Fair value measurement

The Company categorizes each of its fair value measurements in accordance with a fair value hierarchy. The fair value hierarchy establishes three levels to classify the inputs to valuation techniques used to measure fair value. Level 1 inputs are quoted prices (unadjusted) in active markets for identical assets or liabilities. Level 2 inputs are quoted prices in markets that are not active, quoted prices for similar assets or liabilities in active markets, inputs other than quoted prices that are observable for the asset or liability (for example, interest rate and yield curves observable at commonly quoted intervals, forward pricing curves used to value currency and commodity contracts and volatility measurements used to value option contracts), or inputs that are derived principally from or corroborated by observable market data or other means. Level 3 inputs are unobservable (supported by little or no market activity).

The fair value hierarchy gives the highest priority to Level 1 inputs and the lowest priority to Level 3 inputs.

The fair values of the accounts receivable and accounts payable and accrued liabilities approximate their carrying values due to the relatively short-term maturity of these financial instruments.

The following table shows the carrying amounts and fair values of the Company’s financial assets and financial liabilities, including their levels in the fair value hierarchy.


	Carrying amount								Fair value

December 31, 2021	Assets at amortized cost		Fair value through profit and loss		Liabilities at amortized cost		Total		Level 1		Level 2		Level 3		Total
Financial assets measured at fair value

Derivative assets	$	-	$	775	$	-	$	775	$	-	$	775	$	-	$	775

	$	-	$	775	$	-	$	775

Financial assets not measured at fair value

Cash	$	25,000	$	-	$	-	$	25,000		25,000		-		-		25,000

Restricted cash		25,144		-		-		25,144		25, 144		-		-		25, 144

Amounts receivable		877		-		-		877		877		-		-		877

	$	51,021	$	-	$	-	$	51,021

Finacial liabilities not measured at fair value

Accounts payable and accrued liabilities	$	-	$	-	$	36,893	$	36,893		36,893		-		-		36,893

Secured notes payable		-		-		375,517		375,517		357,607		-		-		357,607

	$	-	$	-	$	412,410	$	412,410


	Carrying amount								Fair value

December 31, 2020	Assets at amortized cost		Fair value through profit and loss		Liabilities at amortized cost		Total		Level 1		Level 2		Level 3		Total
Financial assets measured at fair value

Derivative assets	$	-	$	185	$	-	$	185	$	-	$	185	$	-	$	185

	$	-	$	185	$	-	$	185

Financial assets not measured at fair value

Cash	$	35,152	$	-	$	-	$	35,152		35,152		-		-		35,152

Restricted cash		15,019		-		-		15,019		15,019		-		-		15,019

Amounts receivable		797		-		-		797		797		-		-		797

	$	50,968	$	-	$	-	$	50,968

Financial liabilities not measured at fair value

Accounts payable and accrued liabilities	$	-	$	-	$	41,010	$	41,010		41,010		-		-		41,010

Dunebridge revolving credit facility		-		-		31,813		31,813		-		31,813		-		31,813

Secured notes payable		-		-		374,706		374,706		329,632		-		-		329,632

	$	-	$	-	$	447,529	$	447,529

Fair values of assets and liabilities classified as Level 2 are valued using discounted cash flow (“DCF”) models. These models require a variety of observable inputs including market prices, forward price curves, yield curves and credit spreads. Derivative assets are carried at fair value which is determined based on internal valuation model that reflect the observable currency exchange rates in the markets. These inputs are obtained from or verified with the market where possible. The financial assets relate to the embedded derivative assets, which are prepayment options on the secured notes payable (Note 9) and foreign currency put option contracts (Note 14). The financial liabilities relate to the Dunebridge RCF.

The fair value of the secured notes payable is determined using market quoted prices.

Financial instruments risks

The Company examines the various financial instrument risks to which it is exposed and assesses the impact and likelihood of those risks. These risks include credit risk, liquidity risk, market risk, foreign currency risk and interest rate risk.

Credit risk

Credit risk is the risk of financial loss to the Company if a customer or counterparty to a financial instrument fails to meet its obligations. The Company’s exposure to credit risk is for its amounts receivable of which all of the outstanding amounts of $877 and $797 as at December 31, 2021 and 2020, respectively, were collected.

On December 31, 2021 and 2020, the Company does not have any allowance for doubtful accounts, and does not consider that any such allowance is necessary.

All of the Company’s cash and restricted cash is held with a major Canadian financial institution and thus the exposure to credit risk is considered insignificant. Management actively monitors the Company’s exposure to credit risk under its financial instruments, including with respect to amounts receivable. The Company considers the risk of loss for its amounts receivable to be remote and significantly mitigated due to the financial strength of the parties

from whom most of the amounts receivable are due - the Canadian government for harmonized sales tax (“HST”) refunds receivable in the amount of approximately $722 (2020 - $604).

The Company’s current policy is to hold excess cash in bank accounts.

Liquidity risk

Liquidity risk is the risk that the Company will not be able to meet its obligations associated with financial liabilities. The Company’s approach to managing liquidity risk is to monitor forecast cash flows so that it will have sufficient liquidity to meet liabilities when due. The Company has a planning and budgeting process in place by which it anticipates and determines the funds required to support its ongoing requirements. The Company coordinates this planning and budgeting process with its financing activities through its capital management process. To achieve this, the Company relies on regular sales throughout the year, generally nine or ten tender sales, in addition to occasional sales of fancies and special diamonds to De Beers, in order to fund ongoing operations.

Being able to maintain positive cash flows from operations and/or maintain sufficient liquidity, is dependent upon many factors including, but not limited to, diamond prices, exchange rates, operating costs and levels of production. Adverse changes in one or more of these factors negatively impact the Company’s ability to comply with the covenants and/or maintain sufficient liquidity, all of which are subject to the effects of the ongoing

COVID-19

pandemic.

As at December 31, 2021, the Company has

a current

obligation for US$299.9 million or $379 million Canadian dollar equivalent (2020 – US$299.9 million or $381.7 Canadian dollar equivalent) from the secured notes payable. The notes are secured by a second-priority lien on substantially all of the assets which includes the 49% participating rights to the GK Mine. The Dunebridge RCF is granted first priority, if amounts are drawn. Failure to meet the obligations of the s

cured notes payable as they come due may lead to the sale of the 49% participating interest in the GK Mine.

Subsequent to the year ended December 31, 2021, the Company executed a

credit facility with Dunebridge, for US$50 million (Note 20).

The following table summarizes the contractual maturities of the Company’s significant financial liabilities and capital commitments, including contractual obligations:


	Less than		1 to 3		4 to 5		After 5
	1 Year		Years		Years		Years		Total
Gahcho Kué Diamond Mine commitments	$	4,391	$	-	$	-	$	-	$	4,391
Gahcho Kué Diamond Mine decommissioning fund		10,000		20,000		-		-		30,000
Notes payable - Principal		379,034		-		-		-		379,034
Notes payable - Interest		30,323		-		-		-		30,323
	$	423,748	$	20,000	$	-	$	-	$	443,748

Market risk

Market risk is the risk that changes in market prices such as foreign exchange rates, interest rates and equity prices will affect the Company’s income and the value of its financial instruments. The objective of market risk management is to manage and control market risk exposures within acceptable parameters while optimizing returns.

(i) Interest rate risk

The Company does not have significant exposure to interest rate risk at December 31, 2021 and 2020, since the secured notes payable and Dunebridge RCF do not have variable interest rates. At December 31, 2021, the total secured notes payable was US$299.9 million (2020 – US$299.9 million) and the Dunebridge RCF was Nil (2020 - US$25 million).

(ii) Foreign currency

The Company is exposed to market risk related to foreign exchange rates. The Company operates in Canada and has foreign currency exposure to transactions in U.S. dollars. The majority of the ongoing operational costs of the GK Mine are in Canadian dollars, and are funded through operating cash flows. The Company’s operating cash flows include the sale, in U.S. dollars, of its 49% share of the GK Mine diamonds produced.

As at December 31, 2021 and 2020, the Company had cash, derivative assets, accounts payable and accrued liabilities, the Dunebridge revolving credit facility and the secured notes payable that are in U.S. dollars. The Canadian dollar equivalent is as follows:



	December 31,			December 31,

	2021			2020

Cash	$	11,968		$	33,703

Derivative assets		731			-

Accounts payable and accrued liabilities		(1,949	)		(2,538	)

Dunebridge revolving credit facility		-			(31,813	)

Secured notes payable		(379,034	)		(381,674	)

Total	$	(368,284	)	$	(382,322	)

A 10% appreciation or depreciation of the Canadian dollar relative to the U.S. dollar at December 31, 2021 and 2020 would have resulted in an increase or decrease to net income for the year of approximately $36.8 million and $38.2 million, respectively.