Preparing for growth: Capitalizing on a period of progress and stability

www.pwc.com/ca/canadianmine A year of stability

Contents

2 A year of stability 3 Highlights and analysis 7 Agnico Eagle: Perfecting a successful 60 year-old strategy 9 Osisko Royalties: Disrupting the cycle An interview with John Matheson, Partner, PwC 11 Savvy investments in stable times

Call it breathing room. Over the last year, into Eastern and Central Europe with its Canada’s major companies have Belt and Road Initiative (formerly One Belt entered a period of relative stability after and One Road) is increasing demand for weathering a frenzied period of boom, industrial products. bust and recovery. Globally, the geopolitical situation will About this report The sector has been paying down debt, likely remain volatile through 2018 and Preparing for growth is one of improving balance sheets and judiciously beyond. While bullion largely shrugged four publications in our annual investing in capital projects, on trend with off 2017’s world events, international Canadian mine series looking at the wider global mining industry in 2017. uncertainties could yet become an the realities and priorities of public Maintaining flexibility and increasing upward force on gold prices. The success mining companies headquartered efficiency are key goals for many executive of stock markets around the globe last in Canada. It offers a summary of financial analysis of the top 25 teams as they try to position themselves to year dampened general investor interest listings by market capitalization on capitalize on the next stages of the cycle. in gold equities, with the precious metal the TSX and complements our Junior Some companies have sought to enhance traditionally serving as a hedge against mine 2017 report, which analyzes the operations through acquisitions, but on market downturns, said David Smith, top 100 listings on the TSX Venture the whole, 2017 saw few eye-popping Senior Vice President of Finance and Chief Exchange (TSX-V). deals and only limited financing activity. Financial Officer at Agnico Eagle Mines Other large players are opting to make Limited. The market’s relative disinterest All figures used in the financial investments in new technologies, such as in gold makes it all the more important analysis are in Canadian dollars automation and big data analysis, to boost that gold miners find ways to differentiate unless otherwise noted. The results profitability over the long term. themselves to investors, he added. of companies that report in other currencies have been translated This overriding mood of patience coincides “There’s a bit of apathy towards gold at the closing Canadian dollar with relatively stable prices for most equities at the moment, and as a result it’s exchange rate on the respective commodities—particularly gold, which really important to grow important metrics period end date. The financial results is at the core of many miners listed on like cash flow per share, for example, and market data reported here the Stock Exchange (TSX). And or production per share, or margin per cover the 12-month period ended as commodity prices have stabilized at ounce,” he said. September 30, 2017. a moderate level, an attitude of cautious So while last year’s activity may pale in confidence has emerged globally for comparison to the dramatic movement in growth prospects in 2018. recent years, the lull in activity has actually Sentiment is also growing more bullish proved to be a healthy development. With as prices for copper, zinc, cobalt and company balance sheets and cash flow lithium have gained momentum. New growing stronger, the sector is positioning end-user technologies to produce and itself well for future growth. store electricity promise to drive long- term demand for these commodities. At the same time, China’s plan to accelerate economic development across Asia and

Preparing for growth: | Capitalizing on a period of progress and stability 2 Highlights and analysis

TSX-listed miners: A modest decline Market capitalization by industry group of the total TSX Mining stocks lagged behind the broader market (as of Sept. 2017) last year, weighed down by stagnant gold prices that dipped 3% in the 12 months ended September 30, Clean technology & renewable energy 2017. Driven largely by the performance of senior 1% Closed-end funds 1% miners, the aggregate value of the 225 mining Utilities & pipelines 9% Communication & Media companies listed on the TSX slipped 4% during that 7% Technology period, compared with a 10% gain for the overall 3% Consumer products & market. As a result, the mining sector’s share of the Real estate services and CPC/SPAC 3% 10% value of the entire TSX market declined to 9%, down from 11% a year earlier. The industry ranked as the Oil & gas 10% ninth largest sector on the exchange, just below ETFs utilities and pipelines. 5% As noted in our Junior mine 2017 report, gold prices also acted as a drag on mining companies listed on Mining the TSX-V. As a group, the juniors’ valuation rose 18% 9% in the year, compared with a 33% gain for the overall Life sciences market. 1% Financial services 29% The story was very different a year earlier in our Industrial products & services Canadian mine 2016 (Beyond the downturn) report, 12% when TSX mining stocks soared 44% and led all Source: TMX website and PwC analysis industries in terms of trading volumes. In 2017, investor enthusiasm was subdued. The volume of mining share trades declined by 19% and the value of mining shares traded fell by 18%. The number of

TSX mining sector market capitalization ($ billion) TSX overview of the mining sector (% change from YTD Sept. 2016 to YTD Sept. 2017)

Top 25 mining companies Total mining sector (16%) Number of trades 300 281.8 271.3 (18%) Value traded

250 239.8 241.1 (19%) Volume traded 213.8 203.3 (33%) Number of financings 192.9 200 186.0 170.8 (49%) Equity capital raised

150 136.5 New listings 43%

(4%) Market capitalization 100

(2%) Number of issuers 50 -50 -40 -30 -20 -10 0 10 20 30 40 % change 0 2013 2014 2015 2016 2017 Source: TMX website and PwC analysis

Source: S&P Global Market Intelligence, TMX website and PwC analysis

Preparing for growth | Capitalizing on a period of progress and stability 3 Highlights and analysis [continued]

mining financings dropped 33%, to 128, Spot price trend (% change from Sept. 2012) and equity capital raised decreased by 49%, to $3.1 billion. 250 Looking ahead, there are signs that the Copper US$281/mt sector’s heavy reliance on gold could 200 Gold Lithium eventually shift as new technologies and Zinc Nickel markets create demand for different 150 Potash minerals. Rising production of electric Silver vehicles, for example, is lifting demand for 100 lithium, cobalt, copper, nickel, aluminum and manganese—and investors are 50 US$3,217/mt responding. The valuations of the five 0 TSX-listed companies with exposure to US$2.94/lb US$1,280/toz lithium (Orocobre Ltd., Lithium Americas US$10,585/mt -50 US$16.66/toz Corp., Nemaska Lithium Inc., Avalon US$216/mt Advanced Materials Inc. and Globex -100 Mining Enterprises Inc.) increased by approximately 39% in the first nine Sept. 2012 Sept. 2013 Sept. 2014 Sept. 2015 Sept. 2016 Sept. 2017 months of 2017, to $2.2 billion. Source: S&P Global Market Intelligence, Bloomberg Finance L.P. and PwC analysis During the mining industry’s weaker performance in 2017, the total number of mining companies listed on the TSX declined to 225, down from 230 a year TSX industry group breakdown by number of listed issuers (as of Sept. 2017) earlier. But despite the net decrease, 10 new listings from the sector made it onto the exchange in the first nine months of ETFs 509 the year, three more than a year earlier. Mining 225

Seven of the companies graduated from Closed-end funds 148 the TSX-V to the main board. SolGold plc., Industrial products & services 132 headquartered in Brisbane, Australia— Financial services 84 and jointly listed on the London Stock Oil & gas 80 Exchange—stood out as the only new Consumer Products & 73 listing valued at more than $1 billion. Services and CPC/SPAC Real estate 64 Almost half of the mining issuers on the Technology 52 TSX had market capitalizations of $150 million or less, and one third were valued Life sciences 44 Clean Technology & 36 between $150 million and $1 billion. This Renewable Energy second group had the greatest expansion Comm. & media 26 during the period, with the number of Utilities & pipelines 25 companies increasing to 74, up from 59 a 0 100 200 300 400 500 year earlier. Number of listed issuers

Source: TMX website and PwC analysis

Preparing for growth | Capitalizing on a period of progress and stability 4 Highlights and analysis [continued]

The top 25: From gold to potash Corp., which held on to the top spot, As a group, the top 25 mining companies reduced debt to US$6.4 billion, down from US$8.5 on the TSX showed a greater focus on debt billion in September 2016. The company also reduction than capital expenditures last announced that it’s open to divesting stakes in non- year. This discipline brought the average core assets, such as Australia’s Kalgoorlie Super Pit debt-to-equity ratio down by 7%. mine, and is focused on maintaining a disciplined approach to capital allocation to ensure sufficient funds are available for additional debt repayments.

Top 25 mining companies Top 25 mining companies: Balance sheet overview ($ billion) (As of September 30, 2017)

1 Barrick Gold Corporation 270.9 Total assets 282.5 2 Potash Corporation of Saskatchewan Inc. 3 Agrium Inc. Total current 48.9 assets 46.3 4 Franco-Nevada Corporation 5 Limited Cash and cash 17.0 equivalent 15.9 6 Inc. 154.7 7 Agnico Eagle Mines Limited Total equity 157.4 8 Corp. 116.2 9 Ltd. Total liability 10 Turquoise Hill Resources Ltd. 125.1 11 Corporation Total current 23.2 liability 21.1 12 Corporation Sept. 2017 13 Corporation 58.1 Sept. 2016 Total debt 14 IAMGOLD Corporation 65.9 15 B2Gold Corp. 0 50 100 150 200 250 300 $ billion 16 Gold Ltd. 17 Pan American Silver Corp. 18 Yamana Gold Inc. Source: S&P Global Market Intelligence and PwC analysis 19 Ivanhoe Mines Ltd. 20 Centamin plc 21 New Gold Inc. Cash flow analysis for the top 25 mining companies ($ million) 22 Endeavour Mining Corporation 23 Centerra Gold Inc. LTM Sept. 2017 LTM Sept. 2016 24 Alamos Gold Inc. (6,607) 25 Ltd. Net cash used in financing activities (836)

(14,883) Net cash used in investing activities (21,672)

21,551 Net cash provided by operating activities 21,939

(25,000) (20,000) (15,000) (10,000) (5,000) 0 5,000 10,000 15,000 20,000 25,000 $ million

Source: S&P Global Market Intelligence and PwC analysis

Preparing for growth | Capitalizing on a period of progress and stability 5 Highlights and analysis [continued]

Deleveraging at the top of the industry Income statement items for the top 25 mining companies ($ billion) will likely continue this year, suggesting that companies have learned from the last Net income LTM Sept. 2017 downturn and are positioning themselves LTM Sept. 2016 8.8 for growth as the cycle proceeds. Ltd. (no. 16, up from (14.2) no. 41) proved to be the strongest market performer of all the TSX-listed mining companies, with its share price soaring Total revenue 175% over the full year following the 79.1 company’s acquisition of Newmarket Gold Inc. The other newcomers to the top 25 were Ivanhoe Mines Ltd., Endeavour 76.7 Mining Corp., Centerra Gold Inc. and Osisko Gold Royalties Ltd. -20 0 20 40 60 80 Gold remained the most important $ billion commodity among the top 25, with 19 Source: S&P Global Market Intelligence, SEDAR and PwC analysis companies having exposure to the precious metal. Ten have exposure to copper, seven to zinc, six to silver and four to nickel. transformative mergers and acquisitions profile. It increases our size and our Looking ahead, however, the most for smaller, strategic bolt-on transactions. market capitalization, both of which help valuable mining company on the TSX will This trend is likely to continue, and the us attract further capital and benefit our be built on another commodity. key mergers and acquisitions story will be shareholders in providing higher liquidity Ltd., created on January 2, 2018, from about mid-tier miners looking to increase into the marketplace.” efficiencies through consolidation. the merger of Potash Corporation of One of the most active buyers during the Saskatchewan Inc. and Agrium Inc., has a For example, Kirkland Lake Gold’s last two years has been Centerra Gold, a valuation of more than $40 billion, almost approximately $1 billion deal to acquire Toronto-based gold and copper mining twice that of Barrick Gold. Pre-merger, as Newmarket Gold vaulted it up the ranks of company focused on properties in North of September 30, 2017, Potash Corporation gold producers, combining premium assets America and Central Asia. In January, it of Saskatchewan and Agrium secured in Northeastern and Victoria, acquired its smaller rival AuRico Metals second and third spots, respectively. Australia. The new company’s three main Inc. for $310 million, and in October 2016 Rounding out the top five were Franco- mines are producing 330,000 ounces the company bought Thompson Creek Nevada Corp. and Teck Resources Ltd. annually at an all-in sustaining cost of less Metals Company Inc. for approximately Franco-Nevada, which has streaming than US$800/ounce.1 US$1.1 billion. The latter deal was highlighted as the transaction of the year agreements attached to precious metal Meanwhile, royalty company Osisko Gold in our Canadian mine 2016 report for the assets, continued to reap the fruits of its Royalties Ltd. spent $1.13 billion to acquire geographic and asset diversity it added to investments made near the bottom of the a portfolio of assets from US private equity Centerra’s portfolio. last cycle. Teck Resources capitalized on firm Orion Mine Finance Group. The deal higher prices for copper and zinc. helped drive up Osisko shares by 65% In terms of financing deals, mining by more than doubling Osisko’s precious companies on the TSX raised only half Transactions: Looking for metals portfolio of assets to 131 royalties2. the equity capital in 2017 that they did greater efficiencies “The transaction was transformative for the previous year. And for the second Deal making slowed significantly in us,” says Bryan Coates, President of Osisko consecutive year, there were no mining 2017, as CEOs generally shied away from Gold Royalties. “It gives us a great growth initial public offerings on the TSX.

1. Kirkland Lake Gold. September 29, 2016. Kirkland Lake Gold and Newmarket Gold to combine to create a new mid-tier gold company. http://www.klgold.com/news- and-media/news-releases/press-release-details/2016/Kirkland-Lake-Gold-and-Newmarket-Gold-to-Combine-to-Create-a-New-Mid-Tier-Gold-Company-9292016/ default.aspx. Retrieved February 13, 2018. 2. Osisko Gold Royalties. July 31, 2017. Osisko completes acquisition of Orion royalty portfolio. http://osiskogr.com/en/osisko-completes-acquisition-of-orion-royalty- portfolio/. Retrieved February 13, 2018.

Preparing for growth | Capitalizing on a period of progress and stability 6 Agnico Eagle: Perfecting a successful 60 year-old strategy

We’re really planning to be around for 60 more years by executing literally the same strategy that got us here today.

David Smith, Senior Vice President of Finance and CFO, Agnico Eagle Mines Limited

An interview with David Smith, Senior “One of the reasons we’ve been around 27,000 hectares in northeastern Ontario Vice President of Finance and CFO, Agnico for 60 years is that governments haven’t where mineral reserves and resources have Eagle Mines Limited expropriated our assets. We’ve purposely been outlined, as well as the advanced- avoided the parts of the world that are stage Hammond Reef gold project, Amidst the boom-bust cycles and frenzied more difficult, and as a result we’ve been covering more than 31,000 hectares in merger and acquisition (M&A) activity that able to operate these assets over the long northwestern Ontario.3 have defined Canada’s mining industry, term.” longevity is a rare attribute. Last year, Think big Agnico Eagle Mines Limited celebrated its Acquire small Beyond its exploration projects, Agnico 60th anniversary, hitting a milestone that Agnico Eagle’s strategy includes finding Eagle also has a stake in one of the world’s few of its peers have reached, and once its own gold reserves by evaluating early- largest gold-focused producing mines. again landed among the top 10 TSX-listed stage assets. More than 60 of its employees During the first nine months of 2017, mining companies for 2017. focus on project evaluation, a process that the company’s share of production at Agnico Eagle’s vitality results from the often begins with chip samples and drill Canadian Malartic totaled almost 472,000 steady execution of a consistent strategy holes, and in some cases progresses to the ounces of gold at a net production cost of supported by its shareholders, says David development and operation of a new gold US$552 per ounce.4 mine. Smith, Senior Vice President of Finance One of Agnico Eagle’s competitive and Chief Financial Officer of the Toronto- “Our whole strategy is set up to get in advantages has been its willingness to based company. early,” Smith says. “When you find the gold reinvest profits from its mines into the “If you’re well respected, and you’re with your own drill bit, you’re generally exploration for new ones, especially executing on a good plan, and you have paying US$10 to $20 per ounce. But if you during the last economic downturn. good quality assets, basically nobody can buy it in the market through M&A, you’d Looking forward, Smith expects that the afford to take you over,” he says. be paying US$100 to $150 per ounce.” company will continue to consume cash into the middle of 2019, after which free Those assets include eight operating To make the strategy work, Agnico Eagle cash flow should increase, setting the stage mines, located in Canada, and maintains a robust pipeline of potential for the next leg of growth and eventually , along with exploration and projects. In December, the company “a sustainable self-funding business.” development activities in each of these signed a US$162.5 million deal to buy countries and in the and the Canadian exploration assets of Agnico Eagle’s journey over the next 60 Sweden. The choice of these locations Canadian Malartic Corp., a joint venture years will include significant investments in represents a critical part of the company’s it owns equally with Yamana Gold Inc. new technologies, specifically targeted to success, Smith adds. The agreement gives Agnico Eagle the reduce operating costs and move its labour Kirkland Lake project, covering more than force into higher-skilled jobs, Smith says.

3. Agnico Eagle Mines Limited. December 21, 2017. Agnico Eagle to purchase the exploration assets of Canadian Malartic Corporation; including the Kirkland Lake and Hammond Reef Gold projects. https://www.agnicoeagle.com/English/investor-relations/news-and-events/news-releases/news-release-details/2017/Agnico-Eagle-to- Purchase-the-Exploration-Assets-of-Canadian-Malartic-Corporation-Including-the-Kirkland-Lake-and-Hammond-Reef-Gold-Projects/default.aspx Retrieved February 18, 2018. 4. Agnico Eagle Mines Limited. Operations—Canadian Malartic. https://www.agnicoeagle.com/English/operations-and-development-projects/operations/canadian- malartic/default.aspx Retrieved February 18, 2018.

Preparing for growth | Capitalizing on a period of progress and stability 7 Perfecting a successful 60 year-old strategy [continued]

One such early example is an automated oil, and he’s mindful that the best way to Rail-Veyor5 conveyor system installed at prepare Agnico Eagle for that phase of the Agnico Eagle’s Goldex mine in the Abitibi commodity cycle is to maintain a low cost region of northwestern . In one structure. zone of the mine, some 1,200 metres “I’m pretty excited about the state of below the surface, the technology helps the gold market and Agnico Eagle’s move approximately 6,000 tonnes of ore a positioning,” he says. day. The company is considering using the system in other sites as well. “We’ve got a huge pipeline that will keep us growing over the next 5 to 10 years. And Create value as long as we keep control of costs and pay Smith is optimistic that gold prices will attention to the balance sheet, there’s a rise in the next few years as interest rates chance to create huge value for our owners climb and fears of inflation re-emerge. and other stakeholders.” But he cautions that higher bullion prices traditionally bring with them more expensive input costs, including

5. Rail-Veyor. Overview. http://www.railveyor.com/overview.php Retrieved February 18, 2018.

Preparing for growth | Capitalizing on a period of progress and stability 8 Osisko Gold Royalties: Disrupting the cycle

Today we’re the fourth largest precious metal royalty company in the world…we’ve gone from 5 royalty assets to over 130 royalty assets. We’ve done two transformative transactions. So over the past 42 months we’ve had a lot of fun.

Bryan Coates, President, Osisko Gold Royalties

its “accelerator” or “incubator” model, challenge for many miners, with gold An interview with Bryan Coates, President of Osisko Gold Royalties which involves bringing money and talent prices hanging between US$1300 and to new projects and converting them into $1350 per ounce. But looking at it in Osisko Gold Royalties Ltd. was founded operating mines. An added benefit from Canadian dollars, Coates says the gold in June 2014, as the last downturn in the this incubator arm has been the use of price is relatively strong in historical mining sector took hold. The company was flow-through shares, which have allowed terms, between $1,600 and $1,650 per a spin-out from a blockbuster transaction the company to shelter royalty stream ounce. As a result, Osisko Gold Royalties’ that involved Yamana Gold Inc. and Agnico revenue from taxation. focus on the Canadian market has proven an advantage for the company. In fact, the Eagle Mines Limited’s $3.9 billion purchase “The incubator model was something new company raised over $500 million in 2017. of Osisko Mining Corp. Since then, Osisko in the industry and at the time we had Gold Royalties has rapidly ascended to to fight to get acceptability for it. Today, Today, Osisko Gold Royalties owns more become the fourth largest precious metal I think it has proven acceptable because than 130 royalties, streams and precious royalty company in the world. we have concrete examples of success and metal offtakes, 102 of which are located in In less than four years, the market the model has also allowed us to recruit Canada. The cornerstone assets include a capitalization of the Montréal-based talented people,” Coates says. 5% net smelter return (NSR) royalty from Agnico Eagle Mines Ltd. and Yamana Gold company has soared five-fold, to $2.5 Osisko Gold Royalties’ incubator includes Inc.’s Canadian Malartic mine in Quebec billion, making Osisko Gold Royalties the investment stakes in Osisko Mining Inc., and a 2% to 3.5% NSR royalty from 25th largest mining company on the TSX Falco Resources Ltd., Barkerville Gold Goldcorp’s Éléonore mine in James Bay, (September 30, 2017). Mines Ltd. and Osisko Metals Inc. Osisko Quebec. “We always said when we started off Gold Royalties plans to expand its portfolio that we would grow the business,” says and gradually convert more of the assets The Canadian Malartic mine was the President Bryan Coates. “The last 42 into operating mines, Coates adds. key asset behind Yamana and Agnico Eagle’s purchase of Osisko Mining Corp. months have been about the execution of Osisko Gold Royalties strengthened in 2014. As part of the transaction, Osisko the strategy we developed in 2014. We’re its royalty and streaming business last Gold Royalties was spun off as a new a very innovative and entrepreneurial summer with a $1.1 billion purchase of independent company, retaining much of company, and we get up every day to gold, silver and diamond royalty, stream Osisko Mining’s senior management team, basically go out and execute and disrupt and offtake interests from Orion Mine including Coates, who had served as chief what’s going on out there.” Finance Group, a US private equity firm. financial officer. The new business began The transformative deal doubled Osisko Osisko Gold Royalties’ inventive high- operations with $157 million in cash and a Gold Royalties’ assets, diversifying its growth strategy is built on a hybrid portfolio of equity investments worth only portfolio of royalties and boosting cash business model, comprised of a traditional about $15 million. royalty and streaming business and an flow. The transaction has also helped the investment portfolio of publicly held company attract additional capital and Powered by the assets acquired from resource companies. partially close the gap with its competitors Orion Mine Finance, Osisko Gold Royalties Franco-Nevada Corp., Royal Gold and reported a 54% jump in gold equivalent About 75% of the business is directed at Wheaton Precious Metals Corp. ounces earned in 2017, to 58,933. Looking providing financing for mining projects in ahead, the company predicts that figure During a year of stagnant gold prices, return for a stake in future production. The will rise to between 130,000 ounces and accessing capital has become a greater remainder links to what the company calls 140,000 ounces by 2020.

Preparing for growth | Capitalizing on a period of progress and stability 9 Savvy investments in stable times

Positive forecasts for global economic growth bode well for commodity prices ahead, and a host of international uncertainties—combined with the return of rising interest rates in many countries— suggest that demand for gold could also rise. This recovery cycle also brings with it newly emerging opportunities for miners. Burgeoning technologies such as electric vehicles have begun to drive demand for other commodities, including lithium, cobalt, copper and nickel. And the arrival of artificial intelligence, automation and big data analysis into the corporate mainstream means mining companies Prices for many mining commodities were broadly have the ability to transform the way they operate and stable over the last year. Compared to previous greatly improve their efficiency. turbulent years, this brought some relief to mining Our Shaping the mine of the future campaign companies and allowed executive teams to take the spotlights how some companies are capitalizing on necessary steps to ready operations for renewed these opportunities and setting themselves up to growth. prosper through the next cycle and beyond. To start Preparing for growth highlights how rising confidence the conversation, talk with your local PwC mining among Canada’s major mining players remains professional or visit pwc.com/ca/mining. tempered with caution. These companies have paid off Best regards, significant amounts of debt over the last year and are applying a long-term lens to most investments.

Liam Fitzgerald Canadian Mining Leader

Contacts

Liam Fitzgerald Nochane Rousseau Marelize Konig Additional Partner, Canadian Mining Leader Partner, Quebec Mining Leader Partner, Assurance contributors 416 869 2601 514 205 5199 416 814 5862 [email protected] [email protected] [email protected] Facundo Meyniel connect on linkedIn „ connect on linkedIn „ connect on linkedIn „ Manager, Assurance

Michael Lising Dean Braunsteiner Stephen Mullowney John Matheson Associate, Deals Partner, Ontario Mining Leader Partner, Corporate Finance Partner, Deals 416 869 8713 416 687 8511 416 687 8171 Taylor Whittamore [email protected] [email protected] [email protected] National Marketing Specialist connect on linkedIn „ connect on linkedIn „ Mark Platt Shauna Peck Partner, B.C. Mining Leader National Marketing Senior Manager 604 806 7093 mark.r.platt pwc.com @ Mika Bott connect on linkedIn „ Senior Graphic Designer www.pwc.com/ca/canadianmine

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