Form 51-102F1 Interim Management Discussion and Analysis1 For Stornoway Diamond Corporation (“Stornoway” or the “Company”)

Containing Information up to and including December 10, 2012

OVERALL PERFORMANCE Stornoway is a leading Canadian diamond exploration and development company listed on the Toronto Stock Exchange. Stornoway is engaged in the exploration and development of diamond projects in Canada, with a highly prospective pipeline of projects from feasibility stage to grass roots exploration. Stornoway’s principal focus is its 100% owned Renard Diamond Project located in north-central Québec, a feasibility-stage project with the potential to become Québec’s first diamond mine. Four additional projects in eastern Nunavut and on the Ontario/Québec border are classified as being at an “advanced” stage, and Stornoway is also engaged in exploration at several early stage grass roots projects throughout Canada in geologically prospective, underexplored regions. Stornoway’s strategy is to build a growth oriented company that succeeds in the practical business of mining and selling rough diamonds. Stornoway’s long term view of the rough diamond market is positive, with tightening mine supply and growing demand, particularly in developing markets, resulting in real, long term price growth. In this context, Stornoway is well positioned to move Renard towards commercial production, and to add diamond resources from existing internal growth projects or acquisitions as new opportunities are identified. In addition, the Company has a management team with experience at each stage of the diamond pipeline, from exploration through development, mining and marketing.

As of December 10, 2012, the Company holds interests, directly or through joint ventures, in a property portfolio of some 17 properties representing approximately 1.3 million acres that can be roughly subdivided into 118,000 acres of ‘development’ stage projects (the Foxtrot Property, which includes the Renard Diamond Project), 840,000 acres of ‘advanced’ exploration properties (Aviat, Qilalugaq, Churchill and Timiskaming) and 350,000 acres of ‘early stage’ projects (Pikoo property and others).

Forward-Looking Statements

This document contains "forward-looking statements" within the meaning of Canadian securities legislation and the United States Private Securities Litigation Reform Act of 1995. These forward-looking statements are made as of the date of this document and the Company does not intend, and does not assume any obligation, to update these forward-looking statements, except as required by law.

These forward-looking statements include, among others, statements with respect to Stornoway's objectives for the ensuing year, our medium and long-term goals, and strategies to achieve those objectives and goals, as well as statements with respect to our beliefs, plans, objectives, expectations, anticipations, estimates and intentions. All forward-looking statements and information are based on Stornoway's current beliefs as well as assumptions made by and information currently available to Stornoway concerning anticipated financial performance, business prospects, strategies, regulatory developments, development plans, exploration, development and mining activities and commitments. Although management considers these assumptions to be reasonable based on information currently available to it, they may prove to be incorrect.

Forward-looking statements relate to future events or future performance and reflect current expectations or beliefs regarding future events and include, but are not limited to, statements with respect to: (i) the amount of mineral

1 Note to Reader

The following management discussion and analysis (“MD&A”) of the Company’s financial condition and results of operations should be read in conjunction with the audited consolidated financial statements for the years ended April 30, 2012 and 2011 and the condensed interim consolidated financial statements for the six months ended October 31, 2012 and October 31, 2011 together with the notes thereto. These financial statements have been prepared in Canadian funds in accordance with International Financial Reporting Standards (“IFRS”).

1 resources and exploration targets; (ii) the amount of future production over any period; (iii) net present value and internal rates of return of the mining operation; (iv) assumptions relating to capital costs, operating costs, tax rates, royalties and other cost metrics set out in the Feasibility Study; (v) assumptions relating to gross revenues, operating cash flow and other revenue metrics set out in the Feasibility Study; (vi) assumptions relating to recovered grade, average ore recovery and other mining parameters set out in the Feasibility Study; (vii) mine expansion potential and expected mine life; (viii) expected time frames for completion of permitting and regulatory approvals and making a production decision; (ix) the expected time frames for delivery of a winter road by the Québec Ministère des Transports, construction of a mining grade road by Stornoway and completion generally of the Route 167 extension and the financial obligations or costs incurred by Stornoway in connection with such road extension; (x) future exploration plans; (xi) future market prices for rough diamonds; and (xii) sources of and anticipated financing requirements. Any statements that express or involve discussions with respect to predictions, expectations, beliefs, plans, projections, objectives, assumptions or future events or performance (often, but not always, using words or phrases such as “expects”, “anticipates”, “plans”, “projects”, “estimates”, “assumes”, “intends”, “strategy”, “goals”, “objectives” or variations thereof or stating that certain actions, events or results “may”, “could”, “would”, “might” or “will” be taken, occur or be achieved, or the negative of any of these terms and similar expressions) are not statements of historical fact and may be forward-looking statements.

Forward-looking statements are made based upon certain assumptions by Stornoway or its consultants and other important factors that, if untrue, could cause the actual results, performances or achievements of Stornoway to be materially different from future results, performances or achievements expressed or implied by such statements. Such statements and information are based on numerous assumptions regarding present and future business strategies and the environment in which Stornoway will operate in the future, including the price of diamonds, anticipated costs and ability to achieve goals. Certain important factors that could cause actual results, performances or achievements to differ materially from those in the forward-looking statements include, but are not limited to: (i) receipt of approval for the Environmental and Social Impact Assessment; (ii) required capital investment and estimated workforce requirements; (iii) estimates of net present value and internal rates of return; (iv) receipt of regulatory approvals on acceptable terms within commonly experienced time frames; (v) the assumption that a production decision will be made, and that decision will be positive; (vi) anticipated timelines for the commencement of mine production; (vii) anticipated timelines related to the delivery of a winter road by the Québec Ministère des Transports, construction of a mining grade road by Stornoway and completion generally of the Route 167 extension and the impact on the development schedule at Renard; (viii) anticipated timelines for community consultations and the impact of those consultations on the regulatory approval process; (ix) market prices for rough diamonds and the potential impact on the Renard Project’s value; (x) the Company’s ability to raise the required capital to construct a mine at the Renard Diamond Project; and (xi) future exploration plans and objectives.

By their very nature, forward-looking statements involve inherent risks and uncertainties, both general and specific, and risks exist that estimates, forecasts, projections and other forward-looking statements will not be achieved or that assumptions do not reflect future experience. We caution readers not to place undue reliance on these forward- looking statements as a number of important risk factors could cause the actual outcomes to differ materially from the beliefs, plans, objectives, expectations, anticipations, estimates, assumptions and intentions expressed in such forward-looking statements. These risk factors may be generally stated as the risk that the assumptions and estimates expressed above do not occur, including the assumption in many forward-looking statements that other forward-looking statements will be correct, but specifically include, without limitation, (i) risks relating to variations in the grade, kimberlite lithologies and country rock content within the material identified as mineral resources from that predicted; (ii) variations in rates of recovery and breakage; (iii) the greater uncertainty of exploration targets; (iv) developments in world diamond markets; (v) slower increases in diamond valuations than assumed; (vi) risks relating to fluctuations in the Canadian dollar and other currencies relative to the US dollar; (vii) increases in the costs of proposed capital and operating expenditures; (viii) increases in financing costs or adverse changes to the terms of available financing, if any; (ix) tax rates or royalties being greater than assumed; (x) results of exploration in areas of potential expansion of resources; (xi) changes in development or mining plans due to changes in other factors or exploration results of Stornoway; (xii) changes in project parameters as plans continue to be refined; (xiii) risks relating to receipt of regulatory approvals or the implementation of the existing Impact and Benefits Agreement with aboriginal communities; (xiv) the effects of competition in the markets in which Stornoway operates; (xv) operational and infrastructure risks; (xvi) technical, environmental, permitting and execution risk relating to the construction by Stornoway of a mining grade road forming part of the Route 167 extension, (xvii) weather conditions or other unpredictable events which may impact the construction or planned availability of a winter road by March 2013; and (xviii) the additional risks described in Stornoway's Annual Information Form, its

2 annual and interim MD&As, its other disclosure documents and Stornoway's anticipation of and success in managing the foregoing risks. Stornoway cautions that the foregoing list of factors that may affect future results is not exhaustive.

Highlights for the three months ended October 31, 2012 and the period ended December 10, 2012:

During the three months ended October 31, 2012 as well as the period ended December 10, 2012, the Company achieved several notable objectives for the Renard Diamond Project:  Social Acceptance: o In October 2012, the Québec Ministère des Ressources naturelles issued the Mining Lease for the Renard Diamond Project. The Mining Lease represents the formal transference of mineral title from Québec to Stornoway, and is valid for a period of 20 years. o In November 2012, at the annual meeting of the Québec Mineral Exploration Association, Stornoway was awarded the E3 Plus award for the “high level of environmental and social responsibility” shown in the advancement of the Renard Diamond Project. o In December 2012, Stornoway received the global Certificate of Authorization for the Renard Diamond Project from the Québec Ministère du Développement Durable, de l’Environnement,de la Faune et des Parcs. The Certificate of Authorization represents the principal regulatory approval required to commence mine construction, and was issued by the Québec regulators following more than 2 years of formal environmental study, community engagement and public consultation under the terms of the James Bay and Northern Québec Agreement.  Development: O In November 2012, Stornoway’s wholly-owned subsidiary Les Diamants Stornoway (Canada) Inc. entered into a Framework Agreement and an associated Letter of Intent with the Government of Québec for the financing and completion of the Route 167 Extension (the “Mining Road”) under Stornoway’s direct management. O In December 2012, Stornoway completed a Financing Agreement with the Québec Ministère des Finances et de l’Économie under which its wholly-owned subsidiary Les Diamants Stornoway (Canada) Inc. will be financed to complete the construction of a mining-grade access road to the Renard Diamond Project.  Exploration: o In November 2012, Stornoway announced the completion of the field portion of a bulk sample program on the Renard 65 Kimberlite pipe, located at Stornoway’s 100% owned Renard Diamond Project.  Financing: o In September 2012, Stornoway announced the execution of a Mandate Letter with seven financial institutions in connection with a potential senior debt financing of up to US$475 million for the Renard Diamond Project.

ACTIVITIES UPDATE - RENARD DIAMOND PROJECT, QUÉBEC Stornoway's principal mineral property is the Renard Diamond Project, part of the larger Foxtrot Property in the Otish Mountains located in Québec, Canada. Stornoway’s wholly owned subsidiary Les Diamants Stornoway (Canada) inc. (“Les Diamants Stornoway”) has a 100% interest in the Foxtrot Property, which contains the Renard cluster of kimberlite bodies. Until April 1, 2011, this interest was held as a 50/50 joint venture between Les Diamants Stornoway and SOQUEM Inc.’s (“SOQUEM”) wholly owned subsidiary, Diaquem (see “Significant Shareholder” below). Diaquem retains a 2% gross revenue royalty on life of mine production from Renard. The Renard Diamond Project 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.

3 The technical disclosure for the Renard Diamond Project included in this interim MD&A, with the exception of the technical disclosure related to the R65 bulk sample collection described below, has been reviewed by Patrick Godin, Ing. (Québec). Mr. Godin is the Company’s Chief Operating Officer (“COO”) and a Qualified Person (“QP”) under NI 43-101.

In November 2011, Stornoway released the results of a Feasibility Study for Renard that highlighted the potential of the project to become a significant producer of high value rough diamonds over a long mine life. National Instrument (“NI”) 43-101 compliant Probable Mineral Reserves stand at 18.0 million carats, with a further 17.5 million carats classified as Inferred Mineral Resources, and 23.5 to 48.5 million carats classified as non-resource exploration upside. All kimberlites remain open at depth. Pre-production capital cost stands at C$802 million, with a life of mine operating cost of C$54.71/tonne giving a 68% operating margin over an initial 11 year mine life. Readers are referred to the NI 43-101 technical report filed January 3, 2012 under Stornoway's profile on the SEDAR website at www.sedar.com for further details and assumptions relating to the project. Following the release of the Feasibility Study and the filing of a NI 43-101 technical report in early 2012, the Company’s Board of Directors authorized management to proceed to the detailed engineering and project financing phases, which are presently ongoing. A formal production decision is expected to be made following, among other things, financing for the project development. The project development schedule is subject to the receipt of various permits, financing and construction access to the site via the Route 167 extension. Readers are referred to the “Risks” section of the Company’s most recently filed AIF, dated July 30, 2012 and available under the Company’s profile on Sedar (www.sedar.com) for more details about how these risks could affect the development schedule for the Renard Diamond Project. See also the “Risks and Uncertainties” section below for additional information.

Permitting The Renard Diamond Project falls under the environmental protection regimes of the James Bay and Northern Québec Agreement (the “JBNQA”) and the Canadian Environmental Assessment Act (“CEAA”).On December 28, 2011, the Company filed an Environmental, Social and Impact Assessment (“ESIA”) report with the regulators. The submission of the ESIA, which was authored by Roche, was an important milestone in the permitting of the project. The ESIA followed the completion of a positive Feasibility Study for the Renard Diamond Project in mid-November 2011 and the release of a Certificate of Authorization for the Route 167 Extension highway development project by the MDDEP in early December 2011. The Renard ESIA is a comprehensive document that incorporates many years of social and environmental baseline study and stakeholder consultations within the communities of Mistissini, Chibougamau and Chapais. In particular, it has benefitted from the participation of individual community members in the Renard Environmental Exchange Group which met regularly throughout 2011 (and continued to meet regularly in 2012) in the Cree community of Mistissini. The Renard ESIA describes a small-footprint project with limited impact on local land, water and air quality, all of which are well within existing Québec and federal standards. At the same time, the project offers substantial economic benefits in the form of long term employment and business opportunities across the James Bay region of Québec. In October 2012, the Québec Ministère des Ressources naturelles issued the Mining Lease for the Renard Diamond Project. The Mining Lease represents the formal transference of mineral title from Québec to Stornoway, and is valid for a period of 20 years. In December 2012, Stornoway received the global Certificate of Authorization for the Renard Diamond Project from the Québec Ministère du Développement Durable, de l’Environnement,de la Faune et des Parcs (“MDDEFP”). The Certificate of Authorization represents the principal regulatory approval required to commence mine construction, and has been issued by the Québec regulators following more than 2 years of formal environmental study, community engagement and public consultation under the terms of the JBNQA. Receipt of the global Certificate of Authorization represents the most significant milestone in the development of the Renard Diamond Project achieved to date. It comes just 11 months since the filing of the project’s ESIA, an accomplishment that reflects the high quality of the work undertaken by Stornoway’s project team and partners, and the broad support that the project enjoys within the nearby communities of Mistissini, Chibougamau and Chapais. The MDDEFP global Certificate of Authorization is the most important element of the permitting process for mining projects in Québec.

4 The Renard Diamond Project falls under the social and environmental protection regimes of both the JBNQA and the CEAA. Successful public hearings on the project were held by the federal Canadian government and Québec in June and August of this year respectively. Stornoway expects to receive regulatory authorizations from the Fisheries and Oceans Canada and Environment Canada shortly, following the conclusion of the federal government’s evaluation of the project under the CEAA. The Québec Certificate of Authorization has been issued by the MDDEFP upon the recommendation of the review committee of the JBNQA (“COMEX”).

The Renard Environmental and Social Impact Assessment, as well as the project’s Environmental Baseline Study and Restoration Plan, are available in their entirety on Stornoway’s website (www.stornowaydiamonds.com/renard/esia).

In November 2012 at the annual meeting of the Québec Mineral Exploration Association, Stornoway was awarded the E3 Plus award for the “high level of environmental and social responsibility” shown in the advancement of the Renard Diamond Project. The award was accepted by Patrick Godin, Stornoway’s COO, Ghislain Poirier, Vice President, Public Affairs and Martin Boucher, Manager, Sustainable Development. This award recognizes the many years of high quality work undertaken to establish the environmental and social framework necessary for the successful development of the Renard Diamond Project. Over the past two years in particular this involved many thousands of hours of diligent environmental study and baseline assessment with key stakeholders including the Crees of the Eeyou Istchee and the communities of Chibougamau and Chapais.

Route 167 Extension – Framework and Financing Agreements On November 15, 2012, Stornoway’s wholly-owned subsidiary Les Diamants Stornoway entered into a Framework Agreement and an associated Letter of Intent (collectively the “Agreement”) with the Government of Québec for the financing and completion of the Route 167 Extension (the “Mining Road”) under Stornoway’s direct management. The Agreement is designed to ensure timely road access to the Renard Diamond Project and the commencement of mine construction during 2013, as previously contemplated. Key features of the new Agreement are as follows:  Stornoway to assume the completion of segments “C” and ”D” of the Route 167 Extension as a single lane mining grade road; and  Québec to provide Stornoway with financing for the estimated construction cost of segments “C” and “D”. In addition, and in support of Stornoway’s construction schedule for Renard, Québec has agreed that:  The Québec Ministère des Transports (“MTQ”) shall continue with the construction of a winter road this season as previously planned, providing temporary road access to Renard by March 2013; and  The Québec MDDEFP and the MTQ shall transfer all relevant authorizations for Stornoway to commence mining road construction by April 2013. As a result of the Agreement, Stornoway now anticipates first all-season vehicle access to the Renard project site by the 4th Quarter of 2013, compared to July 2013 previously.

On December 6, 2012, Les Diamants Stornoway executed a Financing Agreement with the Québec Ministère des Finances et de l’Économie (“MFE”) under which the Company will be financed to complete the construction of a mining-grade access road to the Renard Diamond Project (the “Renard Mine Road”). The Financing Agreement is pursuant to a Framework Agreement and associated Letter of Intent executed November 15, 2012 between Québec and the Company.

The Framework Agreement and the now-completed Financing Agreement are designed to ensure all-season road access to Renard during 2013. Features of the Financing Agreement are as follows:  Québec to provide Stornoway with a credit facility of up to C$77m (“Loan A”) to complete the road construction work, at an annual interest rate of 3.35% percent, for a term of 15 years, with repayment beginning 48 months following first disbursement, and deferrable up to 2 years due to any delay in the attainment of commercial production at Renard past July 1, 2016.

 Québec to provide Stornoway an additional overrun facility of up to C$7.7m (“Loan B”), at an annual interest rate of 6.3% percent, with repayments concurrent with Loan A.

5  Both Loans A and B are unsecured, subordinated, and pre-payable without penalty. Stornoway is not required to use the full amount of the Loans in the event construction costs are less than the amount of the Loans, and interest will only be calculated on the basis of disbursements requested by Stornoway.

 Stornoway undertakes to complete construction of the Renard Mine Road no later than June 30, 2015, subject to certain terms, including terms of the previously announced Framework Agreement.

On the basis of the construction schedule as currently anticipated, Stornoway expects to request an initial disbursement under Loan A during the month of December 2012.

Construction on a 240km long extension of the Route 167 into the Otish Mountains region of Québec, providing all- season road access to Renard by way of the communities of Mistissini and Chibougamau, began in February 2012 under the auspices of the MTQ. Construction is being undertaken in four segments, “A” to “D”.

Under the terms of the November 15, 2012 Framework Agreement between Stornoway and the MFE, the MTQ and the Québec Ministère des Ressources Naturelles (“MRN”), the MTQ will complete the first 143km of the road over segments A and B as a 70km/hr two-lane gravel highway, as previously planned. Starting in April 2013, Stornoway will assume construction of the remaining 97km covered by segments C and D as a 50km/hr single-lane mining grade road. To facilitate this schedule, the MTQ has committed to complete a winter road by March 2013, allowing temporary access to Renard and the mobilization of fuel, road construction equipment and camps. Given the reduced scope of the mining road that will be built on segments C and D, and the progress that has been made to date on segments A and B, it is expected that this construction plan will allow all-season road access to be available to Renard starting in the 4th Quarter of 2013 and mine construction to commence forthwith, subject to financing. Maintenance costs on segments C and D will be borne by Stornoway, and by the MTQ on segments A and B. The cost of the Renard Mine Road has been estimated by Stornoway at C$77 million, including a 15% contingency.

The Framework Agreement provides for the termination of, and replaces, the two pre-existing agreements between Stornoway and Québec dated August 1, 2011, wherein Stornoway agreed to contribute C$44 million to the construction of the Route 167 Extension at a 6.3% interest rate over 10 years, and up to C$1.215 million per year to the road’s maintenance.

The successful conclusion of the Framework and Financing Agreements removes a major element of uncertainty over the development schedule for the Renard Diamond Project and provides the Company with control of that schedule for the first time. The financing terms negotiated to finance the Company’s completion of sections “C” and “D” of the Route 167 extension are beneficial to Stornoway, and are expected to have a minimal impact on the project’s overall valuation and financing capacity. Management views these agreements as an excellent example of government and the mining industry working in partnership to achieve a common goal.

Financing Strategy – Renard Diamond Project The Company is currently pursuing a financing strategy for the Renard Diamond Project based on a combination of project debt and equity. The Company is actively exploring a broad range of financing options for the project within the commercial bank debt, bond and equity markets, in addition to financing options tied to future diamond supply. The Company also actively pursues corporate development opportunities in the context of the Renard project financing strategy, including potential asset acquisitions or dispositions, and incurs professional fees as a result.

On September 6, 2012, the Company announced the execution of a Mandate Letter with seven financial institutions (the “Mandated Lead Arrangers”) in connection with a potential senior debt financing for the Renard Diamond Project. The Mandated Lead Arrangers are Bank of Montreal, Caterpillar Financial, Export Development Canada, Investissement Québec, Nedbank Capital Limited (London Branch), Société Générale (Canada Branch) and The Bank of Nova Scotia. The Mandate Letter establishes the terms under which the Mandated Lead Arrangers have been appointed to arrange senior loans of up to US$475 million. It does not constitute a commitment to underwrite, provide or secure financing, which remains subject to due diligence, the completion of definitive loan documentation, credit and other approvals, and the terms and conditions of the term sheet attached to the Mandate Letter, among other things.

6 The Mandate Letter contemplates the completion of technical, environmental, social, marketing, insurance, financial and legal due diligence this year, the execution of a commitment letter in Q1 2013, and the completion of definitive documentation in Q2 2013.

Management’s objective in financing Renard is to minimize the capital that has to be raised to construct the project, and to minimize the equity portion of that capital. The Mandate Letter is the first step in this direction, and reflects well on the strength of the project and the credentials of Stornoway’s operating team. The Company continues to be greatly assisted by the support of its principal shareholders, in particular DIAQUEM Inc., a subsidiary of Investissement Québec, with whom the Company entered into a $100 million credit support agreement in April 2011 and who hold a 25% pre-emptive right to subscribe to new equity.

R65 Bulk Sample Mr. David Skelton, P.Geo. (QC), P.Geol (AB), Vice President, Project Development for Stornoway is a Qualified Person as defined under NI 43-101 and was responsible for supervising the Renard 65 bulk sample collection program at the Renard Diamond Project. Mr Skelton has reviewed and approved the scientific and technical information contained below.

In November 2012, the Company completed the field portion of a bulk sample program on the Renard 65 Kimberlite pipe, located at the Renard Diamond Project. The objective of the bulk sample program is to collect a large enough parcel of diamonds to allow the conversion of material that is currently classified as an Inferred Mineral Resource at Renard 65 to an Indicated Mineral Resource and then, if warranted, to a Mineral Reserve. Sampling commenced in July with the objective of collecting five thousand tonnes from a surface trench through blasting. Following the trenching, a sample of approximately 5,147 dry tonnes of kimberlite from Renard 65 was processed at the 10 tonne per hour Dense Media Sample plant located at the Renard project site. A heavy mineral concentrate produced by the plant is now undergoing final diamond recovery at the Company’s lab facilities. Diamond results are expected in Q1 2013. Given the estimated diamond content at the sampling site, it is expected that approximately 1,000 carats of diamonds will be recovered, which will be sent to Antwerp, Belgium for valuation.

Renard 65 is lower grade than the other four kimberlites contained within the Renard Mineral Resource, but it is the largest pipe discovered to date at Renard and is amenable to large scale open-pit mining. It is anticipated that the successful conversion of Inferred Mineral Resources at Renard 65 to a Mineral Reserve will allow the Company to plan for an expanded processing rate and an extension of the reserve mine life beyond the current 11 years. This is expected to add value to the project.

The reader is cautioned that mineral resources that are not mineral reserves do not have demonstrated economic viability. In addition, the potential quantity and grade of any exploration target is conceptual in nature, and it is uncertain if further exploration will result in it being delineated as a mineral resource.

Next Steps

In July 2012, the Company’s Board of Directors approved a $20.8 million budget for pre-development work at the Renard Diamond Project. The focus of this work is detailed engineering and design and site preparation activities. As a component of this program of work, the Company expects to enter into a contract covering project engineering, procurement and construction management (“EPCM”) for the process plant, water treatment plant, accommodation and maintenance facilities, and site utilities. The Company’s mining team based in Longueuil, Québec will be expanded in 2013 and will assume responsibility for design of the open pit and underground mine, design of the processed kimberlite containment facility, and security operations. The Company’s strategy is to build upon its already strong operating credentials, recognizing that in-house expertise is an essential element for the successful growth of any diamond mining business. In parallel with its project financing activities, Stornoway has substantially completed a study aimed at optimizing the sequencing of capital cost expenditures at Renard. In particular, this study is addressing the potential to initiate underground mining by way of a ramp only, and deferring the development of the shaft until later in the mine life. If successful, this study is expected to result in a substantial saving in the project’s initial capital cost while maintaining the overall project description, mine plan and production rate at the expense of a modest operating cost

7 increase. The impact of the optimization study on the project’s overall debt capacity and initial financing requirements, both of which are subject to change, are currently being assessed by the Company’s management.

Other Property Interests - Exploration

Stornoway's diamond exploration programs are conducted under the direction of Robin Hopkins, P.Geol. (NT/NU), Vice President, Exploration, a Qualified Person under NI 43-101. Mr. Hopkins has reviewed the disclosure for the Company’s other exploration property interests which is contained in this Interim MD&A. The Company maintains interests in four advanced exploration stage properties, those being the Aviat, Qilalugaq and Churchill Properties in Nunavut, and the Timiskaming Property in Ontario. The advanced projects have demonstrated the potential for significant tonnages and high diamond contents on a non-resource basis (with the exception of the Qilalugaq Property, where a Mineral Resource estimate was announced in June 2012), and now merit either additional delineation drilling or bulk sampling. The Company considers the Aviat, Qilalugaq and Timiskaming projects to be credible "pipeline" projects, providing the Company with significant exposure to long term diamond price growth, however, the Company’s interest in the Churchill Property is a historical interest and the Company has no plans to participate in future exploration or development programs on this property for the foreseeable future. In addition to the advanced exploration projects, the Company maintains an interest in a number of property interests in other parts of Canada, either as 100% ownership or as part of a property option agreement. Aeon Project (Quebec) The 100% owned Aeon claims were acquired in July 2011 and expanded in September 2011 on the basis of regional indicator mineral sampling that indicated the potential for multiple kimberlites or kimberlite clusters within two 10 km by 10 km source areas. Exploration at the Aeon Property successfully identified a bedrock source for anomalous concentrations of mantle indicator minerals, including pyrope garnets and picroilmenites, recovered in till sampling. However, the bedrock source is not kimberlitic in origin and does not carry any diamonds. No further work is planned at this time.

Pikoo Project (Saskatchewan) On April 26, 2011, the Company announced the acquisition of 33,374 hectares of contiguous claims at the "Pikoo Project" located in central Saskatchewan. The Pikoo claims are owned 100% by the Company, and are located 140 km east of La Ronge, Saskatchewan and 100 km west of Flin Flon, Manitoba. An all-season road to the community of Deschambault Lake comes to within 6km of the property's southern boundary. The 100% owned Pikoo claims were acquired in April 2011 on the basis of indicator mineral sampling in the Sask craton in north-central Saskatchewan that indicated the potential for multiple kimberlites or kimberlite clusters within a 15km by 20km source area. No kimberlites in this area have been discovered previously. During a field program in Summer 2011, Stornoway completed a 75m spaced helicopter magnetic and electromagnetic survey at Pikoo, and identified 102 prominent geophysical targets. 319 till samples were collected in 2011 to allow target discrimination ahead of potential drilling. In June 2012, the Company completed a field program consisting of prospecting and further till sample collection in anticipation of a drill program at a later date. Results from this program will be announced when available. Timiskaming Property (Ontario) On November 28, 2012, Stornoway filed an NI 43-101 technical report on SEDAR (www.sedar.com) that reports a Mineral Resource estimate for the 100% owned 95-2 kimberlite pipe. 95-2 is situated 15 km west of the City of Temiskaming Shores, in Lundy Township, Larder Lake Mining District, Ontario, between the mining and industrial centres of Kirkland Lake, Sudbury and North Bay. The kimberlite is accessible by road (paved to within 1km) and lies in close proximity to a railroad (13km), a natural gas transmission trunk line (10km) and a high voltage power transmission line (13km). A local lower voltage power grid runs within 2km of the kimberlite. Highlights of the NI 43-101 technical report include:  a total Inferred Mineral Resource for the 95-2 kimberlite pipe of 2.3 million carats from 20.2 million tonnes total content of kimberlite with an average +1 DTC total diamond content of 11.3 carats per hundred tonnes (cpht) extending from surface to a depth of 250m;

8  additional resource upside has been identified in the form of a target for further exploration for the 95-2 kimberlite pipe of between 0.4 to 0.6 million carats from 3.7 to 5.6 million tonnes total content of kimberlite with an average +1 DTC total diamond content of 11.3 cpht, extending from 250m depth to 350m depth. The reader is cautioned that mineral resources that are not mineral reserves do not have demonstrated economic viability. In addition, the potential quantity and grade of any target for further exploration is 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. 95-2 is considered part of the Timiskaming kimberlite cluster, and associated with the Lake Timiskaming Structural Zone which also hosts the Attawapiskat, Kyle Lake and Kirkland Lake kimberlite clusters. 95-2 is a mid-sized kimberlite pipe interpreted as a diatreme-zone kimberlite with irregularities in the external shape of the kimberlite near surface and at depth, but an overall smooth and tapering shape when the body is considered as a whole. The pipe shape was derived from drill hole data and modelled to 250 m below surface. Internal geology was established using relogged drill core, archived reverse circulation (RC) chips, geological logs of both core and RC drill holes, and petrographic studies. 95-2 comprises mainly diatreme facies rocks with some evidence of transitional textures and is characterised by a simple internal geology. Three phases of massive volcaniclastic kimberlite (classified as “tuffisitic” kimberlite breccia) were identified and geologically modelled. 95-2 is one of three kimberlite pipes on the 5.3 ha property, and has been the subject of ongoing assessment work by Stornoway since its acquisition in 2006 from Contact Diamond Corporation, now a wholly owned subsidiary of Stornoway. The Mineral Resource Estimate was authored by Geostrat Consulting Services Inc. (“Geostrat”), and comprises the integration of kimberlite volumes, density, petrology and diamond content data obtained from 4,037 m of diamond drilling, 1,799 m of large diameter reverse circulation (“LDD RC”) drilling, 5.7 t of samples submitted for microdiamond analysis, 1,056 t of samples submitted for macrodiamond sampling with 1.06 cts of diamonds of +1 DTC (13 stones) recovered from HQ/NQ diameter diamond drilling in 2012, and 67.17 cts of +1 DTC diamonds (1,487 stones) recovered from LDD RC drilling in 2004. This resource summarizes the results of exploration programs conducted on the 95-2 Diamond Project by Contact Diamond Corporation or its predecessors from 1991 to 2006, and by Stornoway from 2006 to 2012. The technical report recommends further economic assessment as well as potential delineation drilling to constrain the pipe at greater depths and the collection of a large tonnage bulk sample to establish a diamond price estimate for 95-2. As October 31, 2012, the Company wrote off $2.6 million of capitalized property interest related to the Timiskaming property interest, resulting in a remaining carrying value of $2.64 million. The Company evaluated five out of nine kimberlites on the property and determined that no future work/evaluation would be planned for the foreseeable future.

RESULTS OF OPERATIONS The Company reports its financial statements in accordance with International Financial Reporting Standards (“IFRS”). The Company’s significant accounting policies are set out in Note 2 of the consolidated financial statements for the years ended April 30, 2012 and 2011.

The Company’s loss for the six months ended October 31, 2012 (the “Current Period”) was $19.5 million (a loss of $0.12 per share) as compared to a loss of $15.3 million ($0.11 loss per share) for the six months ended October 31, 2011 (the “Comparative Period”). The Company’s loss for the Current Period is mainly due to expenses of $17.6 million (Comparative Period - $14.9 million), incuding exploration expenses of $9.5 million (Comparative Period - $12.4 million), write-off of exploration and evaluation assets (Current Period - $2.66 million; Comparative Period - $50,000) and share-based payments (Current Period - $1.58 million; Comparative Period - $163,000). Other items which affected the Company’s total loss included finance cost (Current Period - $2.2 million; Comparative Period - $889,000) and interest income earned (Current Period - $240,000; Comparative Period - $189,000).

Exploration costs expensed in the Current Period decreased significantly from $12.4 million in the Comparative Period to $9.5 million in the Current Period. During the Current Period, the Company spent $8.5 million on exploration in Eastern Canada. The majority of these expenditures related to pre-development work at the Renard Diamond Project. In addition, the Company spent $236,000 in other Canadian jurisdictions, primarily for a field

9 exploration progam at the Pikoo property in Saskatchewan; $372,000 for generative exploration mostly related to sample processing and analysis; and approximately $500,000 at the Company’s Arctic properties. Additional information about the Company’s exploration properties can be found above in the “Activities Update – Renard Diamond Project, Quebec” section as well as the “Other Property Interests – Exploration” section, and also in the Company’s Annual Information Form (“AIF”) which was filed on SEDAR (www.sedar.com) on July 30, 2012. Overall, the Company’s administrative expenditures increased significantly in the Current Period. Professional fees, which increased from $684,000 in the Comparative Period to $1.24 million in the Current Period include accruals for the annual audit and quarterly reviews, legal expenses and professional fees related to corporate development activities. Salaries, benefits and director’s fees (Current Period - $1.14 million; Comparative Period - $406,000) also increased primarily due to a change in the salary allocation (in the Comparative Period some salaries were allocated as a project cost rather than as a corporate cost due to the specific technical nature of the employee’s role for that period, whereas in the Current Period the responsibilities have more of an overall corporate focus) and new hires. Office and sundry expense also increased (Current Period - $370,000; Comparative Period - $257,000) primarily due to a change in how the Company allocated insurance premiums (in the Comparative Period the insurance was being allocated as a project-specific expense rather than as a corporate expense), repairs expense for certain lab equipment and an increase in travel expenses. Rent and facility fees increased due to changes in lease rates/office space (Current Period - $295,000; Comparative Period - $244,000). Regulatory and shareholder communication expense decreased slightly as certain activities undertaken in the Comparative Period were not repeated in the Current Period (Current Period - $302,000; Comparative Period - $364,000). Operating expenses include a number of non-cash items: amortization (Current Period - $393,000; Comparative Period - $423,000); share-based payments (Current Period - $1.58 million; Comparative Period - $163,000); gain (loss) on the sale of assets (Current Period - $62,000; Comparative Period – loss of $45,000) and a write-off of exploration and evaluation assets (Current Period - $2.66 million; Comparative Period - $50,000). In the Comparative Period, the Company recorded a cost recovery of $129,000 (Current Period - $Nil) for the use of lab equipment in the Company’s North Vancouver office by a third party; this activity was not repeated in the Current Period. Interest income earned was $240,000 in the Current Period as compared to $189,000 in the Comparative Period, due to higher cash and cash equivalents balances available for investment. The Company’s finance expenses were $2.2 million in the Current Period (Comparative Period - $889,000) and related primarily to the interest expense payable (12% per annum) on a $20 million unsecured debt facility (see discussion under “Liquidity” below) and a commitment fee payable (175 basis points per annum) on a $100 million credit support agreement with Investissement Québec (see discussion under “Committments” below). As at October 31, 2012, total assets increased to $253.3 million from $250.1 million at the April 30, 2012 year-end. Exploration and evaluation assets decreased slightly to $213.4 million from $215.6 million at April 30, 2012 of which approximately $208.0 million relates to acquisition costs for the Renard Diamond Project. The Company’s cash, cash equivalents and short-term deposit amounts increased during the Current Period, from $27.9 million as of April 30, 2012 to $31.1 million as of October 31, 2012. During the Current Period, the Company entered into a $20 million unsecured loan (see discussion under “Liquidity” below), the proceeds from which are being used for pre-development activities at the Renard Diamond Project. The increase in the Company’s cash balance is the result of the current financing, and is reduced by the amount of spending on the Company’s exploration and evaluation assets, including the Company’s principal mineral property, the Renard Diamond Project, and funds used for general working capital. The Company’s total liabilities, consisting primarily of trade accounts payable, accrued liabilities and provisions ($5.5 million as at October 31, 2012 versus $3.9 million at April 30, 2012), an asset retirement obligation of $1.6 million (April 30, 2012 - $1.4 million) and long-term debt ($17.2 million as at October 31, 2012 versus $Nil at April 30, 2012), increased to $24.3 million as at October 31, 2012 from $5.3 million as at April 30, 2012. Shareholders’ equity decreased to $229.0 million as at October 31, 2012 from $244.7 million as at April 30, 2012 and consists of share capital, non-voting convertible shares, contributed surplus, accumulated other comprehensive loss and a deficit of $200.6 million (Comparative Period - $181.1 million).

SIGNIFICANT SHAREHOLDER – DIAQUEM INC. On April 1, 2011 the Company and DIAQUEM Inc. (“Diaquem”) closed a agreement, previously announced December 14, 2010, whereby the Company acquired Diaquem’s 50% interest in the Renard Diamond Project (the “Acquisition”). Under the terms of the Acquisition, Diaquem became a significant shareholder of the Company, and retained a direct 2% gross revenue royalty on future diamond production. Diaquem is a wholly-owned subsidiary of SOQUEM INC., itself a wholly-owned subsidiary of Investissement Québec (formerly Société générale de

10 financement du Québec), the Québec government’s main industrial and financial holding company. In conjunction with the Acquisition, Investissement Québec (“IQ”) entered into a credit support agreement with the Company with respect to future project debt financing of a minimum of $100 million. The Company’s shareholders approved the Acquisition at a special meeting held on February 10, 2011.

SUMMARY OF QUARTERLY RESULTS

The following table sets out selected unaudited consolidated quarterly financial information of Stornoway and is derived from the unaudited quarterly consolidated financial statements prepared by management. Stornoway’s condensed interim consolidated financial statements are prepared in accordance with International Accounting Standards 34, Interim Financing Reporting (“IAS 34”), using the same accounting policies and methods of application as the audited, consolidated financial statements of the Company for the year ended April 30, 2012 and are expressed in thousands of Canadian dollars (except for per share amounts).

Basic Loss per share Exploration Net Loss (1) Expenses Period Three months ended $12,123 $0.08 $5,460 October 31, 2012 Three months ended July 7,400 0.05 4,042 31, 2012 Three months ended 4,977 0.03 2,348 April 30, 2012 Three months ended 6,222 0.04 2,687 January 31, 2012 Three months ended 5,690 0.04 4,151 October 31, 2011 Three months ended July 9,619 0.07 8,290 31, 2011 Three months ended 7,841 0.10 3,801 April 30, 2011 Three months ended 2,874 0.04 2,038 January 31, 2011

(1) On February 22, 2011, the Company’s common shares were consolidated on 1-new-for-4-old basis. All basic loss per share information has been adjusted to reflect this share consolidation for all periods presented.

Quarterly results will vary in accordance with the Company’s exploration, development and financing activities. Currently, pre-development expenses for the Renard Diamond Project, finance expenses and, to a lesser extent exploration and evaluation asset write-offs typically have the most significant impact on the Company’s quarterly results, followed by share-based payments expense and general and administrative expenses (which include exploration expenses).

Exploration and evaluation assets write-offs typically vary in accordance with exploration results and changes to the Company’s land position and can rarely be predicted in advance. During the three months ended October 31, 2012, the Company wrote-off capitalized acquisition costs of $2.6 million for the Timiskaming property in Ontario where five of nine kimberlites have been evaluated and no further work on these kimberlites is planned. The Company’s cash flow is affected by the seasonality of the exploration business, while general and administrative expenses are typically incurred more evenly throughout the year.

Share-based payments expense varies, and is dependent upon the amount, timing, the vesting schedules and estimated fair value of the stock options granted (see “Critical Accounting Estimates” below for details on the key assumptions used). The Company typically grants stock options at least annually and typically following the Company’s Annual General Meeting (“AGM”), which is usually held in the fall. The Company granted stock options to directors, officers and employees following the AGM held on September 11, 2012. Share-based payment expense for the three months ended October 31, 2012 totalled $1.5 million.

11

The Company’s activities in the Current Period were focused on pre-development work for the Renard Diamond Project, a field exploration program at the Pikoo, SK project, the clean-up of an exploration camp at the Aviat Project and costs associated with a legal survey for the Aviat and Qilalugaq properties. In addition, the Company continued to work with an independent financial advisor and legal counsel with specific expertise in project finance structuring with respect to financing the Renard Diamond Project. The Company also actively pursues corporate development opportunities in the context of the Renard project financing strategy, including potential asset acquisitions or dispositions, and incurs professional fees as a result.

RISKS AND UNCERTAINTIES The Company’s securities should be considered a highly speculative investment and investors should carefully consider all of the information disclosed in the Company’s Canadian regulatory filings prior to making an investment in the Company, including the risk factors discussed in the Company’s AIF dated July 30, 2012 and in the Company’s Annual MD&A dated June 22, 2012, both of which are available under the Company’s profile on SEDAR at www.sedar.com. The risks described in the AIF, Annual MD&A and in other documents forming part of the Company’s disclosure record are not the only risks facing the Company. Additional risks and uncertainties not currently known to the Company, or that the Company currently deems immaterial, may also materially and adversely affect its business.

In November and December 2012, the Company entered into a Framework Agreement and a Financing Agreement whereby the Company will assume responsibility for the construction of the Mining Road, financed by a loan from the government of Québec. In the context of the schedule for the development of the Renard Diamond Project and the commencement of production, the schedule for the Company to complete the Mining Road remains a significant risk for the Company. Although construction of segments “A” and “B” of the Route 167 Extension has commenced, there can be no assurance that these segments of the road will be completed as scheduled, or at all or that construction will not be delayed due to factors outside the control of the Company and others responsible for the construction of this portion of the Route 167 extension. There is risk that the delivery of a winter road by the Québec MTQ may be delayed, due to weather conditions or other unpredictable events which may impact the construction or planned availability of a winter road by March 2013 and there is execution risk relating to the construction by Stornoway of the Mining Road forming part of the Route 167 extension, including financial obligations and/or costs incurred by Stornoway in connection with the Mining Road.

To the extent that the construction of segments “A”, “B”, “C” or “D” is not completed as scheduled, or at all, and to the extent that a winter road, to be constructed by the MTQ, is not available for Stornoway’s use by March 2013, any of these factors could have a material adverse effect on the commencement of production at the Renard Diamond Project, and on the Company’s business, financial condition, liquidity and results of operations.

LIQUIDITY The Company’s working capital as at October 31, 2012 was $27.3 million (April 30, 2012 - $25.0 million). During the Current Period, the Company’s cash position increased by $3.1 million to $30.7 million in cash and cash equivalents as compared to the six months ended October 31, 2011, where the Company’s cash position decreased by $13.99 million to $20.2 million in cash and cash equivalents.

The Company’s primary operating activity is the acquisition and exploration of its exploration and evaluation assets. During the Current Period, the Company spent $9.5 million on exploration, with the most significant expenditures on the Renard Diamond Project in Québec for pre-development work including permitting activities and detailed engineering. A description of the Company’s most significant operating expenses during the Current Period can be found above under “Results of Operations”. During the Current Period, the Company’s investing activities used $563,000 (Comparative Period - $85,000), mostly in the form of an increase in short-term deposits of $100,000 (Comparative Period - $Nil), $129,000 for the acquisition of property, plant and equipment (Comparative Period - $50,000) and $334,000 for the acquisition of exploration and evaluation assets (Comparative Period - $139,000). In the Current Period, the Company received $17.6 million from financing activities while in the Comparative Period the Company received $15,000 from financing activities. A description of the Company’s financing activities can be found below.

12 Completed Financings

Since March 2012, the Company has raised a total of $38.79 million (net) from the three financings described below, and has applied the net proceeds as follows:

Description of Expenditure Estimated Use Actual Use* $000s $000s Renard Diamond Project

Environmental permits and authorizations 1,904 1,046 Geotechnical studies and management costs 2,861 1,579 Construction costs, EPCM and equipment deposits 10,988 1,068 Project management and support costs 8,102 4,812 Estimated cost to complete - 15,350 23,855 23,855

Annual commitment fee payable for Credit Support Agreement 1,750 877 Annual commitment fee payable for unsecured debt facility 1,200 - General working capital, administrative expenses and salary expenses (including technical) 11,988 5,999 Estimated cost to complete - 8,062 14,938 14,938 38,793 38,793 *from May 1 to October 31, 2012

Net proceeds from the three offerings mentioned below are being used for work related to the Renard Diamond Project as described above. In addition, proceeds from these financings which aren’t allocated for pre-development work are being used in support of the project financing activities for the Renard Diamond Project, the R65 bulk sample collection program that commenced during the summer of 2012 and for general working capital.

Unsecured Debt Facility – May 3, 2012 On May 3, 2012, the Company entered into a $20 million unsecured debt facility with the Fonds de solidarité FTQ, the Fonds régional de solidarité FTQ Nord-du-Québec, S.E.C. (collectively, the “Fonds”) and Investissement Québec, through its indirect wholly-owned subsidiary Diaquem Inc. (collectively with the Fonds, the “Lenders”). The proceeds of the debt facility must be used to finance pre-development work at the Renard Diamond Project. The loan has been provided 75% by the Fonds and 25% by Diaquem.

In connection with the debt facility, the Company has issued the Lenders, on a proportionate basis, a total of fifteen (15) million share purchase warrants (the “Loan Warrants”), each of which entitles the holder to acquire one common share of the Company at a price of $1.21 until May 3, 2017. The fair value of the Warrants was estimated to be $2.25 million using the Black-Scholes option-pricing model (1.56% risk-free interest rate; expected life of five years, 32% volatility, $nil dividends).

The loan has been recognized initially at $17.2 million, net of $2.9 million transaction costs incurred, including the fair value of warrants granted. The contractual interest rate on the loan is 12% per annum, payable 100% in cash or 50% in cash and 50% in the Company’s common shares, at the Company’s option, prior to commencement of commercial production, and 100% in cash thereafter. The calculated effective interest rate of this loan is 15.1%. Principal is to be repaid in equal monthly instalments commencing approximately one month following the date of commercial production at Renard, but not before May 3, 2016 and not later than May 3, 2017. The final maturity is May 3, 2021.

In connection with the loan, the Company’s subsidiary granted the Lenders a 1% contingent secured royalty interest in the Renard Project which is only triggered upon the occurrence of certain specified events, such as a payment default or a default following a change of control of the Company, in each case capped at an amount equal to the aggregate value of the principal and interest then outstanding on the loan. The liabilities and other obligations of the Company under the contingent secured royalty interest are evidenced by a $20 million hypothec against the Renard

13 Diamond Project mineral claims. The loan agreement contains additional representations, covenants and commitments customary for a facility of this nature.

On November 1, 2012, the Company made a cash payment totalling $600,001 and issued 987,392 common shares with a value of $0.61 per share in settlement of the first semi-annual interest payment of $1.2 million.

Short Form Prospectus Offering – March 28, 2012 On March 28, 2012, the Company completed a short-form prospectus offering and issued 15,000,000 units (the “Units”) for gross proceeds of $15.0 million. Each Unit was priced at $1.00 and consisted of one common share and one-half of a common share purchase warrant (the “Warrants”; collectively the “Offering”). Each whole Warrant entitles the holder to acquire one common share at a price of $1.20 until March 31, 2014.

The net proceeds to Stornoway from the sale of the Units were estimated to be $13,695,000, after deducting the Underwriter’s Fee of $840,000 and the estimated expenses of the Offering of approximately $465,000.

The Company had originally allocated the net proceeds from the March 2012 offering mostly for pre-development work related to the Renard Diamond Project. However, since the Company obtained a $20 million loan in May 2012, the proceeds of which must be used to finance pre-development work at the Renard Diamond Project, the Company intends to use the majority of the net proceeds from the March 2012 offering for other items including: general working capital, project financing expenses and the R65 bulk sample (See “Description of Expenditure” table above).

Private Placement – April 19, 2012 On April 19, 2012, the Company completed a private placement with Diaquem Inc., the Company’s largest shareholder. This financing was completed as a result of the exercise by Diaquem Inc. of its pre-emptive right, and upon the same terms as the Units issued by the Corporation pursuant to the Offering which closed on March 28, 2012. The Company issued a total of 5,097,950 Units at $1.00 for gross proceeds of $5.1 million. The Warrants, exercisable at $1.20 per share, expire on April 21, 2014. As a result of this financing, Diaquem Inc.’s shareholding returns to 25% of the Company’s issued and outstanding common shares. The closing price of the Company’s common shares on the TSX on the date of the announcement was $0.86. The securities issued pursuant to the Private Placement are subject to a hold period of four months and one day from closing. Proceeds from this financing are being used for general working capital. Commitments The Company is committed to minimum future operating lease payments for its office premises, minimum future principal and interest payments for the Loan and and, subject to certain conditions being met, to minimum future financial capital contributions for the construction and maintenance of the Route 167 segment for a period of ten years from year 2015, as follows (expressed in thousands of Canadian dollars):

Loan Operating principal lease Commitment and interest payments fee payments Route 167 Total Fiscal year ending April 30, 2014 $ 548 $ 1,750 $ 2,400 $ - $ 4,698 Fiscal year ending April 30, 2015 326 1,750 2,400 - 4,476 Fiscal year ending April 30, 2016 159 - 2,400 4,042 6,601 Fiscal year ending April 30, 2017 121 - 5,848 7,275 13,244 Fiscal year ending April 30, 2018 40 5,594 7,275 12,909 Thereafter - - 14,649 54,155 68,804 $ 1,194 $ 3,500 $ 33,291 $ 72,747 $ 110,732

In August 2011, the Company entered into two financing agreements with the Government of Québec, whereby the Company agreed to contribute $44 million to the construction of the Route 167 extension, with financing to be provided by the government of Québec at 6.3% starting in July 2015. The Company also agreed to contribute a maximum of $5,000 per kilometer, or $1.215 million per year starting July 1, 2015 to the maintenance costs of the

14 Route 167 extension. As at October 31, 2012, the Company’s future obligations for the Route 167 extension totaled $72.7 million. In November 2012, the financing and maintenance agreements dated August 1, 2011 were terminated and replaced with a Framework Agreement and a Loan Agreement between the Company and the Government of Québec (see “Financing Agreement” below for additional details). In March 2012, the Company entered into an impacts and benefits agreement for the Renard Diamond Project with the Cree Nation of Mistissini (“CNM”) and the Grand Council of the Crees (Eeyou Istchee) / Cree Regional Authority (“GCC(EI)/CRA”). The new agreement, designated the “Mecheshoo Agreement”, is a binding agreement that will govern the long-term working relationship between the Company and the Cree parties during all phases of the Renard Diamond Project. It provides for training, employment and business opportunities for the Cree during project construction, operation and closure, and sets out the principles of social, cultural and environmental respect under which the project will be managed. The Mecheshoo Agreement includes a mechanism by which the Cree parties will benefit financially from the success of the project on a long term basis, consistent with the mining industry’s best practices for engagement with First Nations communities. The Company has a $100 million credit support agreement with IQ to fund a portion of future construction and development costs at the Renard Diamond Project, under which commitment fee payments equal to 1.75% per annum are payable by the Company. The obligations of IQ will terminate on the earlier to occur of: (a) the date on which the Company notifies IQ in writing that the credit support agreement is terminated; (b) the date of the initial borrowing under the IQ commitment; and (c) April 1, 2015. It is presently contemplated that the IQ commitment will form part of the senior debt financing if arranged (see “Mandate Letter” section below for additional details). The Renard Diamond Project is subject to a 2% royalty interest on diamond production and a 2% NSR on other mineral production. CAPITAL RESOURCES The Company has no history of profitable operations and its present business is at the development stage. The Company has no source of operating cash flow and no assurance that additional funding will be available to it for further exploration and development of its projects when required. As such, the Company is subject to many risks common to such enterprises, including under-capitalization, cash shortages and limitations with respect to personnel, financial and other resources and the lack of revenues (see “Risks and Uncertainties” above for more details). Although the Company has been successful in the past in obtaining financing through the sale of equity securities or joint ventures, there can be no assurance that the Company will be able to obtain adequate financing in the future or that the terms of such financing will be favorable. Such means of financing typically result in dilution of a shareholder's interest, either directly as a result of issuing equity securities or indirectly through dilution of an interest in one of the Company's projects. Failure to obtain additional financing or failure to meet the loan covenants in the outstanding debt facility with the Fonds and Diaquem could result in the delay or indefinite postponement of further exploration and development of its properties and ultimately in the loss of its properties, including the Renard Diamond Project.

The Company’s most significant fixed costs relate to future principal and interest payments for an unsecured debt facility of $20 million and a financing agreement for the construction of the Mining Road for up to $84.7 million. In addition, the Company has leases for office space and incurrs costs associated with maintaining a TSX listing. The Company’s minimum commitment for its premises for the five year period between 2013 and 2017 is $1.2 million. The Company may be able to reduce some of this liability through the sub-lease of excess space. The Company is also committed to minimum future principal and interest payments for an unsecured debt facility of $2.4 million a year (interest only until principal repayment commences in 2016) however, 50% of the interest payable before principal repayment commences can be paid through the issuance of the Company’s common shares, at its election. In addition, the Company agreed to assume responsibility for the completion of a Mining Road and expects to borrow up to $84.7 million to pay for the construction of the road which will be re-paid beginning 48 months from the first draw-down date. The Company also has a $100 million credit support agreement with IQ to fund a portion of future construction and development costs at the Renard Diamond Project, under which commitment fee payments equal to 1.75% per annum are payable by the Company. (See “Commitments” above for more details).

The Company has sufficient financial resources to keep its principal landholdings and the majority of its non- material landholdings in good standing into 2013 and beyond. The Company has also incurred sufficient exploration expenditures on these properties to keep them in good standing with the respective provincial and territorial governments through 2013 as well. The Company’s management actively manages its landholdings in an effort to keep those landholdings with the greatest exploration potential in good standing for as long as possible.

15 The Company’s management regularly reviews its cash position against future plans and makes decisions regarding these plans accordingly and within the context of existing market conditions. Funds from the recent debt and equity financings in the Spring of 2012 are being used for pre-development work at the Renard Diamond Project (see “Activities Update– Renard Diamond Project, Québec” and “Completed Financings” above) and for general working capital, including project financing work.

Several factors will influence the Company's cash requirements in the near future. These factors include: the receipt of all required permits to construct a diamond mine at Renard as well as a decision by the Board of Directors to proceed with further development and ultimately, mine construction. The majority of the estimated $802 million capital cost to build a mine at Renard (as outlined in an NI 43-101 technical report filed on Sedar January 3, 2012) is presently unfunded and financing will need to be arranged during 2013 to keep the development schedule, which envisions a construction start date in 2013. Despite a positive economic result for the Feasibility Study on the Renard Diamond Project, the Company’s share price decreased significantly following the release of the Feasibility Study on concerns around how the Company will finance a capital expenditure of $802 million, which is much greater than the Company’s market capitalization. The Company’s management is currently considering various alternatives for future financing requirements, within the context of existing market conditions. These alternatives could include, but are not limited to, the issuance of equity, instruments convertible into equity or various forms of debt, the entering into of off-take agreements, the granting of royalties and the execution of material transactions, including potentially significant acquisitions or significant dispositions of assets. There can be no guarantee that the Company’s management will be successful in its efforts to finance the development of the Renard Diamond Project. Credit Facilities The Company has no credit facilities that could be used for ongoing operations or general working capital requirements because it has no operating cash flow. However, the Company’s project financing activities have progressed, with the recent execution of a Mandate Letter (described below) in connection with a potential senior debt financing. Credit Support Agreement During the year ended April 30, 2011, as part of the Acquisition agreement described under “Significant Shareholder – Diaquem Inc.” above, the Company and IQ entered into a credit support agreement (the “Credit Support Agreement”), pursuant to which IQ committed to provide financing in favour of Stornoway in a minimum amount of $100 million to fund a portion of the construction and development costs of the Renard Diamond Project (the “IQ Commitment”). The following description of certain material provisions of the Credit Support Agreement is a summary only, is not comprehensive and is qualified in its entirety by reference to the full text of the Credit Support Agreement, which was filed on SEDAR in April 2011 and is available at www.sedar.com.

The IQ Commitment will be senior and first ranking, pari passu with the other debt of Stornoway that may be provided by a lending syndicate formed to fund a portion of the construction costs of the Renard Diamond Project. The IQ Commitment may either form part of the commitments made available by the lending syndicate or, absent a concurrent facility by a lending syndicate, be made available separately by IQ on terms no less favourable than prevailing commercially reasonable market terms. In addition, IQ shall be entitled to receive the same benefits, on a pro rata basis, as the lending syndicate. In respect of the lending syndicate, IQ will have the right to be lead or co- lead lender and manager or co-manager. The obligations of IQ under the Credit Support Agreement will terminate on the earlier to occur of: (a) the date on which Stornoway notifies IQ in writing that the Credit Support Agreement is terminated; (b) the date of the initial borrowing under the IQ Commitment; and (c) the date which is the 4-year anniversary of the closing of the Acquisition (closing occurred on April 1, 2011). As consideration for the IQ Commitment, Stornoway has agreed to pay IQ, for the period from and including the date of the Credit Support Agreement up to the date the Credit Support Agreement is terminated, a non-refundable commitment fee equal to 1.75% per annum computed daily on the amount of $100 million, payable quarterly in arrears on the first business day of the following quarter. The IQ Commitment shall be conditional upon: (i) the decision of the Board of Directors of Stornoway, following receipt and consideration of a bankable feasibility study relating to the Renard Diamond Project and any other factors as it deems relevant, to proceed with the construction and development of the Renard Diamond Project; (ii)

16 the closing conditions of the lending syndicate (if any); and (iii) in the absence of a concurrent lending syndicate, the IQ Commitment shall be subject to customary closing conditions in favour of IQ as a lender, including satisfactory due diligence investigations and satisfactory settlement of definitive loan and security documentation (but, for greater certainty, it shall not be a condition of closing that Stornoway shall have entered into any marketing off-take or analogous agreement with any third party). Mandate Letter In September 2012, the Company announced the execution of Mandate Letters with seven financial institutions, including IQ, in connection with a potential senior debt financing for the Renard Diamond Project. The Mandate Letter establishes the terms under which the Mandated Lead Arrangers have been appointed to arrange senior loans of up to US$475 million. It does not constitute a commitment to underwrite, provide or secure financing, which remains subject to due diligence, the completion of definitive loan documentation, credit and other approvals, and the terms and conditions of the term sheet attached to the Mandate Letter, among other things. Financing Agreement In December 2012, the Company’s wholly-owned subsidiary Les Diamants Stornoway completed a Financing Agreement with the Québec Ministère des Finances et de l’Économie (“MFE”) under which Stornoway will be financed to complete the construction of a mining-grade access road to the Renard Diamond Project (the “Renard Mine Road”). The Financing Agreement is pursuant to a Framework Agreement and associated Letter of Intent previously executed between Québec and Stornoway and announced on November 15, 2012.

Features of the Financing Agreement are as follows:  Québec to provide Stornoway with a credit facility of up to C$77m (“Loan A”) to complete the road construction work, at an annual interest rate of 3.35% percent, for a term of 15 years, with repayment beginning 48 months following first disbursement, and deferrable up to 2 years due to any delay in the attainment of commercial production at Renard past July 1, 2016.

 Québec to provide Stornoway an additional overrun facility of up to C$7.7m (“Loan B”), at an annual interest rate of 6.3% percent, with repayments concurrent with Loan A.

 Both Loans A and B are unsecured, subordinated, and pre-payable without penalty. Stornoway is not required to use the full amount of the Loans in the event construction costs are less than the amount of the Loans, and interest will only be calculated on the basis of disbursements requested by Stornoway.

 Stornoway undertakes to complete construction of the Renard Mine Road no later than June 30, 2015, subject to certain terms, including terms of the previously announced Framework Agreement.

On the basis of the construction schedule as currently anticipated, Stornoway expects to request an initial disbursement under Loan A during the month of December 2012.

ADDITIONAL DISCLOSURE Additional disclosure concerning Stornoway’s general and administrative expenses and exploration expenses is provided in the Company’s consolidated statements of loss and deficit and the consolidated schedule of exploration and evaluation assets contained in its audited consolidated financial statements for April 30, 2012 and April 30, 2011 and its condensed interim consolidated financial statements for the six months ended October 31, 2012 and 2011. The Company’s most recent AIF, dated July 30, 2012, also provides detailed information about the Company and its properties. These documents are available on Stornoway’s website at www.stornowaydiamonds.com or on its SEDAR Page Site accessed through www.sedar.com.

OUTSTANDING SHARE CAPITAL Stornoway’s authorized capital is an unlimited number of common shares and an unlimited number of non-voting convertible shares without par value.

17 As at December 10, 2012, there were 139,734,757 common shares and 22,543,918 non-voting convertible shares issued and outstanding. The non-voting convertible shares have no expiry date and no restrictions except that Diaquem cannot hold more than 25% of Stornoway’s voting, common shares.

Stock Option Plan

The maximum number of common shares issuable pursuant to the Company’s Stock Option Plan is 10% of the issued and outstanding common shares and non-voting convertible shares.

As at December 10, 2012, the following stock options are outstanding:

Range of Number of Options Weighted Average Year of Weighted Average Remaining Exercise Prices Outstanding Exercise Price Expiry Contractual Life $ 2.52 ~ $ 3.00 620,625 $ 2.59 2012 0.03 years $ 0.40 ~ $ 29.68 963,126 $ 2.05 2013 0.94 years $ 0.40 ~ $ 19.44 658,525 $ 1.18 2014 1.83 years $ 2.24 ~ $ 5.36 1,106,850 $ 2.40 2015 2.67 years $ 1.04 ~ $ 2.50 1,280,000 $ 1.13 2016 3.92 years $ 0.71 ~ $1.04 5,310,000 $ 0.81 2017 4.55 years 9,939,126

As at December 10, 2012, the following warrants are outstanding:

Number of Warrants Exercise Price Expiry Date 7,500,000 $ 1.20 March 31, 2014 2,548,975 $ 1.20 April 21, 2014 15,000,000 $ 1.21 May 3, 2017 25,048,975

TRANSACTIONS WITH RELATED PARTIES Related party transactions (See Note 6 of the condensed interim consolidated financial statements for the periods ended October 31, 2012 and 2011) are as follows: a) Key Management Personnel Remuneration (expressed in thousands of Canadian dollars)

Key management includes the Company’s directors and all executive officers. Compensation awarded to key management includes: October 31, 2012 October 31, 2011 Salaries and other short-term employee benefits(i) $ 832 $ 569 Director’s fees 65 39 Share-based payments 1,151 103 $ 2,048 $ 711

(i) Certain salaries for key management personnel are allocated to exploration and evaluation expense.

b) Transactions with related parties

i) During the period ended October 31, 2012, the Company paid legal fees of $Nil (October 31, 2011 - $50,000) to Lavery de Billy LLP (“Lavery”). On July 20, 2011, a partner of Lavery was appointed to the Company’s Board of Directors as a designee pursuant to an investor agreement between the Company and Diaquem.

ii) During the period ended October 31, 2012, the Company paid or accrued legal fees of $1.0 million Norton Rose Canada, LLP (“NRC”) (October 31, 2011 - $Nil). On February 13, 2012, a partner at NRC was appointed as the Company’s Corporate Secretary.

18 CRITICAL ACCOUNTING ESTIMATES AND JUDGMENTS The preparation of the Company’s condensed interim consolidated financial statements under IFRS requires management to make 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 condensed interim consolidated financial statements include estimates which, by their nature, are uncertain. The impacts of such estimates are pervasive throughout the consolidated financial statements, 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 the revision affects both current and future periods.

Significant assumptions about the future and other sources of estimation uncertainty that management has made at the balance sheet date, that could result in a material adjustment to the carrying amounts of assets and liabilities, in the event that actual results differ from assumptions made, but are not limited to, the following:

 the inputs used in determining the recoverable amounts of exploration and evaluation assets, if an impairment trigger exists;  the inputs used in determining asset retirement obligations included in the consolidated statements of financial position;  the inputs used in accounting for share-based payments (warrants and options) in the consolidated statements of loss and deficit;  the provision for income taxes which is included in the consolidated statements of loss and deficit; and  the going concern assumption.

Please refer to Note 2 of the consolidated financial statements of the Company for the years ended April 30, 2012 and 2011 for a description of all significant accounting policies. These accounting policies are based on IFRS issued and outstanding as at April 30, 2012. There are no new IFRSs or IFRS Interpretations Committee (“IFRIC”) standards that are effective for this interim period that would be expected to have a material impact on the Company.

Impairment of long-lived assets The Company’s management reviews the carrying value of the Company’s long-lived assets when there are events or circumstances that may indicate impairment. IAS 36 Impairment of Assets uses a one-step approach for both identifying and measuring impairments, which is based on comparing the carrying value to the recoverable amount. The recoverable amount is the higher of fair value less selling costs and value in use, which is based on discounted cash flows.

In making an assessment of the potential impairment of the Company's long-lived assets, management has used estimates of future diamond prices, mineral resource quantities, and operating, capital and reclamation costs, as well as making judgments on the potential of certain projects based on the available information at the balance sheet date. These estimates are subject to certain risks and uncertainties that may affect the determination of the recoverability of the Company’s long-lived assets. Although management has made its best estimates of potential impairment, the interpretation of these factors is subjective and will not necessarily result in precise determinations. Should an underlying assumption change, the resulting estimates could change by a material amount.

Exploration and evaluation assets mainly include capitalized acquisition costs and are the Company’s most significant long-lived asset. The carrying value of these assets at October 31, 2012 was $213.4 million, out of total assets of $253.3 million. The Company’s exploration and evaluation assets are at three different stages: a) development (Renard); b) advanced exploration (Aviat, Churchill, Qilalugaq and Timiskaming); and c) grass-roots exploration.

The Company expenses exploration and evaluation expenses but uses the guidance set out in paragraph 20 of IFRS 6, Exploration for and Evaluation of Mineral Resources as the basis for determining whether its grass-roots

19 properties should be written off. Using these conditions as a guideline for estimating whether an impairment exists on its grass-roots properties, and based on the Company’s plans to further evaluate and advance these properties by analyzing results received to-date, management will determine if a write-off is required. During the period ended October 31, 2012, the Company wrote-off exploration and evaluation assets related to capitalized property acquisition costs of $2.6 million where no future exploration programs were planned for the foreseeable future (October 31, 2011 – $50,000).

As at October 31, 2012, the Company’s market capitalization was $98.4 million, compared to a net asset value of $208.0 million for the Renard Diamond Project. In respect of long-lived assets recorded in accordance with IAS 16, this significant difference requires management to make an assessment of impairment. The Company’s Feasibility Study, previously reported on November 16, 2011 and filed on SEDAR on January 3, 2012, estimates a Net Present Value (“NPV”) of C$672 million at a 7% discount rate and Internal Rate of Return (“IRR”) of 18.7% before taxes and mining duties, and C$376 million and 14.9% after taxes and mining duties. The significant assumptions which affect the financial analysis include: the diamond selling price, the crude oil price and diesel price, the price of electricity, the exchange rate and the escalation rate. The project returns are most sensitive to the diamond price assumption, followed by capital costs and operating costs. A pre-tax discount rate of 7% was chosen primarily due to the Renard Diamond Project’s location in Quebec, which has historically been considered one of the best jurisidictions for mining. As part of management’s impairment analysis, management applied a sensitivity analysis to the discount rate used and concluded that there was no impairment in respect of the Renard Diamond Project as at October 31, 2012.

Asset retirement obligations Asset retirement obligations are an obligation to incur restoration, rehabilitation and environmental costs which arise when environmental disturbance is caused by the exploration, development or ongoing production of a mineral property interest. Such costs arising for the decommissioning of plant and other site preparation work, discounted to their net present value, are provided for and capitalized at the start of each project to the carrying value of the asset, as soon as the obligation to incur such costs arises. Discount rates using a pre-tax discount rate that reflects the current market assessments of the time value of money and the risks specific to the liability are used to calculate the net present value. The related liability is adjusted for each period for the unwinding of the discount rate and for changes to the pre-tax discount rate and amount or timing of the underlying cash flows needed to settle the obligation.

An obligation is reviewed at each period end and adjusted to reflect the current best estimates. Events that change the measurement are: i) The amortisation of or ‘unwinding’ of the discount; ii) A change in estimated cash flows – such as new disturbances, updated cost estimates, changes to the estimated useful life of operations; and iii) Revisions to the discount rate. Changes to provisions that were capitalised on initial recognition to the cost of the related asset are added to or deducted from the carrying amount of the asset. Accretion is recognised as part of interest costs in the statement of loss.

The Company has recorded an asset retirement obligation, which reflects the present value of the estimated amount of undiscounted cash flow required to satisfy the asset retirement obligation in respect of the Renard Diamond Project in Québec. The primary component of this obligation is the removal of equipment currently used at the site as well as costs associated with restoration and re-vegetation of the property. If the Company decides not to go into production on the property, it is assumed that the asset retirement obligation will be realized by 2013. Should the Company decide to proceed with a production decision on the Renard Diamond Project, the obligation will be reassessed further into the future. The pre-tax market based discount rate at which the estimated cash flows have been discounted to arrive at the obligation is 1.07%. The undiscounted amount of inflation-adjusted estimated future cash flows is $1,586,000. During the six months ended October 31, 2012, the Company recorded a change in estimate of $115,000 to reflect updated cost estimates for reclamation.

20 Share-based payments and warrants The Company’s current stock price and the volatility of the Company’s stock price will affect the estimates made for share-based payments. The volatility of the Company’s stock price and the stock price at the grant date have the most significant impact on the estimate of fair value of share-based payments. The Company expenses share-based payments for its corporate, administrative, exploration and technical staff.

Share-based payments are accounted for using the fair value based method, whereby compensation cost is measured at the estimated fair value of the options at the date of grant and is expensed over the vesting period of the award. The Company estimates the fair value using the Black- Scholes option-pricing model.

Option pricing models require the input of highly subjective assumptions including the expected price volatility. Changes in the subjective input assumptions can materially affect the fair value estimate, and therefore the existing models do not necessarily provide a reliable single measure of the fair value of the Company’s stock options.

During the six months ended October 31, 2012, the Company issued fifteen million share purchase warrants in connection with the unsecured debt facility described above under “Liquidity”. The warrants are exercisable at $1.21 until May 3, 2017. The Company used the Black-Scholes Option Pricing Model to estimate a fair value of $2.25 million for these warrants. The fair value of these warrants was estimated using the following assumptions: risk-free rate: 1.56%; expected life: five years; expected volatility: 32%; expected dividends: $nil. The warrants were valued using a 32% expected volatility assumption which was based on two historical volatilities: the 2-year TSX Venture index volatility (23%) and the 2-year TSX Mining sector index volatility (27%). A judgemental premium was then added to the observed volatilities, as index volatilities are generally lower than what is observed for an individual company, because of the diversification effect. Accordingly, management has judgementally chosen an estimated volatility of 32% (giving more prominence to the 10 year lookback of the TSX Mining sector) which results in a fair value of $ 0.15 (for a total value of $2,250,000) being attributed to each warrant.

Under the terms of the unsecured debt facility, the Company may, at any time following the operations commencement date at the Renard Diamond Project, prepay the indebtedness in full by paying the principal amount outstanding on the prepayment date, plus accrued and unpaid interest owing, plus a prepayment premium which is equal to the principal outstanding on the prepayment date multiplied by a percentage of the principal, which percentage declines on an annual basis (“Early Repayment Price B”). The prepayment right in Early Repayment Price B is considered an embedded derivative. The Company is required to bifurcate and fair value this embedded option at each reporting date. Management has determined that this embedded derivative has no value as at October 31, 2012 because the Company’s ability to re-finance this unsecured loan at less than the 12% interest rate is limited.

NEW ACCOUNTING STANDARDS AND INTERPRETATIONS The accounting policies followed by the Company in preparing these condensed interim consolidated financial statements are consistent with the accounting policies used by the Company, as set out in the audited consolidated financial statements for the year ended April 30, 2012 except as described below. Borrowings On May 3, 2012, the Company entered into a $20 million unsecured debt facility with the Fonds de solidarité FTQ, the Fonds régional de solidarité FTQ Nord-du-Québec, S.E.C. and Investissement Québec. The debt has been recognised initially at fair value, net of transaction costs incurred. The borrowing is subsequently stated at amortised cost; any difference between the proceeds (net of transaction costs) and the redemption value is recognised in the income statement over the period of the borrowing using the effective interest method. Fees paid on the establishment of a project financing facility are recognised as transaction costs of the loan to the extent that it is probable that some or all of the facility will be drawn down. Transaction costs are deferred until the project finance facility is arranged and draw-down occurs at which time the deferred fees will be recognized as transaction costs over the facility to which they relate. Should the project financing not close as contemplated, the deferred fees will be expensed.

FINANCIAL INSTRUMENTS AND RISK MANAGEMENT The Company’s financial instruments consist of cash and cash equivalents, short-term deposits, other receivables, investments, trade accounts payable, accrued liabilities and provisions, amounts due to related parties and long-term debt. The carrying value of cash and cash equivalents, short-term deposits, other receivables, trade accounts payable,

21 accrued liabilities and provisions and amounts due to related parties approximate their fair values due to their immediate or short-term maturity. Investments are recorded at fair value based on the quoted market prices in active markets at the balance sheet date, which is consistent with Level 1 of the fair value hierarchy. Short-term deposits are recorded consistent with Level 2 of the hierarchy. Long-term debt is recorded initially at fair value net of any directly attributable transaction costs. Following initial recognition, long-term debt is measured at amortized cost using the effective interest method.

The Company is exposed to a variety of financial risks by virtue of its activities, including credit risk, interest rate risk, liquidity risk and insolvency risk. The Company’s financial risks are consistent with those set out in the audited consolidated financial statements for the year ended April 30, 2012 except as described below.

Insolvency Risk The Company entered into a $20 million unsecured debt facility in May 2012. The loan bears interest at a rate of 12% per annum, payable 100% in cash or 50% in cash and 50% in the Company’s common shares, at the Company’s option, prior to commencement of commercial production, and 100% in cash thereafter. Principal is to be repaid in equal monthly instalments commencing approximately one month following the date of commercial production at Renard Diamond Project, but not before May 3, 2016 and not later than May 3, 2017. The final maturity is May 3, 2021. The Company is exposed to insolvency risk if it is unable to meet its obligations under the terms of the loan agreement.

In addition, in December 2012 Les Diamants Stornoway entered into a Financing Agreement with the Government of Quebec whereby the Company may borrow up to $84.7 million for the construction of a Mining Road to the Renard Diamond Project. Repayment of principal and interest will commence forty-eight (48) months following first disbursement and can be deferred for up to two (2) years due to any delay in the attainment of commercial production at the Renard Diamond Project past July 1, 2016. Should the Company be unable to finance the development of the Renard Diamond Project, the Company would be unlikely to meet its obligations under the terms of this financing agreement and would be at risk of insolvency.

DISCLOSURE CONTROLS The Company’s disclosure controls and procedures are designed to provide reasonable assurance that all relevant information is communicated to senior management, to allow timely decisions regarding required disclosure. An evaluation of the effectiveness of the Company’s disclosure controls and procedures, as defined under the rules of the Canadian Securities Administration, was conducted as of April 30, 2012 under the supervision of the Company’s Disclosure Committee and with the participation of management. Based on the results of that evaluation, the Chief Executive Officer and Chief Financial Officer concluded that the Company’s disclosure controls and procedures were effective as of the end of the period covered by this report in providing reasonable assurance that the information required to be disclosed in the Company’s annual filings, interim filings or other reports filed or submitted by it under securities legislation is recorded, processed, summarized and reported as required by applicable securities legislation. Since the April 30, 2012 evaluation, there have been no adverse changes to the Company’s controls and procedures and they continue to remain effective.

INTERNAL CONTROLS OVER FINANCIAL REPORTING Internal control over financial reporting is designed to provide reasonable assurance regarding the reliability of the Company’s financial reporting and the preparation of financial statements in compliance with IFRS. The Company’s internal control over financial reporting includes policies and procedures that:  pertain to the maintenance of records that accurately and fairly reflect the transactions of the Company;  provide reasonable assurance that transactions are recorded as necessary to permit preparation of financial statements in accordance with IFRS;  ensure the Company’s receipts and expenditures are made only in accordance with authorization of management and the Company’s directors; and  provide reasonable assurance regarding prevention or timely detection of unauthorized transactions that could have a material effect on the annual or interim financial statements.

22 An evaluation of the effectiveness of the Company’s internal control over financial reporting was conducted as of April 30, 2012 by the Company’s management, including the Chief Executive Officer and Chief Financial Officer. Based on this evaluation, management has concluded that the Company’s internal controls over financial reporting were effective. There were no changes in the Company’s business activities during the period ended October 31, 2012 that have materially affected, or are reasonably likely to materially affect, its internal controls over financial reporting.

LIMITATIONS OF CONTROLS AND PROCEDURES

The Company’s management, including the Chief Executive Officer and Chief Financial Officer, believe that any disclosure controls and procedures or internal control over financial reporting, no matter how well conceived and operated, can provide only reasonable and not absolute assurance that the objectives of the control system are met. Further, the design of a control system reflects the fact that there are resource constraints, and the benefits of controls must be considered relative to their costs. Because of the inherent limitations in all control systems, they cannot provide absolute assurance that all control issues and instances of fraud, if any, within the Company have been prevented or detected. These inherent limitations include the realities that judgments in decision-making can be faulty, and that breakdowns can occur because of simple error or mistake. Additionally, controls can be circumvented by the individual acts of some persons, by collusion of two or more people, or by unauthorized override of the control. The design of any systems of controls is also based in part upon certain assumptions about the likelihood of future events, and there can be no assurance that any design will succeed in achieving its stated goals under all potential future conditions. Accordingly, because of the inherent limitations in a cost effective control system, misstatements due to error or fraud may occur and not be detected.

APPROVAL The Board of Directors of Stornoway has approved the disclosure contained in this Interim MD&A. A copy of this Interim MD&A will be provided to anyone who requests it.

ADDITIONAL INFORMATION Additional information relating to Stornoway is on SEDAR at www.sedar.com.

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