credit Agreement could affect the Combined Company’s ability to operate its business and may limit its ability
to react to market conditions or take advantage of potential business opportunities as they arise. For example, such restrictions
could adversely affect the Combined Company’s ability to further finance its operations, make strategic acquisitions, investments
or alliances, restructure its organization or finance its capital needs. Additionally, the Combined Company’s ability to comply
with these covenants and restrictions may be affected by events beyond its control. These include prevailing economic, financial
and industry conditions. If the Combined Company breaches any of these covenants or restrictions, it could be in default under
the Mountain Province Indenture or the Revolving Credit Agreement.
Upon the occurrence of any event
of default under the Revolving Credit Agreement, subject to applicable cure periods and other limitations on acceleration or enforcement,
the relevant creditors could elect to declare all amounts outstanding, together with accrued interest, immediately due and payable
and cancel the availability of the facility. In addition, any default under the Revolving Credit Agreement could lead to an event
of default and acceleration under other debt instruments that contain cross default or cross acceleration provisions, including
the Mountain Province Indenture. If the Combined Company’s creditors, including the creditors under the Revolving Credit Agreement,
accelerate the payment of those amounts, the assets of the Combined Company and its Subsidiaries may not be sufficient to repay
in full those amounts, to satisfy all other liabilities of the Subsidiaries which would be due and payable and to make payments
to enable the Combined Company to repay the Notes. In addition, if the Combined Company is unable to repay those amounts, its creditors
could proceed against the collateral that secures the debt under the Revolving Credit Agreement, certain hedging liabilities and
the Notes.
See Schedule “J” –
“Information Concerning Mountain Province” under the heading “Recent Developments”.
The issuance of a significant
number of Mountain Province Shares could adversely affect the market price of Mountain Province Shares.
If the Arrangement is completed, a
significant number of additional Mountain Province Shares will be issued and will become available for trading in the public market.
The increase in the number of Mountain Province Shares may lead to sales of such shares or the perception that such sales may occur,
either of which may adversely affect the market for, and the market price of, Mountain Province Shares.
Following completion of the Arrangement,
Former Kennady Shareholders will have the ability to significantly influence certain corporate actions of Mountain Province
Immediately following the completion
of the Arrangement, Former Kennady Shareholders are expected to own approximately 23.7% of the Mountain Province Shares on an undiluted
basis, based on the number of Mountain Province Shares and Kennady Shares outstanding as of the date of this Circular and assuming
that (i) there are no Dissenting Shareholders, (ii) no Kennady Shares held by Mountain Province between the Kennady Record Date
and the Effective Date are converted pursuant to the Arrangement, and (iii) no Kennady Options are exercised prior to the Effective
Time. Former Kennady Shareholders (other than Mountain Province and any Dissenting Shareholders) will be in a position to exercise
significant influence over all matters requiring shareholder approval, including the election of directors, determination of significant
corporate actions, amendments to Mountain Province’s articles of
incorporation and the approval of any
business combinations, mergers or takeover attempts, in a manner that could conflict with the interests of other shareholders.
Although there are no agreements or understandings between the Kennady Shareholders of which Mountain Province or Kennady is aware
as to voting, if they voted in concert they would exert significant influence over the Combined Company.
Mountain Province has, and the
resulting Combined Company will have, a limited history of operations.
The GK Diamond Mine has had limited
operations to date and Mountain Province has generated only a small amount of revenue from the sale of its diamonds. Commercial
production at the GK Diamond Mine was declared on March 1, 2017 and the three-months ended September 30, 2017 was the first quarter
in which all sales completed were in respect of diamonds produced subsequent to the date of the declaration of commercial production
at the GK Diamond Mine. As a result, Mountain Province has a limited operating history upon which to evaluate the merits of investing
in its securities.
As a result of this limited operating
history, period-to-period comparisons of the GK Diamond Mine’s operating results and Mountain Province’s sales data may not be
meaningful and the results for any particular period should not be relied upon as an indication of future performance.
Risk Factors Related to the Operations
of Mountain Province
Whether or not the Arrangement is
completed, Mountain Province will continue to face many of the risks that it currently faces with respect to its business and
affairs. Certain of these risk factors have been disclosed in the annual audited consolidated financial statements of Mountain
Province and the notes thereto for each of the years ended December 31, 2016 and 2015 (and accompanying management’s discussion
and analysis for the same period), in the unaudited condensed interim consolidated financial statements of Mountain Province for
the three and nine months ended September 30, 2017 (and accompanying management’s discussion and analysis for the same period)
and in the Mountain Province AIF (starting on page 14), each of which are incorporated by reference into this Circular and have
been filed on SEDAR under Mountain Province’s issuer profile at www.sedar.com. Upon request, a Mountain Province Shareholder
will be provided with a copy of such documents free of charge.
See also Schedule “J” –
“Information Concerning Mountain Province” to this Circular.
Risk Factors Related to the Operations
of Kennady
Whether or not the Arrangement is completed,
Kennady will continue to face many of the risks that it currently faces with respect to its business and affairs. Certain of these
risk factors related to the operations of Kennady have been disclosed in Schedule “K” – “Information
Concerning Kennady” to this Circular.
RESCISSION RIGHTS
Securities legislation in the provinces
and territories of Canada provides security holders of Kennady with, in addition to any other rights they may have at law, one
or more rights of rescission, price revision or to damages, if there is a misrepresentation in a circular or notice that is required
to be delivered to those security holders. However, such rights must be exercised within prescribed time limits. Security holders
should refer to the applicable provisions of the securities legislation of their province or territory for particulars of those
rights or consult a lawyer.
INFORMATION CONCERNING MOUNTAIN
PROVINCE
Information concerning Mountain Province
is set out in Schedule “J” – “Information Concerning Mountain Province” to this Circular.
INFORMATION CONCERNING KENNADY
Information concerning Kennady is
set out in Schedule “K” – “Information Concerning Kennady” to this Circular.
INFORMATION CONCERNING THE COMBINED
COMPANY
Information concerning the Combined
Company (assuming the completion of the Arrangement) is set out in Schedule “N” – “Information Concerning
the Combined Company” to this Circular.
INTEREST OF INFORMED PERSONS IN
MATERIAL TRANSACTIONS
To the knowledge of Mountain Province,
after reasonable enquiry, other than as disclosed herein, no informed person of Mountain Province, or any associate or affiliate
of any informed person, has or had any material interest, direct or indirect, in any transaction or any proposed transaction which
has materially affected or would materially affect Mountain Province since the commencement of Mountain Province’s most recently
completed fiscal year.
On December 11, 2017, Mountain Province
closed a private offering of U.S.$330,000,000 senior secured second lien notes due December 15, 2022. Mr. Dermot Fachtna Desmond,
an informed person of Mountain Province, participated in the offering by purchasing U.S.$60,000,000 of Notes. Mr. Desmond, together
with Bottin (International) Investments Ltd., a corporation controlled by him, holds approximately 37,951,887 or 23.7% of the outstanding
Mountain Province Shares and is therefore considered an informed person of Mountain Province. The terms of the Notes were determined
through arm’s length negotiations between Mountain Province and the initial purchasers. Mr. Desmond did not participate in such
negotiations or determination. Mr. Desmond purchased Notes on the same terms as all other purchasers. The proposed participation
of Mr. Desmond in the offering was approved by the independent members of the Mountain Province Board.
See Schedule “J” –
“Information Concerning Mountain Province” under the heading “Recent Developments – Note Offering”.
To the knowledge of Kennady, after
reasonable enquiry, other than as disclosed herein, no informed person of Kennady, or any associate or affiliate of any informed
person, has or had any material interest, direct or indirect, in any transaction or any proposed transaction which has materially
affected or would materially affect Kennady since the commencement of Kennady’s most recently completed fiscal year.
MANAGEMENT CONTRACTS
No management functions of Mountain
Province or any Subsidiaries are performed to any substantial degree by a person other than the directors or officers of Mountain
Province. No management functions of Kennady or any Subsidiary are performed to any substantial degree by a person other than the
directors or officers of Kennady.
AUDITORS
Mountain Province’s auditors are KPMG
LLP, Bay Adelaide Centre, 333 Bay Street, Suite 4600, Toronto, Ontario, Canada, M5H 2S5. KPMG LLP has been the auditor of Mountain
Province since August 6, 1998.
Kennady’s auditors are KPMG LLP, Bay
Adelaide Centre, 333 Bay Street, Suite 4600, Toronto, Ontario, Canada, M5H 2S5. KPMG LLP has been the auditor of Kennady since
November 26, 2012.
LEGAL MATTERS
Certain Canadian legal matters in connection
with the Arrangement as they pertain to Mountain Province will be passed upon by Bennett Jones LLP. Certain Canadian legal matters
in connection with the Arrangement as they pertain to Kennady will be passed upon by Fasken Martineau DuMoulin LLP. Certain U.S.
legal matters in connection with the Arrangement as they pertain to Mountain Province will be passed upon by Paul, Weiss, Rifkind,
Wharton & Garrison LLP. Certain U.S. legal matters in connection with the Arrangement as they pertain to Kennady will be passed
upon by Perkins Coie LLP.
As of the date of this Circular, the
partners and associates of Bennett Jones LLP, as a group, beneficially owned, directly or indirectly, less than 1% of the outstanding
Mountain Province Shares or shares of any of Mountain Province’s associates or affiliates and less than 1% of the outstanding Kennady
Shares or shares of any of Kennady’s associates or affiliates.
As of the date of this Circular, the
partners and associates of Fasken Martineau DuMoulin LLP, as a group, beneficially owned, directly or indirectly, less than 1%
of the outstanding Kennady Shares or shares of any of Kennady’s associates or affiliates and less than 1% of the outstanding Mountain
Province Shares or shares of any of Mountain Province’s associates or affiliates.
As of the date of this Circular, the
partners and associates of Perkins Coie LLP, as a group, beneficially owned, directly or indirectly, less than 1% of the outstanding
Kennady Shares or shares of any of Kennady’s associates or affiliates and less than 1% of the outstanding Mountain Province Shares
or shares of any of Mountain Province’s associates or affiliates.
ADDITIONAL INFORMATION
Additional information relating to
Mountain Province is available on SEDAR under Mountain Province’s issuer profile at www.sedar.com. Mountain Province Shareholders
may contact Mountain Province at 161 Bay Street, Suite 1410, P.O. Box 216, Toronto, Ontario, Canada, M5J 2S1 to request copies
of Mountain Province’s financial statements and management’s discussion and analysis. Financial information is provided in Mountain
Province’s financial statements and management’s discussion and analysis for its most recently completed financial year, which
are filed on SEDAR under Mountain Province’s issuer profile at www.sedar.com.
Additional information relating to
Kennady is available on SEDAR under Kennady’s issuer profile at www.sedar.com. Kennady Shareholders may contact Kennady
at 161 Bay Street, Suite 1410, P.O. Box 216, Toronto, Ontario, M5J 2S1, to request copies of Kennady’s financial statements and
management’s discussion and analysis. Financial information is provided in Kennady’s financial statements and management’s discussion
and analysis for its most recently completed financial year, which is set out in Schedule “L” – “Financial
Statements of Kennady” and Schedule “M” – “Management’s Discussion and Analysis of Kennady”
to this Circular.
OTHER MATTERS
Management of Mountain Province and
Kennady are not aware of any other matter to come before the Mountain Province Meeting or the Kennady Meeting other than as set
forth in the Mountain Province Notice of Meeting and the Kennady Notice of Meeting. If any other matter properly comes before the
Mountain Province Meeting, it is the intention of the persons named in the enclosed Mountain Province Proxy to vote the shares
represented thereby in accordance with their best judgment on such matter. If any other matter properly comes before the Kennady
Meeting, it is the intention of the persons named in the enclosed Kennady Proxy to vote the shares represented thereby in accordance
with their best judgment on such matter.
MOUNTAIN PROVINCE BOARD APPROVAL
The contents and the sending of the Mountain Province Notice
of Meeting and this Circular have been approved by the Mountain Province Board.
ON BEHALF OF THE BOARD OF DIRECTORS OF MOUNTAIN PROVINCE
DIAMONDS INC.
“David Whittle”
David Whittle
Director, Interim President and Chief Executive Officer
March 5, 2018
KENNADY BOARD APPROVAL
The contents and the sending of the Kennady Notice of Meeting
and this Circular have been approved by the Kennady Board.
ON BEHALF OF THE BOARD OF DIRECTORS OF KENNADY DIAMONDS
INC.
“Rory Moore”
Dr. Rory Moore
Director, President and Chief Executive Officer
March 5,
2018
CONSENT OF RBC CAPITAL MARKETS
| To: |
The Directors of Mountain Province Diamonds Inc. |
| And To: |
The Directors of Kennady Diamonds Inc. |
We have read the joint management information
circular of Mountain Province Diamonds Inc. (“Mountain Province”) and Kennady Diamonds Inc. (“Kennady”)
dated March 5, 2018 (the “Circular”) relating to the special meeting of shareholders of Mountain Province and
the special meeting of shareholders of Kennady each meeting of which is convened to approve resolutions relating to the proposed
plan of arrangement under the provisions of Section 182 of the Business Corporations Act (Ontario). We consent to the inclusion
in the Circular of our fairness opinion dated January 27, 2018, a summary of our fairness opinion and references to our firm name
and our fairness opinion in the Circular.
“RBC Capital Markets”
Toronto, Ontario, Canada
March 5, 2018
CONSENT OF HAYWOOD SECURITIES INC.
| To: |
The Directors of Kennady Diamonds Inc. |
| And To: |
The Directors of Mountain Province Diamonds Inc. |
We have read the joint management information
circular of Mountain Province Diamonds Inc. (“Mountain Province”) and Kennady Diamonds Inc. (“Kennady”)
dated March 5, 2018 (the “Circular”) relating to the special meeting of shareholders of Mountain Province and
the special meeting of shareholders of Kennady each meeting of which is convened to approve resolutions relating to the proposed
plan of arrangement under the provisions of Section 182 of the Business Corporations Act (Ontario). We consent to the inclusion
in the Circular of our fairness opinion dated January 28, 2018, a summary of our fairness opinion and references to our firm name
and our fairness opinion in the Circular.
“Haywood Securities Inc.”
Vancouver, British Columbia, Canada
March 5, 2018
SCHEDULE
“A”
GLOSSARY OF TERMS
In this Circular and the Summary, the following capitalized
words and terms shall have the following meanings:
“2012 Arrangement” has the meaning ascribed
to such term in Schedule “K” – “Information Concerning Kennady”.
“2435386” means 2435386 Ontario Inc.,
a company incorporated under the laws of Ontario.
“2435572” means
2435572 Ontario Inc., a company incorporated under the laws of Ontario.
“Acquisition Proposal”
relating to a Party means, other than the transactions contemplated by the Arrangement Agreement and other than any transaction
involving only a Party and/or one or more of its wholly-owned Subsidiaries, any written offer, proposal or inquiry from any Person
or group of Persons (other than from the other Party or any of its Subsidiaries), whether or not delivered to the shareholders
of that Party, after the date hereof relating to: (a) any direct or indirect acquisition or sale (or other arrangement having the
same economic effect), whether in a single transaction or a series or related transactions, of: (i) the assets of that Party and/or
one or more of its Subsidiaries that, individually or in the aggregate, constitute 20% or more of the fair market value of the
consolidated assets of that Party and its Subsidiaries, taken as a whole, or which contribute 20% or more of the consolidated revenue
of that Party and its Subsidiaries, taken as a whole, or (ii) 20% or more of any voting or equity securities of that Party or any
one or more of its Subsidiaries that, individually or in the aggregate, contribute 20% or more of the consolidated revenues or
constitute 20% or more of the consolidated assets of that Party and its Subsidiaries, taken as a whole; (b) any direct or indirect
take-over bid, tender offer, exchange offer or other transaction that, if consummated, would result in such Person or group of
Persons beneficially owning 20% or more of any class of voting or equity securities of that Party and/or any of its Subsidiaries;
(c) a plan of arrangement, merger, amalgamation, consolidation, share exchange, business combination, reorganization, recapitalization,
liquidation, dissolution or other similar transaction involving that Party and/or any of its Subsidiaries whose assets or revenues,
individually or in the aggregate, constitute 20% or more of the consolidated assets or revenues, as applicable, of that Party and
its Subsidiaries, taken as a whole; or (d) any other similar transactions involving such Party or its Subsidiaries.
“affiliate” has
the meaning ascribed to such term in National Instrument 45-106 – Prospectus Exemptions, unless stated otherwise.
“allowable capital loss”
has the meaning ascribed to such term in this Circular under the heading “Principal Canadian Federal Income Tax Considerations
– Holders Resident in Canada – Taxation of Capital Gains and Capital Losses”.
“Arrangement” means
an arrangement under the provisions of Section 182 of the OBCA on the terms and conditions set forth in the Plan of Arrangement,
subject to any amendment or supplement thereto made in accordance therewith, herewith or made at the direction of the Court in
the Final Order.
“Arrangement Agreement”
means the arrangement agreement dated January 28, 2018 between Mountain Province and Kennady including all schedules attached thereto,
together with the Mountain Province Disclosure Letter and the Kennady Disclosure Letter, and as the same may be further amended,
supplemented or otherwise modified from time to time in accordance with the terms thereof, the full text of which may be viewed
on SEDAR under Mountain Province’s and Kennady’s issuer profiles, respectively, at www.sedar.com.
“Arrangement Consideration”
means the consideration to be received by Former Kennady Shareholders (other than Mountain Province and any Dissenting Shareholders)
pursuant to the Plan of Arrangement as consideration for their Kennady Shares, consisting of 0.975 of a Mountain Province Share
for each one (1) issued and outstanding Kennady Share.
“Arrangement Resolution”
means the special resolution of the Kennady Shareholders voting at the Kennady Meeting, in person or by proxy, approving the Arrangement,
the Plan of Arrangement and the Arrangement
Agreement, substantially in the form
set out in Schedule “C” – “Resolutions to be Approved at the Kennady Meeting” to this Circular.
“associate” has
the meaning ascribed to such term in the Securities Act, unless stated otherwise.
“Authorization”
means any authorization, order, permit, approval, grant, licence, registration, consent, right, notification, condition, franchise,
privilege, certificate, judgment, writ, injunction, award, determination, direction, decision, decree, by law, rule or regulation,
whether or not having the force of Law, and includes any Environmental Permit.
“Broadridge”
means Broadridge Financial Solutions Inc.
“business combination”
has the meaning ascribed to such term in MI 61-101.
“Business Day” means any day, other than
a Saturday, a Sunday or a statutory or civic holiday in Toronto, Ontario, Canada or Vancouver, British Columbia, Canada.
“Canada–US Tax Treaty”
has the meaning ascribed to such term in this Circular under the heading “Principal Canadian Federal Income Tax Considerations
– Holders Not Resident in Canada – Dividends on Mountain Province Shares”.
“Canadian Securities Laws”
means applicable Canadian provincial and territorial securities laws.
“CDS” means CDS Clearing and Depositary
Services Inc. or its nominee, which at the date hereof is CDS & Co.
“CIM” means the Canadian
Institute of Mining, Metallurgy and Petroleum.
“Circular” means this joint management
information circular for the Mountain Province Meeting and the Kennady Meeting, including all schedules hereto, and all amendments
and supplements hereto.
“CoC” has the meaning ascribed to such
term in this Circular under the heading “Summary of Circular – Effects of the Arrangement – Holders of Kennady
Options and Kennady RSUs”.
“Code” has the meaning ascribed to such
term in this Circular under the heading “Certain U.S. Federal Income Tax Considerations for U.S. Holders”.
“Combined Company” means Mountain Province
and all of its subsidiaries immediately following the completion of the Arrangement.
“Combined Company Shares” means, following
the Effective Time, Mountain Province Shares.
“Combined Company Options” means, following the Effective Time,
Mountain Province Options.
“Combined Company RSUs” means, following the Effective Time, Mountain Province RSUs.
“Confidentiality Agreement” means the
confidentiality agreement dated January 3, 2018 entered into between Mountain Province and Kennady.
“connected transaction”
has the meaning ascribed to such term in MI 61-101.
“Consideration Shares” means the Mountain
Province Shares to be issued to Former Kennady Shareholders (other than Mountain Province and any Dissenting Shareholders) pursuant
to the Plan of Arrangement.
“Convention” has the meaning ascribed
to such term in this Circular under the heading “Certain U.S. Federal Income Tax Considerations for U.S. Holders”.
“Court” means the
Ontario Superior Court of Justice (Commercial List) or other court with jurisdiction to consider and issue the Interim Order and
the Final Order.
“CRA” means the Canada Revenue Agency.
“DCEI” means De Beers Canada Exploration Inc.
“De Beers” means De Beers Canada Inc.
“Depositary”
means Computershare Investor Services Inc., appointed for the purpose of, among other things, exchanging certificates representing
Kennady Shares for certificates representing Mountain Province Shares in connection with the Arrangement.
“Designated Stock Exchange”
means a stock exchange, or that part of a stock exchange, for which a designation by the Minister of Finance (Canada) under section
262 of the Tax Act is in effect.
“Dissent Procedures”
means the procedures to be taken by a Kennady Shareholder in exercising Dissent Rights.
“Dissent Rights”
means the right to dissent to the Arrangement provided under Section 185 of the OBCA, as set out in Schedule “H” –
“Dissent Rights Under the OBCA” to this Circular, as modified by the Plan of Arrangement, the Interim Order
and any other order of the Court.
“Dissenting Shareholders”
means Registered Kennady Shareholders who have duly and validly exercised their Dissent Rights in strict compliance with the Dissent
Procedures and whose Dissent Rights have not terminated.
“Effective Date”
means the date upon which the Arrangement becomes effective under the OBCA.
“Effective Time”
means 12:01 a.m. (Toronto time) on the Effective Date, or such other time as the Parties may, prior to the Effective Date, agree
to in writing.
“eligible dividends”
has the meaning ascribed to such term in the Tax Act.
“Environmental Laws”
means all Laws, imposing obligations, responsibilities, liabilities or standards of conduct for or relating to: (a) the regulation
or control of pollution, contamination, activities, materials, substances or wastes in connection with or for the protection of
human health or safety, the environment or natural resources (including climate, air, surface water, groundwater, wetlands, land
surface, subsurface strata, wildlife, aquatic species and vegetation); or (b) the use, generation, disposal, treatment, processing,
recycling, handling, transport, distribution, destruction, transfer, import, export or sale of Hazardous Substances.
“Environmental Permits”
means all Permits or program participation requirements with or from any Governmental Entity under any Environmental Laws.
“Evans Agreement”
has the meaning ascribed to such term in Schedule “K” – “Information Concerning Kennady”.
“Excess Distribution”
has the meaning ascribed to such term in this Circular under the heading “Certain U.S. Federal Income Tax Considerations
for U.S. Holders – U.S. Federal Income Tax Considerations Relating to the Mountain Province Shares – U.S. Federal Income
Tax Considerations Relating to the Mountain Province Shares”.
“Exchange Ratio”
means 0.975 Mountain Province Shares for each one (1) Kennady Share.
“Final Order”
means the order of the Court pursuant to Section 182 of the OBCA approving the Arrangement, as such order may be amended at any
time prior to the Effective Date or, if appealed, then unless such appeal is withdrawn or denied, as affirmed or as amended on
appeal.
“Final Proscription Date”
has the meaning ascribed to such term in this Circular under the heading “Procedure for Exchange of Kennady Shares –
Cancellation of Rights after Six Years”.
“Former Kennady Shareholders”
means, at and following the Effective Time, the holders of Kennady Shares immediately prior to the Effective Time.
“forward-looking statements”
has the meaning ascribed to such term in this Circular under the heading “Joint Management Information Circular –
Cautionary Statement Regarding Forward Looking Statements”.
“Gahcho Kué Joint Venture”
has the meaning ascribed to such term in Schedule “J” – “Information Concerning Mountain Province”.
“GGL” means GGL
Resources Corp.
“GK Diamond Mine”
means the diamond mine located in the District of Mackenzie, approximately 300 kilometers from Yellowknife in the Northwest Territories,
Canada, and known as the “GK Diamond Mine”.
“Governmental Entity”
means any applicable: (a) multinational, federal, provincial, territorial, state, regional, municipal, local or other government,
governmental or public department, central bank, court, tribunal, arbitral body, commission, board, bureau, agency or entity, domestic
or foreign; (b) stock exchange, including Nasdaq, the TSX and TSXV; (c) subdivision, agent, commission, board or authority of any
of the foregoing; or (d) quasi-governmental or private body, including any tribunal, commission, regulatory agency or self-regulatory
organization, exercising any regulatory, expropriation or taxing authority under or for the account of any of the foregoing.
“Haywood Fairness Opinion”
means the fairness opinion of Haywood Securities Inc. dated January 28, 2018, a copy of which is attached as Schedule “F”
– “Fairness Opinion of Haywood Securities Inc.” to this Circular.
“Hazardous Substance”
means any pollutant, contaminant, waste or chemical or any toxic, radioactive, ignitable, corrosive, reactive or otherwise hazardous
or deleterious substance, waste or material, including hydrogen sulphide, arsenic, cadmium, copper, lead, mercury, petroleum, polychlorinated
biphenyls, asbestos and urea-formaldehyde insulation, and any other material, substance, pollutant or contaminant regulated or
defined pursuant to, or that could result in liability under, any Environmental Law.
“Holder” has
the meaning ascribed to such term in this Circular under the heading “Principal Canadian Federal Income Tax Considerations”.
“IFRS” means
International Financial Reporting Standards adopted by the International Accounting Standards Board, as updated and amended from
time to time.
“Interim Order”
means the interim order of the Court rendered March 5, 2018, as may be further varied and amended, providing for, among other things,
the calling and holding of the Kennady Meeting, attached as Schedule “G” – “Interim Order”
to this Circular.
“IRS” means the
U.S. Internal Revenue Service.
“Joint Venture Agreement”
has the meaning ascribed to such term in Schedule “J” – “Information Concerning Mountain Province”.
“Kennady” means
Kennady Diamonds Inc., a corporation existing under the OBCA, and all successors thereto.
“Kennady Board”
means the board of directors of Kennady, as the same is constituted from time to time; any recommendation or determination of the
Kennady Board referenced in this Circular shall be deemed to exclude any director who noted a conflict and abstained from voting
on any matter, which, for greater certainty, shall exclude Mr. Comerford and Dr. Moore in respect of any recommendation or determination
of the Kennady Board in respect of the Arrangement or the Arrangement Resolution.
“Kennady Change in Recommendation”
has the meaning ascribed to such term in Section 8.2(c)(i) of the Arrangement Agreement.
“Kennady Disclosure Letter”
means the letter dated January 28 2018 and delivered by Kennady to Mountain Province in the form accepted by and initialled on
behalf of Mountain Province with respect to certain matters in the Arrangement Agreement.
“Kennady DSUs”
means deferred share unit awards of Kennady issued or issuable pursuant to the Kennady Long Term Equity Incentive Plan.
“Kennady Financial Statements”
has the meaning ascribed to such term in Schedule “L” – “Financial Statements of Kennady”
to this Circular.
“Kennady Long Term Equity
Incentive Plan” means the 2017 long term equity incentive plan of Kennady, approved by Kennady Shareholders on June 20,
2017.
“Kennady Management Proxyholders”
has the meaning ascribed to such term in this Circular under the heading “General Proxy Information – Kennady Shareholders
– Kennady Shareholders Entitled to Vote”.
“Kennady Material Adverse
Effect” means any change, development, effect, event, circumstance, fact or occurrence that individually or in the aggregate
with other such changes, developments, effects, events, circumstances, facts or occurrences, (x) is or would reasonably be expected
to be, material and adverse to the business, condition (financial or otherwise), properties, assets (tangible or intangible), liabilities
(including any contingent liabilities), operations or results of operations of Kennady and its subsidiaries, taken as a whole,
or (y) prevents or materially adversely affects, or would reasonably be expected to prevent or materially adversely affect, the
ability of Kennady to timely perform its obligations under the Arrangement Agreement, except, any change, development, effect,
event, circumstance, fact or occurrence resulting from or relating to: (a) a change in the market price of the Kennady Shares following
and reasonably attributable to the public announcement of the execution of this Agreement and the transactions contemplated thereby;
(b) any changes affecting the global diamond mining industry generally; (c) any change in the market price of diamonds; (d) general
economic, political, financial, currency exchange, securities or commodity market conditions in Canada or the United States; (e)
any change in IFRS occurring after the date of the Arrangement Agreement; (f) any change in applicable Laws or in the interpretation
thereof by any Governmental Entity occurring after the date of the Arrangement Agreement; (g) the commencement, occurrence or continuation
of any war, armed hostilities or acts of terrorism; (h) any natural disaster; (i) any decrease in the trading price or any decline
in trading volume of the Kennady Shares (it being understood that the cause underlying such change in trading price or trading
volume (other than those in items (a) to (h) above) may be taken into account in determining whether a Kennady Material Adverse
Effect has occurred); (j) any action taken by Kennady that is required pursuant to this Agreement (excluding any obligation to
act in the ordinary course); or (k) any matters disclosed in the Kennady Disclosure Letter; provided, however, that with respect
to clauses (b) to (h), such changes do not relate primarily to Kennady or do not have a disproportionate effect on Kennady compared
to other companies of similar size operating in the diamond mining industry; and references in this Agreement to dollar amounts
are not intended to be and shall not be deemed to be illustrative or interpretative for purposes of determining whether a “Kennady
Material Adverse Effect” has occurred.
“Kennady Meeting”
means the special meeting, including any adjournments or postponements thereof, of the Kennady Shareholders to be held, among other
things, to consider and, if deemed advisable, to approve the Arrangement Resolution.
“Kennady Mineral Properties”
has the meaning ascribed to such term in the Arrangement Agreement.
“Kennady Mineral Rights”
means all of Kennady’s mineral interests and rights with respect to the Kennady Mineral Properties, including any material mining
claims, concessions, exploration licences, exploitation licences, prospecting permits, mining leases and mining rights, in each
case, either existing under contract or by operation of Law.
“Kennady North Project”
means the 100% Kennady-owned land package comprised of 22 mineral leases and 58 mineral claims located 290 km east-northeast of
Yellowknife, Northwest Territories, Canada.
“Kennady North Reports”
has the meaning ascribed to such term in Schedule “K” – “Information Concerning Kennady”.
“Kennady Notice of Meeting”
has the meaning ascribed to such term in this Circular under the heading “Joint Management Information Circular”.
“Kennady Options”
means the outstanding options to purchase Kennady Shares granted under the Kennady Long Term Equity Incentive Plan.
“Kennady Private Placement”
has the meaning ascribed to such term in this Circular under the heading “The Kennady Private Placement”.
“Kennady Proxy” means the form of proxy
(on blue paper) delivered to Kennady Shareholders.
“Kennady Record Date” means March 5,
2018.
“Kennady RSUs”
means the restricted share unit awards of Kennady issued or issuable pursuant to the Kennady Long Term Equity Incentive Plan.
“Kennady SARs”
mean stock appreciation rights of Kennady issued or issuable pursuant to the Kennady Long Term Equity Incentive Plan.
“Kennady Shareholder Approval”
means the requisite approval for the Arrangement Resolution, being (i) at least 66 ⅔% of the votes cast on the Arrangement
Resolution by the Kennady Shareholders present in person or represented by proxy and entitled to vote at the Kennady Meeting, and
(ii) at least a majority of the votes cast on the Arrangement Resolution by Minority Kennady Shareholders (i.e., excluding votes
attached to Kennady Shares held by any other person described in items (a) through (d) of Section 8.1(2) of MI 61-101) present
in person or represented by proxy and entitled to vote at the Kennady Meeting.
“Kennady Shareholders”
means the holders of Kennady Shares and
“Kennady Shareholder”
means any one of them.
“Kennady Shares”
means the common shares in the capital of Kennady.
“Kennady Special Committee”
means the special committee of the Kennady Board established to consider and make recommendations to the Kennady Board regarding
the Arrangement.
“Kennady Transfer Agent”
means Computershare Investor Services Inc.
“Kennady TSXV Approval” means the
conditional approval of the TSXV in respect of the Arrangement.
“Kennady U.S. Shareholders” means
the holders of Kennady Shares that reside in the United States.
“Kennady Voting and Support
Agreements” means the voting and support agreements (including all amendments thereto) between Mountain Province and
the Supporting Kennady Shareholders setting forth the terms and conditions upon which, among other things, the Supporting Kennady
Shareholders have agreed to vote their Kennady Shares in favour of the Arrangement Resolution.
“Law” or “Laws”
means all laws (including common law), by-laws, statutes, rules, regulations, principles of law and equity, orders, rulings, ordinances,
judgements, injunctions, determinations, awards, decrees or other requirements, whether domestic or foreign, and the terms and
conditions of any Permit of or from any Governmental Entity having the force of law (including Nasdaq, the TSX and TSXV), and the
term “applicable” with respect to such Laws and in
a context that refers to a Party, means
such Laws as are applicable to such Party or its business, undertaking, property or securities and emanate from a Person having
jurisdiction over the Party or its business, undertaking, property or securities.
“Letter of Transmittal”
means a letter of transmittal on yellow paper, a form of which accompanies this Circular, to be completed by Kennady Shareholders
in connection with the Arrangement.
“Mark-to-Market Election”
has the meaning ascribed to such term in this Circular under the heading “Certain U.S. Federal Income Tax Considerations
for U.S. Holders – U.S. Federal Income Tax Considerations Relating to the Mountain Province Shares– U.S. Federal Income
Tax Considerations Relating to the Mountain Province Shares”.
“Matching Party”
has the meaning ascribed to such term in this Circular under the heading “The Arrangement Agreement – Right to Match”.
“Meeting Deadline”
means April 10, 2018.
“MI 61-101” means
Multilateral Instrument 61-101 – Protection of Minority Security Holders in Special Transactions.
“Minority Kennady Shareholders”
means all Kennady Shareholders, other than any Kennady Shareholder that meets
the criteria set out in Section
8.1(2)(a)-(d) of MI 61-101.
“Minority Mountain Province
Shareholders” means all Mountain Province Shareholders, other than any Mountain Province Shareholder that meets the criteria
set out in Section 8.1(2)(a)-(d) of MI 61-101.
“Moore Agreement”
has the meaning ascribed to such term in Schedule “K” – “Information Concerning Kennady”.
“Mountain
Change in Recommendation” has the meaning ascribed to such term in Section 8.2(d)(i) of the Arrangement Agreement.
“Mountain Province”
means Mountain Province Diamonds Inc., a company continued under the OBCA, and all successors thereto.
“Mountain Province AIF”
means the annual information form of Mountain Province dated March 28, 2017 for the fiscal year ended December 31, 2016, which
is available on SEDAR under Mountain Province’s issuer profile at www.sedar.com.
“Mountain Province Awards”
means, collectively, Mountain Province Options, Mountain Province RSUs, Mountain Province DSUs and Mountain Province SARs.
“Mountain Province Board”
means the board of directors of Mountain Province, as the same is constituted from time to time; any recommendation or determination
of the Mountain Province Board referenced in this Circular shall be deemed to exclude any director who noted a conflict and abstained
from voting on any matter, which, for greater certainty, shall exclude Mr. Comerford in respect of any recommendation or determination
of the Mountain Province Board in respect of the Share Issuance Resolution.
“Mountain Province Disclosure
Letter” means the letter dated January 28, 2018 and delivered by Mountain Province to Kennady in the form accepted by
and initialled on behalf of Kennady with respect to certain matters in the Arrangement Agreement.
“Mountain Province DSUs”
means deferred share unit awards of Mountain Province issued or issuable pursuant to the Mountain Province Long Term Equity Incentive
Plan.
“Mountain Province Indenture”
has the meaning ascribed to such term in Schedule “J” – “Information Concerning Mountain Province”.
“Mountain Province Long Term
Equity Incentive Plan” means the 2016 long term equity incentive plan of Mountain Province, approved by Mountain Province
Shareholders on June 21, 2016.
“Mountain Province Management
Proxyholders” has the meaning ascribed to such term in this Circular under the heading “General Proxy Information
– Mountain Province Shareholders – Mountain Province Shareholders Entitled to Vote”.
“Mountain Province Material
Adverse Effect” means any change, development, effect, event, circumstance, fact or occurrence that individually or in
the aggregate with other such changes, developments, effects, events, circumstances, facts or occurrences, (x) is or would reasonably
be expected to be, material and adverse to the business, condition (financial or otherwise), properties, assets (tangible or intangible),
liabilities (including any contingent liabilities), operations or results of operations of Mountain Province and its subsidiaries,
taken as a whole, or (y) prevents or materially adversely affects, or would reasonably be expected to prevent or materially adversely
affect, the ability of Mountain Province to timely perform its obligations under the Arrangement Agreement, except, any change,
development, effect, event, circumstance, fact or occurrence resulting from or relating to: (a) a change in the market price of
the Mountain Province Shares following and reasonably attributable to the public announcement of the execution of this Agreement
and the transactions contemplated thereby; (b) any changes affecting the global diamond mining industry generally; (c) any change
in the market price of diamonds; (d) general economic, political, financial, currency exchange, securities or commodity market
conditions in Canada or the United States; (e) any change in IFRS occurring after the date of the Arrangement Agreement; (f) any
change in applicable Laws or in the interpretation thereof by any Governmental Entity occurring after the date of the Arrangement
Agreement; (g) the commencement, occurrence or continuation of any war, armed hostilities or acts of terrorism; or (h) any natural
disaster; (i) any decrease in the trading price or any decline in trading volume of the Mountain Province Shares (it being understood
that the cause underlying such change in trading price or trading volume (other than those in items (a) to (h) above) may be taken
into account in determining whether a Mountain Province Material Adverse Effect has occurred); (j) any action taken by Mountain
Province or any of its Subsidiaries that is required pursuant to this Agreement (excluding any obligation to act in the ordinary
course); or (k) any matters disclosed in the Mountain Province Disclosure Letter; provided, however, that with respect to clauses
(b) to (h), such changes do not relate primarily to Mountain Province or do not have a disproportionate effect on Mountain Province
compared to other companies of similar size operating in the diamond mining industry; and references in this Agreement to dollar
amounts are not intended to be and shall not be deemed to be illustrative or interpretative for purposes of determining whether
a “Mountain Province Material Adverse Effect” has occurred.
“Mountain Province Meeting”
means the special meeting, including any adjournments or postponements thereof, of the Mountain Province Shareholders to be held,
among other things, to consider and, if deemed advisable, to approve the Share Issuance Resolution.
“Mountain Province Mineral
Properties” has the meaning ascribed to such term in the Arrangement Agreement.
“Mountain
Province Mineral Rights” means all of Mountain Province’s mineral interests and rights with respect to the Mountain
Province Mineral Properties, including any material mining claims, concessions, exploration licences, exploitation licences, prospecting
permits, mining leases and mining rights, in each case, either existing under contract, by operation of Law.
“Mountain Province Nasdaq
Approval” means the conditional approval of Nasdaq of the issuance and listing on Nasdaq of the Consideration Shares,
subject only to satisfaction of the customary listing conditions of Nasdaq.
“Mountain Province Notice
of Meeting” has the meaning ascribed to such term in this Circular under the heading “Joint Management Information
Circular”.
“Mountain Province Options”
means the outstanding options to purchase Mountain Province Shares granted under the Mountain Province Long Term Equity Incentive
Plan.
“Mountain Province Proxy”
means the form of proxy (on white paper) delivered to Mountain Province Shareholders.
“Mountain Province Record
Date” means March 5, 2018.
“Mountain Province RSUs” means the
restricted share unit awards of Mountain Province issued or issuable pursuant to the Mountain Province Long Term Equity Incentive
Plan.
“Mountain Province SARs” mean stock
appreciation rights of Mountain Province issued or issuable pursuant to the Mountain Province Long Term Equity Incentive Plan.
“Mountain Province Shareholder
Approval” means the requisite approval for the Share Issuance Resolution, being a majority of the votes cast on the Share
Issuance Resolution by the holders of Mountain Province Shares, present in person or represented by proxy and entitled to vote
at the Mountain Province Meeting, together with minority approval in accordance with Section 8.1 of MI 61-101.
“Mountain Province Shareholders” means
the holders of Mountain Province Shares and
“Mountain Province Shareholder” means
any one of them.
“Mountain Province Shares”
means common shares in the capital of Mountain Province.
“Mountain Province Special Committee”
means the special committee of the Mountain Province Board established to consider and make recommendations to the Mountain Province
Board regarding the Arrangement.
“Mountain Province Transfer
Agent” means Computershare Investor Services Inc.
“Mountain Province TSX Approval” means
the conditional approval of the TSX of the listing and posting for trading on the TSX of the Consideration Shares, subject only
to satisfaction of the customary listing conditions of the TSX.
“Mountain Province Voting
and Support Agreements” means the voting and support agreements (including all amendments thereto) between Kennady and
the Supporting Mountain Province Shareholders, setting forth the terms and conditions upon which, among other things, the Supporting
Mountain Province Shareholders have agreed to vote their Mountain Province Shares in favour of the Share Issuance Resolution.
“MVLWB” has the meaning ascribed to
such term in Schedule “K” – “Information Concerning Kennady”.
“Nasdaq” means the Nasdaq Stock Market.
“NI 43-101” means National Instrument
43-101 – Standards of Disclosure for Mineral Projects.
“NI 45-102” means National Instrument 45-102
– Resale of Securities.
“NI 52-110” means National Instrument
52-110 – Audit Committees.
“NLRC” means Newfoundland and Labrador
Refining Corporation.
“Non-Electing Shareholder” has the
meaning ascribed to such term in this Circular under the heading “U.S. Federal Income Tax Considerations Relating to the
Mountain Province Shares”.
“Non-Registered Kennady
Shareholder” means a non-registered holder of Kennady Shares.
“Non-Registered Mountain Province Shareholder”
means a non-registered holder of Mountain Province Shares.
“Non-Resident Holder” has the meaning
ascribed to such term in this Circular under the heading “Principal Canadian Federal Income Tax Considerations –
Holders Not Resident in Canada”.
“Notes” has the
meaning ascribed to such term in Schedule “J” – “Information Concerning Mountain Province”.
“OBCA” means the Business Corporations
Act (Ontario) and the regulations made thereunder.
“Offer” has the meaning ascribed to
such term in Schedule “K” – “Information Concerning Kennady”.
“Outside Date” means April 30, 2018,
or such later date as may be agreed to in writing by the Parties.
“Parties” means Mountain Province
and Kennady and
“Party” means any of them.
“Permit” means
any license, permit, certificate, consent, order, grant, approval, agreement, classification, restriction, registration or other
Authorization of, from or required by any Governmental Entity.
“Person” includes
an individual, partnership, association, body corporate, trustee, executor, administrator, legal representative, government (including
any Governmental Entity) or any other entity, whether or not having legal status.
“PFIC” has the
meaning ascribed to such term in this Circular under the heading “Certain U.S. Federal Income Tax Considerations for U.S.
Holders – U.S. Federal Income Tax Considerations Relating to the Arrangement – Exchange of Kennady Shares for Mountain
Province Shares in the Arrangement – Tax-Free Treatment of the Arrangement”.
“Plan of Arrangement”
means the plan of arrangement in respect of the Arrangement attached as Schedule “D” – “Plan of Arrangement”
to this Circular, and any amendments or variations thereto made in accordance with the Arrangement Agreement or the Plan of Arrangement
or at the direction of the Court.
“Proposed Amendments”
has the meaning ascribed to such term in this Circular under the heading “Principal Canadian Federal Income Tax Considerations”.
“Proposed PFIC Regulations”
has the meaning ascribed to such term in this Circular under the heading “Certain
U.S. Federal Income Tax Considerations
for U.S. Holders – U.S. Federal Income Tax Considerations Relating to the Arrangement – Application of the Passive
Foreign Investment Company Rules to Arrangement”.
“Proxy Solicitation Agent”
means Laurel Hill Advisory Group.
“public corporation”
has the meaning ascribed to such term in the Tax Act.
“QEF” has the meaning ascribed to such
term in this Circular under the heading “Certain U.S. Federal Income Tax Considerations for U.S. Holders – U.S.
Federal Income Tax Considerations Relating to the Mountain Province Shares – U.S. Federal Income Tax Considerations Relating
to the Mountain Province Shares”.
“QEF election”
has the meaning ascribed to such term in this Circular under the heading “Certain U.S. Federal Income Tax Considerations
for U.S. Holders – U.S. Federal Income Tax Considerations Relating to the Mountain Province Shares– U.S. Federal Income
Tax Considerations Relating to the Mountain Province Shares”.
“Qualified persons”
has the meaning ascribed to such term in NI 43-101.
“Ramsden Agreement”
has the meaning ascribed to such term in Schedule “K” – “Information Concerning Kennady”.
“RBC Fairness Opinion”
means the fairness opinion of RBC Capital Markets dated January 27, 2018, a copy of which is attached as Schedule “E”
– “Fairness Opinion of RBC Capital Markets” to this Circular.
“RDSP” has the
meaning ascribed to such term in this Circular under the heading “Principal Canadian Federal Income Tax Considerations
– Eligibility for Investment”.
“Receiving Party”
has the meaning ascribed to such term in this Circular under the heading “The Arrangement Agreement – Right to Match”.
“Registered Kennady Shareholder”
means a registered holder of Kennady Shares as recorded in the shareholder register of Kennady maintained by Computershare Investor
Services Inc.
“Registered Mountain Province
Shareholder” means a registered holder of Mountain Province Shares as recorded in the shareholder register of Mountain
Province maintained by Computershare Investor Services Inc.
“Registered Plans”
has the meaning ascribed to such term in this Circular under the heading “Principal Canadian Federal Income Tax Considerations
– Eligibility for Investment”.
“Regulatory Approvals”
means those sanctions, rulings, consents, orders, exemptions, permits and other approvals (including the waiver or lapse, without
objection, of a prescribed time under a statute or regulation that states that a transaction may be implemented if a prescribed
time lapses following the giving of notice without an objection being made) of Governmental Entities.
“Reorganization”
has the meaning ascribed to such term in this Circular under the heading “Certain U.S. Federal Income Tax
Considerations for U.S. Holders – U.S. Federal Income Tax Considerations Relating to the Arrangement – Exchange
of Kennady Shares for Mountain Province Shares in the Arrangement – Tax-Free Treatment of the
Arrangement”.
“Representatives”
means, collectively, in respect of a Person, (a) its directors, officers, employees, agents, representatives and any financial
advisor, law firm, accounting firm or other professional firm retained to assist the Person in connection with the transactions
contemplated in this Agreement, and (b) the Person’s subsidiaries and the directors, officers, employees, agents and representatives
and advisors thereof.
“Resident Holder”
has the meaning ascribed to such term in this Circular under the heading “Principal Canadian Federal Income Tax Considerations
– Holders Resident in Canada”.
“RESP” has the
meaning ascribed to such term in this Circular under the heading “Principal Canadian Federal Income Tax Considerations
– Eligibility for Investment”.
“Revolving Credit Agreement”
has the meaning ascribed to such term in Schedule “J” – “Information Concerning Mountain Province –
Recent Developments – Revolving Credit Agreement”.
“Royalty” has
the meaning ascribed to such term in Schedule “K” – “Information Concerning Kennady”.
“RRIF” has the
meaning ascribed to such term in this Circular under the heading “Principal Canadian Federal Income Tax Considerations
– Eligibility for Investment”.
“RRSP” has the
meaning ascribed to such term in this Circular under the heading “Principal Canadian Federal Income Tax Considerations
– Eligibility for Investment”.
“SEC”
has the meaning ascribed to such term in the Circular under the heading “Note to U.S. Securityholders”.
“Securities
Act” means the Securities Act (Ontario) and the rules, regulations and published policies made thereunder.
“Securities Authorities”
means all applicable securities regulatory authorities, including the applicable securities commission or similar regulatory authorities
in each of the provinces and territories of Canada and the SEC.
“Securities Laws”
means Canadian Securities Laws and U.S. Securities Laws and all other applicable securities Laws and applicable stock exchange
rules and listing standards of the Stock Exchanges.
“SEDAR” means the
System for Electronic Document Analysis and Retrieval.
“Share Issuance Resolution”
means the ordinary resolution of the Mountain Province Shareholders voting at the Mountain Province Meeting, present in person
or represented by proxy, approving the issuance of the Mountain
Province Shares constituting the Consideration
Shares, substantially in the form set out in Schedule “B” – “Resolutions to be Approved at the Mountain
Province Meeting” to this Circular.
“Significant Shareholder”
means, collectively, Dermot Fachtna Desmond, Bottin (International) Investments Ltd. and their respective affiliates that hold
Mountain Province Shares and Kennady Shares.
“Special Value”
has the meaning ascribed to such term in this Circular under the heading “Summary of Circular – Effects of the Arrangement
– Holders of Kennady Options and Kennady RSUs”.
“Subject Kennady Securities”
means all of the Kennady Shares, (including any Kennady Shares issued upon the exercise of the Kennady Options or acquired by the
Supporting Kennady Shareholders on or following the date of such Supporting Kennady Shareholder’s Kennady Voting and Support Agreement
and prior to the meeting of Kennady Shareholders to approve the Arrangement Resolution) that are beneficially owned by, or over
which control or direction is exercised by, the Supporting Kennady Shareholders and which are entitled to be voted at such meeting.
“Subject Mountain Province
Securities” means all of the Mountain Province Shares, (including any Mountain Province Shares issued upon the exercise
of the Mountain Province Options or acquired by the Supporting Mountain Province Shareholders on or following the date of such
Supporting Mountain Province Shareholder’s Mountain Province Voting and Support Agreement and prior to the meeting of Mountain
Province Shareholders to approve the Share Issuance Resolution) that are beneficially owned by, or over which control or direction
is exercised by, the Supporting Mountain Province Shareholders and which are entitled to be voted at such meeting.
“Subsidiary”
has the meaning ascribed to such term in the National Instrument 45-106 – Prospectus Exemptions.
“Subsidiary PFIC”
has the meaning ascribed to such term in this Circular under the heading “Certain U.S. Federal Income Tax Considerations
for U.S. Holders – U.S. Federal Income Tax Considerations Relating to the Mountain Province Shares – U.S. Federal Income
Tax Considerations Relating to the Mountain Province Shares”.
“Superior Proposal”
means a bona fide unsolicited, written Acquisition Proposal made after the date of the Arrangement Agreement that: (a) in respect
of an Acquisition Proposal made to Kennady or the Kennady Shareholders, did not result from or otherwise involve a breach of Section
7.1, Section 7.2, Section 7.3 or Section 7.5 of the Arrangement Agreement by Kennady or its Representatives; (b) in respect of
an Acquisition Proposal made to Mountain Province or the Mountain Province Shareholders, did not result from or otherwise involve
a breach of Section 7.1, Section 7.2, Section 7.4 or Section 7.5 of the Arrangement Agreement by Mountain Province or its Representatives;
(c) relates to the acquisition of 100% of a Party’s outstanding common shares or all or substantially all of the consolidated assets
of a Party and its Subsidiaries; (d) is reasonably capable of being completed without undue delay, taking into account the financial,
legal, regulatory and other aspects of such Acquisition Proposal and the Person making such Acquisition Proposal; (e) that is not
subject to a financing condition and in respect of which it has been demonstrated to the satisfaction of the board of directors
of such Party, acting in good faith (and after receipt of advice from its financial advisors and its outside legal counsel) that
adequate arrangements have been made in respect of any financing required to complete such Acquisition Proposal; (f) if it relates
to the acquisition of a Party’s outstanding common shares, is made available to all holders of such Party’s common shares on the
same terms and conditions, provided that such holders of such Party’s common shares who are also employees of that Party may be
permitted to enter into new employment arrangements or hold securities of the Person making the Acquisition Proposal, conditional
on such acquisition; (g) that is not subject to any due diligence and/or access condition; (h) in respect of which a Party’s board
of directors and such Party’s committee of independent directors determine, in their good faith judgment, after consultation with
outside legal counsel and after receiving advice from their financial advisors that: (A) the failure by the board of directors
to recommend that the Party enter into a definitive agreement with respect to such Superior Proposal would be inconsistent with
its fiduciary duties under applicable Law; and (B) having regard to all of its terms and conditions, such Acquisition Proposal,
would, if consummated in accordance with its terms (but not assuming away any risk of non-completion), result in a transaction
more favourable to the holders of such Party’s common shares from a financial point of view than the Arrangement (after taking
into account any change to the Arrangement proposed by a Party pursuant to Section 7.5(b) of the Arrangement Agreement); and (i)
in respect of an Acquisition Proposal made to Mountain Province or the Mountain Province Shareholders, such Acquisition Proposal
is conditional on the Arrangement not being completed.
“Superior Proposal Notice”
has the meaning ascribed to such term in Section 7.5(a)(ii) of the Arrangement Agreement.
“Supporting Kennady Shareholders”
means the Kennady Shareholders who are party to the Kennady Voting and Support Agreements: the Significant Shareholder, Jonathan
Comerford, Rory Moore, Tom McCandless, Bruce Ramsden, Robert Parsons and Claudia Tornquist, who collectively held 14,560,342 Kennady
Shares.
“Supporting Mountain Province
Shareholders” means the Mountain Province Shareholders who are party to the Mountain Province Voting and Support Agreements:
the Significant Shareholder, Jonathan Comerford, David Whittle, Bruce Dresner, Karen Goracke, Peeyush Varshney, Perry Ing and Carl
Verley, who collectively held 39,006,333 Mountain Province Shares.
“Tax Act” means
the Income Tax Act (Canada) and the regulations thereunder, as may be amended from time to time.
“Tax Returns” means
all returns, reports, declarations, elections, notices, filings, forms, information returns, statements and other documents (whether
in tangible, electronic or other form) and including any amendments, schedules, attachments, supplements, appendices and exhibits
thereto, required to be made, prepared or filed with any Governmental Entity in respect of Taxes.
“taxable Canadian property”
has the meaning ascribed to such term in the Tax Act.
“taxable capital gain”
has the meaning ascribed to such term in this Circular under the heading “Principal Canadian Federal Income Tax Considerations
- Taxation of Capital Gains and Capital Losses”.
“Taxes” means
all taxes, duties, fees, premiums, assessments, imposts, levies, fees and other charges of any kind whatsoever imposed, assessed,
reassessed or collected by any Governmental Entity, including all interest, penalties, fines, instalments, additions to tax or
other additional amounts imposed, assessed, reassessed or collected by any Governmental Entity in respect thereof, and including
those levied on, or measured by, or referred to as, income, gross receipts, gross income, net income, profits, windfall, royalty,
capital, capital gains, transfer, land transfer, sales, goods and services, harmonized sales, use, value-added, premium, alternative,
real property, excise, stamp, withholding, business, franchise, property, development, occupancy, employer health, payroll, employment,
health, social services, education and social security taxes, all surtaxes, all customs duties and import and export taxes, countervail
and anti- dumping, all licence, franchise and registration fees and all employment insurance, health insurance and Canada, Québec
and other pension plan premiums or contributions imposed by any Governmental Entity, all withholdings on amounts paid to or by
the relevant Person and any liability as a transferee, successor, guarantor or by contract or by operation of applicable Laws in
respect of any of the foregoing.
“Terminating Party”
has the meaning ascribed to such term in this Circular under the heading “The Arrangement Agreement – Right
to Match”.
“Termination Fee”
means $6,000,000.
“TFSA” has the
meaning ascribed to such term in this Circular under the heading “Principal Canadian Federal Income Tax Considerations
– Eligibility for Investment”.
“Tranches” has
the meaning ascribed to such term in this Circular under the heading “The Kennady Private Placement”.
“Transferred
Information” means the personal information (namely, information about an identifiable individual other than their business
contact information when used or disclosed for the purpose of contacting such individual in that individual’s capacity as an employee
or an official of an organization and for no other purpose) that is in the control of one Party that is to be disclosed or conveyed
to one Party or any of its representatives or agents (a “Recipient”) by or on behalf of another Party as a result
of or in conjunction with the transactions contemplated herein, and includes all such personal information disclosed to the Recipient
prior to the execution of the Arrangement Agreement.
“TSX” means the Toronto Stock Exchange.
“TSXV” means the TSX Venture Exchange.
“TSXV Policy 5.9” means Policy 5.9
– Protection of Minority Security Holders in Special Transactions of the Corporate Finance Manual of the TSXV.
“U.S.” or “United States”
means the United States of America, its territories and possessions, any state of the United States and the District of Columbia.
“U.S. Exchange Act” has the meaning
ascribed to such term in this Circular under the heading “Note to U.S. Securityholders”.
“U.S. GAAP” means
United States generally accepted accounting principles and standards.
“U.S. Holder” has the meaning ascribed
to such term in this Circular under the heading “Certain U.S. Federal Income Tax Considerations for U.S. Holders”.
“U.S. person”
means a U.S. person, as defined in Rule 902(k) of Regulation S under the U.S. Securities Act.
“U.S. Securities Act” has the meaning
ascribed to such term in this Circular under the heading “Note to U.S. Securityholders”.
“U.S. Securities Laws”
means all applicable securities legislation in the U.S., including without limitation, the U.S. Securities Act and the U.S. Exchange
Act, and the rules and regulations promulgated thereunder, including judicial and administrative interpretations thereof, and the
securities laws of the states of the U.S.
“U.S. Securityholders”
means those Kennady securityholders that are U.S. residents.
“Voting and Support Agreements” means,
collectively, the Mountain Province Voting and Support Agreements and the Kennady Voting and Support Agreements.
SCHEDULE “B”
RESOLUTIONS TO BE APPROVED AT THE
MOUNTAIN PROVINCE MEETING
BE IT RESOLVED THAT:
| 1. | the arrangement agreement dated January 28, 2018 between
Mountain Province Diamonds Inc. (“Mountain Province”) and Kennady Diamonds Inc. (“Kennady”),
as it may be amended from time to time (the “Arrangement Agreement”), and all transactions contemplated therein
including the plan of arrangement (the “Plan of Arrangement”), and the actions of the directors of Mountain
Province in approving the Arrangement Agreement and the actions of the directors and officers of Mountain Province in executing
and delivering the Arrangement Agreement and causing the performance by Mountain Province of its obligations thereunder and under
the Plan of Arrangement, be and are hereby confirmed, ratified, authorized and approved; |
| 2. | the issuance of such number of Mountain Province common shares (“Mountain Province Shares”)
as may be required to be issued pursuant to the terms of the Plan of Arrangement and as more fully described in the accompanying
joint management information circular dated March 5, 2018, including such number of Mountain Province Shares as may be required
to be issued in connection with the acquisition of all of the common shares of Kennady by Mountain Province pursuant to the Plan
of Arrangement, be and is hereby authorized and approved; |
| 3. | notwithstanding that this resolution has been duly passed by the shareholders of Mountain Province
or that the Plan of Arrangement has been approved by the Ontario Superior Court of Justice, the directors of Mountain Province
be and are hereby authorized and empowered, without further notice to, or approval of, the shareholders of Mountain Province (i)
to amend the Arrangement Agreement or the Plan of Arrangement to the extent permitted by the Arrangement Agreement or the Plan
of Arrangement, and (ii) subject to the terms of the Arrangement Agreement, not to proceed with the Plan of Arrangement and to
revoke this resolution at any time prior to the Effective Time (as defined in the Arrangement Agreement); and |
| 4. | any director or officer of Mountain Province is hereby authorized, for and on behalf of Mountain
Province, to execute, with or without the corporate seal and, if appropriate, deliver any and all other agreements, applications,
forms, waivers, notices, certificates, confirmations and other documents and instruments and to do, or cause to be done, any and
all such other acts and things as in the opinion of such director or officer may be necessary, desirable or useful for the purpose
of giving effect to these resolutions, the Arrangement Agreement, the completion of the Plan of Arrangement and related transactions
in accordance with the Arrangement Agreement and the matters authorized hereby, including, without limitation, (i) all actions
required to be taken by or on behalf of Mountain Province, and all necessary filings and obtaining the necessary approvals, consents
and acceptances of appropriate regulatory authorities and (ii) the signing of the certificates, consents and other documents or
declarations required under the Arrangement Agreement or otherwise to be entered into by Mountain Province, such determination
to be conclusively evidenced by the execution and delivery of any such document, agreement or instrument, and the taking or doing
of any such action. |
SCHEDULE “C”
RESOLUTIONS TO BE APPROVED AT THE
KENNADY MEETING
BE IT RESOLVED THAT:
| 1. | The arrangement (the “Arrangement”) under Section 182 of the Business Corporations
Act (Ontario) (the “OBCA”) involving Kennady Diamonds Inc. (“Kennady”), pursuant
to the arrangement agreement between Kennady and Mountain Province Diamonds Inc. (“Mountain Province”), dated
January 28, 2018, as it may be modified, supplemented or amended from time to time in accordance with its terms (the “Arrangement
Agreement”), all as more particularly described and set forth in the joint management information circular of Kennady
and Mountain Province dated March 5, 2018 (the “Circular”) accompanying the notice of this meeting, and all
transactions contemplated thereby, are hereby authorized, approved and adopted. |
| 2. | The plan of arrangement, as it has been or may be modified, supplemented or amended in accordance
with the Arrangement Agreement and its terms, involving Kennady and implementing the Arrangement (the “Plan of Arrangement”),
the full text of which is set out as Schedule “D” to the Circular, is hereby authorized, approved and adopted. |
| 3. | The Arrangement Agreement and all the transactions contemplated therein, the actions of the directors
of Kennady in approving the Arrangement and the Arrangement Agreement and the actions of the directors and officers of Kennady
in executing and delivering the Arrangement Agreement and any modifications, supplements or amendments thereto and causing the
performance by Kennady of its obligations thereunder, are hereby ratified and approved. |
| 4. | Notwithstanding that this resolution has been passed (and the Arrangement adopted) by the shareholders
of Kennady (the “Kennady Shareholders”) entitled to vote thereon or that the Arrangement has been approved by
the Court, the directors of Kennady are hereby authorized and empowered, at their discretion, without further notice to or approval
of the Kennady Shareholders: |
| a. | to amend or modify the Arrangement Agreement or the Plan
of Arrangement to the extent permitted by their terms; and |
| b. | subject to the terms of the Arrangement Agreement, not to proceed with the Arrangement and any
related transactions at any time prior to the Effective Time (as defined in the Arrangement Agreement). |
| 5. | Any officer or director of Kennady is hereby authorized
and directed, for and on behalf of Kennady to execute, under the corporate seal of Kennady or otherwise, and to deliver or cause
to be delivered, for filing under the OBCA, all such documents as are necessary or desirable to give effect to the Arrangement
and the Plan of Arrangement in accordance with the Arrangement Agreement, such determination to be conclusively evidenced by the
execution and delivery of such documents. |
| 6. | Any officer or director of Kennady is hereby authorized
and directed, for and on behalf of Kennady, to execute or cause to be executed and to deliver or cause to be delivered, under
the corporate seal of Kennady or otherwise, all such other documents and instruments and to perform or cause to be performed all
such other acts and things as, in the opinion of such director or officer may be necessary or desirable to give full force and
effect to the foregoing resolutions, the Arrangement Agreement and the completion of the Arrangement and related transactions
in accordance with the terms of the Arrangement Agreement and the matters authorized thereby, including, without limitation: |
| a. | all actions required to be taken by or on behalf of Kennady,
and all necessary filings and obtaining the necessary approvals, consents and acceptances of the appropriate regulatory authorities;
and |
| b. | the signing of the certificates, consents and other documents
or declarations required under the Arrangement Agreement or otherwise to be entered into by Kennady; |
such determination, in each case, to be conclusively evidenced
by the execution and delivery of any such other document or instrument or the doing of any other such act or thing.
SCHEDULE “D”
PLAN OF ARRANGEMENT
UNDER SECTION 182 OF THE
ONTARIO BUSINESS
CORPORATIONS ACT
ARTICLE 1
INTERPRETATION
| 1.1 | Definitions. In this plan of arrangement, unless
there is something in the subject matter or context inconsistent therewith, the following capitalized words and terms shall have
the following meanings: |
| (a) | “Arrangement Agreement” means the
arrangement agreement dated as of January 28, 2018 between Kennady and Mountain Province to which this Kennady Plan of Arrangement
is attached as Schedule A, as may be supplemented, amended or otherwise modified from time to time in accordance with the terms
thereof; |
| (b) | “Business Day” means any day, other than a Saturday, a Sunday or a statutory
or civic holiday in Toronto, Ontario or Vancouver, British Columbia; |
| (c) | “Code” means the U.S. Internal Revenue Code of 1986; |
| (d) | “Consideration Shares” means 0.975 of a Mountain Province Share for each one
issued and outstanding Kennady Share; |
| (e) | “Court” means the Ontario Superior Court of Justice (Commercial List) or other
court with jurisdiction to consider and issue the Kennady Interim Order and the Kennady Final Order; |
| (f) | “Depositary” means any trust company, bank or financial institution agreed to
in writing between Mountain Province and Kennady for the purpose of, among other things, exchanging the Kennady Shares for the
Consideration Shares in connection with the Kennady Arrangement; |
| (g) | “Director” means the Director appointed pursuant to Section 278 of the OBCA; |
| (h) | “Dissent Rights” means the rights of dissent in respect to the Kennady Arrangement
under the OBCA as described in Article 4; |
| (i) | “Dissenting Shareholder” means a registered Kennady Shareholder who duly exercises
its Dissent Rights pursuant to Article 4 of this Kennady Plan of Arrangement and the Kennady Interim Order and who has not withdrawn
or been deemed to have withdrawn such exercise of Dissent Rights; |
| (j) | “Effective Date” means the date the Kennady Arrangement becomes effective under the OBCA; |
| (k) | “Effective Time” means 12:01 a.m. (Toronto time) on the Effective Date; |
| (l) | “Former Kennady Shareholders” means the holders of Kennady Shares immediately
prior to the Effective Time; |
| (m) | “Governmental Entity” means: (a) any multinational, federal, provincial, territorial,
state, regional, municipal, local or other government, governmental or public department, central bank, court, tribunal, arbitral
body, commission, board, bureau, agency or entity, domestic or foreign; (b) any stock exchange, including Nasdaq, the TSX and the
TSXV; (c) any subdivision, agent, commission, board or authority of any of the foregoing; or (d) any quasi-governmental or private
body, including |
any tribunal, commission, regulatory
agency or self-regulatory organization, exercising any regulatory, expropriation or taxing authority under or for the account of
any of the foregoing;
| (n) | “including” means including without limitation, and “include”
and “includes” have a corresponding meaning; |
| (o) | “Kennady” means Kennady Diamonds Inc., a corporation incorporated under the OBCA; |
| (p) | “Kennady Arrangement” means an arrangement under Section 182 of the OBCA on the
terms and conditions set forth in this Kennady Plan of Arrangement, subject to any amendments or variations thereto made in accordance
with the terms of the Arrangement Agreement, this Kennady Plan of Arrangement, or made at the direction of the Court in the Final
Order (provided that any such amendment or variation is acceptable to both Kennady and Mountain Province, each acting reasonably); |
| (q) | “Kennady Arrangement Resolution” means the special resolution of the Kennady Shareholders
approving the Kennady Plan of Arrangement; |
| (r) | “Kennady Final Order” means the final order of the Court pursuant to Section 182(5)
of the OBCA, in form acceptable to Kennady and Mountain Province, each acting reasonably, approving the Kennady Arrangement, as
such order may be amended by the Court (with the consent of both Kennady and Mountain Province, each acting reasonably) at any
time prior to the Effective Date or, if appealed, then, unless such appeal is withdrawn or denied, as affirmed or as amended (provided
that any such amendment is acceptable to both Kennady and Mountain Province, each acting reasonably) on appeal; |
| (s) | “Kennady Interim Order” means the interim order made by the Court contemplated
by Section 2.2 of the Arrangement Agreement, in a form acceptable to Kennady and Mountain Province, each acting reasonably, providing
for, among other things, the calling and holding of the Kennady Meeting, as the same may be amended, supplemented or varied by
the Court (with the consent of Kennady and Mountain Province, each acting reasonably); |
| (t) | “Kennady Meeting” means the special meeting of the Kennady Shareholders, including
any adjournment or postponement thereof, to be called and held in accordance with the Kennady Interim Order to consider the Kennady
Arrangement Resolution; |
| (u) | “Kennady Plan of Arrangement” has the meaning set forth in the Arrangement Agreement; |
| (v) | “Kennady Shareholders” means holders of Kennady Shares; |
| (w) | “Kennady Shares” means the common shares in the capital of Kennady; |
| (x) | “Law” or “Laws” means all laws (including common law), by-laws,
statutes, rules, regulations, principles of law and equity, orders, rulings, ordinances, judgements, injunctions, determinations,
awards, decrees or other requirements, whether domestic or foreign, and the terms and conditions of any grant of approval, permission,
authority or license of any Governmental Entity or self- regulatory authority (including Nasdaq, the TSX and the TSXV), and the
term “applicable” with respect to such Laws and in a context that refers to one or more Parties, means such Laws
as are applicable to such Party or its business, undertaking, property or securities and emanate from a Person having jurisdiction
over the Party or Parties or its or their business, undertaking, property or securities; |
| (y) | “Lien” means any hypothecs, mortgages, pledges, assignments, liens, charges, security
interests, encumbrances and adverse rights or claims or other third person interest or encumbrance of any |
kind, whether contingent or absolute,
and any agreement, option, right or privilege (whether by Law, contract or otherwise) capable of becoming any of the foregoing;
| (z) | “Mountain Province” means Mountain Province Diamonds Inc., a corporation continued
under the laws of the Province of Ontario; |
| (aa) | “Mountain Province Shares” means the common shares in the capital of Mountain
Province; |
| (bb) | “OBCA” means the Business Corporations
Act (Ontario); |
| (cc) | “Parties” means Kennady and Mountain Province, and “Party” means
any of them; |
| (dd) | “Person” or “person”
means an individual, sole proprietorship, partnership, unincorporated association, unincorporated syndicate, unincorporated organization,
trust, body corporate, trustee, executor, administrator or other legal representative, government (including any Governmental
Entity) or any other entity, whether or not having legal status; |
| (ee) | “Tax Act” has the meaning set forth in the Arrangement Agreement; |
| (ff) | “Taxes” means all taxes, duties, fees,
premiums, assessments, imposts, levies, fees and other charges of any kind whatsoever imposed, assessed, reassessed or collected
by any Governmental Entity, including all interest, penalties, fines, instalments, additions to tax or other additional amounts
imposed, assessed, reassessed or collected by any Governmental Entity in respect thereof, and including those levied on, or measured
by, or referred to as, income, gross receipts, gross income, net income, profits, windfall, royalty, capital, capital gains, transfer,
land transfer, sales, goods and services, harmonized sales, use, value-added, premium, alternative, real property, excise, stamp,
withholding, business, franchise, property, development, occupancy, employer health, payroll, employment, health, social services,
education and social security taxes, all surtaxes, all customs duties and import and export taxes, countervail and anti-dumping,
all licence, franchise and registration fees and all employment insurance, health insurance and Canada, Québec and other
pension plan premiums or contributions imposed by any Governmental Entity, all withholdings on amounts paid to or by the relevant
Person and any liability as a transferee, successor, guarantor or by contract or by operation of applicable Laws in respect of
any of the foregoing; |
| (gg) | “TSX” means the Toronto Stock Exchange;
and |
| (hh) | “TSXV” means the TSX Venture Exchange. |
| 1.2 | Sections and Headings. The division of this Kennady Plan of Arrangement into articles and
sections and the insertion of headings are for convenience of reference only and shall not affect the construction or interpretation
of this Kennady Plan of Arrangement. Unless reference is specifically made to some other document or instrument, all references
herein to articles and sections are to articles and sections of this Kennady Plan of Arrangement. |
| 1.3 | Number, Gender and Persons. In this Kennady Plan of Arrangement, unless otherwise expressly
stated or the context otherwise requires, words importing the singular number shall include the plural and vice versa, and words
importing gender shall include all genders. |
| 1.4 | Meaning. Words and phrases used herein and defined in the OBCA shall have the same meaning
herein as in the OBCA, unless the context otherwise requires. |
| 1.5 | Statutory References. Any reference in this Kennady Plan of Arrangement to a statute includes
all regulations made thereunder, all amendments to such statute or regulation in force from time to time and any statute or regulation
that supplements or supersedes such statute or regulation. |
| 1.6 | Currency. Unless otherwise stated all references in this Kennady Plan of Arrangement to
sums of money are expressed in lawful money of Canada. |
| 1.7 | Business Day. In the event that the date on which any action is required to be taken hereunder
by any of the parties is not a Business Day in the place where the action is required to be taken, such action shall be required
to be taken on the next succeeding day which is a Business Day in such place. |
| 1.8 | Governing Law. This Kennady Plan of Arrangement shall be governed by and construed in accordance
with the laws of the Province of Ontario and the federal laws of Canada applicable therein. |
| 1.9 | Binding Effect. This Kennady Plan of Arrangement will become effective at, and be binding
at and after, the Effective Time on: (i) Kennady; (ii) Mountain Province; (iii) all registered and beneficial Kennady Shareholders;
(iv) the Dissenting Shareholders; (v) the registrar and transfer agent in respect of the Kennady Shares; and (vi) the Depositary. |
ARTICLE 2
ARRANGEMENT AGREEMENT
| 2.1 | Arrangement Agreement. This Kennady Plan of Arrangement
is made pursuant and subject to the provisions of the Arrangement Agreement. |
ARTICLE 3
THE KENNADY ARRANGEMENT
| 3.1 | The Arrangement. On the Effective Date, commencing at the Effective Time, the following
events or transactions shall occur and be deemed to occur in the following chronological order without any further act or formality
notwithstanding anything contained in the provisions attaching to any of the securities of Kennady or Mountain Province, but subject
to the provisions of Article 4: |
| (a) | At the Effective Time, each Kennady Share held by a Dissenting Shareholder shall, and shall be
deemed to be, transferred by the holder thereof, without any further act or formality on its part, free and clear of all Liens,
to Kennady for cancellation, and Kennady shall thereupon be obliged to pay the amount therefor determined and payable in accordance
with Article 4 hereof, and the name of each such holder shall be removed from the securities register as a holder of Kennady Shares. |
| (b) | All Kennady Shares (other than Kennady Shares held by Mountain Province or Dissenting Shareholders)
shall be transferred to Mountain Province, free and clear of any Liens, and: |
| (i) | each holder thereof shall receive, in exchange for each Kennady Share, the Consideration Shares; |
| (ii) | each holder of the Kennady Shares shall cease to be the holder of such shares and such holder’s
name shall be removed from the securities register of Kennady with respect to such shares; |
| (iii) | Mountain Province shall be entered in the securities register of Kennady as the holder thereof;
and |
| (iv) | Former Kennady Shareholders (other than Dissenting Shareholders) shall be entered in the securities
register of Mountain Province as holders of the Consideration Shares to which they are entitled pursuant to this Section 3.1(b). |
| 3.2 | No Fractional Shares. Notwithstanding any other provision of this Kennady Arrangement, in
no event shall any Former Kennady Shareholder be entitled to a fractional Mountain Province Share. Where the aggregate number of
Mountain Province Shares to be issued to a Former Kennady Shareholder pursuant to |
Section 3.1(b) hereof would result
in a fraction of a Mountain Province Share being issuable, the number of Mountain Province Shares to be received by such Former
Kennady Shareholder shall be: (i) rounded down to the nearest whole Mountain Province Share in the event that the number of fractional
Mountain Province Shares is equal to or less than 0.5; and (ii) rounded up to the nearest whole Mountain Province Share in the
event that the number of fractional Mountain Province Shares is greater than 0.5 and less than 1.0.
| 3.3 | Tax Election. A Former Kennady Shareholder who exchanges Kennady Shares for Mountain Province
Shares pursuant to this Kennady Plan of Arrangement and who provides Mountain Province with a letter of representation in a form
satisfactory to Mountain Province acting reasonably that such Former Kennady Shareholder does not hold their Kennady Shares as
capital property for purposes of the Tax Act, shall be entitled to make an income tax election with Mountain Province, pursuant
to subsection 85(1) or 85(2) of the Tax Act, as applicable (and the analogous provisions of provincial income tax law) by providing
two signed copies of the necessary election forms to Mountain Province within 90 days following the Effective Date, duly completed
including the details of the number of Kennady Shares transferred and the applicable agreed amounts for the purposes of such elections.
Thereafter, subject to the election forms complying with the provisions of the Tax Act (or applicable provincial income tax law),
the forms will be signed by Mountain Province and returned to such Former Kennady Shareholders within 60 days after the receipt
thereof by Mountain Province for filing with the Canada Revenue Agency (or the applicable provincial taxing authority). In its
sole discretion, Mountain Province may choose to sign and return an election form received by it more than 90 days following the
Effective Date, but has no obligation to do so. Mountain Province will not be responsible for the proper completion of any election
form and, except for the obligation of Mountain Province to so sign and return duly completed election forms which are received
by Mountain Province within 90 days of the Effective Date as described above, Mountain Province shall have no other obligation
with respect to any such election and will not be responsible for any taxes, interest, penalties or losses whatsoever resulting
from the failure by a Kennady Shareholder to properly complete or file the election forms in the form and manner and within the
time prescribed by the Tax Act (and any applicable provincial legislation). |
| 3.4 | Deemed Fully Paid and Non-Assessable Shares. All Consideration Shares issued pursuant hereto
shall be deemed to be validly issued and outstanding as fully paid and non-assessable shares for all purposes. |
| 3.5 | Arrangement Effectiveness. The Kennady Arrangement shall become final and conclusively binding
on all registered and beneficial Kennady Shareholders, each of Kennady and Mountain Province, the Dissenting Shareholders, the
registrar and transfer agent in respect of the Kennady Shares and the Depositary on the Effective Date. |
| 3.6 | Supplementary Actions. Notwithstanding that the transactions and events set out in Section
3.1 hereof shall occur and shall be deemed to occur in the chronological order therein set out without any act or formality, each
of Kennady and Mountain Province shall be required to make, do and execute or cause and procure to be made, done and executed all
such further acts, deeds, agreements, transfers, assurances, instruments or documents as may be required to give effect to, or
further document or evidence, any of the transactions or events set out in Section 3.1 hereof, including any resolutions of directors
authorizing the issue, transfer or redemption of shares, any share transfer powers evidencing the transfer of shares and any receipt
therefor, and any necessary additions to or deletions from share registers. |
| 3.7 | Withholding Rights. Mountain Province, Kennady and the Depositary shall be entitled to deduct
and withhold from the consideration payable or otherwise deliverable to any Person, including to Dissenting Shareholders pursuant
to Article 4, and from all dividends, other distributions or other amount otherwise payable to any Former Kennady Shareholders,
such Taxes or other amounts as Mountain Province, Kennady or the Depositary is required, entitled or permitted to deduct and withhold
with respect to such payment under the Tax Act, the Code or any other provisions of any applicable Laws, in each case, as amended.
To the extent that Taxes or other amounts are so deducted and withheld, such deducted and withheld Taxes or other amounts shall
be treated for all purposes of this Kennady Plan of Arrangement as having been paid to the Person in respect of which such deduction
or withholding was made, provided that such deducted or withheld Taxes or other amounts are actually remitted to the appropriate
taxing authority. Mountain Province, Kennady and the Depositary shall be authorized to sell or otherwise dispose of, on behalf
of a Kennady |
Shareholder, such portion of the
Consideration Shares issuable to such Kennady Shareholder (if any) as is necessary to provide sufficient funds to enable it to
comply with its deducting or withholding requirements and such party shall notify the applicable Kennady Shareholder of the details
of such disposition, including the gross proceeds and any adjustments to the proceeds, and remit any unapplied balance of the net
proceeds of such sale to such Kennady Shareholder.
ARTICLE 4
RIGHTS OF DISSENT
| 4.1 | Rights of Dissent. The Kennady Shareholders may exercise rights of dissent (the “Dissent
Rights”) in connection with the Kennady Arrangement pursuant to the Kennady Interim Order and the Kennady Final Order
and in the manner set forth in Section 185 of the OBCA, provided that the written notice setting forth the objection of such registered
Kennady Shareholders to the Kennady Arrangement and exercise of Dissent Rights must be received by Kennady not later than 5:00
p.m. (Toronto Time) on the Business Day that is two Business Days before the Kennady Meeting or any date to which the Kennady Meeting
may be postponed or adjourned and provided further that holders who exercise such rights of dissent and who: |
| (a) | are ultimately entitled to be paid fair value for their Kennady Shares, which fair value, notwithstanding
anything to the contrary contained in the OBCA, shall be determined immediately prior to the approval of the Kennady Arrangement
Resolution, shall be deemed to have transferred their Kennady Shares to Kennady as of the Effective Time in consideration for a
debt claim against Kennady to be paid the fair value of such Kennady Shares and will not be entitled to any other payment or consideration,
including any payment that would be payable under the Kennady Arrangement had such holders not exercised their Dissent Rights;
and |
| (b) | are ultimately not entitled, for any reason, to be paid fair value for their Kennady Shares shall
be deemed to have participated in the Kennady Arrangement, as of the Effective Time, on the same basis as a non-dissenting holder
of Kennady Shares, and shall be entitled to receive only the consideration contemplated in Section 3.1(b) hereof (less any Taxes
or other amounts deducted or withheld pursuant to Section 3.7 hereof) that such Kennady Shareholder would have received pursuant
to the Kennady Arrangement if such Kennady Shareholder had not exercised Dissent Rights. |
| 4.2 | Recognition of Dissenting Shareholders. In no circumstances shall Kennady or any other Person
be required to recognize a Person exercising Dissent Rights unless such Person is a registered holder of those Kennady Shares in
respect of which such rights are sought to be exercised. From and after the Effective Date, neither Kennady nor any other Person
shall be required to recognize a Dissenting Shareholder as a shareholder of Kennady and the names of the Dissenting Shareholders
shall be deleted from the register of holders of Kennady Shares previously maintained or caused to be maintained by Kennady. |
ARTICLE 5
CERTIFICATES AND PAYMENTS
| 5.1 | Mountain Province Shares. Mountain Province shall
deliver or arrange to be delivered to the Depositary the Consideration Shares in certificated or book-entry form required to be
issued to Kennady Shareholders, which Consideration Shares shall be held by the Depositary as agent and nominee for such Kennady
Shareholders for delivery to such Kennady Shareholders in accordance with the provisions of Section 6.1(a) hereof. |
ARTICLE 6
DELIVERY OF SHARES
| 6.1 | Delivery of Mountain Province Shares. |
| (a) | Upon surrender to the Depositary for cancellation of a certificate, or in the case of Kennady Shares
in uncertificated or book-entry form, an “agent’s message” evidencing the surrender of such shares, that immediately
before the Effective Time represented one or more outstanding Kennady Shares that were transferred in consideration for the Consideration
Shares in accordance with Section 3.1(b) hereof together with a duly completed and executed letter of transmittal and such other
documents and instruments as would have been required to effect the transfer of such Kennady Shares under the OBCA and the articles
and by laws of Kennady and such additional documents and instruments as the Depositary may reasonably require, the holder of such
surrendered Kennady Shares shall be entitled to receive in exchange therefor, and the Depositary shall deliver on behalf of Mountain
Province to such holder following the Effective Time, the Consideration Shares in certificated or book-entry form, that such holder
is entitled to receive in accordance with Section 3.1(b) hereof. |
| (b) | After the Effective Time and until surrendered for cancellation as contemplated by Section 6.1(a)
hereof, each Kennady Share shall be deemed at all times to represent only the right to receive in exchange therefor the Consideration
Shares that the holder of such Kennady Shares is entitled to receive in accordance with Section 3.1(b) hereof. |
| 6.2 | Lost Certificates. If any certificate that immediately prior to the Effective Time represented
one or more outstanding Kennady Shares that were exchanged for Consideration Shares in accordance with Section 3.1(b) hereof, shall
have been lost, stolen or destroyed, upon the making of an affidavit of that fact by the holder claiming such certificate to be
lost, stolen or destroyed, the Depositary shall deliver, in exchange for such lost, stolen or destroyed certificate, a certificate
representing the Consideration Shares that such holder is entitled to receive in accordance with Section 3.1(b) hereof. When authorizing
such delivery in exchange for such lost, stolen or destroyed certificate, the holder to whom such delivery is to be made shall,
as a condition precedent to such delivery, give a bond satisfactory to Mountain Province and the Depositary in such amount as Mountain
Province and the Depositary may direct, or otherwise indemnify Mountain Province and the Depositary in a manner satisfactory to
Mountain Province and the Depositary, against any claim that may be made against Mountain Province or the Depositary with respect
to the certificate alleged to have been lost, stolen or destroyed, and shall otherwise take such actions as may be required by
the articles or by laws of Kennady. |
| 6.3 | Distributions with Respect to Unsurrendered Certificates. No dividend or other distribution
declared or made after the Effective Time with respect to Mountain Province Shares with a record date after the Effective Time
shall be delivered to the holder of any unsurrendered Kennady Shares, unless and until the holder of such Kennady Shares shall
have complied with the provisions of Section 6.1 hereof. Subject to applicable Law and to Section 6.4 hereof, at the time of such
compliance, there shall, in addition to the delivery of the Consideration Shares to which such holder is entitled in accordance
with Section 3.1(b) hereof, be delivered to such holder, without interest, the amount of the dividend or other distribution with
a record date after the Effective Time theretofore paid with respect to such Consideration Shares. |
| 6.4 | Limitation and Proscription. To the extent that a Former Kennady Shareholder shall not have
complied with the provisions of Section 6.1 or Section 6.2 hereof on or before the date that is six years after the Effective Date
(the “final proscription date”), then the Consideration Shares that such Former Kennady Shareholder was entitled
to receive shall be automatically cancelled without any repayment of capital in respect thereof and, as of such final proscription
date, the Depositary shall deliver the certificates representing such Consideration Shares to Mountain Province and Mountain Province
shall cancel such share certificate, and the interest of the Former Kennady Shareholder in such Consideration Shares to which it
was entitled shall be terminated. |
| 6.5 | Paramountcy. From and after the Effective Time: (i) this Kennady Plan of Arrangement shall
take precedence and priority over any and all Kennady Shares issued prior to the Effective Time or pursuant to |
this Kennady Plan of Arrangement;
(ii) the rights and obligations of the registered holders of Kennady Shares (including Dissenting Shareholders) and Kennady, Mountain
Province, the Depositary and any transfer agent or other Depositary in relation thereto, shall be solely as provided for in this
Kennady Plan of Arrangement; and (iii) all actions, causes of action, claims or proceedings (actual or contingent and whether or
not previously asserted) based on or in any way relating to any Kennady Shares shall be deemed to have been settled, compromised,
released and determined without liability except as set forth herein.
ARTICLE 7
AMENDMENT AND FURTHER ASSURANCES
| 7.1 | Amendments to Plan of Arrangement |
| (a) | The Arrangement Agreement and the Kennady Plan of Arrangement may be amended at any time and from
time to time before or after the holding of the Kennady Meeting but not later than the Effective Time; provided that any such amendment
(i) is in writing and is agreed to in writing by the Parties; (ii) if required, is filed with the Court; and (iii) if made following
the Kennady Meeting, is approved by the Court and, if and as required by the Court, is communicated to Kennady Shareholders and/or
consented to by Kennady Shareholders. |
| (b) | Any amendment made before the Kennady Meeting in accordance with this Section 7.1 may be made with
or without any other prior notice or communication and, if accepted by the Kennady Shareholders voting at the Kennady Meeting (other
than as may be required under the Interim Order), shall become part of the Arrangement Agreement and the Kennady Plan of Arrangement
for all purposes. |
| (c) | Any amendment, modification or supplement to this Kennady Plan of Arrangement may be made by the
Parties without the approval of or communication to the Court or the Kennady Shareholders, provided that it concerns a matter which,
in the reasonable opinion of the Parties is of an administrative or ministerial nature required to better give effect to the implementation
of this Kennady Plan of Arrangement and is not materially adverse to the financial or economic interests of any of Kennady Shareholders. |
| (d) | Notwithstanding the foregoing provisions of this Article 7, no amendment, modification or supplement
of this Kennady Plan of Arrangement may be made prior to the Effective Time except in accordance with the terms of the Arrangement
Agreement. |
| 7.2 | Further Assurances. Notwithstanding that the transactions and events set out herein shall
occur and be deemed to occur at the time and in the manner set out in this Kennady Plan of Arrangement without any further act
or formality, Kennady and Mountain Province shall make, do and execute, or cause to be made, done or executed, all such further
acts, deeds, agreements, transfers, assurances, instruments or documents as may reasonably be required by any of them in order
to further document or evidence any of the transactions or events set out herein. |
SCHEDULE “E”
FAIRNESS OPINION OF RBC CAPITAL MARKETS
See attached.
 |
RBC Dominion Securities Inc.
P.O. Box 50
Royal Bank Plaza
Toronto, Ontario M5J 2W7
Telephone:
(416) 842-2000
|
January 27, 2018
The Special Committee of the Board of Directors
Mountain Province Diamonds Inc.
161 Bay Street, Suite 1410
P.O. Box 216
Toronto, Ontario
M5J 2S1
To the Special Committee:
RBC Dominion Securities
Inc. (“RBC”), a member company of RBC Capital Markets, understands that Mountain Province Diamonds Inc. (“Mountain
Province” or the “Company”) and Kennady Diamonds Inc. (“Kennady”) propose to enter into an agreement
to be dated January 28, 2018 (the “Arrangement Agreement”) to effect a plan of arrangement (the “Arrangement”)
under the Business Corporations Act (Ontario) pursuant to which Mountain Province will acquire all of the issued and outstanding
common shares of Kennady (the “Kennady Shares”) for consideration of 0.975 of a common share of Mountain Province (the
“Mountain Province Shares”) for each Kennady Share. RBC also understands that Mountain Province will be providing financing
to Kennady of up to $10 million via an equity private placement at $2.50 per Kennady Share in multiple tranches designed to coincide
with Kennady’s planned near-term exploration expenditures. The terms of the Arrangement will be more fully described in a
management information circular (the “Circular”), which will be mailed to shareholders of the Company (each a “Mountain
Province Shareholder”) in connection with the Arrangement.
RBC also understands that
Mr. Dermot Desmond, beneficial owner of Bottin (International) Investments Ltd. (collectively the “Significant Shareholder”),
controls approximately 23.7% of the outstanding Mountain Province Shares and approximately 28.5% of the outstanding Kennady Shares,
and the Significant Shareholder has entered into voting and support agreements with each of Kennady and Mountain Province to vote
these Mountain Province Shares and Kennady Shares, respectively, in favour of the Arrangement. Each of the directors and senior
officers of Mountain Province, who in aggregate control approximately 0.7% of the Mountain Province Shares, have also entered into
voting and support agreements with Kennady whereby they will vote their Mountain Province Shares in favour of the issuance of Mountain
Province Shares pursuant to the Arrangement. Further, each of the directors and senior officers of Kennady, who in aggregate control
approximately 0.1% of the Kennady Shares, have entered into voting and support agreements with Mountain Province whereby they will
vote their Kennady Shares in favour of the Arrangement. The Significant Shareholder and each of the supporting shareholders above
shall be excluded for the purpose of minority approval under Multilateral Instrument 61-101 (“MI 61-101”).
RBC understands that a
committee (the “Special Committee”) of the board of directors (the “Board”) of the Company who are independent
of the Significant Shareholder has been constituted to consider the Arrangement and make recommendations thereon to the Board.
RBC was instructed by the Special Committee that the Arrangement is a “related party transaction” within the meaning
of MI 61-101. The Special Committee has retained RBC to prepare and deliver to the Special Committee
RBC’s opinion (the “Fairness Opinion”)
as to the fairness of the consideration to be paid under the Arrangement from a financial point of view to Mountain Province. RBC
has not prepared a valuation of the Company, Kennady, or any of their respective securities or assets and the Fairness Opinion
should not be construed as such.
Engagement
The Special Committee initially
contacted RBC regarding a potential advisory assignment in early January 2018, and RBC was formally engaged by the Special Committee
through an agreement between the Company and RBC (the “Engagement Agreement”) dated January 10, 2018. The terms of
the Engagement Agreement provide that RBC is to be paid $700,000 for the Fairness Opinion (regardless of its conclusion). In addition,
RBC is to be reimbursed for its reasonable out-of-pocket expenses and to be indemnified by the Company in certain circumstances.
RBC consents to the inclusion of the Fairness Opinion in its entirety and a summary thereof in the Circular and to the filing thereof,
as necessary, by the Company with the securities commissions or similar regulatory authorities in each province of Canada.
Relationship With Interested Parties
Neither RBC, nor any of
its affiliates is an insider, associate or affiliate (as those terms are defined in the Securities Act (Ontario)) of the
Company, Kennady, Significant Shareholder or any of their respective associates or affiliates. RBC has not been engaged to provide
any financial advisory services nor has it participated in any financing involving the Company, Kennady, the Significant Shareholder
or any of their respective associates or affiliates, within the past two years, other than the services provided under the Engagement
Agreement. There are no understandings, agreements or commitments between RBC and the Company, Kennady, the Significant Shareholder
or any of their respective associates or affiliates with respect to any future business dealings. RBC may, in the future, in the
ordinary course of its business, perform financial advisory or investment banking services for the Company, Kennady, the Significant
Shareholder or any of their respective associates or affiliates. The compensation of RBC under the Engagement Agreement does not
depend in whole or in part on the conclusions reached in the Fairness Opinion or the successful outcome of the Arrangement.
RBC acts as a trader and
dealer, both as principal and agent, in major financial markets and, as such, may have had and may in the future have positions
in the securities of the Company, Kennady, the Significant Shareholder or any of their respective associates or affiliates and,
from time to time, may have executed or may execute transactions on behalf of such companies or clients for which it received or
may receive compensation. As an investment dealer, RBC conducts research on securities and may, in the ordinary course of its business,
provide research reports and investment advice to its clients on investment matters, including with respect to the Company, Kennady,
or any of their respective associates or affiliates or the Arrangement.
Credentials of RBC Capital Markets
RBC is one of Canada’s
largest investment banking firms, with operations in all facets of corporate and government finance, corporate banking, mergers
and acquisitions, equity and fixed income sales and trading and investment research. RBC Capital Markets also has significant operations
in the United States and internationally. The Fairness Opinion expressed herein represents the opinion of RBC and the form and
content herein have been approved for release by a committee of its directors, each of whom is experienced in merger, acquisition,
divestiture and fairness opinion matters.
Scope of Review
In connection with our
Fairness Opinion, we have reviewed and relied upon or carried out, among other things, the following:
| 1. | the most recent draft, dated January 26, 2018, of the Arrangement Agreement; |
| 2. | the most recent drafts, dated January 27, 2018, of the voting and support agreements to be entered
into by the Significant Shareholder, and the directors and senior officers of Kennady and Mountain Province; |
| 3. | audited financial statements of Mountain Province for each of the five years ended December 31,
2012, 2013, 2014, 2015, and 2016; |
| 4. | audited financial statements of Kennady for the period from incorporation on February 27, 2012
to December 31, 2012, and for each of the four years ended December 31, 2013, 2014, 2015, and 2016; |
| 5. | the unaudited interim reports of Mountain Province and Kennady for the quarters ended March 31,
2017, June 30, 2017, and September 30, 2017; |
| 6. | annual reports of Mountain Province and Kennady for each of the two years ended December 31, 2015
and 2016; |
| 7. | the Notices of Annual General & Special Meeting of Shareholders and Management Information
Circulars of Mountain Province for the meetings held on June 21, 2016 and April 4, 2017; |
| 8. | the Notices of Annual General & Special Meeting of Shareholders and Management Information
Circulars of Kennady for the meetings held on June 21, 2016 and June 20, 2017; |
| 9. | annual information forms of Mountain Province and Kennady for each of the two years ended December
31, 2015 and 2016; |
| 10. | unaudited financial projections for Mountain Province prepared by management of the Company for
the years ending December 31, 2018 to December 31, 2028 (the “Mountain Province Management Projections”); |
| 11. | the preliminary information and financial projections regarding resources, milling costs, and mining
costs for Kennady, dated January 24, 2018, prepared by JDS Energy & Mining Inc. (“JDS”), Mountain Province’s
technical advisor, for use by Mountain Province for the years ending December 31, 2018 to December 31, 2034 (the “Kennady
Projections”); |
| 12. | the technical report on the Gahcho Kué Mine (as defined below) dated May 13, 2014 (effective
date March 31, 2014) and as amended May 27, 2014 prepared by JDS and Hatch Ltd.; |
| 13. | the technical report on the Kennady North project dated January 24, 2017 prepared by Aurora Geosciences
Ltd. (“Aurora”); |
| 14. | the technical report on the Kennady North project dated November 16, 2017 prepared by Aurora; |
| 15. | discussions with senior management of Mountain Province and Kennady; |
| 16. | discussions with Mountain Province’s legal counsel; |
| 18. | public information relating to the business, operations, financial performance and stock trading
history of each of Mountain Province, Kennady and other selected public companies considered by us to be relevant; |
| 19. | public information with respect to other transactions of a comparable nature considered by us to
be relevant; |
| 20. | public information regarding the diamond mining industry; |
| 21. | representations contained in certificates addressed to us, dated as of the date hereof, from senior
officers of Mountain Province and Kennady as to the completeness and accuracy of the information upon which the Fairness Opinion
is based; and |
| 22. | such other corporate, industry and financial market information, investigations and analyses as
RBC considered necessary or appropriate in the circumstances. |
RBC has not, to the best
of its knowledge, been denied access by Mountain Province or Kennady to any information requested by RBC.
Prior Valuations
Mountain Province and Kennady
have each represented to RBC that there have not been any prior valuations (as defined in Multilateral Instrument 61-101) of their
respective companies or their material assets or their securities in the past twenty-four month period.
Assumptions and Limitations
With the Special Committee’s
approval and as provided for in the Engagement Agreement, RBC has relied upon the completeness, accuracy and fair presentation
of all of the financial (including, without limitation, the financial statements of Mountain Province and Kennady) and other information,
data, advice, opinions or representations obtained by it from public sources, senior management of each of Mountain Province and
Kennady, and their respective consultants and advisors (collectively, the “Mountain Province Information” as it relates
to Mountain Province and its associates and affiliates, and the “Kennady Information” as it relates to Kennady and
its associates and affiliates). The Fairness Opinion is conditional upon such completeness, accuracy and fair presentation of such
Mountain Province Information and Kennady Information. Subject to the exercise of professional judgment and except as expressly
described herein, we have not attempted to verify independently the completeness, accuracy or fair presentation of any of the Mountain
Province Information or Kennady Information.
Senior officers of Mountain
Province have represented to RBC in a certificate delivered as of the date hereof, among other things, that the Mountain Province
Information provided to RBC orally by, or in the presence of, any officer or employee of the Company, or in writing by the Company,
any of its affiliates (as such term is defined in National Instrument 62-104 Take-Over Bids and Issuer Bids of the Canadian Securities
Administrators) or any of their respective agents or advisors, for the purpose of preparing the Fairness Opinion (i) was, at the
date provided to RBC, and is at the date hereof complete, true and correct in all material respects, (ii) did not and does not
contain any untrue statement of a material fact, and (iii) did not and does not omit to state any material fact necessary to make
such Mountain Province Information, or any statement contained therein, not misleading in light of the circumstances in which it
was provided to RBC. Since the dates on which the Mountain Province Information was provided to RBC, except as disclosed in writing
to RBC, there has been no (i) material change or change in material facts, financial or otherwise, in or relating to the financial
condition, assets, liabilities (contingent or otherwise), business, operations or prospects of the Company or any of its subsidiaries,
(ii) material change in the Mountain Province Information, or (iii) other material change or change in material facts, in each
case, that might reasonably be considered material to the Fairness Opinion.
Senior officers of Kennady
have represented to RBC in a certificate delivered as of the date hereof, among other things, that the Kennady Information provided
to RBC orally by, or in the presence of, any officer or employee of the Company, or in writing by the Company, any of its affiliates
(as such term is defined in National Instrument 62-104 Take-Over Bids and Issuer Bids of the Canadian Securities Administrators)
or any of their respective agents or advisors, for the purpose of preparing the Fairness Opinion (i) was, at the date provided
to RBC, and is at the date hereof complete, true and correct in all material respects, (ii) did not and does not contain any untrue
statement of a material fact, and (iii) did not and does not omit to state any material fact necessary to make such Kennady Information,
or any statement contained therein, not misleading in light of the circumstances in which it was provided to RBC. Since the dates
on which the Kennady Information was provided to RBC, except as disclosed in writing to RBC, there has been no (i) material change
or change in material facts, financial or otherwise, in or relating to the financial condition, assets, liabilities (contingent
or otherwise), business, operations or prospects of the Company, (ii) material change in the Kennady Information, or (iii) other
material change or change in material facts, in each case, that might reasonably be considered material to the Fairness Opinion.
In preparing the Fairness
Opinion, RBC has made several assumptions, including that all of the conditions required to implement the Arrangement will be met.
The Fairness Opinion is
rendered on the basis of securities markets, economic, financial and general business conditions prevailing as at the date hereof
and the condition and prospects, financial and otherwise, of Mountain Province, Kennady, and their respective subsidiaries and
affiliates, as they were reflected in the Mountain Province Information and Kennady Information and as they have been represented
to RBC in discussions with management of each of Mountain Province and Kennady. In its analyses and in preparing the Fairness Opinion,
RBC made numerous assumptions with respect to industry performance, general business and economic conditions and other matters,
many of which are beyond the control of RBC or any party involved in the Arrangement.
The Fairness Opinion has
been provided for the use of the Special Committee and the Board and may not be used by any other person or relied upon by any
other person other than the Special Committee and the Board without the express prior written consent of RBC. The Fairness Opinion
is given as of the date hereof and RBC disclaims any undertaking or obligation to advise any person of any change in any fact or
matter affecting the Fairness Opinion which may come or be brought to RBC’s attention after the date hereof. Without limiting
the foregoing, in the event that there is any material change in any fact or matter affecting the Fairness Opinion after the date
hereof, RBC reserves the right to change, modify or withdraw the Fairness Opinion.
RBC believes that its analyses
must be considered as a whole and that selecting portions of the analyses or the factors considered by it, without considering
all factors and analyses together, could create a misleading view of the process underlying the Fairness Opinion. The preparation
of a fairness opinion is a complex process and is not necessarily susceptible to partial analysis or summary description. Any attempt
to do so could lead to undue emphasis on any particular factor or analysis. The Fairness Opinion is not to be construed as a recommendation
to any Mountain Province Shareholder as to whether to vote in favour of the issuance of Mountain Province Shares pursuant to the
Arrangement.
Overview of Mountain Province Diamonds Inc.
Mountain Province is a
Toronto-based diamond mining company that is listed on the Toronto Stock Exchange (“TSX”) and NASDAQ exchanges. Mountain
Province has a 49% ownership interest in the Gahcho Kué mine (the “Gahcho Kué Mine” or the “Mine”),
which is located at Kennady Lake
approximately 300 kilometres northeast of Yellowknife,
Northwest Territories. The Mine was built and is operated by a joint venture (the “Gahcho Kué Joint Venture”
or the “Joint Venture””) in which Mountain Province has an undivided 49% interest. De Beers Canada Inc. (“De
Beers”) has an undivided interest of 51% in the Joint Venture and operates the Mine. The Gahcho Kué Mine commenced
commercial production in March 2017. As of December 31, 2016, the Mine had probable reserves of 54.6 million carats of diamonds
at a grade of 1.57 carats per tonne and inferred resources of 18.5 million carats of diamonds at a grade of 1.63 carats per tonne.
For the nine months ended
September 30, 2017, Mountain Province generated net income of C$33.1 million. As at September 30, 2017, Mountain Province had total
assets of C$884.8 million.
Overview of Kennady Diamonds Inc.
Kennady is a Toronto-based
diamond exploration company that is listed on the TSX Venture Exchange (“TSXV”). The Company’s main focus is
the 100% owned Kennady North project, located approximately 300 kilometres northeast of Yellowknife, and immediately adjacent to
the Gahcho Kué Mine. As of November 16, 2017, Kennady had indicated resources of 13.6 million carats of diamonds at a grade
of 1.60 carats per tonne and inferred resources of 5.0 million carats of diamonds at a grade of 1.54 carats per tonne, as summarized
below:
Kennady Resource Summary
| |
Tonnage (Mt) |
Grade (cpt) |
Carats (Mct) |
Value (US$/ct) |
| |
|
|
|
|
| Indicated Resource |
|
|
|
|
| Kelvin |
8.50 |
1.60 |
13.62 |
$63 |
| Total Indicated Resource |
8.50 |
1.60 |
13.62 |
$63 |
| |
|
|
|
|
| Inferred Resource |
|
|
|
|
| Faraday 2 |
1.39 |
2.24 |
3.13 |
$112 |
| Faraday 3 |
1.87 |
1.01 |
1.90 |
$75 |
| Total Inferred Resource |
3.27 |
1.54 |
5.02 |
$98 |
| Total Resource |
11.77 |
1.58 |
18.64 |
$72 |
Source: Kennady North Project Technical
Report, dated November 16, 2017, prepared by Aurora Geosciences Ltd.
Kennady Target for Further Exploration Estimates
(“TFFE”)
| |
Tonnage (Mt) |
Grade (+1 mm cpt) |
| |
Low |
High |
Low |
High |
| |
|
|
|
|
| Faraday 1 |
0.6 |
1.2 |
1.5 |
3.7 |
| Faraday 2 |
0.01 |
0.04 |
- |
- |
Source: Kennady North Project Technical
Report, dated November 16, 2017, prepared by Aurora Geosciences Ltd.
For the nine months ended
September 30, 2017, Kennady generated a net loss of C$18.6 million. As at September 30, 2017, Kennady had total assets of C$4.8
million.
Fairness Analysis
Approach to Fairness
In considering the fairness
of the consideration to be paid under the Arrangement from a financial point of view to Mountain Province, RBC principally considered
and relied upon a comparison of the consideration under the Arrangement to the results of a net asset value (“NAV”)
analysis of Kennady. A precedent transactions analysis of diamond exploration, development, and production
companies was also considered, however RBC
placed less reliance on this analysis for the reasons listed under Summary of Precedent Transaction Analysis.
RBC also reviewed trading
multiples of publicly traded comparable diamond companies similar to Kennady, but noted that differences in size and stage of these
companies limit the applicability of this analysis and, given that public company values generally reflect minority discount values
rather than “en bloc” values, RBC did not rely on this methodology.
Review of Consideration
Historical Trading Analysis
In assessing the value
of the Mountain Province Shares being issued under the Arrangement, RBC relied on the market trading value approach in view of
the following: (i) Mountain Province is followed by equity market analysts and trades on a comparable basis and manner consistent
with other comparable publicly traded companies; and (ii) the liquidity of the Mountain Province Shares.
During RBC’s review
of Mountain Province, including discussions with Mountain Province management, RBC was not made aware of any material information
regarding Mountain Province that has not been publicly disclosed, or that would reasonably be expected to materially positively
affect the market price of the Mountain Province Shares.
RBC reviewed the historical
trading prices and volumes for the Mountain Province Shares. As shown in the table below, such review included, among other things,
RBC’s analysis of the average daily trading volume and volume weighted average trading price over various periods ended January
26, 2018.
| |
TSX |
|
Period Ending
January 26, 2018 |
Trading Price |
Average Daily
Trading Volume |
Implied Value of Consideration |
| |
(C$) |
|
(C$
per share(1)) |
(C$
millions(2)) |
| Closing |
$3.55 |
1,240,168 |
$3.46 |
$176.2 |
| 1 Day Volume Weighted Average |
$3.42 |
1,240,168 |
$3.33 |
$169.8 |
| 5 Day Volume Weighted Average |
$3.43 |
439,824 |
$3.35 |
$170.3 |
| 10 Day Volume Weighted Average |
$3.45 |
316,960 |
$3.36 |
$171.3 |
| 30 Day Volume Weighted Average |
$3.46 |
269,269 |
$3.37 |
$171.8 |
Source: Bloomberg
Notes:
| 1) | Based
on the applicable Mountain Province share price multiplied by 0.975 shares per Kennady
Share under the Arrangement |
| 2) | Based
on 49.6 million Mountain Province shares issued under the Arrangement |
Summary of Review of Consideration
Based on the foregoing
analysis, RBC believes that the market trading price of the Mountain Province Shares is an appropriate indicator of the per-share
value of the consideration to be paid under the Arrangement. Based on the closing price of $3.55 of the Mountain Province Shares
on the TSX on January 26, 2018, RBC calculated the per-share value of the consideration to be paid under the Arrangement to be
approximately $3.46 per Kennady Share and the total consideration to be approximately $176.2 million.
Net Asset Value Analysis
The NAV approach allows
for the separate assessment of all assets and liabilities on a proportionate ownership basis in the manner most appropriate to
the nature of the particular asset or liability. The NAV analysis incorporates the use of a discounted cash flow (“DCF”)
analysis to determine the asset values. Adjustments are made for balance sheet items which are either added to or subtracted from
the DCF values to arrive at the NAV for the Company.
In conducting the NAV analysis,
RBC relied on a life-of-mine DCF analysis of Kennady reflecting the potential to utilize existing plant, equipment, and personnel
from the Gahcho Kué Mine and considering the opportunity cost of adjustments to the Gahcho Kué Joint Venture mine
plan required to accommodate mining and processing of ore from the Kennady deposit (the “Opportunity Costs”). Such
utilization will be subject to negotiated agreement with De Beers as the Joint Venture partner and operator of the Mine.
Discounted Cash Flow
Analysis
The DCF approach takes
into account the amount, timing and relative certainty of projected unlevered free cash flows expected to be generated by Kennady.
The DCF approach requires that certain assumptions be made regarding, among other things, future cash flows, discount rates and
terminal values. The possibility that some of the assumptions will prove to be inaccurate is one factor involved in the determination
of the discount rates to be used.
Assumptions
RBC performed a life-of-mine
DCF analysis on Kennady based on projected unlevered after-tax real free cash flows attributable to the Joint Venture. As a basis
for the development of the projected future cash flows, RBC reviewed the Kennady Projections, which assumed the utilization of
plant, equipment, and personnel from the Gahcho Kué Mine and therefore reflected lower required operating and capital expenditures
than would otherwise be required to develop and mine Kennady North on a standalone basis. While no agreement is in place, based
on discussions with management of Mountain Province, RBC assumed the Company would be able to reach an agreement with De Beers
to allow for utilization of the Mine’s infrastructure for the Kennady resources and that De Beers would acquire 51% of Kennady
in order to maintain the current Joint Venture ownership structure.
The Kennady Projections
assume a life-of-mine production period of 2022 to 2034 based on mining the indicated resource from the Kelvin kimberlite, the
inferred resource from the Faraday 2 and 3 kimberlites, and a portion of the Faraday 1 TFFE. RBC also reviewed the Mountain Province
Management Projections in order to assess the timing impact and magnitude of the Opportunity Costs. RBC developed the base case
projections for the pro forma Gahcho Kué entity (the “Base Case”, see Appendix A) after having discussions with
management of Mountain Province and with the benefit of understanding the assumptions behind the Kennady Projections, the Mountain
Province Management Projections, and the calculation of the Opportunity Costs.
In preparing the Base Case,
RBC generally accepted the assumptions of the Mountain Province Management Projections and the Kennady Projections as given, subject
to the adjustments relating to the Opportunity Costs noted above. With respect to diamond prices, RBC relied on the available technical
reports for Kennady and management estimates for Mountain Province for 2018, and assumed 2% real annual growth thereafter based
predominantly on equity research analyst consensuses estimates.
Sensitivity Analysis
In completing our DCF analysis,
RBC did not rely on any single series of projected cash flows but performed a variety of sensitivity analyses using the aforementioned
Base Case forecast. Variables sensitized included real annual growth in diamond prices, capital expenditures, operating costs,
terms of a potential agreement with De Beers to include Kennady in the Joint Venture, and discount rates. RBC also considered
the potential value of future exploration opportunities at Kennady. The results of these sensitivity analyses are reflected in
our judgment as to the fairness of the consideration to be paid under the Arrangement from a financial point of view to Mountain
Province.
Discount Rates
RBC selected a range of
real discount rates between 7% and 9% to apply to the projected future cash flows of Kennady. RBC believes that this range of discount
rates reflects the risk inherent in Kennady and Mountain Province based on their current stage of development and geographic location.
RBC also believes that these ranges are representative of those used by financial and industry participants in evaluating assets
of this nature.
Summary of NAV Analysis
The NAV approach, including
taking into account sensitivity analyses as described above, generates results that are consistent with the consideration to be
paid under the Arrangement.
Precedent Transaction
Analysis
RBC reviewed the available
public information with respect to precedent transactions involving companies primarily focused on diamond exploration, development,
and production. For the purposes of its analysis, RBC determined that the transactions set forth below are most comparable to the
Arrangement, but note that each transaction is: (i) unique in terms of size, stage of development, percentage acquired, geography,
resource upside potential and projected capital and operating costs, (ii) reflective of the diamond price environment prevailing
at the time of the transaction, and (iii) reflective of the strategic rationale of both the respective acquiror and target and
the potential synergies of the transaction. The primary criterion used in analyzing these transactions is transaction value to
diamond resource value.
| |
|
|
Transaction |
Transaction Value / Diamond Value |
| Ann. Date |
Target |
Acquiror |
Value(1) |
Reserve Only |
Total Resource |
| |
|
|
(US$M) |
(%) |
(%) |
| Diamond Developers |
|
|
|
|
|
| 04-Oct-10 |
African Diamonds |
Lucara |
$73 |
12.0% |
6.3% |
| 21-Jul-10 |
Kopane |
Firestone |
$78 |
n/a |
3.7% |
| 10-Nov-09 |
AK6
(70%)(2) |
Lucara |
$49 |
n/a |
4.2%(3) |
| 29-May-07 |
Gope |
Gem Diamonds |
$34 |
n/a |
1.9% |
| Median (Developers) |
|
|
|
12.0% |
3.9% |
| Average (Developers) |
|
|
|
12.0% |
4.0% |
| Diamond Producers |
|
|
|
|
| 17-Jul-17 |
Dominion Diamond |
Washington |
$1,051 |
10.8% |
6.2% |
| 13-Nov-12 |
Ekati (80% / 59%)(4) |
Dominion Diamond |
$562 |
18.7% |
4.4% |
| 04-Nov-11 |
De Beers (40%) |
Anglo American |
$5,100 |
29.6%(5) |
8.7%(5) |
| 21-Jan-11 |
Finsch |
Petra |
$250(6) |
7.8% |
4.3% |
| 18-Nov-09 |
Cullinan (37%) |
Petra |
$193 |
142.3% |
3.9% |
| 22-Nov-07 |
Cullinan |
Petra / Al Rajhi / BEE |
$149 |
20.5%(7) |
0.8%(7) |
| 19-Jul-07 |
Kimberley |
Gem Diamonds |
$331 |
n/a |
38.4% |
| Median (Producers) |
|
|
19.6% |
4.4% |
| Average (Producers) |
|
|
35.6% |
9.5% |
| Median (Developers & Producers) |
|
|
18.7% |
4.3% |
| Average (Developers & Producers) |
|
|
34.6% |
7.5% |
Source: Company reports, Street research,
RBC analysis
| (1) | Transaction
value defined as the sum of total consideration paid for equity interest, debt assumed,
non-controlling interest, and environmental and reclamation obligations assumed, less
cash acquired |
| (2) | African
Diamonds granted a call option exercisable for 120 days to increase its interest in the
project by a further 10.268% in consideration for ~$7 million plus interest at 8% per
annum, reducing Lucara’s ownership to 60% |
| (3) | Resource
estimate released subsequent to transaction closing by Lucara |
| (4) | Dominion
Diamond acquired an 80% interest in the Core Zone and a 58.8% interest in the Buffer
Zone |
| (5) | Reserve
and resource estimate released subsequent to transaction closing by Anglo American; average
value per carat calculated as 2012 sales divided by 2012 carats sold |
| (6) | Includes
$40 million paid to the South African Department of Mineral Resources for the environmental
guarantee and working capital requirements at Finsch; excludes capex acceleration and
deferred consideration settlement |
| (7) | Reserve
and resource estimate released subsequent to transaction closing by Petra |
Summary of Precedent
Transaction Analysis
RBC calculated the transaction
value to total resource value implied by the Arrangement to be 10.5%. However, none of the precedent transactions involved the
same degree of significant capital and operating synergies that may be achieved under the Arrangement. Therefore, precedent transaction
multiples were considered but not relied upon to arrive at a conclusion on the fairness of the consideration to be paid under the
Arrangement.
Fairness Conclusion
Based upon and subject
to the foregoing, RBC is of the opinion that, as of the date hereof, the consideration to be paid under the Arrangement is fair
from a financial point of view to Mountain Province.
Yours very truly,
 |
|
| |
|
| RBC DOMINION SECURITIES INC. |
|
Appendix A – Kennady Base Case
Forecast(1)
(C$ millions)
| |
Years Ending December 31, |
| |
2018E |
2019E |
2020E |
2021E |
2022E |
2023E |
2024E |
2025E |
2026E |
| Free Cash Flow |
|
|
|
|
|
|
|
|
|
| Net
Revenue(2) |
$- |
$- |
$- |
$- |
$286 |
$152 |
$155 |
$143 |
$231 |
| EBITDA(3) |
- |
- |
- |
- |
189 |
65 |
98 |
62 |
145 |
| Capital Expenditure |
(10) |
(14) |
(10) |
(19) |
(8) |
- |
- |
(11) |
(28) |
| Unlevered Cash Taxes |
- |
- |
- |
- |
(30) |
(19) |
(29) |
(18) |
(42) |
| Opportunity Costs (After Tax) |
- |
- |
- |
- |
(50) |
52 |
13 |
(117) |
(186) |
| Free
Cash Flow |
(10) |
(14) |
(10) |
(19) |
99 |
98 |
81 |
(83) |
(111) |
(C$ millions)
| |
|
|
|
|
|
|
|
|
|
| |
2027E |
2028E |
2029E |
2030E |
2031E |
2032E |
2033E |
2034E |
|
| Free Cash Flow |
|
|
|
|
|
|
|
|
|
| Net
Revenue(2) |
$129 |
$131 |
$134 |
$137 |
$139 |
$142 |
$145 |
$- |
|
| EBITDA(3) |
23 |
26 |
28 |
31 |
34 |
36 |
39 |
- |
|
| Capital Expenditure |
(2) |
(2) |
(2) |
(2) |
(1) |
- |
- |
(4) |
|
| Unlevered Cash Taxes |
(4) |
(5) |
(6) |
(6) |
(7) |
(8) |
(9) |
- |
|
| Opportunity Costs (After Tax) |
(185) |
142 |
253 |
170 |
- |
- |
- |
(80) |
|
| Free Cash Flow |
(168) |
161 |
274 |
193 |
26 |
28 |
30 |
(84) |
|
Sources: Mountain Management Province Projections,
Kennady Projections, RBC analysis
Notes:
| 1) | Represents
100% of the cash flow to the Gahcho Kué Joint Venture, which is implied based
on the Mountain Province Management Projections and the assumptions therein, expressed
in real dollar terms |
| 2) | Revenue
net of selling costs |
| 3) | Excludes
government royalties, which are included in Unlevered Cash Taxes |
SCHEDULE “F”
FAIRNESS OPINION OF HAYWOOD
SECURITIES INC.
See attached.
January 28, 2018
The Special Committee of the
Board of Directors and Board of Directors
Kennady Diamonds Inc.
Suite 700 – 1199 West
Hastings Street
Vancouver, BC V6E 3T5
To the Special Committee of
the Board of Directors and Board of Directors:
Haywood Securities Inc. (“Haywood
Securities”) understands that Kennady Diamonds Inc. (the “Corporation”) proposes to enter into an
arrangement agreement (the “Arrangement Agreement” and which term shall include the schedules attached thereto)
with Mountain Province Diamonds Inc. (“Mountain Province”) dated January 28, 2018, pursuant to which Mountain
Province will agree to acquire all of the issued and outstanding common shares of the Corporation (the “Acquired Shares”)
by way of a plan of arrangement (the “Plan of Arrangement”), whereby each Acquired Share shall be exchanged
for 0.975 of a common share of Mountain Province (the “Consideration”) for each share of the Corporation held
(the “Transaction”). The Transaction will be described in greater detail in a joint management information circular
(the “Circular”) to be prepared by the Corporation and Mountain Province in compliance with applicable laws,
regulations, policies and rules, which Circular will be mailed to the shareholders of the Corporation and Mountain Province.
The Special Committee of the
Board of Directors of the Corporation (the “Special Committee”) has engaged Haywood Securities to render an
opinion (this “Fairness Opinion”) as to the fairness, from a financial point of view, of the Consideration to
be received by the shareholders of the Corporation in connection with the Transaction. Haywood Securities has not prepared a valuation
of either the Corporation, or Mountain Province, or any of their respective securities or assets and this Fairness Opinion should
not be construed as such.
Engagement
The Special Committee initially
contacted Haywood Securities regarding a potential advisory assignment on January 6, 2018 and Haywood Securities was formally engaged
by the Special Committee pursuant to an agreement dated January 8, 2018 (the “Engagement Agreement”). Under
the Engagement Agreement, Haywood Securities agreed to render an opinion to the Special Committee and the Board of Directors of
the Corporation with respect to the fairness, from a financial point of view, of the Consideration to be received by the shareholders
of the Corporation in connection with the Transaction. Following review of the terms of the Transaction by Haywood Securities,
Haywood Securities rendered its oral opinion to the Special Committee as to the fairness, from a financial point of view, of the
Consideration to be received by the shareholders of the Corporation in connection with the Transaction. This Fairness Opinion confirms
the oral opinion rendered by Haywood Securities to the Special Committee on January 28, 2018.
| Head Office – Vancouver |
Calgary |
Toronto |
Waterfront
Centre
200
Burrard Street, Suite 700
Vancouver,
BC V6C 3L6 |
808
First Street SW
Suite
301
Calgary,
AB T2P 1M9 |
Brookfield
Place, 181 Bay Street
Suite
2910, Box 808
Toronto,
ON M5J 2T3 |
| Phone: |
(604) 697-7100 |
Phone: |
(403) 509-1900 |
Phone: |
(416) 507-2300 |
| Facsimile: |
(604) 697-7499 |
Facsimile: |
(403) 509-1999 |
Facsimile: |
(416) 507-2350 |
| Toll-Free: |
(800) 663-9499 |
Toll-Free: |
(877) 604-0044 |
Toll-Free: |
(866) 615-2225 |
The terms of the Engagement
Agreement provide that Haywood Securities is to be paid a fixed fee for its services and will be reimbursed for reasonable out-of-pocket
expenses upon submission of the Fairness Opinion. In addition, the Corporation has agreed to indemnify Haywood Securities, its
subsidiaries and affiliates, and their respective officers, directors, and employees, against certain expenses, losses, actions,
claims, damages and liabilities which may arise directly or indirectly from services performed by Haywood Securities in connection
with the Engagement Agreement. The fixed fee payable to Haywood Securities is not contingent in whole or in part upon the outcome
of the Transaction or on the conclusions reached in the Fairness Opinion.
Independence of Haywood
Securities
Haywood Securities is not an
insider, associate, or affiliate of the Corporation or Mountain Province or any of their respective associates or affiliates. Haywood
Securities has not entered into any other agreements or arrangements with the Corporation or Mountain Province or any of their
affiliates with respect to any future dealings.
Haywood Securities acts as
a trader and dealer, both as principal and agent, in major financial markets and, as such, may have had and may in the future have
positions in the securities of the Corporation and/or Mountain Province or any of their respective associates or affiliates and,
from time to time, may have executed or may execute transactions on behalf of such companies or clients for which it received or
may receive compensation. In the ordinary course of trading and brokerage activities, Haywood Securities, the associates and affiliates
thereof and the officers, directors and employees of any of them at any time may hold long or short positions, may trade or otherwise
effect transactions, for their own account, for managed accounts or for the accounts of customers, in debt or equity securities
of the Corporation, Mountain Province, or related assets or derivative securities. As an investment dealer, Haywood Securities
conducts research on securities and may, in the ordinary course of its business, provide research reports and investment advice
to its clients on investment matters, including with respect to the Corporation or Mountain Province or the Transaction.
Haywood Securities has not
acted as agent or underwriter in any financings involving the Corporation, Mountain Province, or any of their associates or affiliates
during the 24-month period preceding the date that Haywood Securities was first contacted in respect of the Transaction. During
this period however, Haywood Securities was engaged to provide certain financial advisory services to the Corporation in relation
to a non-brokered private placement announced on April 28, 2017, in which Haywood Securities received a fee for services provided.
Haywood Securities believes
that it is “independent” (as such term is used in Part 6 of Multilateral Instrument 61-101 Protection of Minority
Security Holders in Special Transactions) of all interested parties in the Transaction and that it has disclosed to the Special
Committee all material facts known to it that could be reasonably considered to be relevant to its independence status under Part
6 of Multilateral Instrument 61-101 Protection of Minority Security Holders in Special Transactions.
Credentials of Haywood
Securities
Haywood Securities is one of
Canada’s leading independent investment dealers with operations in corporate finance, equity sales and trading and investment research.
The opinion expressed herein is the opinion of Haywood Securities, and the individuals primarily responsible for preparing this
opinion are professionals of Haywood Securities experienced in merger, acquisition, divestiture and fairness opinion matters.
Scope of Review and Approach
to Analysis
In connection with rendering
the Fairness Opinion, Haywood Securities has reviewed and relied upon, or carried out, among other things, the following:
| | F-3 |  |
| (a) | reviewed the Arrangement Agreement and Plan of Arrangement, dated January 28, 2018; |
| (b) | reviewed the disclosure letters between the Corporation and Mountain Province, dated January 28,
2018; |
| (c) | reviewed the support agreements between Mountain Province and certain officers, directors, and
major shareholders of the Corporation; |
| (d) | reviewed the support agreements between the Corporation and certain officers, directors, and major
shareholders of Mountain Province; |
| (e) | reviewed the audited consolidated financial statements of the Corporation for the financial years
ended December 31, 2016 and 2015; |
| (f) | reviewed the management’s discussion and analysis of the Corporation for the financial years ended
December 31, 2016 and 2015; |
| (g) | reviewed the unaudited consolidated financial statements of the Corporation for the financial quarters
ended September 30, 2017, June 30, 2017 and March 31, 2017; |
| (h) | reviewed the management’s discussion and analysis of the Corporation for the financial quarters
ended September 30, 2017, June 30, 2017 and March 31, 2017; |
| (i) | reviewed the management information circular of the Corporation dated May 16, 2017; |
| (j) | reviewed the audited consolidated financial statements of Mountain Province for the financial years
ended December 31, 2016 and 2015; |
| (k) | reviewed the management’s discussion and analysis of Mountain Province for the financial years
ended December 31, 2016 and 2015; |
| (l) | reviewed the unaudited consolidated financial statements of Mountain Province for the financial
quarters ended September 30, 2017, June 30, 2017 and March 31, 2017; |
| (m) | reviewed the management’s discussion and analysis of Mountain Province for the financial quarters
ended September 30, 2017, June 30, 2017 and March 31, 2017; |
| (n) | reviewed the annual information form of Mountain Province for the financial year ended December
31, 2016; |
| (o) | reviewed the management information circular of Mountain Province dated February 28, 2017; |
| (p) | reviewed the amended and restated joint venture agreement between Mountain Province and De Beers
Canada Inc. (“De Beers”) dated July 3, 2009; |
| (q) | reviewed press releases and other public information relating to the business, financial condition
and trading history of each of the Corporation and Mountain Province and other select public companies we considered relevant; |
| | F-4 | |
| (r) | reviewed certain applicable National Instrument 43-101 (“NI 43-101”) compliant
technical reports of the Corporation and Mountain Province; |
| (s) | reviewed corporate presentations of each of the Corporation and Mountain Province; |
| (t) | reviewed certain historical financial information and operating data concerning the Corporation
and Mountain Province; |
| (u) | reviewed certain projected financial information, including without limitation, budgets, financial
forecasts, and financial models which were prepared and provided by the Corporation and its advisors; |
| (v) | reviewed certain internal documents which were prepared and provided by the Corporation and Mountain
Province; |
| (w) | attended due diligence sessions with the Corporation and its advisors; |
| (x) | reviewed historical market prices and valuation multiples for the common shares of the Corporation
and the common shares of Mountain Province and compared such prices and multiples with those of certain publicly traded companies
that we deemed relevant for the purposes of our analysis; |
| (y) | reviewed the financial results of the Corporation and Mountain Province and compared them with
publicly available financial data concerning certain publicly traded companies that we deemed relevant for the purposes of our
analysis; |
| (z) | reviewed publicly available financial data for precedent merger and acquisition transactions that
we deemed comparable for the purposes of our analysis; |
| (aa) | compared the Consideration to be received by the shareholders
of the Corporation to the value per common share of the Corporation implied by analyses of market multiples of comparable companies; |
| (bb) | reviewed certain industry and analyst reports and statistics that were deemed relevant for the
purposes of our analysis; and |
| (cc) | reviewed and considered such other financial, market, technical
and industry information, and conducted such other investigations, analyses and discussions (including discussions with senior
management of the Corporation) as we considered relevant and appropriate in the circumstances. |
In addition, Haywood Securities
has participated in discussions with members of the Corporation’s senior management team and its advisors regarding the Corporation,
past and current business operations, and the Corporation’s financial condition and prospects. Haywood Securities has not,
to the best of its knowledge, been denied access by the Corporation to any information under its control requested by Haywood Securities.
Haywood Securities did not meet with the auditors of the Corporation or Mountain Province and has assumed the accuracy and fair
presentation of and relied upon the audited consolidated financial statements of each of the Corporation and Mountain Province
and the reports of the auditor thereon.
In our assessment, we considered
several techniques and used a blended approach to determine our opinion on the Transaction. We based this Fairness Opinion upon
a number of quantitative and qualitative factors.
| | F-5 | |
Assumptions and Limitations
With the approval and agreement
of the Special Committee, we have relied upon and assumed, without assuming responsibility or liability for independent verification,
the completeness, accuracy and fair presentation of all financial information, business plans, financial analyses, forecasts and
other information, data, advice, opinions and representations obtained by us from public sources, or provided to us by the Corporation
or Mountain Province, their respective subsidiaries, directors, officers, associates, affiliates, consultants, advisors and representatives
relating to the Corporation, Mountain Province, their respective subsidiaries, associates and affiliates, and to the Transaction.
The Fairness Opinion is conditional upon such completeness, accuracy and fair presentation. We have not been requested to or, subject
to the exercise of professional judgment, attempted to verify independently the completeness, accuracy or fair presentation of
any such information, data, advice, opinions and representations and assume no responsibility or liability in connection therewith.
We have not conducted or been provided with any valuation or appraisal of any assets or liabilities, nor have we evaluated the
solvency of the Corporation or Mountain Province under any provincial or federal laws relating to bankruptcy, insolvency or similar
matters. In addition, we have not assumed any obligation to conduct any physical inspection of the properties or the facilities
of the Corporation or Mountain Province. Haywood Securities has not had the benefit of reviewing a NI 43-101 compliant economic
study on the Kennady North Project, as none exists as of the date hereof, nor has it had the benefit of reviewing any NI 43-101
compliant technical report issued since May 27, 2014 in relation to the Gahcho Kué Mine, and accordingly expresses no opinion
as to any future results that may be released prior to or following completion of the Transaction, the potential financial impacts
to either the Corporation, Mountain Province or De Beers, or the market reaction to such results. Haywood Securities has relied
upon the guidance of the Corporation and its technical advisors to estimate the integration of the Kennedy North Project into the
Gahcho Kué Mine plan; however, Haywood Securities has not been provided with a clear determination of the likelihood that
such an integration will occur. The technical due diligence investigations conducted by Haywood Securities was limited in scope
and relied heavily on the experience of management of the Corporation and its technical advisors.
With respect to any financial
analyses, forecasts, projections, estimates and/or budgets provided to Haywood Securities and used in its analyses, Haywood Securities
notes that projecting future results of any company is inherently subject to uncertainty. Haywood Securities has assumed, however,
that such financial analyses, forecasts, projections, estimates and/or budgets were prepared using the assumptions identified therein
and that such assumptions reflect the best currently available estimates and judgments by management as to the expected future
results of operations and financial condition of the Corporation and Mountain Province. We express no view as to such financial
analyses, forecasts, projections, estimates and/or budgets or the assumptions on which they were based.
We are not legal, tax or accounting
experts and we express no opinion concerning any legal, tax or accounting matters concerning the Transaction, or the sufficiency
of this Fairness Opinion for such purposes. In preparing the Fairness Opinion, we have made several assumptions, including that
all of the conditions required to complete the Transaction will be met, that the disclosure provided in the Circular with respect
to the Corporation, Mountain Province and their respective subsidiaries and affiliates and the Transaction will be accurate in
all material respects, and that the Arrangement Agreement and Circular will satisfy all applicable legal requirements.
We have relied as to all legal
matters relevant to rendering our Fairness Opinion upon the advice of counsel. We have further assumed that all material governmental,
regulatory or other consents and approvals necessary for the consummation of the Transaction will be obtained without any adverse
effect on the Corporation or Mountain Province or on the contemplated benefits of the Transaction.
The Fairness Opinion is rendered
as at the date hereof and on the basis of securities markets, economic and general business and financial conditions prevailing
as at the date hereof and the conditions and prospects,
| | F-6 | |
financial and otherwise, of
the Corporation and Mountain Province as they are reflected in the information provided by the Corporation and Mountain Province
and as they were represented to us in our discussions with management of the Corporation and the Special Committee. It should be
understood that subsequent developments may affect this Fairness Opinion and that we do not have any obligation to update, revise,
or reaffirm this opinion. We are expressing no opinion herein as to the price at which the common shares of the Corporation or
Mountain Province will trade at any future time, and this Fairness Opinion is not intended to be and does not constitute a recommendation
to any shareholder to accept or reject the Transaction. In our analyses and in connection with the preparation of the Fairness
Opinion, we made numerous assumptions with respect to industry performance, general business, market and economic conditions and
other matters, many of which are beyond the control of Haywood Securities and any party involved in the Transaction.
We have not been asked to prepare
and have not prepared a valuation of the Corporation or Mountain Province or any of the securities or assets thereof and our opinion
should not be construed as a “formal valuation” (within the meaning of Multilateral Instrument 61-101 Protection
of Minority Security Holders in Special Transactions).
This Fairness Opinion is provided
for the exclusive use of the Special Committee and the Board of Directors of the Corporation only in considering the Transaction
and, except for the inclusion of this Fairness Opinion and a summary thereof (in a form acceptable to us) in the Circular, may
not be published, disclosed, referred or communicated to, or relied upon by, any third party without our prior written consent.
Haywood Securities consents to the inclusion of this Fairness Opinion in the Circular. This Fairness Opinion is given as of the
date hereof and Haywood Securities disclaims any undertaking or obligation to advise any person of any change in any fact or matter
affecting the Fairness Opinion which may come or be brought to the attention of Haywood Securities after the date hereof. Without
limiting the foregoing, in the event that there is any material change in any fact or matter affecting the Fairness Opinion after
the date hereof, Haywood Securities reserves the right to change, modify or withdraw the Fairness Opinion.
Haywood Securities believes
that its analyses must be considered as a whole and that selecting portions of the analyses or the factors considered by it, without
considering all factors and analyses together, could create a misleading view of the process underlying this Fairness Opinion.
The preparation of an opinion is a complex process and is not necessarily susceptible to partial analysis or summary description.
Any attempt to do so could lead to undue emphasis on any particular factor or analysis.
Fairness Methodologies
In support of this Fairness
Opinion, Haywood Securities performed certain financial analyses with respect to the Corporation and Mountain Province, based on
those methodologies and assumptions that we considered appropriate in the circumstances for the purposes of providing this Fairness
Opinion. In the context of this Fairness Opinion, Haywood Securities considered the following principal methodologies:
| a) | Recent Market Prices and Historical Trading; |
| b) | Net Asset Value Approach; |
| c) | Precedent Transactions Approach; |
| d) | Peer Comparable Approach. |
Recent Market Prices and
Historical Trading
Haywood Securities reviewed
the trading of the Corporation and Mountain Province and their applicable volume weighted average prices (“VWAP”),
including implied premiums both on an absolute and a relative basis, the historic exchange ratio between the two companies, and
their relative liquidity. The historical trading was also compared to relevant peers. All historical trading was reviewed under
several distinct and conventional time intervals relative to the date of this Fairness Opinion.
| | F-7 | |
As part of the review of recent
market prices and historical trading, Haywood Securities calculated a range of historic exchange ratios, implied prices and premiums
for comparison to the Consideration.
Net Asset Value Approach
The Net Asset Value (“NAV”)
methodology is a fundamental market approach which considers each operating, development, exploration and financial asset, for
which individual values are estimated through the application of the methodology viewed as most appropriate in the circumstances,
net of obligations and liabilities, aggregated together. Under the NAV approach, the NPV (as defined below) for the Kennady North
Project was calculated as the difference between Mountain Province’s applicable NPV for its interest in the Gahcho Kué
Mine on a standalone basis and on a pro-forma basis including the estimated impact of the Kennady North Project integrated into
the Gahcho Kué mine plan. An NPV for the standalone Kennady North Project was not estimated due to insufficient available
data. General and administrative expenses as well as the attributable financial assets and liabilities of each company, as applicable,
were then added or subtracted to each company’s respective project NPV.
For the NAV approach, we relied
on a discounted cash flow (“DCF”) analysis whereby we discounted the after- tax, future free cash flows of the
Gahcho Kué Mine over the life of the asset, with and without the Kennady North Project, at prescribed discount rates, to
generate a net present value (the “NPV”). All forecasts of future free cash flow for the Gahcho Kué Mine,
with and without the Kennady North Project, were based on operating estimates provided by the technical advisors to the Corporation
and informed by their previous analyses of the Gahcho Kué Mine, using diamond price estimates derived from actual sales
results and forward estimates from Mountain Province, the Corporation, and the Corporation’s financial and technical advisors.
Haywood Securities also compared
the values for the Mountain Province standalone NPV obtained under the DCF analysis with the NPV estimates of various research
analysts.
The NAV approach considers
a variety of financial methodologies in the context of individual assets, is less biased with respect to a transaction’s
timing in relation to commodity price or market cycles due to its principal reliance on long-term forecasts, and explicitly addresses
the unique characteristics of the Gahcho Kué Mine, with and without the Kennady North Project, from a long-term operating
and production perspective. The NAV approach requires that certain assumptions be made to derive the NPV including, among other
things, long-term diamond pricing, exchange rate assumptions and forecasts, mining operations and associated costs, mine plan,
capital investment, working capital, and discount rates.
As part of the NAV approach,
Haywood Securities performed a range of sensitivity analyses on a variety of factors. This included calculating a range of estimated
share prices for the Corporation on an implied basis, utilizing a range of diamond prices and other operating parameters and management
guided growth prospects for comparison to the Consideration.
Precedent Transactions Approach
The precedent transactions
approach considers transaction multiples in the context of the purchase or sale of public mining companies or assets. Haywood Securities
reviewed publicly available information in connection with a variety of mining focused change of control transactions that we considered
relevant over recent and longer-term time periods. Haywood Securities also evaluated various area and asset consolidation transactions
considered relevant for comparison purposes.
As part of the precedent transactions
approach, Haywood Securities identified a range of precedent transaction premiums for comparison to the Consideration.
| | F-8 | |
Peer Comparable Approach
The peer comparable approach
considers public market trading and other statistics of the Corporation and Mountain Province to corresponding data for select
publicly-traded diamond companies that we considered relevant. As applicable to each of the Corporation and Mountain Province,
we considered multiples of price to NAV, enterprise value to EBITDA (earnings before interest, taxes, depreciation, and amortization),
price to cash flow, enterprise value to in-situ resource value, as well as trading liquidity and research coverage, as appropriate.
As part of the peer comparable
approach, Haywood Securities identified a range of select peer trading multiples and metrics for the factors identified above for
comparison to the relevant multiples and metrics of the Corporation as implied by the Consideration and to Mountain Province, as
applicable.
Qualitative Considerations
The assessment of fairness
was considered in the context of various risks to the Corporation and Mountain Province including, but not limited to: diamond
price risk, exploration risk, development risk, mining risk, joint venture risk, financing risk, cash flow risk, default risk,
liquidity risk, and currency risk.
Fairness Considerations
In the assessment of fairness
of the Consideration to be received by the shareholders of the Corporation, from a financial point of view, fairness must be determined
in the context of the particular transaction, as previously outlined. We have based our conclusion in this Fairness Opinion upon
a number of quantitative and qualitative factors, taken as a whole including, but not limited to, an evaluation of the Consideration
within the context of our analysis of recent market prices and historical trading, our analysis using the NAV approach, our analysis
using the precedent transactions approach, our analysis using the peer comparable approach, a review of the balance of potential
risks to the Corporation which are anticipated to be mitigated or incurred as a result of the Transaction, and other factors and
analyses, based on our experience in rendering such opinions, which we have deemed to be relevant in the circumstances.
Haywood Securities did not,
in considering the fairness of the Consideration to be received by the shareholders of the Corporation in connection with the Transaction,
from a financial point of view, assess any income tax consequences that any particular shareholder may face in connection with
the Transaction.
Fairness Conclusion
Based on and subject to the
foregoing and such other factors as Haywood Securities considered relevant, Haywood Securities is of the opinion that, as of the
date hereof, the Consideration to be received by the shareholders of the Corporation in connection with the Transaction is fair,
from a financial point of view, to the shareholders of the Corporation.
Yours
truly,
HAYWOOD SECURITIES INC.
| | F-9 | |
SCHEDULE “G”
INTERIM ORDER
See attached.
Court File No. CV-18-592976-00CL
ONTARIO
SUPERIOR COURT OF JUSTICE
COMMERCIAL LIST
THE HONOURABLE  |
) |
MONDAY, THE 5th |
| |
) |
|
| JUSTICE |
) |
DAY OF MARCH, 2018 |
IN THE MATTER OF AN
APPLICATION UNDER SECTION 182 OF THE BUSINESS CORPORATIONS ACT, R.S.O. 1990, c. B.16, AS AMENDED
AND IN THE MATTER OF RULES
14.05(2) AND 14.05(3) OF THE RULES OF CIVIL PROCEDURE
AND IN THE MATTER OF A PROPOSED
ARRANGEMENT INVOLVING KENNADY DIAMONDS INC. and MOUNTAIN PROVINCE DIAMONDS INC.
INTERIM ORDER
THIS
MOTION made by the Applicant, Kennady Diamonds Inc. (“Kennady”), for an interim order for advice and directions pursuant
to section 182 of the Ontario Business Corporations Act, R.S.O.
1990, c. B.l6, as amended, (the “OBCA”) was
heard this day at 330 University Avenue, Toronto, Ontario.
ON READING
the Notice of Motion, the Notice of Application issued on February 28, 2018 and the affidavit of Dr. Tom McCandless sworn March
1, 2018, including the Plan of Arrangement, which is attached as Schedule “D” to the draft Joint Management Information
Circular (the “Circular”) of Kennady and Mountain Province Diamonds Inc. (“Mountain
Province”), which is attached
as Exhibit A to the Doe Affidavit, and on hearing the submissions of counsel for Kennady and counsel for Mountain Province.
Definitions
1. THIS
COURT ORDERS that all definitions used in this Interim Order shall have the meaning ascribed thereto in the Circular
or otherwise as specifically defined herein.
The Meeting
2. THIS
COURT ORDERS that Kennady is permitted to call, hold and conduct a special meeting (the “Meeting”) of
the holders of voting common shares (the “Shareholders”) in the capital of Kennady to be held at the Terminal City
Club, 837 West Hastings Street, Vancouver, British Columbia on April 9, 2018 at 1:00 p.m. (Pacific Standard Time) in order
for the Shareholders to consider and, if determined advisable, pass a special resolution authorizing, adopting and approving,
with or without variation, the Arrangement and the Plan of Arrangement (collectively, the “Arrangement
Resolution”).
3. THIS
COURT ORDERS that the Meeting shall be called, held and conducted in accordance with the OBCA, the notice of
special meeting of Shareholders, which accompanies the Circular (the “Notice of Meeting”) and the articles and
by-laws of Kennady, subject to what may be provided hereafter and subject to further order of this court.
4. THIS
COURT ORDERS that the record date (the “Record Date”) for determination of the shareholders entitled to notice
of, and to vote at, the Meeting shall be March 5, 2018.
5. THIS
COURT ORDERS that the only persons entitled to attend or speak at the Meeting shall be:
| a) | the Shareholders or their respective proxyholders; |
| b) | the officers, directors, auditors and advisors of Kennady; |
| c) | representatives and advisors of Mountain Province; and |
| d) | other persons who may receive the permission of the Chair of the Meeting. |
6. THIS
COURT ORDERS that Kennady may transact such other business at the Meeting as is contemplated in the Circular, or as may otherwise
be properly before the Meeting.
Quorum
7. THIS
COURT ORDERS that the Chair of the Meeting shall be determined by Kennady and that the quorum at the Meeting shall be one or
more persons present in person, being Kennady Shareholders entitled to vote thereat or duly appointed proxyholder or representative
for an absent shareholder so entitled, and together holding or representing by proxy at least 5% of the Kennady Shares entitled
to vote at the Meeting.
Amendments to the Arrangement
and Plan of Arrangement
8. THIS
COURT ORDERS that Kennady is authorized to make, subject to the terms of the Arrangement Agreement, and paragraph 9, below,
such amendments, modifications or supplements to the Arrangement and the Plan of Arrangement as it may determine without any additional
notice to the Shareholders, or others entitled to receive notice under paragraphs 12 and 13 hereof and the Arrangement and Plan
of Arrangement, as so amended, modified or supplemented shall be the Arrangement and Plan of Arrangement to be submitted to the
Shareholders at the Meeting and shall be the subject of the Arrangement Resolution.
Amendments, modifications or
supplements may be made following the Meeting, but shall be subject to review and, if appropriate, further direction by this Honourable
Court at the hearing for the final approval of the Arrangement.
9. THIS
COURT ORDERS that, if any amendments, modifications or supplements to the Arrangement or Plan of Arrangement as referred to
in paragraph 8, above, would, if disclosed, reasonably be expected to affect a Shareholder’s decision to vote for or against the
Arrangement Resolution, notice of such amendment, modification or supplement shall be distributed, subject to further order of
this Honourable Court, by press release, newspaper advertisement, prepaid ordinary mail, or by the method most reasonably practicable
in the circumstances, as Kennady may determine.
Amendments to the Circular
10. THIS
COURT ORDERS that Kennady is authorized to make such amendments, revisions and/or supplements to the draft Circular as it may
determine and the Circular, as so amended, revised and/or supplemental, shall be the Circular to be distributed in accordance with
paragraphs 12 and 13.
Adjournments and Postponements
11. THIS
COURT ORDERS that Kennady, if it deems advisable and subject to the terms of the Arrangement Agreement, is specifically authorized
to adjourn or postpone the Meeting on one or more occasions, without the necessity of first convening the Meeting or first obtaining
any vote of the Shareholders respecting the adjournment or postponement, and notice of any such adjournment or postponement shall
be given by such method as Kennady may
determine is appropriate in
the circumstances. This provision shall not limit the authority of the Chair of the Meeting in respect of adjournments and postponements.
Notice of Meeting
12. THIS
COURT ORDERS that, in order to effect notice of the Meeting, Kennady shall send the Circular
(including the Notice of Application and this Interim Order), the Notice of Meeting, the form of proxy and the letter of transmittal,
along with such amendments or additional documents as Kennady may determine are necessary or desirable and are not inconsistent
with the terms of this Interim Order (collectively, the “Meeting
Materials”), to the following:
| a) | the registered Shareholders at the close of business on the Record
Date, at least twenty-one (21) days prior to the date of the Meeting, excluding the date of sending and the date of the Meeting,
by one or more of the following methods: |
| i) | by pre-paid ordinary or first class mail at the addresses of the Shareholders as they appear on
the books and records of Kennady, or its registrar and transfer agent, at the close of business on the Record Date and if no address
is shown therein, then the last address of the person known to the Corporate Secretary of Kennady; |
| ii) | by delivery, in person or by recognized courier service or inter-office mail, to the address specified
in (i) above; or |
| iii) | by facsimile or electronic transmission to any Shareholder, who is identified to the satisfaction
of Kennady, who requests such transmission |
in writing and, if
required by Kennady, who is prepared to pay the charges for such transmission;
| b) | non-registered Shareholders by providing sufficient copies of the Meeting Materials to intermediaries
and registered nominees in a timely manner, in accordance with National Instrument 54-101 of the Canadian Securities Administrators;
and |
| c) | the respective directors and auditors of Kennady by delivery in person, by recognized courier
service, by pre-paid ordinary or first class mail or, with the consent of the person, by facsimile or electronic
transmission, at least twenty one (21) days prior to the date of the Meeting, excluding the date of sending and the date of
the Meeting; |
and that compliance with this
paragraph shall constitute sufficient notice of the Meeting.
13. THIS
COURT ORDERS that, in the event that Kennady elects to distribute the Meeting Materials, Kennady is hereby directed to distribute
the Circular (including the Notice of Application, and this Interim Order), and any other communications or documents determined
by Kennady to be necessary or desirable (collectively, the “Court Materials”) to the holders of options to purchase Kennady
Shares (“Kennady Options”) and restricted share units issued by Kennady (“Kennady RSUs”), by any method permitted
for notice to Shareholders as set forth in paragraphs 12(a) or 12(b), above, concurrently with the distribution described in paragraph
12 of this Interim Order. Distribution to such persons shall be to their addresses as they appear on the books and records of Kennady
or its registrar and transfer agent at the close of business on the Record Date.
14. THIS
COURT ORDERS that accidental failure or omission by Kennady to give notice of the meeting or to distribute the Meeting Materials
or Court Materials to any person entitled by this Interim Order to receive notice, or any failure or omission to give such notice
as a result of events beyond the reasonable control of Kennady, or the non-receipt of such notice shall, subject to further order
of this Honourable Court, not constitute a breach of this Interim Order nor shall it invalidate any resolution passed or proceedings
taken at the Meeting. If any such failure or omission is brought to the attention of Kennady, it shall use its best efforts to
rectify it by the method and in the time most reasonably practicable in the circumstances.
15. THIS
COURT ORDERS that Kennady is hereby authorized to make such amendments, revisions or supplements to the Meeting Materials and
Court Materials, as Kennady may determine in accordance with the terms of the Arrangement Agreement (“Additional Information”),
and that notice of such Additional Information may, subject to paragraph 9, above, be distributed by press release, newspaper advertisement,
pre-paid ordinary mail, or by the method most reasonably practicable in the circumstances, as Kennady may determine.
16. THIS
COURT ORDERS that distribution of the Meeting Materials and Court Materials pursuant to paragraphs 12
and 13 of this Interim Order shall constitute notice of the Meeting and good and sufficient
service of the within Application upon the persons described in paragraphs 12 and 13
and that those persons are bound by any orders made on the within Application. Further, no other form of service of the Meeting
Materials or the Court Materials or any portion thereof need be made, or notice given or other material served in respect of these
proceedings and/or the Meeting to such persons or to any other persons, except to the extent required by paragraph 9, above.
Solicitation and Revocation
of Proxies
17. THIS
COURT ORDERS that Kennady is authorized to use the letter of transmittal and proxies
substantially in the form of the drafts accompanying the Circular, with such amendments and additional information as Kennady
may determine are necessary or desirable, subject to the terms of the Arrangement Agreement. Kennady is authorized, at its
expense, to solicit proxies, directly or through its officers, directors or employees, and through such agents or
representatives as they may retain for that purpose, and by mail or such other forms of personal or electronic communication
as it may determine. Kennady may waive generally, in its discretion, the time limits set out in the Circular for the deposit
or revocation of proxies by Shareholders, if Kennady deems it advisable to do so.
18. THIS
COURT ORDERS that Shareholders shall be entitled to revoke their proxies in accordance
with section 110(4) of the OBCA (except as the procedures of that section are varied by this paragraph) provided that any instruments
in writing delivered pursuant to s.110(4)(a) of the OBCA must be deposited either with Computershare Investor Services Inc. at
any time up to and including the last business day preceding the day of the Meeting (or any adjournment or postponement thereof),
or with the Chair of the Meeting before the Meeting begins or, if the Meeting is adjourned, before the adjourned Meeting begins.
Voting
19. THIS
COURT ORDERS that the only persons entitled to vote in person or by proxy on the Arrangement
Resolution, or such other business as may be properly brought before the Meeting, shall be those Shareholders who hold voting common
shares of Kennady as of the close of business on the Record Date. Illegible votes, spoiled votes, defective votes and abstentions
shall be deemed to be votes not cast. Proxies that are properly signed and dated but
which do not contain voting
instructions shall be voted in favour of the Arrangement Resolution.
20. THIS
COURT ORDERS that votes shall be taken at the Meeting on the basis of one vote per common share and that in
order for the Plan of Arrangement to be implemented, subject to further Order of this Honourable Court, the Arrangement Resolution
must be passed, with or without variation, at the Meeting by:
| (i) | an affirmative vote of at least two-thirds (66⅔%) of the
votes cast in respect of the Arrangement Resolution at the Meeting in person or by proxy by the Shareholders; and |
| (ii) | a simple majority of the votes cast in respect of the Arrangement Resolution at the Meeting in
person or proxy by the Shareholders, other than votes attached to Kennady Shares held by any other person described in items (a)
through (d) of Section 8.1(2) of Multilateral Instrument 61-101
- Protection of Minority Security Holders in Special Transactions. |
Such votes shall be sufficient
to authorize Kennady to do all such acts and things as may be necessary or desirable to give effect to the Arrangement and
the Plan of Arrangement on a basis consistent with what is provided for in the Circular without the necessity of any further approval
by the Shareholders, subject only to final approval of the Arrangement by this Honourable Court.
21. THIS
COURT ORDERS that in respect of matters properly brought before the Meeting pertaining to items of business affecting Kennady
(other than in respect of the
Arrangement Resolution), each
Shareholder is entitled to one vote for each voting common share held.
Dissent Rights
22. THIS
COURT ORDERS that each registered Shareholder shall be entitled to exercise Dissent Rights in connection with the Arrangement
Resolution in accordance with section 185 of the OBCA (except as the procedures of that section are varied by this Interim Order
and the Plan of Arrangement) provided that, notwithstanding subsection 185(6) of the OBCA, any Shareholder who wishes to dissent
must, as a condition precedent thereto, provide written objection to the Arrangement Resolution to Kennady in the form required
by section 185 of the OBCA and the Arrangement Agreement, which written objection must be received by Kennady not later than 5:00
p.m. (Eastern time) on Thursday April 5, 2018, or two business days prior to any adjournment of the Meeting, and must otherwise
strictly comply with the requirements of the OBCA. For purposes of these proceedings, the “court” referred to in section
185 of the OBCA means this Honourable Court.
23. THIS
COURT ORDERS that any Shareholder who duly exercises such Dissent Rights set out in paragraph 22 above and who:
| i) | is ultimately determined by this Honourable Court to be entitled to be paid fair value for his,
her or its Kennady Shares, shall be deemed to have transferred those Kennady Shares as of the Effective Time, without any further
act or formality and free and clear of all liens, claims, encumbrances, charges, adverse interests or security interests to Kennady
for cancellation in consideration for a payment of cash from Kennady equal to such fair value; or |
| ii) | is for any reason ultimately determined by this Honourable Court not
to be entitled to be paid fair value for his, her or its voting common shares pursuant to the exercise of the Dissent Right, shall
be deemed to have participated in the Arrangement on the same basis and at the same time as any non-dissenting Shareholder; |
but in no case shall Kennady,
Mountain Province or any other person be required to recognize such Shareholders as holders of voting common shares of Kennady
at or after the date upon which the Arrangement becomes effective and the names of such Shareholders shall be deleted from Kennady’s
register of holders of voting common shares at that time.
Hearing of Application for
Approval of the Arrangement
24. THIS
COURT ORDERS that upon approval by the Shareholders of the Plan of Arrangement in the manner
set forth in this Interim Order, Kennady may apply to this Honourable Court for final approval of the Arrangement.
25. THIS
COURT ORDERS that distribution of the Notice of Application and the Interim Order in
the Circular, when sent in accordance with paragraphs 12 and 13 shall constitute good and sufficient service of the Notice of
Application and this Interim Order and no other form of service need be effected and no other material need be served unless
a Notice of Appearance is served in accordance with paragraph 26.
26. THIS
COURT ORDERS that any Notice of Appearance served in response to the Notice of Application
shall be served on the solicitors for Kennady, with a copy to counsel for Mountain Province, as soon as reasonably practicable,
and, in any event, no less than five days before the hearing of this Application at the following addresses:
FASKEN MARTINEAU
DUMOULIN LLP
333 Bay Street, Suite
2400
Toronto, Ontario
M5H 2T6
Brad Moore
bmoore@fasken.com
Tel: 416
865 4550
Lawyers for Kennady
BENNETT JONES LLP
1 First Canadian Place
Suite 3400
Toronto ON M5X 1A4
Robert W. Staley/William
Bortolin
staleyr@bennettjones.com
bortolinw@bennettjones.com
Tel: 416
777 4857
416 777 6126
Lawyers for Mountain
Province
27. THIS
COURT ORDERS that, subject to further order of this Honourable Court, the only persons entitled to appear and be heard
at the hearing of the within application shall be:
| ii) | Mountain Province; and |
| iii) | any person who has filed a Notice of Appearance herein in accordance with the Notice of Application,
this Interim Order and the Rules of Civil Procedure. |
28. THIS
COURT ORDERS that any materials to be filed by Kennady in support of the within Application for final approval of the
Arrangement may be filed up to one day prior to the hearing of the Application without further order of this Honourable Court.
29. THIS
COURT ORDERS that in the event the within Application for final approval does not proceed on the date set forth in the Notice
of Application, and is adjourned, only those persons who served and filed a Notice of Appearance in accordance with paragraph 26
shall be entitled to be given notice of the adjourned date.
Precedence
30. THIS
COURT ORDERS that, to the extent of any inconsistency or discrepancy between this Interim Order and the terms of any instrument
creating, governing or collateral to the Kennady Shares, Kennady Options, Kennady RSUs or other rights to acquire Kennady Shares,
or the articles or by-laws of Kennady, this Interim Order shall govern.
Extra-Territorial Assistance
31. THIS
COURT seeks and requests the aid and recognition of any court or any judicial, regulatory or administrative body in any province
of Canada and any judicial, regulatory or administrative tribunal or other court constituted pursuant to the Parliament of Canada
or the legislature of any province and any court or any judicial, regulatory or administrative body of the United States or other
country to act in aid of and to assist this Honourable Court in carrying out the terms of this Interim Order.
Variance
32. THIS
COURT ORDERS that Kennady shall be entitled to seek leave to vary this Interim Order upon such
terms and upon the giving of such notice as this Honourable Court may direct.
| ENTERED AT
/ INSCRIT A TORONTO |
 |
| ON /
BOOK NO: |
|
| LE / DANS
LE REGISTRE NO: |
|
| |
|
| MAR 05 2018 |
|
| |
|
PER / PAR:  |
|
| IN THE MATTER OF AN APPLICATION UNDER SECTION 182 OF THE BUSINESS CORPORATIONS ACT, R.S.O. 1990, c. B.16, as amended, AND RULES 14.05(2) AND 14.05(3) OF THE RULES OF CIVIL PROCEDURE |
Court File No. CV-18-592976-00CL |
KENNADY DIAMONDS INC.
Applicant
| |
ONTARIO
SUPERIOR COURT OF JUSTICE
(COMMERCIAL LIST)
Proceeding commenced at Toronto
|
| |
INTERIM ORDER
|
| |
FASKEN MARTINEAU DuMOULIN
LLP
Barristers and Solicitors
333 Bay Street, Suite 2400
Bay Adelaide Centre, Box 20
Toronto, ON M5H 2T6
Brad Moore (LSUC: 47880A)
bmoore@fasken.com
Tel: 416 865 4550
Lawyers for the Applicant
|
SCHEDULE “H”
DISSENT RIGHTS UNDER THE OBCA
Rights of dissenting shareholders
185 (1) Subject to subsection (3) and
to sections 186 and 248, if a corporation resolves to,
(a) amend its articles under section 168
to add, remove or change restrictions on the issue, transfer or ownership of shares of a class or series of the shares of the corporation;
(b) amend its articles under section 168
to add, remove or change any restriction upon the business or businesses that the corporation may carry on or upon the powers that
the corporation may exercise;
(c) amalgamate with another corporation
under sections 175 and 176;
(d) be continued under the laws of another
jurisdiction under section 181; or
[Note: On a day to be named by proclamation
of the Lieutenant Governor, subsection 185 (1) of the Act is amended by striking out “or” at the end of clause (d) and
by adding the following clauses: (See: 2017, c. 20, Sched. 6, s. 24)
(d.1) be continued under the
Co-operative Corporations Act under section 181.1;
(d.2) be continued under the
Not-for-Profit Corporations Act, 2010 under section 181.2; or]
(e) sell, lease or exchange all or substantially
all its property under subsection 184 (3),
a holder of shares of any class or series entitled
to vote on the resolution may dissent. R.S.O. 1990, c. B.16, s. 185 (1).
Idem
(2) If a corporation resolves to amend
its articles in a manner referred to in subsection 170 (1), a holder of shares of any class or series entitled to vote on the amendment
under section 168 or 170 may dissent, except in respect of an amendment referred to in,
(a) clause 170 (1) (a), (b) or (e) where
the articles provide that the holders of shares of such class or series are not entitled to dissent; or
(b) subsection 170 (5) or (6). R.S.O. 1990,
c. B.16, s. 185 (2).
One class of shares
(2.1) The right to dissent described in subsection
(2) applies even if there is only one class of shares. 2006, c. 34, Sched. B, s. 35.
Exception
(3) A shareholder of a corporation incorporated
before the 29th day of July, 1983 is not entitled to dissent under this section in respect of an amendment of the articles of the
corporation to the extent that the amendment,
(a) amends the express terms of any provision
of the articles of the corporation to conform to the terms of the provision as deemed to be amended by section 277; or
(b) deletes from the articles of the corporation
all of the objects of the corporation set out in its articles, provided that the deletion is made by the 29th day of July, 1986.
R.S.O. 1990, c. B.16, s. 185 (3).
Shareholder’s right to be paid fair value
(4) In addition to any other right the shareholder
may have, but subject to subsection (30), a shareholder who complies with this section is entitled, when the action approved by
the resolution from which the shareholder dissents becomes effective, to be paid by the corporation the fair value of the shares
held by the shareholder in respect of which the shareholder dissents, determined as of the close of business on the day before
the resolution was adopted. R.S.O. 1990, c. B.16, s. 185 (4).
No partial dissent
(5) A dissenting shareholder may only claim
under this section with respect to all the shares of a class held by the dissenting shareholder on behalf of any one beneficial
owner and registered in the name of the dissenting shareholder. R.S.O. 1990, c. B.16, s. 185 (5).
Objection
(6) A dissenting shareholder shall send to
the corporation, at or before any meeting of shareholders at which a resolution referred to in subsection (1) or (2) is to be voted
on, a written objection to the resolution, unless the corporation did not give notice to the shareholder of the purpose of the
meeting or of the shareholder’s right to dissent. R.S.O. 1990, c. B.16, s. 185 (6).
Idem
(7) The execution or exercise of a proxy does
not constitute a written objection for purposes of subsection (6). R.S.O. 1990, c. B.16, s. 185 (7).
Notice of adoption of resolution
(8) The corporation shall, within ten days
after the shareholders adopt the resolution, send to each shareholder who has filed the objection referred to in subsection (6)
notice that the resolution has been adopted, but such notice is not required to be sent to any shareholder who voted for the resolution
or who has withdrawn the objection. R.S.O. 1990, c. B.16, s. 185 (8).
Idem
(9) A notice sent under subsection (8) shall
set out the rights of the dissenting shareholder and the procedures to be followed to exercise those rights. R.S.O. 1990, c. B.16,
s. 185 (9).
Demand for payment of fair value
(10) A dissenting shareholder entitled to receive
notice under subsection (8) shall, within twenty days after receiving such notice, or, if the shareholder does not receive such
notice, within twenty days after learning that the resolution has been adopted, send to the corporation a written notice containing,
(a) the shareholder’s name and address;
(b) the number and class of shares in respect
of which the shareholder dissents; and
(c) a demand for payment of the fair value
of such shares. R.S.O. 1990, c. B.16, s. 185 (10).
Certificates to be sent in
(11) Not later than the thirtieth day after
the sending of a notice under subsection (10), a dissenting shareholder shall send the certificates, if any, representing the shares
in respect of which the shareholder dissents to the corporation or its transfer agent. R.S.O. 1990, c. B.16, s. 185 (11); 2011,
c. 1, Sched. 2, s. 1 (9).
Idem
(12) A dissenting shareholder who fails to
comply with subsections (6), (10) and (11) has no right to make a claim under this section. R.S.O. 1990, c. B.16, s. 185 (12).
Endorsement on certificate
(13) A corporation or its transfer agent shall
endorse on any share certificate received under subsection (11) a notice that the holder is a dissenting shareholder under this
section and shall return forthwith the share certificates to the dissenting shareholder. R.S.O. 1990, c. B.16, s. 185 (13).
Rights of dissenting shareholder
(14) On sending a notice under subsection (10),
a dissenting shareholder ceases to have any rights as a shareholder other than the right to be paid the fair value of the shares
as determined under this section except where,
(a) the dissenting shareholder withdraws notice
before the corporation makes an offer under subsection (15);
(b) the corporation fails to make an offer
in accordance with subsection (15) and the dissenting shareholder withdraws notice; or
(c) the directors revoke a resolution to amend
the articles under subsection 168 (3), terminate an amalgamation agreement under subsection 176 (5) or an application for continuance
under subsection 181 (5), or abandon a sale, lease or exchange under subsection 184 (8),
in which case the dissenting shareholder’s
rights are reinstated as of the date the dissenting shareholder sent the notice referred to in subsection (10). R.S.O. 1990, c.
B.16, s. 185 (14); 2011, c. 1, Sched. 2, s. 1 (10).
Same
(14.1) A dissenting shareholder whose rights
are reinstated under subsection (14) is entitled, upon presentation and surrender to the corporation or its transfer agent of any
share certificate that has been endorsed in accordance with subsection (13),
(a) to be issued, without payment of any fee,
a new certificate representing the same number, class and series of shares as the certificate so surrendered; or
(b) if a resolution is passed by the directors
under subsection 54 (2) with respect to that class and series of shares,
(i) to be issued the same number, class and
series of uncertificated shares as represented by the certificate so surrendered, and
(ii) to be sent the notice referred to in subsection
54 (3). 2011, c. 1, Sched. 2, s. 1 (11).
Same
(14.2) A dissenting shareholder whose rights
are reinstated under subsection (14) and who held uncertificated shares at the time of sending a notice to the corporation under
subsection (10) is entitled,
(a) to be issued the same number, class and
series of uncertificated shares as those held by the dissenting shareholder at the time of sending the notice under subsection
(10); and
(b) to be sent the notice referred to in subsection
54 (3). 2011, c. 1, Sched. 2, s. 1 (11).
Offer to pay
(15) A corporation shall, not later than seven
days after the later of the day on which the action approved by the resolution is effective or the day the corporation received
the notice referred to in subsection (10), send to each dissenting shareholder who has sent such notice,
(a) a written offer to pay for the dissenting
shareholder’s shares in an amount considered by the directors of the corporation to be the fair value thereof, accompanied by a
statement showing how the fair value was determined; or
(b) if subsection (30) applies, a notification
that it is unable lawfully to pay dissenting shareholders for their shares. R.S.O. 1990, c. B.16, s. 185 (15).
Idem
(16) Every offer made under subsection (15)
for shares of the same class or series shall be on the same terms. R.S.O. 1990, c. B.16, s. 185 (16).
Idem
(17) Subject to subsection (30), a corporation
shall pay for the shares of a dissenting shareholder within ten days after an offer made under subsection (15) has been accepted,
but any such offer lapses if the corporation does not receive an acceptance thereof within thirty days after the offer has been
made. R.S.O. 1990, c. B.16, s. 185 (17).
Application to court to fix fair value
(18) Where a corporation fails to make an offer
under subsection (15) or if a dissenting shareholder fails to accept an offer, the corporation may, within fifty days after the
action approved by the resolution is effective or within such further period as the court may allow, apply to the court to fix
a fair value for the shares of any dissenting shareholder. R.S.O. 1990, c. B.16, s. 185 (18).
Idem
(19) If a corporation fails to apply to the
court under subsection (18), a dissenting shareholder may apply to the court for the same purpose within a further period of twenty
days or within such further period as the court may allow. R.S.O. 1990, c. B.16, s. 185 (19).
Idem
(20) A dissenting shareholder is not required
to give security for costs in an application made under subsection (18) or (19). R.S.O. 1990, c. B.16, s. 185 (20).
Costs
(21) If a corporation fails to comply with
subsection (15), then the costs of a shareholder application under subsection (19) are to be borne by the corporation unless the
court otherwise orders. R.S.O. 1990, c. B.16, s. 185 (21).
Notice to shareholders
(22) Before making application to the court
under subsection (18) or not later than seven days after receiving notice of an application to the court under subsection (19),
as the case may be, a corporation shall give notice to each dissenting shareholder who, at the date upon which the notice is given,
(a) has sent to the corporation the notice
referred to in subsection (10); and
(b) has not accepted an offer made by the corporation
under subsection (15), if such an offer was made,
of the date, place and consequences of the
application and of the dissenting shareholder’s right to appear and be heard in person or by counsel, and a similar notice shall
be given to each dissenting shareholder who, after the date of such first mentioned notice and before termination of the proceedings
commenced by the application, satisfies the conditions set out in clauses (a) and (b) within three days after the dissenting shareholder
satisfies such conditions. R.S.O. 1990, c. B.16, s. 185 (22).
Parties joined
(23) All dissenting shareholders who satisfy
the conditions set out in clauses (22) (a) and (b) shall be deemed to be joined as parties to an application under subsection (18)
or (19) on the later of the date upon which the application is brought and the date upon which they satisfy the conditions, and
shall be bound by the decision rendered by the court in the proceedings commenced by the application. R.S.O. 1990, c. B.16, s.
185 (23).
Idem
(24) Upon an application to the court under
subsection (18) or (19), the court may determine whether any other person is a dissenting shareholder who should be joined as a
party, and the court shall fix a fair value for the shares of all dissenting shareholders. R.S.O. 1990, c. B.16, s. 185 (24).
Appraisers
(25) The court may in its discretion appoint
one or more appraisers to assist the court to fix a fair value for the shares of the dissenting shareholders. R.S.O. 1990, c. B.16,
s. 185 (25).
Final order
(26) The final order of the court in the proceedings
commenced by an application under subsection (18) or (19) shall be rendered against the corporation and in favour of each dissenting
shareholder who, whether before or after the date of the order, complies with the conditions set out in clauses (22) (a) and (b).
R.S.O. 1990, c. B.16, s. 185 (26).
Interest
(27) The court may in its discretion allow
a reasonable rate of interest on the amount payable to each dissenting shareholder from the date the action approved by the resolution
is effective until the date of payment. R.S.O. 1990, c. B.16, s. 185 (27).
Where corporation unable to pay
(28) Where subsection (30) applies, the corporation
shall, within ten days after the pronouncement of an order under subsection (26), notify each dissenting shareholder that it is
unable lawfully to pay dissenting shareholders for their shares. R.S.O. 1990, c. B.16, s. 185 (28).
Idem
(29) Where subsection (30) applies, a dissenting
shareholder, by written notice sent to the corporation within thirty days after receiving a notice under subsection (28), may,
(a) withdraw a notice of dissent, in which
case the corporation is deemed to consent to the withdrawal and the shareholder’s full rights are reinstated; or
(b) retain a status as a claimant against the
corporation, to be paid as soon as the corporation is lawfully able to do so or, in a liquidation, to be ranked subordinate to
the rights of creditors of the corporation but in priority to its shareholders. R.S.O. 1990, c. B.16, s. 185 (29).
Idem
(30) A corporation shall not make a payment
to a dissenting shareholder under this section if there are reasonable grounds for believing that,
(a) the corporation is or, after the payment,
would be unable to pay its liabilities as they become due; or
(b) the realizable value of the corporation’s
assets would thereby be less than the aggregate of its liabilities. R.S.O. 1990, c. B.16, s. 185 (30).
Court order
(31) Upon application by a corporation that
proposes to take any of the actions referred to in subsection (1) or (2), the court may, if satisfied that the proposed action
is not in all the circumstances one that should give rise to the rights arising under subsection (4), by order declare that those
rights will not arise upon the taking of the proposed action, and the order may be subject to compliance upon such terms and conditions
as the court thinks fit and, if the corporation is an offering corporation, notice of any such application and a copy of any order
made by the court upon such application shall be served upon the Commission. 1994, c. 27, s. 71 (24).
Commission may appear
(32) The Commission may appoint counsel to
assist the court upon the hearing of an application under subsection (31), if the corporation is an offering corporation. 1994,
c. 27, s. 71 (24).
SCHEDULE “I”
NOTICE OF APPLICATION FOR
FINAL ORDER
See attached.
Court File No.
CV-18-592976-00CL
ONTARIO
SUPERIOR COURT OF JUSTICE
(COMMERCIAL LIST)
IN THE MATTER OF AN APPLICATION UNDER SECTION 182 OF THE
BUSINESS CORPORATIONS ACT, R.S.O. 1990, c. B.16, AS AMENDED
AND IN THE MATTER OF RULES 14.05(2) AND 14.05(3) OF THE
RULES OF CIVIL PROCEDURE
AND IN THE MATTER OF A PROPOSED ARRANGEMENT INVOLVING KENNADY
DIAMONDS INC. and MOUNTAIN PROVINCE DIAMONDS INC.
| |
KENNADY
DIAMONDS INC.
|
Applicant |
NOTICE OF APPLICATION
TO THE RESPONDENT(S)
A LEGAL PROCEEDING
HAS BEEN COMMENCED by the Applicant. The claim made by the Applicant appears on the following page.
THIS APPLICATION will
come on for a hearing before a Judge presiding over the Commercial List on April 11, 2018 at 10:00 a.m., or as soon after that
time as the application may be heard, at 330 University Avenue, Toronto Ontario.
IF YOU WISH TO OPPOSE
THIS APPLICATION, to receive notice of any step in the application or to be served with any documents in the application you or
an Ontario lawyer acting for you must forthwith prepare a notice of appearance in Form 38A prescribed by the Rules of Civil Procedure,
serve it on the Applicant’s lawyer or, where the Applicant does not have a lawyer, serve it on the Applicant, and file it, with
proof of service, in this court office, and you or your lawyer must appear at the hearing.
IF YOU WISH TO PRESENT
AFFIDAVIT OR OTHER DOCUMENTARY EVIDENCE TO THE COURT OR TO EXAMlNE OR CROSS-EXAMINE WITNESSES ON THE APPLICATION, you or your
lawyer must, in addition to serving your notice of appearance, serve a copy of the evidence on the Applicant’s lawyer or, where
the Applicant does not have a lawyer, serve it on the Applicant, and file it, with proof of service, in the court office where
the application is to be heard as soon as possible, but at least four days before the hearing.
IF YOU FAIL
TO APPEAR AT THE HEARING, JUDGMENT MAY BE GIVEN IN YOUR ABSENCE AND WITHOUT FURTHER NOTICE TO YOU. IF YOU WISH TO OPPOSE
THIS APPLICATION BUT ARE UNABLE TO PAY LEGAL FEES, LEGAL AID MAY BE AVAILABLE TO YOU BY CONTACTING A LOCAL LEGAL AID OFFICE.
| Date |
February 28, 2018 |
|
Issued by |
/s/ Natasha Brown |
Registrar |
| |
|
|
|
Legal Registrar |
| |
|
|
|
|
| |
|
|
Address of |
Superior Court of Justice |
| |
|
|
court office: |
330 University Avenue, 7th Floor |
| |
|
|
|
Toronto ON |
| |
|
|
|
M5G 1R7 |
| TO: |
ALL HOLDERS OF COMMON SHARES OF KENNADY DIAMONDS INC. |
| |
|
| AND TO: |
ALL HOLDERS OF OPTIONS TO PURCHASE COMMON SHARES OF KENNADY DIAMONDS INC. |
| |
|
| AND TO: |
ALL HOLDERS OF RESTRICTED SHARE UNITS ISSUED BY KENNADY DIAMONDS INC. |
| |
|
| AND TO: |
ALL DIRECTORS OF KENNADY DIAMONDS INC. |
| |
|
| AND TO: |
THE AUDITOR FOR KENNADY DIAMONDS INC. |
| AND TO: |
BENNETT JONES LLP |
| |
1 First Canadian Place
Suite 3400
Toronto ON M5X 1A4
Robert W. Staley
staleyr@bennettjones.com
Tel: 416 777 4857
William Bortolin
bortolinw@bennettjones.com
Tel: 416
777 6126
Lawyers for Mountain Province Diamonds Inc. |
APPLICATION
| l. | The
Applicant, Kennady Diamonds Inc. (“Kennady”), makes
application for: |
| (a) | an
order pursuant to section 182 of the Ontario Business Corporations Act, R.S.O.
1990, c. B.16, as amended (the “OBCA”)
approving a Plan of Arrangement (the “Arrangement”)
as described in the Joint Information Circular (the
“Circular”), which Circular will be attached
as an exhibit to the affidavit to be filed in support of this Application, and which
will result in, among other things, the business combination of Kennady and Mountain
Province Diamonds Inc. (“Mountain Province”); |
| (b) | an
interim order for the advice and directions of this Honourable Court pursuant to subsection
182(5) of the OBCA with respect to the Arrangement and this Application (the “Interim
Order”); |
| (c) | an order abridging the time for the service and filing
or dispensing with service of the Notice of Application and Application Record, if necessary; and |
| (d) | such further and other relief as this Honourable Court
may deem just. |
| 2. | The grounds for the application are: |
| (a) | Kennady
is a corporation incorporated under the OBCA, with its registered office in Toronto,
Ontario. Kennady owns 100 per cent of the Kennady North diamond project located in the
Northwest Territories, Canada. The common shares of Kennady (the “Kennady
Shares”) are listed for trading on the TSX Venture
Exchange (the “TSXV”) under
the symbol “KDI”; |
| (b) | Mountain Province is a corporation
continued under the OBCA, and is focused on the mining and marketing of rough diamonds
to the global market. Mountain Province’s primary asset is its 49 per cent ownership
interest in the GK Diamond Mine, which is adjacent to the Kennady North diamond project
in the Northwest Territories. The common shares of Mountain Province (the “Mountain
Province Shares”) are listed for trading on the Toronto Stock Exchange and
the Nasdaq Stock Market under the symbol “MPVD”; |
| (c) | the purpose of the Arrangement is to effect the business combination of Kennady and Mountain Province,
upon completion of which Mountain Province will acquire all of the issued and outstanding Kennady Shares and Kennady will become
a wholly-owned subsidiary of Mountain Province; |
| (d) | the Arrangement is an “arrangement” within the meaning of section 182(1) of the OBCA; |
| (e) | all statutory requirements under section 182 and other applicable provisions of the OBCA will be
satisfied by the return date of this Application; |
| (f) | all requirements pursuant to Multilateral Instrument 61-10l
- Protection of Minority Security Holders in Special Transactions will be
satisfied by the return date of this Application; |
| (g) | the directions set forth in any Interim Order this Court may grant, and the securityholder approvals
required, will be followed and obtained by the date of the return of this Application; |
| (h) | the Arrangement is in the best interests of Kennady and is put forward in good faith; |
| (i) | the Arrangement is fair and reasonable and it is appropriate
for this Honourable Court to approve the Arrangement; |
| (j) | the provisions of section 182 of the OBCA; |
| (k) | National Instrument 54-101 - Communication with Beneficial Owners of Securities of a Reporting
Issuer; |
| (1) | section 3(a)(l0)
of the United States Securities Act of 1933, as amended (the “U.S. Securities
Act”) exempts from registration requirements of the U.S. Securities Act those
securities which are issued in exchange for bona fide outstanding securities,
claims or property interests, or partly in exchange and partly for cash, where the terms
and conditions of such issuance and exchange are approved after a hearing by a court
upon the fairness of such terms and conditions, at which all persons to whom it is proposed
to issue securities in such exchange shall have the right to appear. The Order of this
Honourable Court approving the Arrangement, if granted, will constitute the basis for
the exemption under section 3(a)(l0) from the registration requirements of the U.S. Securities
Act with respect to the Mountain Province Shares to be issued to the holders of Kennady
Shares (“Kennady Shareholders”) pursuant to the Arrangement; |
| (m) | Rules 2.03, 3.02, 14.05, 17.02, 37 and 38 of the Rules
of Civil Procedure; and |
| (n) | such further and other grounds as counsel may advise and this Honourable Court may permit. |
| 3. | The following documentary evidence will be used at the
hearing of the application: |
| (a) | the affidavit of Dr. Rory Moore, President, Chief Executive Officer and a director of Kennady,
to be sworn, and the exhibits thereto; |
| (b) | a further or supplementary affidavit to be sworn, and the exhibits thereto, on behalf of Kennady,
reporting as to compliance with any Interim Order and the results of any meeting conducted pursuant to such Interim Order; and |
| (c) | such further and other evidence as counsel may advise and this Honourable Court may permit. |
4. The Notice of Application will be sent to all registered Kennady Shareholders, all holders of options to purchase Kennady Shares,
and holders of restricted share units issued by Kennady, who otherwise will not receive a copy of the Notice of Application as
a registered Kennady Shareholder, at the address of each holder as shown on the books and records of Kennady as at the close of
business on the Record Date, or as this Court may direct in the Interim Order, pursuant to rule 17.02(n) of the Rules
of Civil Procedure in the case of those holders whose addresses, as they appear on the books
and records of Kennady, are outside Ontario.
| February 28, 2018 |
FASKEN MARTINEAU DuMOULIN LLP |
| |
Barristers and Solicitors |
| |
333 Bay Street, Suite 2400 |
| |
Bay Adelaide Centre, Box 20 |
| |
Toronto, ON M5H 2T6 |
| |
|
| |
Brad Moore (LSUC: 47880A) |
| |
bmoore@ fasken.com |
| |
Tel: 416 865 4550 |
| |
|
| |
Lawyers for the Applicant |
IN THE MATTER OF AN APPLICATION UNDER SECTION
182
OF THE BUSINESS CORPORATIONS ACT, R.S.O. 1990, c.
B.l6,
as amended, AND RULES 14.05(2) AND 14.05(3) OF THE
RULES OF CIVIL PROCEDURE
KENNADY DIAMONDS INC.
Applicant |
Court File No.
CV-18-592976-00CL |
| |
ONTARIO
SUPERIOR COURT OF JUSTICE
(COMMERCIAL LIST)
Proceeding commenced at Toronto |
| |
|
| |
NOTICE OF APPLICATION
(RETURNABLE APRIL 11,2018) |
| |
|
| |
FASKEN MARTINEAU DuMOULIN LLP
Barristers and Solicitors
333 Bay Street, Suite 2400
Bay Adelaide Centre, Box 20
Toronto, ON M5H 2T6
Brad Moore (LSUC: 47880A)
bmoore@ fasken.com
Tel: 416 865 4550
Lawyers for the Applicant |
SCHEDULE “J”
INFORMATION CONCERNING MOUNTAIN PROVINCE
The following information concerning Mountain
Province should be read in conjunction with the information described below under “Information Concerning Mountain Province
– Documents Incorporated by Reference” and the information concerning Mountain Province appearing elsewhere in the
Circular. Capitalized terms used but not otherwise defined in this Schedule “J” – “Information Concerning
Mountain Province” shall have the meaning ascribed to them in the Circular. See Schedule “A” – “Glossary
of Terms”.
Documents Incorporated by Reference
Information has been incorporated by
reference in the Circular from documents filed with securities commissions or similar authorities in Canada. Copies of the
documents incorporated herein by reference may be obtained on request without charge from David Whittle, Interim President and
Chief Executive Officer, at 161 Bay Street, Suite 1410, P.O. Box 216, Toronto, Ontario, Canada M5J 2S1. Alternatively, these documents
may be obtained at Mountain Province’s website at www.mountainprovince.com, and are also available electronically under
Mountain Province’s issuer profile on SEDAR at www.sedar.com.
The following documents (“documents
incorporated by reference” or “documents incorporated herein by reference”) of Mountain Province are
specifically incorporated by reference herein and form an integral part of the Circular:
| (a) | The Mountain Province AIF dated March 28, 2017 for the year ended December 31, 2016; |
| (b) | the annual audited consolidated financial statements of Mountain Province and the notes thereto
for each of the years ended December 31, 2016 and 2015, together with the auditors’ report thereon; |
| (c) | the management’s discussion and analysis of the financial condition and results of operations for
the years ended December 31, 2016 and 2015; |
| (d) | the unaudited condensed interim consolidated financial statements of Mountain Province for the
three and nine months ended September 30, 2017; |
| (e) | the management’s discussion and analysis of the financial condition and results of operations for
the three and nine months ended September 30, 2017; |
| (f) | news release dated November 22, 2017 regarding results of ninth diamond sale of 2017; |
| (g) | news release dated January 3, 2018 regarding results of tenth diamond sale of 2017; |
| (h) | news release dated February 12, 2018 regarding results of first diamond sale of 2018; |
| (i) | the material change report dated and filed on June 9, 2017 in respect of the departure of Patrick
Evans as President and Chief Executive Officer of Mountain Province and the appointment of David Whittle as Interim President and
Chief Executive Officer including all schedules attached thereto; |
| (j) | the material change report dated and filed on December 21, 2017 in respect of Mountain Province’s
completion of its previously announced private offering of U.S.$330,000,000 senior secured second lien notes due December 15, 2022
including all schedules attached thereto; |
| (k) | the material change report dated and filed on February 7, 2018 in respect of the entering into
the Arrangement Agreement; |
| (l) | the management information circular of Mountain Province dated February 28, 2017 in respect of the annual and special meeting
of shareholders of Mountain Province held on April 4, 2017; and |
| (m) | the management information circular of Mountain Province dated May 17, 2016 in respect of the annual and special meeting of
shareholders of Mountain Province held on June 21, 2016. |
Any document of the type referred to above
in (a) through (m) and any other document of the type required by National Instrument 44-101 – Short Form Prospectus Distributions
to be incorporated by reference in a short form prospectus filed by Mountain Province with a securities commission or similar regulatory
authority in Canada after the date of the Circular and prior to the date of completion of the Arrangement will be deemed to be
incorporated by reference in the Circular.
Any statement contained in a document incorporated
or deemed to be incorporated by reference herein will be deemed to be modified or superseded, for purposes of the Circular, to
the extent that a statement contained herein or in any other subsequently filed document which also is or is deemed to be incorporated
by reference herein modifies or supersedes such statement. The modifying or superseding statement need not state that it has modified
or superseded a prior statement or include any other information set forth in the document that it modifies or supersedes. The
making of a modifying or superseding statement will not be deemed an admission for any purposes that the modified or superseded
statement, when made, constituted a misrepresentation, an untrue statement of a material fact or an omission to state a material
fact that is required to be stated or that is necessary to make a statement not misleading in light of the circumstances in which
it was made. Any statement so modified or superseded will not be deemed, except as so modified or superseded, to constitute part
of the Circular.
Summary Description of the Business
Mountain Province is focused on the mining
and marketing of rough diamonds to the global market. Mountain Provinces supplies rough diamonds to the global market from its
49% ownership interest in the GK Diamond Mine (located in the Northwest Territories, Canada). This interest is Mountain Province’s
primary asset.
Mountain Province acquired its interest
in the mineral claims and properties that were developed into the GK Diamond Mine in August 1992. The GK Diamond Mine was built
and is operated by a joint venture (the “Gahcho Kué Joint Venture”) in which Mountain Province has an undivided
49% interest. The other joint venture participant, De Beers, has an undivided 51% interest. Mountain Province has no other mineral
properties other than its 49% undivided interest in the GK Diamond Mine. Mountain Province receives its 49% share of rough diamonds
produced by the GK Diamond Mine and independently markets and sells these diamonds to ten diamond sales held each year.
The terms of the Gahcho Kué Joint
Venture are governed by an amended and restated joint venture agreement, dated July 3, 2009, among Mountain Province, Camphor Ventures
Inc. (which was subsequently amalgamated with Mountain Province on October 1, 2014) and De Beers, as amended by an assignment agreement,
dated as of October 3, 2014 among Mountain Province, 2435386 and De Beers and by a binding confirmation of intent, dated as of
December 2, 2014, among Mountain Province, 2435386, 2435572 and De Beers (as assigned and amended by the binding confirmation of
intent, the “Joint Venture Agreement”).
Recent Developments
Note Offering
On December 11, 2017, Mountain Province
closed a private offering of U.S.$330,000,000 senior secured second lien notes due December 15, 2022 (the “Notes”).
The Notes accrue interest at a coupon rate of 8.0% per year, payable semi-annually in arrears. Pursuant to an indenture, dated
December 11, 2017, between Mountain Province, the guarantors and Computershare Trust Company, N.A. (the “Mountain Province
Indenture”), the Notes are initially guaranteed on a senior secured basis by all of Mountain Province’s existing subsidiaries
and thereafter by all of Mountain Province’s restricted subsidiaries (as such term is defined in the Mountain Province Indenture).
The Notes and the guarantees are secured on a second-priority basis by substantially all of the assets of Mountain Province and
the guarantors, including diamonds in inventory, equity interests in the guarantors and the assignment and pledge of
Mountain Province’s participation interests
and rights in the Gahcho Kué Joint Venture, subject to certain customary exceptions.
Mountain Province used the net proceeds
from the offering of the Notes, together with cash on its balance sheet, to fully repay and terminate its U.S.$370 million
project loan facility (of which U.S.$357 million was outstanding as of September 30, 2017), to fully repay amounts owing to De
Beers for historic sunk costs related to the development of the mine (of which approximately C$48.5 million of costs and accumulated
interest was outstanding as of September 30, 2017), and to pay related fees and expenses of the offering of the Notes and the entry
into the Revolving Credit Agreement.
The following description of certain provisions
of the Mountain Province Indenture is a summary only. The summary of certain provisions of the Mountain Province Indenture below
and in this Circular is not comprehensive and is qualified in its entirety by reference to the full text of the Mountain Province
Indenture, the full text of which may be viewed on SEDAR under Mountain Province’s issuer profile at www.sedar.com.
The Mountain Province Indenture restricts
Mountain Province’s (and Mountain Province’s restricted subsidiaries’) ability to, among other things, directly or indirectly,
| (i) | declare or pay any dividend or make any other payment or distribution on account of the capital
stock, warrants and other rights to acquire capital stock of Mountain Province or any of its restricted subsidiaries (including,
without limitation, any such payment or distribution made in connection with any merger, amalgamation or consolidation involving
Mountain Province or any of its restricted subsidiaries) or to the direct or indirect holders of Mountain Province’s or any of
its restricted subsidiaries’ capital stock, warrants and other rights to acquire capital stock in their capacity as such (other
than dividends or distributions payable in capital stock, warrants and other rights to acquire capital stock (other than disqualified
stock) of Mountain Province and other than dividends or distributions payable to Mountain Province or a restricted subsidiary of
Mountain Province); |
| (ii) | purchase, redeem or otherwise acquire or retire for value (including, without limitation, any such
purchase, redemption, acquisition or retirement made in connection with any merger, amalgamation or consolidation involving Mountain
Province) any capital stock, warrants and other rights to acquire capital stock of Mountain Province held by persons other than
Mountain Province or a restricted subsidiary of Mountain Province; |
| (iii) | make any principal payment on or with respect to, or purchase, redeem, defease or otherwise acquire
or retire for value, prior to the date on which the payment of interest or principal was scheduled to be paid, any subordinate
indebtedness of Mountain Province or any guarantor (excluding any intercompany indebtedness between or among Mountain Province
and any of its restricted subsidiaries and without regard to security or priority of security), except the purchase, redemption,
defeasance, acquisition or retirement of any such indebtedness in anticipation of satisfying any of a sinking fund obligation,
a principal installment or a scheduled maturity, in each case due within one year of the date of such purchase, repurchase or other
acquisition; or |
| (iv) | make any investment not permitted by the terms of the Mountain Province Indenture. |
These restrictions are subject to certain
exceptions and qualifications. Such payments are not considered restricted payments under the Mountain Province Indenture where,
at the time of and after giving effect to such payment, certain threshold tests are met, including lack of default or event of
default, the ability to incur additional indebtedness pursuant to the terms of the Mountain Province Indenture and aggregate restricted
payments being below a certain calculable threshold.
The Mountain Province Indenture also does
not prohibit certain payments including, among others, (i) the payment of any dividend or the consummation of any irrevocable redemption
within 60 days after the date of declaration of the dividend or giving of the redemption notice, as the case may be, if at the
date of declaration or notice, the dividend or
redemption payment would have complied
with the provisions of the Mountain Province Indenture, (ii) the payment of any dividend (or, in the case of any partnership or
limited liability company, any similar distribution) by a restricted subsidiary of Mountain Province to the holders of its capital
stock, warrants and other rights to acquire capital stock (other than Mountain Province or any restricted subsidiary of Mountain
Province) on no more than a pro rata basis, and (iii) so long as no Default has occurred and is continuing or would be caused thereby,
other restricted payments in an aggregate amount not to exceed the greater of (x) U.S.$15.0 million and (y) 2.0% of Total Assets
(as such terms are defined in the Mountain Province Indenture).
Revolving Credit Agreement
Concurrently with the closing of the Notes
offering, Mountain Province entered into an undrawn U.S.$50 million first lien revolving credit facility agreement, dated December
11, 2017, among 2435572 as borrower, Mountain Province and 2435386 as guarantors, the Bank of Nova Scotia as administrative agent,
and Nedbank Limited, London Branch and the financial institutions named therein as lenders (the “Revolving Credit Agreement”).
The liens securing the Notes are junior to liens securing the Revolving Credit Agreement.
The Revolving Credit Agreement contains
customary covenants for such facility and financial maintenance covenants, including total leverage ratio and interest coverage
ratio. The Revolving Credit Agreement also restricts Mountain Province’s ability to make certain payments and distributions, including
dividend payments, except where no default or event of default has occurred or would result and certain threshold tests of financial
health are met.
Arrangement Agreement
On January 28, 2018, Mountain Province
entered into the Arrangement Agreement, setting forth the terms and conditions for the Arrangement. See “The Arrangement”,
“Arrangement Agreement”, “Cautionary Statement Regarding Forward-Looking Statements” and “Risk
Factors” in this Circular. Concurrently with the entering into of the Arrangement Agreement, Mountain Province entered
into the Kennady Voting and Support Agreements. See “The Voting and Support Agreements – Kennady Voting and Support
Agreements” in this Circular.
On January 28, 2018, concurrently with
the Arrangement Agreement, Kennady entered into an agreement with Mountain Province pursuant to which Mountain Province will provide
financing to Kennady of up to $10,000,000 via an equity private placement of 4,000,000 Kennady Shares at $2.50 per Kennady Share
in four equal tranches designed to coincide with Kennady’s budget for the current work program. See “The Kennady Private
Placement” in this Circular.
Consolidated Capitalization
The following table sets out the capitalization
of Mountain Province as at September 30, 2017, the date of Mountain Province’s most recently filed financial statements and on
a pro forma basis as at September 30, 2017, after giving effect to the Arrangement, as if it had occurred on September 30,
2017. The table should be read in conjunction with the unaudited pro forma condensed consolidated financial statements of Mountain
Province attached as Schedule “O” – “Unaudited Pro Forma Condensed Consolidated Financial Statements of
Mountain Province” to the Circular, as well as with the other disclosure contained in this Schedule “J” –
“Information Concerning Mountain Province” and elsewhere in the Circular, including the risk factors described
under the heading “Risk Factors”. See also “Description of the Common Shares” and “Prior
Sales” in this Schedule “J” – “Information Concerning Mountain Province”.
|
Expressed in thousands of Canadian dollars
(Unaudited) |
Historical, as at
September 30, 2017 |
Pro forma, as at
September 30, 2017 |
|
Non-current liabilities |
|
|
|
Loan facility |
306,977 |
306,977 |
|
Expressed in thousands of Canadian dollars (Unaudited) |
Historical, as at
September 30, 2017 |
Pro forma, as at
September 30, 2017 |
|
Decommissioning and restoration liability |
24,687 |
24,859 |
|
Total non-current liabilities |
331,664 |
331,836 |
| |
|
|
|
Shareholders’ equity |
|
|
|
Share capital |
475,570 |
651,791 |
|
Share-based payments reserve |
5,309 |
5,309 |
|
Deficit |
(130,504) |
(134,990) |
|
Total shareholders’ equity |
350,375 |
522,110 |
Notes:
| (1) | On December 11, 2017, Mountain Province closed a private offering of U.S.$330,000,000 senior secured
second lien notes due December 15, 2022 and used the net proceeds from the offering of the Notes, together with cash on its balance
sheet, to fully repay and terminate its U.S.$370 million project loan facility (of which U.S.$357 million was outstanding as of
September 30, 2017). |
Other than as set forth in the table below, there has been no
material change in the consolidated capitalization of Mountain Province since September 30, 2017:
|
Description of
Security |
Number Authorized as
at the date of this
Circular |
Number Outstanding as
of September 30, 2017
(unaudited) |
Number Outstanding as
of the date of this
Circular
(unaudited) |
|
Mountain Province Shares |
Unlimited(1) |
160,245,166 |
160,253,501 |
|
Mountain Province Options |
16,025,350(2) |
2,630,000 |
3,640,000 |
|
Mountain Province RSUs |
16,025,350(2) |
257,000 |
488,665 |
Notes:
| (1) | | Based on there being 160,253,501 Mountain Province Shares outstanding as of the date
hereof. |
| (2) | | Authorized Mountain Province Options and Mountain Province RSUs are presented as an
aggregate figure. Mountain Province has a rolling 10% long term equity incentive plan (the “Mountain Province Long Term
Equity Incentive Plan”) pursuant to which the Mountain Province Board may grant stock option, SAR, RSU and DSU awards
within the limits identified in the Mountain Province Long Term Equity Incentive Plan. See “Particulars of Other Matters
to Be Acted Upon – Approval of Long Term Equity Incentive Plan” in the management information circular of Mountain
Province dated May 17, 2016, which is incorporated by reference in this Circular and available under Mountain Province’s issuer
profile on SEDAR at www.sedar.com. |
Description of the Common Shares
The authorized capital of Mountain Province
consists of an unlimited number of Mountain Province Shares, of which 160,253,501 are issued and outstanding as of the date of
this Circular.
Holders of Mountain Province Shares
are entitled to receive notice of, attend and vote at all meetings of the shareholders of Mountain Province. Each Mountain
Province Share carries the right to one vote in person or by proxy at all meetings of the shareholders of Mountain Province.
The holders of Mountain Province Shares are entitled to receive dividends as and when declared by the Mountain Province
Board. Subject to the rights, privileges, restrictions and conditions attaching to any other class of shares of Mountain
Province, the holders of Mountain Province Shares are entitled to receive Mountain Province’s proportionate remaining
share of the assets of the GK Diamond Mine and any other assets Mountain Province may hold in the event of liquidation,
dissolution or winding - up of Mountain Province.
Securities Authorized for Issuance
Under Equity Compensation Plans
The following table sets out information
for Mountain Province’s most recently completed financial year ended December 31, 2017 with respect to compensation plans under
which equity securities of Mountain Province are authorized for issuance.
|
Plan Category
|
Number of securities to
be issued upon exercise
of outstanding options,
restricted share units,
warrants and rights
(a)
|
Weighted-average
exercise price of
outstanding options,
warrants and rights
(b)
|
Number of securities
remaining available for
future issuance under
equity compensation
plans (excluding
securities reflected in
column (a))
(c)
|
Equity compensation plans approved by securityholders
|
4,128,665 |
$4.45 |
11,896,685 |
|
Equity compensation plans not approved by
securityholders
|
N/A |
N/A |
N/A |
Total
|
4,128,665 |
$4.45 |
11,896,685 |
Prior Sales
The following table sets out the number of Mountain Province
Shares, and securities that are convertible into Mountain Province Shares, issued by Mountain Province during the 12-month period
preceding the date of the Circular.
|
Date of Issuance |
Number of
Securities Issued |
Type of
Security |
Issue, Exercise or
Grant Price per
Security ($) |
Reason for Issuance |
|
June 30, 2017 |
10,000 |
Mountain Province Shares |
3.91 |
RSUs vested and issued |
|
Date of Issuance |
Number of
Securities Issued |
Type of
Security |
Issue, Exercise or
Grant Price per
Security ($) |
Reason for Issuance |
|
July 19, 2017 |
50,000 |
Mountain Province Shares |
4.77 |
RSUs vested and issued |
|
August 15, 2017 |
3,000 |
Mountain Province Shares |
4.96 |
RSUs vested and issued |
|
August 31, 2017 |
8,333 |
Mountain Province Shares |
4.46 |
RSUs vested and issued |
|
December 21, 2017 |
8,335 |
Mountain Province Shares |
3.48 |
RSUs vested and issued |
|
December 22, 2017 |
1,010,000 |
Mountain Province Options |
3.48 |
Issuance pursuant to Mountain
Province Long Term Equity Incentive Plan |
|
December 22, 2017 |
240,000 |
Mountain Province RSUs |
3.48 |
Issuance pursuant to Mountain
Province Long Term Equity Incentive Plan |
Trading Price and Volume
The Mountain Province Shares trade on the
TSX and on Nasdaq under the symbol “MPVD”. The high and low prices of the Mountain Province Shares as well as the monthly
trading volume on the TSX for each of the last twelve months is shown below.
| Date |
High
($) |
Low
($) |
Total Volume
(#) |
| January 2017 |
6.94 |
5.27 |
2,860,384 |
| February 2017 |
6.40 |
5.15 |
7,023,835 |
| March 2017 |
5.55 |
4.07 |
7,105,673 |
| April 2017 |
4.84 |
3.89 |
3,813,621 |
| May 2017 |
4.12 |
3.56 |
2,700,213 |
| June 2017 |
4.39 |
3.63 |
1,287,655 |
| July 2017 |
5.10 |
3.75 |
1,738,961 |
| August 2017 |
4.99 |
4.07 |
1,500,693 |
| September 2017 |
4.27 |
3.95 |
1,312,324 |
| Date |
High
($) |
Low
($) |
Total Volume
(#) |
| October 2017 |
4.10 |
3.53 |
935,734 |
| November 2017 |
3.84 |
3.35 |
2,325,314 |
| December 2017 |
3.55 |
3.28 |
2,191,425 |
| January 2018 |
3.55 |
3.18 |
7,927,064 |
| February 2018 |
3.52 |
3.33 |
2,566,286 |
| March 1 – 5, 2018 |
3.41 |
3.33 |
305,982 |
On January 26, 2018, the last trading day
prior to the date of the public announcement of the Arrangement Agreement, the closing price of the Mountain Province Shares on
the TSX was $3.55. On March 5, 2018, the closing price of the Mountain Province Shares on the TSX was $3.36.
Dividend Policy
Mountain Province did not declare or pay
dividends in fiscal 2016 or 2015. The future payment of dividends or distributions will be dependent upon the financial condition
of Mountain Province and other factors the Mountain Province Board may consider appropriate under the circumstances.
The Mountain Province Indenture and the
Revolving Credit Agreement contain customary terms which restrict, subject to exceptions and qualifications, the ability of Mountain
Province and Subsidiaries of Mountain Province to make certain dividend payments, distributions, redemptions, repurchases, investments
and other restricted payments.
See the disclosure contained in this Schedule
“J” – “Information Concerning Mountain Province” under the heading “Recent Developments”.
Risk Factors
An investment in Mountain Province Shares
should be considered highly speculative and investors should carefully consider all of the information disclosed in the Circular
and the documents incorporated herein by reference. In addition to the other information and risks factors set out elsewhere in
the Circular, the risk factors described in the Mountain Province AIF and the following risk factors should be given special consideration
by Kennady Shareholders when evaluating whether to approve the Arrangement Resolution.
The unaudited pro forma condensed
consolidated financial statements of Mountain Province are presented for illustrative purposes only and may not be an indication
of Mountain Province’s financial condition or results of operations following the Arrangement.
The unaudited pro forma condensed
consolidated financial statements contained in this Circular are presented for illustrative purposes only as of their respective
dates and may not be an indication of the financial condition or results of operations of Mountain Province following the Arrangement
for several reasons. For example, the unaudited pro forma condensed consolidated financial statements have been derived
from the respective historical financial statements of Mountain Province and Kennady, and certain adjustments and assumptions made
as of the dates indicated therein and have been made to give effect to the Arrangement and the other respective relevant transactions.
The information upon which these adjustments and assumptions have been made is preliminary, and these kinds of adjustments and
assumptions are difficult to make with complete accuracy. See “Cautionary Statement Regarding Forward-Looking Statements”
in this Circular.
Mountain Province holds a minority
interest in, and is not the operator of, the GK Diamond Mine and it does not exercise control of the GK Diamond Mine. Removing
De Beers as operator of the GK Diamond Mine could be a disruptive, costly and lengthy process.
Mountain Province is subject to additional
risks because it holds a minority interest in the GK Diamond Mine and De Beers is the operator of the GK Diamond Mine and the majority
interest holder of the Gahcho Kué Joint Venture. Although major operating and budget decisions and certain significant changes
affecting the GK Diamond Mine require Mountain Province’s approval under the Joint Venture Agreement, De Beers, as the operator
of and the holder of a majority interest in the GK Diamond Mine, manages the operations at the GK Diamond Mine and controls most
day-to-day decisions affecting the GK Diamond Mine and its operating activities. Mountain Province does not control De Beers and
at any time De Beers may have economic or business interests or goals that are, or become inconsistent with, Mountain Province’s
economic or business interests or goals. As a holder of a minority interest in the GK Diamond Mine Mountain Province is unable
to exert control over day-to-day decisions relating to the GK Diamond Mine, except in certain limited cases as provided by the
Joint Venture Agreement. Additionally, because De Beers operates the GK Diamond Mine, Mountain Province is highly dependent on
the operational expertise of De Beers, as well as impacted by De Beers’ own corporate priorities and its financial condition. Mountain
Province is also reliant on De Beers complying with its information delivery obligations under the Joint Venture Agreement in order
to gain knowledge about any events at, or updates with respect to, the GK Diamond Mine. As a result, Mountain Province’s results
are subject to additional risks associated with the operational expertise, financial condition and corporate priorities of De Beers,
and if De Beers is unable to successfully operate the GK Diamond Mine, Mountain Province’s business and results of operations will
be materially adversely affected.
De Beers may resign as operator at any
time by giving notice to the management committee, but removing De Beers as operator without De Beers’ consent could be a lengthy
and resource-intensive process. Under the Joint Venture Agreement, unanimous agreement of both parties to the Joint Venture Agreement
is required for removal of the operator, even removal of the operator for cause. Although the operator is required to resign if
it is in material breach of its obligations to the Gahcho Kué Joint Venture, in order to trigger this obligation the participants
to the Joint Venture Agreement must agree that the operator is in material breach and provide notice of the same to the operator.
Any dispute between the parties regarding whether the operator is in material breach of its obligations must be resolved through
the standard dispute resolution mechanisms under the Joint Venture Agreement, which requires negotiation, binding mediation and
determination by an independent expert before any party may seek a court order with respect to the dispute. This process could
significantly disrupt the operations of the GK Diamond Mine, negatively impact the relationship of the Gahcho Kué Joint
Venture partners and be very costly to Mountain Province.
If Mountain Province is in default
under the Joint Venture Agreement, it will be prohibited from participating in the management committee and will not receive its
share of diamonds during the continuance of such default and De Beers may reduce or sell Mountain Province’s participating interest
in the Gahcho Kué Joint Venture or sell a portion or all of its share of diamonds.
If Mountain Province defaults under the
Joint Venture Agreement and fails to remedy such default within the prescribed cure period, it may not attend management committee
meetings or direct the management committee, may not transfer its participating interest in the Gahcho Kué Joint Venture
and have no rights to delivery of its share of diamonds until such default is cured.
In addition, if such default is a default
in payment of Mountain Province’s share of Gahcho Kué Joint Venture expenses, De Beers has the option to pay such defaulted
expenses to the operator and either (a) reduce Mountain Province’s participating interest in the Gahcho Kué Joint Venture
accordingly, which would permanently reduce Mountain Province’s share of diamond production in the same proportion, or (b) sell
a portion or all of Mountain Province’s diamonds in such a manner as De Beers shall determine or, with prior notice, sell all or
a portion of Mountain Province’s participating interest in the Gahcho Kué Joint Venture, and apply the proceeds of such
sale to the defaulted expenses until such expenses, and interest on such expenses, are paid in full. Upon application of either
of these remedies, the payment default would be cured and Mountain Province would resume its full participation and diamond delivery
rights under the Joint Venture Agreement. If Mountain Province’s participating interest in the Gahcho Kué Joint Venture
is reduced or sold in part, its share of diamond production would be permanently reduced to match its then existing participating
interest, and this could impact its ability to pay interest or principal on the Notes when due or to make other required payments
when due under other agreements or obligations, which could
result in a subsequent default under the
Mountain Province Indenture, the Revolving Credit Agreement or other agreements or obligations. In addition, reduction of Mountain
Province’s participating interest below 40% will constitute an event of default under the Revolving Credit Agreement, which may
result in a cross-default under the Mountain Province Indenture that governs the Notes.
Mountain Province is dependent on
the GK Diamond Mine for future operating revenue.
Mountain Province’s only economic interest
is its indirect 100% equity ownership interest in 2435386, which is a 49% participant in the Gahcho Kué Joint Venture, which
owns and operates the GK Diamond Mine. As a result, Mountain Province is solely dependent upon its interest in the GK Diamond Mine
for its revenue and profits. In addition, production and operating costs are difficult to predict and may render further production
at the GK Diamond Mine financially unfeasible. If commercial production and operation of the GK Diamond Mine becomes financially
unfeasible, for engineering, technical, economic, political, legal or other reasons, Mountain Province’s business and financial
position will be materially and adversely affected. In addition, the book value of Mountain Province’s interest in the GK Diamond
Mine is subject to certain accounting assumptions. If such assumptions prove to be incorrect, then the book value of Mountain Province’s
interest in the GK Diamond Mine could be impaired, which could have a material adverse effect on Mountain Province.
There can be no assurance that Mountain
Province will be able to extend the mine life beyond 2028.
Mountain Province is currently exploring
options to potentially extend the mine life beyond 2028 through resource conversion and deep mining of the Tuzo kimberlite. Additional
exploration and resource delineation is required to assess the viability of these prospects at Tuzo. A transition to underground
mining generally increases per unit costs and can limit the annual volumes that can be economically extracted from such orebodies.
There is no assurance that Mountain Province will be able to extend the mine life beyond 2028 through resource conversion or deep
mining.
The volatility of diamond prices
is significant and unpredictable and the demand for diamonds is unpredictable. Many factors that affect diamond prices and demand
for diamonds will be outside Mountain Province’s control.
Mountain Province’s profitability will
be dependent upon its mineral properties and the worldwide demand for and price of diamonds. Diamond prices fluctuate and are affected
by numerous factors beyond Mountain Province’s control, 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 Mountain Province’s results of operations. In addition, prices
for the higher value and lower value market segments can move independently of one another, depending on relative demand. For example,
strengthening prices in one market segment can offset weakening prices in another, or synchronize with strengthening prices in
another, which increases the unpredictability of diamond prices.
Compliance with climate change initiatives
could have a material adverse effect on Mountain Province’s results of operations.
The Canadian government has established
a number of policy measures in response to concerns relating to climate change. While the impact of these measures cannot be quantified
at this time, the likely effect will be to increase costs for fossil fuels, electricity and transportation; restrict industrial
emission levels; impose added costs for emissions in excess of permitted levels; and increase costs for monitoring and reporting.
Compliance with these initiatives could have a material adverse effect on Mountain Province’s results of operations.
In October 2016, Canada’s federal government
announced that it intends to establish a national price on carbon, to be implemented by 2018 through either a carbon tax or a cap
and trade system, applicable in each province except those that enact their own comparable carbon pricing mechanism by such time.
In June 2017, the Government of the
Northwest Territories announced that it
intends to implement a carbon tax, designed to be comparable to the federal approach, effective January 2019. The details of the
announced carbon pricing system and the resulting impact on the GK Diamond Mine are uncertain at this time.
Insurance does not cover all potential
risks.
The business of the Gahcho Kué Joint
Venture is subject to a number of risks and hazards, including adverse environmental conditions, industrial accidents, labour disputes,
unusual or unexpected geological conditions, risks relating to the physical security of diamonds held as inventory or in transit,
changes in the regulatory environment, and natural phenomena such as inclement weather conditions. Such occurrences could result
in damage to the GK Diamond Mine, harm to plants and animals, personal injury or death, environmental damage to the GK Diamond
Mine, delays in mining, monetary losses, fines, penalties and possible legal liability.
Although insurance is maintained to protect
against certain risks in connection with the GK Diamond Mine and our diamonds held as inventory or in transit, the insurance in
place will not cover all potential risks. It may not be possible to maintain insurance to cover insurable risks at economically
feasible premiums. In addition, all insurance policies for the GK Diamond Mine are held and maintained by De Beers as operator.
Therefore, Mountain Province will have no control over the acquisition, maintenance or levels of insurance with respect to the
GK Diamond Mine.
The production and marketing of diamonds
depend on skilled employees and key relationships with certain third parties.
Production at the GK Diamond Mine is dependent
upon the efforts of certain skilled employees. The loss of these employees or the inability to attract and retain additional skilled
employees may adversely affect the level of diamond production. De Beers hires and employs all employees at the GK Diamond Mine
and therefore Mountain Province has no control over the hiring, retention or qualifications of these employees.
Mountain Province’s success in sorting,
valuing and marketing its 49% share of the rough diamonds will be dependent on the services of key executives and skilled employees
and consultants, as well as the continuance of key relationships with certain third parties, such as diamantaires, gem quality
diamond manufacturers and master cutters. The loss of these persons or Mountain Province’s inability to attract and retain additional
skilled employees and consultants or to establish and maintain relationships with required third parties may adversely affect Mountain
Province’s business and future operations in marketing diamonds.
Restrictive covenants in the Mountain
Province Indenture and the Revolving Credit Agreement may restrict Mountain Province’s ability to operate its business. Mountain
Province’s failure to comply with these covenants, including as a result of events beyond its control, could result in an event
of default that could materially and adversely affect its business, results of operations and financial condition.
The Mountain Province Indenture and the
Revolving Credit Agreement contain negative covenants restricting, among other things, Mountain Province’s ability to:
| · | incur or guarantee additional indebtedness and issue certain preferred stock; |
| · | make certain payments, including dividends or other distributions, with respect to the shares of a particular entity; |
| · | create or incur certain liens; |
| · | prepay or redeem subordinated or unsecured debt or equity; |
| · | make certain investments; |
| · | sell, lease or transfer certain assets, including stock of restricted subsidiaries; |
| · | create encumbrances or restrictions on the payment of dividends or other distributions, loans or advances to, and on the transfer
of, assets to a particular entity; |
| · | engage in certain transactions with affiliates; |
| · | consolidate, merge or transfer all or substantially all of Mountain Province’s assets and the assets of its Subsidiaries on
a consolidated basis; |
| · | change the business Mountain Province conducts; and |
| · | consent to or conduct certain activities of the Gahcho Kué Joint Venture. |
All of these limitations are subject to
significant exceptions and qualifications. The covenants to which Mountain Province is subject could limit its ability to finance
its future operations and capital needs and its ability to pursue business opportunities and activities that may be in its interest.
In addition, the Revolving Credit Agreement
requires Mountain Province to comply with certain affirmative covenants and financial maintenance covenants, including total leverage
ratio, interest coverage ratio and total net worth ratio. The restrictions contained in the Mountain Province Indenture and the
Revolving Credit Agreement could affect Mountain Province’s ability to operate its business and may limit its ability to react
to market conditions or take advantage of potential business opportunities as they arise. For example, such restrictions could
adversely affect Mountain Province’s ability to further finance its operations, make strategic acquisitions, investments or alliances,
restructure its organization or finance its capital needs. Additionally, Mountain Province’s ability to comply with these covenants
and restrictions may be affected by events beyond its control. These include prevailing economic, financial and industry conditions.
If Mountain Province breaches any of these covenants or restrictions, it could be in default under the Mountain Province Indenture
or the Revolving Credit Agreement.
Upon the occurrence of any event of default
under the Revolving Credit Agreement, subject to applicable cure periods and other limitations on acceleration or enforcement,
the relevant creditors could elect to declare all amounts outstanding, together with accrued interest, immediately due and payable
and cancel the availability of the facility. In addition, any default under the Revolving Credit Agreement could lead to an event
of default and acceleration under other debt instruments that contain cross default or cross acceleration provisions, including
the Mountain Province Indenture. If Mountain Province’s creditors, including the creditors under the Revolving Credit Agreement,
accelerate the payment of those amounts, the assets of Mountain Province and its Subsidiaries may not be sufficient to repay in
full those amounts, to satisfy all other liabilities of the Subsidiaries which would be due and payable and to make payments to
enable Mountain Province to repay the Notes. In addition, if Mountain Province is unable to repay those amounts, its creditors
could proceed against the collateral that secures the debt under the Revolving Credit Agreement, certain hedging liabilities and
the Notes.
See the disclosure contained in this Schedule
“J” – “Information Concerning Mountain Province” under the heading “Recent Developments”.
Mountain Province has a limited history
of operations.
The GK Diamond Mine has had limited operations
to date and Mountain Province has generated only a small amount of revenue from the sale of its diamonds. Commercial production
at the GK Diamond Mine was declared on March 1, 2017 and the three-months ended September 30, 2017 was the first quarter in which
all sales completed were in respect of diamonds produced subsequent to the date of the declaration of commercial production at
the GK Diamond Mine. As a result, Mountain Province has a limited operating history upon which to evaluate the merits of investing
in our securities.
As a result of this limited operating history,
period-to-period comparisons of the GK Diamond Mine’s operating results and our sales data may not be meaningful and the results
for any particular period should not be relied upon as an indication of future performance.
Interests of Experts
Certain legal matters relating to the Arrangement
will be passed upon on behalf of Mountain Province by Bennett Jones LLP and Paul, Weiss, Rifkind, Wharton & Garrison LLP.
The technical information relating to Mountain
Province included in this Circular was reviewed and approved by Keyvan Salehi, P.Eng., MBA. To the knowledge of Mountain Province,
Mr. Salehi does not have a beneficial interest in the securities or assets of Mountain Province. To the knowledge of Mountain Province,
Mr. Salehi is a “qualified person” as such term is defined in NI 43-101.
KPMG LLP, Chartered Professional Accountants,
have confirmed that they are independent with respect to Mountain Province within the meaning of the relevant rules and related
interpretations prescribed by the relevant professional bodies in Canada and any applicable legislation or regulations, and also
that they are independent accountants with respect to Mountain Province under all relevant United States professional and regulatory
standards.
None of the foregoing experts, nor any
partner, employee or consultant of such an expert who participated in and who was in a position to directly influence the preparation
of the applicable statement, report or valuation, has, has received or is expected to receive, registered or beneficial interests,
direct or indirect, in Mountain Province Shares or other property of Mountain Province or any of its associates or affiliates,
representing 1% or more of the outstanding Mountain Province Shares.
Material Contracts
Except for contracts entered into by Mountain
Province in the ordinary course of business, the only material contracts entered into by Mountain Province since the beginning
of the most recently completed financial year or that are still in effect, are:
| · | the Arrangement Agreement (see under the heading “The Arrangement Agreement” in this Circular); |
| · | the Kennady Voting and Support Agreements (see under the heading “The Voting and Support Agreements |
– Kennady Voting and Support Agreements”
in this Circular);
| · | the Mountain Province Indenture (see the disclosure contained in this Schedule “J” – “Information Concerning
Mountain Province”); |
| · | the Joint Venture Agreement (see the disclosure contained in this Schedule “J” – “Information Concerning
Mountain Province”). |
SCHEDULE “K”
INFORMATION CONCERNING KENNADY
The following information about Kennady
should be read in conjunction with the information concerning Kennady appearing elsewhere in the Circular. Capitalized terms used
but not otherwise defined in this Schedule “K” – “Information Concerning Kennady” shall have the
meaning ascribed to them in the Circular. See Schedule “A” – “Glossary of Terms”.
CORPORATE STRUCTURE
Name, address and incorporation
Kennady Diamonds Inc. was incorporated
pursuant to the OBCA on February 27, 2012. On March 12, 2012, Kennady and Mountain Province entered into an arrangement agreement
(the “2012 Arrangement”) pursuant to which, by way of a court approved plan of arrangement, Mountain Province
transferred its interest in the Kennady North Project, including capital assets, permits, mining claims, rights and titles, in
the Northwest Territories in Canada to Kennady in exchange for one common share of Kennady for every five common shares of Mountain
Province outstanding which would then be distributed to the existing Mountain Province common shareholders. The transactions contemplated
by the 2012 Arrangement were completed on July 6, 2012. Upon completion of the 2012 Arrangement on July 6, 2012, Kennady issued
16,143,111 shares to Mountain Province which were distributed along with the one share held by Mountain Province to the Mountain
Province shareholders.
The head office of Kennady is located at
1199 West Hastings Street, Suite 700, Vancouver, British Columbia, V6E 3T5. The registered office of Kennady is located at 161
Bay Street, Suite 1410, P.O. Box 216, Toronto, Ontario, M5J 2S1.
Kennady is a reporting issuer or the equivalent
in British Columbia, Alberta, Saskatchewan, Manitoba, Ontario, New Brunswick, Nova Scotia, Prince Edward Island, and Newfoundland
and its shares are listed on the TSXV. Kennady became a public company in 2003 as a result of a restructuring transaction with
a public shell.
Intercorporate Relationship
Kennady does not have any subsidiaries.
BUSINESS OF KENNADY
Kennady is a Canadian based resource exploration
company whose principal business is the exploration and development of the Kennady North Project. Kennady currently hold a 100%
interest in 22 federal leases and 58 claims in the Kennady North Project. Kennady is focused on expanding its high grade diamond
resources, as well as identifying new kimberlites on its properties.
Specialized Skill and Knowledge
Most aspects of the Kennady’s business
require specialized skills and knowledge. Such skills and knowledge include the areas of geology, exploration, development, construction,
production and accounting. Kennady has executive officers and employees with extensive experience in mining, geology, exploration
and development, as well as executive officers and employees with relevant accounting experience.
Competitive Conditions
As an exploration company, Kennady may
compete with other entities in the mining industry in various respects, including: (a) obtaining properties and conducting development
activities on such properties; and (b) raising the capital necessary to fund its operations. In addition, Kennady competes with
major mining companies and other
smaller natural resource companies in the
acquisition, exploration, financing and development of new properties and the Kennady North Project. Many of these companies are
more experienced, larger and have greater financial resources for, among other things, financing and the recruitment and retention
of qualified personnel.
The mining industry is intensely competitive
in all its phases, and Kennady may compete with other companies that have greater financial resources and technical facilities.
Competition could adversely affect Kennady’s ability to raise the capital necessary to continue with operations.
Environmental Protection and Policies
Kennady is subject to the laws and regulations
relating to environmental matters in all jurisdictions in which it operates, including provisions relating to property reclamation,
discharge of hazardous materials and other matters. Kennady may also be held liable should environmental problems be discovered
that were caused by former owners and operators of its properties. Kennady intends to conduct its mineral development activities
in compliance with applicable environmental protection legislation. Kennady is committed to operating in a way that protects and
supports social integrity, environmental biodiversity, and equitable development.
Kennady is not aware of any existing environmental
problems related to any of its properties that may result in material liability to Kennady.
Environmental legislation is becoming increasingly
stringent and costs and expenses of regulatory compliance are increasing. The impact of new and future environmental legislation
on Kennady’s operations may cause additional expenses and restrictions. If the restrictions adversely affect the scope of exploration
and development on the mineral property interests, the potential for production on the property may be diminished or negated.
Employees
As at the conclusion of the financial year
ended December 31, 2016, Kennady had no employees other than its CEO. Kennady retains necessary management and non-management independent
contractors on a consultancy basis. No management functions of Kennady are performed to any substantial degree by a person other
than the directors and officers of Kennady.
History and General Development of
the Business
Year Ended December 31, 2015
On March 10, 2015, Kennady announced the
closing of the final tranche of its non-brokered private placement of common shares, for gross proceeds of $2,312,157.60. Kennady
issued 651,312 common shares at a price of $3.55 per share. Together with the first and second tranches, Kennady issued 4,405,947
common shares and 600,000 flow- through shares for aggregate gross proceeds of $18,641,111.85. In connection with the private placement,
Kennady paid cash finder’s fees of $34,825.50 on a portion of the offering.
On March 18, 2015, Kennady announced the
granting of stock options to the Kennady’s directors and employees to purchase up to 685,000 common shares of its capital stock
at a price of $3.61 per share, exercisable for a period of ten years.
On August 12, 2015, Kennady announced the
closing of a non-brokered private placement of common shares for gross proceeds of $4,000,899.00. Kennady issued 1,176,735 common
shares at a price of $3.40 per share.
On October 8, 2015, Kennady announced
the closing of the second and final tranche of a non-brokered
private placement of common shares for gross proceeds of $33,280,538.75. Kennady issued 11,731,105 common shares at a price of
$2.75 per share and 300,000 flow-through common shares at a price
of $3.40 per share. Together with the first tranche that closed on October 1, 2015, Kennady issued 15,403,878 common shares and
1,693,235 flow- through common shares for aggregate gross proceeds
of $48,117,663.50. Kennady paid cash finders’ fees of $258,525 on a portion of the offering.
Year Ended December 31, 2016
Kennady announced the appointment of Claudia
Tornquist to the Kennady Board on January 11, 2016.
On January 14, 2016, Kennady announced
that the Mackenzie Valley Land and Water Board (“MVLWB”) approved amendments to Kennady’s Type A Land Use Permit
and Type B Water License. Approval of these amendments cleared the way for expanded exploration and evaluation programs at the
Kennady North project with camp capacity increased from 50 to 150 persons.
On January 15, 2016, Kennady announced
the granting of stock options to certain directors, officers and employees of Kennady to purchase up to 190,000 common shares of
its capital stock at a price of $2.81 per share and up to 100,000 at a price of $3.00 per, exercisable for a period of ten years.
Kennady announced the appointment of Tom
McCandless to the Kennady Board on March 1, 2016.
On April 6, 2016, Kennady announced the
appointment of Rory O. Moore as President, Chief Executive Officer and Director.
On December 18, 2016, Kennady announced
the acquisition of six mining leases from GGL Resources Corp. (“GGL”). The leases adjoin the southern border of
the GK Diamond Mine and portions are within the structural corridor along which the Gahcho Kué, Kelvin and Faraday kimberlites
have been emplaced (the Kelvin – Faraday Corridor). The new leases comprise roughly 4,233 hectares, bringing the total land
position for the Kennady North Project to over 71,000 hectares. In consideration for the purchase, Kennady paid to GGL a cash sum
of $200,000 and GGL retains a 0.75% royalty interest (the “Royalty”) on all mineral products produced from the
property. Kennady has the right at any time prior to commencement of production from the property to purchase one-third (1/3) of
the Royalty, being 0.25%, for the sum of $1,000,000.
On December 12, 2016, Kennady
announced the completion of a maiden mineral resource estimate for the Kelvin kimberlite, located at the Kennady North
Project. An Indicated Mineral Resource of 13.62 million carats of diamonds is contained in 8.50 million tonnes of kimberlite,
with an overall grade of 1.60 carats per tonne and an average value of US$63 per carat. The resource has been calculated with
a 1mm diamond bottom cutoff size, which is considered a reasonable cutoff for a commercial mining scenario. The resource was
determined through the collective efforts of Aurora Geosciences Ltd., Mineral Services Canada Inc., SRK Consulting Inc., and
JDS Energy & Mining Inc., who were engaged by Kennady to participate in the exercise.
Year Ended December 31, 2017
On January 24, 2017, Kennady filed a NI
43-101 technical report titled “Project Exploration Update
and Maiden Resource Estimate, Kennady North Project, Northwest Territories, Canada” and dated effective January 24, 2017.
On March 17, 2017, Kennady announced that
the Kennady Board had formed a special committee of independent directors in response to discussions with certain interested parties
regarding a potential strategic transaction.
On May 17, 2017, Kennady closed a non-brokered
private placement of flow-through and non-flow-through common shares, for aggregate gross proceeds of $12,035,422.93. Kennady issued
1,538,461 flow-through common shares at price of $4.38 per share and 1,629,835 non flow-through common shares a price of $3.25
per share. Finders’ fees in the aggregate amount of $172,230 and an advisory fee in the amount of $135,000 were paid on a portion
of the offering. The size of the private placement was increased from $10,000,000 to the amount received, being $12, 035,422.93.
Subsequent Events
On January 28, 2018, Kennady entered into
the Arrangement Agreement, setting forth the terms and conditions for the Arrangement. See “The Arrangement”,
“Arrangement Agreement”, “Cautionary Statement Regarding Forward- Looking Statements” and “Risk
Factors” in this Circular.
MINING PROPERTIES
The Kennady North Project detailed hereunder is not in commercial
production.
Kennady North Project
Current Technical Report
The most recent technical reports on the
Kennady North Project are (i) the “2016 Technical Report – Project Exploration Update and Maiden Resource Estimate -
Kennady North Project, Northwest Territories, Canada”, which contains the maiden indicated resource for Kelvin, and (ii) the
“2017 Technical Report – Project Exploration Update and Faraday Inferred Mineral Resource Estimate - Kennady North Project,
Northwest Territories, Canada”, which contains the inferred resource estimate for Faraday 2 and 3 (together, the “Kennady
North Reports”). Both reports are co-authored by Gary Vivian M.Sc., P.Geol. and Dr. Tom Nowicki, P.Geo. The Kennady North
Reports have effective dates of January 24, 2017 and November 16, 2017, respectively.
A summary of the Kennady North Reports
is provided herein and, for the purposes of the disclosure of the Kennady North Project required under NI 51-102. Complete copies
of the Kennady North Technical Reports are available on SEDAR under Kennady’s issuer profile at www.sedar.com.
Project Description, Location and Access
The Kennady North Project is 100% owned
by Kennady. The land package comprises twenty-two (22) mineral leases and fifty-eight (58) mineral claims, totaling 160,997.16
acres or 65,154.66 hectares (Figure 1). The property covers an area roughly 30 kilometres long and up to 30 kilometres wide. The
project area is located 290 kilometres east-northeast of Yellowknife, NT and centered geographically at approximately 63°29’
North latitude and 109°11’ West longitude.
Yellowknife, NT, provides the closest business
and commercial centre for the project. Access to the property is via a winter road, float- and/or ski-equipped aircraft year-round
or via larger Dash 7 aircraft landing on an ice strip in the winter. Kennady also has a license agreement to use the airstrip at
Gahcho Kué.
The property area is part of the Barrenlands
on the edge of the zone of continuous permafrost. The area is characterized by heath and tundra (low shrubs and alpine-type vegetation)
with occasional knolls, surface outcrops and localized surface depressions interspersed with lakes.
The Kennady North Project features low
to moderate relief, ranging from 400 metres to 550 metres ASL (above sea level). Elongate north-northeast trending outcrop expressions
vary in height from a few metres up to 20 metres.
Figure 1. Location of the kimberlites and
land position held by Kennady in relation to the GK Diamond Mine.
History
Numerous exploration programs were completed
on the Kennady North property since 1992 by multiple operators including GGL Diamond Corp, Winspear Resources Ltd., SouthernEra
Resources Ltd., Canamera Geological Ltd. and the joint venture comprising Mountain Province Inc. A joint venture agreement was
signed with Monopros Ltd. (now De Beers Canada Exploration Inc. (“DCEI”)) Mountain Province and Camphor Ventures
Inc. in 1997, turning over operatorship of the large ground package to DCEI. Subsequent to forming the joint venture with DCEI,
all activity on the Mountain Province ground was either undertaken by DCEI directly, or by sub-contractors under the supervision
of DCEI personnel.
In 2012, Kennady Diamonds was
created to acquire and explore areas relinquished by the Mountain Province-DCEI joint venture. Since that time Kennady has
completed extensive programs of till sampling, ground geophysics, diamond drilling and large diameter reverse circulation
drilling. As a result a maiden indicated resource for the Kelvin kimberlite was established in January 2017 of 8.5 million
tonnes, grading 1.6 carats per tonne for a total of 13.62 million carats. By October 2017 an inferred resource was
established for Faraday kimberlites of 3.27 million tonnes, grading 1.54 carats per tonne for a total of 5.02 million
carats.
Geological Setting, Mineralization and Deposit
Types
The Slave craton is a well-exposed small
to medium-sized Archean craton that straddles the Northwest Territories – Nunavut border in northwestern Canada. The craton
dips below Proterozoic rocks to the east and west, and below Paleozoic cover to the north and southwest. The northwest-striking
Bathurst Fault coincides with a broad zone of Proterozoic supracrustal rocks and separates the Bathurst Block in the northeast
from the main Slave craton. The craton is a Mesoarchean nucleus with juvenile Neoarchean crust accreted to its east and southwest
margins. The principal accretion is assumed to be ca. 2650 – 2630 Ma, and is associated with extensive shortening/thickening
of the crust, widespread granitoid emplacement, and the peak of regional metamorphism.
Regional Geology
The crust of the Slave amalgamated during
a 2.69 Ga collision event between island-arc terranes and a basement complex along a N-S suture. The Slave craton was subsequently
intruded by a number of mafic dyke swarms at 2.23 Ga, 2.21 Ga and 2.03 Ga. The Mackenzie Dyke Swarm intruded the entire Slave craton
along a NW trend at 1.27 Ga. Finally, late Proterozoic dyke swarms intrude portions of the Slave at approximately 780 Ma and 723
Ma.
The Kennady North Property lies in the
southeastern portion of the Slave craton. Multiple ages of kimberlite emplacement have occurred in the Slave craton, including
the Cambrian, Siluro-Ordovician, Permian, Cretaceous, Jurassic and Eocene periods. Many of the kimberlites in the southeastern
Slave craton form broad clusters with similar characteristics to other areas of the craton. The early Cambrian (~540 Ma) emplacement
ages for the Snap Lake, Gahcho Kué and Kelvin kimberlites contrast with all other kimberlite ages within the craton.
Property Geology
Bedrock, Structural and Surface Geology
The oldest rocks and host to all known
kimberlites within the Kelvin-Faraday Corridor (KFC) are turbiditic greywacke- mudstone sequences that constitute more than 25%
of the exposed Slave craton. Upper-amphibolite metamorphism has converted these sequences to ubiquitous biotite and sillimanite
(with quartz and feldspar), muscovite, and local garnet. Variable melting of the sedimentary sequence has produced common segregation
fabrics and complex migmatitic textures.
Meta-igneous exposures in the area include
medium- to very coarse-grained hornblende-plagioclase±biotite rocks that are classified as gabbroic. Dyke-like exposures
of fine- to very fine-grained homogeneous non-magnetic intermediate meta-igneous rocks consist of quartz, feldspar and biotite.
Granitoids consist of variable biotite, muscovite and tourmaline, with mappable pegmatite bodies striking north-south. Granodiorites
include biotite- muscovite-tourmaline granites, and hornblende to tonalite granites. Fine- to medium-grained massive diabase is
poorly exposed in outcrop but can be traced by aeromagnetics. All dykes within the map area strike east-northeast and, where exposed,
are subvertical and undeformed and of presumed Paleoproterozoic age.
The most-significant fault in the area
is the Paleoproterozoic Fletcher Fault that can be traced regionally for almost 150 km and passes through the MZ Lake kimberlite
map area. Another significant Proterozoic fault strikes east- west, but correlation between these principal structures and the
Kelvin and Faraday kimberlite bodies is not apparent. Current drilling of each of the kimberlite bodies indicates a shallow inclination
towards the northwest towards their probable source. Although there are some northwest trending topographic lineaments, this orientation
is poorly represented by significant faults or joint sets.
The area has been glaciated repeatedly
during the Pleistocene Epoch. Most recently, the Laurentide ice sheet covered the area and began to recede about 18,000 years before
present (B.P.) The Kennady Lake area was ice-free between 9,000-9,500 years B.P. Investigations of glacial stratigraphy have not
resulted in evidence of any earlier glacial advances. Glacial drift forms a thin veneer in the area and consists of unstratified
till blankets with glaciofluvial outwash deposits.
Till veneers have few bedrock outcrops
but abundant frost boils where cryoturbation has brought materials to surface for sampling of Kimberlite Indicator Minerals (KIM).
The glacial till is predominantly basal or lodgement till associated with the base of the ice sheets, therefore KIM dispersal distances
are minimal. Sand and reworked glacial till deposits are classified as outwash. There are some eskers in the area. There are also
proglacial sediments consisting of glaciofluvial and glaciolacustrine deposits.
Kelvin Kimberlite Geology
The Kelvin kimberlite is defined as an
irregular, subhorizontal, L-shaped inclined pipe infilled primarily by volcaniclastic kimberlite classified as Kimberley-type pyroclastic
kimberlite (KPK), as well as coherent kimberlite (CK) and minor kimberlite transitional in texture between KPK and CK. The combined
geometry of Kelvin and
‘layer cake’ stratigraphy of its internal
units are unconventional relative to other known kimberlite bodies. Six internal kimberlite units have been defined at Kelvin on
the basis of textural characteristics, primary mineralogy, country rock xenolith content, contact relationships and interpreted
emplacement processes.
KIMB1 occurs as a minor discontinuous unit
at the top of the body in contact with the wall rock. KIMB2 is the second most abundant kimberlite unit at Kelvin and occurs above
KIMB3, the dominant unit. Subunits KIMB2A and KIMB2B are distinguished by differences in texture, KIMB2A being mainly KPK and KIMB2B
primarily CK. KIMB3 is volumetrically the most significant kimberlite unit in the Kelvin pipe. It is a massive volcaniclastic rock
containing variable amounts of locally derived gneissic and granitic xenoliths. KIMB6 is a minor unit that occurs discontinuously
along the pipe below KIMB3. It is similar in appearance to KIMB3C and is distinguished primarily based on the presence of more
conspicuous juvenile material, in particular olivine macrocrysts, and distinctive autoliths of CK. KIMB4 is a minor discontinuous
unit at the base of the pipe; it is closely associated spatially with KIMB7. The morphology and relationship of these two units
is not as well constrained as the other units in Kelvin. KIMB7 is a minor discontinuous unit at the base of the body; it is closely
associated spatially with KIMB4. A distinctive feature of KIMB7 relative to the other volcaniclastic kimberlite units at Kelvin
is the presence of more common thicker melt selvages on magmaclasts. KIMB8 is interpreted to represent a sheet or irregular intrusion
adjacent to the Kelvin pipe.
The 3-D geological model of the Kelvin
kimberlite consists of an external pipe shell model that defines the morphology and extent of the body, and an internal geology
model that represents the spatial distribution of the kimberlite units infilling the pipe. The external shell consists of an irregular,
sub-horizontal, shallow-inclined pipe (dipping at 15-20°) that varies in thickness between 60 m at the south end to over 200
m at the north end, and in width between 30 m at the south end to over 70 m at the north end. It is L-shaped with the two ‘limbs’
being referred to as the South and North Limbs.
The internal model reveals that the geological
domains vary significantly in morphology and along strike, but broadly conform to a “layer cake” stratigraphy that is
continuous along strike. The ninth domain (CRX) represents internal waste rock and includes material interpreted as very large
country rock xenoliths (drill hole intercepts > 5 m) and possible wedges of in situ country rock within the pipe shell,
where these could be delineated based on available drilling. The overall shape and internal domains are presented in Figure 2.
Figure 2. Kelvin 3-D model showing
the shape and internal geological domains (CRX domain not shown).
Extensive drilling, detailed core logging
and petrographic work have been used to define the external pipe shell and internal geology model of the Kelvin kimberlite. A total
of 195 drill holes providing 384 contact points define the pipe shell; the total number of contact points delineating the kimberlite
domains ranges from 164 to 312 (Table 1).
Table 1. Summary of drill data used
to construct the Kelvin pipe shell and internal geology model.
| |
Number of
drill holes |
|
Number of drill
hole contact points |
| External pipe shell model |
195 |
|
384 |
|
Geological domains |
|
|
|
| KIMB1 |
83 |
|
164 |
| KIMB2A |
109 |
|
214 |
| KIMB2B |
127 |
|
253 |
| KIMB3A |
159 |
|
312 |
| KIMB3B |
136 |
|
268 |
| KIMB3C |
138 |
|
267 |
| |
Number of
drill holes |
|
Number of drill
hole contact points |
| KIMB6 |
127 |
|
254 |
| KIMB4/7 |
103 |
|
206 |
| CRX |
52 |
|
132 |
Faraday 2 Kimberlite Geology
Current understanding of the geology of
the Faraday 2 kimberlite is based on detailed logging of 85 drill holes, petrographic examination of 295 representative samples
from drill core and 93 representative samples from reverse- circulation chips. To date, four main kimberlite units have been identified:
KIMB1 through KIMB4. KIMB1 is volumetrically dominant and comprises variably altered volcaniclastic kimberlite classified as KPK.
Additional minor units, KIMB5 and KDYKE-INT, have been identified in the northern area of the pipe. KIMB1A is classified as a massive
pyroclastic kimberlite interpreted to be Kimberley-type pyroclastic kimberlite (KPK). KIMB1B is considered to represent an altered
equivalent of KIMB1A. KIMB2 is classified as coherent kimberlite (CK); the groundmass is comprised mainly of phlogopite with less
common carbonate, spinel and perovskite. Very coarse- grained olivine macrocrysts may be present and the country rock dilution
is low. KIMB3 is classified as CK containing scattered very coarse grained olivine macrocrysts. The groundmass in most samples
is comparable to KIMB2, having similar phlogopite phenocrysts and carbonate with less common spinel and perovskite. KIMB4 is classified
as volcaniclastic kimberlite (VK) characterized by very high country rock dilution. KIMB4 is interpreted to be an early-stage unit
related to pipe excavation. KIMB5 is a transitional kimberlite with moderate country rock dilution. KIMB5 is currently a minor
unit, occurring in the northernmost section of the pipe. The coherent kimberlite at Faraday 2 (interpreted as hypabyssal kimberlite,
HK) composed of two generations of olivine well crystallized groundmass. The groundmass consists mainly of distinctive phlogopite
phenocrysts in radiating clusters, as well as carbonate.
Where the HK occurs within the pipe shell
it has been modelled as part of the pipe infill (and not extended away from the main body). Intervals identified as KDyke-INT have
been modelled with KIMB2 and KIMB3 where they are spatially close. Minor KDyke-INT intervals that cannot be reasonably modeled
with the other CK units are grouped with KIMB1. The 3-D geological model of the Faraday 2 kimberlite consists of an external pipe
shell model that defines the morphology and extent of the body, and an internal geology model that represents the spatial distribution
of the kimberlite units infilling the pipe. The Faraday 2 pipe shell model shown incorporates all of the volcaniclastic kimberlite
units identified as well as any hypabyssal kimberlite present within the volcaniclastic pipe infill. Any hypabyssal kimberlite
considered to represent sheet or irregular intrusions adjacent to or outside the main body have not been modelled. Faraday 2 is
an irregular, variably trending (northwest, west) and variably inclined pipe (dips range from less than 20 to 40°). It has
been delineated over 600 m, ranging in width from 20 to 90 m and in height from 20 to 60 m.
Except for the KIMB1, all the domains correspond
to a single kimberlite unit. Domain KIMB1 includes KIMB1A and KIMB1B, an altered variety of KIMB1A. The Xenolith domain represents
internal waste rock and includes material interpreted as very large country rock xenoliths (drill intercepts > 1m) and possible
rafts or wedges of in situ country rock within the pipe shell, where these could be delineated based on available drilling
Figure 3 shows the current 3-D model of the internal geology at Faraday 2.
Figure 3. Faraday 2 3-D
model (looking NE) showing internal geological domains.
The drilling, detailed core logging and
petrographic work conducted at Faraday 2 to date have supported construction of a pipe shell model defined by 56 drill holes providing
113 contact points, and a preliminary internal geology model, in which the number of contact points delineating individual kimberlite
domains ranges from 40 to 126 as shown in Table 2.
Table 2. Summary of drill
data to construct the Faraday 2 pipe shell and internal geology models.
| Model Name |
|
Number of diamond
drill holes |
|
Total Number of large
diameter RC drill
holes |
|
Number
of drill hole
contact points |
| External Pipe Shell |
|
56 |
|
29 |
|
113 |
| Faraday 2 Internal Model |
| KIMB1 |
|
40 |
|
29 |
|
126 |
| KIMB2 |
|
27 |
|
27 |
|
54 |
| KIMB3 |
|
20 |
|
28 |
|
40 |
| KIMB4 |
|
23 |
|
22 |
|
46 |
| KIMB5 |
|
4 |
|
0 |
|
8 |
| Xenoliths |
|
30 |
|
26 |
|
221 |
| Kdyke Internal |
|
2 |
|
0 |
|
4 |
Faraday 3 Kimberlite Geology
Current understanding of the geology of
the Faraday 3 kimberlite is based on logging of 53 drill cores and petrographic examination of 163 kimberlite thin sections from
16 of these drill cores, distributed in a representative manner through the body. A total of four main kimberlite units have been
identified to date: KIMB1 through KIMB4, with KIMB4 subdivided into KIMB4B and KIMB4C based on differences in country rock xenolith
content.
KIMB4B is the volumetrically dominant unit
and comprises variably diluted KPK. KIMB1 is HK composed of a phlogopite kimberlite and a monticellite kimberlite and is located
in the uppermost part of the body. KIMB2 is texturally classified as massive, homogeneous KPK with conspicuous olivine macrocrysts
and magmaclasts. KIMB3 is a highly diluted and sorted kimberlite that may display a fabric defined by the preferred orientation
of elongated clasts. KIMB4B is clast-supported KPK with country rock dilution including conspicuous gneiss xenoliths larger than
5 cm and rare diabase. KIMB4C has greater country rock dilution with a matrix comprised of pulverized country rock as well as large
+10 cm gneiss xenoliths and minor (<20%) juvenile material.
Five additional kimberlite units have been
identified as either insignificant volumes of pipe infill material or as units external to the Faraday 3 pipe. KIMB5 occurs as
isolated VK intervals peripheral to the pipe that may represent a range of kimberlite lithologies. KIMB6 is CK similar to KIMB1
and dominated by carbonate and serpentine melt segregations. KIMB7 is a VK unit with irregular shaped magmaclasts and a matrix
of carbonate and serpentine. KDYKE-EXT is CK similar to KIMB1, but identified spatially as outside of the pipe. KDYKE-INT occurs
as CK units with <10cm widths and variable in composition.
The 3-D geological model for the Faraday
3 kimberlite consists of an external pipe shell model that defines the morphology and extent of the body, and an internal geology
model that represents the spatial distribution of the kimberlite units infilling the pipe. The model is considered preliminary
as further drilling, detailed logging and petrographic work are required to increase confidence in the pipe morphology and the
character and distribution of internal units. The Faraday 3 pipe shell model incorporates all of the hypabyssal, pyroclastic and
volcaniclastic kimberlite units interpreted as pipe infills. Faraday 3 is an irregular inclined pipe that dips at 30° to the
northwest, ranging in width from 40 to 150 m and in height from 20 to 50 m. It extends over approximately 350 m and is open at
depth.
The main kimberlite units are KIMB1, KIMB2
and KIMB3. Two KIMB4 subunits have been modelled as individual domains (KIMB4B and KIMB4C). The CRX domain represents internal
waste rock and includes material interpreted as very large country rock xenoliths (drill intercepts > 1m) and possible rafts
or wedges of in situ country rock within the pipe shell, where these could be delineated based on available drilling. Figure
4 shows the current 3- D model of the internal geology at Faraday 3.
Figure 4. Faraday 3, 3-D model (looking SE)
showing the internal geological domains (June 2017)
The drilling, core logging and petrographic
work conducted at Faraday 3 to date have supported the construction of a pipe shell model defined by 44 drill holes providing 90
contact points, and a preliminary internal geology model, in which the number of contact points delineating individual kimberlite
domains ranges from 14 to 84 (Table 3).
Table 3. Summary of drill data to construct
Faraday 3 pipe shell and internal geological model.
| |
|
Number of
drill holes |
|
Number of drill
hole contact points |
| External pipe shell model |
|
44 |
|
90 |
| |
|
|
|
|
| Geological domains |
|
|
|
|
| KIMB1 |
|
16 |
|
32 |
| KIMB2 |
|
10 |
|
20 |
| KIMB3 |
|
7 |
|
14 |
| KIMB4B |
|
42 |
|
84 |
| KIMB4C |
|
24 |
|
48 |
| CRX |
|
27 |
|
82 |
Faraday 1 Kimberlite Geology
Faraday 1 is an irregular,
tube-shaped body that dips 25-30° to the northwest and is the smallest of the kimberlites along the KFC trend, ranging 30
to 60 m in width and 10 to 20 m in height over approximately 200 m. Faraday 1 is infilled with volcaniclastic kimberlite
(KPK) but is associated with significant amounts of hypabyssal kimberlite. The proportion of marginal breccia versus other
kimberlite material is also higher than in the other kimberlites. The Faraday 1 geology and petrographic work completed
to-date consists of the logging of 42 drill holes and investigation of 137 kimberlite thin sections and 54 country rock and
marginal breccia thin sections collected from 20 drillholes across the length of the body. Seven kimberlite units are
identified at Faraday 1. KIMB1 is a moderately diluted olivine-rich KPK. KIMB2 is a coherent kimberlite with rare occurrences
of transitional textures. KIMB3 is a phlogopite-monticellite HK unit. KIMB4 is a strongly altered olivine-rich KPK. KIMB5 is
a CK-PK that is texturally variable with chaotic appearance and moderate to strong alteration. KDYKE is HK composed of at
least two different kimberlites: a phlogopite kimberlite and a monticellite-phlogopite kimberlite similar to KIMB3. KDYKE EXT
is HK external to the main bodies and < 50 cm in length.
The current Faraday 1 3-D geological model
incorporates all diamond drilling up to the end of 2016, four large- diameter RC holes completed in 2017, and all petrographic
information. Various kimberlite units both internal and external to the pipe shell have been identified and subsequently modelled
within the Faraday 1 kimberlite geology model (Figure 5). Each modeled domain represents a single kimberlite unit. The quantity
of drilling data used to constrain the Faraday 1 geology model is listed in Table 4.
Figure 5. 3-D Geological
Model of the Faraday 1 Kimberlite.
Table 4. Summary of drill data used to define
the Faraday 1 pipe shell and internal domains.
| Model Name |
|
# of Diamond
Drillholes Used |
|
# of Large Diameter
RC Drillholes Used |
|
# of Drillhole
Contact Points |
| External Pipe Shell |
|
32 |
|
4 |
|
72 |
| KIMB3 (Sheet) |
|
19 |
|
4 |
|
46 |
| KDyke (Sheet) |
|
37 |
|
4 |
|
82 |
| KIMB4 (VK above KIMB3) |
|
5 |
|
4 |
|
18 |
|
Faraday 1 Internal Model |
|
|
|
|
|
|
| KIMB1 |
|
31 |
|
4 |
|
70 |
| KIMB1x |
|
10 |
|
0 |
|
20 |
| KIMB2 |
|
8 |
|
2 |
|
20 |
| KIMB5 |
|
6 |
|
0 |
|
12 |
| Country Rock Xenoliths |
|
12 |
|
1 |
|
38 |
Drilling in 2017 demonstrated that the
Faraday 1 and 3 bodies coalesce at depth, and so these two bodies are now identified as the Faraday 1-3 kimberlite complex. Sufficient
drilling on the Faraday 3 limb of the complex has allowed for declaration of a Mineral Resource as described below. The Faraday
1-3 complex has been traced approximately 300 metres along strike to the northwest, comes to surface in the southeast under Faraday
Lake and remains open to the northwest.
Other Kimberlites
The Doyle and MZ kimberlites are located
outside of the KFC, 27 kilometers and 18 kilometers from Kelvin, respectively. The Doyle kimberlite sheets are emplaced in granodiorite-granite
bedrock, and four drillholes targeted to intersect the sheet in 2015 intersected thin kimberlite sheets. Doyle requires further
work to discover unconventional tube-like kimberlites and blows like those observed in the KFC. The MZ kimberlite sheets are also
emplaced in granitic rocks and trend over six kilometers in a northwesterly fashion. Fourteen drillholes identified 2- 10 closely
stacked sheets occurring near the leading of the kimberlite and vary from less than 0.5 m up to 2.87 m. The sheet “complex”
can be traced along a strike of more than six kilometers with a down dip extension of at least one kilometer.
Mineralization
Prior to 2012, five diamond-bearing kimberlites
had been identified, including Doyle in 1996, Faraday in 1999, Kelvin and Hobbes in 2000 and the MZ in 2001. Although the initial
discoveries were considered to be sheets (dykes), volcaniclastic (pyroclastic) kimberlite had been identified that suggested potential
blows or small kimberlite pipes occurring along the sheets. The presence of pyroclastic kimberlite material enticed Kennady to
engage in more detailed exploration along the Kelvin-Faraday Corridor (KFC).
The kimberlites in the KFC area are the
deep roots of an intrusive kimberlitic complex, consisting of volcaniclastic kimberlite and less common hypabyssal kimberlite as
well as transitional kimberlite. Their complex structure and geometry is a result of erosional processes acting on the Slave craton
in the 500 Ma since their emplacement. The deeply eroded kimberlite intrusions are further masked by Ice Age lake basins and glacial
sediments.
Over the past five years, most of the core
drilling was undertaken to obtain kimberlite for caustic fusion analyses for microdiamonds. Additionally, 2,100 tonnes of kimberlite
has been recovered via large diameter reverse circulation drilling and bulk sampled for diamonds. The drilling and testing of drill
material has delineated the kimberlite bodies that host diamond mineralization, and has provided constraints on their volumes and
bulk density, as well as the grade and value of diamonds present, to support the declaration of Mineral Resources for the Kelvin,
Faraday 2 and Faraday 3 bodies.
Deposit Types
The Kelvin, Faraday 2 and Faraday 1-3 kimberlites
are unconventional, irregular shaped, subhorizontal kimberlites. This model type has yet to be recognized anywhere else in the
world. These kimberlites are similar with respect to textures, primary mineralogy, grade and age, but not in external morphology,
to the Gahcho Kué kimberlite cluster.
These kimberlites in the southeast Slave
craton differ from many other Canadian kimberlites. The Fort à la Corne kimberlites preserve the volcanic craters with associated
pyroclastic aprons that erupted in an intertidal environment, which subsequently modified the aprons. These kimberlite crater facies
have relatively large surface areas. The Lac de Gras pipes are preserved as diatreme zones which lie below the craters and above
the hypabyssal root-zone. The Gahcho Kué kimberlite cluster contains significant volcaniclastic kimberlite as well as hypabyssal
kimberlite and textures transitional between these end members.
The Kelvin and Faraday 2 and 3 kimberlites
are dominated by volcaniclastic kimberlite and lesser amounts of hypabyssal kimberlite. There are variable transitional kimberlite
units between these two end members which infill the Kelvin and Faraday 2 and 3 pipe-like bodies. Faraday 1 is dominated by hypabyssal
kimberlite.
The emplacement model for the Kelvin and
Faraday kimberlites is analogous to well documented models of formation and emplacement in KPK systems. The same emplacement processes
are at work but now form an inclined pipe. In cross-section, tilting the internal geology of a Class 1 Type kimberlite to 20-30°
dip is similar in appearance to the Kelvin and Faraday geology.
Exploration
The initial focus of exploration for Kennady
was on the historical discoveries at Kelvin, Hobbes, Faraday, Doyle and MZ. These kimberlites are diamond bearing but were in the
past considered not economic due to a lack of significant volume. This belief has been proven otherwise and consequently the Kennady
property continues have a high probability for the discovery of additional kimberlite bodies.
From 2012 to early 2016, Kennady completed
extensive ground geophysical programs over its land holdings. Ground gravity (over 34,000 readings), OhmMapper (over 1,700 line
km), horizontal loop (over 250 line km) and ground magnetic (over 763 line kms) surveys have comprised the majority of ground geophysics
on the property. Over 100 lakes have also had bathymetry completed in order to correct both airborne and ground gravity data for
possible targets beneath the lakes.
In mid-2016 Kennady acquired four mineral
leases located immediately south of the Gahcho Kué mine site. Exploration ground work subsequently focused at Blob Lake,
located on the western leases. Ground gravity (12,160 stations), OhmMapper (401.78 km), total field magnetic (451.38 line km) and
boat-borne bathymetric (186.53 km) surveys were completed over this area. Ground gravity was conducted in an attempt to outline
trends in density contrast that might lead to the identification of either conventional kimberlite bodies (as at the GK mine site)
or unconventional kimberlite sources like the Kelvin and Faraday kimberlites.
A series of larger circular shaped gravity
lows are in structural orientation that is similar to the Kelvin and Faraday kimberlite bodies. One of these lows beneath Blob
Lake exhibits an orientation much like the unconventional kimberlites along the KFC, north of Gahcho Kué. A similarly oriented
response exists beneath nearby Puff Lake. One of the two highest land-based gravity targets also exhibits a similar orientation
and extends beneath Blob Lake. These prominent oblong to circular gravity low features, which occur along the primary structural
trend, may well represent blows (volcaniclastic features) that will be used to guide exploration for the larger unconventional
kimberlite bodies.
Drilling
From acquiring the KN property to 2016, Kennady completed 44,651.49
m of NQ drilling and 27,164 m of HQ drilling. A total of 14,813.11 m of kimberlite has been intersected with over 95% of this in
the Kelvin-Faraday
Corridor (KFC). Diamond drill core have
been used for both microdiamond analyses through caustic fusion and microdiamond analyses using dense media separation.
Reverse circulation (RC) drilling
during the early winter of 2015 obtained a 443.8 tonne sample of kimberlite from the south limb of the Kelvin. Drilling in
2016 retrieved a 582.2 tonne sample from the north limb of Kelvin and another 38.5 tonne sample from the south limb. Also,
during 2016, a 21.1 tonne sample was retrieved from Faraday 2. With the exception of representative samples, all drilled
kimberlite was sent to Saskatchewan Research Council in Saskatoon, SK for microdiamond or commercial diamond recovery.
In the 2017 programs, a total of
2,766 m of HQ core drilling was completed with kimberlite intersections totaling
334.29 m of the total drilling, or 12.1%. A total of 76 LDRC holes were also
completed into Faraday 2, 3 and 1, totaling 8,008 m of drilling and the recovery of 579.22 tonnes of kimberlite material.
The 2017 core drilling program at Kelvin
comprised one geotechnical hole which was completed across the knuckle area of the Kelvin kimberlite where the kimberlite turns
from trending westerly to trending northerly. Diamond drilling of the Faraday 2 kimberlite during 2017 continued to delineate the
Faraday 2 body, resulting in a 150 metre extension. The Faraday 2 kimberlite body currently is over 600 metres in length and remains
open to the west- northwest. The Faraday 2 extension is the focus of ongoing exploration and evaluation. Two drillholes completed
in 2017 at the Faraday 3 and 1 kimberlite bodies confirmed that the two bodies as one, now referred to as the Faraday 1-3 kimberlite
complex. Faraday 1-3 has been traced approximately 300 metres along strike to the northwest and remains open to the northwest.
The 2017 large diameter reverse circulation
(LDRC) program bulk sampled the Faraday 2 kimberlite to determine macrodiamond grade and carat value to establish an inferred resource.
A total of 1,794 m of kimberlite and 1,311 m of country rock intersected during this drill program. The Faraday 3 kimberlite was
also sampled to determine macrodiamond grade and carat value to establish an inferred resource. A small bulk sample from the Faraday
1 kimberlite provided an assessment of macrodiamond grade and carat value to establish a Target For Further Exploration (TFFE)
and to inform planning work for forward evaluation. The 2017 LDRC program completed a total of 76 drill holes from which a calculated
mass (based on caliper volume measurements and average estimates of bulk density) of 579.22 tonnes of kimberlite were recovered.
Results from the 2017 bulk sampling program are summarized below in Table 5.
Table 5. Bulk sample results from
LDRC drilling of the Faraday kimberlites in 2017.
| |
Holes |
|
Metres |
|
Kimberlite
intersection
(m) |
|
Sample mass
(t) |
|
Diamonds
(+0.85 mm) |
|
Carats
(+0.85 mm) |
| Faraday 1 |
4 |
|
303 |
|
162 |
|
24.42 |
|
1,184 |
|
76.84 |
| Faraday 2 |
29 |
|
3,471 |
|
1,794 |
|
275.38 |
|
14,310 |
|
737.58 |
| Faraday 3 |
43 |
|
4,234 |
|
1,747 |
|
279.42 |
|
7,519 |
|
460.54 |
| Total 2017 |
76 |
|
8,008 |
|
3,703 |
|
579.22 |
|
23,013 |
|
1,274.96 |
Sampling, Analysis and Data Verification
The sample collection and analytical practices
used during the various drilling was conducted using accepted industry procedures. Details are available in the Technical Reports
referenced above; summaries are provided below.
Core Logging
All core was moved from drill shack to
camp and arranged in the core shack. A geotechnician ensured that the core was in order, broken pieces re-assembled, core boxes
were marked properly with meterage markers and labels. Total Core Recovery (TCR) and Rock Quality Designation (RQD) in metres,
and magnetic susceptibility readings were collected, and the information was stored in the core database for each drillhole. The
core was then quick logged by
the geologist using simple designations
such as overburden, country rock and kimberlite. This information was passed on nightly to the Project Manager in Yellowknife.
The logging geologist would then log the core in detail recording lithology, structure, alteration, estimated macrocrysts and xenoliths,
and marked sample designations for representative sampling. Photos of dry core are taken before and after logging.
Downhole surveys were run upon completion
of the drilling and prior to pulling rods. The field geologist would send the full kimberlite intersections to Yellowknife with
at least two core boxes of country rock core above and below the kimberlite intersection. Core was transported via aircraft from
camp to a secure warehouse at the Yellowknife Airport. At the Yellowknife warehouse, detailed logging was initiated using hand
written descriptions of rock type code, colour, mineralogy, grain size, foliation or texture with variability noted by percentage
over core length, alteration plus any other observations. A graphic log is produced by hand with rock codes, and all data are then
entered into a digital entry form.
Core Sampling for Microdiamond Testing
All geologists ensured lithological breaks
were clearly marked with red flagging tape and microdiamond samples are collected consecutively from top to bottom respecting lithological
breaks. Country rock (CR) fragments less than 1 metre are included in the kimberlite sampling, whereas CR intersections between
1-3 m are considered separate units and CR samples greater than 3 m are left in the box and stored. Each sample weighs between
8-8.5 kg but smaller samples are collected to respect lithological boundaries. Samples are identified with sequential sample numbers
and contain depth interval, texture, 3D model code designation, comments and sample weight, with all data recorded on a sample
sheet. Hole number and sample interval are recorded in sample booklets. Samples are placed in plastic sample bags, closed with
zip ties and placed into a 20 litre bucket. The geologist removes all marking blocks and flagging from core boxes and ensures that
all core material, even fine sand, makes it into the mega bag. Sample buckets are marked with hole number, sample numbers and bucket
numbers and secured with three metal security tags. All pail weights and security tag numbers are recorded, and pails are stacked
on pallets two high. All sample data is entered into a Microsoft Access digital database.
LDRC Chip Logging
Representative chip samples are collected
into 235 ml clear plastic containers and logged at the drill rig by the rig sampler. The representative sample is collected every
3.1 m in the country rock and every 0.9 m close to the contact with, and within, the kimberlite. The depth and time that the sample
was collected is recorded on the lid of the sample container and on the hard copy log. Representative samples are stored in the
rig sampler’s shack and transported to the core shack in camp at the end of each shift. Samples are transported to Yellowknife
after being logged in detail in the camp, and stored in the warehouse. All samples are organized by hole, opened for drying and
photographed and are available for re-examination if required.
LDRC Sampling for Commercial Diamond Testing
The purpose of collecting the LDRC bulk
sample is to determine the grade of the various internal geological domains identified, as well as to estimate the dollar per carat
value of the commercial diamonds recovered. Sampling LDRC chips for dense media separation (DMS) to recover commercial diamonds
is based on specific domains based on adjacent core logging. Geologic domain samples are placed into large Mega bags capable of
holding approximately one tonne. Mega bags are labeled with Domain name (Domain KIMB1, KIMB2 etc.) and bag number and placed on
pallets. The geologist reviews geology contacts to ensure samples will be placed into the proper mega bag. All xenoliths are included
in their respective sample domains. Marginal breccia is not included, nor is country rock that is considered to be in-situ.
When the mega bag is full, a heavy-duty metal security tag is placed around the top to close the bag and security tag number is
recorded in the detailed logging table. Once all kimberlite intercepts have been dumped into mega bags, a summary table is compiled
with number of bags in each zone with corresponding security tag numbers. Chain of custody paperwork accompanies each sample. All
bags are checked prior to shipping for errors in documentation, adequate sealing and damage. Compromised bags are documented and
double bagged.
Drill Data Records
Observations at the rig are recorded onto
paper forms and all depths are measured in imperial units to match the drilling procedures. The hand-written records are transcribed
to multiple spreadsheets in a single digital workbook. At the end of each shift, the workbooks are date stamped and transferred
to the server in camp using a USB memory stick. Each shift’s date stamped file is retained on the server, and a final completed
file is saved and appended to a master file. The original hand-written logs are organized into 3-ring binders. All data records
are checked line by line by several personnel directly involved in the sampling, and the entire database is checked by an independent
Q.P.
Onsite Security
Security measures included the setup and
off-site monitoring of digital video surveillance, access control, and cable seals for samples. One camera which broadly covered
the drilling vicinity and one camera at each drill rig, providing coverage of the shaker table, were setup at the beginning of
the program. The video is archived onto disks. Access to the sample recovery area (shaker table to sample bag) is limited to rig
geologists working on shift as well as relevant drilling staff, and the area had posted restricted access signs. Bulk sample bags
are sealed using a metal cable lock with a unique number engraved on the coupler. Bags are temporarily stored at the bulk sample
laydown area organized by hole and all bags are checked prior to shipping for adequate sealing by the senior site geologist.
Sample Shipment and Security
Samples are shipped to Saskatchewan Research
Council’s Geoanalytical Lab in Saskatoon, SK. Chain of custody procedures ensure that samples arrive at the SRC without incident
and with supporting documentation to this end. All samples are transported in locked and secured panel trucks. SRC confirms the
secured samples upon arrival and stores them in locked and secured storage areas at their facilities.
Microdiamond Analysis
All drill core sent for caustic fusion
diamond analysis to the SRC is subjected to stringent protocols. The SRC spikes the samples for quality control and has a recovery
rate of these spikes of over 99%, for the KDI samples. This efficiency is extremely high and as such the microdiamond recoveries
are considered reliable. The SRC Diamond Services Lab is ISO 17025 accredited for caustic fusion.
The fusion residues are held at SRC while
the recovered diamonds are sent to KDI for storage and reference. Every sample is picked by a trained technician and the residue
is re-picked by a senior technician to ensure that all diamonds have been recovered. The senior technician then signs off on the
sample. All technicians are required to take annual retraining. New technicians are trained by picking spikes, first under supervision,
for up to four months.
Density Data
The majority of the bulk density data for
Kelvin and the Faraday kimberlites are collected on-rig and tested immediately after being recovered (with lag-times of less than
12 hours). These samples are measured in-field using a water displacement balance-method and are considered to be near to in
situ measurements. Strength testing of rock (uniaxial and triaxial) is completed at Queens University Laboratory and resulted
in precision measurement of cylinders of rock (n = 10) which included the sample densities. To determine the density of air-dried
kimberlite, a mass/volume method was implemented for Kelvin using large pieces of typically 0.6 m length, with more than 4 months
of air-drying using right-angle sawn kimberlite (n = 70, approximately 200 kg).
Two approaches were used to verify that
moisture content is not an issue in bulk density measurements. This included oven-drying (105°C for 24 hours) 20 samples from
Kelvin and measuring bulk density on an additional 90 samples from Kelvin that had been dry stored for 2 years. Results of the
testing confirmed that moisture is not a significant issue in the measurements.
Mineral Processing and Metallurgical Testing
Microdiamond Recovery from Drill Core
The caustic fusion process begins with
75 kg of virgin caustic (NaOH) in a 40 litre furnace pot. An 8 kg sample of kimberlite is loaded on top of the caustic, followed
by synthetic diamond spikes; bright yellow synthetic diamonds 150 to 212 microns in diameter. The furnace pot is heated in a kiln
to 550°C for 40 hours then removed and allowed to cool. The molten sample is poured through a 106 μm screen, which is then
discarded after use. Microdiamonds and other insoluble minerals (typically ilmenite and chromite) remain on the screen. The furnace
pot is then soaked with water to remove any remaining caustic and micro-diamonds. The water is poured through the same screen.
The samples are sent to the wet lab where acid is used to neutralize the caustic solution. The residue is then rinsed and treated
with acid to dissolve readily soluble materials. Samples are then transferred to a zirconium crucible along with additional synthetic
diamonds as a spike and fused with sodium peroxide to remove any remaining minerals other than diamond from the sample. The sample
is allowed to cool and then decanted through wet screens to divide and classify the recovered diamonds. Stones are stored in plastic
vials filled with methanol.
Commercial Diamond Recovery from LDRC Material
Dense media separation (DMS) is used to
extract commercial sized (+1.00 mm) diamonds from LDRC and core material from the Kelvin and Faraday kimberlites. The process entails
initial and secondary crushing utilizing peripherals including a High Pressure Grinding Roll (HPGR) re-crush to produce DMS feed
in the +0.85-12 mm size range. The DMS concentrates then pass through a standard two-stage X-ray sorter and vibrating grease table
circuit. The concentrate is sized to produce four products - extra fines +0.85 to -2mm, fines +2 to 4 mm, mids +4 to - 6 mm and
coarse +6mm. Each size is batch fed to the X-ray sorter with appropriate settings for the size fraction. Tails from the first stage
X-ray sorter feed directly to a second stage identical Flow Sort machine for a second pass at capturing any remaining diamonds.
Concentrate and diamond handling was performed inside locked and sealed glove boxes. The concentrate pail was placed in the glove
box, which was re-locked and sealed. All concentrate is weighed into the glove box and weighed out of the glove box upon completion.
All fractions are accounted for and a detailed weight reconciliation is kept. Reconciliation weights must match within 0.2% before
a sample is re-sealed and removed. Diamond results are reported by number of stones and carat weight per square mesh sieve class.
All reported diamonds are reviewed to confirm that they originated from the samples, and had no contamination from natural diamond
tracers used by the independent Q.P. for quality control.
Mineral Resources and Mineral Reserve
Estimates
The Kelvin, Faraday 2, and Faraday 3 geological
model domains as described above have been adopted as the resource domains for the estimation of Mineral Resources. The volumes
of these domains were combined with estimates of bulk density to derive tonnage estimates.
Grades are determined from microdiamond
size frequency distribution (SFD) and from macrodiamond grade and SFD for domains within each kimberlite. The Kelvin and Faraday
kimberlites exhibit very little variation in grade or SFD along strike within the volumetrically significant domains. Continuity
is considered to be well established on this basis and is further supported by geological logging and petrographic studies. The
use of average (global) grade estimates is therefore considered to be appropriate.
Diamond values are based on the valuation
of two parcels totaling 2,262.43 ct from Kelvin and 1,183.12 ct from Faraday 2 and 3. The valuations are conducted independently
by WWW International Diamond Consultants Ltd. (Antwerp). Valuation data are further treated by Mineral Services Canada to determine
average value and best estimate value distribution models for recoverable diamonds by domain. These represent estimated average
values of +1 mm recoverable diamonds and correlate with the +1 mm recoverable grades reported from the DMS.
These efforts
have defined a total Indicated Mineral Resource for the Kelvin kimberlite of 8.5 million tonnes at an average grade of 1.6 carats
per tonne and an overall average diamond value of US$63 per carat (Table 6). The estimate encompasses the entire body as defined
by the current Kelvin geological model, extending from base of overburden (~400 masl) in the south-east to a depth of -100 masl
in the north. An Inferred Mineral Resource for Faraday 2 and 3 has been defined, comprising 3.27 million tonnes at an average
grade of 1.54 cpt and an average diamond value of US$98 per carat. The estimate encompasses both bodies as defined by the current
Faraday 2 and 3 geological models, extending from base of overburden (~390 masl) in the south-east to depths of approximately
160 masl in the north-west. The Kelvin Mineral Resources have been assessed to confirm that they satisfy the constraint of reasonable
prospects for eventual economic extraction. The analysis incorporated both open-pit and underground mining options and yielded
positive cash flows for the project based on the declared Mineral Resource estimate and appropriate assumptions regarding average
diamond value. In view of their proximity, comparable character and higher estimated ore values relative to Kelvin, the Faraday
2 and Faraday 3 kimberlites are considered to have reasonable prospects for eventual economic extraction.
Table 6. Mineral Resource Statement
for the Kennady North project.
Resource
classification |
|
Body |
|
Volume
(Mm3) |
|
Density
(g/cm3) |
|
Tonnes
(Mt) |
|
Grade
(cpt) |
|
Carats
(Mct) |
|
Value
(US $/ct) |
| Indicated |
|
Kelvin |
|
3.49 |
|
2.44 |
|
8.50 |
|
1.60 |
|
13.62 |
|
63 |
| Inferred |
|
Faraday 2
and
Faraday 3 |
|
1.35 |
|
2.43 |
|
3.27 |
|
1.54 |
|
5.02 |
|
98 |
Notes:
Mineral Resources are not Mineral Reserves and do
not have demonstrated economic viability.
The volume, tonnes, grade and average diamond
value for two minor domains of Faraday 2 and for the entire Faraday 1 kimberlite are not sufficiently well constrained by available
data to define Mineral Resources. These deposits are defined as Target for Further Exploration (TFFE) and estimates of the potential
ranges of volume, tonnes and grade (where possible) contained within these bodies are provided in Table 7.
Table 7. TFFE estimates of the ranges in volume,
tonnes and grade in Faraday 1 and minor units in Faraday 2.
| |
|
Volume (Mm3) |
|
Tonnes (Mt) |
|
Grade (+1 mm cpt) |
| Body |
|
Low |
|
High |
|
Low |
|
High |
|
Low |
|
High |
| Faraday 1 |
|
0.2 |
|
0.5 |
|
0.6 |
|
1.2 |
|
1.5 |
|
3.7 |
| Faraday 2 |
|
0.01 |
|
0.02 |
|
0.01 |
|
0.04 |
|
- |
|
- |
Notes:
The estimate of TFFE is conceptual in nature as there
has been insufficient exploration to define a Mineral Resource and it is uncertain if future exploration will result in the estimate
being delineated as a Mineral Resource.
RISK FACTORS
Whether or not the Arrangement is completed,
Kennady will continue to face many of the risks that it currently faces with respect to its business and affairs. Certain of these
risk factors have been disclosed in the management’s discussion and analysis of the activities, results of operations, and the
financial condition of Kennady for the year ended December 31, 2016 (on page 20), which is included in Schedule “M” –
“Management’s Discussion and Analysis of Kennady” to this Circular and has been filed on SEDAR under Kennady’s
issuer profile at www.sedar.com. Upon request, a Kennady Shareholder will be provided with a copy of such documents free
of charge.
Kennady is engaged in the exploration and
evaluation of resource properties and operates in an industry that involves a high degree of risk. The reader should carefully
consider the following risks and uncertainties in addition to other information contained herein in evaluating Kennady and its
business before making any investment decision in regards to the Kennady Shares. The risks described below are not the only ones
facing Kennady. Additional risks not presently known to Kennady may also impair its business operations.
Few properties that are explored ultimately
become producing mines. The recoverability of amounts shown for mineral properties may be affected by changing economic, regulatory
and political variables. The mining industry is dependent on a number of factors that include environmental, legal and political
risks and the discovery of economically recoverable reserves. Other risks facing Kennady include competition and insurance risks,
fluctuations in commodity prices, share price volatility and uncertainty of additional financing to continue its exploration and
evaluation activities. If any of these risks occur, or if others occur, Kennady’s business, operating results and financial condition
could be seriously harmed and investors may lose a significant proportion of their investment.
Risks and uncertainties relating
to the interpretation of drill results, the geology, grade and continuity of mineral deposits; mining exploration risks, including
risks related to accidents, equipment breakdowns or other unanticipated difficulties with or interruptions in production.
| · | The business of exploration for minerals and mining involves a high degree of risk that even a
combination of experience, knowledge and careful evaluation may not be able to overcome. Few properties that are explored are ultimately
developed into mineral deposits with significant value. Unusual or unexpected ground or water conditions, geological formation
pressures, fires, rock bursts, power outages, labour disruptions, flooding, earthquakes, explosions, explorations, cave-ins, landslides,
and the inability to obtain suitable adequate or labour and other unfavourable operating conditions are other risks involved in
the operation of mines and the conduct of exploration and development programs. There are also physical risks to the exploration
personnel working in the rugged terrain of remote parts of Canada, often in difficult climate conditions. Kennady’s exploration
properties and any future mining operations will be subject to all the hazards and risks normally incidental to exploration, development
and production of diamonds and other metals, any of which could result in work stoppages and damage to or destruction of exploration
facilities, mines and other producing facilities, damage to life and property, environmental damage and possible legal liability
for any or all damage. Although Kennady maintains liability insurance in an amount which it considers adequate, the nature of these
risks is such that liabilities could exceed policy limits, in which event Kennady could incur significant costs that could have
a materially adverse effect upon their financial condition. The remoteness and restrictions on access of certain of the properties
in which Kennady has an interest could have an adverse effect on profitability in that infrastructure costs would be higher. |
| · | There are always unknown rock mechanics and hydrogeological conditions that cannot be predicted
ahead of mining. These unknown conditions, such as faulting, zones of weak rock, or zones of unanticipated water inflow, may only
be discovered during mining and may require significant changes to any mining plan resulting in additional costs and delays. |
| · | Mineral resource estimates for Kennady’s mineral properties are prepared in accordance with NI
43-101. In this context, mineral resources are estimates and no assurance can be given that the anticipated tonnages, grades, size
distribution and quality of diamonds will be achieved or that the indicated level of recovery will be realized. The estimation
of any mineral reserves and resources is a subjective process. Forecasts are based on geological and engineering data, projected
future rates of production, the timing of future expenditures, and assumed diamond prices, all of which are subject to numerous
uncertainties and various interpretations. Estimates made at a given time may change significantly in the future when new information
becomes available. Variations in grades, size distribution and quality of diamonds as well as market fluctuations and diamond prices
may render the mineral resources uneconomic. |
| · | Mineral resources that are not mineral reserves do not have demonstrated economic viability. Kennady
does not currently have any mineral reserves. Due to the uncertainty that may attach to inferred mineral resources, there is no
assurance that mineral resources will be upgraded to proven and probable ore reserves. Inferred mineral resources are considered
too speculative geologically to have economic considerations applied to them that would enable them to be categorized as mineral
reserves. |
The potential for delays in exploration activities or
the completion of studies.
| · | Kennady’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 cause delays of exploration activities and studies
and/or impair any future production and mining activities. |
| · | The development of a diamond mine in remote parts of Canada has typically taken between seven and
ten years from its initial discovery. Few diamond deposits discovered are ultimately developed into producing mines. There is no
assurance that Kennady’s diamond exploration activities will result in any discoveries of commercial bodies of ore. The long-term
profitability of Kennady’s operations, and those of its subsidiaries, will in part be directly related to the costs and success
of its exploration programs, which may be affected by a number of factors. |
Risks related to the inherent uncertainty of exploration
and cost estimates and the potential for unexpected costs and expenses.
| · | The claims, permits and leases in which Kennady holds an interest are in the exploration stage
only and are without a known body of commercial ore. The business of diamond exploration in remote parts of Canada can be a lengthy,
time consuming, expensive process and involves a high degree of risk. Upon discovery of a diamond bearing kimberlite, the primary
hostrock for diamonds, several stages of assessment are required before its economic viability can be determined. Assessment includes
a determination of deposit size (tonnage), grade (carats/stone), diamond value (U.S.$/carat) and the associated costs of extracting
and selling the diamonds. Development of any diamond properties would follow only if favorable results are obtained at each stage
of assessment. Although Kennady has reported recoveries of diamonds from material extracted from kimberlite occurrences on Kennady’s
properties, the amount of material extracted is small and continuity of the diamond content of the kimberlitic body is not assured
and cannot be assumed. |
| · | Kennady’s exploration properties are located in remote, undeveloped areas; power must be generated
on site, and the availability of infrastructure such as winter road access, skilled labour, fuel and power at an economic cost,
cannot be assured. These are integral requirements for exploration, development and mining operations. Due to the remoteness of
its mining operations, Kennady is forced to rely heavily on a seasonal winter road or air transport for the supply of goods and
services. Both forms of transport are very susceptible to disruptions due to adverse weather conditions, resulting in unavoidable
delays in planned programs and/or cost overruns. |
Risks related to foreign exchange fluctuations and prices
of diamonds.
| · | The future profitability of Kennady is dependent upon Kennady’s mineral properties and the worldwide
demand for, and price of, diamonds. Diamond prices fluctuate and are affected by numerous actors beyond the control of Kennady,
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 availability of credit to Kennady and the economic viability of any potential future production. |
| · | 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 fluctuations may affect Kennady’s financial performance. Diamonds are sold throughout
the world based principally on the U.S. dollar price, and Kennady reports its financial results in Canadian dollars. A majority
of the costs and expenses of Kennady are incurred in Canadian dollars. From time to time, Kennady may use derivative financial
instruments to manage its foreign currency exposure. |
Risks related to fluctuations in the cost of commodities,
labour and other inputs.
| · | Because Kennady’s property interests are located in remote, undeveloped areas, power must be generated
on site, and the availability of infrastructure such as road and surface access, skilled labour, fuel and power at an economic
cost, cannot be assured. These are integral requirements for exploration, development and production facilities on mineral properties.
Due to the remoteness of its exploration projects, Kennady is forced to rely heavily on air transport for the supply of goods and
services. Air transport to and from remote regions in Canada is very susceptible to disruptions due to adverse weather conditions,
resulting in unavoidable delays in planned programs and/or cost overruns. |
| · | The expected fuel needs for the Kennady North Project are purchased in February and March each
year and transported to the mine site by way of the winter road. These costs will increase if transportation by air freight is
required due to a shortened “winter road season” or unexpected high fuel usage. The cost of the fuel purchased is based
on the then prevailing price and expensed into operating costs on a usage basis. Kennady currently has no hedges for future anticipated
fuel consumption. |
| · | When mining investment and activity in Canada is high, companies typically experience a shortage
of experienced technical staff, and heavy demand for drillers, geophysical surveying crews and other goods and services needed
by the mining community. Prices for goods and services will fluctuate in relation to the level of investment in the mining sector;
it is reasonable to expect that increased demand could impact Kennady’s future economic projections and competitiveness. An increased
demand results in a meaningful increase in costs for these goods and services. Improvements in the economic conditions for the
mining industry as a whole will typically result in increases to both the costs of planned exploration, development activities
and operations, which must also be factored into economic models used in projections for future development and potential operations.
Increased demand for and cost of goods or services could result in delays if goods or services cannot be obtained in a timely manner
due to inadequate availability, and may cause scheduling difficulties due to the need to coordinate the availability of goods or
services, any of which could materially increase project exploration, development and/or construction costs. These factors could
have a material impact on Kennady’s share price. |
The uncertainty of profitability based upon Kennady’s
limited life and resultant losses.
| · | As a company involved in the mineral resource exploration and development industry, Kennady is
exposed to a number of risks, including the financial risks associated with the fact that it has no operating cash flow and must
access the capital markets to finance its activities. |
| · | There is no assurance at this time that the mineral properties Kennady is investigating will be
economically viable for development and production. |
| · | Kennady
has not yet realized any revenues or profits from its operations at the Kennady North
Project. Kennady expects to continue to incur losses unless and until such time as the
Kennady North Project generates sufficient revenues to fund its continuing operations.
There can be no assurance that Kennady will achieve profitability or that the Kennady
North Project or any of the properties Kennady may hereafter acquire or obtain an interest
in will generate earnings, operate profitably or provide a return on investment in the
future. In addition, none of Kennady’s mineral properties have an operating history
upon which to base estimates of future operating costs. There can be no assurance that
significant additional losses will not occur in the near future or that Kennady will
be profitable in the future. |
| · | There is no certainty that expenditures made in the exploration of Kennady’s mineral properties
will result in identification of commercially recoverable quantities of ore or that ore reserves will be mined or processed profitably.
Such assurance will require completion of final comprehensive feasibility studies and, possibly, further associated exploration
and other work that concludes a potential mine at each of these projects is likely to be economic. In addition, substantial expenditures
and time are required to establish mineral reserves through drilling and to develop the mining and processing facilities and infrastructure
at any site chosen for mining. Although substantial benefits may be derived from the discovery of a major diamond deposit, no assurance
can be given that diamonds will be discovered in sufficient quantities to justify commercial operations or that necessary approvals
and permits, and funds required for development, can be obtained on a timely basis. |
Risks related to failure of Kennady to obtain adequate
financing on a timely basis and on acceptable terms, particularly given recent volatility in the global financial markets.
| · | Exploration is a capital intensive business activity, typically with long lead times between the
dates exploration expenses are incurred and the time the exploration company can derive a profit from such investments. As a consequence,
junior exploration companies such as Kennady are very reliant upon accessing the equity markets, as they are not generally in a
position to generate cash flow internally. Share prices of companies in the junior exploration sector can be quite volatile and
at times there can be a lack of liquidity, if trading volumes decrease to very low levels. |
| · | There can be no assurances Kennady will continue to be able to access the capital markets for the
funding necessary to acquire and maintain exploration properties and to carry out its desired exploration programs. Kennady may
need to reduce activities if funding is unavailable when required. In addition to this having an impact on current projects, Kennady
could find itself in a position at a future time where it is unable to fund its share of costs incurred under any joint venture
agreements or meet earn-in requirements under purchase options agreements to which it is a party and its interest or right to the
underlying property interest could be reduced or eliminated as a result. |
| · | Kennady’s liquidity requirements fluctuate from quarter to quarter and year to year depending on,
among other factors, the seasonality of exploration expenses; capital expenditure programs. There can be no assurance that Kennady
will be able to meet each or all of its liquidity requirements. A failure by Kennady to meet its liquidity requirements or obtain
the requisite financing as and when needed for future activities could result in Kennady failing to meet its planned exploration
objectives, or in Kennady being in default of a contractual obligation, each of which could have a material adverse effect on Kennady’s
business prospects or financial condition. |
Risks related to environmental and other regulation, permitting
and liability.
| · | Kennady’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. |
| · | The
Canadian government has established a number of policy measures in response to concerns
relating to climate change. While the impact of these measures cannot be quantified at
this time, the likely effect will be to increase costs for fossil fuels, electricity
and transportation; restrict industrial emission levels; impose added costs for emissions
in excess of permitted levels; and increase costs for monitoring and reporting. Compliance
with these initiatives could have a material adverse effect on Kennady’s results
of operations. |
| · | In addition, exploration activities may have caused environmental damage at certain of Kennady’s
properties. It may be difficult or impossible to assess the extent to which such damage was caused by Kennady or by the activities
of others, in which case, any indemnities and exemptions from liability may be ineffective. To the extent that the Kennady North
Project is subject to uninsured environmental liabilities, the payment of such liabilities could have a material adverse effect
on Kennady. |
| · | Kennady’s operations are subject to various laws and regulations governing the protection of the
environment. Environmental legislation provides for restrictions and prohibitions on spills, releases or emissions of various substances
produced in association with certain mining industry operations, such as seepage from processed kimberlite containment (tailings)
areas, which would result in environmental pollution. A breach of such legislation may result in imposition of fines and penalties.
In addition, certain types of operations require the submission and approval of environmental impact assessments. Environmental
legislation is evolving in a direction of stricter standards, and enforcement, and higher fines and penalties for non-compliance.
Environmental assessments of proposed projects carry a heightened degree of responsibility for companies and directors, officers
and employees. The cost of compliance with changes in governmental regulations has the potential to reduce the economic viability
of operations. Kennady intends to fully comply with all environmental regulations. |
| · | Kennady’s exploration activities require permits from various governmental agencies charged with
administering laws and regulations governing exploration, labour standards, occupational health and safety, control of toxic substances,
waste disposal, land use, environmental protection and other matters. Failure to comply with laws, regulations and permit conditions
could result in fines and/or stop work orders, costs for conducting remedial actions and other expenses. In addition, legislated
changes to existing laws and regulations could result in significant additional costs to comply with the revised terms and could
also result in delays in executing planned programs pending compliance with those terms. |
Political and regulatory risks associated with mining
and exploration.
| · | The current operations of Kennady as well as anticipated future operations, including further exploration,
development activities and commencement of production at Kennady’s mineral properties, including without limitation the Kennady
North Project, require permits from various domestic authorities and such operations are governed by laws and regulations governing
prospecting, development, mining, production, exports, taxes (including income and mining taxes), labour standards, occupational
health, storage and disposal of hazardous substances and other wastes and materials, waste water discharges and water quality,
toxic substances, land use, environmental protection, mine safety and other matters. Companies engaged in exploration activities
and in the development and operation of mines and related facilities, generally experience increased costs and delays in production
and other schedules as a result of the need to comply with applicable laws, regulations and permits. |
| · | Amendments to current laws, regulations and permits governing operations and activities of mining
companies, or more stringent implementation thereof, including in respect of taxes, could have a material adverse impact on Kennady
and cause increases in capital expenditures or production costs or reduction in levels of exploration or require abandonment or
delays in new projects. |
| · | While Kennady has good relations with its employees, there can be no assurance that it will be
able to maintain positive relationships with its employees. In addition, relations between Kennady and its employees may be impacted
by regulatory or governmental changes introduced by the relevant authorities in whose jurisdictions Kennady carries on business.
Adverse changes in such legislations or in the relationship between Kennady and its employees could have a material adverse impact
on Kennady’s business, results of operations and financial condition. |
| · | Although Kennady believes it is in substantial compliance with all material laws and regulations
and holds all required permits which currently apply to its activities, there can be no assurance that various permits which Kennady
may be required to obtain or renew in the normal course of business for its current and anticipated future operations and exploration
activities, will be obtainable on reasonable terms or on a timely basis. |
| · | Failure to comply with applicable laws, regulations, and permitting requirements may result in
enforcement actions thereunder, including orders issued by regulatory or judicial authorities causing operations to cease or be
curtailed, and may include corrective measures requiring capital expenditures, installation of additional equipment, or remedial
actions. Parties engaged in mining operations may be required to compensate those suffering loss or damage by reason of mining
activities and may have civil or criminal fines or penalties imposed for violations of applicable laws or regulations and, in particular,
environmental laws. |
Aboriginal rights and title.
| · | Negotiations with First Nations and or aboriginal groups can add an additional layer of risk and
uncertainty to efforts of exploration and development of mineral deposits in many areas of Canada. The nature and extent of First
Nations and or aboriginal rights and title remains the subject of active debate, claims and litigation in Canada, including with
respect to intergovernmental relations between First Nation and or aboriginal authorities and federal, provincial and territorial
authorities. There can be no guarantee that such claims will not cause permitting delays or additional costs for Kennady. |
| · | Although Kennady has exercised the usual due diligence with respect to determining title to properties
in which it has a material interest, there is no guarantee that title to such properties will not be challenged or impugned. Kennady’s
mineral property interests may be subject to prior unregistered agreements or transfers or native land claims and title may be
affected by undetected defects. |
Failure of equipment, processes and transportation services
to operate as anticipated.
| · | Mechanical equipment and facility performance problems, and the inability to obtain suitable adequate
machinery, equipment and transportation are risks involved in the operation of mines and the conduct of exploration and development
programs. |
Possible variations in ore grade or recovery rates, permitting
timelines, capital expenditures, reclamation activities, land titles, and social and political developments, and other risks of
the mining industry.
| · | The commercial viability of any mineral deposit depends on many factors, not all of which are within
the control of management. Some of the factors will affect the financial viability of a given mineral deposit include its size,
grade and proximity to infrastructure. Government regulation, taxes, royalties, land tenure and use, environmental protection and
reclamation and closure obligations could also have a profound impact on the economic viability of a mineral property. |
| · | It
is common to experience unexpected costs, problems and delays during development, start-up
and ramp- up of an operation. During this time, the economic feasibility of exploration
and any future production may change. Kennady’s exploration activities and any
future production are subject to a number of risks and challenges, including unforeseen
geological formations and characteristics of the ore body impacting ore processing, the
implementation of new mining and recovery processes and process plant design with optimal
rates of recovery and limited risk of diamond breakage, the underlying characteristics,
quality and unpredictability of the exact nature of mineralogy of a deposit and the consequent
accurate understanding of ore or concentrate production, including consistency of grades,
size distribution and quality of diamonds, and the successful completion and operation
of haulage ramp and conveyors to move ore, the processing facility and other operational
elements. Any unexpected problems and delays in the completion and successful functioning
of the operational elements result in additional costs being incurred by Kennady beyond
those already incurred and budgeted. There can be no assurance that current or future
exploration plans by Kennady will be successful. |
Other risks and uncertainties related
to Kennady’s prospects, properties and business strategy.
| · | Kennady’s business is subject to a number of risks and hazards, including adverse environmental
conditions, industrial accidents, labour disputes, unusual or unexpected geological conditions, risks relating to the physical
security of diamonds, changes in the regulatory environment, and natural phenomena such as inclement weather conditions. Such occurrences
could result in damage to Kennady’s mineral properties, personal injury or death, environmental damage to Kennady’s mineral properties,
delays in exploration, monetary losses and possible legal liability. Although insurance is maintained to protect against certain
risks in connection with Kennady’s mineral properties and Kennady’s operations, the insurance in place will not cover all potential
risks. It may not be possible to maintain insurance to cover insurable risks at economically feasible premiums. |
| · | There is intense competition within the minerals industry to acquire properties of merit and Kennady
competes with other companies possessing greater technical and financial resources than itself. Even if desirable properties are
secured, there can be no assurances that Kennady will be able to execute its exploration programs on its proposed schedules and
within its cost estimates, whether due to weather conditions in the areas where it operates, increasingly stringent environmental
regulations and other permitting restrictions, or other factors related to exploring in areas that lack infrastructure and where
essential supplies and services may not be readily available. |
Ultimately, even if Kennady is successful
in identifying mineral resources on its properties, the economics of potential projects may be affected by many factors beyond
the capacity of Kennady to anticipate and control, such as the marketability of the mineral products under profitable conditions,
government regulations relating to health, safety and the environment, the scale and scope of royalties and taxes on production
and demands for “value added” processing within Canada of the minerals produced here. One or more of these risk elements
could have a material adverse impact on costs of an operation, which, if significant enough, could reduce or eliminate the profitability
of a particular project.
DIVIDENDS
Kennady has not declared or paid any cash
dividends on any of its issued shares since incorporation. Kennady’s dividend policy will be reviewed from time to time by the
Kennady Board of in the context of Kennady’s earnings, financial condition, capital requirements and other relevant factors. Kennady
currently intends to retain all available funds and any future earnings to fund the development and growth of its business and
Kennady does not anticipate to pay any cash dividends in the foreseeable future.
FINANCIAL INFORMATION
AND MANAGEMENT’S DISCUSSION AND ANALYSIS
Financial Statements and Management’s Discussion
and Analysis for the year ended December 31, 2016 and the nine month period ended September 30, 2017, respectively, can be found
in Schedule “N” – “Financial Statements and Management’s Discussion and Analysis of Kennady” to
this Circular.
CONSOLIDATED CAPITALIZATION
Other than as set forth in the table below, there has been no
material change in the consolidated capitalization of Kennady since December 31, 2017:
| Description |
|
Amount Authorized as at the
date of this Circular |
|
Amount Outstanding as of
December 31, 2017
(unaudited) |
|
Amount Outstanding as of
the date of this Circular
(unaudited) |
| |
|
|
|
|
|
|
| Kennady Shares |
|
Unlimited |
|
50,912,599 |
|
50,912,599 |
| Kennady Options |
|
Not Applicable |
|
1,085,000 |
|
1,085,000 |
PRIOR SALES
The following table summarizes the securities of Kennady issued
or sold through financings during Kennady’s most recently completed financial year and prior to the date of this Circular.
| Date of Issue |
|
Type of
Security |
|
Number of
Securities |
|
Issue or Exercise
Price per Security |
| 18-Jan-17 |
|
Options |
|
5,000 |
|
1.34 |
| 19-Jan-17 |
|
Options |
|
95,000 |
|
1.34 |
| 27-Mar-17 |
|
Options |
|
100,000 |
|
1.27 |
| 12-Apr-17 |
|
Options |
|
200,000 |
|
1.27 |
| 15-May-17 |
|
RSUs |
|
25,000 |
|
3.20 |
| 17-May-17 |
|
RSUs |
|
27,667 |
|
3.14 |
| 17-May-17 |
|
Private placement - share issuance |
|
1,629,835 |
|
3.25 |
| 19-Jun-17 |
|
Options |
|
65,000 |
|
1.27 |
| 09-Aug-17 |
|
RSUs |
|
16,666 |
|
3.37 |
| 15-Aug-17 |
|
RSUs |
|
3,000 |
|
3.36 |
| 30-Aug-17 |
|
Options |
|
25,000 |
|
1.23 |
| 19-Sep-17 |
|
Private placement - share issuance |
|
1,538,461 |
|
4.38 |
| 02-Feb-18 |
|
Private placement - share issuance |
|
1,000,000 |
|
2.50 |
| 28-Feb-18 |
|
Private placement - share issuance |
|
1,000,000 |
|
2.50 |
Trading Price and Volume
The Kennady Shares are currently listed and posted for trading
on the TSXV under the symbol “KDI”. The following table shows the price ranges and volume of the Kennady Shares traded
during the last twelve months.
| Period |
|
High |
|
Low |
|
Close |
|
Total Volume |
| March 1 – 5, 2018 |
|
3.000 |
|
2.900 |
|
2.900 |
|
98,360 |
| February 2018 |
|
3.220 |
|
3.000 |
|
3.000 |
|
811,945 |
| January 2018 |
|
3.310 |
|
2.460 |
|
3.180 |
|
1,392,516 |
| December 2017 |
|
3.060 |
|
2.450 |
|
3.050 |
|
294,935 |
| November 2017 |
|
3.040 |
|
2.480 |
|
2.620 |
|
289,442 |
| October 2017 |
|
3.050 |
|
2.80 |
|
2.880 |
|
583,209 |
| September 2017 |
|
3.220 |
|
2.850 |
|
2.900 |
|
91,262 |
| August 2017 |
|
3.500 |
|
3.110 |
|
3.200 |
|
944,234 |
| July 2017 |
|
3.550 |
|
3.170 |
|
3.260 |
|
200,935 |
| June 2017 |
|
3.750 |
|
3.050 |
|
3.300 |
|
927,984 |
| May 2017 |
|
3.520 |
|
3.010 |
|
3.250 |
|
469,064 |
| April 2017 |
|
3.970 |
|
3.260 |
|
3.590 |
|
937,435 |
| March 2017 |
|
4.250 |
|
3.300 |
|
3.870 |
|
1621,115 |
| February 2017 |
|
3.900 |
|
2.500 |
|
3.750 |
|
336,638 |
On January 26, 2018, the last trading day
prior to the date of the public announcement of the Arrangement Agreement, the closing price of the Kennady Shares on the TSXV
was $2.75. On March 5, 2018, the closing price of the Kennady Shares on the TSXV was $2.90.
ESCROWED SECURITIES
Kennady has no securities held in escrow
or subject to contractual restrictions on transfer.
PRINCIPAL SHAREHOLDERS
To the best of the knowledge of the directors
and executive officers of Kennady, as of the date of this Circular, the following person(s) beneficially own, or exercise control
or direction over, directly or indirectly, more than 10% of the issued and outstanding Kennady Shares.
| Name of Shareholder |
|
Number of Kennady
Shares Held |
|
Percentage of issued and
outstanding share capital of
52,912,599 shares |
| Bottin (International) Investments Ltd(1) and Mr. Dermot Desmond. |
|
14,485,797 |
|
27.4% |
Notes:
(1) Controlled by Mr.
Dermot Desmond.
DIRECTORS AND OFFICERS
The Kennady Board is currently comprised
of five directors. Each director elected director holds office until the next annual meeting of Kennady or until his or her successor
is elected or appointed, unless his or her office is earlier vacated in accordance with the Articles of Kennady or the provisions
of the OBCA.
The following table sets forth the name
the province or state and country in which each is ordinarily resident, the period or periods during which each has served as a
director, the first and last positions held in Kennady, their present principal occupations and the number of Kennady Shares beneficially
owned or controlled or directed by each, directly or indirectly, as at the date hereof.
| Jonathan Comerford |
Mr. Comerford, the Chairman of the Kennady Board and a director of Kennady, is an investment manager at International Investment and Underwriting Ltd. He obtained his Masters in Business from the Michael Smurfit Business School in 1993 and his Bachelor of Economics from University College, Dublin in 1992. |
| |
|
| Chairman of the Kennady Board (Independent) |
Key Areas of Expertise/Experience: |
| |
|
| Investment Manager |
|
| Director since: |
|
|
|
|
|
|
| February 28, 2012 |
2016 Board/Committee |
|
|
|
|
|
| |
Memberships |
|
2016 Attendance |
|
Public Board Membership |
| Age: 45 |
Board of Directors |
|
9 of 9 |
100% |
|
Mountain Province Diamonds Inc. |
| |
Compensation Committee |
|
2 of 2 |
100% |
|
|
| County Dublin, |
Audit Committee |
|
4 of 4 |
100% |
|
|
| Ireland |
Nominating and Corporate |
|
1 of 1 |
100% |
|
|
| |
Governance Committee |
|
|
|
|
|
| |
Securities Held: |
|
|
|
Share ownership guidelines |
|
|
| |
|
|
|
|
|
|
|
|
|
| |
|
|
|
|
Value of |
|
|
|
|
| |
|
|
Common |
|
Common |
|
|
|
|
| |
Fiscal |
|
Shares |
|
Shares |
|
|
Restricted Stock |
|
| |
Year |
|
Held (#) |
|
Held ($) |
|
|
Units Held (#) |
|
| |
2016 |
|
23,455 |
|
93,820 |
|
|
33,333 |
|
| |
2015 |
|
23,455 |
|
70,600 |
|
|
|
|
| |
Change |
|
Nil |
|
|
|
|
|
|
| |
|
|
|
|
|
|
|
|
|
|
|
|
|
Value of |
| |
|
|
|
|
|
|
|
|
|
|
|
Value of |
|
options |
| |
|
|
|
|
|
Options |
|
Options |
|
|
|
unexercised |
|
vested |
| |
|
Date of |
|
Exercise |
|
Held |
|
Vested |
|
Expiration |
|
In-the-money |
|
during the |
| |
|
Grant |
|
Price |
|
(#) |
|
(#) |
|
Date |
|
options ($) |
|
year ($) |
| |
|
13-Mar-15 |
|
3.61 |
|
150,000 |
|
150,000 |
|
12-Mar-25 |
|
58,500 |
|
Nil |
| |
|
7-Nov-12 |
|
1.27 |
|
100,000 |
|
100,000 |
|
6-Nov-22 |
|
273,000 |
|
Nil |
| |
|
Total |
|
|
|
|
|
|
|
|
|
331,500 |
|
Nil |
| |
Mr. Comerford did not exercise any stock options during the year ended December 31, 2016. |
|
Dr. Rory Moore
President and CEO
(Non-Independent) |
Dr. Moore, has served as the President and CEO of the Company since April 2016. Dr. Moore graduated from the University of Cape Town where he received his Ph.D. degree in Geochemistry in 1986 and his B.Sc. (Hons) degree in Geochemistry in 1981. Dr. Moore was CEO and Director of Mineral Service Group from October 2008 to July 2011 and President, CEO and Director of West Melville Metals Inc. from August 2011 to April 30, 2016. |
| |
Key Areas of Expertise/Experience: |
|
|
|
| Director since: |
Diamond exploration & evaluation |
|
Project Management |
|
| May 1, 2016 |
Capital markets |
|
Strategy development |
|
| Age: 59 |
2016 Board/Committee |
|
|
|
|
|
|
Memberships |
|
2016 Attendance |
|
Public Board Membership |
| British Columbia, |
Board of Directors |
|
5 of 5 |
100% |
|
None |
| Canada |
|
|
|
|
|
|
| |
Securities Held: |
|
|
|
Share ownership guidelines |
|
|
| |
|
|
|
|
|
|
|
|
|
| |
|
|
|
|
Value of |
|
|
|
|
| |
|
|
Common |
|
Common |
|
|
|
|
| |
Fiscal |
|
Shares |
|
Shares |
|
|
Restricted Stock |
|
| |
Year |
|
Held (#) |
|
Held ($) |
|
|
Units Held (#) |
|
| |
2016 |
|
Nil |
|
Nil |
|
|
25,000 |
|
| |
Change |
|
Nil |
|
|
|
|
|
|
| |
|
|
|
|
|
|
|
|
|
|
|
|
|
Value of |
| |
|
|
|
|
|
|
|
|
|
|
|
Value of |
|
options |
| |
|
|
|
|
|
Options |
|
Options |
|
|
|
unexercised |
|
vested |
| |
|
Date of |
|
Exercise |
|
Held |
|
Vested |
|
Expiration |
|
In-the-money |
|
during the |
| |
|
Grant |
|
Price |
|
(#) |
|
(#) |
|
Date |
|
options ($) |
|
year ($) |
| |
|
6-Apr-16 |
|
3.30 |
|
200,000 |
|
200,000 |
|
5-Apr-26 |
|
140,000 |
|
Nil |
| |
|
Total |
|
|
|
|
|
|
|
|
|
140,000 |
|
Nil |
| |
Dr. Moore did not exercise any stock options during the year ended December 31, 2016. On May 15, 2017, Dr. Moore exercised 25,000 Restricted Stock Units. |
|
Dr. Tom McCandless
Director (Independent) |
Dr. McCandless is President of MCC Geoscience Inc. since July 21, 2008. Dr. McCandless has acted as Technical Advisor of Dunnedin Ventures Inc. since 2015; Technical Advisor of Canterra Minerals Corp. since 2014; Director of Green Swan Capital since January 2014; Director of Bonaparte Resources Inc (2012-2014); Chief Operating Officer, Director of Group Ten Metals Inc. (2014-2016); Vice President, Exploration and Director of Ashburton Ventures Inc. (2011-2014); President of Caribou King Resources Inc. (2011-2013). |
| Geological Consultant |
|
| Director since: |
Key Areas of Expertise/Experience: |
|
| March 1, 2016 |
Mineral exploration, project early assessment
Geochemistry, isotopes |
Diamond breakage, size distribution |
| Age: 62 |
2016 Board/Committee |
|
|
|
|
|
|
Memberships |
|
2016 Attendance |
|
Public Board Membership |
| British
Columbia, |
Board of Directors |
|
7 of 7 |
100% |
|
None |
| Canada |
Compensation Committee |
|
2 of 2 |
100% |
|
|
| |
Securities Held: |
|
|
|
Share ownership guidelines |
|
|
| |
|
|
|
|
|
|
|
|
|
| |
|
|
|
|
Value of |
|
|
|
|
| |
|
|
Common |
|
Common |
|
|
|
|
| |
Fiscal |
|
Shares |
|
Shares |
|
|
Restricted Stock |
|
| |
Year |
|
Held (#) |
|
Held ($) |
|
|
Units Held (#) |
|
| |
2016 |
|
200 |
|
800 |
|
|
33,333 |
|
| |
Change |
|
Nil |
|
|
|
|
|
|
| |
|
|
|
|
|
|
|
|
|
|
|
|
|
Value of |
| |
|
|
|
|
|
|
|
|
|
|
|
Value of |
|
options |
| |
|
|
|
|
|
Options |
|
Options |
|
|
|
unexercised |
|
vested |
| |
|
Date of |
|
Exercise |
|
Held |
|
Vested |
|
Expiration |
|
In-the-money |
|
during the |
| |
|
Grant |
|
Price |
|
(#) |
|
(#) |
|
Date |
|
options ($) |
|
year ($) |
| |
|
1-Mar-16 |
|
2.80 |
|
85,000 |
|
85,000 |
|
28-Feb-26 |
|
102,000 |
|
Nil |
| |
|
Total |
|
|
|
|
|
|
|
|
|
102,000 |
|
Nil |
| |
Dr. McCandless exercised 15,000 stock options during the year ended December 31, 2016. |
|
Robert Parsons
Director (Independent)
Retired |
Mr. Parsons is a Chartered Accountant. Mr. Parsons is an Independent Consultant since September 1, 2002; Director of Pan Global Resources Inc. (2016 to present); Director of Indico Resources Ltd. (2012 to present); Director of Prism Resources Inc. (2012 to present); Director of Eagle Hill Exploration Corporation (2013 to 2015); Director of Norsemont Mining Inc. (2007 to 2011); Director, East Asia Minerals Corporation (2009 to 2011); Director of Weda Bay Minerals Inc. (2003 to 2006). |
| |
|
| Director since: |
Key Areas of Expertise/Experience: |
| March 9, 2014 |
|
| |
|
| Age: 70 |
|
| British Columbia, |
2016 Board/Committee |
|
|
|
|
|
| Canada |
Memberships |
|
2016 Attendance |
|
Public Board Membership |
| |
Board of Directors |
|
9 of 9 |
100% |
|
None |
| |
Compensation Committee |
|
2 of 2 |
100% |
|
|
| |
Audit Committee |
|
4 of 4 |
100% |
|
|
| |
Nominating and Corporate |
|
1 of 1 |
100% |
|
|
| |
Governance Committee |
|
|
|
|
|
| |
Securities Held: |
|
|
|
Share ownership guidelines |
|
|
| |
|
|
|
|
|
|
|
|
|
| |
|
|
|
|
Value of |
|
|
|
|
| |
|
|
Common |
|
Common |
|
|
|
|
| |
Fiscal |
|
Shares |
|
Shares |
|
|
Restricted Stock |
|
| |
Year |
|
Held (#) |
|
Held ($) |
|
|
Units Held (#) |
|
| |
2016 |
|
15,400 |
|
61,600 |
|
|
25,000 |
|
| |
2015 |
|
12,400 |
|
37,324 |
|
|
|
|
| |
Change |
|
3,000 |
|
|
|
|
|
|
| |
|
|
|
|
|
|
|
|
|
|
|
|
|
Value of |
| |
|
|
|
|
|
|
|
|
|
|
|
Value of |
|
options |
| |
|
|
|
|
|
Options |
|
Options |
|
|
|
unexercised |
|
vested |
| |
|
Date of |
|
Exercise |
|
Held |
|
Vested |
|
Expiration |
|
In-the-money |
|
during the |
| |
|
Grant |
|
Price |
|
(#) |
|
(#) |
|
Date |
|
options ($) |
|
year ($) |
| |
|
13-Mar-15 |
|
3.61 |
|
100,000 |
|
100,000 |
|
12-Mar-25 |
|
39,000 |
|
Nil |
| |
|
10-Mar-14 |
|
4.74 |
|
100,000 |
|
100,000 |
|
09-Mar-24 |
|
Nil |
|
Nil |
| |
|
Total |
|
|
|
|
|
|
|
|
|
39,000 |
|
Nil |
| |
Mr. Parsons did not exercise any stock options during the year ended December 31, 2016. |
|
Claudia Tornquist
Director (Independent) |
Ms. Tornquist has since November 2017 been president of Dunnedin Ventures Inc. Prior to that Ms. Tornquist was an independent consultant (October 2013 – October 2017), Executive Vice President Business Development of Sandstorm Gold Ltd (February 2011 – September 2013) and General Manager for Rio Tinto plc (January 2002 – May 2010). |
| Director since: |
Key Areas of Expertise/Experience: |
|
|
|
| January 1, 2016 |
Project and Financial Evaluation |
|
Financing |
|
| |
M&A |
|
Strategy |
|
| Age: 49 |
2016 Board/Committee |
|
|
|
|
|
|
Memberships |
|
2016 Attendance |
|
Public Board Membership |
| British
Columbia, |
Board of Directors |
|
9 of 9 |
100% |
|
Dunnedin Ventures Inc., Silver |
| Canada |
Audit Committee |
|
3 of 3 |
100% |
|
One Resources Inc. |
| |
Nominating and Corporate |
|
1 of 1 |
100% |
|
|
| |
Governance Committee |
|
|
|
|
|
| |
Securities Held: |
|
|
|
Share ownership guidelines |
|
|
| |
|
|
|
|
|
|
|
|
|
| |
|
|
|
|
Value of |
|
|
|
|
| |
|
|
Common |
|
Common |
|
|
|
|
| |
Fiscal |
|
Shares |
|
Shares |
|
|
Restricted Stock |
|
| |
Year |
|
Held (#) |
|
Held ($) |
|
|
Units Held (#) |
|
| |
2016 |
|
10,000 |
|
40,000 |
|
|
25,000 |
|
| |
Change |
|
Nil |
|
|
|
|
|
|
| |
|
|
|
|
|
|
|
|
|
|
|
|
|
Value of |
| |
|
|
|
|
|
|
|
|
|
|
|
Value of |
|
options |
| |
|
|
|
|
|
Options |
|
Options |
|
|
|
unexercised |
|
vested |
| |
|
Date of |
|
Exercise |
|
Held |
|
Vested |
|
Expiration |
|
In-the-money |
|
during the |
| |
|
Grant |
|
Price |
|
(#) |
|
(#) |
|
Date |
|
options ($) |
|
year ($) |
| |
|
1-Jan-16 |
|
3.0 |
|
100,000 |
|
100,000 |
|
31-Dec-25 |
|
100,000 |
|
Nil |
| |
|
Total |
|
|
|
|
|
|
|
|
|
100,000 |
|
Nil |
| |
Ms. Tornquist did not exercise any stock options during the year ended December 31, 2016. |
Chief Financial Officer - Kennady entered
into a Consulting Agreement with a corporation controlled by Bruce Ramsden, to provide the services of Mr. Ramsden as VP Finance,
effective February 1, 2013 and as VP Finance, Chief Financial Officer and Corporate Secretary, effective May 1, 2013. Mr. Ramsden
has been Chief Executive Officer of Kennady since. Mr. Ramsden’s principal place of residence is Ontario, Canada.
Cease Trade Orders, Bankruptcies, Penalties or Sanctions
To the best of management’s knowledge, and
except as set out in the proceeding paragraphs below, no proposed director is, or has been within the last ten years before the
date of this Circular, a director, chief executive officer or chief financial officer of any corporation that:
| (a) | was the subject to an order that was issued while the proposed director was acting in the capacity
as director, chief executive officer or chief financial officer; |
| (b) | was subject to an order that was issued after the proposed director ceased to be a director, chief
executive office or chief financial officer and which resulted from an event that occurred while that person was acting in the
capacity as director, chief executive officer or chief financial officer; or |
| (c) | within a year of that person ceasing to act in that capacity, became bankrupt, made a proposal
under any legislation relating to bankruptcy or insolvency or was subject to or instituted any proceedings, arrangement or compromise
with creditors or had a receiver, receiver manager or trustee appointed to hold its assets. |
Jonathan Comerford is a director of Newfoundland
and Labrador Refining Corporation (“NLRC”), incorporated under Newfoundland law November 28, 2005. NLRC sought
bankruptcy protection under the Canadian Bankruptcy and Insolvency Act on June 19, 2008, and subsequently obtained Court approval
for a proposal to creditors to sell or finance NLRC’s projects’ interests.
To the best of management’s knowledge, no proposed
director has, within the ten years before the date of this Circular, become bankrupt, made a proposal under any legislation relating
to bankruptcy or insolvency, or become subject to or instituted any proceedings, arrangement or compromise with creditors, or had
a receiver, receiver manager or trustee appointed to hold the assets of the proposed director.
To the best of management’s knowledge, no proposed director has
been subject to:
| (a) | any penalties or sanctions imposed by a court relating to securities legislation or by a securities
regulatory authority or has entered into a settlement agreement with a securities regulatory authority; or |
| (b) | any other penalties or sanctions imposed by a court or regulatory body that would likely be considered
important to a reasonable securityholder in deciding whether to vote for a proposed nominee director. |
EXECUTIVE COMPENSATION
For the purposes of this section:
| (a) | “Chief Executive Officer” or “CEO” of Kennady means the individual
who served as chief executive officer of Kennady during its financial year ended December 31, 2016; |
| (b) | “Chief Financial Officer” or “CFO” of Kennady means the individual
who served as chief financial officer of Kennady during its financial year ended December 31, 2016; |
| (c) | “executive officer” of Kennady means an individual who is a Chairman or Vice-Chairman
of the Kennady Board, the President, a Vice-President in charge of a principal business unit, division or function including sales,
finance or production, an officer of Kennady or any of its subsidiaries who performed a policy-making function in respect of Kennady,
or any other individual who performed a policy-making function in respect of Kennady; |
| (d) | “Named Executive Officers” or “NEO” means; |
| (iii) | each of Kennady’s three most highly compensated officers (including any of its subsidiaries), other
than the CEO and CFO, who were serving as executive officers at the end of the most recently completed financial year and whose
total compensation, individually, exceeded $150,000; and |
| (iv) | any additional individuals for whom disclosure would have been provided under (iii) except that
the individual was not serving as an officer of Kennady or its subsidiaries, nor acting in a similar capacity, at the end of the
most recently completed financial year; |
| (e) | “Option-Based Award” means an award under an equity incentive plan of options,
including, for greater certainty, share options, share appreciation rights, and similar instruments that have option-like features;
and |
| (f) | “Share-Based Award” means an award under an equity incentive plan or equity-based
instruments that do not have option-like features, including, for greater certainty, Kennady Shares, restricted share units, deferred
share units, phantom shares, phantom share units, common share equivalent units, and stock. |
Compensation Discussion and Analysis
| A. | Role of the Compensation Committee |
The Compensation Committee is responsible for
reviewing Kennady’s compensation arrangements with its executive officers as determined to be needed.
When reviewing the compensation of the executive
officers, as needed, the Compensation Committee considers the following objectives: (i) recruiting and retaining the executives
critical to the success of Kennady and the enhancement of shareholder value; (ii) providing fair and competitive compensation based
upon a detailed comparison with the compensation levels paid for similar positions by similar companies; (iii) balancing the interests
of management and shareholders of Kennady; and (iv) rewarding performance, both on an individual basis and with respect to the
business in general. The Compensation Committee has the responsibility of reviewing the executive officers’ total compensation
package in consultation with the CEO and making proposals to the Kennady Board, reviewing and advising on stock option guidelines,
including recommendations on specific option grants, and reviewing and communicating to the Kennady Board the compensation policies
and principles that will be applied to other executives and employees of Kennady.
| B. | Compensation Philosophy |
Kennady’s compensation philosophy provides
that any and all employees, including those consulting in management roles, receive compensation based on the market value for
the type of role they perform. Compensation currently includes three elements: (a) salary or consulting fees (pursuant to the consulting
agreements with the NEOs), and (b) cash bonuses and (c) long-term incentives by way of the grant of stock options, restricted stock
units or stock appreciation rights in accordance with the policies of the TSXV and Kennady’s long term equity incentive plan (the
“Kennady Long Term Equity Incentive Plan”).
Kennady does not provide sponsored or defined
pension or retirement plans, nor does it provide any other benefit plans. Employees and/or consultants to Kennady are expected
to provide for their own benefits and retirement.
Composition of the Compensation Committee
Kennady’s Compensation Committee consists of
Jonathan Comerford, Dr. Tom McCandless (Chair), and Robert Parsons, three (3) non-management directors (each of whom is also an
“independent” director, as defined in the National Instrument 52-110 – Audit Committees).
Mr. Comerford, Mr. Parsons and Dr. McCandless
are directors and/or officers of other companies and have experience in compensation matters. The Kennady Board believes that the
members of the Compensation Committee collectively have the knowledge, experience and background required to fulfill their mandate.
Such knowledge, experience and background enables them to make decisions regarding the sustainability of Kennady’s compensation
policies and practices. Dr. McCandless has been the Chair of the Compensation Committee since 2016.
Report on Executive Compensation
The Compensation Committee has no formal compensation
policy. However, executive officers are compensated in a manner consistent with their respective contributions to the overall benefit
of Kennady.
Executive compensation is generally based on
discussion by the Compensation Committee or by the Kennady Board. Kennady entered into an employment agreement with the current
CEO, Dr. Rory Moore, on May 1, 2016. Kennady entered into a consulting agreement with the CFO, Bruce Ramsden, in January, 2013.
The compensation granted to the CEO and the CFO is primarily cash-based and options based and Bruce Ramsden was granted options
upon the execution of his consulting agreement to align the interests of management and shareholders. For an overview of these
consulting agreements, please refer to the discussion below under the heading “Executive Compensation – Employment/Consulting
Agreements of NEOs”.
As part of the Compensation Committee’s ‘Terms
of Reference’, the Compensation Committee is tasked with the responsibility of reviewing and recommending any changes to compensation
for Kennady’s senior management, or to defer such discussions to the Kennady Board, and to make any recommendations for the granting
of options.
Elements of Compensation
Consulting Fees
Pursuant to the employment and consulting agreements
noted above, the CEO and CFO provide employment and consulting services to Kennady in connection with their respective roles with
Kennady. There are no other NEOs with employment or consulting agreements with Kennady.
Kennady has not retained a compensation consultant
or advisor to assist the Compensation Committee in determining compensation for any of Kennady’s directors or executive officers.
Long-Term Incentives
Kennady provides long-term incentives by granting
stock options or restricted stock units or stock appreciation rights to executive officers in accordance with the policies of the
TSXV and the Kennady Long Term Equity Incentive Plan. On May 17, 2016, the Kennady Board approved the adoption of the Kennady Long
Term Equity Incentive Plan, which replaced Kennady’s previous stock option plan. Shareholders approved the Kennady Long Term Equity
Incentive Plan at the annual general and special meeting of shareholders held on June 20, 2017.
The objective of granting options and/or restricted
stock units is to encourage executive officers to acquire an ownership interest in Kennady over a period of time, which acts as
financial incentive for such executive officers to consider the long-term interests of Kennady and its shareholders.
When determining the number of stock options
or restricted stock units to be granted to an executive officer, the Compensation Committee takes into account the number and terms
of stock options or restricted stock units previously granted to the executive officer, if any, and option compensation granted
by similar companies to executives with similar responsibilities.
Other Compensation
Kennady provides no compensation to its NEOs
other than the amounts under their respective employment or consulting arrangements and long-term incentives as described above.
For greater certainty, Kennady makes no commitments for Option-Based Awards or Share-Based Awards other than the stock options
granted pursuant to the Kennady Long Term Equity Incentive Plan.
Compensation Risk
In the upcoming year, the Compensation Committee
will undertake a review of the risks associated with Kennady’s compensation of its NEOs, other executives (if any), and directors
and, based on the review, the Kennady Board will determine whether any steps should be taken to mitigate and/or manage any identified
risks.
NEOs and directors are discouraged from purchasing
financial instruments designed to hedge or offset a decrease in market value of equity securities granted as compensation or held,
directly or indirectly, by the NEO or director, and to the knowledge of Kennady, no NEO or director has undertaken such hedging
transactions. However, Kennady does not have a policy expressly prohibiting such purchases.
Employment/Consulting Agreements of NEOs
During the financial year ended December 31,
2016, Kennady had an employment contract with the CEO and Consulting Agreements with the former CEO and current CFO, Kennady’s
only Named Executive Officers.
CEO Compensation – Dr. Rory Moore
Kennady entered into an employment agreement
with Dr. Rory Moore for his services as President and CEO effective May 1, 2016 (the “Moore Agreement”). The annual
salary under the Employment Agreement is $275,000 per annum and for the year ended December 31, 2016, Kennady paid or accrued a
salary of $183,333 and a bonus of $183,333 for a total of $366,667. In the event of termination as a result of change in control
of Kennady, Dr. Moore is entitled to receive, within 30 days of the termination, a severance payment equal to 24 months of his
monthly salary. In addition, all stock options held by him will immediately vest and become exercisable on change of control.
CEO Compensation – Patrick Evans
Kennady had a Consulting Agreement with Patrick
Evans for his services as President and CEO which was effective May 1, 2013 (the “Evans Agreement”). The annual
consulting fee under the Evans Agreement is $165,000, and in the year ended December 31, 2015, Kennady paid or accrued a total
of $330,000 in monthly consulting fees and bonuses to Mr. Evans. Effective January 1, 2016, the terms of the Evans Agreement were
amended to a consulting fee of $45,833 per month, payable in advance. In the year ended December 31, 2016, Kennady paid or accrued
a total of $229,165 in monthly consulting fees and bonuses to Mr. Evans. Mr. Evans resigned as a director and CEO of Kennady on
April 30, 2016.
CFO Compensation
Kennady entered into a consulting agreement
with a corporation controlled by Bruce Ramsden, to provide the services of Mr. Ramsden as VP Finance, effective February 1, 2013
and as VP Finance, Chief Financial Officer and Corporate Secretary, effective May 1, 2013 (the “Ramsden Agreement”).
The Ramsden Agreement provides for a monthly consulting fee of $6,667, and in the year ended December 31, 2016, Kennady paid or
accrued a total of $120,000 in monthly consulting fees and bonuses under the Ramsden Agreement. Effective January 1, 2017, the
monthly consulting fee was increased to $7,083.33. Under the Ramsden Agreement, the consultant corporation is entitled to receive
a severance payment equal to six months annual compensation plus all benefits in the event that the Ramsden Agreement is terminated
without cause by Kennady (as defined in the Ramsden Agreement). In the event of termination as a result of change in control of
Kennady (as defined in the Ramsden Agreement), the consultant corporation is entitled to receive, within 30 days of the termination,
a severance payment equal to 12 months of his annual compensation plus all benefits payable for 12 months.
Share-Based and Option-based awards
The Kennady
Long Term Equity Incentive Plan has been used to provide share purchase options which are granted in consideration of the level
of responsibility of the executive as well as his or her impact or contribution to the longer-term operating performance of Kennady.
In determining the number of options to be granted to the executive officers, the Kennady Board takes into account the number
of options, if any, previously granted to each executive officer, and the exercise price of any outstanding options to ensure
that such grants are in accordance with the policies of the TSXV, and closely align the interests of the executive officers with
the interests of shareholders.
The Compensation Committee has the
primary responsibility of administering the compensation policies related to the executive management of Kennady, including option-based
awards.
Summary Compensation Table
The following table (presented in accordance
with Form 51-102F6 – Statement of Executive Compensation) sets forth all direct and indirect compensation provided
to Kennady’s Named Executive Officers during the Kennady’s financial year ended December 31, 2016.
| |
|
|
|
|
|
|
|
|
|
Non-Equity
Incentive |
|
|
|
|
|
|
| |
|
|
|
|
|
|
|
|
|
Plan
Compensation |
|
|
|
|
|
|
| |
|
|
|
|
|
|
|
|
|
($) |
|
|
|
|
|
|
| |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| |
|
|
|
|
|
|
|
|
|
|
|
Long- |
|
|
|
|
|
|
| NEO |
|
|
|
|
|
Share- |
|
Option- |
|
Annual |
|
term |
|
|
|
|
|
|
| Name and |
|
|
|
|
|
Based |
|
Based |
|
Incentive |
|
Incentive |
|
Pension |
|
All Other |
|
Total |
| Principal |
|
|
|
Salary |
|
Awards |
|
Awards |
|
Plans |
|
Plans |
|
Value |
|
Compensation |
|
Compensation |
| Position |
|
Year(1) |
|
($) |
|
($) |
|
($) |
|
($)(4) |
|
($) |
|
($) |
|
($) |
|
($) |
| |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| Dr. Rory |
|
2016 |
|
$183,333 |
|
Nil |
|
$504,400 |
|
$183,333 |
|
Nil |
|
Nil |
|
Nil |
|
$871,066 |
| Moore(1) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| (President |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| and CEO) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| Patrick |
|
2016 |
|
$183,333 |
|
Nil |
|
Nil |
|
Nil |
|
Nil |
|
Nil |
|
Nil |
|
$183,333 |
| Evans(2) |
|
2015 |
|
$165,000 |
|
Nil |
|
$415,950 |
|
$165,000 |
|
Nil |
|
Nil |
|
Nil |
|
$745,950 |
| (President |
|
2014 |
|
$75,000 |
|
Nil |
|
$479,400 |
|
$75,000 |
|
Nil |
|
Nil |
|
Nil |
|
$629,400 |
| and CEO) |
|
2013 |
|
$20,000 |
|
Nil |
|
Nil |
|
$30,000 |
|
Nil |
|
Nil |
|
Nil |
|
$50,000 |
| |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| Bruce |
|
2016 |
|
$80,000 |
|
Nil |
|
$215,100 |
|
$40,000 |
|
Nil |
|
Nil |
|
Nil |
|
$335,100 |
| Ramsden(3) |
|
2015 |
|
$60,000 |
|
Nil |
|
$138,650 |
|
$30,000 |
|
Nil |
|
Nil |
|
Nil |
|
$228,650 |
| (CFO) |
|
2014 |
|
$50,000 |
|
Nil |
|
$159,800 |
|
$15,000 |
|
Nil |
|
Nil |
|
Nil |
|
$224,800 |
| |
|
2013 |
|
$35,200 |
|
Nil |
|
$81,871 |
|
$11,250 |
|
Nil |
|
Nil |
|
Nil |
|
$128,591 |
Notes:
| (1) | In
the fiscal year ended December 31, 2016, 200,000 stock options were granted to Dr. Moore
in his capacity as President and CEO. 50% vested on April 6, 2016 and 50% vested on November
1, 2016. The options expire on April 5, 2026. They have an exercise price of $3.30 per
share. They were valued using the Black-Scholes model (a common methodology) as the methodology
to calculate the grant date fair value (April 6, 2016) and Kennady relied on the following
key assumptions and estimates for the calculation of these Option-based Awards: Dividend
yield – nil; Expected volatility – 72.76%; Risk-free rate of return –
1.16%; Expected life of options – 10 years. The fair value at the time of grant
was calculated to be $504,400 for the options granted to Mr. Moore. |
| (2) | In
the fiscal year ended December 31, 2016 no stock options were granted to Mr. Evans in
his capacity as President and CEO. Mr. Evans resigned as CEO on April 30, 2016. |
| (3) | In
the fiscal year ended December 31, 2016, 100,000 stock options were granted to Mr. Ramsden
in his capacity as VP Finance and CFO. These options were granted on January 13, 2016,
vested immediately and expire on January 12, 2026. They have an exercise price of $2.81
per share. They were valued using the Black-Scholes model (a common methodology) as the
methodology to calculate the grant date fair value (January 13, 2016) and Kennady relied
on the following key assumptions and estimates for the calculation of these Option-based
Awards: Dividend yield – nil; Expected volatility – 72.76%; Risk-free rate
of return – 1. 27%; Expected life of options – 10 years. The fair value at
the time of grant was calculated to be $215,100 for the options granted to Mr. Ramsden. |
| (4) | Bonuses
were accrued and paid in December 31, 2016. |
Incentive Plan Awards
Kennady does not have any incentive plans for
NEOs except with Dr. Moore and with a corporation providing the services of Mr. Ramsden, pursuant to the Moore Agreement and Ramsden
Agreements, respectively.
Outstanding Share-Based Awards and Option-Based Awards
The following table sets forth information
concerning all awards outstanding under incentive plans of Kennady at the year ended December 31, 2016, including awards granted
before the more recently completed financial year, to each of the Named Executive Officers:
| |
|
Option-
Based Awards |
|
Share-Based
Awards |
| |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| |
|
|
|
|
|
|
|
|
|
|
|
|
|
Market or |
| |
|
|
|
|
|
|
|
|
|
|
|
|
|
Payout |
| |
|
|
|
|
|
|
|
|
|
|
|
|
|
Value of |
| |
|
|
|
|
|
|
|
|
|
|
|
|
|
Vested |
| |
|
|
|
|
|
|
|
|
|
Number of |
|
|
|
Share- |
| |
|
|
|
|
|
|
|
Value of |
|
Shares or |
|
Market or |
|
Based |
| |
|
Number of |
|
|
|
|
|
Unexercised |
|
Units of |
|
Payout Value |
|
Awards |
| |
|
Securities |
|
Option |
|
|
|
In-the- |
|
Shares That |
|
of Share-Based |
|
Not Paid |
| |
|
Underlying |
|
Exercise |
|
Option |
|
Money |
|
Have Not |
|
Awards That |
|
Out or |
| |
|
Unexercised |
|
Price |
|
Expiration |
|
Options(1) |
|
Vested |
|
Have Not |
|
Distributed |
| Name |
|
Options
(#) |
|
($) |
|
Date |
|
($) |
|
(#) |
|
Vested
($) |
|
($) |
Dr. Rory
Moore |
|
200,000 |
|
$3.30 |
|
April
5, 2026 |
|
$140,000 |
|
Nil |
|
Nil |
|
Nil |
| Patrick |
|
150,000 |
|
$3.61 |
|
March 12, 2025 |
|
$ 58,500 |
|
Nil |
|
Nil |
|
Nil |
| Evans(2) |
|
150,000 |
|
$4.10 |
|
February 13,
2024 |
|
Nil |
|
Nil |
|
Nil |
|
Nil |
| |
|
300,000 |
|
$1.27 |
|
November
7, 2022 |
|
$819,000 |
|
Nil |
|
Nil |
|
Nil |
| Bruce |
|
100,000 |
|
$2.81 |
|
January 12, 2026 |
|
$119,000 |
|
Nil |
|
Nil |
|
Nil |
| Ramsden |
|
50,000 |
|
$3.61 |
|
March 12, 2025 |
|
$19,500 |
|
Nil |
|
Nil |
|
Nil |
| |
|
50,000 |
|
$4.10 |
|
February 13,
2024 |
|
Nil |
|
Nil |
|
Nil |
|
Nil |
Notes:
| (1) | This
amount is calculated based on the difference between the market value of the securities
underlying the options at the end of the most recently completed financial year, which
is $4.00, and the exercise or base price of the option. |
| (2) | Mr. Evans
resigned on April 30, 2016. |
Incentive Plan Awards – Value Vested or Earned the financial
year ended December 31, 2016
The following table sets out the value of the
option-based awards that vested during the financial year ended December 31, 2016 for each Named Executive Officer. There were
no share-based awards or non-equity incentive plan compensation amounts:
| |
|
Option-Based Awards – |
| |
|
Value Vested |
| NEO Name |
|
during the Year(1) ($) |
| Dr. Rory Moore |
|
$140,000 |
| Patrick Evans(2) |
|
$Nil |
| Bruce Ramsden |
|
$Nil |
Notes:
| (1) | The value
of unexercised in-the-money options on date vested is based on the number of options
that became vested on the applicable date and is calculated based on the difference between
the market value of the Kennady Shares on the TSXV as at the date of vesting and the
exercise price of the option. Options granted during the year vested immediately and
the exercise price represented market value at the time of the grant (and vesting). |
| (2) | Mr. Evans
resigned on April 30, 2016. |
Long Term Equity Incentive Plan
On June 20, 2017, the shareholders of Kennady
approved the Kennady Long Term Equity Incentive Plan, which allows the Kennady Board, from time to time and in its sole discretion,
to determine the eligibility of those directors, employees and other persons who provide ongoing services to Kennady, who are eligible
to participate under the Kennady Long Term Equity Incentive Plan. The Kennady Board believes that stock options and restricted
stock units provide an effective tool for Kennady to enable it to attract and retain key personnel in the face of competition from
larger companies.
The Kennady Long Term Equity Incentive Plan
provides that the maximum number of shares that may be reserved for issuance will be 10% of Kennady’s issued and outstanding shares
at the time of the grant. As of May 16, 2017, there are 1,600,000 stock options and 199,999 restricted share units outstanding
representing 3.8% of the issued and outstanding Kennady Shares.
The material terms of the Kennady Long Term Equity Incentive Plan
are as follows:
| 1. | In no case, may the issuance of shares under the Kennady Long Term Equity Incentive Plan and any
other share compensation arrangement of Kennady result in: |
| (a) | the number of shares reserved for issuance: |
| (i) | to insiders exceeding 10% of Kennady’s issued and outstanding share capital; or |
| (ii) | to any one person exceeding 5% of Kennady’s issued and outstanding share capital; |
| (b) | the number of shares issued within a one year period: |
| (i) | to insiders exceeding 10% of Kennady’s issued and outstanding share capital; or |
| (ii) | to any one insider and its associates exceeding 5% of Kennady’s issued and outstanding share capital. |
| 2. | Subject to all applicable securities laws and regulations and the rules and policies of all applicable
regulatory authorities, the Kennady Board may attach terms and conditions to a grant of options under the Kennady Long Term Equity
Incentive Plan, provided, however, that if no specific determination is made by the Kennady Board with respect to any of the following
matters, each Option shall, subject to any other specific provisions of the Plan, contain the following terms and conditions: |
| (a) | subject to a minimum of $0.10 per Kennady Share, the option exercise price shall not be less than
the closing price of a Kennady Share on the Exchange (as such term is defined in the Kennady Long Term Equity Incentive Plan) immediately
preceding the day on which the Kennady Board grants and provides notice to the Exchange of the options(s), less the discount to
the closing price permitted by the Exchange; |
| (b) | except as provided in (c) below, or as determined by the Kennady Board, the options shall vest
in instalments, with 1/3 of such option exercisable in whole or in part on or after the first anniversary following the grant of
the option, and a further 1/3 vesting and becoming exercisable on each of the second and third anniversaries following the grant
of the option; and |
| (c) | options granted to consultants providing investor relations services shall vest at a minimum over
a period of 12 months with no more than 1/4 of such options vesting in any three (3) month period. |
| 3. | The expiry date of an option under the Kennady Long Term Equity Incentive Plan shall be the date
so fixed by the Kennady Board on the date of the grant, provided such expiry date shall be no later than the tenth anniversary
of the date of the grant. |
| 4. | Options issued under the Kennady Long Term Equity Incentive Plan may not be assigned or transferred
except to the legal personal representatives of a deceased optionee. |
| 5. | The Kennady Long Term Equity Incentive Plan provides for the cashless exercise of options in the
event of a bona fide offer (an “Offer”) for Kennady Shares made to holders of options, or to shareholders of Kennady
generally, or to a class of shareholders which includes the option holders, which Offer, if accepted in whole or in part, would
result in the offeror becoming a control person of Kennady, within the meaning given to “control person” in the Securities
Act, and all stock options will become vested and any optionee may surrender his or her options to Kennady and receive a payment
equal to: |
| (a) | if the Offer is a cash offer, the difference between the option price and the offer price under
the Offer; and |
| (b) | if the Offer is in securities of the offeror, a number of securities of the offeror based on the
difference between the Offer consideration and the option exercise price, multiplied by the number of Kennady Shares held under
option. |
If the Offer is not completed in the time and
manner specified in the Offer, or if the offeror does not take up all Kennady Shares tendered by the option holder, any Kennady
Shares issued upon exercise of stock options may be returned to Kennady and the stock options reinstated.
| 6. | The Kennady Board may from time to time amend the Kennady Long Term Equity Incentive Plan and the
terms and conditions of any option granted under the Kennady Long Term Equity Incentive Plan without obtaining shareholder approval
and, without limitation, may make amendments for the purpose of meeting any changes in any relevant law, rule or regulation applicable
to the Kennady Long Term Equity Incentive Plan, or for any other purpose which may be permitted by all relevant laws, regulations,
rules and policies provided that any such amendment shall not alter the terms or conditions of any option issued under the Kennady
Long Term Equity Incentive Plan or impair any right of any option holder pursuant to any option awarded prior to such amendment.
The Kennady Board’s discretion includes, without limitation, the authority to make amendments respecting administration of the
plan, to change the class of eligible persons under the plan, to substitute any option with another award of the same or a different
type, to adjust for any share consolidation or reclassification, to clarify any ambiguity, inconsistency or omission in the Kennady
Long Term Equity Incentive Plan and other amendments of a clerical or housekeeping nature, to alter the vesting or termination
provisions, and to modify the mechanics of exercise. |
| 7. | The exercise price of any outstanding stock option granted to any non-insiders of Kennady may not
be reduced unless shareholder approval is obtained. The exercise price of any outstanding stock option may not be reduced and the
original exercise period may not be extended to the benefit of insiders of Kennady unless disinterested shareholder approval is
obtained. |
Pension Plan Benefits
Kennady does not have any form of pension plan
that provides for payments or benefits to the Named Executive Officers at, following, or in connection with retirement. Kennady
does not have any form of deferred compensation plan.
Termination and Change of Control Benefits
Except as disclosed above under the
heading “Executive Compensation – Employment/Consulting Agreements of NEOs”, Kennady and its subsidiaries
do not have any contracts, agreements, plans or arrangements that provide for payments to a Named Executive Officer at, following,
or in connection with any termination (whether voluntary, involuntary or constructive), resignation, retirement, change in control
of Kennady, or change in a Named Executive Officer’s responsibilities.
Director Compensation
Director Compensation Table
The following table sets forth all
amounts of compensation provided to the directors, who are each not also a Named Executive Officer, for Kennady’s most recently
completed period from January 1, 2016 to December 31, 2016:
| |
|
|
|
Share- |
|
Option- |
|
Non-Equity |
|
|
|
|
|
|
| |
|
Fees |
|
Based |
|
Based |
|
Incentive Plan |
|
Pension |
|
All Other |
|
|
| Director |
|
Earned |
|
Awards |
|
Awards |
|
Compensation |
|
Value |
|
Compensation |
|
Total |
| Name(1) |
|
($) |
|
($) |
|
($) |
|
($) |
|
($) |
|
($) |
|
($) |
| Jonathan |
|
$15,000 |
|
Nil |
|
$415,950 |
|
Nil |
|
Nil |
|
Nil |
|
$425,950 |
| Comerford |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| Carl Verley(2) |
|
$2,500 |
|
Nil |
|
$277,300 |
|
Nil |
|
Nil |
|
Nil |
|
$287,300 |
| David |
|
$7,500 |
|
Nil |
|
$277,300 |
|
Nil |
|
Nil |
|
Nil |
|
$287,300 |
| Whittle(3) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| Robert |
|
$15,000 |
|
Nil |
|
$277,300 |
|
Nil |
|
Nil |
|
Nil |
|
$287,300 |
| Parsons |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| Claudia |
|
$15,000 |
|
Nil |
|
$230,100 |
|
Nil |
|
Nil |
|
Nil |
|
$245,100 |
| Tornquist(4) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| Dr. Tom |
|
$12,500 |
|
Nil |
|
$214,100 |
|
Nil |
|
Nil |
|
$31,100 |
|
$257,700 |
| McCandless(5) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Notes:
| (1) | This
table excludes the option-based awards to Rory Moore. This amount is included and discussed
under “Summary Compensation Table” above. |
| (2) | Mr.
Verley resigned as a director on February 29, 2016. |
| (3) | Mr.
Whittle resigned on June 21, 2016. |
| (4) | Ms.
Tornquist was appointed to the Kennady Board on January 1, 2016. |
| (5) | Dr.
McCandless was appointed to the Kennady Board on March 1, 2016. Dr. McCandless earned
$31,100 through MCC Geoscience Inc., a Company owned and controlled by Dr. McCandless. |
On January 13, 2016, the Kennady Board
of the Company approved that each of the Non-Executive Directors receive $15,000 per annum, effective January 1, 2016. The fees
have not been increased during 2017.
As stated previously in this Circular,
Kennady has a Kennady Long Term Equity Incentive Plan for the granting of incentive stock options and restricted share units to
the officers, employees, and directors. The purpose of granting such options or restricted share units is to assist Kennady in
compensating, attracting, retaining and motivating the directors of Kennady and to closely align the personal interests of such
persons to those of the shareholders. For further details about the Kennady Long Term Equity Incentive Plan, please refer to the
discussion above under the heading “Executive Compensation – Incentive Plan”.
Incentive Plan Awards – Outstanding Share-Based
Awards and Option-Based Awards
The following table sets forth information
concerning all awards outstanding under incentive plans of Kennady at the end of the most recently completed financial period,
from January 1, 2016 to December 31, 2016, including awards granted before the most recently completed financial year, to each
of the directors who are not Named Executive Officers:
| |
|
Option-Based
Awards |
|
Share-Based
Awards |
| |
|
|
|
|
|
|
|
|
|
|
|
Market
or |
|
Market
or |
| |
|
|
|
|
|
|
|
|
|
|
|
Payout |
|
Payout Value |
| |
|
|
|
|
|
|
|
|
|
Number of |
|
Value of |
|
of Vested |
| |
|
|
|
|
|
|
|
|
|
Shares or |
|
Share- |
|
Share-Based |
| |
|
Number of |
|
|
|
|
|
Value of |
|
Units of |
|
Based |
|
Awards Not |
| |
|
Securities |
|
|
|
|
|
Unexercised |
|
Shares |
|
Awards |
|
Paid Out
or |
| |
|
Underlying |
|
Option |
|
Option |
|
In-the-Money |
|
That Have |
|
That Have |
|
Distributed
($) |
| |
|
Unexercised |
|
Exercise |
|
Expiration |
|
Options(1) |
|
Not
Vested |
|
Not Vested |
|
|
| Name |
|
Options
(#) |
|
Price
($) |
|
Date |
|
($) |
|
(#) |
|
($) |
|
|
| Jonathan |
|
150,000 |
|
$3.61 |
|
March 12, 2025 |
|
$58,500 |
|
Nil |
|
Nil |
|
Nil |
| Comerford |
|
100,000 |
|
$1.27 |
|
November
8, 2022 |
|
$273,000 |
|
Nil |
|
Nil |
|
Nil |
| Robert |
|
100,000 |
|
$3.61 |
|
March 12, 2025 |
|
$39,000 |
|
|
|
|
|
|
| Parsons |
|
100,000 |
|
$4.74 |
|
March
9, 2024 |
|
Nil |
|
Nil |
|
Nil |
|
Nil |
| Claudia |
|
100,000 |
|
$3.00 |
|
December 31, |
|
$100,000 |
|
Nil |
|
Nil |
|
Nil |
| Tornquist |
|
|
|
|
|
2025 |
|
|
|
|
|
|
|
|
| Dr.
Tom |
|
85,000 |
|
$2.80 |
|
February 28, |
|
$102,000 |
|
Nil |
|
Nil |
|
Nil |
| McCandless |
|
|
|
|
|
2026 |
|
|
|
|
|
|
|
|
Notes:
| (1) | This
amount is calculated based on the difference between the market value of the securities
underlying the options at the end of the most recently completed financial year, which
is $4.00, and the exercise or base price of the option. |
Incentive Plan Awards – Value Vested or Earned
During The Year
The following table sets out the value
of the option-based awards that vested during the financial period from January 1, 2016 to December 31, 2016 for each non-executive
director. There were no share-based awards or non-equity incentive plan compensation amounts:
| |
|
Option-Based Awards – |
| Director
Name |
|
Value
Vested during the Year(1) ($) |
| Jonathan Comerford |
|
$Nil |
| Robert Parsons |
|
$Nil |
| Claudia Tornquist |
|
$100,000 |
| Dr. Tom McCandless |
|
$102,000 |
Notes:
| (1) | The
value of unexercised in-the-money options on the date vested is based on the number of
options that became vested on the applicable date and is calculated based on the difference
between the market value of the Kennady Shares on the TSXV as at the date of vesting
and the exercise price of the option. |
INDEBTEDNESS OF DIRECTORS AND EXECUTIVE OFFICERS
As at the date of this Circular, no
executive officer, director, employee or former executive officer, director or employee of Kennady or any of its subsidiaries is,
or at any time since the beginning of the most recently completed financial year, has any of them been, indebted to Kennady, or
any of its subsidiaries, nor is any of these individuals, or at any time since the beginning of the most recently completed financial
year, has any of them been, indebted to another entity which indebtedness is the subject of a guarantee, support agreement, letter
of credit or other similar arrangement or understanding provided by Kennady or any of its subsidiaries.
DISCLOSURE OF CORPORATE GOVERNANCE PRACTICES
Corporate Governance relates to the
activities of the Kennady Board. National Policy 58-201 – Corporate Governance Disclosure establishes corporate governance
guidelines which apply to Kennady. Corporate governance relates to activities of the Kennady Board, the members of which are elected
by and are accountable to the shareholders, and takes into account the role of the individual members of management who are appointed
by the Kennady Board and who are charged with the day-to-day management of Kennady. The Kennady Board is committed to sound corporate
governance practices that are in the interests of its shareholders and contribute to effective and efficient decision making. National
Instrument 58-101 – Disclosure of Corporate Governance Practices requires that each reporting company disclose its
corporate governance practices on an annual basis.
Kennady’s general approach to corporate governance is summarized
below.
Board of Directors
The Kennady Board is currently composed of five directors.
Independence
Section 1.4 of National Instrument
52-110 – Audit Committees (“NI 52-110”) sets out the standard for director independence. Under NI
52-110, a director is independent if he has no direct or indirect material relationship with Kennady. A material relationship is
a relationship which could, in the view of the Kennady Board, be reasonably expected to interfere with the exercise of a director’s
independent judgment. NI 52-110 also sets out certain situations where a director will automatically be considered to have a material
relationship with Kennady.
Applying the definition set out in
section 1.4 of NI 52-110, four of the five members of the Kennady Board are independent. The members who are independent are: Jonathan
Comerford, Claudia Tornquist, Dr. Tom McCandless and Robert Parsons.
Dr. Rory Moore is not independent by
virtue of the fact that he is an executive officer of Kennady (Mr. Moore has been the President and CEO since May 1, 2016).
In order to facilitate its exercise
of independent judgment in carrying out the responsibilities of the Kennady Board, the Kennady Board ensures that a majority of
independent directors sit on all Board committees.
Management Supervision by Board
The operations of Kennady do not support
a large board of directors, and the Kennady Board has determined that the current constitution of the Kennady Board is appropriate
for Kennady’s current stage of development. Independent supervision of management is accomplished through choosing management who
demonstrate a high level of integrity and ability and having strong independent board members. The independent directors are however
able to meet at any time without any members of management including the non-independent directors being present.
Other Directorships
In addition to their positions on the
Kennady Board, the following directors also serve as directors of the following reporting issuers or reporting issuer equivalents
as of the date of this Circular:
| Name of Director |
|
Reporting Issuer(s) or Equivalent(s) |
| Dr. Rory Moore |
|
N/A |
| Jonathan Comerford |
|
Mountain Province Diamonds Inc. |
| Dr. Tom McCandless |
|
N/A |
| Robert Parsons |
|
Indico Resources Ltd., Prism Resources Inc.; Pan Global Resources Inc. |
| Claudia Tornquist |
|
Dunnedin Ventures Inc., Silver One Resources Inc. |
Meetings of Directors
The Kennady Board meets as necessary in the
absence of management to ensure the Kennady Board’s functional independence from management. Kennady recognizes the desirability
of directors being able to consult outside professional advice, as appropriate, in the discharge of their duties.
The Kennady Board meets as necessary in the
absence of management to ensure the Kennady Board’s functional independence from management. Kennady recognizes the desirability
of directors being able to consult outside professional advice, as appropriate, in the discharge of their duties.
Since the beginning of Kennady’s most recently
completed financial year, the independent directors have not held a meeting at which non-independent directors were not in attendance.
The independent directors do not hold regularly scheduled meetings without non-independent directors and the Corporate Secretary
(who is also a member of senior management). Open and candid discussion among independent directors is encouraged, and the independent
directors are free to communicate with each other independent of the non-independent director and management as they feel is appropriate,
and by the means they consider appropriate.
Independence of Chair
Kennady’s corporate governance structure recognizes
the value of separating the offices of the Chair and the CEO. Dr. Rory Moore is Kennady’s President and Chief Executive Officer
and the Kennady Board is chaired by Jonathan Comerford, an independent director.
Attendance
The Kennady Board meets on a regularly scheduled
basis and more frequently if required. During the most recently completed period from January 1, 2016 to December 31, 2016, the
Kennady Board met nine times. All of the directors were in attendance at these meetings with the exception of Mr. Evans who attended
four meetings, Mr. Whittle who attended five meetings, Mr. Verley who attended two meetings, Dr. Moore who attended five meetings
and Dr. McCandless who attended seven meetings.
Board Mandate
The Kennady Board is required to supervise
the management of the business and affairs of Kennady and to act with a view to the best interests of Kennady and its shareholders.
The Kennady Board actively oversees the development, adoption and implementation of Kennady’s strategies and plans. The Kennady
Board’s responsibilities include:
| (a) | representing the interests of the shareholders in all significant decisions affecting Kennady and
ensuring that shareholders are kept informed of developments affecting Kennady; |
| (b) | Kennady’s strategic planning process, |
| (c) | the identification of the principal risks of Kennady’s business and ensuring the implementation
of appropriate systems to manage risk, |
| (d) | reviewing significant operational and financial issues as they arise and providing direction to
management of these matters |
| (e) | acting diligently to ensure that Kennady fulfils its legal and regulatory requirements |
| (f) | evaluating the effectiveness of senior management and establishing their compensation, |
| (g) | evaluating whether or not directors receive the information they require to perform their duties
as directors, |
| (h) | Kennady’s succession planning, including appointing, training and monitoring senior management, |
| (i) | Kennady’s major business development initiatives, |
| (j) | the integrity of Kennady’s internal control and management information systems, |
| (k) | Kennady’s policies for communicating with shareholders and others, and |
| (l) | the general review of Kennady’s results of operations. |
The Kennady Board considers certain decisions
to be of sufficient importance to Kennady and as such, requires management to seek the prior approval of the Kennady Board with
respect to these decisions. Such decisions include:
| (a) | approval of the annual capital budget and any material changes to the operating budget, |
| (b) | approval of Kennady’s business plan and monitoring performance, |
| (c) | acquisition of, or investments in, new business, |
| (d) | changes in the nature of Kennady’s business, |
| (e) | changes in senior management, and |
| (f) | all matters as required under the OBCA. |
Position Descriptions
The Kennady Board has not adopted a written
position description for the President and CEO, Dr. Rory Moore, on the basis that his role and responsibilities are well understood
by him and by the other directors. Furthermore, the duties and responsibilities of the President and CEO are defined in the employment
agreement between the President and CEO. These include the power and authority to manage, supervise and direct Kennady’s business
and affairs, and to undertake such other duties as may, from time to time, be assigned to the President and CEO by the Kennady
Board. Such duties and responsibilities are indicated to be subject always to the control and direction of the Kennady Board.
Orientation and Continuing Education
During the year ended December 31, 2016, Kennady
had three resignations from the Kennady Board and three new appointments, including the CEO. While Kennady does not have formal
orientation and training programs, orientation of new directors is conducted on an as-needed basis. New Board members are provided
with:
| · | information
respecting the functioning of the Kennady Board, committees and copies of Kennady’s corporate governance policies; |
| · | access
to recent, publicly filed documents of Kennady, technical reports and Kennady’s internal financial information; |
| · | access
to management and technical experts and consultants; and |
| · | a
summary of significant corporate and securities responsibilities. |
Board members are encouraged to communicate with management, auditors
and technical consultants; to keep themselves current with industry trends and developments and changes in legislation with management’s
assistance;
and to attend related industry seminars and
visit Kennady’s operations. Board members have full access to Kennady’s records.
Business Conduct Policy
The Kennady Board has adopted a written code of business conduct
and ethics.
Kennady regards maintaining a culture of ethical
business conduct and social responsibility as critically important. Management consistently strives to instill Kennady’s principles
into the practices and actions of Kennady’s management and staff. All known or suspected breaches of ethical business conduct are
required to be reported to the Chairman, President or Chief Financial Officer. All known or suspected instances of fraud are required
to be reported to the Audit Committee, which reports all complaints and allegations to the Kennady Board of Directors for investigation.
Kennady requires all directors, officers and
employees of Kennady to strive to avoid situations that create, have the potential to create, or create the appearance of, a conflict
of interest. A director or officer who has a material interest in any transaction or agreement that comes before the Kennady Board
for decision is required to disclose his or her interest to the Kennady Board members and to abstain from any vote taken on the
matter.
Nomination of Directors
During the year ended December 31, 2016 there
were three resignations from the Kennady Board. The newly-appointed directors to the board were nominated by the Corporate Governance
and Nominating Committee. The Kennady Board does not have a separate nominating committee. The Corporate Governance and Nominating
Committee assesses the performance and qualification of directors and assesses and recommends potential nominees to the Kennady
Board, as needed.
Assessments
The Kennady Board monitors the adequacy of
information given to directors, communication between the Kennady Board and management and the strategic direction and processes
of the Kennady Board and Committees.
Board Committees
Committees of the Kennady Board are an integral
part of Kennady’s governance structure. There are three standing committees: the Audit Committee, the Compensation Committee, and
the Corporate Governance and Nominating Committee. The committees were established to devote the necessary expertise and resources
to particular areas, and to enhance the quality of discussion at Board meetings. The committees facilitate effective board decision-making
by providing recommendations to the Kennady Board on matters within their respective responsibilities. The Kennady Board believes
that the committees assist in the effective functioning of the Kennady Board and that the composition of the committees should
ensure that the views of unrelated and independent directors are effectively represented.
Each of these committees is comprised solely
of non-management directors, each of whom is also independent. The committees, their mandates and memberships are outlined below.
Compensation Committee
The primary function of the Compensation Committee
is to assist the Kennady Board in fulfilling its oversight responsibilities with respect to: (i) human resources policies; and
(ii) executive compensation.
The Compensation
Committee, in consultation with the President of Kennady, reviews and recommends to the Kennady Board for approval all matters
relating to the compensation of executives of Kennady. The Compensation Committee has no formal compensation policy. The Compensation
Committee monitors the performance of senior management generally. Executive officers are compensated in a manner consistent with
their respective contributions to the overall benefit of Kennady.
Executive compensation is based on a combination
of factors, including a comparative review of information provided to the Compensation Committee by compensation consultants, recruitment
agencies and auditors as well as historical precedent.
On December 5, 2016 and on December 15, 2016,
the Compensation Committee met to consider 1) consulting annual compensation adjustments and on February 2, 2017, the Compensation
Committee met to consider 2) restricted stock unit grants to directors, officers and employees.
The Compensation Committee is composed of Jonathan
Comerford, Robert Parsons and Dr. Tom McCandless (Chair), all of whom are independent directors.
Corporate Governance and Nominating Committee
The Corporate Governance and Nominating Committee
has been constituted to assist the Kennady Board in fulfilling its oversight responsibilities in relation to the corporate governance
practices and policies of Kennady, including the mandate, size and composition of the Kennady Board and its committees, and assessing
the effectiveness of the Kennady Board, its members and the committees of the Kennady Board. During the period from January 1,
2016 to December 31, 2016, the Corporate Governance and Nominating Committee met once. The Corporate Governance and Nominating
Committee is composed of Jonathan Comerford, Robert Parsons and Claudia Tornquist (Chair), all of whom are independent directors.
Audit Committee
Audit Committee Charter
The text of Kennady’s Audit Committee Charter
is attached as Appendix “A” to this Schedule “K” - “Information Concerning Kennady”.
The Audit Committee meets with the independent
auditors to review and inquire into matters affecting financial reporting matters, the system of internal accounting and financial
controls and procedures, and the audit procedures and audit plans. The Audit Committee also recommends to the Kennady Board the
auditors to be appointed. In addition, the Audit Committee reviews and recommends to the Kennady Board for approval the annual
financial statements, the annual report and certain other documents required by regulatory authorities. During the period from
January 1, 2016 to December 31, 2016, the Audit Committee met four times.
Composition of the Audit Committee
As of the date hereof, the Audit Committee
is composed of Jonathan Comerford, Robert Parsons (Chair) and Claudia Tornquist, all of whom are independent directors. All of
the members of the Audit Committee are financially literate within the meaning of Section 1.6 of NI 52-110.
Relevant Education and Experience
Robert Parsons, Chair of the Audit Committee,
is a Canadian-qualified Chartered Accountant. Mr. Parsons graduated with a B. Com. from McGill University in 1968, qualified as
a Chartered Accountant in 1970, worked 34 years at PwC where he was a partner, and subsequent to retiring from PwC in 2002 has
provided financial advisory services to clients in both the public and private sectors.
Jonathan Comerford has a Master’s in Business
from the Michael Smurfit Business School and a Bachelor of Economics from University College, Dublin, and serves as Investment
Manager at International Investment and Underwriting.
Claudia Tornquist has a Master’s in Business
Administration from INSEAD and a Masters in Engineering from the Technical University Munich. She worked as General Manager Business
Evaluation for Rio Tinto and as Executive Vice President Business Development for Sandstorm Gold and her experience includes project
and financial evaluation, M&A and financing.
Pre-Approval Policies and Procedures
The Audit Committee pre- approves all audit
services to be provided to Kennady by its independent auditors. The Audit Committee’s policy regarding the pre-approval of non-audit
services to be provided to Kennady by its independent auditors is that all such services shall be pre-approved by the Audit Committee.
Non-audit services that are prohibited to be provided to Kennady by its independent auditors may not be pre-approved. In addition,
prior to the granting of any pre-approval, the Audit Committee must be satisfied that the performance of the services in question
will not compromise the independence of the independent auditors. Since the enactment of the Sarbanes-Oxley Act of 2002, all non-audit
services, performed by Kennady’s auditor, for the fiscal year ended December 31, 2016, have been pre-approved by the Audit Committee
of Kennady. No non-audit services were approved pursuant to the de minimis exemption to the pre-approval requirement.
Audit Fees
“Audit fees” are the aggregate fees
billed by KPMG LLP for the audit of Kennady’s audited financial statements, attestation services provided in connection with statutory
and regulatory filings or engagements, services associated with registration statements, prospectuses, periodic reports and other
documents filed with securities regulatory bodies and stock exchanges and other documents issued in connection with securities
offerings and admissions to trading, and assistance in responding to comment letters from securities regulatory bodies, and consultations
with Kennady’s management as to accounting or disclosure treatment of transactions or events and/or the actual or potential impact
of final or proposed rules, standards or interpretations by the securities regulatory authorities, accounting standard setting
bodies, or other regulatory or standard setting bodies.
Aggregate audit fees billed in fiscal December
31, 2016 by KPMG LLP were $36,000. Aggregate audit fees billed in the fiscal December 31, 2015 by KPMG LLP were $36,000. All such
fees were approved by the Audit Committee of Kennady.
Audit-Related Fees
“Audit-related fees” are fees that
are or would be charged by KPMG LLP for presentations or training on accounting or regulatory pronouncements including IFRS, due
diligence services related to accounting and tax matters in connection with potential acquisitions/dispositions, advice and documentation
assistance with respect to internal controls over financial reporting and disclosure controls and procedures of Kennady, and if
applicable, audits of financial statements of a company’s employee benefit plan.
Audit-related fees charged by KPMG LLP during
the fiscal period ended December 31, 2016 were nil and Kennady had no audit-related fees for the fiscal year ended December 31,
2015.
Tax Fees
“Tax fees” are fees for professional
services rendered by KPMG LLP for tax compliance, and tax advice on actual or contemplated transactions. Tax fees charged by KPMG
LLP during the fiscal period ended December 31, 2016 were $4,004 and $4,195 for the fiscal year ending December 31, 2015.
All Other Fees
In the fiscal year ending December 31, 2016,
aggregate fees billed by KPMG were nil for advice and in the fiscal year ending December 31, 2015, the aggregate fees billed by
KPMG were nil.
CONFLICTS OF INTEREST
There are potential conflicts of interest to
which the directors and officers of Kennady may be subject in connection with the operations of Kennady. Some of the directors
and officers are engaged and will continue to be engaged, directly or indirectly, in other businesses and situations may arise
where some of the directors and officers will be in direct competition with Kennady. Except as otherwise disclosed in this Circular,
no conflicts of interest currently exist between Kennady and a director or officer of Kennady.
LEGAL PROCEEDINGS OR REGULATORY ACTIONS
Kennady is not or was not a party to any legal
proceedings or regulatory actions, since the beginning of the most recently completed financial year, and is not aware of any such
proceedings or actions known to be contemplated.
INTEREST OF MANAGEMENT AND OTHERS IN MATERIAL TRANSACTIONS
Other than otherwise disclosed in this Circular,
no director or executive officer of Kennady, or shareholder who beneficially owns, or controls or directs, directly or indirectly,
more than 10% of the outstanding Kennady Shares, or any known associates or affiliates of such persons, has or has had any material
interest, direct or indirect, in any transaction or in any proposed transaction that has materially affected or is reasonably expected
to materially affect Kennady.
AUDITOR, TRANSFER AGENT AND REGISTRAR
The auditor of Kennady is KPMG LLP, Chartered
Accountants, a partnership of Chartered Professional Accountants, located at Bay Adelaide Centre, 333 Bay Street, Suite 4600, Toronto,
Ontario, Canada, M5H 2S5. KPMG LLP has been the auditor of Kennady since November 26, 2012.
Kennady’s transfer agent and registrar for
the Kennady Shares is Computershare Investor Services Inc., located at 100 University Avenue, 9th Floor, Toronto, Ontario, Canada
M5J 2Y1. Kennady’s securities register and register of transfers are maintained in the Toronto offices of Computershare Investor
Services Inc.
MATERIAL CONTRACTS
Except for the Arrangement Agreement, the Mountain
Province Voting and Support Agreements (see under the heading “The Voting and Support Agreements – Mountain Province
Voting and Support Agreements” in this Circular) and contracts entered into by Kennady in the ordinary course of business,
the Kennady has no other material contracts entered into that are still in effect.
INTERESTS OF EXPERTS
Kennady’s independent auditors, KPMG LLP, have
confirmed that they are independent with respect to Kennady within the meaning of the relevant rules and related interpretations
prescribed by the relevant professional bodies in Canada and any applicable legislation or regulations, and also that they are
independent accountants with respect to Kennady under all relevant United States profession and regulatory standards.
Gary Vivian M.Sc., P.Geol. and Dr. Tom Nowicki,
P.Geo. are the co-authors Kennady’s technical report titled “2017 Technical Report – Project Exploration Update and
Faraday Inferred Mineral Resource Estimate - Kennady North Project - Northwest Territories, Canada”. To the knowledge of Kennady,
neither Mr. Vivian nor Mr. Nowicki has a beneficial interest in the securities or assets of Kennady. To the knowledge of Kennady,
each of Mr. Vivian and Mr. Nowicki are a “qualified person” as such term is defined in NI 43-101.
None of
the foregoing experts, nor any partner, employee or consultant of such an expert who participated in and who was in a
position to directly influence the preparation of the applicable statement, report or valuation, has, has received or is
expected to receive, registered or beneficial interests, direct or indirect, in Kennady Shares or other property of Kennady
or any of its associates or affiliates, representing 1% or more of the outstanding Kennady Shares.
OTHER MATERIAL FACTS
There are no other material facts other than
as disclosed herein that are necessary to be disclosed in order for this Schedule “K” – “Information Concerning
Kennady”, read in conjunction with the Circular, to contain full, true and plain disclosure of all material facts relating
to the Kennady Shares.
APPENDIX “A”
TO SCHEDULE “K”
Kennady Diamonds Inc.
Charter of the
Audit Committee of the Board of Directors
Mandate
The Audit Committee (the “Committee”)
is a committee of the Board of Directors (the “Board”) of Kennady Diamonds Inc. (“KDI” or the
“Corporation”) established for the purpose of overseeing the accounting and financial reporting process of KDI
and external audits of the consolidated financial statements of KDI. In connection therewith, the Committee assists the Board in
fulfilling its oversight responsibilities in relation to KDI’s internal accounting standards and practices, financial information,
accounting systems and procedures, financial reporting and statements and the nature and scope of the annual external audit. The
Committee also recommends for Board approval KDI’s audited annual financial statements and other mandatory financial disclosure.
KDI’s external auditor is accountable
to the Board and the Committee as representatives of shareholders of KDI. The Committee shall be directly responsible for overseeing
the relationship of the external auditor. The Committee shall have such access to the external auditor as it considers necessary
or desirable in order to perform its duties and responsibilities. The external auditor shall report directly to the Committee.
The objectives of the Committee are
as follows:
| 1. | to be satisfied with the credibility and integrity of financial reports; |
| 2. | to support the Board in meeting its oversight responsibilities in respect of the preparation and
disclosure of financial reporting, including the consolidated financial statements of KDI; |
| 3. | to facilitate communication between the Board and the external auditor and to receive all reports
of the external auditor directly from the external auditor; |
| 4. | to be satisfied with the external auditor’s independence and objectivity; and |
| 5. | to strengthen the role of independent directors by facilitating in-depth discussions between members
of the Committee, management and KDI’s external auditor. |
| 1. | The Committee shall comprise at least three directors, none of whom shall be an officer or employee
of KDI or any of its subsidiaries or any affiliate thereof. Each Committee member shall satisfy the independence, financial literacy
and experience requirements of applicable securities laws, rules or guidelines, any applicable stock exchange requirements or guidelines
and any other applicable regulatory rules. In particular, each member of the Committee shall have no direct or indirect material
relationship with KDI or any affiliate thereof which could reasonably interfere with the exercise of the member’s independent judgment.
Determinations as to whether a particular director satisfies the requirements for membership on the Committee shall be made by
the full Board. |
| 2. | Members of the Committee shall be appointed by the Board. Each member shall serve until his successor
is appointed, unless he shall resign or be removed by the Board or he shall otherwise cease to be a director of KDI. |
| 3. | The Chair of the Committee may be designated by the Board or, if it does not do so, the members
of the Committee may elect a Chair by vote of a majority of the full Committee membership. The Committee Chair shall satisfy the
independence, financial literacy and experience requirements as described above. |
| 4. | The Committee shall have access to such officers and employees of KDI and to such information respecting
KDI as it considers necessary or advisable in order to perform its duties and responsibilities. |
| 1. | At all meetings of the Committee, every question shall be decided by a majority of the votes cast.
In case of an equality of votes, the matter will be referred to the Board for decision. |
| 2. | A quorum for meetings of the Committee shall be a majority of its members. |
| 3. | Meetings of the Committee shall be scheduled at least quarterly and at such other times during
each year as it deems appropriate. Minutes of all meetings of the Committee shall be taken. The CFO shall attend meetings of the
Committee, unless otherwise excused from all or part of any such meeting by the Committee Chair. The Chair of the Committee shall
hold in camera sessions of the Committee, without management present, at each meeting, as determined necessary. |
| 4. | The Committee shall report the results of meetings and reviews undertaken and any associated recommendations
to the Board. |
| 5. | The Committee shall meet periodically with KDI’s external auditor in connection with the preparation
of the annual financial statements and otherwise as the Committee may determine, part or all of each such meeting to be in the
absence of management. |
Responsibilities
As discussed above, the Committee is established
to assist the Board in fulfilling its oversight responsibilities with respect to the accounting and financial reporting processes
of KDI and external audits of KDI’s financial statements. In that regard, the Committee shall:
| 1. | satisfy itself on behalf of the Board with respect to KDI’s internal control systems including
identifying, monitoring and mitigating business risks as well as compliance with legal, ethical and regulatory requirements. The
Committee shall also review with management, the external auditor and, if necessary, legal counsel, any litigation, claim or other
contingency (including tax |
assessments) that could have a material effect on the
financial position or operating results of KDI, and the manner in which these matters may be, or have been, disclosed in the financial
statements;
| 2. | review with management and the external auditor the annual financial statements of KDI, the reports
of the external auditor thereon and related financial reporting, including Management’s Discussion and Analysis and any earnings
press releases, (collectively, “Annual Financial Disclosures”) prior to their submission to the Board for approval.
This process should include, but not be limited to: |
| (a) | reviewing changes in accounting principles, or in their application, which may have a material
impact on the current or future year’s financial statements; |
| (b) | reviewing significant accruals, reserves or other estimates; |
| (c) | reviewing accounting treatment of unusual or non-recurring transactions; |
| (d) | reviewing the adequacy of any reclamation fund; |
| (e) | reviewing disclosure requirements for commitments and contingencies; |
| (f) | reviewing financial statements and all items raised by the external auditor, whether or not included
in the financial statements; and |
| (g) | reviewing unresolved differences between KDI and the external auditor. |
Following such review, the Committee shall recommend to
the Board for approval all Annual Financial Disclosures;
| 3. | review with management all interim financial statements of KDI and related financial reporting,
including Management’s Discussion and Analysis and any earnings press releases, (collectively “Quarterly Financial Disclosures”)
and, if thought fit, approve all Quarterly Financial Disclosures; |
| 4. | be satisfied that adequate procedures are in place for the review of KDI’s public disclosure of
financial information extracted or derived from KDI’s financial statements, other than Annual Financial Disclosures or Quarterly
Financial Disclosures, and shall periodically assess the adequacy of those procedures; |
| 5. | review with management and recommend to the Board for approval, any financial statements of KDI
which have not previously been approved by the Board and which are to be included in a prospectus of KDI; |
| 6. | review with management and recommend to the Board for approval, KDI’s Annual Information Form; |
| 7. | with respect to the external auditor: |
| (a) | receive all reports of the external auditor directly from the external auditor; |
| (b) | discuss with the external auditor; |
| (i) | critical accounting policies; |
| (ii) | alternative treatments of financial information within IRFS discussed with management (including
the ramifications thereof and the treatment preferred by the external auditor); and |
| (iii) | other material, written communication between management and the external auditor; |
| (c) | consider and make a recommendation to the Board as to the appointment or re-appointment of the
external auditor, being satisfied that such auditor is a participant in good standing pursuant to applicable securities laws; |
| (d) | review the terms of engagement of the external auditor, including the appropriateness and reasonableness
of the auditor’s fees and make a recommendation to the Board as to the compensation of the external auditor; |
| (e) | when there is to be a replacement of the external auditor, review with management the reasons for
such replacement and the information to be included in any required notice to securities regulators and recommend to the Board
for approval the replacement of the external auditor along with the content of any such notice; |
| (f) | oversee the work of the external auditor in performing its audit or review services and oversee
the resolution of any disagreements between management and the external auditor; |
| (g) | review and discuss with the external auditor all significant relationships that the external auditor
and its affiliates have with KDI and its affiliates in order to determine the external auditor’s independence, including, without
limitation: |
| (i) | requesting, receiving and reviewing, on a periodic basis, written or oral information from the
external auditor delineating all relationships that may reasonably be thought to bear on the independence of the external auditor
with respect to KDI; |
| (ii) | discussing with the external auditor any disclosed relationships or services that the external
auditor believes may affect the objectivity and independence of the external auditor; and |
| (iii) | recommending that the Board take appropriate action in response to the external auditor’s information
to satisfy itself of the external auditor’s independence; |
| (h) | as may be required by applicable securities laws, rules and guidelines, either: |
| (i) | pre-approve all non-audit services to be provided by the external auditor to KDI (and its subsidiaries,
if any), or, in the case of de minimus non-audit services, approve such non-audit services prior to the completion of the audit;
or |
| (ii) | adopt specific policies and procedures for the engagement of the external auditor for the purposes
of the provision of non-audit services; |
| (i) | review and approve the hiring policies of KDI regarding partners, employees and former partners
and employees of the present and former external auditor of KDI; |
| 8. | (a) | establish procedures for: |
| (i) | the receipt, retention and treatment of complaints received by KDI regarding accounting, internal
accounting controls or auditing matters; and |
| (ii) | the confidential, anonymous submission by employees of KDI of concerns regarding questionable accounting
or auditing matters; and |
| (b) | review with the external auditor its assessment of its written reports containing recommendations
for improvement, and KDI’s response and follow-up to any identified weaknesses; |
| 9. | with respect to risk management, be satisfied that KDI has implemented appropriate systems of internal
control over financial reporting (and review management’s assessment thereof) to ensure compliance with any applicable legal and
regulatory requirements; |
| 10. | review annually with management and the external auditor and report to the Board on insurable risks
and insurance coverage; and |
| 11. | engage independent counsel and other advisors as it determines necessary to carry out its duties
and set and pay the compensation for any such advisors. |
SCHEDULE “L”
FINANCIAL STATEMENTS OF KENNADY
See attached.
SCHEDULE “L”
FINANCIAL STATEMENTS OF KENNADY
Table of Contents
| Audited annual financial statements of Kennady for the years ended December 31, 2016 and 2015, together with the notes thereto and the auditor’s report thereon |
L-3 |
| |
|
| Unaudited condensed interim financial statements of Kennady for the three and nine month period ended September 30, 2017 |
L-30 |
| |
Financial Statements
(Expressed in Canadian Dollars) |
| |
|
| |
KENNADY DIAMONDS INC. |
| |
|
| |
For the years ended December 31, 2016 and 2015
|
KENNADY DIAMONDS INC.
| CONTENTS |
Page |
| |
|
| Responsibility for Financial Statements |
5 |
| |
|
| Independent Auditors’ Report |
6 |
| |
|
| Statements of Financial Position |
8 |
| |
|
| Statements of Comprehensive Loss |
9 |
| |
|
| Statements of Equity |
10 |
| |
|
| Statements of Cash Flows |
11 |
| |
|
| Notes to the Financial Statements |
12 – 29 |
KENNADY DIAMONDS INC.
RESPONSIBILITY FOR FINANCIAL STATEMENTS
The accompanying financial statements of
Kennady Diamonds Inc. (“Kennady Diamonds” or the “Company”) are the responsibility of the Board of Directors.
The financial statements have been prepared
by management, on behalf of the Board of Directors, in accordance with the accounting policies disclosed in the notes to these
financial statements. Where necessary, management has made informed judgments and estimates in accounting for transactions which
were not complete at the balance sheet date. In the opinion of management, the financial statements have been prepared in accordance
with International Financial Reporting Standards (“IFRS”) as issued by the International Accounting Standards Board
(“IASB”) appropriate in the circumstances.
Management has established processes, which
are in place to provide sufficient knowledge to support management representations that it has exercised reasonable diligence that
the financial statements fairly present in all material respects the financial condition, results of operations and cash flows
of the Company, as of the date of and for the periods presented by the financial statements.
The Board of Directors is responsible for
reviewing and approving the financial statements together with other financial information of the Company and for ensuring that
management fulfills its financial reporting responsibilities. The Audit Committee assists the Board of Directors in fulfilling
this responsibility.
The Audit Committee meets with management
to review the financial reporting process and financial statements together with other financial information of the Company. The
Audit Committee reports its findings to the Board of Directors for its consideration in approving the financial statements together
with other financial information of the Company for issuance to the shareholders.
Management recognizes its responsibility
for conducting the Company’s affairs in compliance with IFRS as issued by the IASB, and applicable laws and regulations,
and for maintaining proper standards of conduct for its activities.
| “Rory Moore” |
“Bruce Ramsden” |
| Rory Moore |
Bruce Ramsden |
| President and Chief Executive Officer |
VP Finance and Chief Financial Officer |
Toronto, Canada
April 6, 2017
KENNADY DIAMONDS INC.
INDEPENDENT AUDITORS’ REPORT
To the Shareholders of Kennady Diamonds
Inc.
We have audited the accompanying financial
statements of Kennady Diamonds Inc. (the “Company”), which comprise the statements of financial position as at December
31, 2016 and December 31, 2015, the statements of comprehensive loss, equity and cash flows for the years then ended, and notes,
comprising a summary of significant accounting policies and other explanatory information.
Management’s Responsibility for
the Financial Statements
Management is responsible for the preparation
and fair presentation of these financial statements in accordance with International Financial Reporting Standards, and for such
internal control as management determines is necessary to enable the preparation of financial statements that are free from material
misstatement, whether due to fraud or error.
Auditors’ Responsibility
Our responsibility is to express an opinion
on these financial statements based on our audits. We conducted our audits in accordance with Canadian generally accepted auditing
standards. Those standards require that we comply with ethical requirements and plan and perform the audit to obtain reasonable
assurance about whether the financial statements are free from material misstatement.
An audit involves performing procedures
to obtain audit evidence about the amounts and disclosures in the financial statements. The procedures selected depend on our judgment,
including the assessment of the risks of material misstatement of the financial statements, whether due to fraud or error. In making
those risk assessments, we consider internal control relevant to the entity’s preparation and fair presentation of the consolidated
financial statements in order to design audit procedures that are appropriate in the circumstances, but not for the purpose of
expressing an opinion on the effectiveness of the entity’s internal control. An audit also includes evaluating the appropriateness
of accounting policies used and the reasonableness of accounting estimates made by management, as well as evaluating the overall
presentation of the consolidated financial statements.
We believe that the audit evidence we have
obtained in our audits is sufficient and appropriate to provide a basis for our audit opinion.
Opinion
In our opinion, the financial statements
present fairly, in all material respects, the financial position of Kennady Diamonds Inc. as at December 31, 2016 and December
31, 2015, and its financial performance and its cash flows for the years then ended in accordance with International Financial
Reporting Standards.
KENNADY DIAMONDS INC.
Emphasis of Matter
Without modifying our opinion, we draw attention to Note 1 in
the financial statements, which describes that Kennady Diamonds Inc. expects to require additional capital resources to meet planned
expenditures within the next 12 months, and there is no assurance that adequate financing will be available to meet these planned
expenditures. These conditions, along with other matters, as set forth in Note 1 in the financial statements, indicate the existence
of a material uncertainty that may cast significant doubt about the Company’s ability to continue as a going
concern.
Chartered Professional Accountants, Licensed Public Accountants
April 6, 2017
Toronto, Canada
KENNADY DIAMONDS INC.
Statements of Financial Position
In Canadian dollars
| |
Notes |
|
December 31, 2016 |
|
|
December 31, 2015 |
|
| |
|
|
|
|
|
|
|
| ASSETS |
|
|
|
|
|
|
|
| Current assets |
|
|
|
|
|
|
|
| Cash |
4 |
$ |
8,286,064 |
|
$ |
41,068,805 |
|
| Amounts receivable |
4 |
|
322,383 |
|
|
533,453 |
|
| Prepaid expenses |
5 |
|
46,910 |
|
|
228,925 |
|
| |
|
|
8,655,357 |
|
|
41,831,183 |
|
| |
|
|
|
|
|
|
|
| Reclamation deposit |
6 |
|
295,000 |
|
|
295,000 |
|
| Equipment |
7 |
|
1,670,305 |
|
|
1,683,305 |
|
| Mineral properties |
8 |
|
603,305 |
|
|
481,423 |
|
| |
|
|
|
|
|
|
|
| Total assets |
|
$ |
11,223,967 |
|
$ |
44,290,911 |
|
| |
|
|
|
|
|
|
|
| LIABILITIES AND SHAREHOLDERS’ EQUITY |
|
|
|
|
|
|
|
| Current liabilities |
|
|
|
|
|
|
|
| Accounts payable and accrued liabilities |
4 |
$ |
839,893 |
|
$ |
1,103,900 |
|
| Deferred premium on flow-through shares |
9,
11(ii) |
|
- |
|
|
335,748 |
|
| |
|
|
839,893 |
|
|
1,439,648 |
|
| |
|
|
|
|
|
|
|
| Decommissioning and restoration liability |
10 |
|
170,663 |
|
|
247,568 |
|
| |
|
|
|
|
|
|
|
| Shareholders’ equity: |
|
|
|
|
|
|
|
| Share capital |
11 |
|
96,009,406 |
|
|
95,269,951 |
|
| Share-based payments reserve |
11 |
|
4,842,489 |
|
|
3,806,954 |
|
| Deficit |
|
|
(90,638,484 |
) |
|
(56,473,210 |
) |
| Total shareholders’ equity |
|
|
10,213,411 |
|
|
42,603,695 |
|
| |
|
|
|
|
|
|
|
| Total liabilities and shareholders’ equity |
|
$ |
11,223,967 |
|
$ |
44,290,911 |
|
| |
|
|
|
|
|
|
|
| Going concern |
1 |
|
|
|
|
|
|
| Subsequent events |
11 (iv) |
|
|
|
|
|
|
The notes to the financial statements are an integral part
of these statements.
On behalf of the Board:
| “Rory Moore” |
|
“Jonathan Comerford” |
|
| Director |
|
Director |
|
KENNADY DIAMONDS INC.
Statements of Comprehensive Loss
In Canadian dollars
| |
|
|
Year ended |
|
|
Year ended |
|
| |
Notes |
|
December 31, 2016 |
|
|
December 31, 2015 |
|
| Expenses |
|
|
|
|
|
|
|
| Exploration and evaluation expenses |
13 |
$ |
(31,806,615 |
) |
$ |
(28,620,904 |
) |
| Management fees |
12 |
|
(90,000 |
) |
|
(90,000 |
) |
| Share-based payment expense |
11, 12 |
|
(1,357,290 |
) |
|
(1,902,694 |
) |
| Professional fees |
|
|
(75,977 |
) |
|
(73,949 |
) |
| Promotion and investor relations |
|
|
(81,520 |
) |
|
(101,462 |
) |
| Director fees |
|
|
(72,042 |
) |
|
(40,644 |
) |
| Transfer agent & regulatory fees |
|
|
(87,308 |
) |
|
(78,362 |
) |
| Consulting fees and payroll |
|
|
(953,055 |
) |
|
(552,846 |
) |
| Office expenses |
|
|
(76,941 |
) |
|
(48,316 |
) |
| Travel expenses |
|
|
(71,458 |
) |
|
(16,099 |
) |
| Depreciation |
7 |
|
(13,000 |
) |
|
(10,833 |
) |
| Total expenses |
|
|
(34,685,206 |
) |
|
(31,536,109 |
) |
| |
|
|
|
|
|
|
|
| Accretion expense on decommissioning and restoration liability |
10 |
|
(1,213 |
) |
|
(1,484 |
) |
| Interest income |
|
|
185,397 |
|
|
101,787 |
|
| Other income - flow through shares |
9 |
|
335,748 |
|
|
1,634,855 |
|
| |
|
|
|
|
|
|
|
| Net loss and comprehensive loss for the year |
|
$ |
(34,165,274 |
) |
$ |
(29,800,951 |
) |
| |
|
|
|
|
|
|
|
| Basic and diluted loss per share |
11 (iii) |
$ |
(0.73 |
) |
$ |
(0.92 |
) |
| |
|
|
|
|
|
|
|
| Weighted average number of shares outstanding |
|
|
47,069,893 |
|
|
32,390,279 |
|
The notes to the financial statements are an integral part
of these statements.
KENNADY DIAMONDS INC.
Statements of Equity
In Canadian dollars
| | |
| | |
| | |
| | |
Share-based | | |
| | |
| |
| | |
Notes | | |
Number
of shares | | |
Share
capital | | |
payments
reserve | | |
Deficit | | |
Total | |
| Balance, January 1, 2015 | |
| | | |
| 23,627,175 | | |
$ | 26,969,543 | | |
$ | 1,904,260 | | |
$ | (26,672,259 | ) | |
$ | 2,201,544 | |
| Net loss for the year | |
| | | |
| - | | |
| - | | |
| - | | |
| (29,800,951 | ) | |
| (29,800,951 | ) |
| Issuance of common shares -
private placement | |
| 11 | | |
| 23,279,795 | | |
| 68,789,072 | | |
| - | | |
| - | | |
| 68,789,072 | |
| Share issue costs | |
| | | |
| - | | |
| (488,664 | ) | |
| - | | |
| - | | |
| (488,664 | ) |
| Share-based
payment expense | |
| 11 | | |
| - | | |
| - | | |
| 1,902,694 | | |
| - | | |
| 1,902,694 | |
| Balance, December 31, 2015 | |
| | | |
| 46,906,970 | | |
$ | 95,269,951 | | |
$ | 3,806,954 | | |
$ | (56,473,210 | ) | |
$ | 42,603,695 | |
| Net loss for the year | |
| | | |
| - | | |
| - | | |
| - | | |
| (34,165,274 | ) | |
| (34,165,274 | ) |
| Issuance of common shares - exercise
of options | |
| 11 | | |
| 275,000 | | |
| 417,700 | | |
| - | | |
| - | | |
| 417,700 | |
| Fair value of options exercised from share-based
payments reserve | |
| | | |
| - | | |
| 321,755 | | |
| (321,755 | ) | |
| - | | |
| - | |
| Share-based
payment expense | |
| | | |
| - | | |
| - | | |
| 1,357,290 | | |
| - | | |
| 1,357,290 | |
| Balance, December 31, 2016 | |
| | | |
| 47,181,970 | | |
$ | 96,009,406 | | |
$ | 4,842,489 | | |
$ | (90,638,484 | ) | |
$ | 10,213,411 | |
The notes to the financial statements are an integral part
of these statements.
KENNADY DIAMONDS INC.
Statements of Cash Flows
In Canadian dollars
| | |
Notes | |
Year ended
December 31, 2016 | | |
Year ended
December 31, 2015 | |
| Cash provided by (used in): | |
| |
| | | |
| | |
| Operating activities: | |
| |
| | | |
| | |
| Net loss for the year | |
| |
$ | (34,165,274 | ) | |
$ | (29,800,951 | ) |
| Adjustments: | |
| |
| | | |
| | |
| Accretion expense on decomminissioning and restoration liability | |
| |
| 1,213 | | |
| 1,484 | |
| Depreciation | |
| |
| 13,000 | | |
| 10,833 | |
| Interest income | |
| |
| (185,397 | ) | |
| (101,787 | ) |
| Other income - flow-through premium | |
| |
| (335,748 | ) | |
| (1,634,855 | ) |
| Share-based payment expense | |
| |
| 1,357,290 | | |
| 1,902,694 | |
| Changes in non-cash operating working capital: | |
| |
| | | |
| | |
| Amounts receivable | |
| |
| 211,070 | | |
| (266,758 | ) |
| Prepaid expenses | |
| |
| 182,015 | | |
| 797,737 | |
| Accounts payable and accrued liabilities | |
| |
| (264,007 | ) | |
| (1,058,822 | ) |
| | |
| |
| (33,185,838 | ) | |
| (30,150,425 | ) |
| Investing activities: | |
| |
| | | |
| | |
| Interest income | |
| |
| 185,397 | | |
| 101,787 | |
| Reclamation refund | |
| |
| - | | |
| 30,000 | |
| Mineral properties | |
| |
| (200,000 | ) | |
| - | |
| Purchase of equipment | |
| |
| - | | |
| (1,694,138 | ) |
| Redeemption of short-term investments | |
| |
| - | | |
| 2,002,762 | |
| | |
| |
| (14,603 | ) | |
| 440,411 | |
| Financing activities: | |
| |
| | | |
| | |
| Proceeds from option exercises | |
11 | |
| 417,700 | | |
| - | |
| Issuance of shares, net of share issue costs | |
11 | |
| - | | |
| 70,271,011 | |
| | |
| |
| 417,700 | | |
| 70,271,011 | |
| | |
| |
| | | |
| | |
| (Decrease) increase in cash | |
| |
| (32,782,741 | ) | |
| 40,560,997 | |
| Cash, beginning of year | |
| |
| 41,068,805 | | |
| 507,808 | |
| Cash, end of year | |
| |
$ | 8,286,064 | | |
$ | 41,068,805 | |
The notes to the financial statements are an integral part
of these statements.
KENNADY DIAMONDS INC.
Notes to Financial Statements
For the Years Ended December 31, 2016 and 2015
In Canadian
Dollars
| 1. | NATURE OF OPERATIONS AND GOING CONCERN |
Kennady Diamonds Inc. was incorporated
on February 27, 2012 under the Ontario Business Corporation Act.
The address of the Company’s registered
office and its principal place of business is 161 Bay Street, Suite 1410, PO Box 216, Toronto, ON, Canada, M5J 2S1. The Company’s
shares are listed on the TSX Venture Exchange under the symbol ‘KDI’.
Kennady Diamonds is involved in the exploration,
discovery, evaluation and development of diamond properties in Canada’s Northwest Territories. The underlying value and recoverability
of amounts shown as “Mineral Properties” is dependent upon the ability of the Company to discover economically recoverable
reserves, to have successful exploration, permitting and development, and upon future profitable production or proceeds from disposition
of the Company’s mineral properties. Failure to discover and develop economically recoverable reserves will require the Company
to write off costs capitalized to date.
In the year ended December 31, 2016,
the Company incurred a loss of $34,165,274, and had negative cash flow from operating activities of $33,185,838, and will be
required to obtain additional sources of financing to complete its business plans going into the future. Although the Company
had working capital of $7,815,464 at December 31, 2016, including $8,286,064 of cash and cash equivalents and short-term
investments, the Company has insufficient capital to finance its operations over the next twelve months. The Company is
currently investigating various sources of additional funding to increase the cash balances required for ongoing operations
over the foreseeable future. These additional sources include, but are not limited to, share offerings, private placements,
and the exercise of outstanding options. However, there is no certainty that the Company will be able to obtain financing
from any of those sources. These conditions indicate the existence of a material uncertainty that may cast significant doubt
as to the Company’s ability to continue as a going concern.
These financial statements have been prepared
on the basis that the Company will continue as a going concern, and do not reflect adjustments to assets and liabilities that would
be necessary if the going concern assumption was not appropriate, which may be material.
Authorization of Financial Statements
The financial statements for the year ended
December 31, 2016 (including comparatives) were approved by the Board of Directors on April 6, 2017.
| 2. | BASIS OF PRESENTATION AND SIGNIFICANT ACCOUNTING POLICIES |
These financial statements have been prepared
in accordance with International Financial Reporting Standards (“IFRS”) as issued by the International Accounting Standards
Board (“IASB”). The policies set out below were consistently applied to the comparative period presented.
These financial statements have been prepared
on a historical cost basis except for cash which has been measured at fair value.
The Company has elected to present the
‘Statement of Comprehensive Loss’ as a single financial statement with its Statement of Income, titled ‘Statement
of Comprehensive Loss’.
The significant accounting policies adopted
in the preparation of these financial statements are set out below.
KENNADY DIAMONDS INC.
Notes to Financial Statements
For the Years Ended December 31, 2016 and 2015
In Canadian
Dollars
Interest income from financial assets is
recognized when it is probable that the economic benefits will flow to the Company and the amount of income can be measured reliably.
Interest income is accrued on the basis of time that has passed by reference to the principal outstanding and at the effective
interest rate.
| (iii) | Mineral properties and exploration and evaluation costs |
Exploration and evaluation (“E&E”)
costs are those costs required to find a mineral property and determine technical feasibility and commercial viability. E&E
costs include costs to establish an initial mineral resource and determine whether inferred mineral resources can be upgraded to
measured and indicated mineral resources, and whether measured and indicated mineral resources can be converted to proven and probable
reserves.
E&E costs consist of:
| · | gathering
exploration data through topographical and geological studies; |
| · | exploratory
drilling, trenching and sampling; |
| · | determining
the volume and grade of the resource; |
| · | test
work on geology, metallurgy, mining, geotechnical and environmental; and |
| · | conducting
engineering, marketing and financial studies. |
Costs in relation to these activities are
expensed as incurred until such time that technical feasibility and commercial viability are demonstrable. At such time, mineral
properties are assessed for impairment, and an impairment loss, if any, is recognized. Capitalized acquisition costs included in
Mineral Properties are transferred to capitalized costs within property, plant and equipment, or intangible assets, as appropriate.
Determination of technical feasibility and commercial viability require management’s judgment and include assessment of legal,
environmental, social and governmental factors.
The Company recognizes E&E costs as
assets when acquired as part of a business combination, or asset purchase, or as a result of rights acquired relating to a mineral
property. These assets are recognized at fair value or relative fair value if applicable. Capitalized E&E consists of:
| · | acquired
interest in exploration properties; |
| · | amounts
paid for acquired rights associated with exploration properties; and |
| · | changes
in decommissioning and restoration amounts capitalized during the period. |
Equipment is stated at cost less accumulated
amortization and accumulated impairment losses. Cost comprises the fair value of consideration given to acquire an asset and includes
direct charges associated with bringing the asset to the location and condition necessary to put the asset into use, as well as
future cost of dismantling and removing the asset. When parts of an item of property and equipment have different useful lives,
they are accounted for as separate items (major components) of property and equipment. Replacement cost, including major inspection
and overhaul expenditures are capitalized for components of property and equipment, which are accounted for separately.
Equipment are amortized over their useful
lives. Amortization is calculated so as to allocate the cost of each asset over its expected useful life to its estimated residual
value. The estimated useful lives, residual values and amortization method are reviewed at the end of each annual reporting period.
Earthmoving equipment is amortized on a straight line basis over its estimated useful life of ten years. Assets under construction
are not amortized.
A provision is recognized in the statements
of financial position when the Company has a present legal or constructive obligation as a result of a past event, and it is probable
that an outflow of economic benefits will be required to settle the obligation. Provisions are measured at the present value of
the expected expenditures to settle the obligation, applying a risk-free interest rate. The increase in the provision due to passage
of time is recognized as accretion expense.
KENNADY DIAMONDS INC.
Notes to Financial Statements
For the Years Ended December 31, 2016 and 2015
In Canadian
Dollars
The Company’s decommissioning and
restoration liability arise from its obligations to undertake site reclamation and remediation in connection with its mineral properties.
The estimated costs of reclamation are based management’s best estimates of costs expected to reclaim this land in future
periods. Future changes to any regulations and standards, as well as changes resulting from operations may result in actual reclamation
costs differing from the estimate.
| (vi) | Financial instruments |
Financial instruments are classified into
one of the following four categories: loans and receivables; fair value through profit or loss; held-to-maturity; and available-for-sale.
Financial assets are initially measured at fair value. Subsequent measurement and recognition of the changes in fair value of financial
instruments depends upon their initial classifications, as follows:
| · | Financial assets and financial liabilities
at fair value through profit and loss include financial assets and financial liabilities that are held for trading or designated
upon initial recognition as at fair value through profit and loss. These financial instruments are measured at fair value with
changes in fair values recognized in the Statement of Comprehensive Loss. |
| · | Financial assets classified as available-for-sale
are measured at fair value, with changes in fair values recognized as other comprehensive income (“OCI”) in the Statement
of Comprehensive Loss, except when there is objective evidence that the asset is impaired, at which point the cumulative loss that
had been previously recognized in OCI is recognized within the Statement of Comprehensive Loss. |
| · | Financial assets classified as held-to-maturity
and loans and receivables are measured subsequent to initial recognition at amortized cost using the effective interest method. |
| · | Financial liabilities, other than financial
liabilities classified as fair value through profit and loss, are measured in subsequent periods at amortized cost using the effective
interest method. |
The effective interest method is a method
of calculating the amortized cost of a financial liability and of allocating interest expense over the relevant period. The effective
interest rate is the rate that exactly discounts estimated future cash payments (including all fees and points paid or received
that form an integral part of the effective interest rate, transaction costs and other premiums or discounts) through the expected
life of the financial liability, or where appropriate, a short period, to the net carrying amount on initial recognition.
The Company has classified its financial
instruments as follows:
| Asset/Liability |
Classification |
Measurement |
| Cash |
Fair value through profit and loss |
Fair value |
| Amounts receivable |
Loans and receivables |
Amortized cost |
| Accounts payable and accrued liabilities |
Other liabilties |
Amortized cost |
The Company’s cash consists of balances
with banks.
The fair values of the Company’s amounts
receivable, and accounts payable and accrued liabilities approximate their carrying values because of the immediate or short-term
to maturity of these financial instruments.
Under Canadian income tax legislation,
a company is permitted to issue flow-through shares whereby the Company agrees to incur qualifying expenditures and renounce the
related income tax deductions to the investors. The proceeds from issuance of these shares are allocated between the offering of
shares and the sale of tax benefits. The allocation is made based on the difference between the quoted price of the existing shares
and the amount the investor pays for the flow-
KENNADY DIAMONDS INC.
Notes to Financial Statements
For the Years Ended December 31, 2016 and 2015
In Canadian
Dollars
through shares. A deferred premium liability
is recognized for this difference. The Company renounces the deductions for tax purposes related to the eligible exploration and
evaluation expenditures on the date the flow-through shares are issued. The premium liability is reduced on a pro-rata basis and
recorded in other income based on the corresponding eligible expenditures that have been incurred.
Where the Company has unused tax benefits
on loss carry forwards and tax pools in excess of book value available for deduction for which no deferred tax asset is recognized,
the Company recognizes the deferred tax benefit of such amounts to offset the increase in deferred tax liabilities resulting in
an offsetting recovery of deferred income taxes being recognized through profit or loss in the reporting period.
| (viii) | Share-based payments |
Equity-settled share-based payments to
employees and others providing similar services are measured at the fair value of the equity instruments at the grant date.
The fair value determined at the grant
date of the equity-settled share-based payments is expensed to the Statement of Comprehensive Loss over the vesting period, if
any, which is the period during which the employee becomes unconditionally entitled to equity instruments. At the end of each reporting
period, the Company revises its estimate of the number of equity instruments expected to vest, if any.
Equity-settled share-based payment transactions
with parties other than employees, if any, are measured at the fair value of the goods or services received, except where that
fair value cannot be estimated reliably, in which case they are measured at the fair value of the equity instruments granted, measured
at the date the entity obtains the goods or the counterparty renders the service.
Basic loss or earnings per share is calculated
by dividing loss or earnings attributable to common shares by the weighted
average number of shares outstanding during
the period.
Diluted loss or earnings per share is calculated
using the denominator of the basic loss or earnings calculation described above adjusted to include the potentially dilutive effect
of outstanding stock options.
| (x) | Restricted and deferred share unit plans |
The Restricted and Deferred Share Unit (“RSU” and
“DSU”) plans are full value phantom shares that mirror the value of Kennady Diamonds Inc.’s publicly traded
common shares. Grants under the RSU and DSU plan are made on a discretionary basis to qualified persons and employees of the Company
subject to the Board of Directors’ approval. RSU’s and DSU’s vest according to the terms set out in the award
agreement.
Both the RSU and DSU plans are equity settled.
Equity-settled transactions are measured by reference to the fair value at the grant date. The fair value determined at grant date
is recognized over the vesting period in accordance with the vesting terms and conditions, with a corresponding increase to contributed
surplus.
| (xi) | Income taxes and deferred taxes |
The income tax expense or benefit for the
period consists of two components: current and deferred. Income tax expense or benefit is recognized in the Statement of Comprehensive
Loss except to the extent it relates to a business combination or items recognized directly in equity.
Current tax is the expected tax payable
or receivable on the taxable profit or loss for the period. Current tax is calculated using tax rates and laws that were enacted
or substantively enacted at the balance sheet date in each of the jurisdictions and includes any adjustments for taxes payable
or recovery in respect of prior periods.
KENNADY DIAMONDS INC.
Notes to Financial Statements
For the Years Ended December 31, 2016 and 2015
In Canadian
Dollars
Taxable profit or loss differs from profit
or loss as reported in the Statement of Comprehensive Loss because of items of income or expense that are taxable or deductible
in other years, and items that are never taxable or deductible.
Deferred tax is recognized on temporary
differences between the carrying amounts of assets and liabilities in the financial statements and the corresponding tax bases
used in the computation of taxable profit. Deferred tax liabilities are generally recognized for all taxable temporary differences.
Deferred tax assets are generally recognized for all deductible temporary differences, loss carryforwards and tax credit carryforwards
to the extent that it is probable that taxable profits will be available against which they can be utilized. To the extent that
the Company does not consider it to be probable that taxable profits will be available against which deductible temporary differences,
loss carryforwards, and tax credit carryforwards can be utilized, a deferred tax asset is not recognized.
Deferred tax assets and liabilities are
not recognized if the temporary difference arises from the initial recognition (other than in a business combination) of other
assets and liabilities in a transaction that affects neither the taxable profit nor the accounting profit.
Deferred tax assets and liabilities are
measured at the tax rates that are expected to apply in the period in which the liability is settled or the asset realized, based
on tax rates (and tax laws) that have been enacted or substantively enacted by the end of the reporting period. The measurement
of deferred tax liabilities and assets reflects the tax consequences that would follow from the manner in which the Company expects,
at the end of the reporting period, to recover or settle the carrying amount of its assets and liabilities.
Deferred tax assets and liabilities are
offset when there is a legally enforceable right to set off current tax assets against current tax liabilities and when they relate
to income taxes levied by the same taxation authority and the Company intends to settle its current tax assets and liabilities
on a net basis.
Current and deferred taxes are recognized
in profit or loss, except when they relate to items that are recognized in other comprehensive income or directly into equity,
in which case, the current and deferred taxes are also recognized in other comprehensive income or directly in equity respectively.
| (xii) | Standards, amendments and interpretations to existing
standards that are not yet effective and have not been adopted early by the Company |
At the date of authorization of these financial
statements, certain new standards, amendments and interpretations to existing standards have been published but are not yet effective,
and have not been adopted early by the Company.
The Company anticipates that all of the
relevant pronouncements will be adopted in the Company’s accounting policy for the first period beginning after the effective
date of the pronouncement. Information on new standards, amendments and interpretations that are expected to be relevant to the
Company’s audited financial statements is provided below. Certain other new standards and interpretations have been issued
but are not expected to have a material impact on the Company’s financial statements and are therefore not discussed below.
Share-based payments
In June 2016, the IASB issued
amendments to International Financial Reporting Standard 2, Share-based Transactions (“IFRS 2”). The amendments
to IFRS 2 are effective for periods beginning on or after January 1, 2018 and are to be applied prospectively. The amendments
clarify the classification and measurement of share-based payment transactions. Management is currently assessing the impact
of the amendments to IFRS 2 on the financial statements.
KENNADY DIAMONDS INC.
Notes to Financial Statements
For the Years Ended December 31, 2016 and 2015
In Canadian
Dollars
Financial instruments
In July 2014, the IASB issued the final
version of IFRS 9 Financial Instruments (“IFRS 9”) bringing together the classification and measurement, impairment
and hedge accounting phases of the IASB’s project to replace IAS 39 Financial Instruments: Recognition and Measurement. IFRS
9 is effective for annual periods beginning on or after January 1, 2018, with early adoption permitted. The extent of the impact
of adoption of IFRS 9 has not yet been determined.
Leases
On January 13, 2016, the IASB issued
International Financial Reporting Standard 16, Leases (“IFRS 16”). The new standard will replace existing lease
guidance in IFRS and related interpretations, and requires companies to bring most leases on- balance sheet. The new standard
is effective for annuals beginning on or after January 1, 2019. The Company is currently assessing the impact of IFRS 16.
Income taxes
In January 2016, the IASB issued amendments
to IAS 12 Income Taxes (“IAS 12”). The amendments clarify that the existence of a deductible temporary difference is
not affected by possible future changes in the carrying amount or expected manner of recovery of the asset and also clarify the
methodology to determine the future taxable profits used for assessing the utilization of deductible temporary differences. The
amendments apply for annual periods beginning on or after January 1, 2017 with retrospective application. Early application of
the amendments is permitted. The impact of the amendments to IAS 12 on the Company’s financial statements has not yet been
determined.
| 3. | SIGNIFICANT ACCOUNTING JUDGMENTS, ESTIMATES AND ASSUMPTIONS |
The preparation of the Company’s
financial statements requires management to make judgments, estimates and assumptions that affect the reported amounts of assets
and liabilities at the date of the financial statements and reported amounts of expenses during the reporting period. Actual outcomes
could differ from these estimates. These audited financial statements include estimates, which, by their nature, are uncertain
and may require accounting adjustments based on future occurrences. Revisions to accounting estimates are recognized in the period
in which the estimate is revised and future periods if the revision affects both current and future periods. These estimates are
based on historical experience, current and future economic conditions, and other factors, including expectations of future events
that are believed to be reasonable under the circumstances.
| i) | Significant Judgments in Applying Accounting Policies |
The areas which require management to make significant
judgments in applying the Company’s accounting policies in determining carrying values include, but are not limited to:
| a) | Impairment analysis – Mineral Properties |
The Company reviews its mineral
properties for impairment based on results to date and when events and changes in circumstances indicate that the carrying value
of the assets may not be recoverable. IFRS 6 - Exploration for and evaluation of mineral resources requires the Company
to make certain judgments in respect of such events and changes in circumstances, and in assessing their impact on the valuations
of the affected assets. The Company’s assessment is that as at December 31, 2016 and December 31, 2015, no indicators of
an impairment in the carrying value of its mineral properties had occurred.
KENNADY DIAMONDS INC.
Notes to Financial Statements
For the Years Ended December 31, 2016 and 2015
In Canadian
Dollars
| ii) | Significant Accounting Estimates and Assumptions |
The areas which require management to make significant
estimates and assumptions in determining carrying values include, but are not limited to:
| a) | Impairment analysis – Mineral Properties |
The Company reviews its mineral properties for impairment
based on results to date and when events and changes in circumstances indicate that the carrying value of the assets may not be
recoverable. If indicators of impairment are identified, management will perform an impairment test in accordance with IAS 36 –
Impairment of assets (“IAS 36”). IAS 36 requires the Company to make certain judgments, assumptions, and estimates
in determining the estimate of the net recoverable amount. Impairments are recognized when the carrying values exceed management’s
estimate of the net recoverable amounts associated with the affected assets. The values shown on the statement of financial position
for Mineral Properties represents the Company’s assumption that the amounts are recoverable. As a result of the numerous
variables associated with the Company’s judgments and assumptions, the precision and accuracy of estimates of the recoverable
amount is subject to significant uncertainties, and may change significantly as additional information becomes known.
The stock option pricing model requires the input
of highly subjective assumptions including the expected life and volatility. Changes in the subjective input assumptions can materially
affect the fair value estimate.
| c) | Provision for decommissioning and restoration |
The decommissioning and restoration liability and
the accretion recorded are based on estimates of future cash flows, discount rates, and assumptions regarding timing. The estimates
are subject to change and the actual costs for the decommissioning and restoration liability may change significantly.
Deferred income tax assets and liabilities are determined
based on differences between the financial reporting and tax bases of assets and liabilities and on unused losses carried forward,
and are measured using the substantively enacted tax rates that are expected to be in effect when the differences are expected
to reverse or losses are expected to be utilized. Deferred tax assets are recorded to recognize tax benefits only to the extent
that, based on available evidence, including forecasts, it is probable that they will be realized. The Company has not recorded
the benefit of tax losses or deductible temporary differences.
For financial instruments recorded at fair
value, the Company categorizes each of its fair value measurements in accordance with a fair value hierarchy. The fair value hierarchy
establishes three levels to classify the inputs to valuation techniques used to measure fair value. Level 1 inputs are quoted prices
(unadjusted) in active markets for identical assets or liabilities. Level 2 inputs are quoted prices in markets that are not active,
quoted prices for similar assets or liabilities in active markets, inputs other than quoted prices that are observable for the
asset or liability (for example, interest rate and yield curves observable at commonly quoted intervals, forward pricing curves
used to value currency and commodity contracts and volatility measurements used to value option contracts), or inputs that are
derived principally from or corroborated by observable market data or other means. Level 3 inputs are unobservable (supported by
little or no market activity).
The fair value hierarchy gives the highest
priority to Level 1 inputs and the lowest priority to Level 3 inputs.
KENNADY DIAMONDS INC.
Notes to Financial Statements
For the Years Ended December 31, 2016 and 2015
In Canadian
Dollars
The Company’s financial assets are measured at fair value
and are summarized in the following table:
| | |
December 31, 2016 | |
| | |
Level 1 | | |
Level 2 | | |
Level 3 | |
| Cash | |
$ | 8,286,064 | | |
$ | - | | |
$ | - | |
| | |
| | | |
| | | |
| | |
| | |
December 31, 2015 | |
| | |
Level 1 | | |
Level 2 | | |
Level 3 | |
| Cash | |
$ | 41,068,805 | | |
$ | - | | |
$ | - | |
The fair values of the amounts receivable and accounts payable
and accrued liabilities approximate their carrying values due to the relatively short-term maturity of these financial instruments.
The carrying amounts by classification are:
| | |
December 31, | | |
December 31, | |
| | |
2016 | | |
2015 | |
| Financial assets | |
| | | |
| | |
| | |
| | | |
| | |
| Fair value through profit or loss | |
| | | |
| | |
| Cash | |
$ | 8,286,064 | | |
$ | 41,068,805 | |
| | |
| | | |
| | |
| Loans and receivables | |
| | | |
| | |
| Amounts receivable | |
| 322,383 | | |
| 533,453 | |
| | |
| | | |
| | |
| Financial liabilities | |
| | | |
| | |
| Financial liabilities measured at amortized cost | |
| | | |
| | |
| Accounts payable and accrued liabilities | |
| 839,893 | | |
| 1,103,900 | |
The Company’s interest income on
its bank balances carried at fair value is presented on the Statements of Comprehensive Loss in the interest line.
Financial instruments risks
The Company thoroughly examines the various
financial instrument risks to which it is exposed and assesses the impact and likelihood of those risks. These risks may include
credit risk, liquidity risk and market risk.
Credit risk
Credit risk is the risk of financial loss
to the Company if a customer or counterparty to a financial instrument fails to meet its obligations.
At December 31, 2016 and 2015, the Company
does not have any allowance for doubtful accounts, and does not consider that any such allowance is necessary.
All of the Company’s cash is held
with a major Canadian financial institution and thus the exposure to credit risk is considered insignificant. Management actively
monitors the Company’s exposure to credit risk under its financial instruments, including with respect to amounts receivable.
The Company considers the risk of loss for its amounts receivable to be remote and significantly mitigated due to the financial
strength of the party from whom the receivables are due - the Canadian government for harmonized sales tax (“HST”)
refunds receivable in the amount of $322,383 (December 31, 2015 - $503,453).
KENNADY DIAMONDS INC.
Notes to Financial Statements
For the Years Ended December 31, 2016 and 2015
In Canadian
Dollars
The Company’s current policy is to
hold excess cash in high interest bank accounts. It periodically monitors the investment income it makes and is satisfied with
the credit ratings of its bank.
Liquidity risk
Liquidity risk is the risk that the Company
will not be able to meet its obligations associated with financial liabilities. The Company has a planning and budgeting process
in place by which it anticipates and determines the funds required to support its operating requirements. The Company coordinates
this planning and budgeting process with its financing activities through its capital management process. The Company’s financial
liabilities comprise its accounts payable and accrued liabilities, all of which are due within the next 12-month period. Refer
to note 1 with respect to the ability of the Company to continue as a going concern. There are no operating lease commitments.
Market risk
Market risk primarily relates to the risk
of loss that results from change in commodity prices, foreign exchange and interest rates. The Company does not have commodity
price risk or foreign exchange risk. The Company has no significant exposure at December 31, 2016 to interest rate risk through
its financial instruments. The Company has no interest-bearing debt.
| | |
|
December 31, 2016 | | |
|
December 31,
2015 | |
| Prepaid expenses | |
$ | 45,420 | | |
$ | 28,925 | |
| Prepaid deposits | |
| 1,490 | | |
| - | |
| Prepaid drilling expense | |
| - | | |
| 200,000 | |
| | |
$ | 46,910 | | |
$ | 228,925 | |
At December 31, 2016, the Company had provided
a total reclamation deposit of $295,000 (December 31, 2015 – $295,000) to the Mackenzie Valley Land and Water Board for its
mining project to secure clean-up costs if the project is abandoned or closed (Note 10).
KENNADY DIAMONDS INC.
Notes to Financial Statements
For the Years Ended December 31, 2016 and 2015
In Canadian
Dollars
The Company’s equipment as at December 31, 2016 and 2015
is as follows:
| | |
Earthmoving | | |
Assets under | | |
|
| |
| | |
equipment | | |
construction* | | |
|
Total | |
| Cost | |
| | | |
| | | |
| | |
| At January 1, 2015 | |
$ | - | | |
$ | - | | |
$ | - | |
| Additions | |
| 130,000 | | |
| 1,564,138 | | |
| 1,694,138 | |
| At December 31, 2015 | |
| 130,000 | | |
| 1,564,138 | | |
| 1,694,138 | |
| Additions | |
| - | | |
| - | | |
| - | |
| At December 31, 2016 | |
$ | 130,000 | | |
$ | 1,564,138 | | |
$ | 1,694,138 | |
| | |
| | | |
| | | |
| | |
| Accumulated depreciation | |
| | | |
| | | |
| | |
| At January 1, 2015 | |
$ | - | | |
$ | - | | |
$ | - | |
| Depreciation | |
| (10,833 | ) | |
| - | | |
| (10,833 | ) |
| At December 31, 2015 | |
| (10,833 | ) | |
| - | | |
| (10,833 | ) |
| Depreciation | |
| (13,000 | ) | |
| - | | |
| (13,000 | ) |
| At December 31, 2016 | |
$ | (23,833 | ) | |
$ | - | | |
$ | (23,833 | ) |
| | |
| | | |
| | | |
| | |
| Carrying amounts | |
| | | |
| | | |
| | |
| At December 31, 2015 | |
$ | 119,167 | | |
$ | 1,564,138 | | |
$ | 1,683,305 | |
| At December 31, 2016 | |
$ | 106,167 | | |
$ | 1,564,138 | | |
$ | 1,670,305 | |
*Assets under construction represents an exploration camp that
is currently in storage and not in use.
Mineral properties represent the Company’s claim to the
Kennady North Project.
The continuity of the Mineral Properties is as follows:
| Balance, January 1, 2015 | |
$ | 382,355 | |
| Acquired mineral rights and claims | |
| - | |
| Change in expected decommissioning and restoration liability | |
| 99,068 | |
| Balance, December 31, 2015 | |
$ | 481,423 | |
| Acquired mineral rights and claims | |
| 200,000 | |
| Change in expected decommissioning and restoration liability | |
| (78,118 | ) |
| Balance, December 31, 2016 | |
$ | 603,305 | |
In the year ended December 31, 2016, the
Company acquired six mining leases from GGL Resources Corp (“GGL”). In consideration for the purchase, the Company
paid to GGL a cash sum of $200,000 and GGL retained a 0.75% royalty interest (the “Royalty”) on all mineral products
produced from the property. The Company has the right at any time prior to commencement of production from the property to purchase
one-third (1/3) of the Royalty, being 0.25%, for the sum of $1,000,000.
KENNADY DIAMONDS INC.
Notes to Financial Statements
For the Years Ended December 31, 2016 and 2015
In Canadian
Dollars
| 9. | DEFERRED PREMIUM ON FLOW-THROUGH SHARES |
The premium paid for flow-through shares
in excess of the fair value of common shares is initially recognized as a liability. The liability is reduced on a pro-rata basis
and recorded in other income based on the corresponding eligible expenditures that have been incurred.
| | |
|
December 31, 2016 | | |
December 31,
2015 | |
| Balance, beginning of year | |
$ | 335,748 | | |
$ | - | |
| Deferred premium liability recognized on flow-through issuances | |
| - | | |
| 1,970,603 | |
| Income recognized based on corresponding eligible expenditures | |
| (335,748 | ) | |
| (1,634,855 | ) |
| Balance, end of year | |
$ | - | | |
$ | 335,748 | |
| 10. | DECOMMISSIONING AND RESTORATION LIABILITY |
The decommissioning and restoration liability refers to projected
costs to remove the camp and all of the equipment from the Company’s exploration site in the Northwest Territories.
The decommissioning and restoration liability was calculated
using the following assumptions as at December 31, 2016 and 2015:
| | |
|
December 31, 2016 | | |
|
December 31,
2015 | |
| Expected undiscounted cash flows | |
$ | 175,000 | | |
$ | 250,000 | |
| Discount rate | |
| 0.84% | | |
| 0.49% | |
| Periods | |
| 2019 | | |
| 2018 | |
The continuity of the decommissioning and restoration liability
at December 31, 2016 and 2015 is as follows:
| | |
|
December 31, 2016 | | |
|
December 31,
2015 | |
| Balance, beginning of year | |
$ | 247,568 | | |
$ | 147,016 | |
| Change in estimate of discounted cash flows for the year | |
| (78,118 | ) | |
| 99,068 | |
| Accretion recorded in the year | |
| 1,213 | | |
| 1,484 | |
| Balance, end of the year | |
$ | 170,663 | | |
$ | 247,568 | |
| i. | Authorized share capital |
Unlimited common shares, without par value. Each common share
entitles the holder to one shareholder vote. There is no other class of shares in the Company.
The number of shares issued and fully paid
as at December 31, 2016 is 47,181,970.
On October 8, 2015, the Company closed
a non-brokered private placement of flow-through common shares and non-flow- through common shares, at the prices of $3.40 per
share and $2.75 per share, respectively. The Company issued a total of 11,731,105 non-flow through common shares for gross proceeds
of $32,260,539, and 300,000 flow-through common
KENNADY DIAMONDS INC.
Notes to Financial Statements
For the Years Ended December 31, 2016 and 2015
In Canadian Dollars
shares for gross proceeds of $1,020,000.
An amount of $195,000 was recognized as the premium paid for flow-through shares in excess of the fair value of the common shares
and was initially recognized as a liability. Share issuance costs of
$202,646 were incurred in connection with
the private placement.
On September 30, 2015, the Company closed
a non-brokered private placement of flow-through common shares and non- flow-through common shares, at the prices of $3.40 per
share and $2.75 per share, respectively. The Company issued 1,393,235 flow-through common shares for gross proceeds of $4,736,999,
and 3,672,773 non flow-through common shares for gross proceeds of $10,100,126 as a result of the non-brokered private placement.
An amount of $905,603 was recognized as the premium paid for flow-through shares in excess of the fair value of the common shares
and was initially recognized as a liability. Share issuance costs of $150,042 were incurred in connection with the private placement.
On August 12, 2015, the Company closed
a non-brokered private placement and issued a total of 1,176,735 common shares at a price of $3.40 per share, for aggregate gross
proceeds of $4,000,899. Share issuance costs of $35,780 were incurred in connection with the private placement.
On March 10, 2015, the Company closed the
final tranche of the non-brokered private placement and issued a total of 4,405,947 common shares at a price of $3.55 per share,
for aggregate gross proceeds of $15,641,112. Share issuance costs of $100,196 were incurred in connection with the private placement.
On February 25, 2015, the Company issued
600,000 flow-through common shares at a price of $5.00 per share, for aggregate gross proceeds of $3,000,000. An amount of $870,000
was recognized as the premium paid for flow-through shares in excess of the fair value of the common shares was recognized as a
liability.
The following table sets forth the computation
of basic and diluted loss or earnings per share:
| | |
|
Year ended | | |
|
Year ended | |
| | |
|
December 31, 2016 | | |
|
December 31, 2015 | |
| Numerator | |
| | |
| |
| Net loss for the year | |
$ | (34,165,274 | ) | |
$ | (29,800,951 | ) |
| | |
| | | |
| | |
| Denominator | |
| | | |
| | |
| For basic - weighted average number of shares outstanding | |
| 47,069,893 | | |
| 32,390,279 | |
| Effect of dilutive securities | |
| - | | |
| - | |
| For diluted - adjusted weighted average number of shares outstanding | |
| 47,069,893 | | |
| 32,390,279 | |
| | |
| | | |
| | |
| Loss Per Share | |
| | | |
| | |
| Basic | |
$ | (0.73 | ) | |
$ | (0.92 | ) |
| Diluted | |
| (0.73 | ) | |
| (0.92 | ) |
The calculation for the weighted average
number of shares outstanding is based on the number of shares outstanding on a daily basis in the year ended December 31, 2016
and 2015. Shares issuable on exercise of stock options totaling 2,100,000 on December 31, 2016 (2015 - 1,785,000) were not included
in the computation of diluted loss per share because the effect would have been anti-dilutive.
| iv. | Stock options, RSUs, DSUs and share-based payments reserve |
The Company, through its Board of Directors
and shareholders, adopted a long-term equity incentive plan (the “Plan”) which, among other things, allows for the
maximum number of shares that may be reserved for issuance under the Plan to be 10% of the Company’s issued and outstanding
shares at the time of the grant. The Board of Directors has the authority
KENNADY DIAMONDS INC.
Notes to Financial Statements
For the Years Ended December 31, 2016 and 2015
In Canadian
Dollars
and discretion to grant stock option, RSU and DSU awards within
the limits identified in the Plan, which includes provisions limiting the issuance of options to qualified persons and employees
of the Company to maximums identified in the Plan.
The following table summarizes information about the stock options
outstanding and exercisable at December 31, 2016 and 2015:
| | |
December 31, 2016 | |
| | |
Number of options | | |
Weighted average
exercise price | |
| Balance at beginning of year | |
| 1,785,000 | | |
| 2.76 | |
| Granted during the year | |
| 590,000 | | |
| 3.01 | |
| Exercised during the year | |
| (275,000 | ) | |
| 1.52 | |
| Balance at end of the year | |
| 2,100,000 | | |
$ | 2.99 | |
| Options exercisable at the end of the year | |
| 2,100,000 | | |
| | |
| | |
December 31, 2015 | |
| | |
| | |
Weighted average | |
| | |
Number of options | | |
exercise price | |
| Balance at beginning of year | |
| 1,100,000 | | |
$ | 2.23 | |
| Granted during the year | |
| 685,000 | | |
| 3.61 | |
| Balance at end of the year | |
| 1,785,000 | | |
$ | 2.76 | |
| Options exercisable at the end of the year | |
| 1,785,000 | | |
| | |
The fair value of the 590,000 (2015
- 685,000) stock options granted in the year ended December 31, 2016 has been estimated on the date of grant using the
Black-Scholes option pricing model, using the assumptions below, and total $1,357,290 (2015 - $1,899,505). The stock options
granted in the year ended December 31, 2016 and 2015 vested immediately, except for the 200,000 granted on April 5, 2016
which vested 50% on May 1, 2016 and the remainder on November 1, 2016.
| |
December 31,
2016 |
December 31,
2015 |
| Exercise price |
$2.80 - $3.30 |
$3.61 |
| Expected volatility* |
72.76% |
72.76% |
| Expected option life |
10 years |
10 years |
| Expected forfeiture |
none |
none |
| Expected dividend yield |
0% |
0% |
| Risk-free interest rate |
1.16% - 1.40% |
1.48% |
*Expected volatility has been based on an evaluation of the
historical volatility of comparable companies in the same industry and stage of operations.
KENNADY DIAMONDS INC.
Notes to Financial Statements
For the Years Ended December 31, 2016 and 2015
In Canadian
Dollars
The following tables reflect the Black-Scholes values, the number
of stock options outstanding, the weighted average of options outstanding, and the exercise price of stock options outstanding
at December 31, 2016 and 2015.
| At December 31, 2016 | |
| | |
| | |
| |
| Expiry Date | |
|
Black-Scholes Value | | |
Number of Options | | |
Exercise Price | |
| November 6, 2022 | |
$ | 455,235 | | |
| 465,000 | | |
| 1.27 | |
| March 17, 2023 | |
| 47,549 | | |
| 50,000 | | |
| 1.23 | |
| February 13, 2024 | |
| 799,000 | | |
| 250,000 | | |
| 4.10 | |
| March 9, 2024 | |
| 369,800 | | |
| 100,000 | | |
| 4.74 | |
| March 12, 2025 | |
| 1,899,505 | | |
| 685,000 | | |
| 3.61 | |
| December 31, 2025 | |
| 230,100 | | |
| 100,000 | | |
| 3.00 | |
| January 12, 2026 | |
| 354,915 | | |
| 165,000 | | |
| 2.81 | |
| February 28, 2026 | |
| 181,985 | | |
| 85,000 | | |
| 2.80 | |
| April 5, 2026 | |
| 504,400 | | |
| 200,000 | | |
| 3.30 | |
| | |
$ | 4,842,489 | | |
| 2,100,000 | | |
| 2.99 | |
| | |
| | | |
| | | |
| | |
| At December 31, 2015 | |
| |
| | |
Black-Scholes | | |
Number of | | |
Exercise | |
| Expiry Date | |
Value | | |
Options | | |
Price | |
| November 6, 2022 | |
$ | 587,400 | | |
| 600,000 | | |
| 1.27 | |
| January 31, 2023 | |
| 103,700 | | |
| 100,000 | | |
| 1.34 | |
| March 17, 2023 | |
| 47,550 | | |
| 50,000 | | |
| 1.23 | |
| February 13, 2024 | |
| 799,000 | | |
| 250,000 | | |
| 4.10 | |
| March 9, 2024 | |
| 369,800 | | |
| 100,000 | | |
| 4.74 | |
| March 12, 2025 | |
| 1,899,505 | | |
| 685,000 | | |
| 3.61 | |
| | |
$ | 3,806,955 | | |
| 1,785,000 | | |
| 2.76 | |
The weighted average remaining contractual
life of the options outstanding at December 31, 2016 is 7.7 years (2015 – 8.03 years).
During the year ended December 31,
2016, 275,000 stock options were exercised for gross proceeds of $417,700 (2015 - $Nil). The market price, on the dates of
exercise, of stock options exercised during the year ended December 31, 2016 were
$1,053,650 (2015 - $Nil).
The Restricted and Deferred Share Unit
(“RSU” and “DSU”) plans are full value phantom shares that mirror the value of Kennady Diamonds Inc.’s
publicly traded common shares. Grants under the RSU and DSU plan are made on a discretionary basis to qualified persons and employees
of the Company subject to the Board of Directors’ approval. Under the 2016 RSU and DSU plan, RSU’s vests according
to the terms set out in the award agreement. Vesting under the RSU and DSU plan is subject to special rules for death, disability
and change in control. The awards can be settled through issuance of common shares or paid in cash, at the discretion of the Board
of Directors.
As at December 31, 2016, no RSU or DSU
awards have been granted.
Subsequent to the year ended December 31,
2016, 200,000 stock options were exercised for gross proceeds of $408,000.
Subsequent to the year ended December 31,
2016, 100,000 stock options were forfeited.
Subsequent to the year ended December 31,
2016, 224,999 RSUs were granted with a fair value of $3.55 per unit.
KENNADY DIAMONDS INC.
Notes to Financial Statements
For the Years Ended December 31, 2016 and 2015
In Canadian
Dollars
In accordance with IAS 24 Related Parties,
key management personnel are those persons having authority and responsibility for planning, directing and controlling the activities
of the Company directly or indirectly, including any directors (executive and non-executive) of the Company.
The Company’s related parties include
its key management, the Company’s directors, and their close family members. Mountain Province and the Gahcho Kué
Joint Venture, in which Mountain Province holds an interest, are also related parties since the Company and Mountain Province had
common members of key management and certain directors in 2016. International Investment and Underwriting (“IIU”) is
also a related party since it is controlled by Mr. Dermot Desmond. MCC Geoscience Inc. (“MCC”) is also a related party
since it is controlled by a member of the Board of Directors.
Related party transactions are recorded
at their exchange amount, being the amount agreed to by the parties. Outstanding balances are settled in cash.
The Company had the following transactions
and balances with its related parties including key management personnel, and Mountain Province which includes the monthly management
fee charged by Mountain Province for the reimbursement of expenses incurred on the Company’s behalf by Mountain Province.
The transactions with key management personnel are in the nature of remuneration which are paid directly by the Company and are
not included in the monthly management fee charged by Mountain Province. The transactions with IIU are for the director fees and
travel expenses of the Chairman of the Company. The transactions with MCC are for consulting fees and reimbursements of travel
expenses.
The balances as at December 31, 2016 and
2015 were as follows:
| | |
|
December 31, 2016 | | |
|
December 31,
2015 | |
| Payable to key management personnel and directors | |
$ | 406 | | |
$ | - | |
| Payable to International Investment and Underwriting | |
| 22,832 | | |
| - | |
| Payable to MCC Geoscience Inc. | |
| 9,056 | | |
| - | |
| Payable to Mountain Province Diamonds Inc. | |
| - | | |
| 8,475 | |
| | |
| | | |
| | |
| The transactions for the year ended December 31, 2016 and 2015 were as follows: | |
| | |
| | |
|
Year ended | | |
|
Year ended | |
| | |
|
December 31, 2016 | | |
|
December 31, 2015 | |
| The total of the transactions: | |
| | | |
| | |
| Management fee and reimburseable expenses charged by Mountain Province | |
$ | 90,000 | | |
$ | 90,000 | |
| International Investment and Underwriting | |
| 22,832 | | |
| 10,000 | |
| Consulting fees charged by MCC Geoscience Inc. | |
| 31,100 | | |
| - | |
| Remuneration of key management personnel | |
| 1,955,039 | | |
| 2,364,213 | |
KENNADY DIAMONDS INC.
Notes to Financial Statements
For the Years Ended December 31, 2016 and 2015
In Canadian
Dollars
The remuneration expense of key management personnel for the
year ended December 31, 2016 and 2015 were as follows:
| | |
|
Year ended
December 31, 2016 | | |
|
Year ended
December 31, 2015 | |
| Consulting fees, director fees, payroll and other short-term benefits | |
$ | 791,339 | | |
$ | 461,519 | |
| Share-based payment expense | |
| 1,163,700 | | |
| 1,902,694 | |
| | |
$ | 1,955,039 | | |
$ | 2,364,213 | |
| 13. | EXPLORATION AND EVALUATION EXPENSES |
| | |
|
Year ended
December 31, 2016 | | |
|
Year ended
December 31, 2015 | |
| Lease payments | |
$ | 28,423 | | |
$ | 28,325 | |
| Aircraft support | |
| 2,379,866 | | |
| 2,342,757 | |
| Fuel | |
| 1,406,832 | | |
| 1,502,523 | |
| Geophysics | |
| 605,597 | | |
| 139,214 | |
| Drilling support | |
| 120,623 | | |
| 475,518 | |
| Exploration personnel and program support | |
| 4,177,077 | | |
| 3,587,393 | |
| Camp maintenance, supplies, mobilization, general costs | |
| 4,236,642 | | |
| 4,614,370 | |
| Site & logistical support | |
| 5,767,738 | | |
| 2,210,130 | |
| Environmental | |
| 115,933 | | |
| 82,160 | |
| Professional geological services | |
| 895,178 | | |
| 732,703 | |
| Drilling | |
| 9,270,993 | | |
| 10,646,286 | |
| Technical consultant | |
| 196,225 | | |
| 119,783 | |
| Laboratory analysis | |
| 1,816,974 | | |
| 1,896,063 | |
| Diamond valuation | |
| 191,048 | | |
| 155,145 | |
| Permitting | |
| 149,135 | | |
| 88,534 | |
| Preliminary economic assessment | |
| 448,331 | | |
| - | |
| | |
$ | 31,806,615 | | |
$ | 28,620,904 | |
KENNADY DIAMONDS INC.
Notes to Financial Statements
For the Years Ended December 31, 2016 and 2015
In Canadian
Dollars
Rate Reconciliation
The provision for income tax differs from the amount that would
have resulted by applying the combined Canadian Federal and Ontario statutory income tax rates of approximately 26.5% (2015 –
26.5%):
| | |
|
December 31, 2016 | | |
|
December 31, 2015 | |
| Loss before income taxes | |
$ | (34,165,274 | ) | |
$ | (29,800,951 | ) |
| | |
| 26.5% | | |
| 26.5% | |
| Tax recovery calculated using statutory rates | |
| (9,053,798 | ) | |
| (7,897,252 | ) |
| Expenses not deductible | |
| 736,620 | | |
| 1,926,206 | |
| Change in tax benefits not recognized | |
| 8,317,178 | | |
| 5,971,046 | |
| | |
| | | |
| | |
| Income tax expenses (recovery) | |
$ | - | | |
$ | - | |
Unrecognized deferred tax assets
Deductible temporary differences for which no deferred tax assets
have been recognized are attributable to the following:
| | |
|
December 31, 2016 | | |
|
December 31, 2015 | |
| Property and equipment | |
$ | 629,393 | | |
$ | 10,833 | |
| Mineral properties | |
| 65,695,947 | | |
| 44,128,904 | |
| Decommissionning and restoration liability | |
| 170,663 | | |
| 247,568 | |
| Loss carryforwards | |
| 4,808,877 | | |
| 2,682,949 | |
| Share issuance costs | |
| 415,708 | | |
| 638,844 | |
| Investment tax credits | |
| 429,007 | | |
| 436,854 | |
Income tax attributes
As at December 31, 2016, the Company had the following non-capital
losses available for carry forward and certain other tax attributes as follows:
| | |
|
Amounts | | |
|
Expiry Date | |
| Non-capital losses | |
$ | 4,808,877 | | |
| 2032-2036 | |
| Investment tax credits | |
| 429,007 | | |
| 2032-2036 | |
| Tax basis of mineral properties | |
| 65,695,947 | | |
| indefinite | |
| Tax basis of property and equipment | |
| 735,560 | | |
| indefinite | |
| Share issuance costs | |
| 415,708 | | |
| 2035-2040 | |
The capital of Kennady Diamonds consists
of its shareholders’ equity. The Company’s objectives when managing capital are to safeguard Kennady Diamonds’
ability to continue to pursue the exploration and evaluation of its mineral properties and to maintain optimal returns to shareholders
and benefits for other stakeholders. The Company manages its capital structure and makes adjustments to it, in order to have the
funds available to support the exploration of its mineral
KENNADY DIAMONDS INC.
Notes to Financial Statements
For the Years Ended December 31, 2016 and 2015
In Canadian
Dollars
properties. The Company’s main property,
Kennady North, is in the exploration stage, and as such the Company is dependent on external equity financing to fund its activities.
The Board of Directors does not establish quantitative return on capital criteria for management, but rather relies on the expertise
of the Company’s management to sustain future development of the business.
The Company’s capital consists of:
| | |
|
December 31, 2016 | | |
|
December 31,
2015 | |
| Share capital | |
$ | 96,009,406 | | |
$ | 95,269,951 | |
| Share-based payments reserve | |
| 4,842,489 | | |
| 3,806,954 | |
| Deficit | |
| (90,638,484 | ) | |
| (56,473,210 | ) |
| | |
$ | 10,213,411 | | |
$ | 42,603,695 | |
In order to carry out the planned management
of the Company’s properties and to pay for administrative costs, the Company will spend its existing working capital and
raise additional amounts as needed.
Management reviews its capital management
approach on an on-going basis and believes that this approach, given the relative size of the Company, is reasonable. There were
no changes in the Company’s approach to capital management during the year ended December 31, 2016.
The Company has determined that it has
only one operating segment.
| |
Condensed Interim Financial Statements
(Expressed in Canadian Dollars) |
| |
|
| |
KENNADY DIAMONDS INC. |
| |
|
| |
For the three and nine months ended September 30, 2017
(Unaudited) |
| CONTENTS |
Page |
| |
|
| Responsibility for Condensed Interim Financial Statements |
32 |
| |
|
| Condensed Interim Statements of Financial Position |
33 |
| |
|
| Condensed Interim Statements of Comprehensive Loss |
34 |
| |
|
| Condensed Interim Statements of Equity |
35 |
| |
|
| Condensed Interim Statements of Cash Flows |
36 |
| |
|
| Notes to the Condensed Interim Financial Statements |
37 – 53 |
RESPONSIBILITY FOR CONDENSED INTERIM FINANCIAL
STATEMENTS
The accompanying unaudited condensed interim
financial statements of Kennady Diamonds Inc. (“Kennady Diamonds” or the “Company”) are the responsibility
of the Board of Directors.
The unaudited condensed interim financial statements
have been prepared by management, on behalf of the Board of Directors, in accordance with the accounting policies disclosed in
the notes to the Company’s audited financial statements as at December 31, 2016. Where necessary, management has made informed
judgments and estimates in accounting for transactions which were not complete at the financial position date. The condensed interim
financial statements have been prepared in accordance with International Accounting Standards 34 – Interim Financial Reporting
using the accounting policies consistent with International Financial Reporting Standards (“IFRS”) as issued by the
International Accounting Standards Board (“IASB”) appropriate in the circumstances.
Management has established processes, which
are in place to provide sufficient knowledge to support management representations that it has exercised reasonable diligence that
the unaudited condensed interim financial statements fairly present in all material respects the financial condition, results of
operations and cash flows of the Company, as of the date of and for the periods presented by the unaudited condensed interim financial
statements.
The Board of Directors is responsible for reviewing
and approving the unaudited condensed interim financial statements together with other financial information of the Company and
for ensuring that management fulfills its financial reporting responsibilities. The Audit Committee assists the Board of Directors
in fulfilling this responsibility.
The Audit Committee meets with management to
review the financial reporting process and financial statements together with other financial information of the Company. The Audit
Committee approves the unaudited condensed interim financial statements together with other financial information of the Company
for issuance to the shareholders on behalf of the Board of Directors.
Management recognizes its responsibility for
conducting the Company’s affairs in compliance with IFRS as issued by the IASB, and applicable laws and regulations, and
for maintaining proper standards of conduct for its activities.
| “Rory Moore” |
“Bruce Ramsden” |
| Rory Moore |
Bruce Ramsden |
| President and Chief Executive Officer |
VP Finance and Chief Financial Officer |
Toronto, Canada
November 17, 2017
Condensed Interim Statements of Financial Position
In Canadian dollars
(Unaudited)
| | |
Notes | |
|
September 30, 2017 | | |
|
December 31, 2016 | |
| | |
| |
|
| | |
|
| |
| ASSETS | |
| |
|
| | |
| |
| Current assets | |
| |
| | | |
| | |
| Cash | |
4 | |
$ | 2,032,386 | | |
$ | 8,286,064 | |
| Amounts receivable | |
4 | |
| 172,351 | | |
| 322,383 | |
| Prepaid expenses | |
5 | |
| 65,589 | | |
| 46,910 | |
| | |
| |
| 2,270,326 | | |
| 8,655,357 | |
| | |
| |
| | | |
| | |
| Reclamation deposit | |
6 | |
| 250,000 | | |
| 295,000 | |
| Equipment | |
7 | |
| 1,660,555 | | |
| 1,670,305 | |
| Mineral properties | |
8 | |
| 603,305 | | |
| 603,305 | |
| | |
| |
| | | |
| | |
| Total assets | |
| |
$ | 4,784,186 | | |
$ | 11,223,967 | |
| | |
| |
| | | |
| | |
| LIABILITIES AND SHAREHOLDERS’ EQUITY | |
| |
| | | |
| | |
| Current liabilities | |
| |
| | | |
| | |
| Accounts payable and accrued liabilities | |
4 | |
| 667,496 | | |
| 839,893 | |
| Deferred premium on flow-through shares | |
9, 11(ii) | |
| 889,083 | | |
| - | |
| | |
| |
| 1,556,579 | | |
| 839,893 | |
| | |
| |
| | | |
| | |
| Decommissioning and restoration liability | |
10 | |
| 171,736 | | |
| 170,663 | |
| | |
| |
| | | |
| | |
| Shareholders’ equity: | |
| |
| | | |
| | |
| Share capital | |
11 | |
| 107,545,837 | | |
| 96,009,406 | |
| Share-based payments reserve | |
11 | |
| 4,788,244 | | |
| 4,842,489 | |
| Deficit | |
| |
| (109,278,210 | ) | |
| (90,638,484 | ) |
| Total shareholders’ equity | |
| |
| 3,055,871 | | |
| 10,213,411 | |
| | |
| |
| | | |
| | |
| Total liabilities and shareholders’ equity | |
| |
$ | 4,784,186 | | |
$ | 11,223,967 | |
| | |
| |
| | | |
| | |
| Going concern | |
1 | |
| | | |
| | |
The notes to the condensed interim financial statements are an
integral part of these statements.
On behalf of the Board:
| “Rory Moore” |
|
“Jonathan Comerford” |
|
| Director |
|
Director |
|
Condensed Interim Statements of Comprehensive Loss
In Canadian dollars
(Unaudited)
| | |
| |
|
Three
months ended | | |
|
Three months ended | | |
|
Nine
months ended | | |
|
Nine months ended | |
| | |
Notes | |
|
September
30, 2017 | | |
|
September 30, 2016 | | |
|
September
30, 2017 | | |
|
September 30, 2016 | |
| Expenses | |
| |
| | |
| | |
| | |
| |
| Exploration and evaluation expenses | |
13 | |
$ | (2,869,279 | ) | |
$ | (6,021,997 | ) | |
$ | (17,855,176 | ) | |
$ | (29,182,492 | ) |
| Management fees | |
12 | |
| (22,500 | ) | |
| (22,500 | ) | |
| (67,500 | ) | |
| (67,500 | ) |
| Share-based
payment expense | |
12 | |
| (81,640 | ) | |
| (126,100 | ) | |
| (798,747 | ) | |
| (1,313,429 | ) |
| Professional fees | |
| |
| (29,275 | ) | |
| (24,638 | ) | |
| (110,906 | ) | |
| (61,441 | ) |
| Promotion and investor relations | |
| |
| (20,345 | ) | |
| (6,067 | ) | |
| (69,735 | ) | |
| (61,431 | ) |
| Director fees | |
| |
| (15,285 | ) | |
| (17,536 | ) | |
| (48,219 | ) | |
| (56,766 | ) |
| Transfer agent & regulatory fees | |
| |
| (15,648 | ) | |
| (22,845 | ) | |
| (89,634 | ) | |
| (73,455 | ) |
| Consulting fees and payroll | |
| |
| (104,958 | ) | |
| (109,884 | ) | |
| (361,704 | ) | |
| (539,882 | ) |
| Office expenses | |
| |
| (14,702 | ) | |
| (21,327 | ) | |
| (55,096 | ) | |
| (56,914 | ) |
| Travel expenses | |
| |
| (29,588 | ) | |
| (10,123 | ) | |
| (50,033 | ) | |
| (26,676 | ) |
| Depreciation | |
7 | |
| (3,250 | ) | |
| (3,250 | ) | |
| (9,750 | ) | |
| (9,750 | ) |
| Total expenses | |
| |
| (3,206,470 | ) | |
| (6,386,267 | ) | |
| (19,516,500 | ) | |
| (31,449,736 | ) |
| | |
| |
| | | |
| | | |
| | | |
| | |
| Accretion expense on decommissioning and restoration
liability | |
10 | |
| (360 | ) | |
| (305 | ) | |
| (1,073 | ) | |
| (908 | ) |
| Interest income | |
| |
| 9,060 | | |
| 33,406 | | |
| 28,469 | | |
| 163,821 | |
| Other income flow-
through shares | |
9 | |
| 745,282 | | |
| - | | |
| 849,378 | | |
| 335,748 | |
| | |
| |
| | | |
| | | |
| | | |
| | |
| Net loss and
comprehensive loss for the period | |
| |
$ | (2,452,488 | ) | |
$ | (6,353,166 | ) | |
$ | (18,639,726 | ) | |
$ | (30,951,075 | ) |
| | |
| |
| | | |
| | | |
| | | |
| | |
| Basic and diluted
loss per share | |
11 (iii) | |
$ | (0.05 | ) | |
$ | (0.13 | ) | |
$ | (0.38 | ) | |
$ | (0.66 | ) |
| | |
| |
| | | |
| | | |
| | | |
| | |
| Weighted average number of shares
outstanding | |
| |
| 50,887,277 | | |
| 47,144,416 | | |
| 49,104,610 | | |
| 47,033,448 | |
The notes to the condensed interim financial statements are an
integral part of these statements.
Condensed Interim Statements of Equity
In Canadian dollars
(Unaudited)
| | |
Notes | | |
Number of shares | | |
Share capital | | |
Share-based
payments reserve | | |
Deficit | | |
|
Total | |
| Balance, January 1, 2016 | |
| | | |
| 46,906,970 | | |
$ | 95,269,951 | | |
$ | 3,806,954 | | |
$ | (56,473,210 | ) | |
$ | 42,603,695 | |
| Net loss for the period | |
| | | |
| - | | |
| - | | |
| - | | |
| (30,951,075 | ) | |
| (30,951,075 | ) |
| Issuance of common shares -
exercise of options | |
| 11 | (iv) | |
| 250,000 | | |
| 347,450 | | |
| - | | |
| - | | |
| 347,450 | |
| Fair value of options exercised from share-based
payments reserve | |
| | | |
| - | | |
| 267,980 | | |
| (267,980 | ) | |
| - | | |
| - | |
| Share-based
payment expense | |
| | | |
| - | | |
| - | | |
| 1,313,429 | | |
| - | | |
| 1,313,429 | |
| Balance, September 30, 2016 | |
| | | |
| 47,156,970 | | |
$ | 95,885,381 | | |
$ | 4,852,403 | | |
$ | (87,424,285 | ) | |
$ | 13,313,499 | |
| | |
| | | |
| | | |
| | | |
| | | |
| | | |
| | |
| Balance, January 1, 2017 | |
| | | |
| 47,181,970 | | |
$ | 96,009,406 | | |
$ | 4,842,489 | | |
$ | (90,638,484 | ) | |
$ | 10,213,411 | |
| Net loss for the period | |
| | | |
| - | | |
| - | | |
| - | | |
| (18,639,726 | ) | |
| (18,639,726 | ) |
| Issuance of common shares -
exercise of options | |
| 11 | (iv) | |
| 490,000 | | |
| 775,300 | | |
| - | | |
| - | | |
| 775,300 | |
| Fair value of options exercised from share-based
payments reserve | |
| | | |
| - | | |
| 596,210 | | |
| (596,210 | ) | |
| - | | |
| - | |
| Issuance of common shares -
private placement | |
| 11 | (ii) | |
| 3,168,296 | | |
| 10,296,962 | | |
| - | | |
| - | | |
| 10,296,962 | |
| Share issue costs | |
| | | |
| - | | |
| (388,823 | ) | |
| - | | |
| - | | |
| (388,823 | ) |
| Issurance of common shares -
exercise of vested RSUs | |
| 11 | (iv) | |
| 72,333 | | |
| 256,782 | | |
| (256,782 | ) | |
| - | | |
| - | |
| Share-based
payment expense | |
| | | |
| - | | |
| - | | |
| 798,747 | | |
| - | | |
| 798,747 | |
| Balance, September 30, 2017 | |
| | | |
| 50,912,599 | | |
$ | 107,545,837 | | |
$ | 4,788,244 | | |
$ | (109,278,210 | ) | |
$ | 3,055,871 | |
The notes to the condensed interim financial statements are an
integral part of these statements.
Condensed Interim Statements of Cash Flows
In Canadian dollars
(Unaudited)
| | |
| |
|
Nine months ended | | |
|
Nine months ended | |
| | |
Notes | |
|
September 30, 2017 | | |
|
September 30, 2016 | |
| Cash provided by (used in): | |
| |
| | | |
| | |
| Operating activities: | |
| |
| | | |
| | |
| Net loss for the period | |
| |
$ | (18,639,726 | ) | |
$ | (30,951,075 | ) |
| Adjustments: | |
| |
| | | |
| | |
| Accretion expense on decomminissioning and restoration liability | |
| |
| 1,073 | | |
| 908 | |
| Depreciation | |
| |
| 9,750 | | |
| 9,750 | |
| Interest income | |
| |
| (28,469 | ) | |
| (163,821 | ) |
| Other income flow--through premium | |
| |
| (849,378 | ) | |
| (335,748 | ) |
| Share-based payment expense | |
| |
| 798,747 | | |
| 1,313,429 | |
| Changes in non-cash operating working capital: | |
| |
| | | |
| | |
| Amounts receivable | |
| |
| 150,032 | | |
| 80,486 | |
| Prepaid expenses | |
| |
| (18,679 | ) | |
| 167,985 | |
| Accounts payable and accrued liabilities | |
| |
| (172,397 | ) | |
| 1,157,735 | |
| | |
| |
| (18,749,047 | ) | |
| (28,720,351 | ) |
| Investing activities: | |
| |
| | | |
| | |
| Interest income | |
| |
| 28,469 | | |
| 163,821 | |
| Reclamation deposit refund | |
| |
| 45,000 | | |
| - | |
| Mineral properties | |
| |
| - | | |
| (200,000 | ) |
| | |
| |
| 73,469 | | |
| (36,179 | ) |
| Financing activities: | |
| |
| | | |
| | |
| Proceeds from option exercises | |
11(iv) | |
| 775,300 | | |
| 347,450 | |
| Issuance of shares, net of share issue costs | |
11(ii) | |
| 11,646,600 | | |
| - | |
| | |
| |
| 12,421,900 | | |
| 347,450 | |
| | |
| |
| | | |
| | |
| Decrease in cash | |
| |
| (6,253,678 | ) | |
| (28,409,080 | ) |
| Cash, beginning of period | |
| |
| 8,286,064 | | |
| 41,068,805 | |
| Cash, end of period | |
| |
$ | 2,032,386 | | |
$ | 12,659,725 | |
The notes to the condensed interim financial statements are an
integral part of these statements.
| KENNADY DIAMONDS INC. |
| Notes to Condensed Interim Financial Statements |
| For the Three and Nine Months Ended September 30, 2017 |
| In Canadian Dollars |
| (Unaudited) |
| 1. | NATURE OF OPERATIONS AND GOING CONCERN |
Kennady Diamonds Inc. was incorporated on February
27, 2012 under the Ontario Business Corporation Act.
The address of the Company’s registered
office and its principal place of business is 1145 Midland Avenue, Suite 9, Scarborough, ON, Canada, M1K 4H2. The Company’s
shares are listed on the TSX Venture Exchange under the symbol ‘KDI’.
Kennady Diamonds is involved in the exploration,
discovery, evaluation and development of diamond properties in Canada’s Northwest Territories. The underlying value and recoverability
of amounts shown as “Mineral Properties” is dependent upon the ability of the Company to discover economically recoverable
reserves, to have successful exploration, permitting and development, and upon future profitable production or proceeds from disposition
of the Company’s mineral properties. Failure to discover and develop economically recoverable reserves will require the Company
to write off costs capitalized to date.
For the nine months ended September 30, 2017,
the Company incurred a loss of $18,639,726, and had negative cash flow from operating activities of $18,749,047, and will be required
to obtain additional sources of financing to complete its business plans going into the future. Although the Company had a working
capital of $713,747 at September 30, 2017, including $2,032,386 of cash and cash equivalents, the Company has insufficient capital
to finance its operations over the next twelve months. The Company is currently investigating various sources of additional funding
to increase the cash balances required for ongoing operations over the foreseeable future. These additional sources include, but
are not limited to, share offerings, private placements, and the exercise of outstanding options. However, there is no certainty
that the Company will be able to obtain financing from any of those sources. These conditions indicate the existence of a material
uncertainty that my cast significant doubt as to the Company’s ability to continue as a going concern.
These financial statements have been prepared
on the basis that the Company will continue as a going concern, and do not reflect adjustments to assets and liabilities that would
be necessary if the going concern assumption was not appropriate, which may be material.
Authorization of Financial Statements
The unaudited condensed interim financial statements
for the period ended September 30, 2017 (including comparatives) were approved by the Audit Committee on behalf of the Board of
Directors on November 17, 2017.
| 2. | BASIS OF PRESENTATION AND SIGNIFICANT ACCOUNTING POLICIES |
These unaudited condensed interim financial
statements have been prepared in accordance with IAS 34 Interim Financial Reporting. These condensed interim financial statements
follow the same accounting policies and methods of computation as compared with the most recent annual financial statements, being
for the year ended December 31, 2016, which were prepared in accordance with International Financial Reporting Standards (“IFRS”)
as issued by the International Accounting Standards Board (“IASB”). Accordingly, these unaudited condensed interim
financial statements should be read in conjunction with the Company’s most recent annual financial statements.
These financial statements have been prepared
on a historical cost basis except for cash which has been measured at fair value.
The Company has elected to present the ‘Condensed
Interim Statement of Comprehensive Loss’ as a single financial statement with its Statement of Income, titled ‘Statement
of Comprehensive Loss’.
| KENNADY DIAMONDS INC. |
| Notes to Condensed Interim Financial Statements |
| For the Three and Nine Months Ended September 30, 2017 |
| In Canadian Dollars |
| (Unaudited) |
The significant accounting policies adopted
in the preparation of these financial statements are set out below.
Interest income from financial assets is recognized
when it is probable that the economic benefits will flow to the Company and the amount of income can be measured reliably. Interest
income is accrued on the basis of time that has passed by reference to the principal outstanding and at the effective interest
rate.
| (iii) | Mineral properties and exploration and evaluation costs |
Exploration and evaluation (“E&E”)
costs are those costs required to find a mineral property and determine technical feasibility and commercial viability. E&E
costs include costs to establish an initial mineral resource and determine whether inferred mineral resources can be upgraded to
measured and indicated mineral resources, and whether measured and indicated mineral resources can be converted to proven and probable
reserves.
E&E costs consist of:
| · | gathering exploration data through topographical and geological
studies; |
| · | exploratory drilling, trenching and sampling; |
| · | determining the volume and grade of the resource; |
| · | test work on geology, metallurgy, mining, geotechnical
and environmental; and |
| · | conducting engineering, marketing and financial studies. |
Costs in relation to these activities are expensed
as incurred until such time that technical feasibility and commercial viability are demonstrable. At such time, mineral properties
are assessed for impairment, and an impairment loss, if any, is recognized. Capitalized acquisition costs included in Mineral Properties
are transferred to capitalized costs within property, plant and equipment, or intangible assets, as appropriate. Determination
of technical feasibility and commercial viability require management’s judgment and include assessment of legal, environmental,
social and governmental factors.
The Company recognizes E&E costs as assets
when acquired as part of a business combination, or asset purchase, or as a result of rights acquired relating to a mineral property.
These assets are recognized at fair value or relative fair value if applicable. Capitalized E&E consists of:
| · | acquired interest in exploration properties; |
| · | amounts paid for acquired rights associated with exploration
properties; and |
| · | changes in decommissioning and restoration amounts capitalized
during the period. |
Equipment is stated at cost less accumulated
amortization and accumulated impairment losses. Cost comprises the fair value of consideration given to acquire an asset and includes
direct charges associated with bringing the asset to the location and condition necessary to put the asset into use, as well as
future cost of dismantling and removing the asset. When parts of an item of property and equipment have different useful lives,
they are accounted for as separate items (major components) of property and equipment. Replacement cost, including major inspection
and overhaul expenditures are capitalized for components of property and equipment, which are accounted for separately.
Equipment are amortized over their useful lives.
Amortization is calculated so as to allocate the cost of each asset over its expected useful life to its estimated residual value.
The estimated useful lives, residual values and amortization method are reviewed at the end of each annual reporting period. Earthmoving
equipment is amortized on a straight line basis over its estimated useful life of ten years. Assets under construction are not
amortized.
A provision is recognized in the statements
of financial position when the Company has a present legal or constructive obligation as a result of a past event, and it is probable
that an outflow of economic benefits will be required to settle the
| KENNADY DIAMONDS INC. |
| Notes to Condensed Interim Financial Statements |
| For the Three and Nine Months Ended September 30, 2017 |
| In Canadian Dollars |
| (Unaudited) |
obligation. Provisions are measured at the
present value of the expected expenditures to settle the obligation, applying a risk-free
interest rate. The increase in the provision due to passage of time is recognized as accretion expense.
The Company’s decommissioning and restoration
liability arise from its obligations to undertake site reclamation and remediation in connection with its mineral properties. The
estimated costs of reclamation are based management’s best estimates of costs expected to reclaim this land in future periods.
Future changes to any regulations and standards, as well as changes resulting from operations may result in actual reclamation
costs differing from the estimate.
| (vi) | Financial instruments |
Financial instruments are classified into one
of the following four categories: loans and receivables; fair value through profit or loss; held-to-maturity;
and available-for-sale.
Financial assets are initially measured at fair value. Subsequent measurement and recognition of the changes in fair value of financial
instruments depends upon their initial classifications, as follows:
| · | Financial assets and financial liabilities at fair value
through profit and loss include financial assets and financial liabilities that are held for trading or designated upon initial
recognition as at fair value through profit and loss. These financial instruments are measured at fair value with changes in fair
values recognized in the Statement of Comprehensive Loss. |
| · | Financial assets classified as available-for-sale
are measured at fair value, with changes in fair values recognized as other comprehensive income (“OCI”) in the Statement
of Comprehensive Loss, except when there is objective evidence that the asset is impaired, at which point the cumulative loss
that had been previously recognized in OCI is recognized within the Statement of Comprehensive Loss. |
| · | Financial assets classified as held-to-maturity
and loans and receivables are measured subsequent to initial recognition at amortized cost using the effective interest method. |
| · | Financial liabilities, other than financial liabilities
classified as fair value through profit and loss, are measured in subsequent periods at amortized cost using the effective interest
method. |
The effective interest method is a method of
calculating the amortized cost of a financial liability and of allocating interest expense over the relevant period. The effective
interest rate is the rate that exactly discounts estimated future cash payments (including all fees and points paid or received
that form an integral part of the effective interest rate, transaction costs and other premiums or discounts) through the expected
life of the financial liability, or where appropriate, a short period, to the net carrying amount on initial recognition.
The Company has classified its financial instruments
as follows:
| Asset/Liability |
Classification |
Measurement |
| Cash |
Fair value through profit and loss |
Fair value |
| Amounts receivable |
Loans and receivables |
Amortized cost |
| Accounts payable and accrued liabilities |
Other liabilties |
Amortized cost |
The Company’s cash consists of balances with banks.
The fair values of the Company’s amounts receivable, and accounts
payable and accrued liabilities approximate their carrying values because of the immediate or short-term
to maturity of these financial instruments.
| KENNADY DIAMONDS INC. |
| Notes to Condensed Interim Financial Statements |
| For the Three and Nine Months Ended September 30, 2017 |
| In Canadian Dollars |
| (Unaudited) |
Under Canadian income tax legislation, a company
is permitted to issue flow-through shares whereby the Company agrees
to incur qualifying expenditures and renounce the related income tax deductions to the investors. The proceeds from issuance of
these shares are allocated between the offering of shares and the sale of tax benefits. The allocation is made based on the difference
between the quoted price of the existing shares and the amount the investor pays for the flow-through
shares. A deferred premium liability is recognized for this difference. The Company renounces the deductions for tax purposes related
to the eligible exploration and evaluation expenditures on the date the flow-through
shares are issued. The premium liability is reduced on a pro-rata
basis and recorded in other income based on the corresponding eligible expenditures that have been incurred.
Where the Company has unused tax benefits on
loss carry forwards and tax pools in excess of book value available for deduction for which no deferred tax asset is recognized,
the Company recognizes the deferred tax benefit of such amounts to offset the increase in deferred tax liabilities resulting in
an offsetting recovery of deferred income taxes being recognized through profit or loss in the reporting period.
| (viii) | Share-based
payments |
Equity-settled
share-based payments to employees and others providing similar
services are measured at the fair value of the equity instruments at the grant date.
The fair value determined at the grant date
of the equity-settled share-based
payments is expensed to the Statement of Comprehensive Loss over the vesting period, if any, which is the period during which the
employee becomes unconditionally entitled to equity instruments. At the end of each reporting period, the Company revises its estimate
of the number of equity instruments expected to vest, if any.
Equity-settled
share-based payment transactions with parties other than employees,
if any, are measured at the fair value of the goods or services received, except where that fair value cannot be estimated reliably,
in which case they are measured at the fair value of the equity instruments granted, measured at the date the entity obtains the
goods or the counterparty renders the service.
Basic loss or earnings per share is
calculated by dividing loss or earnings attributable to common shares by the weighted average number of shares outstanding
during the period.
Diluted loss or earnings per share is calculated
using the denominator of the basic loss or earnings calculation described above adjusted to include the potentially dilutive effect
of outstanding stock options.
| (x) | Restricted and deferred share unit plans |
The Restricted and Deferred Share Unit (“RSU”
and “DSU”) plans are full value phantom shares that mirror the value of Kennady Diamonds Inc.’s publicly traded
common shares. Grants under the RSU and DSU plan are made on a discretionary basis to qualified persons and employees of the Company
subject to the Board of Directors’ approval. RSU’s and DSU’s vest according to the terms set out in the award
agreement.
Both the RSU and DSU plans are equity settled.
Equity-settled transactions are measured by reference to the fair
value at the grant date. The fair value determined at grant date is recognized over the vesting period in accordance with the vesting
terms and conditions, with a corresponding increase to contributed surplus.
| KENNADY DIAMONDS INC. |
| Notes to Condensed Interim Financial Statements |
| For the Three and Nine Months Ended September 30, 2017 |
| In Canadian Dollars |
| (Unaudited) |
| (xi) | Income taxes and deferred taxes |
The income tax expense or benefit for the period
consists of two components: current and deferred. Income tax expense or benefit is recognized in the Statement of Comprehensive
Loss except to the extent it relates to a business combination or items recognized directly in equity.
Current tax is the expected tax payable or
receivable on the taxable profit or loss for the period. Current tax is calculated using tax rates and laws that were enacted or
substantively enacted at the balance sheet date in each of the jurisdictions and includes any adjustments for taxes payable or
recovery in respect of prior periods.
Taxable profit or loss differs from profit
or loss as reported in the condensed statement of comprehensive loss because of items of income or expense that are taxable or
deductible in other years, and items that are never taxable or deductible.
Deferred tax is recognized on temporary differences
between the carrying amounts of assets and liabilities in the financial statements and the corresponding tax bases used in the
computation of taxable profit. Deferred tax liabilities are generally recognized for all taxable temporary differences. Deferred
tax assets are generally recognized for all deductible temporary differences, loss carryforwards and tax credit carryforwards to
the extent that it is probable that taxable profits will be available against which they can be utilized. To the extent that the
Company does not consider it to be probable that taxable profits will be available against which deductible temporary differences,
loss carryforwards, and tax credit carryforwards can be utilized, a deferred tax asset is not recognized.
Deferred tax assets and liabilities are not
recognized if the temporary difference arises from the initial recognition (other than in a business combination) of other assets
and liabilities in a transaction that affects neither the taxable profit nor the accounting profit.
Deferred tax assets and liabilities are measured
at the tax rates that are expected to apply in the period in which the liability is settled or the asset realized, based on tax
rates (and tax laws) that have been enacted or substantively enacted by the end of the reporting period. The measurement of deferred
tax liabilities and assets reflects the tax consequences that would follow from the manner in which the Company expects, at the
end of the reporting period, to recover or settle the carrying amount of its assets and liabilities.
Deferred tax assets and liabilities are offset
when there is a legally enforceable right to set off current tax assets against current tax liabilities and when they relate to
income taxes levied by the same taxation authority and the Company intends to settle its current tax assets and liabilities on
a net basis.
Current and deferred taxes are recognized in
profit or loss, except when they relate to items that are recognized in other comprehensive income or directly into equity, in
which case, the current and deferred taxes are also recognized in other comprehensive income or directly in equity respectively.
| (xii) | Standards, amendments and interpretations to existing
standards that are not yet effective and have not been adopted early by the Company |
At the date of authorization of these financial
statements, certain new standards, amendments and interpretations to existing standards have been published but are not yet effective,
and have not been adopted early by the Company.
The Company anticipates that all of the relevant
pronouncements will be adopted in the Company’s accounting policy for the first period beginning after the effective date
of the pronouncement. Information on new standards, amendments and interpretations that are expected to be relevant to the Company’s
audited financial statements is provided below. Certain other new standards and interpretations have been issued but are not expected
to have a material impact on the Company’s financial statements and are therefore not discussed below.
| KENNADY DIAMONDS INC. |
| Notes to Condensed Interim Financial Statements |
| For the Three and Nine Months Ended September 30, 2017 |
| In Canadian Dollars |
| (Unaudited) |
Share-based
payments
In June 2016, the IASB issued amendments to
International Financial Reporting Standard 2, Share-based Transactions
(“IFRS 2”). The amendments to IFRS 2 are effective for periods beginning on or after January 1, 2018 and are to be
applied prospectively. The amendments clarify the classification and measurement of share-based
payment transactions. Management is currently assessing the impact of the amendments to IFRS 2 on the financial statements.
Financial instruments
In July 2014, the IASB issued the final
version of IFRS 9 Financial Instruments (“IFRS 9”) bringing together the classification and measurement,
impairment and hedge accounting phases of the IASB’s project to replace IAS 39 Financial Instruments: Recognition and
Measurement. IFRS 9 is effective for annual periods beginning on or after January 1, 2018, with early adoption permitted. The
extent of the impact of adoption of IFRS 9 has not yet been determined.
Leases
On January 13, 2016, the IASB issued
International Financial Reporting Standard 16, Leases (“IFRS 16”). The new standard will replace existing lease
guidance in IFRS and related interpretations, and requires companies to bring most leases on- balance
sheet. The new standard is effective for annuals beginning on or after January 1, 2019. The Company is currently assessing
the impact of IFRS 16.
| 3. | SIGNIFICANT ACCOUNTING JUDGMENTS, ESTIMATES AND ASSUMPTIONS |
The preparation of the Company’s unaudited
condensed interim financial statements requires management to make judgments, estimates and assumptions that affect the reported
amounts of assets and liabilities at the date of the financial statements and reported amounts of expenses during the reporting
period. Actual outcomes could differ from these estimates. These audited financial statements include estimates, which, by their
nature, are uncertain and may require accounting adjustments based on future occurrences. Revisions to accounting estimates are
recognized in the period in which the estimate is revised and future periods if the revision affects both current and future periods.
These estimates are based on historical experience, current and future economic conditions, and other factors, including expectations
of future events that are believed to be reasonable under the circumstances.
| i) | Significant Judgments in Applying Accounting Policies |
The areas which require management to make significant judgments
in applying the Company’s accounting policies in determining carrying values include, but are not limited to:
| a) | Impairment analysis – Mineral Properties |
The Company reviews its mineral properties
for impairment based on results to date and when events and changes in circumstances indicate that the carrying value of the assets
may not be recoverable. IFRS 6 - Exploration for and evaluation
of mineral resources requires the Company to make certain judgments in respect of such events and changes in circumstances,
and in assessing their impact on the valuations of the affected assets. The Company’s assessment is that as at September
30, 2017, no indicators of an impairment in the carrying value of its mineral properties had occurred.
| ii) | Significant Accounting Estimates and Assumptions |
The areas which require management to make significant estimates
and assumptions in determining carrying values include, but are not limited to:
| a) | Impairment analysis – Mineral Properties |
The Company reviews its mineral properties for impairment based
on results to date and when events and changes in circumstances indicate that the carrying value of the assets may not be recoverable.
If
| KENNADY DIAMONDS INC. |
| Notes to Condensed Interim Financial Statements |
| For the Three and Nine Months Ended September 30, 2017 |
| In Canadian Dollars |
| (Unaudited) |
indicators of impairment are identified, management
will perform an impairment test in accordance with IAS 36 – Impairment of assets (“IAS 36”). IAS 36 requires
the Company to make certain judgments, assumptions, and estimates in determining the estimate of the net recoverable amount. Impairments
are recognized when the carrying values exceed management’s estimate of the net recoverable amounts associated with the affected
assets. The values shown on the statement of financial position for Mineral Properties represents the Company’s assumption
that the amounts are recoverable. As a result of the numerous variables associated with the Company’s judgments and assumptions,
the precision and accuracy of estimates of the recoverable amount is subject to significant uncertainties, and may change significantly
as additional information becomes known.
The stock option pricing model requires the
input of highly subjective assumptions including the expected life and volatility. Changes in the subjective input assumptions
can materially affect the fair value estimate.
| c) | Provision for decommissioning and restoration |
The decommissioning and
restoration liability and the accretion recorded are based on estimates of future cash flows, discount rates, and assumptions
regarding timing. The estimates are subject to change and the actual costs for the decommissioning and restoration liability
may change significantly.
Deferred income tax assets and
liabilities are determined based on differences between the financial reporting and tax bases of assets and liabilities and
on unused losses carried forward, and are measured using the substantively enacted tax rates that are expected to be in
effect when the differences are expected to reverse or losses are expected to be utilized. Deferred tax assets are recorded
to recognize tax benefits only to the extent that, based on available evidence, including forecasts, it is probable that they
will be realized. The Company has not recorded the benefit of tax losses or deductible temporary differences.
For financial instruments recorded at fair
value, the Company categorizes each of its fair value measurements in accordance with a fair value hierarchy. The fair value hierarchy
establishes three levels to classify the inputs to valuation techniques used to measure fair value. Level 1 inputs are quoted prices
(unadjusted) in active markets for identical assets or liabilities. Level 2 inputs are quoted prices in markets that are not active,
quoted prices for similar assets or liabilities in active markets, inputs other than quoted prices that are observable for the
asset or liability (for example, interest rate and yield curves observable at commonly quoted intervals, forward pricing curves
used to value currency and commodity contracts and volatility measurements used to value option contracts), or inputs that are
derived principally from or corroborated by observable market data or other means. Level 3 inputs are unobservable (supported by
little or no market activity).
The fair value hierarchy gives the highest priority to Level 1 inputs
and the lowest priority to Level 3 inputs.
The Company’s financial assets are measured at fair value and are summarized in
the following table:
| KENNADY DIAMONDS INC. |
| Notes to Condensed Interim Financial Statements |
| For the Three and Nine Months Ended September 30, 2017 |
| In Canadian Dollars |
| (Unaudited) |
| | |
September 30, 2017 | |
| | |
Level 1 | | |
Level 2 | | |
Level 3 | |
| Cash | |
$ | 2,032,386 | | |
$ | - | | |
$ | - | |
| | |
December 31, 2016 | |
| | |
Level 1 | | |
Level 2 | | |
Level 3 | |
| Cash | |
$ | 8,286,064 | | |
$ | - | | |
$ | - | |
The fair values of the amounts receivable and accounts payable and
accrued liabilities approximate their carrying values due to the relatively short-term
maturity of these financial instruments.
The carrying amounts by classification are:
| | |
September 30, | | |
December 31, | |
| | |
2017 | | |
2016 | |
| Financial assets | |
| | | |
| | |
| | |
| | | |
| | |
| Fair value through profit or loss | |
| | | |
| | |
| Cash | |
$ | 2,032,386 | | |
$ | 8,286,064 | |
| | |
| | | |
| | |
| Loans and receivables | |
| | | |
| | |
| Amounts receivable | |
| 172,351 | | |
| 322,383 | |
| | |
| | | |
| | |
| Financial liabilities | |
| | | |
| | |
| Financial liabilities measured at amortized cost | |
| | | |
| | |
| Accounts payable and accrued liabilities | |
| 667,496 | | |
| 839,893 | |
The Company’s interest income on its bank balances carried
at fair value is presented on the Statements of Comprehensive Loss in the interest line.
Financial instruments risks
The Company thoroughly examines the various financial instrument
risks to which it is exposed and assesses the impact and likelihood of those risks. These risks may include credit risk, liquidity
risk and market risk.
Credit risk
Credit risk is the risk of financial loss to the Company if a customer
or counterparty to a financial instrument fails to meet its obligations.
At September 30, 2017 and December 31, 2016, the Company does not
have any allowance for doubtful accounts, and does not consider that any such allowance is necessary.
All of the Company’s cash is held with a major Canadian financial
institution and thus the exposure to credit risk is considered insignificant. Management actively monitors the Company’s
exposure to credit risk under its financial instruments, including with respect to amounts receivable. The Company considers the
risk of loss for its amounts receivable to be remote and significantly mitigated due to the financial strength of the party from
whom the receivables
| KENNADY DIAMONDS INC. |
| Notes to Condensed Interim Financial Statements |
| For the Three and Nine Months Ended September 30, 2017 |
| In Canadian Dollars |
| (Unaudited) |
are due -
the Canadian government for harmonized sales tax (“HST”) refunds receivable in the amount of $172,351 (December 31,
2016 - $322,383).
The Company’s current policy is to hold excess cash in high
interest bank accounts. It periodically monitors the investment income it makes and is satisfied with the credit ratings of its
bank.
Liquidity risk
Liquidity risk is the risk that the Company
will not be able to meet its obligations associated with financial liabilities. The Company has a planning and budgeting process
in place by which it anticipates and determines the funds required to support its operating requirements. The Company coordinates
this planning and budgeting process with its financing activities through its capital management process. The Company’s financial
liabilities comprise its accounts payable and accrued liabilities, all of which are due within the next 12-month
period. There are no operating lease commitments.
Market risk
Market risk primarily relates to the risk of loss that results from
change in commodity prices, foreign exchange and interest rates. The Company does not have commodity price risk or foreign exchange
risk. The Company has no significant exposure at September 30, 2017 to interest rate risk through its financial instruments. The
Company has no interest- bearing debt.
| | |
September 30, | | |
December 31, | |
| | |
2017 | | |
2016 | |
| Prepaid expenses | |
$ | 65,589 | | |
$ | 45,420 | |
| Prepaid deposits | |
| - | | |
| 1,490 | |
| | |
$ | 65,589 | | |
$ | 46,910 | |
At September 30, 2017, the Company had provided
a total reclamation deposit of $250,000 (December 31, 2016 – $295,000) to the Mackenzie Valley Land and Water Board for
its mining project to secure clean-up costs if the project is
abandoned or closed (Note 10).
The Company’s equipment as at September 30, 2017 and December
31, 2016 is as follows:
| KENNADY DIAMONDS INC. |
| Notes to Condensed Interim Financial Statements |
| For the Three and Nine Months Ended September 30, 2017 |
| In Canadian Dollars |
| (Unaudited) |
| | |
Earthmoving | | |
Assets under | | |
| |
| | |
equipment | | |
construction* | | |
Total | |
| Cost | |
| | | |
| | | |
| | |
| At January 1, 2016 | |
$ | 130,000 | | |
$ | 1,564,138 | | |
$ | 1,694,138 | |
| Additions | |
| - | | |
| - | | |
| - | |
| At December 31, 2016 | |
| 130,000 | | |
| 1,564,138 | | |
| 1,694,138 | |
| Additions | |
| - | | |
| - | | |
| - | |
| At September 30, 2017 | |
$ | 130,000 | | |
$ | 1,564,138 | | |
$ | 1,694,138 | |
| | |
| | | |
| | | |
| | |
| Accumulated depreciation | |
| | | |
| | | |
| | |
| At January 1, 2016 | |
$ | (10,833 | ) | |
$ | - | | |
$ | (10,833 | ) |
| Depreciation | |
| (13,000 | ) | |
| - | | |
| (13,000 | ) |
| At December 31, 2016 | |
| (23,833 | ) | |
| - | | |
| (23,833 | ) |
| Depreciation | |
| (9,750 | ) | |
| - | | |
| (9,750 | ) |
| At September 30, 2017 | |
$ | (33,583 | ) | |
$ | - | | |
$ | (33,583 | ) |
| | |
| | | |
| | | |
| | |
| Carrying amounts | |
| | | |
| | | |
| | |
| At December 31, 2016 | |
$ | 106,167 | | |
$ | 1,564,138 | | |
$ | 1,670,305 | |
| At September 30, 2017 | |
$ | 96,417 | | |
$ | 1,564,138 | | |
$ | 1,660,555 | |
*Assets under construction represents an exploration
camp that is currently in storage and not in use.
Mineral properties represent the Company’s claim to the Kennady
North Project. The continuity of the Mineral Properties is as follows:
| Balance, January 1, 2016 | |
$ | 481,423 | |
| Acquired mineral rights and claims | |
| 200,000 | |
| Change in expected decommissioning and restoration liability | |
| (78,118 | ) |
| Balance, December 31, 2016 and September 30, 2017 | |
$ | 603,305 | |
During the year ended December 31, 2016, the
Company acquired six mining leases from GGL Resources Corp (“GGL”). In consideration for the purchase, the Company
paid to GGL a cash sum of $200,000 and GGL retained a 0.75% royalty interest (the “Royalty”) on all mineral products
produced from the property. The Company has the right at any time prior to commencement of production from the property to purchase
one-third (1/3) of the Royalty, being 0.25%, for the sum of $1,000,000.
| 9. | DEFERRED PREMIUM ON FLOW-THROUGH SHARES |
The premium paid for flow-through
shares in excess of the fair value of common shares is initially recognized as a liability. The liability is reduced on a pro-rata
basis and recorded in other income based on the corresponding eligible expenditures that have been incurred.
| KENNADY DIAMONDS INC. |
| Notes to Condensed Interim Financial Statements |
| For the Three and Nine Months Ended September 30, 2017 |
| In Canadian Dollars |
| (Unaudited) |
| | |
September 30, | | |
December 31, | |
| | |
2017 | | |
2016 | |
| Balance, beginning of period | |
$ | - | | |
$ | 335,748 | |
| Deferred premium liability recognized on flow-through issuances | |
| 1,738,461 | | |
| - | |
| Income recognized based on corresponding eligible expenditures | |
| (849,378 | ) | |
| (335,748 | ) |
| Balance, end of period | |
$ | 889,083 | | |
$ | - | |
| 10. | DECOMMISSIONING AND RESTORATION LIABILITY |
The decommissioning and restoration liability refers to projected
costs to remove the camp and all of the equipment from the Company’s exploration site in the Northwest Territories.
The decommissioning and restoration liability was calculated using
the following assumptions as at September 30, 2017 and December 31, 2016:
| | |
September 30, | | |
December 31, | |
| | |
2017 | | |
2016 | |
| Expected undiscounted cash flows | |
$ | 175,000 | | |
$ | 175,000 | |
| Discount rate | |
| 0.84 | % | |
| 0.84 | % |
| Periods | |
| 2019 | | |
| 2019 | |
The continuity of the decommissioning and restoration liability
at September 30, 2017 and December 31, 2016 is as follows:
| | |
September 30, | | |
December 31, | |
| | |
2017 | | |
2016 | |
| Balance, beginning of period | |
$ | 170,663 | | |
$ | 247,568 | |
| Change in estimate of discounted cash flows for the period | |
| - | | |
| (78,118 | ) |
| Accretion recorded in the period | |
| 1,073 | | |
| 1,213 | |
| Balance, end of the period | |
$ | 171,736 | | |
$ | 170,663 | |
| i. | Authorized share capital |
Unlimited common shares, without par value. Each common share entitles
the holder to one shareholder vote. There is no other class of shares in the Company.
The number of shares issued and fully paid as at September 30, 2017
is 50,912,599.
| KENNADY DIAMONDS INC. |
| Notes to Condensed Interim Financial Statements |
| For the Three and Nine Months Ended September 30, 2017 |
| In Canadian Dollars |
| (Unaudited) |
On May 17, 2017, the Company closed a non-brokered
private placement of flow-through common shares and non-flow-through
common shares, at the price of $4.38 and $3.25 per share, respectively. The Company issued 1,538,461 flow-through
common shares for gross proceeds of $6,738,459, and 1,629,835 non-flow-through
common shares for gross proceeds of $5,296,964 as a result of the non-brokered
private placement. An amount of $1,738,461 was recognized as the premium paid for the flow-through
shares in excess of the fair value of the common shares, and was initially recognized as a liability. Share issuance costs of $388,823
were incurred in connection with the private placement. The shares were subject to a four month hold period, which expired on September
18, 2017.
The following table sets forth the computation
of basic and diluted loss or earnings per share:
| | |
Three months ended | | |
Three months ended | | |
Nine months ended | | |
Nine months ended | |
| | |
September 30, 2017 | | |
September 30, 2016 | | |
September 30, 2017 | | |
September 30, 2016 | |
| Numerator | |
| | | |
| | | |
| | | |
| | |
| Net loss for the period | |
$ | (2,452,488 | ) | |
$ | (6,353,166 | ) | |
$ | (18,639,726 | ) | |
$ | (30,951,075 | ) |
| | |
| | | |
| | | |
| | | |
| | |
| Denominator | |
| | | |
| | | |
| | | |
| | |
| For basic - weighted average
number of shares outstanding | |
| 50,887,277 | | |
| 47,144,416 | | |
| 49,104,610 | | |
| 47,033,448 | |
| Effect of dilutive securities | |
| - | | |
| - | | |
| - | | |
| - | |
| For diluted - adjusted weighted average number of shares
outstanding | |
| 50,887,277 | | |
| 47,144,416 | | |
| 49,104,610 | | |
| 47,033,448 | |
| | |
| | | |
| | | |
| | | |
| | |
| Loss Per Share | |
| | | |
| | | |
| | | |
| | |
| Basic | |
$ | (0.05 | ) | |
$ | (0.13 | ) | |
$ | (0.38 | ) | |
$ | (0.66 | ) |
| Diluted | |
| (0.05 | ) | |
| (0.13 | ) | |
| (0.38 | ) | |
| (0.66 | ) |
The calculation for the weighted average number
of shares outstanding is based on the number of shares outstanding on a daily basis in the nine months ended September 30, 2017
and 2016. Shares issuable on exercise of stock options totaling 1,110,000 on September 30, 2017 (September 30, 2016 – 2,125,000)
and 152,666 RSUs (September 30, 2016 – nil) were not included in the computation of diluted loss per share because the effect
would have been anti-dilutive.
| iv. | Stock options, restricted share units and share-based
payments reserve |
The Company, through its Board of Directors
and shareholders, adopted a long-term equity incentive plan (the
“Plan”) which, among other things, allows for the maximum number of shares that may be reserved for issuance under
the Plan to be 10% of the Company’s issued and outstanding shares at the time of the grant. The Board of Directors has the
authority and discretion to grant stock options, restricted share unit’s and other share based payments as identified in
the Plan, which includes provisions limiting the issuance of options and other share based payments to qualified persons and employees
of the Company to maximums identified in the Plan.
The following table summarizes information
about the stock options outstanding and exercisable at September 30, 2017 and December 31, 2016:
| KENNADY DIAMONDS INC. |
| Notes to Condensed Interim Financial Statements |
| For the Three and Nine Months Ended September 30, 2017 |
| In Canadian Dollars |
| (Unaudited) |
| | |
September 30, 2017 | |
| | |
| | |
Weighted average | |
| | |
Number of options | | |
exercise price | |
| Balance at beginning of period | |
| 2,100,000 | | |
$ | 2.99 | |
| Granted during the period | |
| - | | |
| - | |
| Forfeited during the period | |
| (500,000 | ) | |
| 3.76 | |
| Exercised during the period | |
| (490,000 | ) | |
| 1.58 | |
| Balance at end of the period | |
| 1,110,000 | | |
$ | 3.27 | |
| Options exercisable at the end of the period | |
| 1,110,000 | | |
| | |
| | |
December 31, 2016 | |
| | |
| | |
Weighted average | |
| | |
Number of options | | |
exercise price | |
| Balance at beginning of year | |
| 1,785,000 | | |
$ | 2.76 | |
| Granted during the year | |
| 590,000 | | |
| 3.01 | |
| Exercised during the year | |
| (275,000 | ) | |
| 1.52 | |
| Balance at end of the year | |
| 2,100,000 | | |
$ | 2.99 | |
| Options exercisable at the end of the year | |
| 2,100,000 | | |
| | |
No stock options were granted in the nine months
ended September 30, 2017. The fair value of the 590,000 stock options granted for the year ended December 31, 2016 has been estimated
on the date of grant using the Black-Scholes option pricing model,
using the assumptions below, and total $1,357,290. The stock options granted in the year ended December 31, 2016 vested immediately,
except for the 200,000 granted on April 5, 2016 which vested 50% on May 1, 2016 and the remainder on November 1, 2016.
The following tables reflect the Black-Scholes
values, the number of stock options outstanding, the weighted average of options outstanding, and the exercise price of stock options
outstanding at September 30, 2017 and December 31, 2016.
| KENNADY DIAMONDS INC. |
| Notes to Condensed Interim Financial Statements |
| For the Three and Nine Months Ended September 30, 2017 |
| In Canadian Dollars |
| (Unaudited) |
| At September 30, 2017 | |
| | |
| | |
| |
| | |
Black-Scholes | | |
Number of | | |
Exercise | |
| Expiry Date | |
Value | | |
Options | | |
Price | |
| November 6, 2022 | |
$ | 97,900 | | |
| 100,000 | | |
$ | 1.27 | |
| March 17, 2023 | |
| 23,775 | | |
| 25,000 | | |
| 1.23 | |
| February 13, 2024 | |
| 319,600 | | |
| 100,000 | | |
| 4.10 | |
| March 9, 2024 | |
| 369,800 | | |
| 100,000 | | |
| 4.74 | |
| March 12, 2025 | |
| 928,955 | | |
| 335,000 | | |
| 3.61 | |
| December 31, 2025 | |
| 230,100 | | |
| 100,000 | | |
| 3.00 | |
| January 12, 2026 | |
| 139,815 | | |
| 65,000 | | |
| 2.81 | |
| February 28, 2026 | |
| 181,985 | | |
| 85,000 | | |
| 2.80 | |
| April 5, 2026 | |
| 504,400 | | |
| 200,000 | | |
| 3.30 | |
| | |
$ | 2,796,330 | | |
| 1,110,000 | | |
$ | 3.27 | |
| At December 31, 2016 | |
| | |
| | |
| |
| | |
Black-Scholes | | |
Number of | | |
Exercise | |
| Expiry Date | |
Value | | |
Options | | |
Price | |
| November 6, 2022 | |
$ | 455,235 | | |
| 465,000 | | |
$ | 1.27 | |
| March 17, 2023 | |
| 47,549 | | |
| 50,000 | | |
| 1.23 | |
| February 13, 2024 | |
| 799,000 | | |
| 250,000 | | |
| 4.10 | |
| March 9, 2024 | |
| 369,800 | | |
| 100,000 | | |
| 4.74 | |
| March 12, 2025 | |
| 1,899,505 | | |
| 685,000 | | |
| 3.61 | |
| December 31, 2025 | |
| 230,100 | | |
| 100,000 | | |
| 3.00 | |
| January 12, 2026 | |
| 354,915 | | |
| 165,000 | | |
| 2.81 | |
| February 28, 2026 | |
| 181,985 | | |
| 85,000 | | |
| 2.80 | |
| April 5, 2026 | |
| 504,400 | | |
| 200,000 | | |
| 3.30 | |
| | |
$ | 4,842,489 | | |
| 2,100,000 | | |
$ | 2.99 | |
The weighted average remaining contractual
life of the options outstanding at September 30, 2017 is 7.38 years (December 31, 2016 – 7.7 years).
During the nine months ended September 30,
2017, 490,000 (December 31, 2016 – 275,000) stock options were exercised for proceeds of $775,300 (December 31, 2016 -
$417,700). The market price, on the dates of exercise, of stock options exercised during the nine months ended September 30, 2017
were $1,844,250 (December 31, 2016 - $1,053,650). During the nine
months ended September 30, 2017, 500,000 stock options were forfeited.
The Restricted Share Units and Deferred Share
Unit (“RSU” and “DSU”) plans are full value phantom shares that mirror the value of Kennady Diamonds Inc.’s
publicly traded common shares. Grants under the RSU and DSU plan are made on a discretionary basis to qualified persons and employees
of the Company subject to the Board of Directors’ approval. Under the 2016 RSU and DSU plan, RSU’s vests according
to the terms set out in the award agreement. Vesting under the RSU and DSU plan is subject to special rules for death and change
in control. The awards can be settled through issuance of common shares or paid in cash, at the discretion of the Board of Directors,
however in the event of a change in control the awards will be settled in cash.
The following table shows the RSU awards which
have been granted and settled during the period:
| KENNADY DIAMONDS INC. |
| Notes to Condensed Interim Financial Statements |
| For the Three and Nine Months Ended September 30, 2017 |
| In Canadian Dollars |
| (Unaudited) |
| | |
Number of | | |
Weighted | |
| RSU | |
units | | |
average value | |
| Balance at beginning of period | |
| - | | |
$ | - | |
| Awards and payouts during the period: | |
| | | |
| | |
| RSUs awarded | |
| 224,999 | | |
| 3.55 | |
| RSUs vested and common shares issued | |
| (72,333 | ) | |
| 3.55 | |
| Balance, September 30, 2017 | |
| 152,666 | | |
$ | 3.55 | |
The RSU’s granted vested 50% on February
6, 2017 and 50% on August 6, 2017. The fair value of each RSU issued is determined at the closing share price on the grant date.
As at September 30, 2017, no DSU awards have
been granted.
In accordance with IAS 24 Related Parties,
key management personnel are those persons having authority and responsibility for planning, directing and controlling the activities
of the Company directly or indirectly, including any directors (executive and non-executive)
of the Company.
The Company’s related parties include
its key management, the Company’s directors, and their close family members. At February 1, 2017, the Company ceased to have
any common key management with Mountain Province and any fees from February 1, 2017 paid to Mountain Province are for reimbursable
expenses. International Investment and Underwriting (“IIU”) is also a related party since it is controlled by Mr. Dermot
Desmond. MCC Geoscience Inc. (“MCC”) is also a related party since it is controlled by a member of the Board of Directors.
None of the transactions with related parties
incorporate special terms and conditions, and no guarantees were given or received. Related party transactions are recorded at
their exchange amount, being the amount agreed to by the parties. Outstanding balances are settled in cash.
The Company had the following transactions
and balances with its related parties including key management personnel, and Mountain Province which includes the monthly management
fee charged by Mountain Province for the reimbursement of expenses incurred on the Company’s behalf by Mountain Province.
The transactions with key management personnel are in the nature of remuneration which are paid directly by the Company and are
not included in the monthly management fee charged by Mountain Province. The transactions with IIU are for the director fees and
travel expenses of the Chairman of the Company. The transactions with MCC are for consulting fees and reimbursements of travel
expenses.
The balances as at September 30, 2017 and December
31, 2016 were as follows:
| | |
September 30, | | |
December 31, | |
| | |
2017 | | |
2016 | |
| Payable to key management personnel and directors | |
$ | 7,447 | | |
$ | 406 | |
| Payable to International Investment and Underwriting | |
| 11,250 | | |
| 22,832 | |
| Payable to MCC Geoscience Inc. | |
| 1,483 | | |
| 9,056 | |
| KENNADY DIAMONDS INC. |
| Notes to Condensed Interim Financial Statements |
| For the Three and Nine Months Ended September 30, 2017 |
| In Canadian Dollars |
| (Unaudited) |
The transactions for the three and nine months ended September 30,
2017 and 2016 were as follows:
| | |
Three months ended | | |
Three months ended | | |
Nine months ended | | |
Nine months ended | |
| | |
September 30, 2017 | | |
September 30, 2016 | | |
September 30, 2017 | | |
September 30, 2016 | |
| The total of the transactions: | |
| | | |
| | | |
| | | |
| | |
| Management fee and reimburseable expenses charged by Mountain Province | |
$ | 22,500 | | |
$ | 22,500 | | |
$ | 67,500 | | |
$ | 67,500 | |
| International Investment and Underwriting | |
| 3,750 | | |
| 3,750 | | |
| 11,250 | | |
| 11,250 | |
| Consulting fees charged by MCC Geoscience Inc. | |
| 12,138 | | |
| 17,413 | | |
| 35,696 | | |
| 22,475 | |
| Remuneration of key management personnel | |
| 172,324 | | |
| 219,698 | | |
| 1,043,613 | | |
| 1,765,305 | |
The remuneration expense of key management personnel for the three
and nine months ended September 30, 2017 and 2016 were as follows:
| | |
Three months ended | | |
Three months ended | | |
Nine months ended | | |
Nine months ended | |
| | |
September 30, 2017 | | |
September 30, 2016 | | |
September 30, 2017 | | |
September 30, 2016 | |
| Consulting fees, director fees, payroll and other short-term benefits | |
$ | 103,505 | | |
$ | 93,598 | | |
$ | 344,866 | | |
$ | 451,876 | |
| Share-based payment expense | |
| 72,569 | | |
| 126,100 | | |
| 709,997 | | |
| 1,313,429 | |
| | |
$ | 176,074 | | |
$ | 219,698 | | |
$ | 1,054,863 | | |
$ | 1,765,305 | |
| 13. | EXPLORATION AND EVALUATION EXPENSES |
| | |
Three months ended | | |
Three months ended | | |
Nine months ended | | |
Nine months ended | |
| | |
September 30, 2017 | | |
September 30, 2016 | | |
September 30, 2017 | | |
September 30, 2016 | |
| Lease payments | |
$ | 9,865 | | |
$ | 7,229 | | |
$ | 26,699 | | |
$ | 21,194 | |
| Aircraft support | |
| 500,097 | | |
| 795,493 | | |
| 691,568 | | |
| 2,173,948 | |
| Fuel | |
| 55,921 | | |
| 141,453 | | |
| 743,970 | | |
| 1,404,891 | |
| Geophysics | |
| 133,715 | | |
| 68,639 | | |
| 513,218 | | |
| 601,142 | |
| Drilling support | |
| 89,420 | | |
| 57,570 | | |
| 89,420 | | |
| 108,068 | |
| Exploration personnel and program support | |
| 449,330 | | |
| 896,260 | | |
| 2,344,016 | | |
| 3,790,505 | |
| Camp maintenance, supplies, mobilization, general costs | |
| 346,009 | | |
| 630,595 | | |
| 2,361,902 | | |
| 3,918,075 | |
| Site & logistical support | |
| 189,574 | | |
| 448,877 | | |
| 3,535,651 | | |
| 5,381,738 | |
| Environmental | |
| 46,414 | | |
| 7,151 | | |
| 62,444 | | |
| 79,918 | |
| Professional geological services | |
| 164,681 | | |
| 364,593 | | |
| 322,191 | | |
| 718,708 | |
| Drilling | |
| 750,211 | | |
| 1,507,933 | | |
| 6,167,750 | | |
| 8,920,868 | |
| Technical consultant | |
| 12,138 | | |
| 122,648 | | |
| 106,668 | | |
| 174,159 | |
| Laboratory analysis | |
| - | | |
| 731,602 | | |
| 708,766 | | |
| 1,368,736 | |
| Diamond valuation | |
| 118,802 | | |
| 17,776 | | |
| 118,802 | | |
| 27,776 | |
| Permitting | |
| 2,932 | | |
| 73,120 | | |
| 25,005 | | |
| 128,022 | |
| Preliminary economic assessment | |
| 170 | | |
| 151,058 | | |
| 37,106 | | |
| 364,744 | |
| | |
$ | 2,869,279 | | |
$ | 6,021,997 | | |
$ | 17,855,176 | | |
$ | 29,182,492 | |
The capital of Kennady Diamonds consists of
its shareholders’ equity. The Company’s objectives when managing capital are to safeguard Kennady Diamonds’ ability
to continue to pursue the exploration and evaluation of its mineral properties and to maintain optimal returns to shareholders
and benefits for other stakeholders. The Company manages its capital structure and makes adjustments to it, in order to have the
funds available to support the exploration of its mineral properties. The Company’s main property, Kennady North, is in the
exploration stage, and as such the Company is dependent on external equity financing to fund its activities. The Board of Directors
does not establish quantitative return on capital criteria for management, but rather relies on the expertise of the Company’s
management to sustain future development of the business.
| KENNADY DIAMONDS INC. |
| Notes to Condensed Interim Financial Statements |
| For the Three and Nine Months Ended September 30, 2017 |
| In Canadian Dollars |
| (Unaudited) |
The Company’s capital consists of:
| | |
September 30, | | |
December 31, | |
| | |
2017 | | |
2016 | |
| Share capital | |
$ | 107,545,837 | | |
$ | 96,009,406 | |
| Share-based payments reserve | |
| 4,788,244 | | |
| 4,842,489 | |
| Deficit | |
| (109,278,210 | ) | |
| (90,638,484 | ) |
| | |
$ | 3,055,871 | | |
$ | 10,213,411 | |
In order to carry out the planned management
of the Company’s properties and to pay for administrative costs, the Company will spend its existing working capital and
raise additional amounts as needed.
Management reviews its capital management approach
on an on-going basis and believes that this approach, given the
relative size of the Company, is reasonable. There were no changes in the Company’s approach to capital management during
the nine months ended September 30, 2017.
SCHEDULE “M”
MANAGEMENT’S DISCUSSION
AND ANALYSIS OF KENNADY
See attached.
SCHEDULE “M”
MANAGEMENT’S DISCUSSION
AND ANALYSIS OF KENNADY
Table of Contents
| Kennady’s management’s discussion
and analysis for the year ended December 31, 2016 |
M-3 |
| |
|
| Kennady’s management’s discussion and analysis
for the three and nine month period ended |
|
| September 30, 2017 |
M-27 |
Management’s
Discussion and Analysis
For the Year Ended
December 31, 2016
TSXV: KDI
KENNADY DIAMONDS
INC.
MANAGEMENT’S
DISCUSSION AND ANALYSIS
FOR THE YEAR ENDED
DECEMBER 31, 2016
| TABLE OF CONTENTS |
Page |
| |
|
| Company Overview |
5 |
| Highlights |
5 |
| Kennady North Diamond Project |
6 |
| Outlook |
15 |
| Financial Review |
16 |
| Summary of Quarterly Results |
17 |
| Costs and Expenses |
17 |
| Income and Resource Taxes |
19 |
| Financial Position and Liquidity |
19 |
| Off-Balance Sheet Arrangements |
20 |
| Significant Accounting Judgments, Estimates and Assumptions |
20 |
| Standards, Amendments and Interpretation to Existing Standards |
21 |
| Financial Instruments |
22 |
| Related Party Transactions |
22 |
| Contractual Obligations |
23 |
| Subsequent Event |
23 |
| Other Management Discussion and Analysis Requirements |
23 |
| Disclosure of Outstanding Share Data |
24 |
| Disclosure of Controls and Procedures |
24 |
| Cautionary Note on Forward-Looking Statements |
24 |
This Management’s Discussion and
Analysis (“MD&A”) of April 6, 2017 provides a review of the financial performance of Kennady Diamonds Inc. (the
“Company” or “Kennady Diamonds” or “KDI”) and should be read in conjunction with the audited
financial statements for the years ended December 31, 2016 and 2015. Financial filings and additional information relevant to
the Company’s activities can be found on SEDAR at www.sedar.com or at the Company’s website www.kennadydiamonds.com.
The Company’s audited financial
statements have been prepared in accordance with International Financial Reporting Standards (“IFRS”) as issued by
the International Accounting Standards Board (“IASB”).
All amounts are expressed in Canadian dollars unless otherwise
stated.
Technical information included in this
MD&A regarding the Company’s mineral property has been reviewed by Dr. Tom McCandless, a Director of the Company and
a Qualified Person as defined by National Instrument 43-101 - Standards of Disclosure for Mineral Properties (“NI 43-101”).
COMPANY OVERVIEW
Kennady Diamonds is a Canadian-based resource
company that was incorporated on February 27, 2012 under the laws of the Province of Ontario. Kennady Diamonds currently holds
a 100% interest in 22 federal leases and 58 claims in the Kennady North diamond project.
Large diameter reverse circulation drilling
and bulk sampling is currently underway on the Company’s properties. At this time the Company has not generated any revenue.
Kennady Diamonds commenced trading on
the TSX Venture Exchange on July 10, 2012 under the ticker symbol “KDI”. The Company’s registered office and
its principal place of business is 161 Bay Street, Suite 1410, P.O. Box 216, Toronto, ON, Canada, M5J 2S1.
HIGHLIGHTS
During the third quarter, the bulk
sample recovered during the winter 2016 Program was processed for diamonds using dense media separation (‘DMS’)
technology at the Geoanalytical Laboratories Diamond Services of the Saskatchewan Research Council (‘SRC’). The
612.0 tonne bulk sample from Kelvin was comprised of 32 large diameter drill holes from the north lobe. In addition, two
large-diameter RC holes were completed at Faraday 2 to obtain 21.1 tonnes of kimberlite to assess commercial diamond
content.
A total of 1,278 carats of diamonds (+0.85mm)
were recovered from the 612.0 tonne Kelvin sample for a sample grade of 2.09 carats per tonne. Forty-four diamonds of one carat
or greater were recovered, with the largest stone being a 3.43 carat white/colourless transparent octahedral twin with no inclusions.
A total of 56.64 carats of
diamonds (+0.85mm) were recovered from the 21.1 tonne sample from Faraday 2 for a sample grade of 2.69 carats per tonne. Four
diamonds of one carat or greater were recovered, with the largest stone being a 1.90 carat grey transparent aggregate with
inclusions. Faraday 2 currently measures over 480 meters in the long dimension and extends in subsurface onto land.
The Company retained the services of WWW
International Diamond Consultants (Antwerp, Belgium) to provide an independent valuation of the Kelvin bulk sample diamonds, and
also to develop size frequency distribution and revenue models. This work was implemented in Q3 2016 and the results were received
in early November 2016.
Detailed logging and petrographic studies
were completed on the Kelvin kimberlite in Q3 2016 and the geological model was updated with the diamond grade and valuation results,
allowing the Company to declare a maiden resource estimate for the Kelvin kimberlite. On December 12, 2016, the Company announced
that an Indicated Mineral Resource of 13.62 million carats of diamonds is contained in 8.50 million tonnes of kimberlite, with
an overall grade of 1.60 carats per tonne and an average value of US$63 per carat using a bottom cutoff size of 1 mm. The resource
was determined through the collective efforts of Aurora Geosciences Ltd., Mineral Services Canada Inc., SRK Consulting Inc., and
JDS Energy & Mining Inc., who were engaged by the Company to participate in the exercise. A NI 43-101 report describing the
resource and was published on SEDAR at www.sedar.com on January 26, 2017.
Previous drilling established the presence
of three kimberlite bodies under Faraday Lake, located 2.3 km northeast of Kelvin (Faraday 1, 2 & 3). Faraday 1 has been traced
for over 200 meters under Faraday Lake, and Faraday 3 represents a new discovery for 2016. Initial drilling showed two discrete
kimberlites located 100 meters apart, but ice based drilling completed in the winter of 2016 confirmed that the two limbs coalesce
into one body near the shore of Faraday Lake (as Faraday 1-3). A total of 0.743 tonnes of kimberlite recovered from Faraday 1
by core drilling generated a sample grade of 4.17 carats per tonne for diamonds larger than 0.85mm.
A total of 9,548 meters of exploration
and delineation drilling was completed during the summer program using two helicopter portable core drill rigs operating from
land-based setups. One rig focused on the Faraday 1-3 kimberlite
complex, and the second rig was focused
on Faraday 2. Two infill delineation drill holes were also completed on the Kelvin kimberlite to refine the kimberlite pipe shell
in two specific areas of the Kelvin geological model.
A 97% success rate of hitting kimberlite
was achieved during the summer drill program, and the Faraday 1-3 and Faraday 2 kimberlite bodies were successfully delineated
from under Faraday Lake well onto the land. Three long kimberlite intercepts on Faraday 2 in the latter stages of the program
of 76.9, 50.3 and 38.0 meters provided an indication that the kimberlite body may be expanding as it turns to the north, similar
to what was observed in the early stages of drill delineating the Kelvin kimberlite. All of the goals of the summer program were
successfully achieved.
In August 2016, the Company acquired
six mining leases from GGL Resources Corporation (“GGL”). The leases are located along the south-western
extension of a structural corridor that extends from the Faraday Complex through Kelvin to include the Gahcho Kué
Mine. Management believes that these leases are prospective for the discovery of new diamond-bearing kimberlites. In
consideration for the purchase, the Company paid to GGL a cash sum of $200,000 and GGL retains a 0.75% royalty interest (the
“Royalty”) on all mineral products produced from the property. The Company has the right at any time, prior to
commencement of production from the property, to purchase one- third (1/3) of the Royalty, being 0.25%, for the sum of
$1,000,000.
On January 17, 2017, the Company announced
diamond recovery results from the Faraday 3 kimberlite. A total of 3.03 tonnes of kimberlite recovered by core drilling at Faraday
3 in 2016 returned 6.61 carats of diamonds larger than 0.85 mm for a sample grade of 2.18 carats per tonne. On January 23, 2017,
the Company announced diamond recovery results from the Faraday 1 and 2 kimberlites. For Faraday 1, a total of 2.70 carats of
diamonds larger than 0.85 mm were recovered from 0.86 tonnes of kimberlite core for a sample grade of 3.14 carats per tonne. For
Faraday 2, a total of 1.37 carats of diamonds larger than 0.85 mm were recovered from 0.43 tonnes of kimberlite core for a sample
grade of 3.22 carats per tonne. All samples were processed by caustic fusion at the Geoanalytical Laboratories Diamond Services
of the Saskatchewan Research Council (“SRC”).
In December 2016, Kennady was awarded ‘Exploration
Company of the Year’ at the Mines and Money Conference in London, England. The award recognizes outstanding achievement
in the field of mineral exploration.
KENNADY NORTH DIAMOND PROJECT
Overview
The Kennady North diamond project is located
approximately 300 kilometers north-east of Yellowknife in Canada’s Northwest Territories. The Project is 100% owned by the
Company and consists of 22 federal leases and 58 claims covering an area of 67,164.17 hectares.
Exploration at Kennady North commenced
in the late 1990’s and resulted in the discovery of the diamond-bearing Kelvin, Faraday, MZ and Doyle kimberlite occurrences.
The number of diamonds recovered from the Kelvin and Faraday kimberlites and the size-frequency distribution indicated that they
may be of comparable grade to the 5034 (1.77 carats per tonne) and Hearne (2.10 carats per tonne) kimberlites at the Gahcho Kué
Diamond Mine.
Exploration
In October 2011, there was an Airborne
Gravity Gradiometry survey (“AGG”), which included a total of 2,793 line- kilometres flown over the Kennady North
diamond project. This survey resulted in the identification of 106 geophysical targets, resulting in a 560 line-kilometre total
magnetic field ground (“MAG”) survey over the geophysical targets identified by the AGG survey. The MAG survey was
conducted at 20 metre line-spacing, and the results enabled Mountain Province to prioritize the geophysical targets for drilling.
The MAG survey was managed by Aurora Geosciences Ltd. (“Aurora”) and was completed in April 2012.
In June 2012, Kennady Diamonds received
a Type A Land Use Permit from the Mackenzie Valley Land and Water Board in respect of the Kennady North diamond project, which
cleared the way for Kennady Diamonds to commence a summer drill program at the Kennady North diamond project.
In July 2012, the Company entered into
an Exploration Agreement with the Lutsel K’e Dene First Nation (“Lutsel K’e”). The Exploration Agreement
established the basis for Kennady Diamonds and Lutsel K’e to work collaboratively to advance exploration at Kennady North.
The Company has completed a number of
exploration and evaluation programs since the summer of 2012 through to December 2016. Exploration and evaluation expenditures
through 2016 are summarized below.
| |
Total |
December
31, |
December
31, |
December
31, |
December
31, |
December
31, |
| |
|
2016 |
2015 |
2014 |
2013 |
2012 |
| Exploration
and evaluation expenses |
$85,121,740 |
$31,806,615 |
$28,620,904 |
$17,415,440 |
$5,307,526 |
$1,971,255 |
| Meters
drilled |
102,749 |
30,932 |
33,423 |
27,258 |
8,648 |
2,488 |
2012 Exploration Program
Based on the AGG survey results, exploration
drilling at the Kennady North Project commenced in mid-2012. At that time, it was unclear whether the Kelvin and Faraday kimberlites
were contiguous or separate bodies. Land-based drilling took place at both kimberlites and the core was sent to the the Saskatchewan
Research Council (“SRC”) for diamond recovery by caustic fusion.
The combined Kelvin/Faraday diamond results are summarized
below in Table 1.
Table 1 - Kelvin/Faraday 2012 Summer Diamond Recovery Results
| Total |
Numbers
of Diamonds According to Sieve Size Fraction (mm) |
Total |
| Weight |
+0.075 |
- |
+0.106 |
- |
+0.150 |
- |
+0.212 |
- |
+0.300 |
- |
+0.425 - |
+0.600 - |
+0.850 - |
+1.180 - |
+1.700 - |
Diamonds |
| (Kg) |
0.106 |
|
0.150 |
|
0.212 |
|
0.300 |
|
0.425 |
|
0.600 |
0.850 |
1.180 |
1.700 |
2.360 |
|
| 394.44 |
570 |
|
528 |
|
316 |
|
241 |
|
123 |
|
22 |
67 |
12 |
9 |
1 |
1,889 |
*Total carat weight of the sample is 0.92.
2013 Exploration Program
In winter 2013, the Company completed
5,000 meters of drilling at Kennady North. Kimberlite was intersected in 24 of 26 drill holes with intercepts ranging from a few
meters to approximately 100 meters. Kimberlite core was treated by the SRC for recovery of diamonds by caustic fusion with results
summarized in Table 2. For the Kelvin kimberlite a sample grade of 7.24 carats per tonne for diamonds greater than 0.85mm was
obtained,which included a 2.48 carat diamond. In summer 2013, a 2,500 meter drill program focused on land-based drilling at the
North Lobe of the Kelvin kimberlite with recovered kimberlite again treated at SRC. Table 3 combines the total 2013 Kelvin diamond
recovery results from both winter and summer programs.
Detailed high-resolution ground surveys
were initiated during the winter of 2013 using ground gravity, horizontal loop and minimal capacitively coupled resistivity surveys
(ohmmapper). High resolution ground geophysical surveying helped to delineate the upper portions of these unconventional kimberlite
body shapes delineating the Kelvin kimberlite.
Table 2 - Kelvin/Faraday 2013 Winter Diamond
Recovery Results
| Total |
Number
of Diamonds According to Sieve Size Fraction (mm) |
Total |
| Weight |
+0.075 |
+0.106 |
+0.150 |
+0.212 |
+0.300 |
+0.425 |
+0.600 |
+0.850 |
+1.180 |
+1.700 |
+2.360 |
+3.350 |
+4.750 |
Diamonds |
| (Kg) |
-0.106 |
-0.150 |
-0.212 |
-0.300 |
-0.425 |
-0.600 |
-0.850 |
-1.180 |
-1.700 |
-2.360 |
-3.350 |
-4.750 |
|
|
| 1,103 |
3,139 |
2,285 |
1,283 |
823 |
552 |
289 |
199 |
78 |
40 |
13 |
4 |
2 |
1 |
8,708 |
Table 3 - Kelvin 2013 Winter and Summer
Diamond Recovery Results
| Total |
Number
of Diamonds According to Sieve Size Fraction (mm) |
Total
Diamonds* |
| Weight |
+0.106 |
+0.150 |
+0.212 |
+0.300 |
+0.425 |
+0.600 |
+0.850 |
+1.180 |
+1.700 |
+2.360 |
+3.350 |
+4.750 |
|
| (Kg) |
-0.150 |
-0.212 |
-0.300 |
-0.425 |
-0.600 |
-0.850 |
-1.180 |
-1.700 |
-2.360 |
-3.350 |
-4.750 |
|
|
| 4,301 |
5,343 |
4,262 |
2,664 |
1,817 |
959 |
602 |
279 |
126 |
52 |
10 |
6 |
1 |
16,121 |
*Total weight of diamonds greater than 0.85mm:
18.58 carats
* Sample grade of diamonds greater than
0.85mm: 4.32 carats/tonne
2014 Exploration Program
In winter 2014, the Company
commenced a much larger geophysical program comprising ground gravity, ohmmapper, ground-penetrating radar and ELF (extremely
low frequency EM survey) along the Kelvin-Faraday corridor. Roughly 10,200 meters of drilling was completed with over 25 tonnes
of kimberlite recovered from Kelvin and over one tonne of kimberlite recovered from the Faraday bodies. The drilling defined the
Kelvin and Faraday 2 kimberlites and identified a third kimberlite, Faraday 1. It was unclear whether the Faraday kimberlites
were separate bodies. It is now understood that Faraday 1 and Faraday 2 are two separate kimberlites. Nearly one tonne of kimberlite
from the Faraday kimberlites was processed at the SRC with diamond recovery results summarized in Table 4.
Table 4 - Faraday 2014 Winter Diamond Recovery
Results
| Total |
Number
of Diamonds According to Sieve Size Fraction (mm) |
Total |
| Weight |
|
|
|
|
|
|
|
|
|
|
|
|
Diamonds |
| (Kg) |
+0.106 |
+0.150 |
+0.212 |
+0.300 |
+0.425 |
+0.600 |
+0.850 |
+1.180 |
+1.700 |
+2.360 |
+3.350 |
+4.750 |
|
| |
-0.150 |
-0.212 |
-0.300 |
-0.425 |
-0.600 |
-0.850 |
-1.180 |
-1.700 |
-2.360 |
-3.350 |
-4.750 |
|
|
| 933.08 |
1,879 |
1,180 |
741 |
420 |
207 |
104 |
59 |
25 |
6 |
7 |
0 |
0 |
4,628 |
*Total weight of diamonds greater than 0.85mm:
3.62 carats
*Sample grade of diamonds greater than 0.85mm:
3.88 carats per tonne
There was also a 25
tonne bulk sample retrieved from the Kelvin kimberlite using HQ core drilling. The core was shipped to Yellowknife where
detailed logging and analysis took place under the guidance of SRK Consulting, Vancouver, B.C.(“SRK”) prior to
dispatch to the SRC for processing through the dense-media separation (DMS) plant. Four distinct kimberlite phases were
identified in the mini-bulk sample core, which are described in Table 5. The DMS results generated an overall sample grade of
1.79 c/t and are summarized in Table 6.
Table 5 – Kelvin Kimberlite Phases
| Zone 1 |
Coherent
pyroclastic kimberlite (PK) |
| Zone
2 |
Pyroclastic
kimberlite with small (1-3cm) and medium (1-8cm) xenoliths |
| Zone
3 |
Pyroclastic
kimberlite with rock flour and large (+10cm) xenoliths |
| Zone
4 |
Coherent
transitional pyroclastic kimberlite |
Table 6 – Kelvin 2014 Winter/Spring
Diamond Recovery Results
| Batch |
Sample |
Number
of Diamonds According to Sieve Size Fraction (mm) |
Total |
Carats |
Sample |
| |
Weight |
+0.850
- |
+1.180
- |
+1.700
- |
+2.360
- |
+3.350
- |
+4.750
- |
+6.700
- |
|
|
Grade |
| |
(tonnes) |
1.180 |
1.700 |
2.360 |
3.350 |
4.750 |
6.700 |
9.500 |
|
|
(c/t) |
| Zone
1 |
6.12 |
70 |
133 |
71 |
23 |
1 |
0 |
0 |
298 |
18.13 |
2.96 |
| Zone
2 |
5.60 |
45 |
95 |
43 |
9 |
2 |
1 |
0 |
195 |
11.91 |
2.13 |
| Zone
3 |
9.20 |
44 |
60 |
18 |
10 |
1 |
0 |
0 |
133 |
7.76 |
0.84 |
| Zone
4 |
4.05 |
32 |
54 |
15 |
7 |
1 |
0 |
0 |
109 |
6.32 |
1.56 |
| Total* |
24.97 |
200 |
347 |
149 |
49 |
5 |
1 |
0 |
751 |
44.64 |
1.79 |
*Includes DMS and recovery cleanup
Under the guidance of SRK, three main zones
of kimberlite emplacement were defined at the Kelvin kimberlite, described as zones A, B and C, with zone B further subdivided
into a Bx Zone. Table 7 describes the kimberlite zones
present in the Kelvin
kimberlite. For a 19 tonne mini-bulk sample recovered in the summer/fall drilling program, each of the zones were processed separately
to understand the variability in diamond size and grade. Table 8 summarizes the diamond recovery results from the summer/fall
mini-bulk sample. The summer/fall mini-bulk sample from the Kelvin North Lobe returned a grade of 2.59 carats per tonne.
Table 7 - Kelvin kimberlite zones
| Zone |
Kimberlite
textural classification |
Comments |
| |
|
|
| A |
Hypabyssal kimberlite with less
common pyroclastic kimberlite |
|
| |
|
|
| B1 |
Pyroclastic kimberlite |
Less than 50% dilution |
| |
|
|
| B2/3 |
Pyroclastic kimberlite |
More than 50% dilution |
| |
|
|
| C |
Hypabyssal kimberlite and pyroclastic
kimberlite |
|
| |
|
|
Table 8 – Kelvin 2014 Summer/Fall
Diamond Recovery Results
| Batch |
Sample |
Number
of Diamonds According to Sieve Size Fraction (mm) |
Total |
Carats* |
Sample |
| |
Weight (dry |
+0.850 |
+1.180 - |
+1.700 - |
+2.360 - |
+3.350 - |
+4.750 - |
+6.700 - |
Diamonds* |
|
Grade |
| |
tonnes) |
-1.180 |
1.700 |
2.360 |
3.350 |
4.750 |
6.700 |
9.500 |
|
|
(c/t) |
| |
|
|
|
|
|
|
|
|
|
|
+0.85mm |
| Zone
A |
5.87 |
87 |
152 |
76 |
25 |
7 |
1 |
0 |
348 |
24.71 |
4.21 |
| Zone
B1 |
3.75 |
47 |
85 |
32 |
10 |
4 |
0 |
0 |
178 |
11.00 |
2.93 |
| Zone
B1(a) |
1.67 |
12 |
28 |
14 |
4 |
2 |
0 |
0 |
60 |
5.16 |
3.09 |
| Zone
B2 |
1.90 |
11 |
18 |
3 |
1 |
0 |
0 |
0 |
33 |
1.15 |
0.61 |
| Zone
B3 |
2.62 |
2 |
13 |
4 |
1 |
0 |
0 |
0 |
20 |
0.97 |
0.37 |
| Zone
B3(a) |
1.90 |
12 |
17 |
6 |
4 |
2 |
0 |
0 |
41 |
3.74 |
1.97 |
| Zone
C |
1.17 |
5 |
24 |
4 |
3 |
0 |
0 |
0 |
36 |
1.97 |
1.68 |
| TOTAL |
18.88 |
177 |
339 |
140 |
48 |
15 |
1 |
0 |
720 |
48.84 |
2.59 |
*Includes DMS recovery cleanup
In addition to the mini-bulk
sample results, 3.77 tonnes of kimberlite from the summer/fall sample was processed by caustic fusion at the SRC and 1.23 tonnes
was processed by caustic fusion at the Rio Tinto diamond laboratory in Thunder Bay, Ontario. Table 9 summarizes these caustic
fusion results. A 1.83 tonne sample from the southern portion of the Kelvin North Lobe and a 47.62 kilogram sample from the Kelvin
Sheet was also processed by caustic fusion at SRC, with results summarized in Tables 10 and 11.
In 2014, a total of approximately 27,200 meters
was drilled at the Kelvin and Faraday kimberlites, resulting in the recovery of approximately 55 tonnes of kimberlite.
Table 9 – Kelvin 2014 Summer/Fall
Diamond Recovery Results
| Sample
Weight |
Number
and Weight of Diamonds According to Sieve Size Fraction (mm) |
*Total |
| (Dry
tonnes) |
|
|
|
|
|
|
|
|
|
|
|
|
Diamonds |
| |
+0.106 |
+0.150 |
+0.212 |
+0.300 |
+0.425 |
+0.600 |
+0.850 |
+1.180 |
+1.700 |
+2.360 |
+3.350 |
+4.750 |
|
| |
-0.150 |
-0.212 |
-0.300 |
-0.425 |
-0.600 |
-0.850 |
-1.180 |
-1.700 |
-2.360 |
-3.350 |
-4.750 |
|
|
| 5.001 |
4,556 |
3,176 |
2,041 |
1,257 |
772 |
462 |
218 |
105 |
35 |
7 |
4 |
0 |
12,633 |
*Total weight of recovered diamonds greater
than 0.85mm: 12.85 carats
*Sample grade of diamonds greater than 0.85mm:
2.57 carats per tonne
Table 10 – Kelvin South Lobe 2014
Caustic Fusion Diamond Recovery Results
| Sample |
Number
and Weight of Diamonds According to Sieve Size Fraction (mm) |
|
| Weight
(dry |
+0.106 |
+0.150 |
+0.212 |
+0.300 |
+0.425 |
+0.600 |
+0.850 |
+1.180 |
+1.700 |
+2.360 |
+3.350 |
+4.750 |
*Total |
| tonnes) |
-0.150 |
-0.212 |
-0.300 |
-0.425 |
-0.600 |
-0.850 |
-1.180 |
-1.700 |
-2.360 |
-3.350 |
-4.750 |
|
diamonds |
| 1.8376 |
1,679 |
1,150 |
693 |
425 |
235 |
121 |
72 |
35 |
15 |
3 |
2 |
1 |
4,431 |
*Total weight of recovered diamonds greater
than 0.85mm: 6.68 carats
*Sample grade of diamonds greater than 0.85mm:
3.64 carats per tonne
Table 11 – Kelvin Sheet 2014 Caustic Fusion Diamond
Recovery Results
| Sample |
Number
and Weight of Diamonds According to Sieve Size Fraction (mm) |
|
| Weight
(dry |
+0.106 |
+0.150 |
+0.212 |
+0.300 |
+0.425 |
+0.600 |
+0.850 |
+1.180 |
+1.700 |
+2.360 |
+3.350 |
+4.750 |
*Total |
| kilograms) |
-0.150 |
-0.212 |
-0.300 |
-0.425 |
-0.600 |
-0.850 |
-1.180 |
-1.700 |
-2.360 |
-3.350 |
-4.750 |
|
diamonds |
| 47.62 |
53 |
46 |
25 |
15 |
5 |
2 |
3 |
1 |
2 |
0 |
0 |
0 |
152 |
*Total weight of recovered diamonds greater
than 0.85mm: 0.28 carats
*Sample grade of diamonds greater than 0.85mm:
5.95 carats per tonne
2015 Exploration Program
The 2015 drilling program
confirmed the continuity of the Kelvin kimberlite beyond the current geological model. A winter core drilling program recovered
2.7 tonnes of kimberlite from the Kelvin North Lobe, which was processed by caustic fusion at the SRC
and returned a sample grade of 2.74 carats per tonne for diamonds greater than 0.85mm. The spring drilling program recovered two
samples from Kelvin for caustic fusion at the SRC; A 2.42 tonne sample from the Kelvin North Lobe returned a sample grade of 2.60
carats per tonne, and 2.67 tonnes of kimberlite returned a sample grade of 3.40 carats per tonne for diamonds greater than 0.85mm.
In summer, 0.93 tonnes of kimberlite from the Kelvin North Lobe returned a sample grade of 3.55 carats per tonne for diamonds
greater than 0.85mm. Table 12 below summarizes the 2015 caustic fusion diamond recovery results from the Kelvin North Lobe 2015
summer drill program.
Table 12 – Kelvin North Lobe 2015
Caustic Fusion Diamond Recovery Results
Winter Results
Sample
Weight |
Number
and Weight of Diamonds According to Sieve Size Fraction(mm) |
Total |
| (dry
tonnes) |
+0.106 |
+0.150 |
+0.212 |
+0.300 |
+0.425 |
+0.600 |
+0.850 |
+1.180 |
+1.700 |
+2.360 |
+3.350 |
+4.750 |
diamonds |
| |
-0.150 |
-0.212 |
-0.300 |
-0.425 |
-0.600 |
-0.850 |
-1.180 |
-1.700 |
-2.360 |
-3.350 |
-4.750 |
|
|
| 2.6874 |
3,312 |
2,098 |
1,208 |
751 |
435 |
245 |
133 |
53 |
21 |
9 |
1 |
0 |
8,266 |
| |
|
|
|
|
|
|
|
|
|
|
|
|
|
*Total weight of recovered diamonds greater than 0.85mm:
7.37 carats
*Sample grade of diamonds greater than 0.85mm: 2.74
carats per tonne
Spring Results
Sample
Weight |
Number
and Weight of Diamonds According to Sieve Size Fraction(mm) |
*Total |
| (dry
tonnes) |
+0.106 |
+0.150 |
+0.212 |
+0.300 |
+0.425 |
+0.600 |
+0.850 |
+1.180 |
+1.700 |
+2.360 |
+3.350 |
+4.750 |
diamonds |
| |
-0.150 |
-0.212 |
-0.300 |
-0.425 |
-0.600 |
-0.850 |
-1.180 |
-1.700 |
-2.360 |
-3.350 |
-4.750 |
|
|
| 2.416 |
2,438 |
1,632 |
1,034 |
639 |
397 |
209 |
113 |
53 |
24 |
6 |
0 |
0 |
6,455 |
| |
|
|
|
|
|
|
|
|
|
|
|
|
|
*Total weight of recovered diamonds greater than 0.85mm:
6.29 carats
*Sample grade of diamonds greater than 0.85mm: 2.60
carats per tonne
Sample
Weight |
Number
and Weight of Diamonds According to Sieve Size Fraction(mm) |
*Total |
| (dry
tonnes) |
+0.106 |
+0.150 |
+0.212 |
+0.300 |
+0.425 |
+0.600 |
+0.850 |
+1.180 |
+1.700 |
+2.360 |
+3.350 |
+4.750 |
diamonds |
| |
-0.150 |
-0.212 |
-0.300 |
-0.425 |
-0.600 |
-0.850 |
-1.180 |
-1.700 |
-2.360 |
-3.350 |
-4.750 |
|
|
| 2.674 |
2,608 |
1,811 |
1,096 |
719 |
421 |
259 |
125 |
53 |
21 |
8 |
3 |
0 |
7,124 |
| |
|
|
|
|
|
|
|
|
|
|
|
|
|
*Total weight of recovered diamonds greater than 0.85mm:
9.10 carats
*Sample grade of diamonds greater than 0.85mm: 3.40
carats per tonne
Summer Results
Sample
Weight |
Number
and Weight of Diamonds According to Sieve Size Fraction(mm) |
*Total |
| (dry
tonnes) |
+0.106 |
+0.150 |
+0.212 |
+0.300 |
+0.425 |
+0.600 |
+0.850 |
+1.180 |
+1.700 |
+2.360 |
+3.350 |
+4.750 |
diamonds |
| |
-0.150 |
-0.212 |
-0.300 |
-0.425 |
-0.600 |
-0.850 |
-1.180 |
-1.700 |
-2.360 |
-3.350 |
-4.750 |
|
|
| 0.926 |
1,375 |
927 |
568 |
363 |
181 |
110 |
56 |
29 |
1 |
1 |
1 |
0 |
7,124 |
*Total weight of recovered diamonds greater than 0.85mm:
3.29 carats
*Sample grade of diamonds greater than 0.85mm: 3.55
carats per tonne
Drilling in 2015 also confirmed that Faraday
1 and Faraday 2 are separate bodies. A 0.93 tonne sample of kimberlite from the Southeast Lobe of Faraday 2 was processed by caustic
fusion and returned a sample grade of 1.93 carats per tonne for diamonds greater than 0.85mm. Table 13 summarizes the caustic
fusion diamond recovery for the Faraday 2 Southeast Lobe.
Table 13 – Faraday 2 Southeast Lobe
2015 Spring Caustic Fusion Diamond Recovery Results
Sample
Weight(dry |
Number
and Weight of Diamonds According to Sieve Size Fraction(mm) |
Total |
| tonnes) |
+0.106 |
+0.150 |
+0.212 |
+0.300 |
+0.425 |
+0.600 |
+0.850 |
+1.180 |
+1.700 |
+2.360 |
+3.350 |
+4.750 |
diamonds |
| |
-0.150 |
-0.212 |
-0.300 |
-0.425 |
-0.600 |
-0.850 |
-1.180 |
-1.700 |
-2.360 |
-3.350 |
-4.750 |
|
|
| 0.9337 |
1,275 |
872 |
488 |
283 |
179 |
99 |
48 |
16 |
3 |
3 |
0 |
0 |
3,266 |
*Total weight of recovered diamonds greater
than 0.85mm: 1.81 carats
*Sample grade of diamonds greater than 0.85mm: 1.93 carats per tonne
In 2015, a 443
tonne bulk sample recovered by large-diameter reverse circulation drilling at the Southeast Lobe of the Kelvin kimberlite
was processed by dense-media separation at SRC. Table 14 summarizes the dense media separation (DMS) diamond recovery results
from the southeast lobe of the Kelvin kimberlite. A total of 35 diamonds larger than 1 carat were recovered from the
bulk sample.
Table 14 – Kelvin 2015 Bulk Sample Diamond
Recovery Results
| Batch |
Sample |
Number
of Diamonds According to Sieve Size Fraction (mm) |
Total
Diamonds |
Carats |
Sample
Grade |
| |
Weight |
+0.850
- |
+1.180 |
- |
+1.700 |
- |
+2.360
- |
+3.350
- |
+4.750
- |
+6.700
- |
|
|
(c/t) |
| |
(tonnes) |
1.180 |
1.700 |
|
2.360 |
|
3.350 |
4.750 |
6.700 |
9.500 |
|
|
+0.85mm |
| Zone
A |
143.35 |
2,307 |
3,563 |
|
1,350 |
|
373 |
78 |
8 |
- |
7,679 |
409.21 |
2.85 |
| Zone
B |
119.13 |
1,357 |
2,496 |
|
925 |
|
254 |
50 |
10 |
1 |
5,093 |
292.83 |
2.46 |
| Zone
Bx |
143.04 |
623 |
1,095 |
|
315 |
|
106 |
27 |
1 |
- |
2,167 |
117.39 |
0.82 |
| Zone
C |
37.02 |
362 |
639 |
|
234 |
|
60 |
10 |
3 |
- |
1,308 |
73.43 |
1.98 |
| TOTAL |
442.54 |
4,649 |
7,793 |
|
2,824 |
|
793 |
165 |
22 |
1 |
16,247 |
892.86 |
2.02 |
The five largest diamonds recovered from the
Kelvin bulk sample were described by the SRC as:
| • | 4.22 carat white/colorless,
transparent macle with no inclusions; |
| • | 3.95 carat brown,
transparent aggregate with inclusions; |
| • | 2.79 carat light
brown, transparent aggregate with minor inclusions; |
| • | 2.63 carat white/colorless,
transparent octahedral with inclusions; and |
| • | 2.59 carat white/colorless,
transparent dodecahedron with no inclusions. |
A preliminary valuation
of diamonds recovered from the 443 tonne bulk Kelvin kimberlite was obtained from WWW International Diamond Consultants (“WWW”)
in Antwerp. Four separate diamond parcels represented Zone A (442.82 carats), Zone B (447.05 carats), Zone C (80.44 carats) and
a small mixed parcel (16.79 carats). An average modeled price of US$56 per carat was obtained for Zone A and US$70 per carat for
Zone B. The parcel from Zone C was too small to create modeled values, so an average price of US$123 per carat was reported. While
only 88 diamonds greater than 0.66 carats per stone were present in the combined parcel many good colour white gem stones were
present, especially in the C sample, with five of the eight stones being good colour and gem quality. The three highest value
diamonds are a 4.22 carat diamond from Zone B valued at US$1,603 per carat, a 2.58 carat diamond from Zone C valued at US$1,366
per carat, and a 2.38 carat diamond from Zone C valued at US$1,196 per carat.
High resolution ground
geophysical surveying continued at the Kelvin-Faraday corridor and at both the MZ and Doyle sills using gravity and ohmmapper.
2016 Exploration Program
Exploration in 2016 included
caustic fusion diamond recovery results for Faraday 1 and Faraday 2. Samples of 6.42 tonnes of Faraday 2 collected in 2015 and
1.53 tonnes collected in 2016 each returned sample grades of 3.04 and 4.48 carats per tonne, respectively. Results for Faraday
2 are summarized in Table 15 and 16 and were released in Q1 2016.
Table 15 – Faraday 2 2016 Caustic
Fusion Results from 2015 Drilling
Sample
Weight |
Number
and Weight of Diamonds According to Sieve Size Fraction(mm) |
Total |
Carats |
| (dry |
+0.106 |
+0.150 |
+0.212 |
+0.300 |
+0.425 |
+0.600 |
+0.850 |
+1.180 |
+1.700 |
+2.360 |
+3.350 |
+3.350 |
Diamonds |
(+0.85mm) |
| tonnes) |
-0.150 |
-0.212 |
-0.300 |
-0.425 |
-0.600 |
-0.850 |
-1.180 |
-1.700 |
-2.360 |
-3.350 |
-4.750 |
-4.750 |
|
|
| 6.428 |
5,689 |
3,670 |
2,192 |
1,320 |
831 |
679 |
290 |
125 |
40 |
23 |
4 |
0 |
14,863 |
19.53 |
*Sample grade of diamonds greater than 0.85mm: 3.04 carats
per tonne
Table 16 – Faraday 2 2016 Caustic Fusion Results from
2016 Drilling
Sample
Weight |
Number
and Weight of Diamonds According to Sieve Size Fraction(mm) |
Total |
Carats |
| (dry |
+0.106 |
+0.150 |
+0.212 |
+0.300 |
+0.425 |
+0.600 |
+0.850 |
+1.180 |
+1.700 |
+2.360 |
+3.350 |
+3.350 |
Diamonds |
(+0.85mm) |
| tonnes) |
-0.150 |
-0.212 |
-0.300 |
-0.425 |
-0.600 |
-0.850 |
-1.180 |
-1.700 |
-2.360 |
-3.350 |
-4.750 |
-4.750 |
|
|
| 1.53 |
2,064 |
1,353 |
794 |
492 |
241 |
159 |
72 |
33 |
9 |
9 |
2 |
0 |
5,228 |
6.85 |
*Sample grade of diamonds greater than 0.85mm: 4.48 carats
per tonne
Caustic fusion diamond recovery results
for Faraday 1 include 0.225 tonnes of kimberlite that was collected in 2015, and 0.518 tonnes collected in 2016, each returning
sample grades of 3.07 and 4.65 carats per tonne, respectively. Results for Faraday 1 are summarized in Table 17 and 18 below.
Table 17 – Faraday 1 2016 Caustic Fusion Results from
2015 Drilling
Sample
Weight |
Number
and Weight of Diamonds According to Sieve Size Fraction(mm) |
Total |
Carats |
| (dry |
+0.106 |
+0.150 |
+0.212 |
+0.300 |
+0.425 |
+0.600 |
+0.850 |
+1.180 |
+1.700 |
+2.360 |
+3.350 |
+3.350 |
Diamonds |
(+0.85mm) |
| tonnes) |
-0.150 |
-0.212 |
-0.300 |
-0.425 |
-0.600 |
-0.850 |
-1.180 |
-1.700 |
-2.360 |
-3.350 |
-4.750 |
-4.750 |
|
|
| 0.518 |
741 |
491 |
257 |
162 |
84 |
41 |
29 |
13 |
3 |
0 |
0 |
1 |
1,822 |
2.41 |
*Sample grade of diamonds greater than 0.85mm: 4.65 carats
per tonne
Table 18 – Faraday 1 2016 Caustic Fusion Results from
2016 Drilling
Sample
Weight |
Number
and Weight of Diamonds According to Sieve Size Fraction(mm) |
Total |
Carats |
| (dry |
+0.106 |
+0.150 |
+0.212 |
+0.300 |
+0.425 |
+0.600 |
+0.850 |
+1.180 |
+1.700 |
+2.360 |
+3.350 |
+3.350 |
Diamonds |
(+0.85mm) |
| tonnes) |
-0.150 |
-0.212 |
-0.300 |
-0.425 |
-0.600 |
-0.850 |
-1.180 |
-1.700 |
-2.360 |
-3.350 |
-4.750 |
-4.750 |
|
|
| 0.225 |
368 |
239 |
119 |
67 |
41 |
21 |
12 |
8 |
2 |
0 |
0 |
0 |
877 |
0.6921 |
*Sample grade of diamonds greater than 0.85mm:
3.07 carats per tonne
Following on positive results of the 2015
program for Kelvin South, a second bulk sampling program was initiated at Kelvin North on February 18th and completed
by April 24th, 2016. Thirty-two large diameter reverse circulation drill holes (29 holes on the North Limb and 3 holes
on the South Limb) recovered a total of 612.0 tonnes of kimberlite, which significantly surpassed the target recovery of 500 tonnes.
In the same program, two large diameter RC holes were drilled on the Faraday 2 kimberlite to obtain a mini-bulk sample, with a
total of 21.1 tonnes of kimberlite recovered.
The kimberlite recovered during the winter
2016 large diameter drilling program was processed for diamonds using dense media separation (‘DMS’) technology located
at the Geoanalytical Laboratories Diamond Services of the Saskatchewan Research Council (‘SRC’), which is accredited
to the ISO/IEC 17025 standard by the Standards Council of Canada as a testing laboratory for diamond analysis.
In July, the Company announced that the
Faraday 2 mini-bulk sample produced a total of 56.64 carats of diamonds (+0.85mm) for a sample grade of 2.69 carats per tonne.
Core logging and geological modeling for Faraday 2 identified four kimberlite units (KIMB1-KIMB4), with KIMB1 being volumetrically
dominant. The mini-bulk sample recovered only small amounts of some lithologies and as such, sample grades for every lithology
could not be individually determined. Table 19 summarizes the diamond recovery results from the 2016 Faraday 2 mini-bulk sample.
Table 19 – Diamond Recovery Results from
the Winter 2016 Faraday 2 Mini-bulk Sample
| Kimberlite |
Sample1 |
Number
of Diamonds per Square Mesh Sieve Division (mm) |
Total
Stones |
Total
Carats |
Sample |
| Lithology |
Weight (dry |
+0.850 |
+1.180 |
+1.700 |
+2.360 |
+3.350 |
+4.750 |
(+0.85mm) |
(+0.85mm) |
Grade* |
| |
tonnes) |
-1.180 |
-1.700 |
-2.360 |
-3.350 |
-4.750 |
-6.700 |
|
|
(ct/t) |
| KIMB1+2+3 |
16.7 |
245 |
328 |
117 |
48 |
12 |
1 |
751 |
47.34 |
2.84 |
| KIMB4 |
4.40 |
20 |
54 |
20 |
6 |
4 |
0 |
104 |
9.27 |
2.10 |
| Total2 |
21.1 |
266 |
383 |
137 |
54 |
16 |
1 |
857 |
56.64 |
2.69 |
Notes: 1 – Sample weight is calculated from drillhole
diameter and kimberlite density measurements. 2 – includes one +1.18mm and one +0.85mm stone from the DMS circuit cleanup
totaling 0.04 carats. * Sample grade of diamonds greater than 0.85mm: 2.69 carats per tonne. Rounding error may occur in the total
carats and sample grade.
The three largest diamonds recovered from the Faraday 2 sample
are described by the SRC as follows:
| · | 1.90
carat grey transparent aggregate with inclusions; |
| · | 1.73
carat light brown, transparent broken aggregate with inclusions; and |
| · | 1.52
carat grey transparent aggregate with inclusions. |
In September 2016, the Company announced
the diamond recovery results for the north limb of the Kelvin kimberlite. A total of 1,278 carats of diamonds (+0.85mm) were recovered
from 612.0 tonnes for a sample grade of 2.09 carats per tonne. Forty-four diamonds of one carat or greater were recovered with
the largest stone a 3.43 carat white/colourless transparent octahedral twin with no inclusions.
Under the guidance of SRK Consulting (Vancouver,
B.C.), three broadly-defined zones of kimberlite labeled A, B and C have been identified at the Kelvin kimberlite, with zone B
further subdivided into zones B and Bx. The thickness of each zone varies along the length of the body, and so each zone was processed
separately in order to better understand the diamond size and grade variability between each zone. Table 20 summarizes the diamond
recovery results from the 2016 Kelvin north limb bulk sample.
Table 20 – Kelvin North 2016 Bulk Sample
Diamond Recovery Results
| Kimberlite |
Sample1 |
Number
of Diamonds per Square Mesh Sieve Division (mm) |
Total
Stones |
Total
Carats |
Sample |
| Lithology |
Weight |
+0.850 |
+1.180 |
+1.700 |
+2.360 |
+3.350 |
+4.750 |
(+0.85mm) |
(+0.85mm) |
Grade2 |
| |
(tonnes) |
-1.180 |
-1.700 |
-2.360 |
-3.350 |
-4.750 |
-6.700 |
|
|
(ct/t) |
| Zone
A |
184.2 |
4,929 |
5,004 |
1,672 |
463 |
65 |
8 |
12,141 |
529.00 |
2.87 |
| Zone
B |
200.2 |
3,100 |
4,269 |
1,549 |
465 |
91 |
15 |
9,489 |
514.46 |
2.57 |
| Zone
Bx |
183.5 |
1,080 |
1,310 |
463 |
149 |
22 |
2 |
3,026 |
155.03 |
0.84 |
| Zone
C |
44.0 |
511 |
688 |
248 |
63 |
15 |
2 |
1,527 |
79.82 |
1.81 |
| Total2 |
612.0 |
9,620 |
11,271 |
3,932 |
1,140 |
193 |
27 |
26,183 |
1,278.31 |
2.09 |
Notes: 1 – Sample weight is calculated
from drillhole calliper and kimberlite bulk density measurements. 2 – Excludes 10.46 carats of diamonds recovered from mixed
country rock and country rock breccia intersections external to the Kelvin body, and from DMS plant clean-up. Some rounding error
may occur in the total carats and sample grade.
The five largest diamonds recovered from the Kelvin bulk sample
are described by the SRC as:
| · | 3.43
carat white/colourless transparent octahedral twin with no inclusions; |
| · | 3.23
carat grey, translucent irregular shape with inclusions; |
| · | 2.84
carat white/colourless, transparent octahedron with no inclusions; |
| · | 2.57
carat white/colourless, transparent broken irregular shape with no inclusions; |
| · | 2.14
carat off-white, transparent tetrahexahedron with no inclusions. |
Kennady Diamonds
retained the services of WWW International Diamond Consultants (Antwerp, Belgium) to provide an independent valuation as well
as size frequency distribution and revenue models for the 2016 Kelvin bulk sample. The diamonds from the 2015 bulk sample also
underwent revaluation and the combined result for 2,262.43 carats (+0.85mm) produced a value of US$52 per carat.
In December 2016, the culmination
of logging, petrography and geological modelling was combined with the diamond grade and valuation results to allow declaration
of a maiden resource estimate for the Kelvin kimberlite. An Indicated
Mineral Resource of
13.62 million carats of diamonds is contained in 8.50 million tonnes of kimberlite, with an overall grade of 1.60 carats per
tonne and an average value of US$63 per carat using a bottom cutoff size of 1 mm. The resource was determined through the
collective efforts of Aurora Geosciences Ltd., Mineral Services Canada Inc., SRK Consulting Inc., and JDS Energy & Mining
Inc., who were engaged by the Company to participate in the exercise. A NI 43-101 report describing the resource is available
on SEDAR at www.sedar.com.
In January 2017, the Company
announced caustic fusion diamond recovery results for the Faraday 3 kimberlite. A total of 3.03 tonnes of kimberlite recovered
by core drilling at Faraday 3 in 2016 returned 6.61 carats of diamonds larger than 0.85 mm for a sample grade of 2.18 carats per
tonne. Results for Faraday 3 are summarized in Table 21.
Table 21 – Faraday 3 Caustic Fusion Results
from 2016 Drilling
| Sample |
Number
and Weight of Diamonds According to Sieve Size Fraction (mm) |
|
Total |
| Weight |
+0.106 |
+0.150 |
+0.212 |
+0.300 |
+0.425 |
+0.600 |
+0.850 |
+1.180 |
+1.700 |
+2.360 |
+3.350 |
Total |
Carats |
| (dry tonnes) |
-0.150 |
-0.212 |
-0.300 |
-0.425 |
-0.600 |
-0.850 |
-1.180 |
-1.700 |
-2.360 |
-3.350 |
-4.750 |
diamonds |
(+0.85mm) |
| 3.0289 |
2,406 |
1,631 |
925 |
559 |
294 |
154 |
80 |
43 |
20 |
8 |
2 |
6,122 |
6.61 |
*Sample grade of diamonds greater than 0.85mm: 2.18 carats
per tonne
In January 2017 the
Company also announced diamond recovery results from 2016 drilling on the Faraday 1 and 2 kimberlites. At Faraday 1 a total
of 2.70 carats of diamonds larger than 0.85 mm were recovered from 0.86 tonnes of kimberlite core for a sample grade of 3.14
carats per tonne. For Faraday 2, a total of 1.37 carats of diamonds larger than 0.85 mm were recovered from 0.43 tonnes of
kimberlite core for a sample grade of 3.22 carats per tonne. Results for Faraday 1 and 2 are summarized in Table 22 and 23
below.
Table 22 – Faraday 1 Caustic Fusion
Results from 2016 Drilling
| Sample |
Number
and Weight of Diamonds According to Sieve Size Fraction (mm) |
Total |
Total |
| Weight |
+0.106 |
+0.150 |
+0.212 |
+0.300 |
+0.425 |
+0.600 |
+0.850 |
+1.180 |
+1.700 |
+2.360 |
diamonds |
Carats |
| (dry
tonnes) |
-0.150 |
-0.212 |
-0.300 |
-0.425 |
-0.600 |
-0.850 |
-1.180 |
-1.700 |
-2.360 |
-3.350 |
|
(+0.85mm) |
| 0.8615 |
1,139 |
708 |
374 |
255 |
130 |
86 |
39 |
23 |
7 |
5 |
2,766 |
2.7043 |
*Sample grade of diamonds greater than 0.85mm: 3.14 carats
per tonne.
Table 23 – Faraday 2 Caustic Fusion Results
from 2016 Drilling
| Sample |
Number
and Weight of Diamonds According to Sieve Size Fraction (mm) |
Total |
Total |
| Weight |
+0.106 |
+0.150 |
+0.212 |
+0.300 |
+0.425 |
+0.600 |
+0.850 |
+1.180 |
+1.700 |
diamonds |
Carats |
| (dry
tonnes) |
-0.150 |
-0.212 |
-0.300 |
-0.425 |
-0.600 |
-0.850 |
-1.180 |
-1.700 |
-2.360 |
|
(+0.85mm) |
| 0.4249 |
683 |
482 |
302 |
158 |
83 |
46 |
26 |
17 |
6 |
1,803 |
1.369 |
*Sample grade of diamonds greater than 0.85mm:
3.22 carats per tonne.
A total of 10,712 meters of exploration core drilling was completed
in the 2016 winter/spring program as summarized in Table 24. Both Faraday 1 and 3 have been drill confirmed as over 200 meters
in length, with late season drilling confirming that they coalesce near the shoreline of Faraday Lake, continue onto land, and
are open along strike. Based on the mini-bulk sample results, a single HQ pilot hole was drilled into Faraday 2 to guide future
large diameter RC drilling.
Table 24 – Summary of Winter/Spring Exploration
Diamond Drilling - 2016
| |
Faraday
(F1) |
Faraday
(F2) |
Faraday
(F3) |
Hobbes |
Kelvin
Pipe |
Kelvin
Sheet |
Total |
| |
|
|
|
|
|
|
|
| Number
of Drill Holes |
25 |
1 |
30 |
14 |
1 |
3 |
74 |
| |
|
|
|
|
|
|
|
| HQ
Total (m) |
251 |
139 |
323 |
0 |
0 |
0 |
713 |
| |
|
|
|
|
|
|
|
| HQ3
Total (m) |
0 |
0 |
0 |
0 |
211 |
169 |
380 |
| |
|
|
|
|
|
|
|
| NQ
Total (m) |
3,830 |
0 |
4,504 |
1,136 |
0 |
149 |
9,619 |
| |
|
|
|
|
|
|
|
| HQ
KIMB (m) |
80 |
73 |
85 |
0 |
0 |
0 |
238 |
| |
|
|
|
|
|
|
|
| HQ3
KIMB (m) |
0 |
0 |
0 |
0 |
79 |
6 |
86 |
| |
|
|
|
|
|
|
|
| NQ
KIMB (m) |
606 |
0 |
775 |
107 |
0 |
6 |
1,494 |
| |
|
|
|
|
|
|
|
| Total
Drilled (m) |
4,081 |
139 |
4,827 |
1,136 |
211 |
318 |
10,712 |
| |
|
|
|
|
|
|
|
| Total
KIMB (m) |
686 |
73 |
860 |
107 |
79 |
12 |
1,818 |
| |
|
|
|
|
|
|
|
A total of 9,548 meters of exploration
and delineation drilling was completed during the summer program using two helicopter portable core drill rigs from land-based
setups. One rig primarily focused on the Faraday 1 - 3 kimberlite complex, and the second rig was focused on Faraday 2. Towards
the end of the program, two infill delineation drill holes were completed on the Kelvin kimberlite in order to refine the kimberlite
pipe shell in two specific areas of the Kelvin geological model. A 97% success rate of hitting kimberlite was achieved on the
drill program, and the Faraday 1 - 3 and Faraday 2 kimberlite bodies were successfully tracked from under Faraday Lake well onto
the land. Drilling has demonstrated that the Faraday kimberlites are conceptually similar to the Kelvin kimberlite and are unconventional
with respect to the traditional morphology of kimberlite pipes.
A series of longer kimberlite intercepts
on Faraday 2 in the latter stages of the program(e.g. 76.9 m; 50.3 m and 38.0 m) provided an indication that the kimberlite body
may be expanding as it turns towards the North, along the lines of what was observed when delineating Kelvin. All of the goals
of the summer program were successfully achieved.
A breakdown of drilling statistics for the summer program is
summarized below in Table 25.
Table 25 – Summary of Summer Exploration Drilling
- 2016
| |
Faraday
(F2) |
Faraday
(F3) |
Kelvin
Pipe |
Total |
| |
|
|
|
|
| Number
of Drill Holes |
14 |
20 |
2 |
36 |
| |
|
|
|
|
| HQ
Total (m) |
3,394 |
592 |
772 |
4,758 |
| |
|
|
|
|
| NQ
Total (m) |
555 |
4234 |
0 |
4,789 |
| |
|
|
|
|
| HQ
KIMB (m) |
327 |
26 |
143 |
496 |
| |
|
|
|
|
| NQ
KIMB (m) |
53 |
223 |
0 |
276 |
| |
|
|
|
|
| Total
Drilled (m) |
3,949 |
4,827 |
772 |
9,548 |
| |
|
|
|
|
| Total
KIMB (m) |
380 |
249 |
143 |
772 |
| |
|
|
|
|
High resolution geophysics continues to be a critical component
of the Company’s exploration methodology to help delineate the unconventional kimberlite pipes within the Kelvin-Faraday
corridor.
OUTLOOK
Drilling, sampling
and modeling over the past four years have provided the data required for the Company to prepare the first NI 43-101 resource
statement for the Kelvin kimberlite, which was published on January, 26, 2017 and includes the bulk samples from 2015 and 2016
and the Kelvin diamond valuation report from WWW International Diamonds. The NI 43-101 resource statement is available at www.SEDAR.com
Drilling, sampling and modeling
of the Faraday 1, Faraday 2 and Faraday 3 kimberlites continues with a view to being able to declare a NI 43-101 inferred
resource statement for these kimberlites during 2017.
The Company is extremely encouraged with
its success within the Kelvin-Faraday corridor and looks forward to identifying additional unconventional pipe-like bodies.
Exploration drilling will continue at
the MZ and Doyle kimberlites as well as potential new kimberlite targets across the Kennady North property.
The Preliminary Economic Assessment (PEA)
that was initiated in Q2 of 2016 was suspended in Q4 to allow for the development of additional resources on the Kennady North
Project.
SELECTED FINANCIAL INFORMATION
| | |
December 31, 2016 | | |
December 31, 2015 | | |
December 31, 2014 | |
| Interest income | |
$ | 185,397 | | |
$ | 101,787 | | |
$ | 107,675 | |
| Other income - flow through shares | |
| 335,748 | | |
| 1,634,855 | | |
| 1,163,492 | |
| Operating expenses | |
| (34,685,206 | ) | |
| (31,536,109 | ) | |
| (19,337,577 | ) |
| Other expenses | |
| (1,213 | ) | |
| (1,484 | ) | |
| (1,271 | ) |
| Net loss for the period | |
| (34,165,274 | ) | |
| (29,800,951 | ) | |
| (18,067,681 | ) |
| Basic and diluted loss per share | |
| (0.73 | ) | |
| (0.92 | ) | |
| (0.78 | ) |
| Cash flow from operations | |
| (33,185,838 | ) | |
| (30,150,425 | ) | |
| (17,274,367 | ) |
| Cash, end of year | |
| 8,286,064 | | |
| 41,068,805 | | |
| 507,808 | |
| Total assets | |
| 11,223,967 | | |
| 44,290,911 | | |
| 4,511,282 | |
| Long-term liabilities | |
| 170,663 | | |
| 247,568 | | |
| 147,016 | |
| Dividend declared | |
| Nil | | |
| Nil | | |
| Nil | |
FINANCIAL REVIEW
For the three months and year
ended December 31, 2016 compared to the three months and year ended December 31, 2015
For the three months and year
ended December 31, 2016, the Company recorded a net loss of $3,214,199 or $0.07 per share and $34,165,274 or $0.73 per share, respectively,
compared to a net loss of $3,628,290 or $0.08 per share and $29,800,951 or $0.92 per share for the same period in 2015. The increase
over the same period in 2015 is mainly as a result of $31,806,615 being spent on exploration and evaluation expenses compared to
$28,620,904. During 2016, more drilling and bulk samples were undertaken resulting in the increase. A notable decrease was share-based
payment expense, which decreased from $1,902,694 in 2015 to $1,357,290 in 2016.
Quarterly financial information
for the past 8 quarters is shown in Table 1.
SUMMARY OF QUARTERLY RESULTS
Table 1 - Quarterly Financial Data
| | |
| | |
Three months ended | | |
| |
| | |
December 31 | | |
September 30 | | |
June 30 | | |
March 31 | |
| Unaudited | |
2016 | | |
2016 | | |
2016 | | |
2016 | |
| | |
$ | | |
$ | | |
$ | | |
$ | |
| Earnings and Cash Flow | |
| | | |
| | | |
| | | |
| | |
| Interest and other income | |
| 21,576 | | |
| 33,406 | | |
| 50,754 | | |
| 415,409 | |
| Expenses | |
| (3,235,461 | ) | |
| (6,386,276 | ) | |
| (9,996,750 | ) | |
| (15,066,719 | ) |
| Net loss for period | |
| (3,214,199 | ) | |
| (6,353,166 | ) | |
| (9,946,298 | ) | |
| (14,651,611 | ) |
| Cash flow from operations | |
| (4,465,487 | ) | |
| (5,423,137 | ) | |
| (12,392,022 | ) | |
| (10,905,192 | ) |
| Basic and diluted loss per share | |
| (0.07 | ) | |
| (0.13 | ) | |
| (0.21 | ) | |
| (0.31 | ) |
| Investing activities | |
| 21,576 | | |
| (166,594 | ) | |
| 50,754 | | |
| 79,661 | |
| Financing activities | |
| 70,250 | | |
| 44,450 | | |
| 176,000 | | |
| 127,000 | |
| Balance Sheet | |
| | | |
| | | |
| | | |
| | |
| Total assets | |
| 11,223,967 | | |
| 15,823,610 | | |
| 21,427,628 | | |
| 33,685,090 | |
| | |
| | |
Three months ended | | |
| |
| | |
December 31 | | |
September 30 | | |
June 30 | | |
March 31 | |
| Unaudited | |
2015 | | |
2015 | | |
2015 | | |
2015 | |
| | |
$ | | |
$ | | |
$ | | |
$ | |
| Earnings and Cash Flow | |
| | | |
| | | |
| | | |
| | |
| Interest and other income | |
| 851,045 | | |
| 2,830 | | |
| 11,634 | | |
| 871,133 | |
| Expenses | |
| (4,478,961 | ) | |
| (8,388,064 | ) | |
| (7,068,586 | ) | |
| (11,600,498 | ) |
| Net loss for period | |
| (3,628,290 | ) | |
| (8,385,608 | ) | |
| (7,057,322 | ) | |
| (10,729,731 | ) |
| Cash flow from operations | |
| (6,364,802 | ) | |
| (7,724,352 | ) | |
| (7,047,892 | ) | |
| (9,013,379 | ) |
| Basic and diluted loss per share | |
| (0.08 | ) | |
| (0.29 | ) | |
| (0.25 | ) | |
| (0.42 | ) |
| Investing activities | |
| 116,190 | | |
| (61,308 | ) | |
| (1,488,366 | ) | |
| 1,873,895 | |
| Financing activities | |
| 33,080,623 | | |
| 18,649,472 | | |
| - | | |
| 18,540,916 | |
| Balance Sheet | |
| | | |
| | | |
| | | |
| | |
| Total assets | |
| 44,290,911 | | |
| 18,554,705 | | |
| 6,488,826 | | |
| 13,894,156 | |
COSTS AND EXPENSES
The costs and expenses for the three
months and year ended December 31, 2016 compared to the three months and year ended December 31, 2015 are similar except for the
following:
Exploration and evaluation expenses
Exploration and evaluation expenses
for the three months and year ended December 31, 2016 were $2,624,123 and $31,806,615, respectively, compared to $4,142,795
and $28,620,904 for the same period in 2015. The increase in exploration and evaluation expenses is a result of an extensive
winter/spring and summer program on the Kennady North Project.
| | |
Three months ended | | |
Three months ended | | |
Year ended | | |
Year ended | |
| | |
December 31, 2016 | | |
December 31, 2015 | | |
December 31, 2016 | | |
December 31, 2015 | |
| Lease payments | |
$ | 7,229 | | |
$ | 7,234 | | |
$ | 28,423 | | |
$ | 28,325 | |
| Aircraft support | |
| 205,918 | | |
| 391,829 | | |
| 2,379,866 | | |
| 2,342,757 | |
| Fuel | |
| 1,941 | | |
| (44,884 | ) | |
| 1,406,832 | | |
| 1,502,523 | |
| Geophysics | |
| 4,455 | | |
| 19,139 | | |
| 605,597 | | |
| 139,214 | |
| Drilling support | |
| 12,555 | | |
| 137,585 | | |
| 120,623 | | |
| 475,518 | |
| Exploration personnel and program support | |
| 386,572 | | |
| 650,645 | | |
| 4,177,077 | | |
| 3,587,393 | |
| Camp maintenance, supplies, mobilization, general costs | |
| 318,567 | | |
| 760,155 | | |
| 4,236,642 | | |
| 4,614,370 | |
| Site& logistical support | |
| 386,000 | | |
| 427,567 | | |
| 5,767,738 | | |
| 2,210,130 | |
| Environmental | |
| 36,015 | | |
| 63,987 | | |
| 115,933 | | |
| 82,160 | |
| Professional geological services | |
| 176,470 | | |
| 169,176 | | |
| 895,178 | | |
| 732,703 | |
| Drilling | |
| 350,125 | | |
| 941,484 | | |
| 9,270,993 | | |
| 10,646,286 | |
| Technical consultant | |
| 22,066 | | |
| (1,831 | ) | |
| 196,225 | | |
| 119,783 | |
| Laboratory analysis | |
| 448,238 | | |
| 544,346 | | |
| 1,816,974 | | |
| 1,896,063 | |
| Diamond valuation | |
| 163,272 | | |
| 23,826 | | |
| 191,048 | | |
| 155,145 | |
| Permitting | |
| 21,113 | | |
| 52,537 | | |
| 149,135 | | |
| 88,534 | |
| Preliminary economic assessment | |
| 83,587 | | |
| - | | |
| 448,331 | | |
| - | |
| | |
$ | 2,624,123 | | |
$ | 4,142,795 | | |
$ | 31,806,615 | | |
$ | 28,620,904 | |
Consulting fees and payroll
Consulting fees and payroll
expenses for the three months and year ended December 31, 2016 were $413,173 and $953,055, respectively, compared to $235,099
and $552,846 for the same period in 2015. The increase is as a result of the former President and CEO’s increase in
consulting fees for the first 5 months of the period, and the recruitment costs associated with the search for a new
President and CEO.
Share-based payment expense
Share-based payment expense for the three
months and year ended December 31, 2016 were $43,861 and $1,357,290, respectively, compared to $Nil and $1,902,694 for the same
period in 2015. During the year ended December 31, 2016, 590,000 options were granted compared to 685,000 options granted for
the same period in 2015. All options vested immediately, in December 31, 2016 and 2015.
Interest income
Interest income for the three months and
year ended December 31, 2016 was $21,576 and $185,397, respectively, compared to $86,190 and $101,787 for the same period in 2015.
The increase over 2015 is mainly due to the significantly higher average cash balance during the year as a result of the September
and October 2015 private placements.
Other income
Other income for the three months and
year ended December 31, 2016 were $Nil and $335,748, respectively, compared to $764,855 and $1,634,855 same period in 2015. In
2016, exploration expenditures were renounced relating to the flow-through common shares from the September and October 2015 private
placements. In 2015, exploration expenditures were renounced relating to flow-through common shares from the February, September
and October 2015 private placements and as a result, the flow-through premiums were recognized in the statement of comprehensive
loss as other income, as the expenditures were incurred.
Travel expenses
Travel expenses for the three
months and year ended December 31, 2016 were $44,782 and $71,458, respectively, compared to $14,133 and $16,099 for the same period
in 2015. The increase over 2015 is mainly due to the increased exploration program, and travel expenses of the new President and
CEO.
INCOME AND RESOURCE TAXES
The Company is subject to mining and income taxes in Canada
with the statutory income tax rate at 26.50%.
No deferred tax asset has been recorded
financial statements as a result of the uncertainty associated with the ultimate realization of these tax assets.
The Company is subject to assessment by
Canadian authorities, which may interpret tax legislation in a manner different from the Company. These differences may affect
the final amount or the timing of the payment of taxes. When such differences arise the Company makes provision for such items
based on management’s best estimate of the final outcome of these matters.
FINANCIAL POSITION AND LIQUIDITY
Operating Activities
Cash used in operating activities for
the year ended December 31, 2016 was $33,185,838 compared with $30,150,425 for the comparative period in 2015. This is mainly
a result of increased exploration and evaluation activities in 2016.
Investing Activities
Investing activities for the year ended
December 31, 2016 amounted to ($14,603) compared to $440,411 for the comparative period in 2015. In the year ended December 31,
2015, equipment was purchased totalling $1,694,138 and short-term investments were redeemed totalling $2,002,762 compared to $Nil
in the current period. During the year ended December 31, 2016, $200,000 was incurred to acquire six mining leases. Interest income
of $185,357 was received in the year ended December 31, 2016 compared to $101,787 in 2015.
Financing Activities
Financing activities for the year ended
December 31, 2016 amounted to $417,700 compared to $70,271,011 for the comparative period in 2015. During the year ended December
31, 2015, the Company issued by way of private placements 20,986,560 commons shares and 2,293,235 flow-through common shares for
gross proceeds of $70,759,675. Share issuance costs of $488,664 were incurred. In the year ended December 31, 2016, 275,000 options
were exercised for gross proceeds of $417,700.
Cash Resources and Liquidity
At December 31, 2016, the Company reported
a working capital of $7,815,464 (2015 - $40,391,535). Included in working capital at December 31, 2016 was cash of $8,286,064
(2015 - $41,068,805). At December 31, 2016 and 2015, the Company had no long-term debt.
The Company’s budgeted expenditures
for the H1 2017 program is approximately $15.65 million and is contingent on the Company’s ability to successfully raise
additional capital as noted in Note 1 of the Financial Statements regarding going concern.
OFF-BALANCE SHEET ARRANGEMENTS
The Company has no off-balance sheet arrangements.
SIGNIFICANT ACCOUNTING JUDGMENTS, ESTIMATES AND ASSUMPTIONS
The preparation of the Company’s
financial statements requires management to make judgments, estimates and assumptions that affect the reported amounts of assets
and liabilities at the date of the financial statements and reported amounts of expenses during the reporting period. Actual outcomes
could differ from these estimates. The financial statements include estimates, which, by their nature, are uncertain and may require
accounting adjustments based on future occurrences. Revisions to accounting estimates are recognized in the period in which the
estimate is revised and future periods if the revision affects both current and future periods. These estimates are based on historical
experience, current and future economic conditions, and other factors, including expectations of future events that are believed
to be reasonable under the circumstances.
| i) | Significant Judgments in Applying Accounting Policies |
The areas which require management to make significant judgments
in applying the Company’s accounting policies in determining carrying values include, but are not limited to:
| a) | Impairment analysis – Mineral Properties |
The Company reviews its mineral properties for impairment
based on results to date and when events and changes in circumstances indicate that the carrying value of the assets may not be
recoverable. IFRS 6 -Exploration for and evaluation of mineral resources requires the Company to make certain judgments
in respect of such events and changes in circumstances, and in assessing their impact on the valuations of the affected assets.
The Company’s assessment is that as at December 31, 2016 and December 31, 2015, no indicators of an impairment in the carrying
value of its mineral properties had occurred.
| ii) | Significant Accounting Estimates and Assumptions |
The areas which require management to make significant estimates
and assumptions in determining carrying values include, but are not limited to:
| a) | Impairment analysis – Mineral Properties |
The Company reviews its mineral properties for impairment
based on results to date and when events and changes in circumstances indicate that the carrying value of the assets may not be
recoverable. If indicators of impairment are identified, management will perform an impairment test in accordance with IAS 36
– Impairment of assets (“IAS 36”). IAS 36 requires the Company to make certain judgments, assumptions,
and estimates in determining the estimate of the net recoverable amount. Impairments are recognized when the carrying values exceed
management’s estimate of the net recoverable amounts associated with the affected assets. The values shown on the balance
sheet for Mineral Properties represents the Company’s assumption that the amounts are recoverable. As a result of the numerous
variables associated with the Company’s judgments and assumptions, the precision and accuracy of estimates of recoverable
amount is subject to significant uncertainties, and may change significantly as additional information becomes known.
The stock option pricing model requires the input of highly
subjective assumptions including the expected life and
volatility. Changes in the subjective input assumptions can materially affect the fair value estimate.
| c) | Provision for decommissioning and restoration |
The decommissioning and
restoration liability and the accretion recorded are based on estimates of future cash flows, discount rates, and assumptions
regarding timing. The estimates are subject to change and the actual costs for the decommissioning and restoration liability
may change significantly.
Deferred income tax
assets and liabilities are determined based on differences between the financial reporting and tax bases of assets and
liabilities and on unused losses carried forward, and are measured using the substantively enacted tax rates that are
expected to be in effect when the differences are expected to reverse or losses are expected to be utilized. Deferred tax
assets are recorded to recognize tax benefits only to the extent that, based on available evidence, including forecasts, it
is probable that they will be realized. The Company has not recorded the benefit of any tax losses or deductible temporary
differences.
STANDARDS, AMENDMENTS AND INTERPRETATIONS TO EXISTING
STANDARDS THAT ARE NOT YET EFFECTIVE AND HAVE NOT BEEN ADOPTED EARLY BY THE COMPANY
At the date of this MD&A,
certain new standards, amendments and interpretations to existing standards have been published but are not yet effective, and
have not been adopted early by the Company.
The Company anticipates that
all of the relevant pronouncements will be adopted in the Company’s accounting policy for the first period beginning after
the effective date of the pronouncement. Information on new standards, amendments and interpretations that are expected to be relevant
to the Company’s financial statements is provided below. Certain other new standards and interpretations have been issued
but are not expected to have a material impact on the Company’s financial statements and are therefore not discussed below.
Share-based payments
In June 2016, the IASB
issued amendments to International Financial Reporting Standard 2, Share-based Transactions (“IFRS 2”). The
amendments are effective for periods beginning on or after January 1, 2018 and are to be applied prospectively. The
amendments clarify the classification and measurement of share-based payment transactions. Management is currently assessing
the impact of the amendments to IFRS 2 on the financial statements.
Financial instruments
In July 2014, the IASB
issued the final version of IFRS 9 Financial Instruments (“IFRS 9”) bringing together the classification and
measurement, impairment and hedge accounting phases of the IASB’s project to replace IAS 39 Financial Instruments:
Recognition and Measurement. IFRS 9 is effective for annual periods beginning on or after January 1, 2018, with early
adoption permitted. The extent of the impact of adoption of IFRS 9 has not yet been determined.
Leases
On January 13, 2016, the
IASB issued International Financial Reporting Standard 16, Leases (“IFRS 16”). The new standard will replace
existing lease guidance in IFRS and related interpretations, and requires companies to bring most leases on-balance sheet.
The new standard is effective for annuals beginning on or after January 1, 2019. The Company is currently assessing the
impact of IFRS 16.
Income taxes
In January 2016, the IASB
issued amendments to IAS 12 Income Taxes (“IAS 12”). The amendments clarify that the existence of a deductible
temporary difference is not affected by possible future changes in the carrying amount or expected manner of recovery of the
asset and also clarify the methodology to determine the future taxable profits used for assessing the utilization of
deductible temporary differences. The amendments apply for annual periods beginning on or after January 1, 2017 with
retrospective application. Early application of the amendments is permitted. The impact of the amendments to IAS 12 on the
Company’s financial statements has not yet been determined.
FINANCIAL INSTRUMENTS
The Company’s financial instruments
are described in Note 4 to the Company’s December 31, 2016 financial statements.
RELATED PARTY TRANSACTIONS
In accordance with IAS 24 Related
Parties, key management personnel are those persons having authority and responsibility for planning, directing and controlling
the activities of the Company directly or indirectly, including any directors (executive and non-executive) of the Company.
The Company’s related
parties include its key management, the Company’s directors, and their close family members. Mountain Province and the Gahcho
Kué Joint Venture, in which Mountain Province holds an interest, are also related parties since the Company and Mountain
Province had common members of key management and certain directors in 2016. International Investment and Underwriting (“IIU”)
is also a related party since it is controlled by Mr. Dermot Desmond. MCC Geoscience Inc. (“MCC”) is also a related
party since it is controlled by a member of the Board of Directors.
None of the transactions with
related parties incorporate special terms and conditions, and no guarantees were given or received. Related party transactions
are recorded at their exchange amount, being the amount agreed to by the parties. Outstanding balances are settled in cash.
The Company had the following
transactions and balances with its related parties including key management personnel, and Mountain Province which includes the
monthly management fee charged by Mountain Province for the reimbursement of expenses incurred on the Company’s behalf by
Mountain Province. The transactions with key management personnel are in the nature of remuneration which are paid directly by
the Company and are not included in the monthly management fee charged by Mountain Province. The transactions with IIU are for
the director fees and travel expenses of the Chairman of the Company. The transactions with MCC are for consulting fees and reimbursements
of travel expenses.
The balances as at December 31,
2016 and 2015 were as follows:
| |
December 31,
2016 |
December 31,
2015 |
| Payable to key management personnel and directors |
$ |
406 |
$ |
- |
| Payable to International Investment and Underwriting |
|
22,832 |
|
- |
| Payable to MCC Geoscience Inc. |
|
9,056 |
|
- |
| Payable to Mountain Province Diamonds Inc. |
|
- |
|
8,475 |
The transactions for the year ended December 31, 2016
and 2015 were as follows:
| |
Year ended
December 31, 2016 |
Year ended
December 31, 2015 |
| The total of the transactions: |
|
|
|
|
| Management fee and reimburseable expenses charged by Mountain Province |
$ |
90,000 |
$ |
90,000 |
| International Investment and Underwriting |
|
22,832 |
|
10,000 |
| Consulting fees charged by MCC Geoscience Inc. |
|
31,100 |
|
- |
| Remuneration of key management personnel |
|
1,955,039 |
|
2,364,213 |
The remuneration expense of directors and other members
of key management personnel for the year ended December 31, 2016 and 2015 were as follows:
| |
Year ended
December 31, 2016 |
Year ended
December 31, 2015 |
| Consulting fees, director fees, payroll and other short-term benefits |
$ |
791,339 |
$ |
461,519 |
| Share-based payment expense |
|
1,163,700 |
|
1,902,694 |
| |
$ |
1,955,039 |
$ |
2,364,213 |
CONTRACTUAL OBLIGATIONS
The Company has no contractual
obligations at December 31, 2016 other than a management services agreement with Mountain Province, for an annual amount of approximately
$90,000. The contract can be terminated at any time by either party without penalty.
SUBSEQUENT EVENT
Subsequent to the year ended December
31, 2016, 200,000 stock options were exercised for gross proceeds of $408,000.
Subsequent to the year ended December
31, 2016, 100,000 stock options were forfeited.
Subsequent to the year ended December
31, 2016, 224,999 Restricted Share Units were granted at a fair value of $3.55 per unit.
OTHER MANAGEMENT DISCUSSION AND ANALYSIS REQUIREMENTS
RISKS
Kennady Diamond’s business
of exploring and developing mineral resources involves a variety of operational, financial and regulatory risks that are typical
in the mining industry. The Company attempts to mitigate these risks and minimize their effect on its financial performance, but
there is no guarantee that the Company will be profitable in the future, and investing in the Company’s common shares should
be considered speculative.
Kennady Diamond’s business
of exploring and developing mineral properties is subject to a variety of risks and uncertainties, including, without limitation:
| § | risks and uncertainties relating to the interpretation of drill results,
the geology, grade and continuity of mineral deposits; |
| § | mining exploration risks, including risks related to accidents, equipment
breakdowns or other unanticipated difficulties with or interruptions in production; |
| § | the potential for delays in exploration activities or the completion
of studies; |
| § | risks related to the inherent uncertainty of exploration and cost
estimates and the potential for unexpected costs and expenses; |
| § | risks related to foreign exchange fluctuations and prices of diamonds; |
| § | risks related to commodity price fluctuations; |
| § | the uncertainty of profitability based upon the Company’s limited
life and resultant losses; |
| § | risks related to failure of the Company to obtain adequate financing
on a timely basis and on acceptable terms, particularly given recent volatility in the global financial markets; |
| § | risks related to environmental regulation, permitting and liability; |
| § | political and regulatory risks associated with mining and exploration; |
| § | aboriginal rights and title; |
| § | failure of plant, equipment, processes and transportation services
to operate as anticipated; |
| § | possible variations in ore grade or recovery rates, permitting timelines,
capital expenditures, reclamation activities, land titles, and social and political developments, and other risks of the mining
industry; and |
| § | other risks and uncertainties related to the Company’s prospects,
properties and business strategy. |
As well, there can be no assurance
that any further funding required by the Company will become available to it, and if so, that it will be offered on reasonable
terms, or that the Company will be able to secure such funding. Furthermore, there is no assurance that the Company will be able
to secure new mineral properties or projects, or that they can be secured on competitive terms.
DISCLOSURE OF OUTSTANDING SHARE
DATA
The Company’s common shares
are listed on the TSX Venture Exchange under the symbol KDI. There are an unlimited number of common shares without par value authorized
to be issued by the Company.
At April 6, 2017, there are 47,381,970
shares outstanding, 1,800,000 options and 224,999 Restricted Share Units granted by the Company.
DISCLOSURE CONTROLS AND PROCEDURES
Management has established processes
to provide sufficient knowledge to support representations that it has exercised reasonable diligence that (i) the financial statements
do not contain any untrue statement of material fact or omit to state a material fact required to be stated or that is necessary
to make a statement not misleading in light of the circumstances under which it is made, as of the date of and for the periods
presented by the financial statements, and (ii) the financial statements fairly present in all material respects the financial
condition, results of operations and cash flow of the Company, as of the date of and for the periods presented.
In contrast to the certificate
required for non-venture issuers under National Instrument 52-109, Certification of Disclosure in Issuers’ Annual and Interim Filings
(“NI 52-109”), the Venture Issuer Basic Certificate does not include representations relating to the establishment and
maintenance of disclosure controls and procedures (“DC&P”) and internal control over financial reporting (“ICFR”),
as defined in NI 52-109. In particular, the certifying officers filing this certificate are not making any representations relating
to the establishment and maintenance of:
| (i) | controls and other procedures designed to provide reasonable
assurance that information required to be disclosed by the issuer in its annual filings, interim filings or other reports filed
or submitted under securities legislation is recorded, processed, summarized and reported within the time periods specified in
securities legislation; and |
| (ii) | a process to provide reasonable assurance regarding the reliability of financial reporting and
the preparation of financial statements for external purposes in accordance with the issuer’s GAAP. |
The issuer’s certifying officers
are responsible for ensuring that processes are in place to provide them with sufficient knowledge to support the representations
they are making in the certificate. Investors should be aware that inherent limitations on the ability of certifying officers of
a venture issuer to design and implement on a cost effective basis DC&P and ICFR as defined in NI 52-109 may result in additional
risks to the quality, reliability, transparency and timeliness of interim and annual filings and other reports provided under securities
legislation.
CAUTIONARY NOTE ON FORWARD-LOOKING
STATEMENTS
Certain of the statements made
and information contained herein is “forward-looking information” within the meaning of the Ontario Securities Act.
Forward-looking information may include, but is not limited to, statements with respect to the success of exploration activities,
future mineral exploration, permitting time lines, requirements for additional capital, sources and uses of funds, the estimation
of mineral reserves and mineral resources, the realization of mineral reserve and mineral resource estimates, future remediation
and reclamation activities, the timing of activities and the amount of estimated revenues and expenses. Forward-looking information
is based on
various assumptions including,
without limitation, the expectations and beliefs of management, the assumed long term price of diamonds; that the Company can access
financing, appropriate equipment and sufficient labour and that the political environment where the Company operates will continue
to support the development and operation of mining projects. Should underlying assumptions prove incorrect, or one or more of the
risks and uncertainties described below materialize, actual results may vary materially from those described in forward-looking
statements. Accordingly, readers are advised not to place undue reliance on forward-looking statements.
Forward-looking information
is subject to a variety of risks and uncertainties which could cause actual events or results to differ from those reflected in
the forward-looking information, including, without limitation, risks and uncertainties relating to foreign currency fluctuations;
risks inherent in mining including environmental hazards, industrial accidents, unusual or unexpected geological formations, ground
control problems and flooding; delays or the inability to obtain necessary governmental permits or financing; risks associated
with the estimation of mineral resources and reserves and the geology, grade and continuity of mineral deposits; the possibility
that future exploration, development or mining results will not be consistent with the Company’s expectations; the potential
for and effects of labor disputes or other unanticipated difficulties with or shortages of labor or interruptions in production;
failure of plant, equipment or processes to operate as anticipated; actual ore mined varying from estimates of grade, tonnage,
dilution and metallurgical and other characteristics; the inherent uncertainty of production and cost estimates and the potential
for unexpected costs and expenses, diamond price fluctuations; uncertain political and economic environments; changes in laws or
policies, and other risks and uncertainties, including those described under Risks.
Historical results of operations
and trends that may be inferred from the following discussions and analysis may not necessarily indicate future results from operations.
The Company undertakes no obligation to publicly update or review the forward-looking statements whether as a result of new information,
future events or otherwise, other than as required under applicable securities laws.
Cautionary Note to U.S.
Investors – Information Concerning Preparation of Resource Estimates
This MD&A has been prepared
in accordance with the requirements of the securities laws in effect in Canada, which differ from the requirements of United States
securities laws. Unless otherwise indicated, all resource and reserve estimates included in this MD&A have been prepared in
accordance with NI 43-101 and the Canadian Institute of Mining and Metallurgy Classification System. NI 43-101 is a rule developed
by the Canadian Securities Administrators which establishes standards for all public disclosure an issuer makes of scientific and
technical information concerning mineral projects.
Canadian standards, including
NI 43-101, differ significantly from the requirements of Industry Guide 7 promulgated by the United States Securities and Exchange
Commission (“SEC”) under the United States Securities Act of 1933, as amended, and resource and reserve information
contained herein may not be comparable to similar information disclosed by U.S. companies. In particular, and without limiting
the generality of the foregoing, the term “resource” does not equate to the term “reserves”. Under U.S.
standards, mineralization may not be classified as a “reserve” unless the determination has been made that the mineralization
could be economically and legally produced or extracted at the time the reserve determination is made. The SEC’s disclosure standards
under Industry Guide 7 do not define the terms and normally do not permit the inclusion of information concerning “measured
mineral resources”, “indicated mineral resources” or “inferred mineral resources” or other descriptions
of the amount of mineralization in mineral deposits that do not constitute “reserves” by U.S. standards in documents
filed with the SEC. U.S. Investors should also understand that “inferred mineral resources” have a great amount of
uncertainty as to their existence and great uncertainty as to their economic and legal feasibility. It cannot be assumed that all
or any part of an “inferred mineral resource” will ever be upgraded to a higher category. Under Canadian rules, estimated
“inferred mineral resources” may not form the basis of feasibility or pre-feasibility studies except in rare cases.
Investors are cautioned not to assume that all or any part of an “inferred mineral resource” exists or is economically
or legally mineable.
Disclosure of “contained
ounces” (or “contained carats”) in a resource is permitted disclosure under Canadian regulations; however, the
SEC normally only permits issuers to report mineralization that does not constitute “reserves” by SEC standards as
in place tonnage and grade without reference to unit measures. The requirements of NI 43-101 for identification of “reserves”
are also not the same as those of the SEC’s Industry Guide 7, and reserves reported by the Company in compliance with NI
43-101 may not qualify as “reserves” under Industry Guide 7 standards. Accordingly, information concerning mineral
deposits set forth herein may not be comparable with information made public by companies that report in accordance with U. S.
standards.
On behalf of the Board of Directors,
“Rory Moore”
Dr. Rory Moore
President & CEO
April 6, 2017
Management’s Discussion
and Analysis
For the Three and Nine Months
Ended September 30, 2017
TSXV: KDI
KENNADY
DIAMONDS INC.
MANAGEMENT’S
DISCUSSION AND ANALYSIS
FOR THE THREE AND NINE MONTHS ENDED SEPTEMBER
30, 2017
| TABLE OF CONTENTS |
Page |
| |
|
| Company Overview |
29 |
| Highlights |
29 |
| Kennady North Diamond Project |
30 |
| Outlook |
43 |
| Financial Review |
43 |
| Summary of Quarterly Results |
44 |
| Costs and Expenses |
45 |
| Income and Resource Taxes |
46 |
| Financial Position and Liquidity |
46 |
| Off-Balance Sheet Arrangements |
47 |
| Significant Accounting Judgments, Estimates and Assumptions |
47 |
| Standards, Amendments and Interpretation to Existing Standards |
48 |
| Financial Instruments |
48 |
| Related Party Transactions |
49 |
| Contractual Obligations |
50 |
| Other Management Discussion and Analysis Requirements |
50 |
| Disclosure of Outstanding Share Data |
50 |
| Disclosure of Controls and Procedures |
51 |
| Cautionary Note on Forward-Looking Statements |
51 |
This Management’s
Discussion and Analysis (“MD&A”) of November 17, 2017 provides a review of the financial performance of Kennady
Diamonds Inc. (the “Company” or “Kennady Diamonds” or “KDI”) and should be read in conjunction
with the MD&A for year ended December 31, 2016, the unaudited condensed interim financial statements and related notes for
the three and nine months ended September 30, 2017 and the audited financial statements for the year ended December 31, 2016. Financial
filings and additional information relevant to the Company’s activities can be found on SEDAR at www.sedar.com or
at the Company’s website www.kennadydiamonds.com.
All amounts are expressed in Canadian
dollars unless otherwise stated.
Technical
information included in this MD&A regarding the Company’s mineral property has been reviewed by Dr. Tom McCandless, a
Director of the Company and a Qualified Person as defined by National Instrument 43-101 - Standards of Disclosure for Mineral Properties
(“NI 43-101”).
COMPANY OVERVIEW
Kennady Diamonds is a Canadian-based
resource company that was incorporated on February 27, 2012 under the laws of the Province of Ontario. Kennady Diamonds currently
holds a 100% interest in 22 federal leases and 58 claims in the Kennady North diamond project.
Kennady
is focused on expanding its high-grade diamond resources, as well as identifying new kimberlites on its properties. To date an
indicated resource of 13.62 million carats of diamonds contained in 8.50 million tonnes of kimberlite, with a grade of 1.60 carats
per tonne and an average value of US$63 per carat has been defined for the Kelvin kimberlite. An inferred resource of 5.02 million
carats contained in 3.27 million tonnes of kimberlite, with a grade of 1.54 carats per tonne and an average value of US$98 per
carat has been defined for the Faraday kimberlites using a 1mm diamond bottom cutoff size.
Kennady
Diamonds commenced trading on the TSX Venture Exchange on July 10, 2012 under the ticker symbol “KDI”. The Company’s
registered office and its principal place of business is 1145 Midland Avenue, Suite 9, Scarborough, ON, Canada, M1K 4H2.
HIGHLIGHTS
The Company
completed a large diameter reverse circulation drilling program on the Faraday kimberlites on April 10. The aim of the program
was to recover approximately 250 tonnes from each of Faraday 2 and 3, and to obtain a smaller (~20 tonne) representative sample
from Faraday 1. This program would advance the Faraday 2 and 3 kimberlites to an inferred mineral resource, and provide diamond
grade and quality data for a Target For Further Exploration (TFFE) from Faraday 1 for correlation with the nearby Faraday 3 results.
The Faraday bulk samples
were processed at the Geoanalytical Laboratories Diamond Services of the Saskatchewan Research Council (“The SRC
Lab”). DMS processing commenced on March 27 and was completed on May 18 for Faraday 2 and June 15 for Faraday 3 and 1.
Faraday 2 returned a total of 737.6 carats of diamonds (+0.85mm) from 262.6 tonnes of kimberlite for a sample grade of 2.81
carats per tonne. Faraday 3 returned a total of 460.5 carats of diamonds (+0.85mm) from 276.4 tonnes for a sample grade of
1.67 carats per tonne. Faraday 1 returned a total of 76.8 carats of diamonds (+0.85mm) from 26.4 tonnes for a sample grade of
2.91 carats per tonne. Of particular significance was the recovery of a 7.78 carat white/colorless octahedral gem from
Faraday 3. This represents the largest diamond recovered on the project to date. Another notable highlight is that the
Faraday diamonds appear to show superior quality to the Kelvin diamonds in respect to all value parameters, including colour,
size distribution and shape. WWW International Diamond Consultants (WWW) was engaged to provide an independent valuation of
the Faraday bulk sample diamonds together with size frequency distribution and revenue models and in early August they
reported a collective average value of US$109 per carat for the 1,259 carats recovered.
Summer exploration
drilling was successful in extending the Faraday 2 kimberlite an additional 150 metres along strike, bringing the total strike
length of the kimberlite to approximately 600 metres. In addition, drilling on the Faraday 1 and 3 established that the two pipes
coalesce at the northwestern tip of Faraday 1. As a consequence, Faraday 1 and 3 are now considered to be a single kimberlite body
termed “Faraday 1-3”.
An Inferred Mineral Resource
of 5.02 million carats of diamonds has been declared for the Faraday kimberlites. The resource is contained in 3.27 million tonnes
of kimberlite, with an overall grade of 1.54 carats per tonne and an average value of US$98 per carat. A 1mm diamond bottom cutoff
size was used in the resource calculation.
The Company also
successfully completed a non-brokered private placement for aggregate gross proceeds of $12,035,423. With respect to this
placement, the Company issued 1,538,461 flow-through common shares at a price of $4.38 per share and 1,629,835 non-flow
through common shares at a price of $3.25 per share. The shares were subject to a four month hold period that expired on
September 18, 2017.
KENNADY NORTH DIAMOND PROJECT
Overview
The Kennady North diamond project
is located approximately 300 kilometers north-east of Yellowknife in Canada’s Northwest Territories. The Project is 100%
owned by the Company and consists of 22 federal leases and 58 claims covering an area of 67,164.17 hectares.
Exploration
at Kennady North commenced in the late 1990’s and resulted in the discovery of the diamond-bearing Kelvin, Faraday, MZ
and Doyle kimberlite occurrences. The number of diamonds recovered from the Kelvin and Faraday kimberlites and the
size-frequency distribution indicated that they may be of comparable grade to the 5034 (1.77 carats per tonne) and Hearne
(2.10 carats per tonne) kimberlites at the Gahcho Kué Diamond Mine.
Exploration
In October
2011, there was an Airborne Gravity Gradiometry survey (“AGG”), which included a total of 2,793 line- kilometres flown
over the Kennady North diamond project. This survey resulted in the identification of 106 geophysical targets, resulting in a 560
line-kilometre total magnetic field ground (“MAG”) survey over the geophysical targets identified by the AGG survey.
The MAG survey was conducted at 20 metre line-spacing, and the results enabled Mountain Province to prioritize the geophysical
targets for drilling. The MAG survey was managed by Aurora Geosciences Ltd. (“Aurora”) and was completed in April 2012.
In June
2012, Kennady Diamonds received a Type A Land Use Permit from the Mackenzie Valley Land and Water Board in respect of the Kennady
North diamond project, which cleared the way for Kennady Diamonds to commence a summer drill program at the Kennady North diamond
project.
In July
2012, the Company entered into an Exploration Agreement with the Lutsel K’e Dene First Nation (“Lutsel K’e”).
The Exploration Agreement established the basis for Kennady Diamonds and Lutsel K’e to work collaboratively to advance exploration
at Kennady North.
The Company
has completed a number of exploration and evaluation programs since the summer of 2012 through to December 2016. Exploration and
evaluation expenditures through 2017 are summarized below.
| |
Total |
December 31,
2016 |
December 31,
2015 |
December 31,
2014 |
December 31,
2013 |
December 31,
2012 |
| Exploration and evaluation expenses |
$85,121,740 |
$31,806,615 |
$28,620,904 |
$17,415,440 |
$5,307,526 |
$1,971,255 |
| Meters drilled |
102,749 |
30,932 |
33,423 |
27,258 |
8,648 |
2,488 |
2012 Exploration Program
Based on the AGG survey results,
exploration drilling at the Kennady North Project commenced in mid-2012. At that time, it was unclear whether the Kelvin and Faraday
kimberlites were blows along a contiguous kimberlite sill or whether they might be discrete tiny kimberlite bodies. Land-based
drilling took place at both kimberlites and the core was sent to the the Saskatchewan Research Council (“SRC”) for
diamond recovery by caustic fusion.
The combined Kelvin/Faraday diamond
results are summarized below in Table 1.
Table 1 - Kelvin/Faraday
2012 Summer Diamond Recovery Results
Total
Weight
(Kg) |
Numbers of Diamonds According to Sieve Size Fraction (mm) |
Total
Diamonds |
| +0.075 |
- |
+0.106 |
- |
+0.150 |
- |
+0.212 |
- |
+0.300 |
- |
+0.425 |
- |
+0.600 |
- |
+0.850 |
- |
+1.180 |
- |
+1.700 |
- |
| 0.106 |
|
0.150 |
|
0.212 |
|
0.300 |
|
0.425 |
|
0.600 |
|
0.850 |
|
1.180 |
|
1.700 |
|
2.360 |
|
| 394.44 |
570 |
528 |
316 |
241 |
123 |
22 |
67 |
12 |
9 |
1 |
1,889 |
*Total carat weight of the sample is 0.92.
2013 Exploration Program
In winter
2013, the Company completed 5,000 meters of drilling at Kennady North. Kimberlite was intersected in 24 of 26 drill holes with
intercepts ranging from a few meters to approximately 100 meters. Kimberlite core was treated by the SRC for recovery of diamonds
by caustic fusion with results summarized in Table 2. The Kelvin kimberlite returned a sample grade of 7.24 carats per tonne for
diamonds greater than 0.85mm and included a 2.48 carat diamond. In summer 2013, a 2,500 meter drill program focused on land-based
drilling at the North Lobe of the Kelvin kimberlite with recovered kimberlite treated at SRC. Table 3 combines the total 2013 Kelvin
diamond recovery results from both winter and summer programs.
Detailed
high-resolution ground surveys were initiated during the winter of 2013 using ground gravity, horizontal loop and minimal capacitively
coupled resistivity surveys (ohmmapper). High resolution ground geophysical surveying helped to delineate the upper portions of
the unconventional shape of the Kelvin kimberlite.
Table 2 - Kelvin/Faraday 2013
Winter Diamond Recovery Results
Total
Weight
(Kg) |
Number of Diamonds According to Sieve Size Fraction (mm) |
Total
Diamonds |
| +0.075 |
+0.106 |
+0.150 |
+0.212 |
+0.300 |
+0.425 |
+0.600 |
+0.850 |
+1.180 |
+1.700 |
+2.360 |
+3.350 |
+4.750 |
| -0.106 |
-0.150 |
-0.212 |
-0.300 |
-0.425 |
-0.600 |
-0.850 |
-1.180 |
-1.700 |
-2.360 |
-3.350 |
-4.750 |
| 1,103 |
3,139 |
2,285 |
1,283 |
823 |
552 |
289 |
199 |
78 |
40 |
13 |
4 |
2 |
1 |
8,708 |
Table 3 - Kelvin 2013 Winter and Summer Diamond
Recovery Results
Total
Weight
(Kg) |
Number of Diamonds According to Sieve Size Fraction (mm) |
Total Diamonds* |
| +0.106 |
+0.150 |
+0.212 |
+0.300 |
+0.425 |
+0.600 |
+0.850 |
+1.180 |
+1.700 |
+2.360 |
+3.350 |
+4.750 |
|
| -0.150 |
-0.212 |
-0.300 |
-0.425 |
-0.600 |
-0.850 |
-1.180 |
-1.700 |
-2.360 |
-3.350 |
-4.750 |
| 4,301 |
5,343 |
4,262 |
2,664 |
1,817 |
959 |
602 |
279 |
126 |
52 |
10 |
6 |
1 |
16,121 |
*Total weight of diamonds greater than 0.85mm: 18.58
carats
* Sample grade of diamonds greater than 0.85mm: 4.32
carats/tonne
2014 Exploration Program
In winter
2014, the Company commenced a much larger geophysical program comprising ground gravity, ohmmapper with lesser amounts of ground-penetrating
radar and ELF (extremely low frequency EM survey) along the Kelvin-Faraday corridor. Roughly 10,200 meters of drilling was completed
with over 25 tonnes of kimberlite recovered from Kelvin and over one tonne of kimberlite recovered from the Faraday bodies. This
drilling helped to define the Kelvin and Faraday 2 kimberlites and also intersected a third kimberlite, Faraday 1. It was at this
time we began to focus on the unconventional shapes of these kimberlites and focusing on the geophysical features trending northwesterly
from the kimberlite sill. Nearly one tonne of kimberlite from the Faraday kimberlites was processed at the SRC with diamond recovery
results summarized in Table 4.
Table 4 - Faraday 2014 Winter
Diamond Recovery Results
Total
Weight
(Kg) |
Number of Diamonds According to Sieve Size Fraction (mm) |
Total
Diamonds |
| +0.106 |
+0.150 |
+0.212 |
+0.300 |
+0.425 |
+0.600 |
+0.850 |
+1.180 |
+1.700 |
+2.360 |
+3.350 |
+4.750 |
|
| -0.150 |
-0.212 |
-0.300 |
-0.425 |
-0.600 |
-0.850 |
-1.180 |
-1.700 |
-2.360 |
-3.350 |
-4.750 |
| 933.08 |
1,879 |
1,180 |
741 |
420 |
207 |
104 |
59 |
25 |
6 |
7 |
0 |
0 |
4,628 |
*Total weight of diamonds greater
than 0.85mm: 3.62 carats
*Sample grade of diamonds greater
than 0.85mm: 3.88 carats per tonne
KDI retrieved
a 25 tonne bulk sample from the Kelvin kimberlite using HQ core drilling. The core was shipped to Yellowknife where detailed logging
and analysis took place under the guidance of SRK Consulting (“SRK”) of Vancouver, B.C. prior to dispatching the kimberlite
to the SRC for processing through the dense-media separation (DMS) plant. Four distinct kimberlite phases were identified in the
mini-bulk sample core, which are described in Table 5. The DMS results generated an overall sample grade of 1.79 c/t and are summarized
in Table 6.
Table
5 – Kelvin Kimberlite Phases
| Zone 1 |
Coherent pyroclastic kimberlite (PK) |
| Zone 2 |
Pyroclastic kimberlite with small (1-3cm) and medium (1-8cm) xenoliths |
| Zone 3 |
Pyroclastic kimberlite with rock flour and large (+10cm) xenoliths |
| Zone 4 |
Coherent transitional pyroclastic kimberlite |
Table 6 – Kelvin 2014 Winter/Spring Diamond
Recovery Results
| Batch |
Sample
Weight
(tonnes) |
Number of Diamonds According to Sieve Size Fraction (mm) |
Total |
Carats |
Sample
Grade
(c/t) |
| +0.850 - |
+1.180 - |
+1.700 - |
+2.360 - |
+3.350 - |
+4.750 - |
+6.700 - |
| 1.180 |
1.700 |
2.360 |
3.350 |
4.750 |
6.700 |
9.500 |
| Zone 1 |
6.12 |
70 |
133 |
71 |
23 |
1 |
0 |
0 |
298 |
18.13 |
2.96 |
| Zone 2 |
5.60 |
45 |
95 |
43 |
9 |
2 |
1 |
0 |
195 |
11.91 |
2.13 |
| Zone 3 |
9.20 |
44 |
60 |
18 |
10 |
1 |
0 |
0 |
133 |
7.76 |
0.84 |
| Zone 4 |
4.05 |
32 |
54 |
15 |
7 |
1 |
0 |
0 |
109 |
6.32 |
1.56 |
| Total* |
24.97 |
200 |
347 |
149 |
49 |
5 |
1 |
0 |
751 |
44.64 |
1.79 |
*Includes DMS and recovery cleanup
Under the
guidance of SRK, KDI has identified three main domains of kimberlite emplacement at the Kelvin kimberlite. The three domains are
defined as A, B and C, with domain B further subdivided into a Bx sub-unit. Table 7 describes the kimberlite domains present in
the Kelvin kimberlite. A 19 tonne mini-bulk sample was recovered during the summer/fall drilling program. Each of the defined
domains was processed separately to document any variability in diamond size and grade per domain. Table 8 summarizes the diamond
recovery results from the summer/fall mini-bulk sample. The summer/fall mini-bulk sample from the Kelvin North Lobe returned a
grade of 2.59 carats per tonne.
Table 7 - Kelvin kimberlite
zones
| Zone |
Kimberlite textural classification |
Comments |
| A |
Hypabyssal kimberlite with less common pyroclastic kimberlite |
|
| B1 |
Pyroclastic kimberlite |
Less than 50% dilution |
| B2/3 |
Pyroclastic kimberlite |
More than 50% dilution |
| C |
Hypabyssal kimberlite and pyroclastic kimberlite |
|
Table 8 – Kelvin 2014 Summer/Fall Diamond Recovery
Results
| Batch |
Sample
Weight (dry
tonnes) |
Number of Diamonds According to Sieve Size Fraction (mm) |
Total
Diamonds* |
Carats* |
Sample
Grade
(c/t)
+0.85mm |
| +0.850 |
+1.180 - |
+1.700 - |
+2.360 - |
+3.350 - |
+4.750 - |
+6.700 - |
| -1.180 |
1.700 |
2.360 |
3.350 |
4.750 |
6.700 |
9.500 |
| Zone A |
5.87 |
87 |
152 |
76 |
25 |
7 |
1 |
0 |
348 |
24.71 |
4.21 |
| Zone B1 |
3.75 |
47 |
85 |
32 |
10 |
4 |
0 |
0 |
178 |
11.00 |
2.93 |
| Zone B1(a) |
1.67 |
12 |
28 |
14 |
4 |
2 |
0 |
0 |
60 |
5.16 |
3.09 |
| Zone B2 |
1.90 |
11 |
18 |
3 |
1 |
0 |
0 |
0 |
33 |
1.15 |
0.61 |
| Zone B3 |
2.62 |
2 |
13 |
4 |
1 |
0 |
0 |
0 |
20 |
0.97 |
0.37 |
| Zone B3(a) |
1.90 |
12 |
17 |
6 |
4 |
2 |
0 |
0 |
41 |
3.74 |
1.97 |
| Zone C |
1.17 |
5 |
24 |
4 |
3 |
0 |
0 |
0 |
36 |
1.97 |
1.68 |
| TOTAL |
18.88 |
177 |
339 |
140 |
48 |
15 |
1 |
0 |
720 |
48.84 |
2.59 |
*Includes DMS recovery cleanup
In addition to the mini-bulk
sample results, 3.77 tonnes of kimberlite from the summer/fall drilling was processed by caustic fusion at the SRC and 1.23 tonnes
was processed by caustic fusion at the Rio Tinto diamond laboratory in Thunder Bay, Ontario. Table 9 summarizes these caustic fusion
results. A 1.83 tonne sample from the southern portion of the Kelvin North Lobe and a 47.62 kilogram sample from the Kelvin Sheet
was also processed by caustic fusion at SRC, with results summarized in Tables 10 and 11.
In 2014,
approximately 27,200 meters of drilling was completed at the Kelvin and Faraday kimberlites, resulting in the recovery of approximately
55 tonnes of kimberlite.
Table 9 – Kelvin 2014 Summer/Fall Diamond
Recovery Results
Sample
Weight
(dry
tonnes) |
Number and Weight of Diamonds According to Sieve Size Fraction (mm) |
*Total
Diamonds |
| +0.106 |
+0.150 |
+0.212 |
+0.300 |
+0.425 |
+0.600 |
+0.850 |
+1.180 |
+1.700 |
+2.360 |
+3.350 |
+4.750 |
|
| -0.150 |
-0.212 |
-0.300 |
-0.425 |
-0.600 |
-0.850 |
-1.180 |
-1.700 |
-2.360 |
-3.350 |
-4.750 |
| 5.001 |
4,556 |
3,176 |
2,041 |
1,257 |
772 |
462 |
218 |
105 |
35 |
7 |
4 |
0 |
12,633 |
*Total weight of recovered diamonds greater than
0.85mm: 12.85 carats
*Sample grade of diamonds greater than 0.85mm: 2.57
carats per tonne
Table
10 – Kelvin South Lobe 2014 Caustic Fusion Diamond Recovery Results
Sample
Weight
(dry
tonnes) |
Number and Weight of Diamonds According to Sieve Size Fraction (mm) |
*Total
diamonds |
| +0.106 |
+0.150 |
+0.212 |
+0.300 |
+0.425 |
+0.600 |
+0.850 |
+1.180 |
+1.700 |
+2.360 |
+3.350 |
+4.750 |
| -0.150 |
-0.212 |
-0.300 |
-0.425 |
-0.600 |
-0.850 |
-1.180 |
-1.700 |
-2.360 |
-3.350 |
-4.750 |
| 1.8376 |
1,679 |
1,150 |
693 |
425 |
235 |
121 |
72 |
35 |
15 |
3 |
2 |
1 |
4,431 |
*Total weight of recovered diamonds greater than
0.85mm: 6.68 carats
*Sample grade of diamonds greater than 0.85mm: 3.64
carats per tonne
Table
11 – Kelvin Sheet 2014 Caustic Fusion Diamond Recovery Results
Sample
Weight
(dry
kilograms) |
Number and Weight of Diamonds According to Sieve Size Fraction (mm) |
*Total
diamonds |
| +0.10 |
+0.150 |
+0.212 |
+0.300 |
+0.425 |
+0.600 |
+0.850 |
+1.180 |
+1.700 |
+2.360 |
+3.350 |
+4.750 |
| 6 - |
-0.212 |
-0.300 |
-0.425 |
-0.600 |
-0.850 |
-1.180 |
-1.700 |
-2.360 |
-3.350 |
-4.750 |
| 0.150 |
| 47.62 |
53 |
46 |
25 |
15 |
5 |
2 |
3 |
1 |
2 |
0 |
0 |
0 |
152 |
*Total weight of recovered diamonds greater than
0.85mm: 0.28 carats
*Sample grade of diamonds greater than 0.85mm: 5.95
carats per tonne
2015 Exploration Program
The
2015 drilling program confirmed the continuity of the Kelvin kimberlite beyond the current geological model. A winter core
drilling program recovered 2.7 tonnes of kimberlite from the Kelvin North Lobe. This material was processed by caustic fusion
analysis at the SRC and returned a sample grade of 2.74 carats per tonne for diamonds greater than 0.85mm. The spring
drilling program recovered two samples from Kelvin for caustic fusion analysis at the SRC; A 2.42 tonne sample from the
Kelvin North Lobe returned a sample grade of 2.60 carats per tonne, and 2.67 tonnes of kimberlite returned a sample grade of
3.40 carats per tonne for diamonds greater than 0.85mm. In summer, 0.93 tonnes of kimberlite from the Kelvin North Lobe
returned a sample grade of 3.55 carats per tonne for diamonds greater than 0.85mm. Table 12 below summarizes the 2015 caustic
fusion diamond recovery results from the Kelvin North Lobe summer drill program.
Table 12 – Kelvin North
Lobe 2015 Caustic Fusion Diamond Recovery Results
Winter Results
Sample
Weight
(dry tonnes) |
Number and Weight of Diamonds According to Sieve Size Fraction (mm) |
Total
diamonds |
| +0.106 |
+0.150 |
+0.212 |
+0.300 |
+0.425 |
+0.600 |
+0.850 |
+1.180 |
+1.700 |
+2.360 |
+3.350 |
+4.750 |
| -0.150 |
-0.212 |
-0.300 |
-0.425 |
-0.600 |
-0.850 |
-1.180 |
-1.700 |
-2.360 |
-3.350 |
-4.750 |
| 2.6874 |
3,312 |
2,098 |
1,208 |
751 |
435 |
245 |
133 |
53 |
21 |
9 |
1 |
0 |
8,266 |
*Total weight of recovered diamonds greater than
0.85mm: 7.37 carats
*Sample grade of diamonds greater than 0.85mm:
2.74 carats per tonne
Spring Results
Sample
Weight
(dry tonnes) |
Number and Weight of Diamonds According to Sieve Size Fraction (mm) |
*Total
diamonds |
| +0.106 |
+0.150 |
+0.212 |
+0.300 |
+0.425 |
+0.600 |
+0.850 |
+1.180 |
+1.700 |
+2.360 |
+3.350 |
+4.750 |
| -0.150 |
-0.212 |
-0.300 |
-0.425 |
-0.600 |
-0.850 |
-1.180 |
-1.700 |
-2.360 |
-3.350 |
-4.750 |
| 2.416 |
2,438 |
1,632 |
1,034 |
639 |
397 |
209 |
113 |
53 |
24 |
6 |
0 |
0 |
6,455 |
*Total weight of recovered diamonds greater than
0.85mm: 6.29 carats
*Sample grade of diamonds greater than 0.85mm:
2.60 carats per tonne
Sample
Weight
(dry tonnes) |
Number and Weight of Diamonds According to Sieve Size Fraction (mm) |
*Total
diamonds |
| +0.106 |
+0.150 |
+0.212 |
+0.300 |
+0.425 |
+0.600 |
+0.850 |
+1.180 |
+1.700 |
+2.360 |
+3.350 |
+4.750 |
| -0.150 |
-0.212 |
-0.300 |
-0.425 |
-0.600 |
-0.850 |
-1.180 |
-1.700 |
-2.360 |
-3.350 |
-4.750 |
| 2.674 |
2,608 |
1,811 |
1,096 |
719 |
421 |
259 |
125 |
53 |
21 |
8 |
3 |
0 |
7,124 |
*Total weight of recovered diamonds greater than
0.85mm: 9.10 carats
*Sample grade of diamonds greater than 0.85mm:
3.40 carats per tonne
Summer Results
Sample
Weight
(dry tonnes) |
Number and Weight of Diamonds According to Sieve Size Fraction (mm) |
*Total
diamonds |
| +0.106 |
+0.150 |
+0.212 |
+0.300 |
+0.425 |
+0.600 |
+0.850 |
+1.180 |
+1.700 |
+2.360 |
+3.350 |
+4.750 |
| -0.150 |
-0.212 |
-0.300 |
-0.425 |
-0.600 |
-0.850 |
-1.180 |
-1.700 |
-2.360 |
-3.350 |
-4.750 |
| 0.926 |
1,375 |
927 |
568 |
363 |
181 |
110 |
56 |
29 |
1 |
1 |
1 |
0 |
7,124 |
*Total weight of recovered diamonds greater than
0.85mm: 3.29 carats
*Sample grade of diamonds greater than 0.85mm:
3.55 carats per tonne
Drilling
in 2015 returned a 0.93 tonne sample of kimberlite from the Southeast Lobe of Faraday 2. This material was processed by caustic
fusion analysis and returned a sample grade of 1.93 carats per tonne for diamonds greater than 0.85mm. Table 13 summarizes the
caustic fusion diamond recovery for the Faraday 2 Southeast Lobe.
Table 13 – Faraday 2 Southeast Lobe 2015
Spring Caustic Fusion Diamond Recovery Results
Sample
Weight (dry
tonnes) |
Number and Weight of Diamonds According to Sieve Size Fraction (mm) |
Total
diamonds |
| +0.106 |
+0.150 |
+0.212 |
+0.300 |
+0.425 |
+0.600 |
+0.850 |
+1.180 |
+1.700 |
+2.360 |
+3.350 |
+4.750 |
| -0.150 |
-0.212 |
-0.300 |
-0.425 |
-0.600 |
-0.850 |
-1.180 |
-1.700 |
-2.360 |
-3.350 |
-4.750 |
| 0.9337 |
1,275 |
872 |
488 |
283 |
179 |
99 |
48 |
16 |
3 |
3 |
0 |
0 |
3,266 |
*Total weight of recovered diamonds greater than
0.85mm: 1.81 carats
*Sample grade of diamonds greater than 0.85mm:
1.93 carats per tonne
In 2015, a 443 tonne bulk sample
recovered by large-diameter reverse circulation drilling at the southeast lobe of the Kelvin kimberlite was processed by dense-media
separation at SRC. Table 14 summarizes the dense media separation (DMS) diamond recovery results from the southeast lobe of the
Kelvin kimberlite. A total of 35 diamonds larger than 1 carat were recovered from the bulk sample.
Table 14 – Kelvin 2015
Bulk Sample Diamond Recovery Results
| Batch |
Sample
Weight
(tonnes) |
Number of Diamonds According to Sieve Size Fraction (mm) |
Total Diamonds |
Carats |
Sample Grade
(c/t)
+0.85mm |
| +0.850 - |
+1.180 - |
+1.700 - |
+2.360 - |
+3.350 - |
+4.750 - |
+6.700 - |
| 1.180 |
1.700 |
2.360 |
3.350 |
4.750 |
6.700 |
9.500 |
| Zone A |
143.35 |
2,307 |
3,563 |
1,350 |
373 |
78 |
8 |
- |
7,679 |
409.21 |
2.85 |
| Zone B |
119.13 |
1,357 |
2,496 |
925 |
254 |
50 |
10 |
1 |
5,093 |
292.83 |
2.46 |
| Zone Bx |
143.04 |
623 |
1,095 |
315 |
106 |
27 |
1 |
- |
2,167 |
117.39 |
0.82 |
| Zone C |
37.02 |
362 |
639 |
234 |
60 |
10 |
3 |
- |
1,308 |
73.43 |
1.98 |
| TOTAL |
442.54 |
4,649 |
7,793 |
2,824 |
793 |
165 |
22 |
1 |
16,247 |
892.86 |
2.02 |
The five largest diamonds recovered from the Kelvin
bulk sample were described by the SRC as:
| • | 4.22 carat white/colorless, transparent macle with no inclusions; |
| • | 3.95 carat brown, transparent aggregate with inclusions; |
| • | 2.79 carat light brown, transparent aggregate with minor
inclusions; |
| • | 2.63 carat white/colorless, transparent octahedral with
inclusions; and |
| • | 2.59 carat white/colorless, transparent dodecahedron with
no inclusions. |
A preliminary valuation of diamonds
recovered from the 443 tonne bulk Kelvin kimberlite was obtained from WWW International Diamond Consultants (“WWW”)
in Antwerp. Four separate diamond parcels represented Zone (Domain) A (442.82 carats), Domain B (447.05 carats), Domain C (80.44
carats) and a small mixed parcel (16.79 carats). An average modeled price of US$56 per carat was obtained for Domain A and US$70
per carat for Domain B. The parcel from Domain C was too small to create modeled values, so an average price of US$123 per carat
was reported. While only 88 diamonds greater than 0.66 carats per stone were present in the combined parcel many good colour white
gem stones were present, especially in the C sample, with five of the eight stones being good colour and gem quality. The three
highest value diamonds are a 4.22 carat diamond from Domain B valued at US$1,603 per carat, a 2.58 carat diamond from Domain C
valued at US$1,366 per carat, and a 2.38 carat diamond also from Domain C valued at US$1,196 per carat.
High resolution
ground geophysical surveying continued at the Kelvin-Faraday corridor and at both the MZ and Doyle sills using gravity and ohmmapper.
2016 Exploration Program
Exploration
in 2016 included caustic fusion diamond recovery results for Faraday 1 and Faraday 2. Samples of 6.42 tonnes of Faraday 2 collected
in 2015 and 1.53 tonnes collected in 2016 each returned sample grades of 3.04 and 4.48 carats per tonne, respectively. Results
for Faraday 2 are summarized in Table 15 and 16 and were released in Q1 2016.
Table 15 – Faraday 2 2016 Caustic Fusion
Results from 2015 Drilling
Sample
Weight
(dry
tonnes) |
Number and Weight of Diamonds According to Sieve Size Fraction (mm) |
Total |
Carats |
| +0.106 |
+0.150 |
+0.212 |
+0.300 |
+0.425 |
+0.600 |
+0.850 |
+1.180 |
+1.700 |
+2.360 |
+3.350 |
+3.350 |
| -0.150 |
-0.212 |
-0.300 |
-0.425 |
-0.600 |
-0.850 |
-1.180 |
-1.700 |
-2.360 |
-3.350 |
-4.750 |
-4.750 |
| 6.428 |
5,689 |
3,670 |
2,192 |
1,320 |
831 |
679 |
290 |
125 |
40 |
23 |
4 |
0 |
14,863 |
19.53 |
*Sample grade of diamonds greater than 0.85mm:
3.04 carats per tonne
Table 16 – Faraday 2 2016 Caustic Fusion
Results from 2016 Drilling
|
Sample
Weight
(dry
tonnes) |
Number and Weight of Diamonds According to Sieve Size Fraction (mm) |
Total
Diamonds |
Carats
(+0.85mm) |
| +0.106 |
+0.150 |
+0.212 |
+0.300 |
+0.425 |
+0.600 |
+0.850 |
+1.180 |
+1.700 |
+2.360 |
+3.350 |
+3.350 |
| -0.150 |
-0.212 |
-0.300 |
-0.425 |
-0.600 |
-0.850 |
-1.180 |
-1.700 |
-2.360 |
-3.350 |
-4.750 |
-4.750 |
| 1.53 |
2,064 |
1,353 |
794 |
492 |
241 |
159 |
72 |
33 |
9 |
9 |
2 |
0 |
5,228 |
6.85 |
*Sample grade of diamonds greater than 0.85mm:
4.48 carats per tonne
Caustic
fusion diamond recovery results for Faraday 1 include 0.225 tonnes of kimberlite that was collected in 2015, and 0.518 tonnes collected
in 2016, each returning sample grades of 3.07 and 4.65 carats per tonne, respectively. Results for Faraday 1 are summarized in
Table 17 and 18 below.
Table 17 – Faraday 1 2016 Caustic Fusion
Results from 2015 Drilling
Sample
Weight
(dry
tonnes) |
Number and Weight of Diamonds According to Sieve Size Fraction (mm) |
Total
Diamonds |
Carats
(+0.85mm) |
| +0.106 |
+0.150 |
+0.212 |
+0.300 |
+0.425 |
+0.600 |
+0.850 |
+1.180 |
+1.700 |
+2.360 |
+3.350 |
+3.350 |
| -0.150 |
-0.212 |
-0.300 |
-0.425 |
-0.600 |
-0.850 |
-1.180 |
-1.700 |
-2.360 |
-3.350 |
-4.750 |
-4.750 |
| 0.518 |
741 |
491 |
257 |
162 |
84 |
41 |
29 |
13 |
3 |
0 |
0 |
1 |
1,822 |
2.41 |
*Sample grade of diamonds greater than 0.85mm:
4.65 carats per tonne
Table 18 – Faraday 1 2016 Caustic Fusion
Results from 2016 Drilling
Sample
Weight
(dry
tonnes) |
Number and Weight of Diamonds According to Sieve Size Fraction (mm) |
Total
Diamonds |
Carats
(+0.85mm) |
| +0.106 |
+0.150 |
+0.212 |
+0.300 |
+0.425 |
+0.600 |
+0.850 |
+1.180 |
+1.700 |
+2.360 |
+3.350 |
+3.350 |
| -0.150 |
-0.212 |
-0.300 |
-0.425 |
-0.600 |
-0.850 |
-1.180 |
-1.700 |
-2.360 |
-3.350 |
-4.750 |
-4.750 |
| 0.225 |
368 |
239 |
119 |
67 |
41 |
21 |
12 |
8 |
2 |
0 |
0 |
0 |
877 |
0.6921 |
*Sample grade of diamonds greater than 0.85mm:
3.07 carats per tonne
Following
on positive results from the 2015 program at Kelvin South, a second bulk sampling program was initiated at Kelvin North on February
18th and was completed by April 24th, 2016. Thirty-two
large diameter reverse circulation drill holes (29 holes on the North Limb and 3 holes on the South Limb) recovered a total of
612.0 tonnes of kimberlite, which significantly surpassed the target recovery of 500 tonnes. In the same program, two large diameter
RC holes were drilled on the Faraday 2 kimberlite to obtain a mini-bulk sample, with a total of 21.1 tonnes of kimberlite recovered.
The kimberlite recovered during
the winter 2016 large diameter drilling program was processed for diamonds using dense media separation (‘DMS’) technology
located at the Geoanalytical Laboratories Diamond Services of the Saskatchewan Research Council (‘SRC’), which is accredited
to the ISO/IEC 17025 standard by the Standards Council of Canada as a testing laboratory for diamond analysis.
In July
2016, the Company announced that the Faraday 2 mini-bulk sample produced a total of 56.64 carats of diamonds (+0.85mm) for a sample
grade of 2.69 carats per tonne. Core logging and geological modeling for Faraday 2 identified four kimberlite domains (KIMB1-KIMB4),
with KIMB1 being volumetrically dominant. The mini-bulk sample recovered only small amounts of some lithologies and as such, sample
grades for each lithology could not be individually determined. Table 19 summarizes the diamond recovery results from the 2016
Faraday 2 mini-bulk sample.
Table 19 – Diamond Recovery Results from
the Winter 2016 Faraday 2 Mini-bulk Sample
Kimberlite
Lithology |
Sample1
Weight (dry
tonnes) |
Number of Diamonds per Square Mesh Sieve Division (mm) |
Total Stones
(+0.85mm) |
Total Carats
(+0.85mm) |
Sample
Grade*
(ct/t) |
| +0.850 |
+1.180 |
+1.700 |
+2.360 |
+3.350 |
+4.750 |
| -1.180 |
-1.700 |
-2.360 |
-3.350 |
-4.750 |
-6.700 |
| KIMB1+2+3 |
16.7 |
245 |
328 |
117 |
48 |
12 |
1 |
751 |
47.34 |
2.84 |
| KIMB4 |
4.40 |
20 |
54 |
20 |
6 |
4 |
0 |
104 |
9.27 |
2.10 |
| Total2 |
21.1 |
266 |
383 |
137 |
54 |
16 |
1 |
857 |
56.64 |
2.69 |
Notes: 1 – Sample weight is calculated from
drillhole diameter and kimberlite density measurements. 2 – includes one +1.18mm and one +0.85mm stone from the DMS circuit
cleanup totaling 0.04 carats. * Sample grade of diamonds greater than 0.85mm: 2.69 carats per tonne. Rounding error may occur in
the total carats and sample grade.
The three largest diamonds recovered
from the Faraday 2 sample are described by the SRC as follows:
| · | 1.90
carat grey transparent aggregate with inclusions; |
| · | 1.73
carat light brown, transparent broken aggregate with inclusions; and |
| · | 1.52
carat grey transparent aggregate with inclusions. |
In
September 2016, the Company announced the diamond recovery results for the north limb of the Kelvin kimberlite. A total of
1,278 carats of diamonds (+0.85mm) were recovered from 612.0 tonnes for a sample grade of
2.9 carats per tonne. Forty-four diamonds of one carat or greater were recovered
with the largest stone a 3.43 carat white/colourless transparent octahedral twin with no inclusions.
Under the
guidance of SRK Consulting (Vancouver, B.C.), three broadly-defined domains of kimberlite labeled A, B and C have been identified
at the Kelvin kimberlite, with domain B further subdivided into a sub-unit Bx. The thickness of each domain varies along the length
of the body, and so each domain was processed separately in order to document diamond grade and size variability within each domain.
Table 20 summarizes the diamond recovery results from the 2016 Kelvin north limb bulk sample.
Table 20 – Kelvin North 2016 Bulk Sample
Diamond Recovery Results
Kimberlite
Lithology |
Sample1
Weight
(tonnes) |
Number of Diamonds per Square Mesh Sieve Division (mm) |
Total Stones
(+0.85mm) |
Total Carats
(+0.85mm) |
Sample
Grade2
(ct/t) |
| +0.850 |
+1.180 |
+1.700 |
+2.360 |
+3.350 |
+4.750 |
| -1.180 |
-1.700 |
-2.360 |
-3.350 |
-4.750 |
-6.700 |
| Zone A |
184.2 |
4,929 |
5,004 |
1,672 |
463 |
65 |
8 |
12,141 |
529.00 |
2.87 |
| Zone B |
200.2 |
3,100 |
4,269 |
1,549 |
465 |
91 |
15 |
9,489 |
514.46 |
2.57 |
| Zone Bx |
183.5 |
1,080 |
1,310 |
463 |
149 |
22 |
2 |
3,026 |
155.03 |
0.84 |
| Zone C |
44.0 |
511 |
688 |
248 |
63 |
15 |
2 |
1,527 |
79.82 |
1.81 |
| Total2 |
612.0 |
9,620 |
11,271 |
3,932 |
1,140 |
193 |
27 |
26,183 |
1,278.31 |
2.09 |
Notes:
1 – Sample weight is calculated from drillhole calliper and kimberlite bulk density measurements. 2 – Excludes 10.46
carats of diamonds recovered from mixed country rock and country rock breccia intersections external to the Kelvin body, and from
DMS plant clean-up. Some rounding error may occur in the total carats and sample grade.
The five largest diamonds recovered
from the Kelvin bulk sample are described by the SRC as:
| · | 3.43
carat white/colourless transparent octahedral twin with no inclusions; |
| · | 3.23
carat grey, translucent irregular shape with inclusions; |
| · | 2.84
carat white/colourless, transparent octahedron with no inclusions; |
| · | 2.57
carat white/colourless, transparent broken irregular shape with no inclusions; |
| · | 2.14
carat off-white, transparent tetrahexahedron with no inclusions. |
Kennady
Diamonds retained the services of WWW International Diamond Consultants (Antwerp, Belgium) to provide an independent valuation
as well as size frequency distribution and revenue models for the 2016 Kelvin bulk sample. The diamonds from the 2015 bulk sample
also underwent revaluation and the combined result for 2,262.43 carats (+0.85mm) produced a value of US$52 per carat.
In December
2016, the culmination of logging, petrography and geological modelling was combined with the diamond grade and valuation results
to allow declaration of a maiden resource estimate for the Kelvin kimberlite. An Indicated Mineral Resource of 13.62 million carats
of diamonds is contained in 8.50 million tonnes of kimberlite, with an overall grade of 1.60 carats per tonne and an average value
of US$63 per carat using a bottom cutoff size of 1 mm. The resource was determined through the collective efforts of Aurora Geosciences
Ltd., Mineral Services Canada Inc., SRK Consulting Inc., and JDS Energy & Mining Inc., who were all engaged by the Company
to participate in the exercise. A NI 43-101 report describing the resource is available on SEDAR at www.sedar.com.
In January
2017, the Company announced caustic fusion diamond recovery results for the Faraday 3 kimberlite. A total of 3.03 tonnes of kimberlite
recovered by core drilling at Faraday 3 in 2016, returned 6.61 carats of diamonds larger than 0.85 mm for a sample grade of 2.18
carats per tonne. Results from Faraday 3 are summarized in Table 21.
Table 21 – Faraday 3 Caustic Fusion Results
from 2016 Drilling
|
Sample
Weight
(dry
tonnes) |
Number and Weight of Diamonds According to Sieve Size Fraction (mm) |
Total
diamonds |
Total
Carats
(+0.85mm) |
| +0.106 |
+0.150 |
+0.212 |
+0.300 |
+0.425 |
+0.600 |
+0.850 |
+1.180 |
+1.700 |
+2.360 |
+3.350 |
| -0.150 |
-0.212 |
-0.300 |
-0.425 |
-0.600 |
-0.850 |
-1.180 |
-1.700 |
-2.360 |
-3.350 |
-4.750 |
| 3.0289 |
2,406 |
1,631 |
925 |
559 |
294 |
154 |
80 |
43 |
20 |
8 |
2 |
6,122 |
6.61 |
*Sample grade of diamonds greater than 0.85mm:
2.18 carats per tonne
In January 2017, the Company also
announced diamond recovery results from 2016 drilling on the Faraday 1 and 2 kimberlites. At Faraday 1, a total of 2.70 carats
of diamonds larger than 0.85 mm were recovered from 0.86 tonnes of kimberlite core for a sample grade of 3.14 carats per tonne.
At Faraday 2, a total of 1.37 carats of diamonds larger than 0.85 mm were recovered from 0.43 tonnes of kimberlite core for a sample
grade of 3.22 carats per tonne. Results from Faraday 1 and 2 are summarized in Table 22 and 23 below.
Table 22 – Faraday 1 Caustic Fusion Results
from 2016 Drilling
Sample
Weight
(dry tonnes) |
Number and Weight of Diamonds According to Sieve Size Fraction (mm) |
Total
diamonds |
Total
Carats
(+0.85mm) |
| +0.106 |
+0.150 |
+0.212 |
+0.300 |
+0.425 |
+0.600 |
+0.850 |
+1.180 |
+1.700 |
+2.360 |
| -0.150 |
-0.212 |
-0.300 |
-0.425 |
-0.600 |
-0.850 |
-1.180 |
-1.700 |
-2.360 |
-3.350 |
| 0.8615 |
1,139 |
708 |
374 |
255 |
130 |
86 |
39 |
23 |
7 |
5 |
2,766 |
2.7043 |
*Sample grade of diamonds greater than 0.85mm:
3.14 carats per tonne.
Table 23 – Faraday 2 Caustic Fusion Results
from 2016 Drilling
Sample
Weight
(dry tonnes) |
Number and Weight of Diamonds According to Sieve Size Fraction (mm) |
Total
diamonds |
Total
Carats
(+0.85mm) |
| +0.106 |
+0.150 |
+0.212 |
+0.300 |
+0.425 |
+0.600 |
+0.850 |
+1.180 |
+1.700 |
| -0.150 |
-0.212 |
-0.300 |
-0.425 |
-0.600 |
-0.850 |
-1.180 |
-1.700 |
-2.360 |
| 0.4249 |
683 |
482 |
302 |
158 |
83 |
46 |
26 |
17 |
6 |
1,803 |
1.369 |
*Sample grade of diamonds
greater than 0.85mm: 3.22 carats per tonne.
A total
of 10,712 meters of exploration core drilling was completed during the 2016 winter/spring program and is summarized in Table 24.
Both Faraday 1 and 3 have been drill confirmed to be over 200 meters in length, with late season drilling confirming that they
coalesce near the shoreline of Faraday Lake, continue onto land, and are open to depth along strike. Based on the mini-bulk sample
results, a single HQ pilot hole was drilled into Faraday 2 to guide future large diameter RC drilling.
Table 24 – Summary of Winter/Spring Exploration
Diamond Drilling - 2016
| |
Faraday (F1) |
Faraday (F2) |
Faraday (F3) |
Hobbes |
Kelvin Pipe |
Kelvin Sheet |
Total |
| Number of Drill Holes |
25 |
1 |
30 |
14 |
1 |
3 |
74 |
| HQ Total (m) |
251 |
139 |
323 |
0 |
0 |
0 |
713 |
| HQ3 Total (m) |
0 |
0 |
0 |
0 |
211 |
169 |
380 |
| NQ Total (m) |
3,830 |
0 |
4,504 |
1,136 |
0 |
149 |
9,619 |
| HQ KIMB (m) |
80 |
73 |
85 |
0 |
0 |
0 |
238 |
| HQ3 KIMB (m) |
0 |
0 |
0 |
0 |
79 |
6 |
86 |
| NQ KIMB (m) |
606 |
0 |
775 |
107 |
0 |
6 |
1,494 |
| Total Drilled (m) |
4,081 |
139 |
4,827 |
1,136 |
211 |
318 |
10,712 |
| Total KIMB (m) |
686 |
73 |
860 |
107 |
79 |
12 |
1,818 |
A total
of 9,548 meters of exploration and delineation drilling was completed during the summer program using two helicopter portable core
drill rigs from land-based setups. One rig primarily focused on the Faraday 1 and 3 kimberlite complex, and the second rig was
focused on Faraday 2. Towards the end of the program, two infill delineation drill holes were completed on the Kelvin kimberlite
to refine the kimberlite pipe shell in two specific areas of the geological model. A 97% success rate of intersecting kimberlite
was achieved on the drill program, and the Faraday 1 - 3 complex and Faraday 2 kimberlite bodies were successfully traced from
under Faraday Lake well onto the land. Drilling has demonstrated that the Faraday kimberlites are conceptually similar to the Kelvin
kimberlite and are unconventional with respect to the traditional morphology of kimberlite pipes.
A series
of longer kimberlite intercepts on Faraday 2 encountered during the latter stages of the program (e.g. 76.9 m; 50.3 m and 38.0
m) provides an indication that the kimberlite body may be expanding as it turns towards the North. This same behavior was observed
when delineating Kelvin. All of the goals of the summer program were successfully achieved.
A breakdown of drilling statistics for the summer program
is summarized below in Table 25.
Table 25 – Summary of Summer Exploration
Drilling - 2016
| |
Faraday (F2) |
Faraday (F3) |
Kelvin Pipe |
Total |
| Number of Drill Holes |
14 |
20 |
2 |
36 |
| HQ Total (m) |
3,394 |
592 |
772 |
4,758 |
| NQ Total (m) |
555 |
4234 |
0 |
4,789 |
| HQ KIMB (m) |
327 |
26 |
143 |
496 |
| NQ KIMB (m) |
53 |
223 |
0 |
276 |
| Total Drilled (m) |
3,949 |
4,827 |
772 |
9,548 |
| Total KIMB (m) |
380 |
249 |
143 |
772 |
High resolution geophysics continues
to be a critical component of the Company’s exploration methodology to help delineate the unconventional kimberlite pipes
within the Kelvin-Faraday corridor.
2017 Exploration Program
The Company
completed a large diameter reverse circulation drilling program on the Faraday kimberlites during the first quarter of 2017. The
aim of the program was to recover approximately 250 tonnes from each of Faraday 2 and 3, and obtain a small (~20 tonne) representative
sample from Faraday 1.
Drilling
was initiated January 20 and was completed on April 10. A total of 565 tonnes of kimberlite was recovered from 75 drill holes comprising
a total of 8,030 meters of drilling. Key statistics for the program are summarized in Table 26 below.
Table 26: Summary Statistics
for the 2017 Winter Program
| Kimberlite |
Holes |
Metres |
Tonnes |
| Faraday #2 |
29 |
3,471 |
262.6 |
| Faraday #3 |
42 |
4,256 |
276.4 |
| Faraday #1 |
4 |
303 |
26.4 |
| Totals |
75 |
8,030 |
565.4 |
Note: Tonnages reported are based on caliper survey
logs of drillholes together with detailed density models.
The Faraday
bulk samples were processed for diamonds at the SRC lab, which is accredited to the ISO/IEC 17025 standard by the Standards Council
of Canada as a testing laboratory for diamond analysis. DMS processing commenced on March 27 and was completed on May 18 for Faraday
2 and June 15 for Faraday 3 and 1.
In May 2017,
the Company announced that the Faraday 2 bulk sample produced a total of 737.6 carats of diamonds (+0.85mm) from 262.6 tonnes for
a sample grade of 2.81 carats per tonne. The result is similar to the mini-bulk sample grade of 2.69 carats per tonne reported
in 2016 (see previous section). In this latest result, 45 diamonds of one carat or greater were recovered of which 12 are described
as white in color. The largest stone is a 4.72 carat white/colorless octahedron with minor inclusions. Table 27 below summarizes
the diamond recovery results from the 2017 Faraday 2 bulk sample.
Table 27 – Diamond recovery results from the
winter 2017 Faraday 2 mini-bulk sample
| Kimberlite |
Sample
Weight1
(dry
tonnes) |
Number of Diamonds per Square Mesh Sieve Division (mm) |
Total
Stones
(+0.85mm) |
Total
Carats
(+0.85mm) |
Sample
Grade2
(ct/t) |
| +0.850 |
+1.180 |
+1.700 |
+2.360 |
+3.350 |
+4.750 |
+6.700 |
| -1.180 |
-1.700 |
-2.360 |
-3.350 |
-4.750 |
-6.700 |
-9.500 |
| Faraday 2 |
262.6 |
5,406 |
6,011 |
2,036 |
708 |
124 |
22 |
3 |
14,310 |
737.6 |
2.813 |
Notes: 1 – Sample weight is calculated from
measured drillhole diameter and a model of kimberlite bulk density. 2 – Includes two stones from the +1.70mm, 21 stones from
the +1.18mm and ten stones from +0.85mm size class recovered during DMS circuit cleanup and totaling 0.78 carats. 3 – Sample
grade is for diamonds greater than 0.85mm square mesh. Rounding error may occur in the total carats and sample grade.
The four largest diamonds recovered from the Faraday
2 bulk sample are described by the SRC as:
| · | 4.72
carat white/colorless octahedron with minor inclusions |
| · | 4.28
carat off-white transparent octahedron with noticeable inclusions; |
| · | 3.45
carat brown transparent octahedron with noticeable inclusions; |
| · | 2.69
carat white/colorless, transparent tetrahexahedroid with noticeable inclusions |
In June
2017, the Company announced the results for the Faraday 3 and 1 kimberlites. The Faraday 3 bulk sample produced a total of 460.5
carats of diamonds (+0.85mm) from 276.4 tonnes for a sample grade of 1.67 carats per tonne. The largest stone recovered is a 7.78
carat white/colorless octahedral gem with no inclusions. A total of 26 diamonds of one carat or greater were recovered, of which
nine are gem quality and seven are “near gem” quality. Since drilling was designed to sample the thickest parts of
the pipe in order to maximize carats recovered for the purpose of resource definition, the sample grade reported here may not be
representative of the grade of the entire kimberlite pipe. Table 28 below summarizes the diamond recovery results from the 2017
Faraday 3 bulk sample.
Table 28 – Diamond recovery results
from the winter 2017 Faraday 3 bulk sample
| Kimberlite |
Sample
Weight1
(dry
tonnes) |
Number of Diamonds per Square
Mesh Sieve Division (mm) |
Total
Stones
(+0.85mm) |
Total
Carats
(+0.85mm) |
Sample
Grade2
(ct/t) |
| +0.850 |
+1.180 |
+1.700 |
+2.360 |
+3.350 |
+4.750 |
+6.700 |
| -1.180 |
-1.700 |
-2.360 |
-3.350 |
-4.750 |
-6.700 |
-9.500 |
| Faraday 3 |
276.4 |
2,417 |
3,284 |
1,245 |
449 |
110 |
10 |
4 |
7,519 |
460.5 |
1.673 |
Notes: 1 – Sample weight is calculated
from measured drillhole diameter and a model of kimberlite bulk density. 2 – Includes two stones in the +1.70mm, one in the
+1.18mm, and eight from +0.85mm size class recovered during DMS circuit cleanup and totaling 0.39 carats. 3 – Sample grade
is for diamonds greater than 0.85mm square mesh. Rounding error may occur in the total carats and sample grade.
The five largest diamonds recovered
from the Faraday 3 bulk sample are described by the SRC as:
| · | 7.78
carat white/colorless octahedron with no inclusions |
| · | 4.02
carat white/colorless octahedron with minor inclusions; |
| · | 3.41
carat off-white octahedron with minor inclusions; |
| · | 3.38
carat off-white octahedron with noticeable inclusions |
| · | 3.08
carat off-white octahedron with no inclusions. |
The Faraday
1 kimberlite returned a total of 76.8 carats of diamonds (+0.85mm) from 26.37 tonnes for a sample grade of 2.91 carats per tonne.
The largest stone recovered is a 3.21 carat white/colorless tetrahexahedron. A total of eight diamonds of one carat or greater
were recovered. Table 29 below summarizes the diamond recovery results from the 2017 Faraday 1 bulk sample.
Table 29 – Diamond
recovery results from the winter 2017 Faraday 1 mini-bulk sample
| Kimberlite |
Sample |
|
|
|
|
|
|
|
Total |
Total |
Sample |
| |
Weight1 |
Number of
Diamonds per Square Mesh Sieve Division (mm) |
Stones |
Carats |
Grade2 |
| |
(dry |
|
|
|
|
|
|
|
(+0.85mm) |
(+0.85mm) |
(ct/t) |
| |
tonnes) |
+0.850 |
+1.180 |
+1.700 |
+2.360 |
+3.350 |
+4.750 |
+6.700 |
|
|
|
| |
|
-1.180 |
-1.700 |
-2.360 |
-3.350 |
-4.750 |
-6.700 |
-9.500 |
|
|
|
| Faraday
1 |
26.37 |
442 |
478 |
172 |
65 |
20 |
7 |
0 |
1,184 |
76.8 |
2.913 |
Notes: 1
– Sample weight is calculated from measured drillhole diameter and a model of kimberlite bulk density. 2 –
Includes one stone from the +0.85mm size class recovered during DMS circuit cleanup and totaling 0.014 carats. 3 –
Sample grade is for diamonds greater than 0.85mm square mesh. Rounding error may occur in the total carats and sample
grade.
The five largest diamonds recovered from the Faraday 1 bulk sample
are described by the SRC as:
| · | 3.21 carat white/colorless tetrahexahedron with noticeable inclusions |
| · | 2.35 carat off white translucent octahedron with no inclusions; |
| · | 2.31 carat off white transparent octahedron with no inclusions; |
| · | 1.94 carat brown transparent octahedral twin with noticeable inclusions; |
| · | 1.64 carat white/colorless tetrahexahedron with no inclusions. |
Of particular significance
is the recovery of a 7.78 carat white/colorless octahedral gem from Faraday 3, the largest diamond recovered on the project to
date. Another notable highlight is that the Faraday diamonds appear to show superior quality to the Kelvin diamonds in respect
to all value parameters, including colour, size distribution and shape.
WWW International Diamond Consultants
(WWW) was retained to provide an independent valuation of the Faraday bulk sample diamonds together with size frequency
distribution and revenue models. They reported a collective average value of US$109 per carat for the 1,259 carats (+0.85mm)
recovered. Summary results are presented in Table 30 below.
Table 30: Summary of the Faraday Diamond Valuations (0.85 mm
bottom cutoff)
| Zone |
Parcel Size (carats)1 |
Parcel Value2 (US$) |
Average Price2 |
| |
|
|
(US$/carat) |
| Faraday 1 |
76.04 |
$10,974 |
$144 |
| Faraday 2 |
726.47 |
$54,124 |
$75 |
| Faraday 3 |
456.65 |
$72,738 |
$159 |
| TOTAL3 |
1,259.16 |
$137,835 |
$109 |
Notes:
1 – Only diamonds greater than +1 DTC sieve size are reported. 2 – Based on WWW price book as at July 31, 2017.
3 – Some rounding error may occur in the values reported.
The five highest value diamonds on a dollar per carat basis from
the Faraday bulk samples include:
| 1. | 7.78 carat sawable octahedron from Faraday 3 valued at US$2,967 per carat |
| 2. | 4.02 carat sawable octahedron from Faraday 3 valued at US$2,526 per carat |
| 3. | 3.08 carat sawable octahedron from Faraday 3 valued at US$1,966 per carat |
| 4. | 4.72 carat sawable octahedron from Faraday 2 valued at US$1,667 per carat |
| 5. | 2.37 carat sawable diamond from Faraday 2 valued at US$1,502 per carat |
The valuation results for
Faraday 2 and 3 consist of two sub-parcels from each body. The sub-parcels represent broadly-defined geological divisions that
may have importance as the bodies are advanced to resource status. WWW determined market values of US$60 and US$83 per carat for
the Faraday 2 sub-parcels that were 456.76 carats and 269.71 carats respectively, and US$184 and US$124 per carat for two Faraday
3 parcels of 268.45 and
188.20 carats respectively.
The relevance of these geological divisions will be assessed as the Company advances the Faraday bodies.
Based on sample weight
and diamond size frequency distributions, modeled values were produced for the five individual samples and then for each of the
three kimberlites. For the Faraday 2 kimberlite, WWW recommends using a modelled average price of $73 per carat with a ‘low’
value of $56 per carat and a ‘high’ value of $100 per carat. For the Faraday 3 kimberlite, WWW recommends using a modelled
average price of $87 per carat with a ‘low’ value of $65 per carat and a ‘high’ value of $125 per carat,
while for the Faraday 1 kimberlite, WWW recommends using a modeled average price of $164 per carat with a ‘low’ value
of $108 per carat and a ‘high’ value of $267 per carat. In their report, WWW noted: “Given the combined sample
weight of only 1,259 carats, with the largest sample of just 457 carats and the smallest of 76 carats, there is a high degree of
uncertainty in the models.”
A comprehensive
review of geological, microdiamond, bulk sampling, and valuation results allowed for the declaration of a maiden Mineral
Resource estimate for the Faraday kimberlites on October 3, 2017. An Inferred Mineral Resource of 5.02 million carats of
diamonds is contained in 3.27 million tonnes of kimberlite, with an overall grade of 1.54 carats per tonne and an average
value of US$98 per carat. The resource was calculated with a 1mm diamond bottom cutoff size, which is considered a reasonable
cutoff for a commercial mining scenario. The resource was determined through the collective efforts of Aurora Geosciences
Ltd., Mineral Services Canada Inc., and SRK Consulting Inc., who were engaged by the Company to participate in the exercise.
The Faraday Inferred Mineral Resource is provided in Table 31.
Table 31: Inferred Mineral Resource Estimate for the Faraday
Kimberlites
| Kimberlite |
Tonnes1
(million tonnes) |
Grade2
(carats per tonne) |
Carats
(million carats) |
Value3
(US $/carat) |
| Faraday
2 |
1.39 |
2.24 |
3.13 |
112 |
| Faraday
3 |
1.87 |
1.01 |
1.90 |
75 |
| Total
Inferred |
3.27 |
1.54 |
5.02 |
98 |
Notes:
1 - The estimates encompass the entire bodies as defined by the current geological models, extending from the base
of overburden (~390 masl) in the south-east to similar depths of approximately 160 masl.; 2 - grades are expressed as
recoverable diamonds above 1 mm bottom cut-off.; 3 base- average value is derived by applying a base case value distribution
model (as determined by WWW during the valuation of Faraday diamonds reported in News Release dated 8 August 2017) to models
of recoverable (+1 mm) diamond size frequency distribution for each geological domain”. Some rounding error may occur
in the values reported.
The volume, tonnes, grade and average diamond
value for the Faraday 1 kimberlite and for two minor domains of Faraday 2 were not sufficiently well constrained by available data
to define Mineral Resources. These deposits are therefore defined as Target for Further Exploration (TFFE) and estimates of the
potential ranges of volume, tonnes and grade (where possible) contained within these bodies are provided in Table 32 below.
Table 32: Target for Further Exploration Estimates within Faraday
1 and Faraday 2
| Kimberlite |
Volume (Mm3) |
Tonnes (Mt) |
Grade (+1mm cpt) |
| Low |
High |
Low |
High |
Low |
High |
| Faraday 1 |
0.2 |
0.50 |
0.6 |
1.2 |
1.5 |
3.7 |
| Faraday 2 |
0.01 |
0.02 |
0.01 |
0.04 |
-- |
-- |
Mm3 = million cubic metres, Mt = million tonnes, cpt
= recoverable (+1 mm) carats per tonne, Mct = million carats
The estimate of TFFE is
conceptual in nature as there has been insufficient exploration to define a Mineral Resource and it is uncertain if future exploration
will result in the estimate being delineated as a Mineral Resource.
A updated NI 43-101 report describing the Faraday resource will
be filed on SEDAR during Q4.
The Company completed a
summer exploration program comprising nine HQ diameter drill holes totaling 2,766 meters and a ground geophysical program covering
key target areas on leases acquired from GGL Resources Corp. in August 2016. The program commenced on July 4, 2017 and was completed
on September 11, 2017 with drilling focused on further delineating the Faraday kimberlites. A single geotechnical hole was also
drilled adjacent to the Kelvin kimberlite for the purpose of collecting the remaining geotechnical data required to complete a
pre-feasibility study of the Kelvin kimberlite. The drilling was successful in extending the Faraday 2 kimberlite by a further
150 metres along strike, bringing the total strike length of the kimberlite to approximately 600 metres. In addition, drilling
on Faraday 1 and 3 established that the two pipes coalesce at the northwestern tip of Faraday 1. As a consequence, Faraday 1 and
3 are now considered to be a single kimberlite body termed “Faraday 1-3”.
A breakdown of drilling statistics for the summer program is summarized
below in Table 33.
Table 33 – Summary of Summer Exploration
Drilling - 2017
| |
Faraday (F2) |
Faraday (F1-3) |
Kelvin |
Total |
| Number of Drill Holes |
6 |
2 |
1 |
9 |
| HQ Total (m) |
1917 |
554 |
295 |
2,766 |
| HQ KIMB (m) |
287.7 |
23.14 |
31.64 |
334.29 |
OUTLOOK
Drilling, sampling and modeling over the past
five years have provided the data required for the Company to prepare an indicated resource statement for the Kelvin kimberlite
and an inferred resource statement for the Faraday kimberlites. The Kelvin resource was published on January, 26, 2017 in an NI
43-101 Technical Report that is available at www.SEDAR.com. An updated NI 43-101 Technical Report describing the Faraday
inferred resource is currently being prepared and will be published during Q4.
The Company is very encouraged
with its success at the Kelvin-Faraday corridor and anticipates discovering additional unconventional pipe-like bodies. Numerous
high priority targets have been identified in close proximity to the Kelvin and Faraday kimberlites, as well as in the Blob Lake
area located southwest of the Gahcho Kué mine.
Exploration drilling
will continue to test new kimberlite targets across the Kennady North property in the 2018 winter season. It is also anticipated
that delineation drilling on the Faraday bodies will be reactivated during the upcoming winter season.
FINANCIAL REVIEW
For the three and nine
months ended September 30, 2017 compared to the three and nine months ended September 30, 2016
For the three and nine
months ended September 30, 2017, the Company recorded a net loss of $2,452,488 or $0.05 loss per share and $18,639,726 or $0.38
loss per share compared to a net loss of $6,353,166 or $0.13 loss per share and $30,951,075 or $0.66 loss per share for the same
period in 2016. For the nine months ended September 30, 2017, the decrease was mainly as a result of $17,855,176 being spent on
exploration and evaluation expenses compared to $29,182,492 being spent for the same period in 2016. During 2017, less drilling
and bulk samples were
undertaken resulting in the decrease. A notable
decrease was share-based payment expense, which decreased from $1,313,429 in 2016 to $798,747 in 2017.
Quarterly financial information for the past 8 quarters is shown
in Table 1.
SUMMARY OF QUARTERLY RESULTS
| Table 1 Quarterly- Financial Data |
| | |
| | |
Three months ended | | |
| |
| | |
September 30 | | |
June 30 | | |
March 31 | | |
December 31 | |
| Unaudited | |
2017 | | |
2017 | | |
2017 | | |
2016 | |
| | |
$ | | |
$ | | |
$ | | |
$ | |
| Earnings and Cash Flow | |
| | | |
| | | |
| | | |
| | |
| Interest and other income | |
| 754,342 | | |
| 111,733 | | |
| 11,772 | | |
| 21,576 | |
| Expenses | |
| (3,206,470 | ) | |
| (3,800,014 | ) | |
| (12,510,016 | ) | |
| (3,235,461 | ) |
| Net loss for period | |
| (2,452,488 | ) | |
| (3,688,638 | ) | |
| (12,498,600 | ) | |
| (3,214,199 | ) |
| Cash flow from operations | |
| (2,691,329 | ) | |
| (8,519,936 | ) | |
| (7,537,782 | ) | |
| (4,465,487 | ) |
| Basic and diluted loss per share | |
| (0.05 | ) | |
| (0.08 | ) | |
| (0.26 | ) | |
| (0.07 | ) |
| Investing activities | |
| 9,060 | | |
| 7,637 | | |
| 56,772 | | |
| 21,576 | |
| Financing activities | |
| 30,750 | | |
| 11,983,150 | | |
| 408,000 | | |
| 70,250 | |
| Balance Sheet | |
| | | |
| | | |
| | | |
| | |
| Total assets | |
| 4,784,186 | | |
| 7,798,012 | | |
| 4,461,200 | | |
| 11,223,967 | |
| | |
| | |
Three months ended | | |
| |
| | |
September 30 | | |
June 30 | | |
March 31 | | |
December 31 | |
| Unaudited | |
2016 | | |
2016 | | |
2016 | | |
2015 | |
| | |
$ | | |
$ | | |
$ | | |
$ | |
| Earnings and Cash Flow | |
| | | |
| | | |
| | | |
| | |
| Interest and other income | |
| 33,406 | | |
| 50,754 | | |
| 415,409 | | |
| 851,045 | |
| Expenses | |
| (6,386,276 | ) | |
| (9,996,750 | ) | |
| (15,066,719 | ) | |
| (4,478,961 | ) |
| Net loss for period | |
| (6,353,166 | ) | |
| (9,946,298 | ) | |
| (14,651,611 | ) | |
| (3,628,290 | ) |
| Cash flow from operations | |
| (5,423,137 | ) | |
| (12,392,022 | ) | |
| (10,905,192 | ) | |
| (6,364,802 | ) |
| Basic and diluted loss per share | |
| (0.13 | ) | |
| (0.21 | ) | |
| (0.31 | ) | |
| (0.08 | ) |
| Investing activities | |
| (166,594 | ) | |
| 50,754 | | |
| 79,661 | | |
| 116,190 | |
| Financing activities | |
| 44,450 | | |
| 176,000 | | |
| 127,000 | | |
| 33,080,623 | |
| Balance Sheet | |
| | | |
| | | |
| | | |
| | |
| Total assets | |
| 15,823,610 | | |
| 21,427,628 | | |
| 33,685,090 | | |
| 44,290,911 | |
COSTS AND EXPENSES
The costs and expenses
for the three and nine months ended September 30, 2017 compared to the three and nine months ended September 30, 2016 are similar
except for the following:
Exploration and evaluation expenses
Exploration and evaluation
expenses for the three and nine months ended September 30, 2017 were $2,869,279 and $17,855,176 compared to $6,021,997 and $29,182,492
for the same period in 2016. The decrease in exploration and evaluation expenses is a result of a less extensive winter program
on the Kennady North Project, compared to the same period in 2016.
| | |
Three months ended | | |
Three months ended | | |
Nine months ended | | |
Nine months ended | |
| | |
September 30, 2017 | | |
September 30, 2016 | | |
September 30, 2017 | | |
September 30, 2016 | |
| Lease payments | |
$ | 9,865 | | |
$ | 7,229 | | |
$ | 26,699 | | |
$ | 21,194 | |
| Aircraft support | |
| 500,097 | | |
| 795,493 | | |
| 691,568 | | |
| 2,173,948 | |
| Fuel | |
| 55,921 | | |
| 141,453 | | |
| 743,970 | | |
| 1,404,891 | |
| Geophysics | |
| 133,715 | | |
| 68,639 | | |
| 513,218 | | |
| 601,142 | |
| Drilling support | |
| 89,420 | | |
| 57,570 | | |
| 89,420 | | |
| 108,068 | |
| Exploration personnel and program support | |
| 449,330 | | |
| 896,260 | | |
| 2,344,016 | | |
| 3,790,505 | |
| Camp maintenance, supplies, mobilization, general costs | |
| 346,009 | | |
| 630,595 | | |
| 2,361,902 | | |
| 3,918,075 | |
| Site & logistical support | |
| 189,574 | | |
| 448,877 | | |
| 3,535,651 | | |
| 5,381,738 | |
| Environmental | |
| 46,414 | | |
| 7,151 | | |
| 62,444 | | |
| 79,918 | |
| Professional geological services | |
| 164,681 | | |
| 364,593 | | |
| 322,191 | | |
| 718,708 | |
| Drilling | |
| 750,211 | | |
| 1,507,933 | | |
| 6,167,750 | | |
| 8,920,868 | |
| Technical consultant | |
| 12,138 | | |
| 122,648 | | |
| 106,668 | | |
| 174,159 | |
| Laboratory analysis | |
| - | | |
| 731,602 | | |
| 708,766 | | |
| 1,368,736 | |
| Diamond valuation | |
| 118,802 | | |
| 17,776 | | |
| 118,802 | | |
| 27,776 | |
| Permitting | |
| 2,932 | | |
| 73,120 | | |
| 25,005 | | |
| 128,022 | |
| Preliminary economic assessment | |
| 170 | | |
| 151,058 | | |
| 37,106 | | |
| 364,744 | |
| | |
$ | 2,869,279 | | |
$ | 6,021,997 | | |
$ | 17,855,176 | | |
$ | 29,182,492 | |
Consulting fees and payroll
Consulting fees and payroll
expenses for the three and nine months ended September 30, 2017 were $104,958 and $361,704 compared to $109,884 and $539,882 for
the same period in 2016. Although the consulting and payroll was consistent for the three months ended September 30, 2016, the
nine months ended September 30, 2016 was higher due to the prior President and CEO having higher compensation than the current
President and CEO’s compensation for the same period during 2017.
Share-based payment expense
Share-based payment expense
for the three and nine months ended September 30, 2017 were $81,640 and $798,747 compared to $126,100 and $1,313,429 for the same
period in 2016. During the three and nine months ended September 30, 2017, 224,999 restricted share units were granted at a fair
value of $3.55 per unit were granted compared to 590,000 options granted for the same period in 2016. Restricted share units vested
50% in February and 50% in August 2017.
Interest income
Interest income for the three and nine months
ended September 30, 2017 were $9,060 and $28,469 compared to $33,406 and $163,821 for the same period in 2016. The decrease over
the same period in 2016 is mainly due to the significantly lower average cash balance during the period.
Other income
Other income for the three and nine months
ended September 30, 2017 were $745,282 and $849,378 compared to $nil and $335,748 for the same period in 2016. In 2017, exploration
expenditures were renounced relating to the flow-through common shares from the May 2017 private placement. In 2016, exploration
expenditures were renounced relating to the flow-through common shares from the September and October 2015 private placements.
INCOME AND RESOURCE TAXES
The Company is subject to mining and income taxes in Canada with
the statutory income tax rate at 26.50%.
No deferred tax asset
has been recorded financial statements as a result of the uncertainty associated with the ultimate realization of these tax assets.
The Company is subject
to assessment by Canadian authorities, which may interpret tax legislation in a manner different from the Company. These differences
may affect the final amount or the timing of the payment of taxes. When such differences arise the Company makes provision for
such items based on management’s best estimate of the final outcome of these matters.
FINANCIAL POSITION AND LIQUIDITY
Operating activities
Cash used in operating
activities for nine months ended September 30, 2017 was $18,749,047 compared with $28,720,351 for the comparative period in 2016.
This is mainly a result of decreased exploration and evaluation activities in 2017.
Investing activities
Investing activities for
the nine months ended September 30, 2017 amounted to $73,469 compared to ($36,179) for the comparative period in 2016. During the
period ended September 30, 2017, $45,000 was received as a reclamation deposit refund. Interest income of $28,469 was received
in the nine months ended September 30, 2017 compared to $163,821 for the same period in 2016.
Financing activities
Financing activities for
the nine months ended September 30, 2017 amounted to $12,421,900 compared to $347,450 for the comparative period in 2016. During
the nine months ended September 30, 2017, 490,000 options were exercised for gross proceeds of $775,300, compared to 250,000 options
for gross proceeds of $347,450 for the comparative period in 2016.
On May 17, 2017, the Company
closed a private placement and issued 1,629,835 non-flow through shares at $3.25 per common share for gross proceeds of $5,296,964
and issued 1,538,461 flow-through shares at $4.38 per common share for gross proceeds of $6,738,459. Share issue costs of $388,823
were incurred in connection with the private placement.
Cash resources and liquidity
At September 30, 2017,
the Company reported a working capital of $713,747 (December 31 2016 – $7,815,464). Included in working capital at September
30, 2017 was cash of $2,032,386 (December 31, 2016 $-8,286,064). At September 30, 2017 and December 31, 2016, the Company had no
long-term debt.
The Company’s remaining
budgeted expenditures for the H2 2017 program is approximately $1.4 million and is contingent on the Company’s ability to
successfully raise additional capital as outlined in Note 1 of the financial statements regarding going concern.
OFF-BALANCE SHEET ARRANGEMENTS
The Company has no off-balance sheet arrangements.
SIGNIFICANT ACCOUNTING JUDGMENTS, ESTIMATES AND ASSUMPTIONS
The preparation of the
Company’s financial statements requires management to make judgments, estimates and assumptions that affect the reported
amounts of assets and liabilities at the date of the financial statements and reported amounts of expenses during the reporting
period. Actual outcomes could differ from these estimates. The financial statements include estimates, which, by their nature,
are uncertain and may require accounting adjustments based on future occurrences. Revisions to accounting estimates are recognized
in the period in which the estimate is revised and future periods if the revision affects both current and future periods. These
estimates are based on historical experience, current and future economic conditions, and other factors, including expectations
of future events that are believed to be reasonable under the circumstances.
| i) | Significant Judgments in Applying Accounting Policies |
The areas which
require management to make significant judgments in applying the Company’s accounting policies in determining carrying values
include, but are not limited to:
| a) | Impairment analysis – Mineral Properties |
The Company
reviews its mineral properties for impairment based on results to date and when events and changes in circumstances indicate that
the carrying value of the assets may not be recoverable. IFRS 6 - Exploration for and evaluation of mineral resources requires
the Company to make certain judgments in respect of such events and changes in circumstances, and in assessing their impact on
the valuations of the affected assets. The Company’s assessment is that as at September 30, 2017, no indicators of an impairment
in the carrying value of its mineral properties had occurred.
| ii) | Significant Accounting Estimates and Assumptions |
The areas which
require management to make significant estimates and assumptions in determining carrying values include, but are not limited to:
| a) | Impairment analysis – Mineral Properties |
The Company reviews
its mineral properties for impairment based on results to date and when events and changes in circumstances indicate that the carrying
value of the assets may not be recoverable. If indicators of impairment are identified, management will perform an impairment test
in accordance with IAS 36 – Impairment of assets (“IAS 36”). IAS 36 requires the Company to make certain
judgments, assumptions, and estimates in determining the estimate of the net recoverable amount. Impairments are recognized when
the carrying values exceed management’s estimate of the net recoverable amounts associated with the affected assets. The
values shown on the balance sheet for Mineral Properties represents the Company’s assumption that the amounts are recoverable.
As a result of the numerous variables associated with the Company’s judgments and assumptions, the precision and accuracy
of estimates of recoverable amount is subject to significant uncertainties, and may change significantly as additional information
becomes known.
The stock option
pricing model requires the input of highly subjective assumptions including the expected life and volatility. Changes in the subjective
input assumptions can materially affect the fair value estimate
| c) | Provision for decommissioning and restoration |
The decommissioning
and restoration liability and the accretion recorded are based on estimates of future cash flows, discount rates, and assumptions
regarding timing. The estimates are subject to change and the actual costs for the decommissioning and restoration liability may
change significantly.
Deferred income
tax assets and liabilities are determined based on differences between the financial reporting and tax bases of assets and liabilities
and on unused losses carried forward, and are measured using the substantively enacted tax rates that are expected to be in effect
when the differences are expected to reverse or losses are expected to be utilized. Deferred tax assets are recorded to recognize
tax benefits only to the extent that, based on available evidence, including forecasts, it is probable that they will be realized.
The Company has not recorded the benefit of any tax losses or deductible temporary differences.
STANDARDS, AMENDMENTS
AND INTERPRETATIONS TO EXISTING STANDARDS THAT ARE NOT YET EFFECTIVE AND HAVE NOT BEEN ADOPTED EARLY BY THE COMPANY
At the date of this MD&A,
certain new standards, amendments and interpretations to existing standards have been published but are not yet effective, and
have not been adopted early by the Company.
The Company anticipates
that all of the relevant pronouncements will be adopted in the Company’s accounting policy for the first period beginning
after the effective date of the pronouncement. Information on new standards, amendments and interpretations that are expected to
be relevant to the Company’s financial statements is provided below. Certain other new standards and interpretations have
been issued but are not expected to have a material impact on the Company’s financial statements and are therefore not discussed
below.
Share-based payments
In June 2016, the IASB
issued amendments to International Financial Reporting Standard 2, Share-based Transactions (“IFRS 2”). The amendments
are effective for periods beginning on or after January 1, 2018 and are to be applied prospectively. The amendments clarify the
classification and measurement of share-based payment transactions. Management is currently assessing the impact of the amendments
to IFRS 2 on the financial statements.
Financial instruments
In July 2014, the IASB
issued the final version of IFRS 9 Financial Instruments (“IFRS 9”) bringing together the classification and measurement,
impairment and hedge accounting phases of the IASB’s project to replace IAS 39 Financial Instruments: Recognition and Measurement.
IFRS 9 is effective for annual periods beginning on or after January 1, 2018, with early adoption permitted. The extent of the
impact of adoption of IFRS 9 has not yet been determined.
Leases
On January 13, 2016, the
IASB issued International Financial Reporting Standard 16, Leases (“IFRS 16”). The new standard will replace existing
lease guidance in IFRS and related interpretations, and requires companies to bring most leases on-balance sheet. The new standard
is effective for annuals beginning on or after January 1, 2019. The Company is currently assessing the impact of IFRS 16.
FINANCIAL INSTRUMENTS
The Company’s financial
instruments are described in Note 4 to the Company’s September 30, 2017 financial statements.
RELATED PARTY TRANSACTIONS
In accordance with IAS
24 Related Parties, key management personnel are those persons having authority and responsibility for planning, directing
and controlling the activities of the Company directly or indirectly, including any directors (executive and non-executive) of
the Company.
The Company’s related
parties include its key management, the Company’s directors, and their close family members. At February 1, 2017, the Company
ceased to have any common key management with Mountain Province and any fees from February 1, 2017 paid to Mountain Province are
for reimbursable expenses. International Investment and Underwriting (“IIU”) is also a related party since it is controlled
by Mr. Dermot Desmond. MCC Geoscience Inc. (“MCC”) is also a related party since it is controlled by a member of the
Board of Directors.
None of the transactions
with related parties incorporate special terms and conditions, and no guarantees were given or received. Related party transactions
are recorded at their exchange amount, being the amount agreed to by the parties. Outstanding balances are settled in cash.
The Company had the following transactions
and balances with its related parties including key management personnel, and Mountain Province which includes the monthly management
fee charged by Mountain Province for the reimbursement of expenses incurred on the Company’s behalf by Mountain Province.
The transactions with key management personnel are in the nature of remuneration which are paid directly by the Company and are
not included in the monthly management fee charged by Mountain Province. The transactions with IIU are for the director fees and
travel expenses of the Chairman of the Company. The transactions with MCC are for consulting fees and reimbursements of travel
expenses.
The balances as at September 30, 2017 and December 31, 2016 were
as follows:
| | |
September 30, | | |
December 31, | |
| | |
2017 | | |
2016 | |
| Payable to key management personnel and directors | |
$ | 7,447 | | |
$ | 406 | |
| Payable to International Investment and Underwriting | |
| 11,250 | | |
| 22,832 | |
| Payable to MCC Geoscience Inc. | |
| 1,483 | | |
| 9,056 | |
The transactions for the three and nine months ended September 30,
2017 and 2016 were as follows:
| | |
Three months ended | | |
Three months ended | | |
Nine months ended | | |
Nine months ended | |
| | |
September
30, 2017 | | |
September 30, 2016 | | |
September 30, 2017 | | |
September 30, 2016 | |
| The total of the transactions: | |
| | | |
| | | |
| | | |
| | |
| Management fee and reimburseable expenses charged by Mountain Province | |
$ | 22,500 | | |
$ | 22,500 | | |
$ | 67,500 | | |
$ | 67,500 | |
| International Investment and Underwriting | |
| 3,750 | | |
| 3,750 | | |
| 11,250 | | |
| 11,250 | |
| Consulting fees charged by MCC Geoscience Inc. | |
| 12,138 | | |
| 17,413 | | |
| 35,696 | | |
| 22,475 | |
| Remuneration of key management personnel | |
| 172,324 | | |
| 219,698 | | |
| 1,043,613 | | |
| 1,765,305 | |
The remuneration expense
of directors and other members of key management personnel for the three and nine months ended September 30, 2017 and 2016 were
as follows:
| | |
Three
months ended | | |
Three months ended | | |
Nine
months ended | | |
Nine months ended | |
| | |
September
30, 2017 | | |
September 30, 2016 | | |
September
30, 2017 | | |
September 30, 2016 | |
| Consulting fees, director fees, payroll and other short-term benefits | |
$ | 103,505 | | |
$ | 93,598 | | |
$ | 344,866 | | |
$ | 451,876 | |
| Share-based payment expense | |
| 72,569 | | |
| 126,100 | | |
| 709,997 | | |
| 1,313,429 | |
| | |
$ | 176,074 | | |
$ | 219,698 | | |
$ | 1,054,863 | | |
$ | 1,765,305 | |
CONTRACTUAL OBLIGATIONS
The Company has no contractual
obligations at September 30, 2017 other than a management services agreement with Mountain Province, for an annual amount of approximately
$90,000. The contract can be terminated at any time by either party without penalty.
OTHER MANAGEMENT DISCUSSION AND ANALYSIS REQUIREMENTS
RISKS
Kennady Diamond’s
business of exploring and developing mineral resources involves a variety of operational, financial and regulatory risks that are
typical in the mining industry. The Company attempts to mitigate these risks and minimize their effect on its financial performance,
but there is no guarantee that the Company will be profitable in the future, and investing in the Company’s common shares
should be considered speculative.
Kennady Diamond’s
business of exploring and developing mineral properties is subject to a variety of risks and uncertainties, including, without
limitation:
| § | risks and uncertainties relating to the interpretation of drill results, the geology, grade and
continuity of mineral deposits; |
| § | mining exploration risks, including risks related to accidents, equipment breakdowns or other unanticipated
difficulties with or interruptions in production; |
| § | the potential for delays in exploration activities or the completion of studies; |
| § | risks related to the inherent uncertainty of exploration and cost estimates and the potential for
unexpected costs and expenses; |
| § | risks related to foreign exchange fluctuations and prices of diamonds; |
| § | risks related to commodity price fluctuations; |
| § | the uncertainty of profitability based upon the Company’s limited life and resultant losses; |
| § | risks related to failure of the Company to obtain adequate financing on a timely basis and on acceptable
terms, particularly given recent volatility in the global financial markets; |
| § | risks related to environmental regulation, permitting and liability; |
| § | political and regulatory risks associated with mining and exploration; |
| § | aboriginal rights and title; |
| § | failure of plant, equipment, processes and transportation services to operate as anticipated; |
| § | possible variations in ore grade or recovery rates, permitting timelines, capital expenditures,
reclamation activities, land titles, and social and political developments, and other risks of the mining industry; and |
| § | other risks and uncertainties related to the Company’s prospects, properties and business strategy. |
As well, there can be no
assurance that any further funding required by the Company will become available to it, and if so, that it will be offered on reasonable
terms, or that the Company will be able to secure such funding. Furthermore, there is no assurance that the Company will be able
to secure new mineral properties or projects, or that they can be secured on competitive terms.
DISCLOSURE OF OUTSTANDING SHARE DATA
The Company’s common
shares are listed on the TSX Venture Exchange under the symbol KDI. There are an unlimited number of common shares without par
value authorized to be issued by the Company.
At November 17, 2017,
there are 50,912,599 shares outstanding, 1,110,000 options and 152,666 restricted share units granted by the Company.
DISCLOSURE CONTROLS AND PROCEDURES
Management has established
processes to provide sufficient knowledge to support representations that it has exercised reasonable diligence that (i) the financial
statements do not contain any untrue statement of material fact or omit to state a material fact required to be stated or that
is necessary to make a statement not misleading in light of the circumstances under which it is made, as of the date of and for
the periods presented by the financial statements, and (ii) the financial statements fairly present in all material respects the
financial condition, results of operations and cash flow of the Company, as of the date of and for the periods presented.
In contrast to the certificate
required for non-venture issuers under National Instrument 52-109, Certification of Disclosure in Issuers’ Annual and Interim Filings
(“NI 52-109”), the Venture Issuer Basic Certificate does not include representations relating to the establishment and
maintenance of disclosure controls and procedures (“DC&P”) and internal control over financial reporting (“ICFR”),
as defined in NI 52-109. In particular, the certifying officers filing this certificate are not making any representations relating
to the establishment and maintenance of:
| (i) | controls and other procedures designed to provide reasonable assurance that information required
to be disclosed by the issuer in its annual filings, interim filings or other reports filed or submitted under securities legislation
is recorded, processed, summarized and reported within the time periods specified in securities legislation; and |
| (ii) | a process to provide reasonable assurance regarding the reliability of financial reporting and
the preparation of financial statements for external purposes in accordance with the issuer’s GAAP. |
The issuer’s certifying
officers are responsible for ensuring that processes are in place to provide them with sufficient knowledge to support the representations
they are making in the certificate. Investors should be aware that inherent limitations on the ability of certifying officers of
a venture issuer to design and implement on a cost effective basis DC&P and ICFR as defined in NI 52-109 may result in additional
risks to the quality, reliability, transparency and timeliness of interim and annual filings and other reports provided under securities
legislation.
CAUTIONARY NOTE ON FORWARD-LOOKING STATEMENTS
Certain of the statements
made and information contained herein is “forward-looking information” within the meaning of the Ontario Securities
Act. Forward-looking information may include, but is not limited to, statements with respect to the success of exploration activities,
future mineral exploration, permitting time lines, requirements for additional capital, sources and uses of funds, the estimation
of mineral reserves and mineral resources, the realization of mineral reserve and mineral resource estimates, future remediation
and reclamation activities, the timing of activities and the amount of estimated revenues and expenses. Forward-looking information
is based on various assumptions including, without limitation, the expectations and beliefs of management, the assumed long term
price of diamonds; that the Company can access financing, appropriate equipment and sufficient labour and that the political environment
where the Company operates will continue to support the development and operation of mining projects. Should underlying assumptions
prove incorrect, or one or more of the risks and uncertainties described below materialize, actual results may vary materially
from those described in forward-looking statements. Accordingly, readers are advised not to place undue reliance on forward-looking
statements.
Forward-looking information
is subject to a variety of risks and uncertainties which could cause actual events or results to differ from those reflected in
the forward-looking information, including, without limitation, risks and uncertainties relating to foreign currency fluctuations;
risks inherent in mining including environmental hazards, industrial accidents, unusual or unexpected geological formations, ground
control problems and flooding; delays or the inability to obtain necessary governmental permits or financing; risks associated
with the estimation of mineral resources and reserves and the geology, grade and continuity of mineral deposits; the possibility
that future exploration, development or mining results will not be consistent with the Company’s expectations; the potential
for and effects of labor disputes or other unanticipated difficulties with or shortages of labor or interruptions in production;
failure of plant, equipment or processes to operate as anticipated; actual ore mined varying from estimates of grade, tonnage,
dilution and metallurgical and other characteristics; the inherent uncertainty of
production and cost
estimates and the potential for unexpected costs and expenses, diamond price fluctuations; uncertain political and economic environments;
changes in laws or policies, and other risks and uncertainties, including those described under Risks.
Historical results
of operations and trends that may be inferred from the following discussions and analysis may not necessarily indicate future results
from operations. The Company undertakes no obligation to publicly update or review the forward-looking statements whether as a
result of new information, future events or otherwise, other than as required under applicable securities laws.
Cautionary Note to U.S. Investors – Information Concerning
Preparation of Resource Estimates
This MD&A has been
prepared in accordance with the requirements of the securities laws in effect in Canada, which differ from the requirements of
United States securities laws. Unless otherwise indicated, all resource and reserve estimates included in this MD&A have been
prepared in accordance with NI 43-101 and the Canadian Institute of Mining and Metallurgy Classification System. NI 43-101 is a
rule developed by the Canadian Securities Administrators which establishes standards for all public disclosure an issuer makes
of scientific and technical information concerning mineral projects.
Canadian standards,
including NI 43-101, differ significantly from the requirements of Industry Guide 7 promulgated by the United States Securities
and Exchange Commission (“SEC”) under the United States Securities Act of 1933, as amended, and resource and reserve
information contained herein may not be comparable to similar information disclosed by U.S. companies. In particular, and without
limiting the generality of the foregoing, the term “resource” does not equate to the term “reserves”. Under
U.S. standards, mineralization may not be classified as a “reserve” unless the determination has been made that the
mineralization could be economically and legally produced or extracted at the time the reserve determination is made. The SEC’s
disclosure standards under Industry Guide 7 do not define the terms and normally do not permit the inclusion of information concerning
“measured mineral resources”, “indicated mineral resources” or “inferred mineral resources”
or other descriptions of the amount of mineralization in mineral deposits that do not constitute “reserves” by U.S.
standards in documents filed with the SEC. U.S. Investors should also understand that “inferred mineral resources”
have a great amount of uncertainty as to their existence and great uncertainty as to their economic and legal feasibility. It cannot
be assumed that all or any part of an “inferred mineral resource” will ever be upgraded to a higher category. Under
Canadian rules, estimated “inferred mineral resources” may not form the basis of feasibility or pre-feasibility studies
except in rare cases. Investors are cautioned not to assume that all or any part of an “inferred mineral resource”
exists or is economically or legally mineable.
Disclosure of “contained
ounces” (or “contained carats”) in a resource is permitted disclosure under Canadian regulations; however, the
SEC normally only permits issuers to report mineralization that does not constitute “reserves” by SEC standards as
in place tonnage and grade without reference to unit measures. The requirements of NI 43-101 for identification of “reserves”
are also not the same as those of the SEC’s Industry Guide 7, and reserves reported by the Company in compliance with NI
43-101 may not qualify as “reserves” under Industry Guide 7 standards. Accordingly, information concerning mineral
deposits set forth herein may not be comparable with information made public by companies that report in accordance with U. S.
standards.
On behalf of the Board of Directors,
“Rory Moore”
Dr. Rory Moore
President & CEO
November 17, 2017
SCHEDULE “N”
INFORMATION CONCERNING THE COMBINED COMPANY
The following is a summary of the Combined
Company, its business and operations, which should be read together with the more detailed information and financial data and statements
contained elsewhere in this Circular. The information contained in this Schedule “N”, unless otherwise indicated, is
given as of March 5, 2018.
All capitalized terms used in this Schedule
“N” and not defined herein have the meaning ascribed to such terms in Schedule “A” – “Glossary
of Terms” or elsewhere in this Circular. Unless otherwise indicated herein, references to “$”, “C$”
or “Canadian dollars” are to Canadian dollars, references to “U.S.$” or “U.S. dollars” are to United
States dollars. See in this Circular, “General Matters – Exchange Rate Data”. See also in this Circular,
“Cautionary Statement Regarding Forward-Looking Statements”.
Corporate Structure
Name and Incorporation
On completion of the Arrangement, the Combined
Company will continue the current operations of Mountain Province and Kennady under the name “Mountain Province Diamonds Inc.”,
and be governed by the laws of the Province of Ontario. The Combined Company will, immediately following the Effective Time, directly
own all of the issued and outstanding Kennady Shares and Kennady will be a wholly-owned subsidiary of Mountain Province.
It is expected that the business operations
of the Combined Company will be headquartered in Toronto at 161 Bay Street, Suite 1410, P.O. Box 216, Toronto, Ontario, Canada,
M5J 2S1.
The following diagram sets forth the corporate structure of the
Combined Company following the Arrangement.
Description of the Business of the Combined Company
On completion of the Arrangement, the Combined
Company will carry on the business operated by Mountain Province and Kennady, and its efforts will be focused on the mining and
marketing of rough diamonds to the global market, expanding its high-grade diamond resources along the Kelvin–Faraday kimberlite
corridor and identifying new kimberlites outside of the corridor. The Combined Company also expects to target the Kelvin–Faraday
corridor for further exploration.
The Combined Company’s portfolio of assets will include the following:
| 1. | its 49% interest in the GK Diamond Mine; |
| 2. | its 100% interest in 22 federal leases and 58 claims in the Kennady North Project; and |
| 3. | approximately $13.3 million in cash (expected cash holdings
as of September 30, 2017). |
The following table summarizes the expected
mineral reserves and resources of the Combined Company:
| Kimberlite Deposit |
Classification |
Tonnes (Mt) |
Carats (Mct) |
Grade (cpht) |
| 5034 |
Probable Reserve |
12.8 |
22.3 |
174 |
| |
Indicated Resource |
|
|
|
| |
Inferred Resource |
0.8 |
1.2 |
150 |
| Hearne |
Probable Reserve |
5.6 |
11.7 |
207 |
| |
Indicated Resource |
|
|
|
| |
Inferred Resource |
1.6 |
2.9 |
180 |
| Tuzo |
Probable Reserve |
16.4 |
20.6 |
125 |
| |
Indicated Resource |
|
|
|
| |
Inferred Resource |
8.9 |
14.4 |
161 |
| Kelvin |
Probable Reserve |
|
|
|
| |
Indicated Resource |
8.5 |
13.6 |
160 |
| |
Inferred Resource |
|
|
|
| Faraday 2 and Faraday 3 |
Probable Reserve |
|
|
|
| |
Indicated Resource |
|
|
|
| |
Inferred Resource |
3.3 |
5 |
154 |
| Summary |
Probable Reserve |
34.8 |
54.6 |
157 |
| |
Indicated Resource |
8.5 |
13.6 |
160 |
| |
Inferred Resource |
14.6 |
23.5 |
161 |
Notes:
| (1) | 5034,
Hearn and Tuzo mineral reserves / resources summarized from Gahcho Kué Project,
2014 Feasibility Study Report NI 43-101 Technical Report dated May 13, 2014 as amended
May 27, 2014 (less production up to December 31, 2016). |
| (2) | Mineral
reserves / resources are reported at a bottom cut-off of 1.0 mm. |
| (3) | Mineral
resources are not mineral reserves and do not have demonstrated economic viability. |
| (4) | Tonnes
and carats are rounded to the nearest 100,000. |
| (5) | Tuzo
tonnes exclude 0.6 Mt of a granite raft and CRX_BX. |
| (6) | Resources
and reserves have been reported in this report to remain consistent with previous technical
reports. |
| (7) | Probable
reserves for 5034 are net of production that occurred in 2016. |
| (8) | MT =
Metric tonnes, Mct = Million carats, Cpht = Carats per hundred tonnes. |
Information regarding commercial production guidance for the GK
Diamond Mine can be found in the documents incorporated by reference to Schedule “J” – “Information Concerning
Mountain Province”.
Diamond Properties
GK Diamond Mine
Information regarding the GK Diamond Mine can
be found in the documents incorporated by reference to Schedule “J” – “Information Concerning Mountain
Province”.
Kennady North Project
Information regarding the Kennady North Project
can be found at Schedule “K” – “Information Concerning Kennady” under the heading “Mining Properties
– Kennady North Project”.
Description of Securities
The authorized share capital of the Combined
Company will be the same as the currently authorized share capital of Mountain Province and the rights associated with each Combined
Company Share will be the same as the rights associated with each Mountain Province Share. The Combined Company will have an unlimited
number of Combined Company Shares authorized for issuance.
Based on pro forma figures as of the
date hereof that give effect to the Arrangement, it is anticipated that there will be (i) 209,893,285 Combined Company Shares issued
and outstanding, (ii) 3,640,000 Combined Company Options issued and outstanding, and (iii) 488,665 Combined Company RSUs issued
and outstanding. See “Pro Forma Consolidated Capitalization” in this Schedule “N” – “Information
Concerning the Combined Company”.
Unaudited Pro Forma Financial Information
The unaudited pro forma consolidated
financial statements of the Combined Company and accompanying notes are included in Schedule “O” – “Unaudited
Pro Forma Condensed Consolidated Financial Statements of Mountain Province” to this Circular. The following selected unaudited
pro forma consolidated financial information (expressed in thousands of Canadian dollars) is based on the assumptions described
in the respective notes to the unaudited pro forma consolidated financial statements included in this Circular at Schedule
“O” – “Unaudited Pro Forma Condensed Consolidated Financial Statements of Mountain Province”.
Pro Forma Consolidation Capitalization
The following table sets forth the approximate
capitalization of the Combined Company after giving effect to the Arrangement.
| |
Amount Authorized or to |
Amount Outstanding After Giving |
| Designation of Security |
be Authorized |
Effect to the Arrangement |
| Combined Company Shares |
Unlimited(1) |
209,893,285 |
| Combined Company Options |
20,989,328(2) |
3,640,000 |
| Combined Company RSUs |
20,989,328(2) |
488,665 |
Notes:
| (1) | Based
on there being (i) 160,253,501 Mountain Province Shares outstanding as of the date hereof,
(ii) 50,912,599 Kennady Shares outstanding as of the date hereof (after deducting any
Kennady Shares held by Mountain Province), entitling the holders thereof to acquire 0.975
of a Mountain Province Share for each Kennady Share following the Effective Time of the
Arrangement. |
| (2) | Expected
authorized Combined Company Options and Combined Company RSUs are presented as an aggregate
figure. Mountain Province has a rolling 10% long term equity incentive plan (the Mountain
Province Long Term Equity Incentive Plan) pursuant to which the Mountain Province Board
may grant stock option, SAR, RSU and DSU awards within the limits identified in the Mountain
Province Long Term Equity Incentive Plan. See “Particulars of Other Matters to
Be Acted Upon – Approval of Long Term Equity Incentive Plan” in the management |
information circular of Mountain Province dated May 17,
2016, which is incorporated by reference in this Circular and available under Mountain Province’s issuer profile on SEDAR at www.sedar.com.
Dividends
There will be no restrictions in the Combined
Company’s articles or elsewhere which would prevent the Combined Company from paying dividends following completion of the Arrangement,
other than customary general solvency requirements and certain restrictions imposed by the Mountain Province Indenture and the
Senior Secured Credit Facility. For information on Mountain Province’s dividend policy, see “Description of Common Shares”
in Schedule “J” – “Information Concerning Mountain Province”.
Principal Securityholders
To the best of the knowledge of the directors
and officers of Mountain Province and Kennady, upon completion of the Arrangement, there will be no persons or companies who will
beneficially own, directly or indirectly, or exercise control or direction over, shares carrying more than 10% of the voting rights
attached to the Combined Company Shares, after giving effect to the Arrangement except as follows:
| Name |
Number of Combined
Company Shares |
Percentage of
Voting Rights |
| Dermot
Fachtna Desmond(1) |
52,075,539 |
24.8%(2) |
Note:
| (1) | Represents
holdings beneficially owned or controlled by Mr. Dermot Fachtna Desmond. The holdings
of Mr. Desmond and Bottin (International) Investments Ltd. have been aggregated as Mr.
Desmond controls Bottin (International) Investments Ltd. Based on the number of Mountain
Province Shares (being 37,951,887 Mountain Province Shares) and Kennady Shares (being
14,485,797 Kennady Shares) beneficially owned or controlled by Mr. Desmond as of the
date hereof, Mr. Desmond would beneficially own or control 52,075,539 Combined Company
Shares upon the completion of the Arrangement. |
| (2) | Assuming
209,893,285 Combined Company Shares outstanding at the Effective Time, based on there
being (i) 160,253,501 Mountain Province Shares outstanding, being the number of Mountain
Province Shares outstanding as of the date hereof, plus 49,639,784 Mountain Province
Shares expected to be issued under the Arrangement as Arrangement Consideration, being
the number of Kennady Shares outstanding as of the date hereof (after deducting any Kennady
Shares held by Mountain Province). The foregoing assumes that no additional Mountain
Province Shares or Kennady Shares will be issued until the Effective Time, and that there
will be no Dissenting Shareholders. |
Officers and Directors of the Combined Company
Directors
Upon completion of the Arrangement, it is expected
that board of directors of the Combined Company will be the current Mountain Province Board, which is composed of the following
six directors: Jonathan Comerford, David Whittle, Bruce Dresner, Peeyush Varshney, Karen Goracke and Carl Verley.
Upon completion of the Arrangement, it is expected
that the board of directors of Kennady will be replaced as of the Effective Date by persons nominated by Mountain Province.
Officers
Following the completion of the Arrangement,
it is expected that the management of the Combined Company will be the current management of Mountain Province, which includes
the following individuals: David Whittle, Perry Ing and Reid Mackie.
Following the completion of the Arrangement,
it is expected that the management of Kennady will be replaced as of the Effective Date by persons appointed by the reconstituted
Kennady Board.
Executive Compensation
Following the completion of the Arrangement,
it is expected that the Combined Company will maintain the policies of Mountain Province with respect to executive compensation.
See “Executive Compensation” in the management information circular of Mountain Province dated February 28, 2017,
which is incorporated by reference in this Circular and available under Mountain Province’s issuer profile on SEDAR at www.sedar.com.
Compensation of Directors
Following the completion of the Arrangement,
it is expected that the Combined Company will maintain the policies of Mountain Province with respect to director compensation.
See “Executive Compensation – Director Compensation” of the management information circular of Mountain
Province dated February 28, 2017, which is incorporated by reference in this Circular and available under Mountain Province’s issuer
profile on SEDAR at www.sedar.com.
Stock Exchange Listing
On the completion of the Arrangement, it is expected that the Mountain
Province Shares will continue to trade on the TSX and Nasdaq under the symbol “MPVD”.
Auditor
Following the completion of the Arrangement, it is expected that
the auditor for the Combined Company will continue to be KPMG LLP.
Registrar and Transfer Agent
Following the completion of the Arrangement, it is expected that
the transfer agent and registrar of the Combined Company will continue to be Computershare Investor Services Inc.
SCHEDULE “O”
UNAUDITED PRO FORMA CONDENSED CONSOLIDATED
FINANCIAL STATEMENTS OF
MOUNTAIN PROVINCE
See attached.
Pro Forma Consolidated Financial Statements
(Expressed in thousands of Canadian Dollars)
MOUNTAIN PROVINCE
DIAMONDS INC.
As at and for the Nine Months Ended September 30, 2017 and for the
Year Ended December 31, 2016
(Unaudited)
MOUNTAIN PROVINCE DIAMONDS INC.
Pro Forma Consolidated Balance
Sheets
Expressed in thousands of Canadian dollars
(Unaudited)
| As at September 30, 2017 | |
Mountain
Province Diamonds Inc. | | |
Kennady
Diamonds Inc. | | |
Pro
Forma Adjustments | | |
Notes | |
Pro
Forma Consolidated | |
| | |
| | |
| | |
| | |
| |
| |
| ASSETS | |
| | | |
| | | |
| | | |
| |
| | |
| Current assets | |
| | | |
| | | |
| | | |
| |
| | |
| Cash | |
$ | 14,867 | | |
$ | 2,032 | | |
$ | - | | |
| |
$ | 13,331 | |
| | |
| | | |
| | | |
| (3,568 | ) | |
5(e) | |
| | |
| Amounts receivable | |
| 1,642 | | |
| 172 | | |
| - | | |
| |
| 1,814 | |
| Prepaid expenses and other | |
| 331 | | |
| 66 | | |
| - | | |
| |
| 397 | |
| Inventories | |
| 88,046 | | |
| - | | |
| - | | |
| |
| 88,046 | |
| | |
| 104,886 | | |
| 2,270 | | |
| (3,568 | ) | |
| |
| 103,588 | |
| | |
| | | |
| | | |
| | | |
| |
| | |
| Restricted cash | |
| 110,994 | | |
| - | | |
| - | | |
| |
| 110,994 | |
| Reclamation deposit | |
| - | | |
| 250 | | |
| - | | |
| |
| 250 | |
| Derivative assets | |
| 90 | | |
| - | | |
| - | | |
| |
| 90 | |
| Mineral properties | |
| - | | |
| 603 | | |
| 181,219 | | |
5(a) | |
| 181,822 | |
| Property, plant
and equipment | |
| 668,836 | | |
| 1,661 | | |
| - | | |
| |
| 670,497 | |
| | |
| | | |
| | | |
| | | |
| |
| | |
| Total
assets | |
$ | 884,806 | | |
$ | 4,784 | | |
$ | 177,651 | | |
| |
$ | 1,067,241 | |
| | |
| | | |
| | | |
| | | |
| |
| | |
| LIABILITIES AND SHAREHOLDERS’
EQUITY | |
| | | |
| | | |
| | | |
| |
| | |
| Current liabilities | |
| | | |
| | | |
| | | |
| |
| | |
| Accounts payable and accrued
liabilities | |
$ | 30,681 | | |
$ | 667 | | |
$ | 4,486 | | |
5(d) | |
$ | 35,834 | |
| Deferred premium on flow
through shares | |
| - | | |
| 889 | | |
| - | | |
| |
| 889 | |
| Derivative liabilities | |
| 882 | | |
| - | | |
| - | | |
| |
| 882 | |
| Payable to De Beers Canada | |
| 48,464 | | |
| - | | |
| - | | |
| |
| 48,464 | |
| Current
portion of loan facility | |
| 122,740 | | |
| - | | |
| - | | |
| |
| 122,740 | |
| | |
| 202,767 | | |
| 1,556 | | |
| 4,486 | | |
| |
| 208,809 | |
| | |
| | | |
| | | |
| | | |
| |
| | |
| Loan facility | |
| 306,977 | | |
| - | | |
| - | | |
| |
| 306,977 | |
| Decommissioning
and restoration liability | |
| 24,687 | | |
| 172 | | |
| - | | |
| |
| 24,859 | |
| | |
| | | |
| | | |
| | | |
| |
| | |
| Shareholders’ equity: | |
| | | |
| | | |
| | | |
| |
| | |
| Share capital | |
| 475,570 | | |
| 107,546 | | |
| 68,675 | | |
5(c) | |
| 651,791 | |
| Share based payments reserve | |
| 5,309 | | |
| 4,788 | | |
| (4,788 | ) | |
5(c) | |
| 5,309 | |
| Deficit | |
| (130,504 | ) | |
| (109,278 | ) | |
| 109,278 | | |
5(c) | |
| (130,504 | ) |
| Total
shareholders’ equity | |
| 350,375 | | |
| 3,056 | | |
| 173,165 | | |
| |
| 526,596 | |
| | |
| | | |
| | | |
| | | |
| |
| | |
| Total
liabilities and shareholders’ equity | |
$ | 884,806 | | |
$ | 4,784 | | |
$ | 177,651 | | |
| |
$ | 1,067,241 | |
The accompanying notes are an integral part of these pro forma
financial statements.
MOUNTAIN PROVINCE DIAMONDS INC.
Pro Forma Consolidated Statements
of Comprehensive Income (Loss)
Expressed in thousands of Canadian dollars
(Unaudited)
| For
the nine months ended September 30, 2017 | |
Mountain
Province Diamonds Inc. | | |
Kennady
Diamonds Inc. | | |
Pro
Forma Adjustments | | |
Notes | |
Pro
Forma Consolidated | |
| | |
| | |
| | |
| | |
| |
| |
| Sales | |
$ | 92,866 | | |
$ | - | | |
$ | - | | |
| |
$ | 92,866 | |
| Cost of sales: | |
| | | |
| | | |
| | | |
| |
| | |
| Production costs | |
| 29,826 | | |
| - | | |
| - | | |
| |
| 29,826 | |
| Cost of acquired diamonds | |
| 5,683 | | |
| - | | |
| - | | |
| |
| 5,683 | |
| Depreciation
and depletion | |
| 21,587 | | |
| - | | |
| - | | |
| |
| 21,587 | |
| Earnings from mine operations | |
| 35,770 | | |
| - | | |
| - | | |
| |
| 35,770 | |
| Exploration and evaluation expenses | |
| - | | |
| 17,855 | | |
| - | | |
| |
| 17,855 | |
| Selling, general and administrative
expenses | |
| 10,878 | | |
| 1,594 | | |
| - | | |
| |
| 12,472 | |
| | |
| | | |
| | | |
| | | |
| |
| | |
| Operating income (loss) | |
| 24,892 | | |
| (19,449 | ) | |
| - | | |
| |
| 5,443 | |
| Net finance income (expenses) | |
| (26,280 | ) | |
| 28 | | |
| - | | |
| |
| (26,252 | ) |
| Derivative gains | |
| 1,415 | | |
| - | | |
| - | | |
| |
| 1,415 | |
| Foreign exchange gains (losses) | |
| 32,984 | | |
| - | | |
| - | | |
| |
| 32,984 | |
| Other expenses | |
| - | | |
| (68 | ) | |
| 68 | | |
5(f) | |
| - | |
| Other income | |
| 68 | | |
| 849 | | |
| (68 | ) | |
5(f) | |
| 849 | |
| | |
| | | |
| | | |
| | | |
| |
| | |
| Net income (loss) and comprehensive
income (loss) for the period | |
$ | 33,079 | | |
$ | (18,640 | ) | |
$ | - | | |
| |
$ | 14,439 | |
| | |
| | | |
| | | |
| | | |
| |
| | |
| Basic weighted average number of common shares outstanding
(000’s) | |
| 160,171 | | |
| - | | |
| 49,640 | | |
5(b) | |
| 209,811 | |
| Diluted weighted average number of common shares outstanding
(000’s) | |
| 160,601 | | |
| - | | |
| 49,640 | | |
5(b) | |
| 210,241 | |
| | |
| | | |
| | | |
| | | |
| |
| | |
| Basic income (loss) per common share | |
$ | 0.21 | | |
| | | |
| | | |
| |
$ | 0.07 | |
| Diluted income (loss) per common
share | |
$ | 0.21 | | |
| | | |
| | | |
| |
$ | 0.07 | |
The accompanying notes are an integral part of these pro forma
financial statements.
MOUNTAIN PROVINCE DIAMONDS INC.
Pro Forma Consolidated Statements
of Comprehensive Income (Loss)
Expressed in thousands of Canadian dollars
(Unaudited)
| For the year ended December
31, 2016 | |
Mountain
Province Diamonds Inc. | | |
Kennady
Diamonds Inc. | | |
Pro
Forma Adjustments | | |
Notes | |
Pro
Forma Consolidated | |
| | |
| | |
| | |
| | |
| |
| |
| Sales | |
$ | - | | |
$ | - | | |
$ | - | | |
| |
$ | - | |
| Cost of sales: | |
| | | |
| | | |
| | | |
| |
| | |
| Production costs | |
| - | | |
| - | | |
| - | | |
| |
| - | |
| Cost of acquired diamonds | |
| - | | |
| - | | |
| - | | |
| |
| - | |
| Depreciation and depletion | |
| - | | |
| - | | |
| - | | |
| |
| - | |
| Earnings from mine operations | |
| - | | |
| - | | |
| | | |
| |
| - | |
| Exploration and evaluation expenses | |
| - | | |
| 31,807 | | |
| | | |
| |
| 31,807 | |
| Selling, general and administrative expenses | |
| 6,277 | | |
| 2,789 | | |
| - | | |
| |
| 9,066 | |
| | |
| | | |
| | | |
| | | |
| |
| | |
| Operating income (loss) | |
| (6,277 | ) | |
| (34,596 | ) | |
| - | | |
| |
| (40,873 | ) |
| Net finance income (expenses) | |
| 122 | | |
| 185 | | |
| - | | |
| |
| 307 | |
| Derivative gains | |
| 6,028 | | |
| - | | |
| - | | |
| |
| 6,028 | |
| Foreign exchange gains (losses) | |
| 4,835 | | |
| - | | |
| - | | |
| |
| 4,835 | |
| Other expenses | |
| - | | |
| (90 | ) | |
| 90 | | |
5(f) | |
| - | |
| Other income | |
| 90 | | |
| 336 | | |
| (90 | ) | |
5(f) | |
| 336 | |
| | |
| | | |
| | | |
| | | |
| |
| | |
| Net income (loss) and comprehensive income (loss) for the period | |
$ | 4,798 | | |
$ | (34,165 | ) | |
$ | - | | |
| |
$ | (29,367 | ) |
| | |
| | | |
| | | |
| | | |
| |
| | |
| Basic weighted average number of common shares outstanding (000’s) | |
| 159,744 | | |
| - | | |
| 49,640 | | |
5(b) | |
| 209,384 | |
| Diluted weighted average number of common shares outstanding (000’s) | |
| 160,374 | | |
| - | | |
| 49,640 | | |
5(b) | |
| 210,014 | |
| | |
| | | |
| | | |
| | | |
| |
| | |
| Basic income (loss) per common share | |
$ | 0.03 | | |
| | | |
| | | |
| |
$ | (0.14 | ) |
| Diluted income (loss) per common share | |
$ | 0.03 | | |
| | | |
| | | |
| |
$ | (0.14 | ) |
The accompanying notes are an integral part of these pro forma
financial statements.
| MOUNTAIN PROVINCE DIAMONDS INC. |
| Notes to the Pro Forma Consolidated Financial Statements |
| As at and for the Nine Months Ended September 30, 2017 and for the Year Ended December 31, 2016 |
| Amounts in thousands of Canadian Dollars, except share and per share amounts, unless otherwise noted |
| (Unaudited) |
| 1. | DESCRIPTION OF THE TRANSACTION |
These unaudited pro forma consolidated financial
statements have been prepared for the purpose of inclusion in an information circular dated March 5, 2018 in connection with the
binding definitive agreement (the “Agreement”) announced on January 29, 2018 pursuant to which Mountain Province Diamonds
Inc. (“Mountain Province” or the “Company”) will acquire all of the outstanding common shares of Kennady
Diamonds Inc. (“Kennady”) pursuant to a plan of arrangement (the “Transaction”).
Under the terms of the Agreement, common shareholders
of Kennady will receive 0.975 of one common share of Mountain Province (the “Exchange Ratio”) for each Kennady common
share held. The total transaction consideration to be paid to the Kennady shareholders will be finalized when the Transaction is
completed. These pro forma financial statements use the closing Company share price of $3.55 per share on January 26, 2018 to illustrate
the consideration paid to Kennady shareholders.
The unaudited pro forma consolidated statement
of comprehensive income (loss) for the nine months ended September 30, 2017 and the unaudited pro forma consolidated statement
of comprehensive income (loss) for the year ended December 31, 2016 give effect to the Transaction as if it had occurred on January
1, 2016. The unaudited pro forma consolidated balance sheet as at September 30, 2017 gives effect to the Transaction as if it had
occurred on September 30, 2017.
The pro forma consolidated financial statements
have been prepared by management of Mountain Province to give effect to the transaction described in note 1 and have been compiled
from and include:
| a) | An unaudited pro forma consolidated balance sheet as at
September 30, 2017 combining the unaudited interim balance sheet of Mountain Province as at September 30, 2017 with the unaudited
interim balance sheet of Kennady as at September 30, 2017; |
| b) | An unaudited pro forma consolidated statement of comprehensive
income (loss) for the year ended December 31, 2016 combining the audited results of operations of Mountain Province for the year
ended December 31, 2016 with the audited results of operations of Kennady for the year ended December 31, 2016; |
| c) | An unaudited pro forma consolidated statement of comprehensive
income (loss) for the nine months ended September 30, 2017 combining the unaudited results of operations of Mountain Province
for the nine months ended September 30, 2017 with the unaudited results of operations of Kennady for the nine months ended September
30, 2017; |
The unaudited pro forma consolidated financial
statements should be read in conjunction with the description of the transaction in this Information Circular and with the historical
financial statements and notes included therein. The aforementioned documents are available on the System for Electronic Document
Analysis and Retrieval (“SEDAR”) at www.sedar.com or on the respective company’s websites.
Certain reclassifications have been made to
the historical financial statements of Kennady in the preparation of the unaudited pro forma consolidated financial statements
to conform to the financial statement presentation currently adopted by Mountain Province, and to align the accounting policies
of Kennady to those applied by Mountain Province.
The historical consolidated financial statements
have been adjusted to give effect to pro forma events that are (1) directly attributable to the Transaction, (2) factually supportable,
and (3) with respect to the income statement,
| MOUNTAIN PROVINCE DIAMONDS INC. |
| Notes to the Pro Forma Consolidated Financial Statements |
| As at and for the Nine Months Ended September 30, 2017 and for the Year Ended December 31, 2016 |
| Amounts in thousands of Canadian Dollars, except share and per share amounts, unless otherwise noted |
| (Unaudited) |
certain expenses are a one time cost and others
are expected to have a continuing impact on the consolidated results.
The Transaction is considered to be an asset
acquisition whereby the purchase price is allocated to the assets acquired and liabilities assumed on a relative fair value basis
and the Company’s acquisition costs are considered as part of the purchase price. This method utilizes fair value estimates
and assumptions as at the acquisition date. The preliminary purchase price allocation estimates used may be materially different
than the values reported as at the Transaction closing date.
The unaudited pro forma consolidated financial
statements have been presented for informational purposes only. In the opinion of the Company’s management, all adjustments
considered necessary for a fair presentation have been included. The pro forma information is not necessarily indicative of what
the Company’s financial position or financial performance actually would have been had the Transaction been completed as
of the dates indicated and does not purport to project the future financial position or operating results of the Company. Similarly,
these unaudited pro forma condensed consolidated financial statements do not reflect the additional savings or costs that may result
from the Transaction and no amounts have been included in the purchase price allocation for the estimated costs to be incurred
to achieve savings or other benefits of the Transaction.
| 3. | SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES |
These unaudited pro forma consolidated financial statements have
been compiled using the significant accounting policies as set out in the audited financial statements of the Company as at and
for the year ended December 31, 2016, prepared in accordance with IFRS.
| 4. | PURCHASE PRICE ALLOCATION |
The Company has assumed a preliminary purchase
price of $179,789 to acquire the assets and liabilities of Kennady. This price is the product of the 50,912,599 Kennady common
shares outstanding as at March 5, 2018 and the equity issuance ratio of 0.975 Company shares per Kennady shares and an assumed
share price of $3.55 (see note 1) and calculated as follows:
| Kennady’s shares outstanding (000’s) | |
| 50,913 | |
| Exchange ratio | |
| 0.975 | |
| Company shares issued (000’s) | |
| 49,640 | |
| Company share price | |
| 3.55 | |
| Purchase price | |
$ | 176,221 | |
| Add: Company transaction costs | |
| 3,568 | |
| Aggregate purchase price | |
$ | 179,789 | |
| MOUNTAIN PROVINCE DIAMONDS INC. |
| Notes to the Pro Forma Consolidated Financial Statements |
| As at and for the Nine Months Ended September 30, 2017 and for the Year Ended December 31, 2016 |
| Amounts in thousands of Canadian Dollars, except share and per share amounts, unless otherwise noted |
| (Unaudited) |
The preliminary aggregate purchase price has been allocated to the
following identifiable assets and liabilities based on their estimated fair values as of September 30, 2017:
| Cash | |
$ | 2,032 | |
| Amounts receivable | |
| 172 | |
| Prepaid expenses | |
| 66 | |
| Reclamation deposit | |
| 250 | |
| Property, plant and equipment | |
| 1,661 | |
| Mineral properties | |
| 181,822 | |
| Accounts payable and accrued liabilities | |
| (5,153 | ) |
| Deferred premium on flow through shares | |
| (889 | ) |
| Decommissioning and restoration liability | |
| (172 | ) |
| Total net identifiable asset acquired | |
$ | 179,789 | |
The final purchase price and allocation to the acquired assets and
assumed liabilities will ultimately be determined as of the date of the closing of the Transaction.
| 5. | PRO FORMA ASSUMPTIONS AND ADJUSTMENTS |
The following assumptions and adjustments are used to give the effect
that the Transaction had occurred on January 1, 2017:
| a) | An adjustment to mineral properties of approximately
$181,219 as of September 30, 2017 to reflect the estimated fair value of the acquired mineral properties; |
| b) | An adjustment to reflect the issuance of 49,639,784
common shares of Mountain Province at $3.55 per common share in connection with the acquisition of 100% of the outstanding shares
of Kennady as shown in note six; |
| c) | An adjustment to eliminate the historical Kennady
shareholders’ equity; |
| d) | An adjustment for estimated Transaction costs of
$4,486 incurred by Kennady prior to Transaction, which includes items such as change in control payments, legal fees, the cost
of a fairness of opinion etc. |
| e) | An adjustment for the Transaction costs incurred
by the Company, estimated as $3,568; |
| f) | An adjustment to eliminate management fee revenue
of Mountain Province and management fee expenses of Kennady. |
| 6. | PRO FORMA SHARE CAPITAL |
| | |
September 30, 2017 | |
| | |
Number (000’s) | | |
Amount | |
| Company common shares outstanding | |
| 160,254 | | |
$ | 475,570 | |
| Company common shares issued under the Transaction | |
| 49,640 | | |
| 176,221 | |
| Total | |
| 209,894 | | |
$ | 651,791 | |
| MOUNTAIN PROVINCE DIAMONDS INC. |
| Notes to the Pro Forma Consolidated Financial Statements |
| As at and for the Nine Months Ended September 30, 2017 and for the Year Ended December 31, 2016 |
| Amounts in thousands of Canadian Dollars, except share and per share amounts, unless otherwise noted |
| (Unaudited) |
| 7. | PRO FORMA EARNINGS (LOSS)
PER SHARE |
| For the nine months ended September 30, 2017: | |
(000’s) | |
| Company weighted average number of common shares outstanding - basic | |
| 160,171 | |
| Company weighted average number of common shares outstanding - diluted | |
| 160,601 | |
| Adjustment for company common shares to be issued under the Transaction | |
| 49,640 | |
| Pro forma weighted average common shares outstanding - basic | |
| 209,811 | |
| Pro forma weighted average common shares outstanding -
diluted | |
| 210,241 | |
| Pro forma company earnings attributable to common shareholders | |
$ | 14,439 | |
| Pro forma earnings per share - basic | |
$ | 0.07 | |
| Pro forma earnings per share - diluted | |
$ | 0.07 | |
| | |
| |
| For the year ended December 31, 2016: | |
(000’s) | |
| Company weighted average number of common shares outstanding - basic | |
| 159,744 | |
| Company weighted average number of common shares outstanding - diluted | |
| 160,374 | |
| Adjustment for company common shares to be issued under the Transaction | |
| 49,640 | |
| Pro forma weighted average common shares outstanding - basic | |
| 209,384 | |
| Pro forma weighted average common shares outstanding -
diluted | |
| 210,014 | |
| Pro forma company loss attributable to common shareholders | |
$ | (29,367 | ) |
| Pro forma loss per share - basic | |
$ | (0.14 | ) |
| Pro forma loss per share - diluted | |
$ | (0.14 | ) |
ANY QUESTIONS AND REQUESTS FOR ASSISTANCE
MAY BE DIRECTED TO THE
PROXY SOLICITATION AGENT:
North American Toll-Free: 1-877-452-7184
Collect Calls Outside North America: 416-304-0211
Email: assistance@laurelhill.com
