Diamcor Mining Inc. (TSXV: DMI, OTC: DMIFF) Rough diamond prices improving / Another record quarter for DMI

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1 Siddharth Rajeev, B.Tech, MBA, CFA Analyst September 12, 2016 Diamcor Mining Inc. (TSXV: DMI, OTC: DMIFF) Rough diamond prices improving / Another record quarter for DMI Sector/Industry: Junior Mining Market Data (as of September 12, 2016) Current Price C$1.08 Fair Value C$2.45 Rating* BUY Risk* 4 (Speculative) 52 Week Range C$0.65 C$1.25 Shares O/S mm Market Cap C$53.57 mm Current Yield N/A P/E (forward) N/A P/B N/A YoY Return 5.9% YoY TSXV 48.4% *see back of report for rating and risk definitions Highlights Rough diamond prices have been on a recovery for the past 6 months, and hit a 52 week high in August Q (quarter ended June 30, 2016) was another record quarter for Diamcor Mining ( DMI, company ). The company sold 13,385 carats at an average price of US$142 per carat for revenues of US$1.91 million. DMI also had an additional 5,037 carats in inventory available for sale at the end of Q1. The company has so far sold a total of 71,413 carats for gross proceeds of US$12.46 million at an average rate of US$174 per carat. DMI reported positive EBITDA for the first time. EBITDA in Q was $0.44 million versus -$0.27 million in Q In April 2016, the company announced the receipt of its much awaited Water Use License, approved by the South African Department of Water and Sanitation. Balance sheet continues to be highly leveraged. Total debt was $8.72 million at the end of Q DMI s partner, Tiffany & Co. (NYSE: TIF), holds $7.62 million of the debt. The company started regular repayment of debt in July. On September 1, 2016, the company closed a $5.82 million financing (oversubscribed) by issuing 5.29 million units at a unit price of $1.10. We maintain our BUY rating and fair value estimate at $2.45 per share. Key Financial Data (YE- March 31) (C$) (9M) Cash 793,622 3,671,238 2,042, ,224 Working Capital (2,837,520) 971, ,945 (514,072) Total Debt 11,360,737 8,250,820 7,950,883 8,342,799 Total Assets 7,258,428 11,795,700 10,884,266 8,621,635 Revenues 539,979 4,287,129 3,073,905 3,219,956 Net Income (4,305,834) (3,693,073) (3,126,302) (1,766,174) EPS (0.10) (0.09) (0.05) (0.02) Diamcor Mining Inc. holds a 70% interest in the Krone-Endora diamond project and has a strategic alliance with Tiffany & Co. Trial mining is underway. The company has sold US$10.55 million worth of rough diamonds so far.

2 Page 2 Rough diamond prices bounce back In our previous reports, we had predicted a stronger rough diamond prices in 2016 primarily because of the announcement by major producers, De Beers and Alrosa (MCX: ALRS) to cut production. Prices had been on a declining trend since mid The following chart shows the strong growth in the Global Rough Diamond Price Index (developed by Industry Analyst Paul Zimnisky) in the past 6 months. Source: The Diamond Loupe The following recent developments indicate the improvement in rough diamond sales: According to the Antwerp World Diamond Centre, the value of Antwerp's rough diamond trade increased by 23% YOY in August. Antwerp's rough diamond exports in the first 8 months were up by 7% YOY. On September 6, 2016, De Beers announced that their most recent sales cycle (auction) saw a 19% increase to US$630 million from the previous cycle. This compares to sales of just US$360 million in the same time in the previous year. Anglo American (LSE: AAL) stated that De Beers' EBIT in the first half of 2016 was up by 2% YOY primarily due to higher revenues from rough diamond sales. Revenues increased despite a decline in the production of rough diamonds by 15% YOY to 13.3 million carats. A key positive for diamonds is that, unlike most other commodities, prices are not overly dependent on China s consumption. The U.S. is the major consumer, accounting for 35% - 40% of the total global demand. We continue to believe the strength in the U.S. economy will keep the demand for rough diamonds steady, offset by the slower demand growth in China.

3 Page 3 Record sales and revenues in Q In Q1-2016, the company reported the highest ever sales since commencing sales in November Approximately 13,385 carats were sold at an average price of US$142 per carat for record quarterly revenues of US$1.91 million. At the end of Q1, the company also had an additional 5,037 carats in inventory available for sale. The following table shows all diamond sales so far. The company has so far sold a total of 71,413 carats for gross proceeds of US$12.46 million at an average rate of US$174 per carat. Carats Revenues (US$, M) US$ per Carat Nov-12 3,580 $0.51 $143 Jul-13 3,123 $0.42 $133 Sep-13 4,753 $0.86 $180 Oct-13 3,863 $0.58 $150 Oct-13 * 91.7 $0.82 $8,924 Jan'14 - Mar'14 (Q4-2013) 4,352 $1.01 $233 Jan'14 - Mar'14 * 43.9 $0.32 $7,242 Apr'14 - Jun'14 (Q1-2014) 2,507 $0.49 $194 Jul'14 - Sep'14 (Q2-2014) 3,449 $0.55 $161 Oct'14 - Dec'14 (Q3-2014) 3,579 $0.79 $222 Jan'15 - Mar'15 (Q4-2014) 4,619 $0.84 $182 Apr'15 - Jun'15 (Q1-2015) 2,856 $0.46 $159 Jul'15 - Sept'15 (Q2-2015) 4,846 $0.68 $140 Oct'15 - Dec'15 (Q3-2015) 9,469 $1.20 $127 Jan'16 - Mar'16 (Q4-2015) 6,897 $1.03 $149 Apr'16 - Jun'16 (Q1-2016) 13,385 $1.91 $142 Total 71,413 $12.46 $174 * Large Gem Quality Diamond Sale Note The figures in the table above are slightly different from the figures disclosed by the company due to rounding. On April 11, 2016, the company announced the receipt of its much awaited Water Use License, approved by the South African Department of Water and Sanitation. The license provides the company the ability to extract 410,148 cubic meters of water per year, which can support the company s long-term processing target of 300,000 tons per month. Subsequently, Diamcor completed four additional water boreholes associated with the Water Use License. The additional water supply will enable the company to increase processing of all size fractions of material up to 45mm. Most of the materials processed so far have been

4 Page 4 in the +1.0mm to -26.0mm size range. In December 2015, the company had announced the installation of a crushing circuit, along with Tomra XRT diamond recovery technology, for the processing of material in the +26.0mm size. Our discussions with management indicated that the Tomra system met their expectations, and that lower water consumption is its key benefit. Management also indicated that the extensive testing of the Tomra XRT system indicated it would be suited to larger size fraction processing within the circuit. Management has identified the following as the key plans for the next 12 months: Advance to 24/7 operations in the near-term. Continue optimization of the processing plant and operations to support continued growth in processing volumes. Transition into large-scale trial mining exercises to assist the company in arriving at initial production decisions for the K1 area. Complete bulk sampling on the surrounding areas to assist the company in developing its long-term strategy and targets for the project. Q1 revenues up by 317% YOY In Q1-2016, DMI reported 317% YOY revenue growth to $2.40 million as a result of the record sales mentioned earlier. The company had reported 52% YOY revenue growth to $4.68 million in FY2015. The following chart shows quarterly revenues since Q

5 Page 5 Gross margins were 37% in Q versus 39% in Q As mentioned in our previous reports, volatility in margins is expected as the company has yet to achieve commercial production. Margins Q Q Gross 22.04% 21.63% 38.95% 36.53% EBITDA % % % 18.39% EBIT % % % 9.59% EBT % % % 1.29% Net % % % 1.61% General and Administrative ( G&A ) expenses, excluding stock based compensation, amortization, and interest expenses, decreased by 9% YOY to $0.43 million. We were very pleased with this considering that the company was able to reduce expenses by 3.4% YOY in FY2015. The company reported positive EBITDA for the first time. EBITDA in Q was $0.44 million versus -$0.27 million in Q The company reported net income of $0.04 million (EPS: $0.00) in Q versus a net loss of $0.71 million (EPS: -$0.01) in the comparable period in the previous year. In FY2015, the company had reported a net loss of $4.23 million (EPS: -$0.05). Net losses were $2.05 million excluding stock based compensation. As mentioned in our previous reports, we will start reporting our revenue and EPS estimates once the project commences commercial production. Free Cash Flows ( FCF ) were -$0.40 million in Q versus -$0.61 million in Q Q Q Cash Flow from Operation (1,584,233) (157,992) (123,303) (378,570) Cash Flow from Financing 1,714,732 1,066, ,000 - Cash Flow from Investing (1,788,307) (408,779) (490,727) (22,335) Free Cash Flow to Firm (3,372,540) (566,771) (614,030) (400,905) At the end of Q1-2016, the company had $0.42 million in cash. Working capital was -$1.62 million. The table below shows a summary of the company s cash and liquidity position.

6 Page 6 Liquidity Analysis Q Cash 2,042, , ,026 Working Capital 371,945 (1,044,719) (1,621,882) Current Ratio Debt / Capital 84.3% 112.5% 111.8% EBIT Interest Coverage Ratio (3.25) (5.30) 1.16 The company had $8.72 million in debt at the end of Q1-2016, which included: $2.16 million term loan (interest - 9% p.a.; repayment of $143k per month started in July 2016 for 16 months) $3.28 million term loan (interest 9% p.a.; repayment of $103k per month started in July 2016 for 36 months) $2.18 million convertible debenture (interest 9% p.a.; conversion price - $1.60 per share; repayment of $69k per month started in July 2016). $1.09 million due to Nozala Investments no terms of repayment interest of 12% p.a. DMI s partner, Tiffany & Co. (NYSE: TIF), holds $7.62 million of the above mentioned debt. Equity Financing On September 1, 2016, the company closed a $5.82 million financing (oversubscribed) by issuing 5.29 million units at a unit price of $1.10. Each unit consists of a common share and one-half warrant (exercise price - $1.60 until August 2019). These proceeds will be used for the acquisition of additional operational equipment and materials for the Krone-Endora at Venetia project, and for working capital. Stock options and warrants: We estimate the company currently has 6.85 million warrants (weighted average exercise price of $1.57), and 6.52 million stock options (weighted average exercise price of $1.12) outstanding. Approximately 3.75 million options are currently in the money. Rating We are maintaining our fair value estimate of $2.45 per share and BUY rating (Risk 4: Speculative). Risks The following risks, though not exhaustive, may cause our estimates to differ from actual results: The value of the company is heavily dependent on rough diamond prices. The Krone-Endora project is in the test mining phase and there is no guarantee that full scale production will be achieved and that it will be profitable. The company is subject to all risks associated with operating in a foreign country (South Africa) with the potential for civil or political unrest. Our fair value estimate is based on a resource estimate much higher than the current NI resource estimate.

7 Page 7 The project does not have a NI compliant economic study completed. Delays in achievement of commercial production. Balance sheet is currently leveraged. Heavy rains may negatively impact mining operations. Exchange rate risks.

8 Page 8 Fundamental Research Corp. Equity Rating Scale: Buy Annual expected rate of return exceeds 12% or the expected return is commensurate with risk Hold Annual expected rate of return is between 5% and 12% Sell Annual expected rate of return is below 5% or the expected return is not commensurate with risk Suspended or Rating N/A Coverage and ratings suspended until more information can be obtained from the company regarding recent events. Fundamental Research Corp. Risk Rating Scale: 1 (Low Risk) - The company operates in an industry where it has a strong position (for example a monopoly, high market share etc.) or operates in a regulated industry. The future outlook is stable or positive for the industry. The company generates positive free cash flow and has a history of profitability. The capital structure is conservative with little or no debt. 2 (Below Average Risk) - The company operates in an industry where the fundamentals and outlook are positive. The industry and company are relatively less sensitive to systematic risk than companies with a Risk Rating of 3. The company has a history of profitability and has demonstrated its ability to generate positive free cash flows (though current free cash flow may be negative due to capital investment). The company s capital structure is conservative with little to modest use of debt. 3 (Average Risk) - The company operates in an industry that has average sensitivity to systematic risk. The industry may be cyclical. Profits and cash flow are sensitive to economic factors although the company has demonstrated its ability to generate positive earnings and cash flow. Debt use is in line with industry averages, and coverage ratios are sufficient. 4 (Speculative) - The company has little or no history of generating earnings or cash flow. Debt use is higher. These companies may be in start-up mode or in a turnaround situation. These companies should be considered speculative. 5 (Highly Speculative) - The company has no history of generating earnings or cash flow. They may operate in a new industry with new, and unproven products. Products may be at the development stage, testing, or seeking regulatory approval. These companies may run into liquidity issues, and may rely on external funding. These stocks are considered highly speculative. Disclaimers and Disclosure The opinions expressed in this report are the true opinions of the analyst about this company and industry. Any forward looking statements are our best estimates and opinions based upon information that is publicly available and that we believe to be correct, but we have not independently verified with respect to truth or correctness. There is no guarantee that our forecasts will materialize. Actual results will likely vary. The analyst and Fundamental Research Corp. 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