Stornoway Reports Second Quarter 2019 Financial Results

Press Release

LONGUEUIL, Québec, Aug. 14, 2019 — Stornoway Diamond Corporation (TSX-SWY; the “Corporation” or “Stornoway”) reports its financial and operating results for the quarter ended June 30, 2019.

(All quoted figures in CAD$, unless otherwise noted)

FINANCIAL SUMMARY

Revenues during the three months ended June 30, 2019 (“Current Quarter”) totalled $189.4 million, compared to $56.9 million for the three months ended June 30, 2018 (“Comparative Quarter”). Revenues in the Current Quarter are made up of cash sales revenues of $40.7 million and non-cash revenues of $148.7 million. The non-cash revenues of $148.7 million is comprised of $13.3 million of Stream amortisation and an increase in revenue of $135.4 million resulting from a reduction in contract liabilities related to the upfront proceeds received by the Corporation under the Amended Stream agreement in consideration for future commitments to deliver diamonds at contracted prices (Comparative Quarter – $13.5 million).

For the Current Quarter, cash-operating cost per tonne processed1 was $42.4, compared to $58.7 per tonne in the Comparative Quarter. Cash operating cost per carat recovered1 was $63.8, compared to $147.7 in the Comparative Quarter. Cash operating cost per tonne processed1 and per carat recovered1 decreased due to the ramp up of underground operations, the improved mix of ore sent to the process plant and cost reduction initiatives.

For the Current Quarter, the Corporation reported a net loss of $346.3 million (Comparative Quarter – $35.9 million) due primarily to a non-cash impairment charge of $442.7 million partially offset by the aforementioned reduction of contract liabilities of $135.4 million. The impairment charge was principally driven by decreasing prices of rough diamonds resulting in a write-down of property plant and equipment, right-of-use assets and deferred transaction costs.

For the Current Quarter, the Corporation’s Adjusted EBITDA1,2 , which adjusts for the non-cash charges mentioned above and is a good proxy of the Corporation’s cash flow and business profitability, stood at $13.1 million, a significant increase versus the Comparative Quarter’s Adjusted EBITDA1,2 of $1.6 million.

LIQUIDITY AND CAPITAL RESOURCES

As at June 30, 2019, cash and cash equivalents stood at $21.3 million. These amounts exclude $5.1 million of restricted deposits related to debt service reserve accounts.

Management estimates that the working capital as at June 30, 2019 and forecasted cash flows will not be sufficient to meet the Corporation’s obligations, commitments and budgeted expenditures through June 30, 2020 in the current diamond market price conditions. Management is aware, in making its assessment, of material uncertainties related to events and conditions that may cast significant doubt upon the Corporation’s ability to continue as a going concern and accordingly, the appropriateness of the use of accounting principles applicable to a going concern. The consolidated financial statements do not reflect the adjustments, some of which could be material, to the carrying values and classifications of certain assets and liabilities, and the related expenses that would be necessary if the application of the going concern accounting principle was no longer appropriate.

UPDATE ON THE SALE AND INVESTMENT SOLICITATION PROCESS

Under the terms of the sale and investment solicitation process, the original deadline for a submission by third parties of a qualified non-binding indication of interest was July 15, 2019. However, subsequent to quarter-end, the Corporation and the Bridge Lenders amended the terms of the sale and investment solicitation process (as so amended, the “SISP”), with effect as of July 15, 2019, such that the deadline for submissions of qualified bids under the SISP is now September 16, 2019. The amendment also extends to September 16, 2019 the period during which the Corporation is not required to comply with a minimum tangible net worth covenant of $225 million.

The Bridge Lenders have advised the Corporation that they remain committed to continue collaborating with the Corporation to arrive at a solution with a view to securing the long-term financial viability of the Corporation’s business. The Bridge Financing Agreement continues to provide the Corporation with near-term liquidity.

As of the date hereof, the Corporation has not received a non-binding indication of interest that was considered acceptable in accordance with the terms of the SISP. The Corporation believes it is highly unlikely that the SISP could result in one or more bids that will ultimately lead to a successfully completed transaction pursuant to which Stornoway’s equity securities (including securities convertible into or exercisable for equity securities) would have any recoverable value. The failure to receive a qualified indication of interest within the deadlines provided in the SISP would constitute an event of default under the Bridge Financing Agreement.

There is also no assurance that the Corporation will not be required, or will not determine, that it is in its best interests to file for any form of creditor protection proceeding whether or not in connection with any bid or transaction, including shortly following the date hereof.

CAUTIONARY STATEMENTS REGARDING SISP PROCESS AND EQUITY VALUE

Investors are cautioned that there can be no assurance that the SISP will result in a successfully completed transaction.

The Corporation believes it is highly likely that any transaction or any other outcome of the SISP will result in Stornoway’s equity securities (including securities convertible into or exercisable for equity securities) having no recoverable value. Furthermore, there can be no assurance that the Corporation’s common shares and/or the Convertible Debentures will continue to trade on TSX or on any other trading platform.

As a result of all of the foregoing, Stornoway’s securityholders (including common shareholders, holders of Convertible Debentures and holders of Warrants) are cautioned that trading in such securities is highly speculative, and that the trading prices for such securities may bear little or no relationship to the actual realization of value, if any, by holders thereof as a result of the SISP.

OPERATIONAL SUMMARY

Environment, Health, Safety and Communities

During the quarter, 3 lost time incidences (“LTI”) were recorded, for a year to date LTI rate of 1.5 for both contractors and Stornoway employees (3.2 for contractors and 1.1 for Stornoway employees). No incidences of environmental non-compliance were recorded during the quarter. Stornoway employees stood at 556 as at June 30, 2019, of which 11.3% were Crees of Eeyou Istchee, 19.6% were from Chibougamau or Chapais, and 69.1% were from outside the region.

Mining and Processing

During the quarter ended June 30, 2019, 741,698 tonnes were mined from the underground mine, including 619,942 tonnes of ore. Tonnes mined from Renard 65 open pit totaled 110,884 tonnes, including 101,032 tonnes of ore. Average ore tonnage hauled to surface was 6,813 tonnes per day (tpd), significantly above the design capacity of the underground mine of 6,000 tpd. Due to having sufficient ore stockpiled from Renard 65 to meet planned processing requirements into the second quarter of 2020, Stornoway announced on April 9, 2019 that it was temporarily suspending the open pit mining operations in the Renard 65 pit. The suspension of open pit mining activities in the Renard 65 pit enables the idling of part of the surface equipment fleet, realizing operating cost savings and delaying capital expenditures. All surface equipment operators have been trained and transitioned to underground operating roles or occupy open positions.

In April, production was initiated in the first underground mining horizon of the Renard 3 kimberlite, which has since been ramping up, contributing higher average grade ore to process plant feed. During the quarter, a total of 695,934 tonnes of ore were processed with 463,136 carats recovered at an average grade of 67 cpht. The processed ore was derived from underground production and development at the Renard 2 kimberlite (87%), open pit production and stockpiles from the Renard 65 kimberlite (9%) and underground production and development ore from the Renard 3 kimberlite (4%). Tonnes processed in the Current Quarter increased year over year by 24%, due to the underground mine achieving full-ramp up in the second half of 2018. Carats recovered increased 107% year over year, due to the delivery of higher-grade ore from the underground mine to the process plant. Due to lower ore availability attributable to delays in the ramp-up of the underground mine, 2018 ore feed to the plant had to be supplemented from low grade stockpiles, which reduced the recovered grade compared to plan. Improvements in availability and utilization rate enabled the process plant throughput in the Current Quarter to be higher than budgeted. The plant operated above its targeted rate of 7,000 tonnes per day in April (7,734 tpd), May (7,320 tpd) and June (7,899 tpd). This strong performance in the Current Quarter has allowed the process plant to fully catch up on the tonnes processed shortfall that was experienced due to mechanical issues caused by very cold weather during the first quarter of 2019.

Diamond Sales

Two tender sales were completed in the second quarter for a total of 460,832 carats sold. During the quarter, revenue recognized was derived from 386,459 run-of-mine3 carats and 74,373 supplemental3 carats that were sold for gross proceeds4 of $46.8 million at an average price of US$76 per carat ($102 per carat5. The achieved pricing of US$76 per carat for all goods sold during the quarter represents a decrease of 9% compared to the first quarter of 2019, attributable to weak market conditions which management believes are driven primarily from the oversupply of rough diamonds relative to demand, the high inventory levels in the mid stream and the reduced availability of bank financing. Smaller and lower quality diamonds continue to sell at the lower prices experienced in the fourth quarter of 2018 and first quarter of 2019. The average pricing achieved in 2018 was US$93 per carat, and the 2014 independent pre-financing evaluation of diamonds recovered during the bulk sampling of the Renard 2 and Renard 3 kimberlites was US$147 per carat for a comparable size frequency distribution.

Capital Projects

Capital expenditures1 in the Current Quarter were $13.5 million, compared to $19.9 million in the Comparative Quarter. Capital expenditures1 in the second quarter were primarily related to the development of the next underground mining horizon in the Renard 2 ore body (450-470m level), of the first underground mining horizon in the Renard 3 ore body (290m level), the underground access ramp and the development of ventilation raises. Underground lateral development of 1,388 meters and underground vertical development of 157 meters were achieved in the quarter. Capital expenditures1 declined compared to the Comparative Quarter, as the Comparative Quarter capital expenditures1 included expenses related to the ore-waste sorting circuit that was completed in the first half of 2018 and for equipment purchases related to the underground mining fleet. Stornoway completed the purchases of its initial underground fleet in 2018 and does not expect to require additional mobile equipment in 2019.

NON-IFRS FINANCIAL MEASURES

This document refers to certain financial measures, such as Adjusted Net Loss, Adjusted Revenues, Adjusted EBITDA, Adjusted EBITDA Margin, Average Diamond Pricing Achieved, Cash Operating Cost per Tonne Processed, Cash Operating Cost per Carat Recovered and Capital Expenditures, which are not measures recognized under IFRS and do not have a standardized meaning prescribed by IFRS. As a result, these measures may not be comparable to similar measures reported by other corporations.

Each of these measures have been derived from the Corporation’s financial statements and have been defined and calculated based on management’s reasonable judgement. These measures are used by management and by investors to assist in assessing the Corporation’s performance. The measures are intended to provide additional information to the user and should not be considered in isolation or as a substitute for measures prepared in accordance with IFRS. Refer to the “Non-IFRS Financial Measures” section of the Corporation’s Management Discussion and Analysis as at and for the quarter ended June 30, 2019 for further discussion of these items, including reconciliations to IFRS measures.

CEO PATRICK GODIN COMMENTS ON CURRENT QUARTER

Patrick Godin, President and CEO, commented: “Production during the second quarter at our Renard Mine exceeded the results of the first quarter: ore processed was up 19% and at an all-time high, and carats recovered were up 4% quarter-on-quarter. This is mainly due to an increase in the utilization factor of the Renard process plant, as we had experienced challenges due to very cold weather in the course of the first quarter and have improved the efficiency of preventive maintenance shutdowns. The diamond market continued to show significant weakness, with average prices further declining from already low levels. However, our operation was able to generate significant reductions in capital expenditures and cash operating cost, in great part attributable to the cost reduction initiatives we announced during the second quarter.

I am extremely proud of all our employees, contractors and suppliers for their dedicated efforts in generating further production and cost efficiencies. I am very thankful for their strong support and commitment. We also appreciate the support of the Bridge Lenders, providing us the runway to work on a sustainable solution for the operations.”

ABOUT THE RENARD DIAMOND MINE

The Renard Diamond Mine is Quebec’s first producing diamond mine and Canada’s sixth. It is located approximately 250 km north of the Cree community of Mistissini and 350 km north of Chibougamau in the James Bay region of north-central Québec. Construction on the project commenced on July 10, 2014, and commercial production was declared on January 1, 2017. Average annual diamond production is forecast at 1.8 million carats per annum over the first 10 years of mining. Readers are referred to the technical report dated January 11, 2016, in respect of the September 2015 Mineral Resource estimate, and the technical report dated March 30, 2016, in respect of the March 2016 Updated Mine Plan and Mineral Reserve Estimate for further details and assumptions relating to the project.

QUALIFIED PERSON

Disclosure of a scientific or technical nature in this press release was prepared under the supervision of Mr. Patrick Sévigny, P.Eng. (Québec), Vice President, Operations and Mr. Robin Hopkins, P.Geol. (NT/NU), Vice President, Exploration, both “qualified persons” under National Instrument (“NI”) 43-101.

ABOUT STORNOWAY DIAMOND CORPORATION

Stornoway is a leading Canadian diamond exploration and production company listed on the Toronto Stock Exchange under the symbol SWY and headquartered in Montreal. Stornoway owns a 100% interest in the Renard Mine, Québec’s first diamond mine.

On behalf of the Board
STORNOWAY DIAMOND CORPORATION
/s/ “Patrick Godin”
Patrick Godin
President and Chief Executive Officer

For more information, please contact Alexandre Burelle (Manager, Investor Relations and Business Development) at 450-616-5555 x2264, aburelle@stornowaydiamonds.com or toll free at 1-877-331-2232

Pour plus d’information, veuillez contacter Alexandre Burelle (Directeur, Relations avec les investisseurs et développement des affaires) au 450-616-5555 x2264, aburelle@stornowaydiamonds.com ou sans frais au 1-877-331-2232

** Website: www.stornowaydiamonds.com Email: info@stornowaydiamonds.com **

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