Mr. Matt Manson reports

STORNOWAY REPORTS FOURTH QUARTER AND 2017 FINANCIAL RESULTS

Stornoway Diamond Corp. has released financial and operating results for the fourth quarter and year ended Dec. 31, 2017.

Earnings, operating expenses and capital expenses quoted reflect the recent adoption of a change in accounting policy regarding the capitalization of certain underground mine development costs.

Year ended Dec. 31, 2017, highlights:

• For the year ended Dec. 31, 2017, Stornoway reported net loss of $114.6-million (14 cents per share on a basic and fully diluted basis), compared with net income of $19.6-million in 2016 (three cents per share basic and fully diluted). Included in 2017 earnings is a non-cash impairment charge of $171.0-million, reflecting a lower diamond price environment than was originally forecast by the corporation. Net income before impairment was $11.1-million for the fourth quarter and $15.0-million for the year.
• During 2017, the Renard diamond mine attained commercial production, completed the processing ramp-up on schedule, and accomplished two full quarters at or above plant nameplate operating capacity.
• Mining in the Renard 2-3 and Renard 65 open pits in the fourth quarter comprised 827,181 tonnes, with 442,476 tonnes of ore extracted. For the full year, open-pit mining stood at 4,475,854 tonnes (102 per cent of plan), with 2,091,782 tonnes of ore extracted.
• A total of 398,267 carats were recovered in the fourth quarter from the processing of 518,817 tonnes of ore at a grade of 77 carats per 100 tonnes (cpht). For the full year, a total of 1,642,934 carats were recovered from 1,956,436 tonnes of ore at 84 cpht (98 per cent, 97 per cent and 99 per cent of plan, respectively).
• Diamond sales of 486,633 carats were completed in the fourth quarter with gross proceeds of $52.6-million at an average price of $86 (U.S.) per carat ($108 per carat). For the full year, Stornoway sold 1,701,561 carats for gross proceeds of $186.2-million at an average price of $85 (U.S.) per carat ($109 per carat).
• In the fourth quarter, cash operating costs per tonne processed were $42.10 per tonne ($54.85 per carat) and capital expenditures were $47.7-million. For the full year, cash operating costs per tonne processed were $45.02 per tonne ($53.60 per carat) and capital expenditures were $126.9-million.
• In the fourth quarter, the corporation reported adjusted EBITDA (earnings before interest, taxes, depreciation and amortization) of $25.2-million, or 45.5 per cent of revenues, and $85.0-million, or 43.3 per cent of revenues, for the full year ended Dec. 31, 2017.
• At year-end, cash, cash equivalents and short-term investments stood at $81.0-million and available liquidity to the corporation, including available credit facilities, stood at $101.8-million.

Matt Manson, president and chief executive officer, commented: "In 2017, Stornoway's Renard diamond mine produced a strong performance in mining, carat production, processing ramp-up and cost. It has delivered strong operating margins, with EBITDA of $85-million, despite the lower diamond pricing environment that has characterized our first year of sales. As 2017 ended, Renard had established itself as the lowest-cost diamond mine in Canada, and Renard diamonds had developed a strong position in the rough diamond market. The first half of 2018 will see ore production transition from our starter open pit to our underground mine. Ensuring an efficient ramp-up of the underground operations is a key priority for the Renard team. At the same time, we are introducing our new ore-waste sorting circuit designed to improve the quality of our diamond production and provide future processing expansion capacity. Both of these capital projects, once completed, will define the character of the project for the next decade." Mr. Manson continued: "Since the completion of our project fundraising in 2014, and through four years of mine construction and operations, Stornoway has maintained a strong balance sheet and liquidity position. This will remain a priority for us in our financial management as we pass through the scheduled capital spending of 2018 and pursue the production and revenue growth potential of our business."

                               FINANCIAL RESULTS HIGHLIGHTS
               (expressed in millions of dollars, except as otherwise noted)
 
                                                      Three months ended            Year ended       
                                                           Dec. 31, 2017         Dec. 31, 2017

Ore mined (tonnes)                                               490,237             2,218,385
Waste mined (tonnes)                                             444,058             2,704,560
Ore processed (tonnes)                                           518,816             1,956,435
Carats recovered                                                 398,267             1,642,934
Carats sold                                                      486,633             1,701,561
Revenues                                                            55.5                 196.5
Cost of goods sold                                                  43.2                 149.2
Impairment charge                                                  171.0                 171.0
Selling, general, administrative
and exploration expenses                                             4.6                  19.9
Financial and other (income) expenses                                3.1                   7.6
Foreign exchange (gain) loss                                         0.7                  (7.9)
Net (loss) income                                                 (118.6)               (114.6)
Net (loss) income per share -- basic and diluted                   (0.14)                (0.14)
Net income before impairment                                        11.1                  15.0
Adjusted EBITDA                                                     25.2                  85.0
Adjusted EBITDA margin                                               45%                   43%
Capital expenditures                                                47.6                 126.9

Financial summary

Revenue for the fourth quarter is estimated at $55.5-million, and at $196.5-million for the full year 2017. Revenue includes amortization of upfront proceeds received by the corporation under the Renard stream agreement in consideration for future commitments to deliver diamonds at contracted prices.

Under the changed accounting policy, the corporation reported 2017 adjusted EBITDA of $85.0-million, or 43.3 per cent of revenue. The corporation incurred a non-cash impairment charge of $171.0-million as at Dec. 31, 2017, on the carrying value of the corporation's property plant and equipment, reflecting an outlook of lower-than-expected diamond pricing. Prior to this charge, the corporation reported net income before impairment for 2017 of $15.0-million.

During the fourth quarter the corporation drew down funds available under its senior loan facility with Diaquem Inc. (a wholly owned subsidiary of Ressources Quebec) prior to its scheduled expiry at year-end, and made $16.0-million of principal repayments on existing indebtedness. As at Dec. 31, 2017, cash, cash equivalents and short-term investments stood at $81.0-million and available liquidity to the corporation, including available credit facilities, stood at $101.8-million.

Change in accounting policy

The fourth quarter and full-year 2017 results incorporate the impact of an accounting policy change recently adopted by the corporation in accordance with IAS 8 accounting policies, changes in accounting estimates and errors wherein certain costs associated with the development of the underground mine that were previously expensed will now be capitalized and amortized over the period during which the underground infrastructure can be expected to contribute to the revenue-earning capability of the mine. Mining companies use different accounting treatments on development expenditure incurred during the production phase. This change will result in the financial statements providing reliable and more relevant information on Stornoway's financial performance, such as operating expense, capital expense and earnings.

Operational summary

Environment, health, safety and communities

No lost-time incidents (LTI) were recorded during the quarter, for a year-to-date LTI rate of 0.4 for contractors and zero for Stornoway employees. Average daily manpower at site in December averaged 324 workers (Stornoway and contractors) of which 12 per cent were Crees of the Eeyou Istchee. Stornoway employees stood at 505 as at Dec. 31, 2017, including 437 mine-located employees, of which 12 per cent were Crees, 26 per cent were from Chibougamau and Chapais, and 62 per cent were from outside the region. One incident of administrative environmental non-conformity was identified during the quarter due to reporting an accidental glycol spill outside of the 24-hour prescribed delay.

Commercial production, ramp-up and completion certification

Stornoway formally declared commercial production at the Renard diamond mine on Jan. 1, 2017, marking the end of the project's initial capital expense period. Production ramp-up was completed on schedule at the end of the second quarter of 2017, with an average processing rate of 6,149 tonnes per day achieved in June, 2017. Since then, two full operating quarters have been completed at average processing rates of 5,957 tonnes per day and 6,014 tonnes per day, respectively.

Subsequent to the year-end, on Feb. 7, 2018, the corporation announced the attainment of full completion certification at the Renard mine pursuant to the terms of Stornoway's July, 2014, material project finance agreements.

Mining and processing

During the fourth quarter, 827,181 tonnes were mined from the Renard 2-3 and Renard 65 open pits, with 442,476 tonnes of ore extracted. Five hundred eighteen thousand eight hundred seventeen tonnes of ore from the Renard 2 and Renard 3 kimberlites were processed with a diamond recovery of 398,267 carats at an attributable grade of 77 cpht.

During the year, 4,475,854 tonnes were mined from the Renard 2-3 and Renard 65 open pits, compared with a plan of 4,369,532 tonnes (102 per cent), with 2,091,782 tonnes of ore extracted. One million nine hundred fifty-six thousand four hundred thirty-six tonnes of ore were processed with a diamond recovery of 1,642,934 carats at an attributable grade of 84 cpht, compared with a plan of 1,999,000 tonnes and 1,694,312 carats at 85 cpht (98 per cent, 97 per cent and 99 per cent, respectively).

Carat production was lower than planned in the fourth quarter and on a full-year basis, due to the unscheduled batch processing of lower-grade Renard 65 ore in November for the purpose of obtaining a valuation sample of Renard 65 diamonds.

In the fourth quarter, cash operating costs per tonne processed were $42.10 per tonne ($54.85 per carat recovered). On a full-year basis, cash operating costs per tonne processed were $45.02 per tonne ($53.60 per carat recovered). Under the changed accounting policy, cash operating costs are lower and capital expenditures are higher than was contemplated in the 2017 guidance.

Diamond sales

During the fourth quarter, Stornoway sold a total of 486,6332 carats in two tender sales with gross proceeds of $52.6-million, at an average price of $86 (U.S.) per carat ($108 per carat). On a full-year basis Stornoway sold 1,701,561 carats for gross proceeds of $186.2-million, at an average price of $85 (U.S.) per carat ($109 per carat).

Commentary on diamond production and the rough diamond market

During 2017, the quality and size distribution of diamond recoveries at Renard were negatively impacted by high levels of diamond damage incurred during processing, producing a commensurate reduction in the average price achieved at sale. The corporation believes that significant value improvement may be achieved upon successful mitigation of the breakage to more acceptable levels. The source of the breakage has been localized, primarily, within the secondary cone crusher and tertiary high-pressure grinding roll crusher, and appears associated with the high proportion of hard, internal dilution inherent in Renard ore producing an abrasive environment within the crushers. The corporation believes that the introduction of ore-waste sorting, approved under an extraordinary capital plan by the board of directors in August, 2017, will contribute to a higher-quality diamond product through the removal of a large proportion of the abrasive dilution from the crushing circuits. Commissioning of the new ore-waste sorting circuit is expected to commence shortly.

Between the first sale of Renard diamonds in November, 2016, and the 10th sale in December, 2017, the average run-of-mine pricing for Renard diamonds, after accounting for size distribution and quality variations, increased in real terms by 13.5 per cent. This increasing trend reflected a positive reaction by the rough market to the qualities, colours and polished yields of the Renard diamond production, and increasing participation in the corporation's diamond tenders. This result was attained despite a challenging rough diamond market in 2017, which was characterized by an increase in sales from rough producers (including from three new diamond mining projects) and flat to low sales growth for polished diamonds and diamond jewellery. These market conditions were exacerbated by the Indian demonetization events of late 2016, which impacted rough diamond pricing for smaller and lower-quality items during the course of 2017. By year-end, the effect of the Indian demonetization event had largely been removed from the rough diamond market, and a strong holiday selling season, particularly in Asian markets, had resulted in moderate price growth at the start of 2018 for both rough and polished diamonds.

Subsequent to the year-end, the corporation announced on Jan. 29, 2018, that in the first tender of 2018 it had sold 138,687 carats were sold for gross proceeds of $14.4-million (U.S.) at an average price of $104 (U.S.) per carat. This is the highest price for Renard diamonds achieved to date, and reflected the strengthening diamond market and appreciable improvements in breakage levels, size distribution and quality mix.

Capital projects

Under the changed accounting policy, capital expenditures in the fourth quarter were $47.7-million, primarily related to the development of the underground mine and the construction of the ore-waste sorting circuit. For the year ended Dec. 31, 2017, capital expenditures stood at $126.9-million. Under the changed accounting policy, cash operating costs are lower and capital expenditures are higher than was contemplated in the 2017 guidance.

Development of the underground mine during the fourth quarter focussed on lateral development in kimberlite and waste for the drill drift on levels 160, 240 and 270, and also for the draw points on level 290. Development of the fresh air raise was also completed during this period. Lateral development comprised 1,227 metres compared with a plan of 1,062 metres (plus 16 per cent). On a yearly basis, lateral development stood at 4,869 metres compared with a plan of 4,460 metres (plus 9 per cent).

The first production blast in the underground mine occurred successfully on Dec. 20, 2017. Full production from the underground mine is on schedule to commence within the second quarter of 2018.

Updated 2018 guidance

Under the changed accounting policy, cash operating costs in 2018 are expected to be $48 to $50 per tonne processed ($75 to $77 per carat recovered), and capital expenditures are expected to be $100-million. This compares with previous 2018 guidance of $56 to $58 per tonne processed ($87 to $92 per carat recovered) and $82-million of capital expenditures. Other 2018 guidance is unimpacted by the accounting changes.

                        UPDATED 2018 GUIDANCE 
     (expressed in millions of dollars, except as otherwise noted)   

Mining and processing
Open-pit tonnes mined                                          2.7 million
Underground tonnes mined                                       2.2 million
Tonnes processed                                               2.5 million
Carats recovered                                               1.6 million
Grade (cpht)                                                            65
Cash operating cost per tonne processed                             $48-50
Cash operating cost per carat recovered                             $75-77
Selling and marketing
Carats sold (+7 DTC)                                           1.1 million
Carats sold (-7 DTC)                                               500,000
Average diamond pricing (+7 DTC)                $125 (U.S.) to $165 (U.S.)
Average diamond pricing (-7 DTC)                  $15 (U.S.) to $19 (U.S.)
Capital
Capital expenditures                                          $100-million

Mineral reserves update

Mineral reserves as of Dec. 31, 2017, have been updated based on mining depletion. At Dec. 31, 2016, proven and probable mineral reserves for the Renard diamond mine were 30.2 million tonnes at a grade of 66.3 carats per 100 tonnes (cpht) for 20.0 million attributable carats.

Exclusive of the mineral reserves, the Renard diamond mine includes additional indicated mineral resources of 2.8 million carats (6.1 million tonnes at 46 cpht), inferred mineral resources of 13.1 million carats (23.4 million tonnes at 56 cpht), and 33.0 million to 71.1 million carats of non-resource exploration upside (76.2 million to 113.2 million tonnes at grades ranging from 20 to 168 cpht). Readers are cautioned that the potential quantity and grade of any such exploration target are conceptual in nature, there has been insufficient exploration to define a mineral resource, and it is uncertain if further exploration will result in the target being delineated as a mineral resource. All kimberlites remain open at depth. The 2017 updated mineral resource incorporates geological data on kimberlite contacts and internal geology as revealed on the 160-metre, 270-metre and 290-metre levels in the Renard underground mine.

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 Quebec. Construction on the project commenced on July 10, 2014, and commercial production was declared on Jan. 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 Jan. 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 M. Patrick Godin, PEng (Quebec), chief operating officer, and Robin Hopkins, PGeol (Northwest Territories/Nunavut), vice-president, exploration, both qualified persons under National Instrument 43-101.

About Stornoway Diamond Corp.

Stornoway is a leading Canadian diamond exploration and production company listed on the Toronto Stock Exchange under the symbol SWY and headquartered in Montreal. A growth-oriented company, Stornoway owns a 100-per-cent interest in the world-class Renard mine, Quebec's first diamond mine.

We seek Safe Harbor.