FALCO RESOURCES LTD.€¦ · an issue price of $0.32 per FT Share, for aggregate gross proceeds of...

FALCO RESOURCES LTD.

MANAGEMENT’S DISCUSSION & ANALYSIS

FOR THE THREE AND SIX MONTHS ENDED

DECEMBER 31, 2015

FALCO RESOURCES LTD. Management’s Discussion & Analysis For the Three and Six Months Ended December 31, 2015

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The following management discussion and analysis (“MD&A”) of the operations and financial position of Falco Resources Ltd. (“Falco” or the “Company”) for the three and six months ended December 31, 3015 should be read in conjunction with the Company’s unaudited condensed interim financial statements and related notes for the three and six months ended December 31, 2015. The unaudited condensed interim financial statements have been prepared in accordance with International Financial Reporting Standards (“IFRS”) as issued by the Accounting Standards Board (“IASB”). Management is responsible for the preparation of the financial statements and other financial information relating to the Company included in this report. The Board of Directors is responsible for ensuring that management fulfills its responsibilities for financial reporting. In furtherance of the foregoing, the Board of Directors has appointed an Audit Committee composed of independent directors. The Audit Committee meets with management in order to discuss results of operations and the financial condition of the Company prior to making recommendations and submitting the financial statements to the Board of Directors for its consideration and approval for issuance to shareholders. The information included in this MD&A is as of February 26, 2016, the date when the Board of Directors has approved the Company's unaudited condensed interim financial statements for the three and six months ended December 31, 2015 following the recommendation of the Audit Committee. All monetary amounts included in this report are expressed in Canadian dollars, the Company’s reporting and functional currency, unless otherwise noted. This MD&A contains forward-looking statements and should be read in conjunction with the risk factors described in the “Forward-Looking Statements” section.

For further details regarding the Horne 5 polymetallic deposit project (“Horne 5 Deposit”), please refer to the NI 43-101 technical report dated April 16, 2014 and entitled “Technical Report and Mineral Resource Estimate for the Horne 5 Deposit” (the “Technical Report”) available on SEDAR at www.sedar.com.

Claude Bernier, Exploration Manager, (P.Geo. Eng.) is the qualified person as defined by National Instrument 43-101 - Standards of Disclosure for Mineral Projects who has reviewed and verified the technical information contained in this MD&A. Description of the Business

Falco Resources Ltd. is listed on the TSX Venture Exchange (the “TSX-V” or “Exchange”) under the symbol FPC. The Company is one of the largest claim holders in the Province of Québec, with extensive land holdings in the Abitibi Greenstone Belt. Falco owns approximately 72,800 hectares of land in the Rouyn-Noranda mining camp, including 14 former gold and base metal mine sites.

Falco's principal property is the Horne Mine Complex, which hosts several former producers including the Horne Mine, the camp’s largest, operated by Noranda from 1927 to 1976. Horne produced approximately 11.6 million ounces of gold and 2.5 billion pounds of copper. Falco’s Technical Report contained a maiden 43-101 mineral resource estimate dated April 16, 2014 for the Horne 5 Deposit delineating an initial inferred resource of 25.3 million tonnes grading 2.64 g/t Au, 0.23% Cu and 0.7% Zn, for 2.8 million ounces of gold equivalent. A copy of this report is available on SEDAR at www.sedar.com.

The Company was originally incorporated as Druk Capital Partners Inc. under the British Columbia Business Corporations Act on March 16, 2010 as a Capital Pool Company (“CPC”), as defined in TSX Venture Exchange Policy 2.4. As a CPC, the Company’s principal business was to identify, evaluate and acquire assets, properties or businesses which would constitute a Qualifying Transaction (“QT”) in accordance with Policy 2.4 of the Exchange.

To satisfy the QT requirements, the Company signed a purchase agreement on September 12, 2012 with QMX Gold Corporation (“QMX”), a company incorporated in Ontario and listed on the TSX-V, to acquire 100% of QMX’s right, title and interest in the Rouyn-Noranda Project in the Canadian Province of Québec. On September 25, 2012, the Company changed its name to Falco Pacific Resource Group Inc. and began trading as a Tier 2 Mining Issuer on the TSX-V under the symbol “FPC”. As a result of the QT, the Company is now in the business of exploration and evaluation of these and potentially other exploration assets to determine whether or not these properties contain mineral resources that are economically recoverable.

On July 24, 2014, the Company changed its name from Falco Pacific Resource Group to Falco Resources Ltd. and on June 30, 2015, the Company was continued under the Canada Business Corporations Act.

http://www.sedar.com/



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Highlights for the Quarter

On November 6, 2015, Falco reported positive results from its preliminary infrastructure evaluation assessment and from its groundwater sampling campaign on its 100% owned Horne Complex property, located in Rouyn-Noranda, Québec.

On November 6, 2015, the Company announced the nomination of two new independent mining industry professionals who stood for election as nominees to Falco's Board of Directors at the annual and special meeting of shareholders on November 24, 2015;

o Mario Caron: an executive with over 35 years of experience in the mining industry including board

and management expertise in operations, development, exploration, and capital markets as well as government relations with companies having projects in the Americas, Africa and South-East Asia.

o Hélène Cartier: formerly Vice-President, Environment and Sustainable Development at Osisko Mining Corporation from 2011 to 2013. She was intimately involved in the community relations aspects during the permitting, construction and development phases of the Canadian Malartic Mine.

On November 9, 2015, Falco announced positive results from its confirmation drilling program on the Horne 5 project. The new results included 2 additional pilot holes and 2 wedges. At that date, the total 18 planned holes had been completed and logged. Comparisons of the new results with the nearest historical data continued to confirm the overall grade and geometry of the Horne 5 Deposit. Falco also reported that it intercepted 108.9 meters averaging 3.1 g/t Au equivalent at Horne 5.

On November 19, 2015, Falco announced results from the Quémont Extension. Falco reported it had intercepted 55.5 meters averaging 4.0g/t Au Equivalent.

On November 23, 2015, Falco announced the final results of the confirmation drilling program on the Horne 5 project. New results included 2 pilot holes and 2 wedges. Analytical results in the mineralized zones had now been received for all 18 holes. A total of 17,150 meters were drilled in the 18 holes.

On December 15, 2015, Falco announced positive flotation and leaching results at Horne 5 Deposit.

On December 24, 2015, Falco announced that the Board of Directors approved the grant of incentive stock options to directors, officers and employees to purchase up to an aggregate of 2,582,026 common shares in the share capital of the Company. Grants to officers are subject to a three-year vesting period and a five-year term and grants to directors are subject to a two-year vesting period and a three-year term, all at an exercise price of $0.25 per option.

On December 30, 2015, Falco closed a non-brokered private placement of flow-through shares (“FT Shares”) at an issue price of $0.32 per FT Share, for aggregate gross proceeds of $3,281,040. Osisko Gold Royalties Ltd, an insider of the Company, also participated in the Offering. The net proceeds raised from the sale of flow-through shares will be used by Falco to finance qualified Canadian exploration expenditures on its Canadian resource properties

Highlights Subsequent to Quarter-End

On January 25, 2016, Falco announced a significant increase in Horne 5 gold equivalent resources.

o Indicated Resource: 5.36 million ounces of gold equivalent; 58.3 million tonnes averaging 2.86 g/t AuEq (1.82 g/t Au; 15.60 g/t Ag; 0.20% Cu; 1.00% Zn)

o Inferred Resource: 1.25 million ounces of gold equivalent; 12.7 million tonnes averaging 3.08 g/t AuEq (2.10 g/t Au; 26.26 g/t Ag; 0.22% Cu; 0.57% Zn)


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Rouyn-Noranda Mining District

The Company’s principal asset is its 100% interest in approximately 728 square kilometers of mineral claims in the historic Rouyn-Noranda mining camp. Management believes that this represents approximately 70% of the entire mining district. The Company’s holdings include 14 former producing gold and base metal mines. As an established mining camp in the Province of Québec, Rouyn-Noranda has the necessary infrastructure in place for exploration and mine development.

Rouyn-Noranda has had a long history of mining and exploration. Since the Horne deposit discovery in the 1920's, the area has been host to 50 past-producers, including 20 base metal mines and 30 gold mines. A number of copper-zinc volcanogenic massive sulphide (“VMS”) deposits in the camp contain gold grades well in excess of those associated with typical VMS deposits which along with several mesothermal vein type deposits have accounted for more than 19 million ounces of historic gold production from the camp as a whole.

In addition to the acquisition of the mining claims comprising the Rouyn-Noranda project, the Company acquired an extensive database accumulated by Glencore Canada Corporation and its predecessors, consisting of detailed GoCad 3D computerized models of area geology, mine infrastructure, geophysics and lithogeochemistry, as well as results from over four million metres of surface and underground drilling. The Company continues to analyze the data package to identify exploration targets. Included in this process is the identification and selective construction of geological models for highly prospective targets, including the Horne 5 Deposit.

The summary of the exploration and evaluation investments in the Rouyn-Noranda Mining District for the three and six months ended December 31, 2015 and for the year ended June 30, 2015 is as follows:

For the three-month period ended

For the six-month period ended

For the year ended

December 31, 2015

December 31, 2015

June 30, 2015

Balance – beginning of period $ 16,932,488 $ 14,431,059 $ 10,330,484

Consulting and salaries 100,466 204,128 752,753 Drilling 1,862,854 3,688,893 2,815,249 Geochemistry - - 237,473 Geology 17,151 76,816 449,123 Geophysics 87,706 131,664 321,608 Data compilation - - 228,393 Metallurgy 370,955 508,977 - Environment and securing of the sites 52,075 172,767 - Mining engineering 43,085 150,636 - Technical studies 159,520 207,519 - Hydrology 137,100 137,594 - Other 91,601 144,948 -

Total expenditures for the period Refundable tax credits for the period

2,922,513 (75,634)

5,423,942 (75,634)

4,804,599 (3,662)

Total for the period, net of tax credits Write-off of exploration and evaluation assets(1)

2,846,879 -

5,348,308 -

4,800,937 (700,362)

Balance – end of period $ 19,779,367 $ 19,779,367 $ 14,431,059

(1) During the year ended June 30, 2015, the Company wrote-off 100% of the capitalized historical costs related

to specific areas where claims were not expected to be renewed or where the Company has decided to discontinue exploration and evaluation activities.


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Horne 5 Deposit

The Horne 5 Deposit sits immediately below the former producing Horne Mine, which was operated by Noranda Inc. from 1926 to 1976 and produced approximately 2.5 billion pounds of copper and 11.6 million ounces of gold. Historically 4,386 holes were drilled at Horne 5 representing a total of 305 kilometers of drilling. This drill data has been digitized and served as the basis to publish the initial NI 43-101 Inferred resource and for devising the current confirmation drilling program.

In March of 2013, the Company retained InnovExplo of Val d'Or, Québec, to complete a digital model of the Horne 5 Deposit. Over 4,300 drill holes, 370 level plans, 620 cross sections, 99 longitudinal sections and over 150,000 assay results were incorporated into the Horne 5 Deposit model. The data incorporated over 55,000 meters of underground development on 22 levels and 18 sublevels completed by Noranda during the development and operation of the Horne mine between 1931 and 1976.

Following completion of the digital model, InnovExplo was retained to prepare the Company’s Technical Report for the Horne 5 Deposit. An initial 43-101 mineral resource estimate outlining an inferred resource of 25.3 million tonnes grading 2.64 g/t Au, 0.23% Cu and 0.7% Zn, for 2.8 million ounces of gold equivalents was reported in a March 4, 2014 news release.

On February 10, 2015, Falco announced the inaugural confirmatory drill program on the Horne 5 Deposit. The program was intended to confirm historical drill data, upgrade the size of and confidence level in the mineral resource estimate and provide material for metallurgical testing. The $3.7 million program consisted of 16,000 meter surface drilling consisting of 9 holes and 9 wedge holes.

In November 2015, Falco announced that the total 18 planned confirmation holes had been completed and logged. Final results were received on November 23. Analytical results have been received for all holes drilled in the mineralized zones at Horne 5. The comparisons of the results with the nearest historical data are made on all assays for the entire length of the mineralized zone without application of a cut-off grade. Given the historical drill holes are not parallel to the 2015 drill holes, cylinders of 15 meters around the 2015 drill holes were used to select the historical samples in the immediate vicinity of the drill hole for the basis of comparison. Comparisons of the results with the nearest historical data continued to confirm the overall grade and geometry of the Horne 5 Deposit. A confirmation hole intercepted 108.9 meters averaging 3.10 g/t Au equivalent within the mineralization envelop which was subject to the confirmation program.

On November 19, 2015, Falco announced results from the Quémont Extension. Falco reported it had intercepted 55.5 meters averaging 4.0g/t Au equivalent. Two pilot holes and two wedges were initiated to follow up on the Quémont Extension target. Compilation of the results are in progress.

Updated mineral resource estimate

On January 25, 2016, Falco reported an updated mineral resource estimate for its wholly-owned Horne 5 gold project. Gold equivalent resources have increased significantly as a result of the work completed in 2014 and 2015. The estimate combines the results of the 2015 surface confirmation drilling program and the historic drilling data collected by Noranda Inc. between 1924 and 1976. The majority of the Noranda drilling was conducted as radiating “fan drilling” on 15 meters spacing from 40 underground working levels developed throughout the deposit. New indicated and inferred resources have been estimated for the Horne 5 deposit. This new mineral resource estimate contains 5 high grade zones.

Highlights at a $65 per tonne net smelter return (“NSR”) cut-off are as follows:

o Horne 5 currently hosts an indicated resource of 5,361,000 gold equivalent ounces (“oz AuEq”) including 3,418,232 oz Au hosted in 58.3 million tonnes averaging 2.86 g/t AuEq (1.82 g/t Au; 15.60 g/t Ag; 0.20% Cu; 1.00% Zn).

o Horne 5 also currently hosts an inferred resource of 1,254,000 oz AuEq including 854,534 oz Au hosted in 12.7 million tonnes averaging 3.08 g/t AuEq (2.10 g/t Au; 26.26 g/t Ag; 0.22% Cu; 0.57% Zn).

o The indicated resources represent 81% of the total resources. The recently completed drilling program confirmed Au, Cu and Zn grades in historical drill holes and provided the data to upgrade a large portion of the inferred resource into the indicated category.


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o The significant increase in indicated resources together with the increase in global resources provides further

confidence in the quality and predictability of Horne 5 as the project moves towards preliminary economic assessment and feasibility study stages.

o An initial Preliminary Economic Assessment (“PEA”) using the updated Horne 5 resource has been commenced and is planned to be completed by the end of the second calendar quarter of 2016.

o Ongoing work on the PEA is focusing on refining the mining method, mining rate and production costs. Ongoing work on rock mechanics (using information from drill core collected during the confirmation drilling program) was used to determine stope dimensions. New parameters from this work in progress were used for the calculation of the cut-off grade of $65 per tonne.

o The confirmation drilling program results also confirmed silver grades from the historical metallurgical test work done by Noranda, and silver values were included in the mineral resource estimate. The historical metallurgical testing was done on 54 lots from more than 75,000 meters of core (representing 2,112 drill holes), coming from an area of 920 meters vertical and 730 meters horizontal in the Horne 5 deposit.

The Horne 5 resource estimate is based on 4,384 underground drill holes (305,788 meters) drilled by Noranda between 1924 and 1976 and 18 new confirmation drill holes (17,300 meters) drilled by the Company in 2015. The resource estimate also includes silver assays from exhaustive metallurgical test work completed by Noranda (comprising 2,112 drill holes representing 75,540 meters) grouped in 54 lots.

Falco’s confirmation drill holes were collared from surface. They successfully confirmed previously drilled areas between 650 meters and 2,035 meters below surface. The historic Noranda holes were collared at depths ranging from 600 meters to 2,300 meters below surface across a strike length of up to 1,000 meters. The majority of drilling was conducted as radiating “fan drilling” on 15 meters spacing from 40 underground working levels developed throughout the deposit. The 15 meters spacing is significantly closer than standard drill spacing used in resource estimation work today providing a very high level of confidence in the data. Falco sampled at 1 meter intervals, Noranda primarily sampled at 3 meter core lengths (which homogenizes individual higher grade results), generating the more than 87,000 assays that were used in the 2015 resource estimate.

Preliminary engineering studies have been initiated. Metallurgical testing is underway to optimize metal recoveries and to determine geotechnical and hydrology information required for project design. Mechanized mining methods, hoisting, rock mechanics studies have also been commenced. All studies are being completed in tandem with the drill programs, in preparation for an upcoming preliminary economic assessment.

Flotation and leaching results

On December 15, 2015, Falco announced the results of preliminary metallurgical test work performed on drill cores originating from two mineralized zones of the Horne 5 deposit. Comminution, open-circuit sequential flotation and leaching tests were performed to assess potential metal recoveries and base metal concentrate grades. The flowsheet tested produced copper and zinc flotation concentrates with saleable concentrate grades. Precious metals were recovered to these base metal concentrates and from flotation of a pyrite concentrate and its subsequent leaching.

The initial metallurgical results were positive and are key to demonstrate the strength of the Horne 5 deposit. Overall results indicate that the Horne 5 deposit is amenable to flotation and leaching resulting in strong recoveries for all four metals.

Horne 5 PLUS

In September 2015, the Company also initiated a drill program on the Horne 5 PLUS target. The program tested several zones and extensions from historically mined areas located between surface and a depth of 650 meters. The initial phase of exploration was essentially planned to test the Zones M, C and K with a 6-hole drilling campaign totaling 6,300 meters. The program has been completed and the results will be compiled by the end of March 2016.


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Horne Mine Complex Immediate Area

In addition to the work on the Horne 5 Deposit, the Company continues to incorporate additional historic data into the digital model in an area surrounding the Horne 5 Deposit known as the Horne Mine Complex. This includes the areas immediately adjacent to the former producing Horne, Remnor, Quémont, Joliet and Chadbourne mines and exploration targets within the Horne area, including Horne West, Zone AA, Zone AM, Zone C, Zone R and Gatehouse.

In May 2015, Falco announced that the regional exploration budget would be amended to favor additional drilling and exploration on the Horne Mine Complex area. A portion of the $2.2 million originally committed to the regional exploration budget was allocated to the Horne 5 PLUS drilling program.

The data compilation exercise has identified an additional 6,600 historic drill holes (460,000 meters of historic drilling) in the Horne Mine Complex. A significant number of these holes were drilled in areas not previously mined and include areas adjacent to the Horne 5 Deposit. Ongoing digitization and compilation of these drill holes is expanding the scope of the proprietary Horne model and is providing additional exploration targets in proximity to the Horne 5 Deposit. Summaries outlining eleven of these new satellite gold zones were presented in the Company’s July 10, 2014 and August 22, 2014 news releases. An additional 16 new targets were identified (see November 6, 2014 news release filed on www.sedar.com) based on isolated historical drill intercepts that were never followed-up, thus remaining hidden in the archived drill database until Falco initiated its compilation.

InnovExplo was mandated and is currently reviewing the data to identify targets that could be integrated to the Horne 5 Deposit.

Infrastructures

In November 2015, Falco announced that it had conducted a comprehensive evaluation of the existing infrastructure on its Horne Complex property. A preliminary assessment of the existing infrastructure suggests that the Company will be able to utilize the existing Quémont #2 shaft as its production shaft, and 3 of the Horne shafts (#4, #6 & #8) as ventilation raises. The Quémont #2 shaft will need to be rehabilitated to current production standards, however it will not have to be widened to accommodate larger skips. The historical workings located in the upper portion of the ore body offer several openings where waste material and tailings could be sent and disposed of. These openings will enable the Company to minimize the impact on surface and manage tailings efficiently.

The evaluation estimates the capital cost savings to be upwards of $100 million in direct and indirect costs. Additionally, the existing infrastructures will enable the Company to further accelerate the development timeline of the Horne 5 deposit. Underground water sampling results

In November 2015, the Company reported initial results on the quality of groundwater in the flooded Quémont #4 shaft. The water sampling operation was initiated by measuring the physico-chemical parameters (pH, conductivity, dissolved oxygen and redox) in the water columns while lowering a probe to a depth of 1,000 meters in the flooded shaft. This was completed nine times to obtain reliable data. No physical obstacles were encountered during the probe’s movement. Above the 600 meter level, the pH ranged from 5.6 to 5.7, which can be explained by the influence of surface water infiltration. Below the 600 meter level, the pH increases to eventually reach 6.5 at the bottom of the shaft. A water treatment procedure will be prepared for a future underground dewatering. Neutralization will be needed to reach the lower pH limit in accordance with the Québec Directive 019, however the Company and its consultants believe neutralization will require minimal work and that standard equipment and technology could be utilized. It is expected that water treatment for removal of iron and zinc will be straightforward.



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Regional Exploration Activities

On June 5, 2014, Falco announced the commencement of a $2.2 million field exploration program, covering its mineral properties outside the Horne Mine Complex. During Phase One of this campaign, the Company completed assessment work required to keep 33 different properties in good standing. Phase One also included work on certain high-priority targets, such as the RIMO and the Duprat Syenite properties. Phase Two of the exploration program was recently completed and included follow up work on Phase One activities as well as exploration of new targets. The following news releases, filed on www.sedar.com, provided updates on the results of these activities: July 6, 2015, January 29, 2015; November 20, 2014; September 2, 2014; July 21, 2014.

On September 2, 2014 the Company announced initiation of drilling at its Lac Hervé property to test a large borehole anomaly with conductivities typical of massive sulphide mineralization. On November 20, 2014, it was announced that drilling had intersected a few meters of stringer zone VMS style mineralization. Recognition of this new VMS setting in the eastern portion of the Rouyn-Noranda camp opens up over 15 kilometers of favorable felsic volcanic stratigraphy for potential new VMS discoveries.

As discussed previously, on May 12, 2015, Falco announced that the regional exploration budget would be amended to favor additional drilling and exploration on the Horne Mine Complex area, with the exception of the RIMO copper-zinc-gold property, located 25 kilometers northwest of the city of Rouyn-Noranda, where a drill program commenced in August. The majority of Falco regional properties will be kept in good standing, but field work will be reduced to a minimum.

RIMO

The RIMO property (a copper-zinc-gold target) is composed of a regionally extensive felsic volcanic succession in the northwestern exposure of the Blake River Group. These deposits are found within a series of aligned felsic centers extending to the northwest from the Horne Mine. The RIMO felsic volcanic units exhibit the same geochemical signature as those of the Horne Complex, which hosts the Horne-Quémont high-grade Cu-Au VMS system. A mineralized exhalative unit has been identified in the uppermost portion of the volcanic succession. Following a review of available historical downhole electromagnetic data in the area, a series of sub-horizontal conductors have been identified. The exploration target conductors are parallel to the stratigraphy and potentially represent mineralized exhalative units. The Company believes RIMO is one of the more significant targets for potential gold-rich VMS mineralization in the region. The initial phase of exploration will consist of a 5,000 meter 10 hole drilling campaign on the northern extent of the felsic volcanic package. Downhole electromagnetic surveying will be conducted simultaneously. Downhole induced polarization (IP) surveying will be conducted simultaneously. In addition, a 46 km ground IP survey is presently ongoing on the property. Phase one drilling was completed and a low grade anomaly was intercepted. Follow-up drilling is to be conducted in 2016.

Surface Rights Agreement

On September 8, 2014, the Company announced that it had signed an agreement with the City of Rouyn-Noranda to acquire the surface rights to land 500 metres north of the Horne 5 Deposit and immediately adjacent to the Horne smelter. The agreement provides the Company with a 5-year option to purchase additional land in the Horne Mine Complex. The total purchase price is $2,900,000, of which a $1,000,000 non-refundable was paid upon transfer of the property. The remaining $1,900,000 is payable by August 1, 2019 if the Company decides to exercise its option.



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Results of operations for the three months ended December 31, 2015 (compared to the three months ended December 31, 2014)

Falco incurred a net loss of $343,920 for the three months ended December 31, 2015 compared to a net loss of $1,244,174 for the three months ended December 31, 2014.

The operating loss for the three months ended December 31, 2015 decreased by $703,960 to reach $592,147. The lower operating loss is mainly the result of corporate restructuring in the second quarter of 2015, resulting in lower expenses going forward. All categories of expenses decreased significantly as a result of the restructuring.

Other income related to the recognition of the deferred premium on flow-through shares amounted to $246,333 compared to $51,591 in the corresponding period of 2014 as a result of increased exploration and evaluation activities financed through flow-through shares.

Results of operations for the six months ended December 31, 2015 (compared to the six months ended December 31, 2014) Falco incurred a net loss of $570,207 for the six months ended December 31, 2015 compared to a net loss of $1,897,934 for the six months ended December 31, 2014.

The operating loss for the six months ended December 31, 2015 decreased by $1,050,387 to reach $1,112,904. The lower operating loss is mainly the result of corporate restructuring in the second quarter of 2015, resulting in lower expenses going forward. All categories of expenses decreased significantly as a result of the restructuring.

Other income related to the recognition of the deferred premium on flow-through shares amounted to $539,748 compared to $261,135 in the corresponding period of 2014 as a result of increased exploration and evaluation activities financed through flow-through shares.

Liquidity and Capital Resources

As at December 31, 2015, the Company had working capital of $2,745,076 (excluding the deferred premium on flow-through shares), including cash and cash equivalents of $3,924,470 compared to $4,038,634 as at June 30, 2015 (excluding the deferred premium on flow-through shares), including cash and cash equivalents of $4,834,866.

The decrease in the Company’s cash and cash equivalent position is primarily the result of investments in exploration and evaluation assets of $5,184,118 and administrative costs that resulted in cash outflows of $577,148 (including the changes in non-cash working capital items), partially offset by a private placement of $1,850,000 ($1,741,834 net of share issue costs) completed in July 2015 and a private placement of flow-through shares of $3,281,040 ($3,209,131 net of share issue costs).

As at December 31, 2015, a balance of $3,281,040 was required to be spent on flow-through expenditures by December 31, 2016. Based on the current work programs, the Company expects to meet this requirement.

The Company’s continued development is contingent upon its ability to raise sufficient financing both in the short term and long term. The Company does not generate cash flow therefore additional capital will be required to pursue its long-term development. The ability to raise additional funds may be impaired or such financing may not be available on favourable terms, due to conditions beyond the control of the Company, such as continued uncertainty in the capital markets and depressed commodity markets.

Management of the Company believes that it has sufficient funds to pay its ongoing general and administrative expenses and to meet its liabilities, obligations and existing commitments for the ensuing 12 months as they fall due. In assessing whether the going concern assumption is appropriate, management takes into account all available information about the future, which is at least, but not limited to, 12 months from the end of the reporting period. The Company’s ability to continue future operations beyond December 31, 2016 and fund its exploration and evaluation expenditures is dependent on management’s ability to secure additional financing in the future, which may be completed in a number of ways, including, but not limited to, the issuance of debt or equity instruments. Management will pursue such additional sources of financing when required, and while management has been successful in securing financing in the past, there can be no assurance it will be able to do so in the future or that these sources of funding or initiatives will be available for the Company or that they will be available on terms which are acceptable to the Company.


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Cash flows for the three months ended December 31, 2015 (compared to the three months ended December 31, 2014)

Cash flows used in operating activities totaled $350,861 during the three months ended December 31, 2015 compared to $1,077,170 in the corresponding period in 2014. The improvement in 2015 is mainly due to the decrease in operating expenses.

Cash outflows from investing activities amounted to $2,784,866 for the three months ended December 31, 2015 compared to $1,060,396 for the three months ended December 31, 2014. The Company invested $2,783,579 in exploration and evaluation assets in 2015 compared to $1,027,210 in 2014. The investments were allocated to the continued exploration and evaluation work in the Rouyn–Noranda District, as previously described in this MD&A. During the three months ended December 31, 2015, $1,287 were invested in property and equipment compared to $48,186 in 2014. In 2014, the Company also invested $15,000 in exploration deposits.

Cash flows provided by financing activities were $3,209,131 for the three months ended December 31, 2015 compared to $9,244,843 in the comparative period of 2014. The cash inflow was the result of a non-brokered private placement, on December 30, 2015, of flow-through shares at an issue price of $0.32 per FT Share, for aggregate gross proceeds of $3,281,040. The net proceeds raised from the sale of flow-through shares will be used by Falco to finance qualified Canadian exploration expenditures on its Canadian resource properties. Share issue costs related to this financing amounted to $71,909. The cash inflow in 2014 was the result of a brokered private placement of flow-through shares and common shares. Falco sold 6,555,600 common shares at a price of $0.45 per common share and 13,557,716 flow-through shares at a price of $0.52 per flow-through share for aggregate gross proceeds of $10,000,032. Share-issue costs related to this financing amounted to $755,189. Cash flows for the six months ended December 31, 2015 (compared to the six months ended December 31, 2014)

Cash flows used in operating activities totaled $577,148 during the six months ended December 31, 2015 compared to $1,266,896 in the corresponding period in 2014. The improvement in 2015 is mainly due to the decrease in operating expenses.

Cash outflows from investing activities amounted to $5,284,213 for the six months ended December 31, 2015 compared to $3,626,471 for the six months ended December 31, 2014. The Company invested $5,184,118 in exploration and evaluation assets in 2015 compared to $2,558,716 in 2014. The investments were allocated to the continued exploration and evaluation work in the Rouyn–Noranda District, as previously described in this MD&A. In 2014, the Company had also invested $1,000,000 to option a property. During the six months ended December 31, 2015, $29,607 were invested in property and equipment compared to $82,755 in 2014. In 2014, the Company also invested $15,000 in exploration deposits.

Cash flows provided by financing activities were $4,950,965 for the six months ended December 31, 2015 compared to $10,327,593 in the comparative period of 2014. The cash inflow was the result of two placements. The first placement was a private placement of Units that generated gross proceeds of $1,850,000. The private placement was comprised of Units at an issue price of $0.40 per Unit. Each Unit consisted of one Common Share in the capital of the Company and one half of one common share purchase Warrant. Each Warrant shall be exercisable into one additional Common Share of the Company for 24 months from the closing date of the Offering at an exercise price of $0.52 per Common Share. The net proceeds of the Offering is to be used by the Company to advance and complete the Horne 5 Preliminary Economic Assessment to be delivered in 2016 and for general working capital. Share issue costs related to this financing amounted to $108,166. The second placement was a non-brokered private placement, completed on December 30, 2015, of flow-through shares at an issue price of $0.32 per FT Share, for aggregate gross proceeds of $3,281,040. The net proceeds raised from the sale of flow-through shares is to be used by Falco to finance qualified Canadian exploration expenditures on its Canadian resource properties. Share issue costs related to this financing amounted to $71,909.

The cash inflow in 2014 was the result of a brokered private placement of flow-through shares and common shares. Falco sold 6,555,600 common shares at a price of $0.45 per common share and 13,557,716 flow-through shares at a price of $0.52 per flow-through share for aggregate gross proceeds of $10,000,032. Share-issue costs related to this financing amounted to $755,189. The cash inflow was also the result of the acceleration of certain callable common share purchase warrants for gross proceeds of $1,026,000. The exercise of warrants also generated $56,750 during the six months ended December 31, 2014.


11

Description of financing transactions (last 2 years)

Financing transactions completed over the past two years consisted of the following:

On October 22, 2014 the Company closed a brokered private placement of flow-through shares and common shares. Falco sold 6,555,600 common shares at a price of $0.45 per common share and 13,557,716 flow-through shares at a price of $0.52 per flow-through share for aggregate gross proceeds of $10,000,032. In conjunction with the closing of the offering, the Company agreed to pay the agents a cash commission of 6% of the gross proceeds raised from subscriptions in the offering from persons placed by the agents which is equal to $540,691. There were other share issuance costs of $214,498 composed of legal fees, filing fees and other associated costs. In addition the Company has issued to the agents common share warrants equal to 6% of the common shares and flow-through shares subscribed by persons placed to the Company by the agents totaling 967,014 agent’s warrants at an exercise price of $0.5625 per common share until October 22, 2016.

On July 22, 2015, the Company closed a non-brokered private placement of Units to raise aggregate gross proceeds of $1,850,000. The private placement was comprised of Units at an issue price of $0.40. Each unit consists of one Common Share in the capital of the Company and one half of one Common Share purchase Warrant. Each Warrant is exercisable into one additional Common Share of the Company for 24 months from the closing date of the offering at an exercise price of $0.52 per Common Share. The Company may accelerate the expiry of the Warrants should the volume weighted average trading price of the Common Shares of the Company on the TSX Venture Exchange exceed $0.65 over a period of 20 consecutive trading days, by giving notice in writing to the Warrant holders that the Warrants shall expire on that day which is 30 days following the notice date unless exercised by the holders prior to such date. The net proceeds of the private placement was used by the Company to advance the Horne 5 Preliminary Economic Assessment to be delivered in 2016 and for general working capital.

On December 30, 2015, Falco closed a non-brokered private placement of flow-through shares ("FT Shares") at an issue price of $0.32 per FT Share, to raise aggregate gross proceeds of $3,281,040 (the "Offering"). The net proceeds raised from the sale of flow-through shares will be used by Falco to finance qualified Canadian exploration expenditures on its Canadian resource properties. Pursuant to the Offering, the Company entered into a finder's fee agreement with certain arm's length parties (the "Finders"), pursuant to which the Finders were paid a finder's fee equal to 4% with respect to certain subscriptions in connection with the Offering.


12

Quarterly information (1)

A summary of selected quarterly financial information for the last eight quarters is outlined below:

(1) Financial information in Canadian dollars and prepared in accordance with IFRS. (2) Excluding the deferred premium on flow-through shares. (3) Including the payments of options on properties.

(for the three months ended) December 31, 2015

$

September 30, 2015

$

June 30, 2015

$

March 31, 2015

$

Cash and cash equivalents 3,924,470 3,851,066 4,834,866 7,436,098

Working capital(2) 2,745,076 2,815,500 4,038,634 6,405,376

Total assets 25,739,260 22,873,386 21,343,225 22,599,668

Total non-current financial liabilities - - - -

Investments in exploration and evaluation assets(3) 2,783,579 2,400,539 952,861 442,805

Total revenue - - - -

Net loss for the period 343,920 226,287 1,413,982 2,694,091

Basic and diluted net loss per share - - 0.015 0.03

(for the three months ended) December 31, 2014

$

September 30, 2014

$

June 30, 2014

$

March 31, 2014

$

Cash and cash equivalents 9,307,591 2,200,314 3,833,365 5,649,532

Working capital(2) 9,623,544 2,057,914 4,141,978 5,682,778

Total assets 23,662,796 15,745,671 15,301,391 15,773,257

Total non-current financial liabilities - - - -

Investments in exploration and evaluation assets(3) 1,027,210 2,531,506 122,326 1,100,907

Total revenue - - - -

Net loss for the period 1,244,174 653,760 1,047,036 683,319

Basic and diluted net loss per share 0.015 0.01 0.02 0.01


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Key Management and Related Party Transactions

Key management includes directors (executive and non-executive) and officers of the Company. The compensation paid or payable to key management for employee services is presented below for the six months ended December 31, 2015 and 2014:

Six months ended

December 31, 2015

Six months ended

December 31, 2014

Salaries and short-term employees benefits(1) 412,459 $ 448,918 Share-based compensation 236,511 459,068

648,970 $ 907,986

(1) Including consulting and directors’ fees.

Key management is subject to employment agreements which provide for market standard payments on termination of employment without cause or following a change of control which call for payments of between once to twice base salary and bonus and certain vesting clauses on options.

During the six months ended December 31, 2015, an amount of $570,927 (nil for the six months ended December 31, 2014) was invoiced by Osisko Gold Royalties Ltd (“Osisko”), a shareholder with significant influence over the Company, for professional services and rental of offices. An amount of $324,774 is included in accounts payable and accrued liabilities as at December 31, 2015.

On December 30, 2015, the Company closed a non-brokered private placement and issued 10,253,250 flow-through shares at a price of $0.32 per share for gross proceeds of $3,281,040. Directors and officers of Falco as well as Osisko and certain officers of Osisko have subscribed to the flow-through shares under the same terms and conditions set forth for all subscribers for a total of 6,367,500 shares for gross proceeds of $2,037,600.

As at December 31, 2014, an amount of $71,984 was included in accounts payable and accrued liabilities for salaries and short-term employee benefits.

Contractual Obligations and Commitments

As at December 31, 2015, the Company is committed under a flow-through share agreement to spend $3,281,040 by December 31, 2016 on eligible exploration and evaluation expenses. Based on the current work programs, the Company expects to meet its requirements.

The Company is committed to minimum amounts under long-term lease agreements for office space and equipment which expire at the latest in 2021. As at December 31, 2015, minimum commitments remaining under these leases were approximately $232,000 over the following years:

Twelve months ending December 31,

2016 $ 33,250 2017 45,000 2018 45,000 2019 45,000 2020 45,000 2021 18,750

$ 232,000

The contractual obligations and commitments will be funded through the working capital and financing completed in December 2015.


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Subsequent Events

On January 25, 2016, Falco announced significant increase in Horne 5 gold equivalent resources. Indicated Resources were reported at 5.36 million ounces of gold equivalent; 58.3 million tonnes averaging 2.86 g/t AuEq (1.82 g/t Au; 15.60 g/t Ag; 0.20% Cu; 1.00% Zn) and Inferred Resources were reported at 1.25 million ounces of gold equivalent; 12.7 million tonnes averaging 3.08 g/t AuEq (2.10 g/t Au; 26.26 g/t Ag; 0.22% Cu; 0.57% Zn).

For more information, please refer to the press release dated January 25, 2106 and filed on www.sedar.com.

Subsequently to December 31, 2015, 1,518,889 share options expired unexercised.

Outstanding Share Data

At the date of this MD&A, the Company has 110,213,907 issued and outstanding common shares, 7,297,027 outstanding stock options and 3,279,514 outstanding warrants.

Off-Balance Sheet Arrangements

At the date of this MD&A, the Company had no material off-balance sheet arrangements such as guarantee contracts, contingent interest in assets transferred to an entity, derivative instruments obligations or any obligations that trigger financing, liquidity, market or credit risk to the Company.

Basis of Presentation of Financial Statements

The unaudited condensed interim financial statements for the three and six months ended December 31, 2015 have been prepared in accordance with IFRS as issued by the IASB applicable to the preparation of interim financial statements, including International Accounting Standard 34, Interim Financial Reporting. The unaudited condensed

interim financial statements of Falco for the three and six months ended December 31, 2015 should be read in conjunction with the annual audited financial statements for the year ended June 30, 2015, which have been prepared in accordance with IFRS as issued by the IASB. The accounting policies, methods of computation and presentation applied in the unaudited condensed interim financial statements for the three and six months ended December 31, 2015 are consistent with those applied by the Company to the audited financial statements for the year ended June 30, 2015. The Board of Directors has approved the unaudited condensed interim financial statements on February 26, 2016.

The significant accounting policies of Falco are detailed in the notes to the audited financial statements for the year ended June 30, 2015 filed on SEDAR (www.sedar.com).

Critical Accounting Estimates and Judgments

Estimates and assumptions are continually evaluated and are based on historical experience and other factors, including expectations of future events that are believed to be reasonable under the circumstances. The determination of estimates requires the exercise of judgement based on various assumptions and other factors such as historical experience and current and expected economic conditions. Actual results could differ from those estimates.

Critical judgements in applying the Company’s accounting policies are detailed in the audited financial statements for the year ended June 30, 2015 filed on SEDAR (www.sedar.com).





15

Financial Instruments

All financial instruments are required to be measured at fair value on initial recognition. The fair value is based on quoted market prices, unless the financial instruments are not traded in an active market. In this case, the fair value is determined by using valuation techniques like the Black-Scholes option pricing model or other valuation techniques. Measurement in subsequent periods depends on the classification of the financial instrument.

A description of financial instruments and their fair value is included in the audited financial statements for the year ended June 30, 2015 filed on SEDAR (www.sedar.com).

Financial Risks

The Company’s activities expose it to a variety of financial risks: market risks (including interest rate risk, foreign currency risk and commodity price risk), credit risk and liquidity risk. The Company’s overall risk management program focuses on the unpredictability of financial markets and seeks to minimize potential adverse effects on the Company’s performance.

A description of the financial risks are included in the audited annual financial statements for the year ended June 30, 2015 filed on SEDAR (www.sedar.com).

Internal Control Disclosure

On November 23, 2007, the British Columbia Securities Commission exempted Venture Issuers, such as the Company, from certifying disclosure controls and procedures, as well as internal controls over financial reporting as of December 31, 2007 and thereafter. The Company is required to file basic certificates. The Company makes no assessment relating to establishment and maintenance of disclosure controls and procedures as defined under National Instrument 52-109.

Risk Factors

An investment in the Company's common shares is subject to a number of risks and uncertainties. An investor should carefully consider the risks described in the MD&A for the year ended June 30, 2015 and the other information filed with the Canadian securities regulators (www.sedar.com) before investing in the Company's common shares. If any of the described risks occur, or if others occur, the Company's business, operating results and financial condition could be seriously harmed and investors may lose a significant proportion of their investment.

Additional Information

Additional information relating to the Company has been filed on SEDAR and is available at www.sedar.com.

Forward-Looking Statements

This MD&A contains “forward-looking statements” and “forward-looking information” within the meaning of applicable Canadian securities legislation, including information about the Company’s projects, plans and future performance. All statements, other than statements of historical fact, are forward-looking statements. The words “expect”, “believe”, “anticipate”, “will”, “intend”, “estimate”, “forecast”, “budget”, “schedule” and similar expressions identify forward-looking statements. Forward-looking statements are necessarily based upon a number of factors and assumptions that, while considered reasonable by management, are inherently subject to significant business, economic and competitive uncertainties and contingencies. Known and unknown factors could cause actual results to differ materially from those projected in the forward-looking statements. Such factors include, but are not limited to: changes to current estimates of mineral resources; labour availability; litigation; availability of and increased costs associated with contractors and exploration equipment; the speculative nature of mineral exploration and development, including the risks of obtaining necessary licenses and permits; contests over title to properties; uncertainty with the Company’s ability to secure capital to execute its business plans; changes in national and local government legislation in Canada; risk of loss due to sabotage and civil disturbances; and business opportunities that may be pursued by the Company. Many of these uncertainties and contingencies can affect the Company’s actual results and could cause actual results to differ materially from those expressed or implied in any forward-looking statements made by, or on behalf of, us. Readers are cautioned that forward-looking statements are not guarantees of future performance. The Company disclaims any intention or obligation to update or revise any forward-looking statements whether as a result of new information, future events or otherwise, except as required by applicable law.





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