Capital Resources

The Company has no operations that generate cash flow and its long-term financial success is dependant on management’s ability to discover economically viable diamond deposits. The diamond exploration process can take many years and is subject to factors that are beyond the Company’s control. Many factors influence the Company’s ability to raise funds, including the health of the resource market, the climate for diamond exploration investment, the Company’s track record and the experience and caliber of its management.

Several factors will influence the Company’s cash requirements in the near future. These factors include: a decision to proceed with further development of the Renard Project in Quebec, results from the Summer 2008 exploration programs and the Company’s exploration and development plans for 2009. The Company’s actual funding requirements may vary from those planned due to a number of factors, including the progress of exploration activity.

For the Company’s exploration and development plans for 2009, the Company intends to conduct modest programs of value-driven exploration focused on its key, advanced projects. It is anticipated that the majority of the planned exploration expenditures will be financed from current cash resources (primarily from the proceeds of flow-through financing completed in November 2008 and May 2009), and work will be tailored so as to provide the most efficient use of funds. Expenditures are planned for the following areas:

  • Mineral resource expansion and optimization at the Renard Diamond Project. Pending joint venture approval, this work program will include drilling and sampling on the Renard 2 and Renard 3 kimberlites leading to an update of the National Instrument (”NI”) 43-101 mineral resource statement.
  • Advanced assessment of the Aviat Project. This work program included the processing of a 200 tonne sample collected from the Eastern Sheet Complex in 2008. Results from this sample processing are discussed above.
  • Ongoing assessment of Stornoway’s extensive grass roots exploration portfolio, including opportunistic drill testing as appropriate.

The Company has historically financed its exploration programs through the issuance of equity capital, and through the use of a convertible debenture (issued in March 2007 and extinguished in July 2008) while at the same timetrying to reduce shareholder dilution by securing joint venture partners where appropriate and more recently, by the monetization of non-core assets. Recent malaise in the Canadian equity capital markets could make securing additional financing difficult in the short-term. The Company’s management intends to continue to seek out the best opportunities to maximize shareholder value by furthering exploration programs on its most promising projects and by generating new discoveries. However, failure to secure additional financing at reasonable terms may significantly impact the Company’s ability to continue as a going concern.

The Company’s consolidated financial statements for the year ended April 30, 2009 have been prepared in accordance with Canadian GAAP and on the basis of accounting principles applicable to a going concern, which assumes that the Company will be able to continue in operation for the foreseeable future and will be able to realize its assets and discharge its liabilities in the normal course of business. There are conditions and events at the present time that cast significant doubt on the validity of this assumption, as discussed below.

In order to finance the Company’s exploration programs and to cover administrative and overhead expenses, the Company historically has raised money through equity sales and from the exercise of convertible securities.

On March 16, 2007, the Company concluded a non-brokered sale of $20.0 million in unsecured convertible debentures to Agnico-Eagle (a related party) ($10.0 million) and Lorito Holdings Limited (“Lorito”) ($10.0 million). The proceeds of the debenture financing were used to repay the bridge loan that was used to finance the acquisition of Ashton in September 2006. The debentures would have matured March 16, 2009 and interest was payable under the debentures quarterly at 12% per annum. The Company issued two series of debentures, $10.0 million in Series A Debentures that provided for the Company to repay principal on the maturity date in cash or common shares of Stornoway (”Shares”) at the Company’s election and $10.0 million in Series B Debentures that provided for the Company to repay the principal on the maturity date in cash or Shares at the holder’s election. If the principal was repaid in Shares, the Shares would have been issued at a price of the lower of $1.25 and the five-day volume weighted average price of the Shares ending three trading days before the payment date. At the date of issuance, the debentures were segregated into a liability component of $17.08 million and an equity component of $2.92 million based on the estimated fair value of the holder’s conversion option. The Company estimated the fair value of the conversion option by using the Black-Scholes option pricing model with the following assumptions: two-year estimated life, 42.2% volatility and a risk-free rate of 4.1%.

In July 2008, the Company issued 22,222,222 common shares, split equally between Agnico-Eagle and Lorito, as redemption of the $10.0 million principal amount of debentures held by each of the companies. See “Results of Operations” above for details on the allocation of the fair value associated with the early redemption of the convertible debentures. Accrued interest to the July 31st redemption date of $289,315 was paid on July 31, 2008 by the issuance of 1,055,894 common shares issued at $0.2740 per share. As a result of this transaction, the Company has no debt repayment obligations.

In November 2008, the Company completed a brokered private placement with Canaccord Capital Corporation (”Canaccord” or the “Agent”), which consisted of 15,806,000 “flow-through” common shares of the Company for gross proceeds of $2,370,900. Concurrently, the Company completed the sale of 10,382,334 “flow-through” common shares for gross proceeds of $1,557,350 under the non-brokered private placement. Insiders of the Company subscribed for 435,000 “flow-through” common shares of the Company on the same terms as the arms’ length subscribers. The Company issued a total of 26,188,334 “flow-through” common shares and paid a 6% commission on certain subscriptions received, which consisted of cash and 521,077 agent’s commission shares and 298,242 finder’s commission shares. Management intends to use the total gross proceeds of $3,928,250 from both the brokered and non-brokered private placements to further exploration on the Renard Project in Quebec and certain of the Company’s other Canadian mineral properties.

In May 2009, the Company completed a brokered private placement, with Sandfire Securities Inc. as lead agent, which consisted of 8,421,276 “flow-through” common shares of the Company for gross proceeds of $1,431,617. The “flow-through” common shares were issued at a price of $0.17 per share and are subject to a four-month hold period expiring September 30, 2009. The Company paid a 7% cash commission on certain subscriptions received and issued 568,695 Compensation Warrants. The Compensation Warrants are exercisable at $0.17 to acquire one non-flow-through common share and will expire May 29, 2011. Expenditures from the flow-through shares are expected to constitute Canadian exploration expense (“CEE”) (as defined in the Income Tax Act) for the 2009 tax year and must be renounced to the subscribers under the terms of the subscription agreement.

At July 20, 2009 the Company had 12,265,485 stock options outstanding which, if exercised, would increase the Company’s available cash by approximately $12.4 million. However, the average exercise price of these options is $1.01, well in excess of the Company’s current market price of ~$0.14 per share.