ALO Alio Gold Inc

ITEM 4:  INFORMATION ON THE COMPANY

A.History and Development of the Company

General

The Company was incorporated in British Columbia, Canada pursuant to the Business Corporations Act (British Columbia) (the “BCBCA”) on March 17, 2005. On May 12, 2017, the Company changed its name from “Timmins Gold Corp.” to “Alio Gold Inc.”

The Company is a corporation domiciled in British Columbia, Canada and operates under the BCBCA. Its head office and registered and records office are located at Suite 507 – 700 West Pender Street, Vancouver, British Columbia, V6C 1G8. Its telephone number is (604) 682-4002 and its internet address is https://www.aliogold.com/.  Unless and to the extent specifically referred to herein, the information on the Company’s website shall not be deemed to be incorporated by reference in this annual report.

The Company’s agent for service in the United States is CT Corporation System located at 28 Liberty St., New York, NY, 10005.

Recent Developments

On March 30, 2020 the Company announced that it had entered into a definitive agreement for an at-market merger (the “Arrangement Agreement”) with Argonaut Gold Inc. (“Argonaut”) whereby Argonaut will acquire all of the issued and outstanding shares of Alio Gold (the “Transaction”).  Under the terms of the Arrangement Agreement, all of the Company’s issued and outstanding common shares will be exchanged on the basis of 0.67 of an Argonaut common share for each Alio Gold common share (the “Exchange Ratio”).

The Arrangement Agreement has been approved by the boards of directors of Argonaut and Alio Gold, and each board recommends that their respective shareholders vote in favor of the Transaction.  Alio Gold will be entitled to nominate two directors to the Argonaut board upon closing.

The proposed business combination will be affected by way of a Plan of Arrangement completed under British Columbia law.  The Transaction will require approval by 66 2/3 percent of the votes cast by the shareholders of Alio Gold at a special meeting of Alio Gold shareholders.  The issuance of Argonaut common shares in connection with the Transaction will require the approval of a simple majority of the shareholders of Argonaut voting at a special meeting.  Officers and directors of Alio Gold and Argonaut have entered into voting support agreements, pursuant to which they will vote their common shares held in favour of the Transaction.  In addition to shareholder approvals, the Transaction is subject to the receipt of certain regulatory, court and stock exchange approvals and the satisfaction of certain other closing conditions customary in transactions of this nature, which, if they are received, are expected during Q2, 2020.  The Transaction is also subject to the closing of Alio Gold’s sale of the shares of Molimentales del Noroeste S.A. de C.V to Magna Gold Corp.(“Magna”) announced on March 6, 2020.

The Arrangement Agreement includes customary provisions including non-solicitation provisions, a right to match any superior proposal and a $2.0 million termination fee payable to Argonaut under certain circumstances.  Details of the proposed arrangement and a description of the resulting company will be set out in an Information Circular mailed to all shareholders in connection with the meeting.

On March 5, 2020, the Company entered into an agreement to sell Molimentales del Noroeste, S.A. de C.V., which owns a 100% interest in the San Francisco Property to Magna. Upon closing, the Company will receive 9,740,000 shares of Magna representing approximately 19.9% of the issued and outstanding shares of Magna and will receive an additional $5 million in cash or in certain circumstances a 1% net smelter royalty, due within twelve months of closing of the transaction.

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2019

Florida Canyon Mine

In early 2019 the Company reported the results of an updated life of mine plan for its 100% owned Florida Canyon mine located in Pershing County, Nevada (the “Florida Canyon Mine”) and the subsequent filing of an associated NI 43-101 compliant technical report.  See Item 4, Section D, “Florida Canyon Gold Mine” below.

In May 2019, the Company announced that the Mine Safety and Health Administration completed a routine inspection at the Florida Canyon Mine. As a result of the inspection, a portion of the mining fleet was taken out of service to address deficiencies with respect to fluid leaks present on the equipment.  The Company voluntarily removed the majority of the fleet from service to address similar issues and ensure a safe working operating standard on all equipment.  Mine production continued to be negatively affected as a result of the mechanical downtime.  Crushing activity was also negatively affected resulting in a reduction of the ore tonnes processed.  As at May 7, 2019, Florida Canyon Mine continued to experience low availability of mining equipment and production was negatively impacted.

In October 2019, the Company announced the signing of a lease agreement for the acquisition of new loading and hauling equipment.  The fleet consists of 13 90-tonne haul trucks and three matched front-end loaders.  A maintenance and service agreement was also signed that provides guaranteed mechanical availability of the new fleet and encompasses all required maintenance activities over the life of the lease.  The lease agreement and maintenance agreement are for an approximate five-year term, depending on the actual hours of operation, after which the equipment can be purchased for approximately $2 million.  The Company’s existing fleet was retired as the new fleet became operational.

In addition, in 2019, Florida Canyon Mine received all required permits to initiate construction of the second heap leach pad.  Contractor mobilization commenced during Q4 of 2019 and long lead-time items were ordered.  Construction is expected to take approximately six months and could be completed in stages to facilitate early placement and leaching of ore.

In 2019, the Company also announced that it plans to investigate the potential for producing a gold-bearing sulphide concentrate suitable for treatment at other Nevada gold facilities.

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San Francisco Property

The San Francisco pit at the Company’s 100% owned San Francisco property in Sonora Mexico (the “San Francisco Property”) did not meet planned ore production rates at an acceptable strip ratio in the upper levels of the planned pit laybacks.  As a result, in January 2019, the Company made the decision to stop active mining in the San Francisco pit and to only process low grade stockpile material through the crusher.  A number of mine planning options were investigated and while the options were economic, the Company did not have the ability to fund the capital required for the various options. Stockpiles were sufficient to operate at this capacity throughout 2019. Following the depletion of the stockpiles the operation went into residual leach after December 31, 2019.

Ana Paula Project

The Company’s Ana Paula development property located in Guerrero, Mexico (the “Ana Paula Project”) remained on care and maintenance, where it was placed in August 2018 to allow the Company to focus efforts and capital on other projects.

Loan Facility with Sprott Private Resource Lending II (Collector), LP

In November 2019, the Company signed and closed a three-year, $15 million loan facility (the “Facility”) with Sprott Private Resource Lending II (Collector), LP (“Sprott”) to fund construction of the new Phase II leach pad at the Florida Canyon Mine.  The principal amount of the Facility is $15 million, maturing on October 31, 2022. Interest on the Facility is 8% plus the greater of LIBOR and 2%. The Facility amortizes in eight equal quarterly payments commencing January 31, 2021. In conjunction with closing, the Company issued 1,286,228 common shares to Sprott. Such shares were subject to a hold period under applicable securities legislation of four months and one day from their date of issue.

Board and Management Changes

During 2019 David Whittle joined the Board and Bryan Coates, Jose Vizquerra, Tim Baker and Greg McCunn resigned as Board members.  Mr. McCunn also resigned as the Company’s Chief Executive Officer.  Jason Gregg, Colette Rustad, Paul Hosford and Doug Jones resigned from their offices during 2019.  Markus Felderer was appointed and resigned as the Company’s Vice President Corporate Development during the year.  Ian Harcus was promoted to Vice President of Finance and Miguel Bonilla was promoted to the Company’s Country Manager, Mexico.  Paul Jones joined the Company as Senior Vice President Corporate Development in October 2019.

2018

San Francisco Property

At the San Francisco Property, a strategy which was implemented in December 2017 which involved trucking lower grade run-of-mine ore to old heap leach pads while higher cut-off grade material was fed to the crusher, continued throughout most of 2018. However, the dual cut-off strategy was not successful in increasing the grade of the ore to the crusher as was anticipated by the Company and was discontinued in September 2018.

On August 10, 2018, the Mineral Reserve Estimate for the San Francisco Property was updated and showed proven and probable mineral reserves of 854,472 ounces of gold (55.5 million tonnes at 0.49 g/t gold) as of July 1, 2018. For further information please see the news release disseminated by the Company on August 10, 2018 entitled “Alio Gold Reports Second Quarter 2018 Results” and available on the System for Electronic Document Analysis and Retrieval at www.sedar.com (“SEDAR”) and the Electronic Data Gathering, Analysis, and Retrieval system at www.sec.gov (“EDGAR”), which was reviewed and approved by Jorge Lozano, a “qualified person” as defined by NI 43-101. None of the other Qualified Persons referred to in this annual report have reviewed or approved of this update or news release or the related technical disclosure.

A full technical review of the mining operations commenced in September 2018 that led in January 2019, to the decision to stop active mining in the San Francisco pit.

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Ana Paula Project

In early 2018, the Company announced that it continued to advance its exploration and development program at its Ana Paula Project in Guerrero, Mexico.  The 3,800 metre surface diamond drill program was initiated in January 2018 and completed in May 2018.  In addition to the exploration drilling program, the Company continued to advance its regional exploration program in the area, carrying out surface exploration work on the 56,000-hectare land package. Support infrastructure construction was completed at the Ana Paula Project in 2018 including: a 100-person camp site, a power line connecting the camp and the mine portal area to the power grid and a communications tower providing cellular and internet services to the site. On August 20, 2018, the Company announced the temporary suspension of exploration and development work at its Ana Paula Project and a commitment to focus its efforts and capital allocation on its two operating mines, the San Francisco Property and the Florida Canyon Mine. The Company also took steps to reduce costs at the Ana Paula Project site in Mexico while maintaining a level of local employment and community engagement.

Acquisition of Rye Patch Cold Corp.

On May 25, 2018, the Company acquired all of the issued and outstanding shares of Rye Patch Gold Corp. (“Rye Patch”) by way of a court-approved plan of arrangement under the BCBCA (the “Rye Patch Acquisition”). Rye Patch, through its wholly owned subsidiary Florida Canyon Mine, Inc. is the owner and operator of the Florida Canyon Mine. In connection with the Rye Patch Acquisition, the Company sold all of the issued and outstanding shares of Rye Patch to 1164410 B.C. Ltd. (“1164410”), a wholly owned subsidiary of the Company and Rye Patch and 1164410 subsequently amalgamated to form a wholly owned subsidiary of the Company, Alio Gold (US) Inc. On the closing of the Rye Patch Acquisition, the Company acquired 100% of Rye Patch’s issued and outstanding common shares, being 81,469,521 common shares, in exchange for 39,105,365 common shares of the Company (representing an exchange ratio of 0.48 common shares of the Company for each common share of Rye Patch (the “Exchange Ratio”)).

The Company also paid to each Rye Patch shareholder at the effective time of the Rye Patch Acquisition $0.001 for each Rye Patch common share held (for a total amount of approximately $81,000). The cash consideration paid by the Company to the shareholders of Rye Patch was funded by the Company from cash on hand. Outstanding Rye Patch options to purchase Rye Patch common shares were exchanged for fully vested options to purchase that number of common shares of the Company equal to the Exchange Ratio multiplied by the number of Rye Patch common shares subject to such Rye Patch options. Outstanding warrants to purchase Rye Patch common shares were converted into warrants to acquire common shares of the Company at the Exchange Ratio. Outstanding broker warrants and agent’s compensation options exercisable for Rye Patch common shares were also converted into broker warrants and agent’s compensation options exercisable for common shares of the Company at the Exchange Ratio.

Disposition of Non-Core Assets

On October 16, 2018, the Company announced that it had entered into a definitive agreement to sell non-core assets, located 40 kilometers south of the Company’s Florida Canyon Mine in Nevada to Coeur Rochester, Inc., a wholly owned subsidiary of Coeur Mining, Inc. (“Coeur”). The assets include those comprising the Lincoln Hill Project, Wilco Project, Gold Ridge Property and other nearby claims. Under the terms of the definitive agreement, the Company received total consideration of $19 million upon closing of the transaction, payable in shares of Coeur common stock valued based on a volume-weighted average stock price for the five trading day period ending on the third trading day preceding the closing.

Debt Facility with Macquarie Bank Limited

During 2018 the Company restructured its existing debt facility with Macquarie Bank Limited which was scheduled to be repaid in December 2018. As of June 30, 2018 the outstanding principal of $15 million was to be repaid in twelve quarterly payments of $1.25 million in principal together with accrued interest, ending in June 2021. The Company reduced the debt facility to $5 million by making the first scheduled principal and interest payment on September 30, 2018, monetizing the gold hedge book for proceeds of $2.5 million and by utilizing approximately $6.25 million in previously restricted cash to pay down the debt. The Company extinguished the debt in the fourth quarter of 2018.

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In connection with the reduction of the Macquarie Bank Limited debt, the Company also settled a $5 million contingent liability that the Company acquired with the Rye Patch Acquisition. The Company also updated its surety bond for the Florida Canyon Mine in Nevada, releasing an additional $5.1 million in cash.

Board and Management Changes

During 2018, Tim Baker and John Mansanti joined the Board and Doug Jones was appointed the Chief Operating Officer of the Company.

2017

San Francisco Property

On May 11, 2017, the Company announced the revitalization plan for the San Francisco Property, and subsequently filed an updated NI 43-101 compliant technical report on the San Francisco Property on May 26, 2017. See Item 4, Section D, “San Francisco Property” below.

During the second half of 2017, steps were undertaken to revitalize the San Francisco Property. A waste stripping campaign was undertaken to open-up the main pit in phases 5 and 6 which resulted in increased mining flexibility and the ability to deliver consistent ore feed to the leach pads. The main pit opened across multiple mining faces as the ramp-up of pre-stripping reached sustainable and planned levels toward the end of 2017.

In the fourth quarter of 2017, opportunities to reduce capital expenditures envisioned in the revitalization plan for the San Francisco Property were investigated. In particular, crushing improvements which targeted improved metallurgical recovery were put on hold to evaluate improvements in recovery obtainable by improvements in blasting in open pit. In addition, the power upgrade project which commenced in the third quarter of 2017 was put on hold while discussions with power authorities (“CFE”) were undertaken. During the fourth quarter of 2017, the CFE requested the Company pay for additional infrastructure not contemplated in the original scope of work. As a result of dialogue with CFE, the project was later abandoned.

Ana Paula Project

On April 10, 2017, the Company received authorization of the Environmental Impact Assessment for the Ana Paula Project from the Mexican regulator, the Secretaría de Medio Ambiente y Recursos Naturales (“SEMARNAT”).

On May 16, 2017, the Company announced the results of a preliminary feasibility study on its Ana Paula Project, and subsequently filed an updated NI 43-101 compliant technical report on the Ana Paula Project on May 26, 2017 and a further revised version of the technical report on June 12, 2017, which incorporated non-material changes to the previously filed version. In July 2017, a definitive feasibility study in respect of the Ana Paula Project commenced.

On September 18, 2017, the Company announced that its Board had formally approved an underground exploration decline and exploration program at its Ana Paula Project. The Company also received authorization to start construction of the decline from SEMARNAT. The Company initiated a regional exploration program for the remainder of 2017 on a 56,000-hectare land package in the Guerrero Gold Belt.

On September 21, 2017, the Company received its Change of Land Use Approval for the Ana Paula Project. This approval covers the 370 hectares required for the proposed open pit mine, waste storage, process plant and the tailings storage facility.

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Name Change and Share Consolidation

On May 12, 2017 the Company changed its name to Alio Gold Inc. (the “Name Change”) and effected a consolidation of its outstanding shares on a 10:1 basis (the “Consolidation”). Following the Consolidation, the number of outstanding common shares of the Company was approximately 35,562,860. The common shares commenced trading on a post-Consolidation basis on the Toronto Stock Exchange (“TSX”) and the NYSE American May 16, 2017 under the ticker symbol ALO.

Bought Deal Financing

On July 20, 2017 the Company closed a bought deal offering of 8,062,000 units of the Company (the “2017 Units”), at a price C$6.25 per 2017 Unit for gross proceeds to the Company of approximately C$50.4 million.  The 2017 Units were issued in a public offering in all of the provinces of Canada, other than Québec, pursuant to a short form prospectus dated July 12, 2017. The financing was underwritten by a syndicate of underwriters led by Cormark Securities Inc. and Clarus Securities Inc. and included Raymond James Ltd. and BMO Nesbitt Burns Inc. Each 2017 Unit consisted of one common share of the Company and one-half of one common share purchase warrant (each whole common share purchase warrant, a “2017 Warrant”). Each 2017 Warrant entitled the holder to acquire one common share at a price of C$8.00 at any time prior to July 20, 2018.  The net proceeds of the offering were used by the Company to advance the Ana Paula Project and for general corporate purposes.

Board and Management Changes

During 2017 Greg McCunn was appointed Chief Executive Officer and joined the Board.  Anthony Hawkshaw resigned as a director of the Company and Taj Singh and Alex Tsakumis resigned as Vice President of Business Development and Vice President of Corporate Development respectively.  Jason Gregg joined the Company as Vice President of Human Resources, Jose Hector was appointed and resigned as Vice President of Operations, Paul Hosford was appointed as Vice President Project Development and Colette Rustad was appointed as Chief Financial Officer of the Company in 2017.

Capital Expenditures

During the year ended December 31, 2019, the Company had capital expenditures of $15.1 million. Expenditures at the Florida Canyon Mine were $9.7 million and consisted of the construction of a new heap leach pad and stormwater diversion channel. Spending at the Ana Paula Project was $4.0 million relating to the payment of outstanding 2018 expenses, as well as land and concession payments. Capital Expenditures at the San Francisco Mine were $1.3 million relating to concession payments.

During the year ended December 31, 2018, the Company had capital expenditures of $29.5 million. Capital Expenditures at the San Francisco Mine were $11.3 million relating to significant deferred stripping expenditures. Spending at the Ana Paula Project was $15.8 million relating to feasibility study and exploration works. Expenditures at the Florida Canyon Mine were $2.4 million and consisted of capitalized maintenance parts.

During the year ended December 31, 2017, the Company had capital expenditures of $38.3 million. Capital Expenditures at the San Francisco Mine were $20.9 million relating to deferred stripping, leach pad expansion, power and crusher upgrades, and drilling costs. Capital expenditures at the Ana Paula Project were $17.3 million relating to feasibility study and exploration works.

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B.Business Overview

General

The Company is a publicly traded gold producer that owns and operates the Florida Canyon Mine, an open pit gold mine in Pershing County, Nevada USA, consisting of 11,866 hectares of surface area in the state of Nevada, USA.  The Company also owns development stage properties in the states of Sonora and Guerrero, Mexico. The Company’s principal product sold for each of the last three financial years is gold, with silver also produced and sold as a by-product.  

Locations of the Company’s Assets

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Gold Sales

The Company delivers gold and silver in doré form to an international precious metal refinery in North America where the doré may, at the Company’s option, be converted into London Good Delivery metal, or alternatively, be sold to the refiner.  Gold is delivered to the refinery by armored, insured carriers.  If the metal is returned to the Company, it is sold to international bullion dealers.

Metal Revenues

In 2019, the Company sold 80,530 gold ounces at an average realized gold price of $1,333 per ounce, compared to sales of 82,598 gold ounces at an average realized gold price of $1,280 per ounce during 2018. This represents a decrease of 3% in gold ounces sold and an increase of 4% in realized gold price over 2018.

Total metal revenues from mining operations in 2019 were $111.5 million compared to $104.5 million during 2018, due to lower gold ounces sold in 2018.

Financial Instruments

From time to time, the Company holds open option contracts whereby the Company purchased the option to sell gold ounces at a set price (“put option”) and financed the purchase price of this put option by selling the right to a third party to purchase a number of the Company’s gold ounces at a set price (“call option”).

From time to time, the Company also holds forward contracts.

At December 31, 2019, the Company did not hold any option or forward contracts. Subsequent to December 31, 2019, the Company did not acquire any additional option or forward contracts.

Environmental Protection Requirements

Mining, exploration and development activities are subject to various levels of federal, provincial, state and local laws and regulations relating to the protection of the environment, including requirements for closure and reclamation of mining properties.

The Company’s total liability for reclamation and closure cost obligations at December 31, 2019, was $35.6 million and was calculated using an effective weighted discount rate of 2.9% The undiscounted value of this liability is $36.7 million, calculated using an effective weighted inflation rate assumption of 2.4%. Reclamation expenditures for the year ended December 31, 2019, were nil.  

Environmental Policies

The Company implemented an environmental policy in August 2017 which was updated in November 2019 (the “Environmental Policy”). The Environmental Policy affirms the Company’s belief that effective environmental management is paramount to a successful future. To promote its commitment to environmental management, the Company has committed to develop and maintain a comprehensive environmental management system with environmental targets for each project and to promote employee commitment to environmental performance through appropriate training and periodic evaluations. Furthermore, the Company has committed to conduct business in a manner that attempts to minimize any potential environmental impacts, foster mutually beneficial environmental partnerships with host communities and maintain open and transparent communication with stakeholders that may be impacted by its operations. Finally, the Company has committed to identify and protect sites of environmental or cultural significance, provide for the reclamation and rehabilitation of areas impacted by its operations and maintain a culture where environmental, social, cultural and economic considerations are integrated into all planning and decision-making processes.

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Competitive Conditions

The Company’s business is to produce and sell gold.  Prices are determined by world markets over which the Company has no influence or control.  The Company’s competitive position is primarily determined by its costs compared to other producers throughout the world and its ability to maintain its financial integrity through metal price cycles.  Costs are governed to a large extent by the grade, nature and location of the Company’s mineral reserves as well as by input costs and operating and management skills.  In contrast with diversified mining companies, the Company focuses on gold production, development and exploration and is therefore subject to unique competitive advantages and disadvantages related to the price of gold and to a lesser extent, the price of its silver by-product.  If gold prices increase, the Company will be in a relatively stronger competitive position than diversified mining companies that produce, develop and explore for other minerals in addition to gold.  Conversely, if gold prices decrease, the Company will be at a competitive disadvantage to diversified mining companies. The mining industry is competitive, particularly in the acquisition of additional mineral reserves and resources in all phases of operation and the Company competes with many companies possessing similar or greater financial and technical resources. All of the Company’s revenues are derived from the sale of gold, with silver produced and sold as a by-product. A breakdown of total revenues by geographic market for each of the three years ended December 31, 2019 is provided below:

Seasonality

The Company’s business is not materially affected by seasonality; however, periodic interruptions due to inclement or hazardous weather conditions occasionally occur, particularly during the rainy/hurricane season in Mexico between the months of July and October.

Raw Materials

The Company is dependent on various commodities (such as diesel fuel, electricity, steel, and concrete), labor and equipment (including parts) to conduct its mining operations and development projects. A shortage of such input commodities, labor or equipment or a significant increase of their cost could have a material adverse effect on the Company’s ability to carry out its operations and therefore limit or increase the cost of production.

The Company is also dependent on access to and supply of water and electricity to carry out its mining operations, and such access and supply may not be readily available. Market prices of input commodities can be subject to volatile price movements which can be material, occur over short periods of time and are affected by factors that are beyond the Company’s control, including global and regional supply and demand, political and economic conditions, and applicable regulatory regimes. An increase in the cost, or decrease in the availability, of input commodities, labor or equipment may affect the timely conduct and cost of the Company’s operations and development projects. If the costs of certain input commodities consumed or otherwise used in connection with the Company’s operations and development projects were to increase significantly, and remain at such levels for a substantial period, the Company may determine that it is not economically feasible to continue commercial production at some or all of its operations or the development of some or all of its current projects, which could have an adverse impact on the Company’s financial performance and results of operations.

Marketing Channels

During the years ended December 31, 2019, 2018 and 2017, the Company had sales agreements with five, five, and three customers, respectively. Due to the nature of the gold market, the Company is not dependent on any particular customer to sell finished goods.

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Dependence on Patents or Licenses, Industrial, Commercial or Financial Contracts

In the ordinary course of business, the Company is required to obtain and renew governmental permits and licenses for the operation and expansion of existing operations or for the development, construction and commencement of new operations. Obtaining or renewing the necessary governmental permits and licenses is a complex and time-consuming process, often involving public hearings and costly undertakings on the Company’s part.

The duration and success of the Company’s efforts to obtain and renew permits and licenses are contingent upon many variables not within its control, including the interpretation of applicable requirements implemented by the permitting authority. The Company may not be able to obtain or renew permits or licenses that are necessary to its operations, or the cost to obtain or renew permits or licenses may exceed what the Company believes it can recover from a given property once in production. Any unexpected delays or costs associated with the permitting and licensing process, including challenges to the terms of such permits or licenses, whether successful or unsuccessful, could delay the development or impede the operation of a mine, which could adversely affect the Company’s operations and profitability.

For the Company to carry out its mining activities, its exploitation licenses must be kept current. There is no guarantee that the Company’s exploitation licenses will be extended or that new exploitation licenses will be granted. In addition, such exploitation licenses could be changed and applications to renew existing licenses may not be approved. The Company may also be required to contribute to the cost of providing the required infrastructure to facilitate the development of its properties. The Company will also be required to obtain and comply with permits and licenses that may contain specific conditions concerning operating procedures, water use, waste disposal, spills, environmental studies, abandonment and restoration plans and financial assurances. The Company may not be able to comply with any such conditions.

For further information, see Item 4, Section D.

Government Regulation

The Company’s business is subject to a variety of federal, state, provincial and local laws and regulations in Mexico, the United States and Canada, including:

In the United States, the Company’s Florida Canyon Mine is subject to continuous inspections by the U.S. Mine Safety and Health Administration (“MSHA”), which inspections often lead to notices of violation. Recently, MSHA has been conducting more frequent and more comprehensive inspections of mining operations in general.

Additional regulations or requirements also are imposed on the Florida Canyon Mine’s tailings and waste disposal areas in Nevada under the Nevada Water Pollution Control Law and on the Company’s operations in Nevada under Clean Air Act in Nevada. In addition, proposed Comprehensive Environmental Response, Compensation, and Liability Act regulations requiring mining companies to obtain supplemental financial assurance could, if adopted, have a material adverse effect on results of operations and cash flows.

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In the United States, the Company must also comply with regulations promulgated by the Internal Revenue Service regarding income tax filings, the Securities and Exchange Commission that regulates public companies and the NYSE American on which the shares of the Company trade.

In Mexico, the Company is most significantly impacted by the following government bodies and regulations:

In addition, state and federal regulators regulate the exploration, exploitation and beneficiation of minerals in Mexico, the private use of natural resources through government granted concessions, the payment of special duties and fees required to maintain mining properties and related to income derived from mining properties, annual assessment work reports, technical reports and production reports.

The Company must also comply with environmental regulations in Mexico including:

In Canada, the main regulations with which the Company must comply are those promulgated by the Canada Revenue Agency regarding income tax filings, the securities commissions that regulate public companies in Canada, and the Toronto Stock Exchange on which the shares of the Company trade.

For further information, see Item 4, Section D.

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C.Organizational Structure

As at December 31, 2019, the corporate structure of the Company is as follows:*

Notes:

*All subsidiaries are 100% owned, except that, as at December 31, 2019, 0.01% of the issued and outstanding share capital of Timmins Goldcorp Mexico S.A. de C.V. was owned by Mark Backens, 0.01% of the issued and outstanding share capital of Aurea Mining Inc. was owned by Alio Gold Inc., 0.01% of the issued and outstanding share capital of Molimentales del Noroeste S.A . de C.V. was owned by Arturo Bonillas and 0.01% of the issued and outstanding share capital of Minera Aurea S.A. de C.V. was owned by Molimentales del Noroeste, S.A. de C.V.

**On March 5, 2020, Magna agreed to purchase all of the shares of Molimentales del Noroeste S.A. de C.V. held by Timmins Goldcorp Mexico S.A. de C.V. in exchange for 9,740,000 shares of Magna and $5.0 million in cash or in certain circumstances a 1% net smelter royalty, due to Alio within twelve months of closing of the transaction.

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D.Property, Plants and Equipment

San Francisco Property

The Company has determined that the San Francisco Property is no longer a material property. Since December 31, 2019 the Company announced the sale of the project and related property and assets. 

Introduction and Technical Information

The following information has been derived from the NI 43-101 technical report entitled “NI 43-101 F1 Technical Report Updated Resources and Reserves and Mine Plan for the San Francisco Gold Project, Sonora, Mexico” dated May 25, 2017, with an effective date of April 1, 2017 (the “San Francisco Technical Report”), prepared by Micon International Limited of Toronto, Ontario (“Micon”). The Qualified Persons responsible for the San Francisco Technical Report are William J. Lewis, B.Sc., P.Geo., Ing. Alan J. San Martin, MAusIMM(CP), Mani Verma, P.Eng. and Richard M. Gowans, B.Sc., P.Eng. of Micon who have approved of the summary of the San Francisco Technical Report provided below. The San Francisco Technical Report is available on the Company’s website (www.aliogold.com) and has been filed with the Canadian securities regulatory authorities on SEDAR and with the SEC on EDGAR.

Subsequent to the effective date of the San Francisco Technical Report, the Company disclosed scientific and technical information in respect of the San Francisco Property that supersedes the San Francisco Technical Report in certain respects. Please see the section below entitled “Update on the San Francisco Property”.   The Qualified Persons responsible for the San Francisco Technical Report have not reviewed or approved of the Update on the San Francisco Property, nor do they take any responsibility for such update.

Property Description and Location

The San Francisco Property is situated in the north central portion of the state of Sonora, Mexico, approximately 150 kilometres (“km”) north of the state capital, Hermosillo. In the San Francisco Technical Report and in this annual report, the term San Francisco Project refers to the area within the exploitation or mining concessions controlled by Alio Gold, while the term “San Francisco Property” refers to the entire land package (mineral exploitation and exploration concessions) under Alio Gold’s control.

The San Francisco Project is comprised of two previously mined open pits (San Francisco and La Chicharra), together with heap leach processing facilities and associated infrastructure located close to the San Francisco pit.

Alio Gold holds the San Francisco Project, which consists of 13 mining concessions, through its wholly-owned Mexican subsidiary Timmins Goldcorp Mexico, S.A. de C.V. All concessions are contiguous and each varies in size for a total property area of 33,667.72 hectares. In late 2005, the original Timmins II concession was subdivided into two concessions (Timmins II Fraccion Sur and Pima), as part of separate exploration strategies for the original Timmins II concession. All concessions are subject to a bi-annual fee and the filing of reports in May of each year covering the work accomplished on the San Francisco Property between January and December of the preceding year. The fee rates are estimated in U.S. dollars based on the rates published in the “Diario Oficial de la Federacion (DOF)” as of March 31, 2017.

Alio Gold acquired the first seven concessions covering the San Francisco Mine through its purchase of Molimentales in April 2007.

In 2006, Molimentales signed a temporary occupancy agreement with an agrarian community (“Ejido”) in Mexico called Los Chinos, whereby Alio Gold was granted access privileges to 674 hectares, the use of the Ejido’s roads, as well as being able to perform all exploration work on the area covered by the agreement. Subsequent to the agreement, Molimentales has completed the process (before the Mexican Federal Agrarian Secretariat) of converting the 674 hectares contracted from the Los Chinos Ejido into private property, and formalizing the purchase of the 674 hectares, before a notary public, according to the Sonora State Civil Code. The 674 hectares was purchased by Molimentales in 2011, and the final public instrument documenting the purchase was issued on February 9, 2015.

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During August and September, 2009, Molimentales acquired the 800 hectares of surface land on which the San Francisco Mine is located, by means of five purchase agreements covering all of the Ejido Jesus Garcia Heroe de Nacozari’s five former parcels that together form the 800 hectares.

Other parties control two mineral concessions which are contained within the area of the mineral concessions owned by Alio Gold but neither of these concessions impacts the main area of the San Francisco Project.

On February 23, 2011, Alio Gold announced that it had staked an additional 95,000 hectares of claims along the highly prospective Sonora-Mojave Megashear structural province in northern Sonora. Alio Gold has continued to stake additional concessions since February, 2011 and the total additional regional mineral concessions amounted to approximately 152,279.6 hectares in 2013.

On July 6, 2011, Molimentales acquired (through a straight purchase) a 10 hectares mineral concession called La Mexicana. Prior to this purchase, the La Mexicana mineral concession was the last area in the metamorphic package that did not belong to Alio Gold. Alio Gold reduced the size of the regional mineral concessions in 2015 by eliminating those areas deemed to have very little exploration potential, while maintaining the integrity of the overall concessions. After 2015, it retained approximately 19,713 ha. A further reduction occurred in 2016 when Alio Gold dropped the El Exito and El Picacho concessions. Therefore, Alio Gold currently retains a total of 13,284.19 hectares in its regional package of mineral concessions, which it believes contain the most prospective geology and mineralized targets upon which to base further exploration. The reduction in the size of the concessions has also resulted in a reduction in the bi-annual fees for the San Francisco Project.

The Mexican mining laws were changed in 2005 and, as a result, all mineral concessions granted by the Dirección General de Minas (“DGM”) became mining concessions. There are no longer separate specifications for a mineral exploration or exploitation concession. A second change to the mining laws was that all mining concessions are granted for 50 years, provided that the concessions remain in good standing. As part of this change, all former exploration concessions which were previously granted for six years became eligible for the 50-year term.

Alio Gold has been granted the temporary occupation of surface rights at the San Francisco Mine by the DGM for the duration of the exploitation concessions. In the case of an exploration concession, the holder is granted temporary occupancy for the creation of land easements needed to carry out exploration for the duration of the mineral concession. In order to commence mining, the holder of the concession is required to negotiate the surface rights with the legal holder of these rights or to acquire the surface rights through a temporary expropriation. The current surface rights are more than adequate to cover the infrastructure, mining and stockpile areas needed for the life of the San Francisco Project.

Concessions are extendable provided that the application is made within the five-year period prior to the expiry of the concession and the bi-annual fee and work requirements are in good standing. Alio Gold has free and clear title to the equipment on the property and no obligations to pay any net smelter return (“NSR”) royalties.

Accessibility, Climate, Physiography, Local Resources and Infrastructure

The San Francisco Project is located in the Arizona-Sonora desert in the northern portion of the Mexican state of Sonora, 2 km west of the town of Estación Llano (Estación), approximately 150 km north of Hermosillo and 120 km south of the United States/Mexico border city of Nogales along Highway 15 (Pan American highway). The closest accommodations are in Santa Ana, a small city located 21 km to the north on Highway 15.

The climate at the San Francisco Project site ranges from semi-arid to arid. The average ambient temperature is 21°C, with minimum and maximum temperatures of -5ºC and 50ºC, respectively. The average annual rainfall for the area is 330 mm with an upper extreme of 880 mm. The desert vegetation surrounding the San Francisco Mine is composed of low lying scrub, thickets and various types of cacti, with the vegetation type classified as Sarrocaulus Thicket.

Physiographically, the San Francisco Property is situated within the southern Basin and Range Province, characterized by elongate, northwest-trending ranges separated by wide alluvial valleys. The San Francisco Mine is located in a relatively flat area of the desert with the topography ranging between 700 and 750 m above sea level.

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History

After conducting exploration on the San Francisco Project between 1983 and 1992, Compania Fresnillo S.A. de C.V. sold the property in 1992 to Geomaque Explorations Ltd. (“Geomaque”). After conducting further exploration, Geomaque decided to bring the San Francisco Project into production in 1995. Production began at the rate of 3,000 t/d of ore or 30,000 oz/y of gold. As a result of the discovery of additional reserves, an expansion of the mining fleet, crushing system and gold recovery plant was undertaken in an effort to increase production to 10,000 t/d of ore. Due to the prevailing market conditions in February, 2000, Geomaque announced a revised mine plan whereby higher grade ore with a lower stripping ratio would be mined from the San Francisco pit and the La Chicharra deposit, which is located west of the San Francisco pit. The San Francisco area contained the El Manto, the San Francisco, the En Medio and the El Polvorin deposits. All of these deposits were later incorporated into the main San Francisco pit. The La Chicharra zone was mined during the last two years of production as a second pit. Due to economic conditions, mining ceased and the operation entered into the leach-only mode in November, 2000. Between 1996 and 2002, Geomaque produced a total of 300,590 ounces of gold at the San Francisco Project. In May, 2002, the last gold pour was conducted; the plant was mothballed, and clean-up activities at the mine site began.

In 2003, Geomaque sought and received shareholder approval to amalgamate the corporation under a new Canadian company, Defiance Mining Corporation (“Defiance”). On November 24, 2003, Defiance sold its Mexican subsidiaries (Geomaque de Mexico and Mina San Francisco), which held the San Francisco Mine, to the Astiazaran family of Sonora and their private company.

Since June 2006, the Astiazaran family and their company Desarrollos Prodesa S.A. de C.V. have been extracting sand and gravel intermittently from both the waste dumps and the leach pads for use in highway construction as well as other construction projects.

Alio Gold acquired an option to earn an interest in the San Francisco Property in early 2005, whereupon it conducted a review of the available data and started an RC drilling program in August and September 2005. This was followed by a second drilling program comprised of both RC and diamond drilling in 2006, based on the results of the 2005 drilling program.

Geological Setting and Mineralization

The San Francisco Project is a gold occurrence with trace to small amounts of other metallic minerals. The gold occurs in granitic gneiss and the deposit contains principally free gold and occasionally electrum. The mineralogy, the possibility of associated tourmaline, the style of mineralization and fluid inclusion studies suggest that the San Francisco deposits may be of mesothermal origin.

The San Francisco deposits are roughly tabular with multiple phases of gold mineralization. The deposits strike 60˚ to 65˚ west, dip to the northeast, range in thickness from 4 to 50 m, extend over 1,500 m along strike and are open ended. Another deposit, the La Chicharra zone, was mined by Geomaque, as a separate pit.

The Basin and Range province, which extends into Sonora from the United States, is characterized by northwest-trending valleys and ranges. Paleozoic rocks, including quartzite and limestone, overlie the Precambrian locally. The valleys are covered and in-filled by recent gravels.

The San Francisco Property lies in a portion of the Mojave-Sonora megashear belt characterized by the presence of Precambrian to Tertiary age rocks represented by different grades of deformation and metamorphism as evidenced in the field by imbricate tectonic laminates. The rocks principally involved in the process of deformation and associated with the gold mineralization in the region are of Precambrian, Jurassic and Cretaceous age.

The main vein systems in the region strike 50° to 80° west with dips ranging from northeast to southwest. These vein systems are the San Francisco, La Playa, El Diez, La Chicharra, and several systems in the La Mexicana area, Area 1B and La Escondida. A secondary system of veins includes the La Trinchera, Casa de Piedra, unnamed veins in portions of Area 1B and the La Mexicana veins which strike 60° to 80° east and dip northwest to southeast. Although the age relation between the two systems is unknown, it is believed that the northeast system is probably later stage.

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The geology of the La Chicharra deposit, although it is hosted in the San Francisco group, differs from the geology found in the San Francisco pit. While the geology consists of quartz-feldspar gneiss, pegmatite, schist, granite and gabbro, the mineralization is hosted principally in gabbro. The gabbro has a very sheared appearance, almost like a breccia, comprised of large fragments with lenses of pegmatite between the fragments. Due to the shearing process, the blocks of gabbro are highly fractured and the fractures are filled with quartz veins and veinlets. The gold mineralization is hosted by the pegmatite lenses and in the veins and veinlets within the gabbro. The limits of the mineralized gabbro are very well delineated by the shear zones, at both the hanging wall and footwall. This geological control allowed for better operational planning during the exploitation by Geomaque. Alio Gold completed a program of core drilling seeking the extension of mineralization down dip and along strike, and confirming continuity for the first 150 m from the northern limit of the pit, with the mineralization open in the northwest direction towards La Severiana.

Structurally, all of the metamorphic and igneous interpretation is based on the High Resolution Airborne Magnetics which indicate a regional lineament varying in direction from 60° to 30° to the west. The gold deposits are located in the southern portion on each side of this main lineament, and are related to the extension faulting of the system west-northwest and west-east.

Exploration Programs

Alio Exploration Programs

In 2007 and early 2008, geochemical surveys were conducted over the area occupied by the package of igneous and metamorphic rocks within the concessions. A total of 222 chip samples and 2,697 soil samples were collected. The results confirmed the targets already identified from historical shallow underground workings developed by former miners along quartz veins containing high gold values.

During May, 2007, Alio Gold contracted the Mexican Geological Service to survey 1,227 km of high resolution aeromagnetic lineaments and radiometry and acquired raw data for a further 1,569 km previously surveyed by the same institution which fully covered the surface of the San Francisco Property, over 40,000 hectares. The resolution of the data varies due to the flight height, which ranged between 75 and 100 m, with the lines spaced every 100 m. The conclusion of this study was the definition of the indicative structural lineaments of the tectonic sequence in northern Sonora.

With a view to a more detailed interpretation, a Natural Source Audio-Frequency Magnetotelluric (“NSAMT”) survey was completed on the San Francisco Mine along the lines 200E, 0, 800W, 1,000W, 1,200W, 1,400W, 1,600W and on the La Chicharra pit along the lines 2,500W and 2,700W. A total of 19.2 km of coverage in 10 survey lines with dipoles of 25 m was completed. Two lines were 2,400 m long and the remainder were 1,800 m.

The San Francisco pit is clearly located within the magnetic high zone, positioned along a linear contact seen in the radiometric data. In contrast, the La Chicharra pit is located in a non-magnetic zone also positioned along a linear contact observed in the radiometric data. Both pit locations are within the area thought to be the shear zone, and locally in areas characterized by contacts between intrusive (more resistive) and possibly altered (more conductive) rock types. The NSAMT program successfully identified the shear zone and provided sub-surface imaging of geologic trends that have been identified by airborne magnetic and radiometric surveys, in the test area. Alio Gold has concluded that the interpretation of NSAMT is a useful indicator of the different lithologies associated with the mineralization or host rock.

At the end of 2008, the services of a structural geologist, were recruited to obtain a greater understanding of the structural evolution of the region and in particular the tectonic complex in the San Francisco Mine area, and thereby to define the structural controls for the mineralization. The conclusions from this structural report have assisted Alio Gold in outlining subsequent exploration programs.

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From 2007 to 2009, concurrent with the feasibility study, which focused on re-starting the mining operations, Alio Gold conducted exploration comprised mainly of in-fill and confirmation drilling in and around of the San Francisco and La Chicharra pits. The drilling results as of the end of 2009 indicated that the mineralization extended both along strike and down dip of the known deposit, a situation which led to the decision to accelerate the drilling in the first 6 months of 2010. The results from the 2010 drilling, when combined with the previous results, led to Alio Gold updating the resource and reserve estimations, as well as its mine plan.

Between July 2010 and June 2011, Alio Gold conducted an intensive exploration drilling program which included deeper drilling to explore the mineralization at depth, both in and around the La Chicharra and San Francisco pits. The results of this drilling indicated that the mineralization is located in parallel mineralized bodies both along strike and at depth.

From July 2011 to June 2013, 1,464 RC and core holes were drilled for a total of 327,853 m. Most of the drilling was undertaken in and around the San Francisco pit and the La Chicharra pit. The RC drilling included 13,219 m in 62 holes of condemnation drilling and 3,842 m in 20 holes for water monitoring. A further 8 RC holes totaling 107 m were drilled on the low grade stockpile for grade control.

The drilling conducted within and around the San Francisco and La Chicharra pits comprised more than 92.8% of the drilling undertaken between July, 2011 and June, 2013. Both the RC and core drilling in these areas identified the extent of the mineralization along strike, as well as the extent down-dip, which remains open. The drilling surrounding the San Francisco and La Chicharra pits has been completed, except for defining the extent of the mineralization to the southeast of the San Francisco pit which remains open along strike and at depth. In 2013, Alio Gold had completed its planned exploration drilling programs. Additional in-fill drilling is necessary to confirm the extension in the up-dip direction from the newly discovered mineral zones identified at the northern extremity of the pit but it was still undecided if these areas were going to be exploited due to the lower gold price.

In the period between 2013 and 2017, Alio Gold has only conducted a small number of exploration drilling programs comprised of in-fill drilling in the San Francisco pit to cover gaps in drilling on the lower benches, exploration drilling to outline preliminary underground resources beneath the south wall of the pit and exploration drilling to the north of the San Francisco pit to potentially identify a secondary deposit which would supply feed to the heap leach pad and processing facilities at the San Francisco Mine.

The in-fill drilling in the San Francisco pit on the lower benches was successful in allowing a better understanding of the mineralization being extracted in these areas. The drilling in the south wall, along with preliminary underground mining, has helped to identify the extent and mining potential for these areas but further drilling will be necessary to fully identify the extent of the mineralized lenses in this area. The exploration drilling to the north produced mixed results with areas of good mineralization identified but the extent of the mineralization is still not fully understood and these areas will need further work to identify if they are amenable to open pit mining methods.

Alio Gold has continued to conduct in-fill drilling programs which have led to two small satellite pits to the north and northeast being identified around the La Chicharra deposit and a small pit to the southeast of the San Francisco deposit. These small pits are only a few benches deep.

In-fill drilling has been conducted in the pit to further define the mineralization and this information was used to update the mineral resources. Please see the “Update on the San Francisco Project”.

Future Exploration Programs

As of May 25, 2017, Alio Gold was not planning any further exploration programs on the San Francisco Property.

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Sampling, Analysis and Data Verification

A common feature in the sampling process for RC drilling is that a unique sample tag is inserted into the sample bag with each sample, and each sample bag is marked with its individual sample number. The bags containing the blank and standard samples are added into the sequential numbering system prior to shipment of the samples to the preparation facility. Sample preparation and assaying were performed at the San Francisco Mine. Approximately 15% of the samples assayed in the laboratory at the San Francisco Mine were checked at an external laboratory. The principal external laboratory has been the IPL-Inspectorate laboratory in Vancouver, B.C.

For core drilling, control starts after a run has been completed and the rods are pulled out of the hole. Once the core is removed, it is placed in core boxes. This step in the procedure is completed by the contractor’s personnel, under the supervision of an Alio Gold geologist. Alio Gold and the drill contractors follow generally accepted industry procedures for core placement in the core boxes. Bags containing blank and standard samples are added into the sequential sample numbering system prior to be being shipped to the assay preparation facilities of Inspectorate or ALS-Chemex. Both of these preparation facilities are located in Hermosillo, although ALS-Chemex has sent samples to its facilities in Chihuahua and Zacatecas for preparation.

As part of Alio Gold’s QA/QC procedures, a set of samples comprised of a blank sample, a standard reference sample and a field duplicate sample are inserted randomly into the sample sequence. The insertion rate for the blanks, standards and duplicate samples is approximately one each in every 25 samples.

Samples from the San Francisco Mine are picked up periodically by Inspectorate de Mexico, SA de CV., a subsidiary of Inspectorate America Corp.

Alio Gold has stopped using its assay laboratory at the San Francisco Mine to analyze samples and is only preparing samples on site at this time. However, there were still some mine laboratory assays in the QA/QC program. The San Francisco Mine laboratory continues to participate in a round-robin assay process through CANMET, which is the Materials Technology Laboratory at Natural Resources Canada, a branch of the Canadian Government.

Between January 2014 and December 2015, in addition to its regular QA/QC programs, Alio Gold added a program of conducting screen metallic samples as part of its assay checks to deal with free gold that it observed at the Vetatierra Project.

Mineral Resource and Reserve Estimates

The Mineral Resource and Reserve estimate in this section is as at the date of the San Francisco Technical Report. For an update to the Mineral Resource and Reserve estimate at the San Francisco Property, please see “Update on the San Francisco Property”.

Mineral Resource Estimate

The resource block model is based on 5 m by 5 m by 6 m high blocks. The coordinate limits of the previous model were retained for this current work. The topography was updated to reflect the mined surface as of April 1, 2017. The undisturbed pre-mining topographic surfaces are also available in the model.

Alio Gold has continued to conduct a manual interpretation of the mineralized zones, based on all of the drilling intersections now available in its database. This approach allows for more precise geological modelling and mineralization interpretation, which is enabling Alio Gold to plan better drilling programs to explore the extent of the mineralization and also to prepare better engineering designs regarding the ore and waste split in the pit for planning purposes. Grade envelopes and geological domains are directly interpreted by the geologists using the drilling information they have gathered.

The database of the San Francisco and La Chicharra deposits consists of 4,261 drill holes with 407,805 intervals, amounting to 640,782 m of drilling. A total of 135 of the drill holes lie beyond the model limits and have not been included in the study. The current database includes 13,877 m of drilling from 101 new holes drilled in 2016 and 2017.

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Approximately 13% of the sampling intervals are greater than or equal to a 2 m length, about 84% of the intervals are between 1.5 and 2.0 m in length, and about 3% are less than 1.5 m in length. In the case of duplicate samples, the original sample was used in the database.

High grade outlier assays were capped at different gold grades, according to the domains.

Once Micon had audited and accepted Alio Gold’s block model, Alio Gold proceeded to run a pit optimization program in order to estimate the resources. The gold price used for estimating the resources at the San Francisco Project was US$1,350 per ounce. The parameters used in the pit optimization for the estimation of the resources are summarized in Table 2-1. They are a combination of the parameters determined by Micon and Alio Gold, taking into account the actual costs obtained from the operation.

Pit bench heights were set at 6 m (the block height used in the model) and slope angles were based on inter-ramp angles recommended by Golder Associates in its December, 1996, report, adjusted to allow for haul roads of 25 m width.

The pit shell adopted for reporting resources was estimated at a gold price of US$1,350/troy ounce, using the economic parameters summarized in Table 1-1, the drilling database as of March 2017, and the topographic surface as of April 1, 2017. The Mineral Resource, as estimated by Alio Gold and audited by Micon, is presented in Table 1-2. This resource estimate includes the Mineral Reserve described subsequently, and has an effective date of April 1, 2017.

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Micon recommended that Alio Gold use the April 1, 2017, Mineral Resource estimate contained in Table 1-2 as the stated Mineral Resource estimate for the San Francisco Project as this estimate recognizes the use of 0.121 g/t gold for the San Francisco deposit and 0.115 g/t gold for the La Chicharra deposit as the open pit (OP) cut-off grades, at which the mineralization would meet the parameters for potential economic extraction, as defined by the CIM standards and definitions for resources.

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*Inferred resources in this table only include material within the limits of the US$1,350/oz pit shell and do not include material outside of the pits limit.

Micon believes that no environmental, permitting, legal, title, taxation, socio-economic, marketing or political issues exist which would adversely affect the Mineral Resources estimated above. However, Mineral Resources that are not Mineral Reserves do not have demonstrated economic viability. The Mineral Resource figures in Table 1-2 have been rounded to reflect that they are estimates and therefore, the totals in the table may not add.

The Mineral Resource estimate has been reviewed and audited by Micon. It is Micon’s opinion that the April 1, 2017, Mineral Resource estimate has been prepared in accordance with the CIM standards and definitions for Mineral Resource estimates and that Alio Gold can use this estimate as a basis for further exploration and economic evaluation of the San Francisco Project.

Mineral Reserve Estimate

Once Micon had audited and accepted Alio Gold’s resource estimate, Alio Gold proceeded to run a pit optimization program in order to estimate the reserves. The gold price used for estimating the reserves at the San Francisco Project was US$1,250 per ounce. The parameters used in the pit optimization for the estimation of reserves are the same as those used for the resource estimation.

Mining recovery has been estimated at 98% for both the San Francisco and La Chicharra deposits. Micon agrees with this estimate, as it is based on actual experience at the mine.

The dilution for the San Francisco and La Chicharra deposits varies, up to 4%, depending on the pit phases.

Table 1-3 presents the total reserves estimated within the pit design outline, including mine recovery and dilution factors.

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The proven and probable reserves in Table 1-3 have been derived from the measured and indicated Mineral Resources summarized in Table 1-2 and account for mining recovery and dilution. The figures in Table 1-3 have been rounded to reflect that they are an estimate and, therefore, the totals in the table may not add.

The Mineral Reserve estimate has been reviewed and audited by Micon. It is Micon’s opinion that the April 1, 2017, Mineral Reserve estimate has been prepared in accordance with the CIM standards and definitions for Mineral Reserve estimates and that Alio Gold can use this estimate as a basis for further mine planning and operational optimization at the San Francisco Project (San Francisco and La Chicharra pits).

Operational Data

The foregoing operational, processing, cost and economic analysis data is presented as at the date of the San Francisco Technical Report. For updated operational data for the San Francisco Property, please see “Update on the San Francisco Property”, below.

Production to Date

The San Francisco Mine resumed commercial production in April, 2010. Table 1-4 summarizes production from April, 2010 to the end of March, 2017, by quarter. Ore of lower grade is being stockpiled for processing at the end of the mine life. Alio Gold reports that, as of the end of August 2016, a total of 8.121 Mt at an average grade of 0.260 g/t gold had been placed on the low grade stockpile since 2010. However, Alio Gold has processed some of the stockpile material and the actual low grade stockpile contains 7.287 MT at an average grade of 0.26 oz/t gold as of the date of the San Francisco Technical Report.

During July, 2011, Alio Gold expanded the crushing system to 15,000 t/d. In December, 2012, a new additional 5,000 t/d crushing circuit was installed. The equipment initially installed was one jaw crusher, one secondary crusher, two tertiary crushers and two screens. In August 2013, an expansion was made to this crushing circuit, installing an additional secondary crusher, along with a screen, for a further capacity of 2,000 t/d. Total capacity for the new crushing circuit is 7,000 t/d.

With the original plant equipment and additions mentioned, the crushing capacity currently operates at 22,000 t/d.

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Mine Plans and Activities

Production from the La Chicharra deposit recommenced in late 2015. The San Francisco and La Chicharra pits will be mined at the same time. The La Chicharra pit, previously mined by Geomaque, is located 1,000 m west of the San Francisco pit.

All mining activities are being carried out by the contractor, Peal Mexico, S.A. de C.V., of Navojoa, Mexico. The contractor is obliged to supply and maintain the appropriate principal and auxiliary mining equipment and personnel required to produce the tonnage mandated by Alio Gold, in accordance with the mining plan.

Alio Gold provides contract supervision, geology, engineering and planning and survey services, using its own employees.

Processing

Ore extracted from the pit is transported in 100 tonne capacity haulage trucks, which feed directly into the gyratory primary crusher with dimensions of 42” x 65”. The crusher has nominal capacity of 900 t/h. The crushed product is then transported on conveyor belts to a stockpile with a capacity of 6,000 tonnes.

Two feeders beneath the stockpile deliver the ore onto a conveyor belt which feeds the secondary crushing circuit. The ore is screened and the screen undersize (minus 0.5 inch) reports to the final product, while screen oversize is fed to two parallel secondary crushers.

Product from the secondary crushers is transported on conveyor belts to the tertiary crushing circuit, which consists of three tertiary crushers in parallel operating in closed circuit with screens. The minus 0.5 inch undersize from the screens is delivered to the leach pad.

As noted above, the crushing circuits are presently being modified to deliver a finer product.

Product from the crushing plant is transported to the leach pad on overland conveyors and deposited on the pad with a stacker, forming lifts between 8 m and 12 m in height. A bulldozer is used to level the surface of each lift. The irrigation pipelines are then installed to distribute the leach solution over the entire surface of the lift.

Alio Gold has constructed the leach pad and has six different phases for depositing, based on the permits granted by the Mexican Environmental Agency (PROFEPA, Procuraduría Federal de Protección al Ambiente).

The 0.05% sodium cyanide leach solution with a pH of 10.5 to 11, flows downward through the crushed ore, dissolving the precious metals. The solution percolates to the bottom of the lift and is collected in the channel that carries the pregnant solution to a storage pond, from which it is pumped to the gold recovery plant. The gold contained in pregnant solution is adsorbed in the carbon columns.

The gold recovery operation comprises two adsorption-desorption-recovery (“ADR”) plants with a total of three parallel sets of carbon columns with a total feed capacity of 1,475 m3/h (6,500 US gpm) of pregnant solution.

Barren solution exiting the ADR plant flows to a second storage pond where fresh water and sodium cyanide are added, before the solution is pumped back to the leach pad.

A new stripping circuit with a capacity of 5.5 tonnes of carbon has been added to the process. In March, 2017, this new circuit started full operations. At the time of the San Francisco Technical Report, the target was to improve the stripping efficiency to an average of 95%.

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In March, 2017, Alio Gold initiated a process to separate the drainage solution from old leach pads (Phases 1 and 2) in a parallel intermediate solution process and recirculate this drained solution continually until it is enriched enough to process (minimum average head grade of 0.13 ppm). Additional infrastructure was added in order to process the 8,000 m3/d recirculated from the old leach pads.

An additional carbon tank with a capacity of 6 tonne of activated carbon (similar at the existing ones in ADR Plant #2) for capturing the gold solution drained from old phases has been added to the circuit.

In the first quarter of 2017, Alio Gold implemented a number of operational changes to the heap leach and crushing circuits as described above and improved overall gold recovery. Metallurgical test work indicated that recovery would be improved with the proposed modifications to the crushing circuity described above.

Capital and Cash Costs

Capital Expenditures

Future capital expenditures over the mine life were estimated to total US$70 million at the date of the San Francisco Technical Report, as shown in Table 1-4.

Sustaining capital expenditure includes equipment for crushing and conveying requirements, the continued expansion of leach pads for production purposes, and miscellaneous process equipment and plant improvements to generate efficiencies.

Expansionary capital expenditure includes pre-stripping to provide access to additional ore, crushing upgrades to enable finer crushing of ore to improve recoveries, power upgrade to provide more main power to the crushing circuit and enable removal of the diesel generating plant.

Closure and reclamation costs were estimated to be US$8.0 million at the date of the San Francisco Technical Report. This amount includes physical reclamation and payments to employees. This cost is not included in the capital estimates.

As at the date of the San Francisco Technical Report, Micon had reviewed Alio Gold’s estimate of the future capital expenditures for the San Francisco Project and regards it as reasonable.

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Cash Operating Costs

As at the date of the San Francisco Technical Report, Alio Gold’s projected production and average cash cost per ounce of gold from 2017 to 2024 was estimated to be as shown in Table 1-5:

As at the date of the San Francisco Technical Report, Alio Gold’s estimate of its life-of-mine production was between 670,000 and 720,000 ounces of gold at cash costs of US$900 to US$950 per ounce of gold. Cost per ounce of gold quoted is net of by-product credits.

As at the date of the San Francisco Technical Report, Micon had reviewed Alio Gold’s operating cost forecast for the life of the San Francisco Project and regarded them as reasonable.

Economic Analysis

Alio Gold continues to meet the requirements necessary to be considered a producing issuer, according to the definition contained in NI 43-101.

As at the date of the San Francisco Technical Report, the investment of an incremental US$45 million during 2017-2019 was expected by Alio Gold to generate an additional 360,000 gold ounces, compared to the estimates in the prior technical report. Alio Gold expected the US$38 million in capital stripping to provide access from the current phase 5 through to phase 8 of the San Francisco pit and phase 2 of La Chicharra pit, for a combined expected increase of approximately 265,000 ounces. The US$5 million investment in crusher upgrades was expected to increase recoveries.

Closure and reclamation costs were estimated to be US$8.0 million. This amount includes physical reclamation and payments to employees. These costs were not included in the economic analysis as they did not vary materially between alternate mine life scenarios.

The Company proposes to fund incremental capital expenditures and reclamation costs from existing capital resources and cash generated from operations.

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The expansionary capital expenditure was intended to be phased smoothly over 2017-2019, and as a result the updated LOM did not significantly depart from the 2016 technical report cash flows during the investment period. The planned capital investments were expected by Alio Gold to generate an additional US$85 million in after tax free cash flow, compared to the economic projections contained in the 2016 technical report.

Update on the San Francisco Property

On August 10, 2018, the Company disclosed scientific and technical information in respect of the San Francisco Property that supersedes the San Francisco Technical Report in certain respects.  For further information please see the news release disseminated by the Company on August 10, 2018 entitled “Alio Gold Reports Second Quarter 2018 Results” and available on SEDAR and EDGAR, which was reviewed and approved by Jorge Lozano, a “qualified person” as defined by NI 43-101. The Qualified Persons responsible for the San Francisco Technical Report have not reviewed or approved of the Update on the San Francisco Property.  The following is a summary of the contents of the August 10, 2018 news release:

In May 2018, the Company completed an update resource block model for the San Francisco Property in Sonora, Mexico.  The Mineral Reserve estimates at San Francisco from April 1, 2017 was updated as of July 1, 2018 utilizing the latest available information, including mining depletion over the period and infill and grade-control drilling carried out as part of the mining operations during the period.  Mining depletion of Mineral Reserves was partly offset by expansion of the reserves in Phases 6 through 9 of the San Francisco Pit.  Total proven and probable mineral reserves totaled 854,472 ounces of gold (55.5 million tonnes at 0.49 g/t) as of July 1, 2018, an approximate decrease of 74,228 ounces of gold or 8% from April 1, 2017.

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⁽¹⁾Figures may not total due to rounding

San Francisco Mine: Reserve and Resource Reporting Notes as of July 1, 2018:

For further information, please see the Company’s news release dated August 10, 2018 and the annual Management Discussion and Analysis for the Company’s financial year ended December 31, 2018, available on SEDAR and EDGAR or on the Company’s website at www.aliogold.com.

Florida Canyon Gold Mine

Introduction and Technical Information

The following summary is derived from the NI 43-101 technical report entitled “NI 43-101 Technical Report Life of Mine Plan and Mineral Reserves for the Florida Canyon Gold Mine Perishing County, Nevada, USA”, dated February 8, 2019, with an effective date of November 1, 2018 (the “Florida Canyon Report”), prepared by SRK Consulting (US) Inc. (“SRK”). The Qualified Persons responsible for the Florida Canyon Report are Allan V. Moran, CPG, Timothy Carew, M.Sc., P. Geo., Kent Harley, PE, Justin Smith, PE, SME RM, Jeffrey Woods, SME RM, Mark Willow, M.Sc., C.E.M., SME RM, and Thomas Bagan, PE, MBA, SME RM. The Florida Canyon Report is available on the Company’s website (http://aliogold.com/) and on the Company’s profile on SEDAR or EDGAR.

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Property Description and Location  

The Florida Canyon Mine is located about 42 miles south of Winnemucca, Nevada, just off Interstate 80 (I-80) at the Humboldt exit (Exit 138). Access to the Florida Canyon Mine offices is from the Interstate at the Humboldt exit, proceeding to the security gate, less than one mile. The leach pad, plant, and offices are visible east of the Interstate. The mine is partially visible east of the leach pad area. The pits, waste dumps, and facilities are in Sections 1, 2, 3, 10, 11, and 12 of T31N, R33E and Sections 34 and 35 of T32N, R33E, Mount Diablo Base & Meridian, Pershing County, Nevada. The approximate location of the Florida Canyon deposit is longitude 118° 14’W and latitude 40° 35’N.

The Florida Canyon Mine is an operating open pit and heap leach gold recovery mining operation 100% owned by the Company through its subsidiary Florida Canyon Mining, Inc. (“FCMI”). Florida Canyon Mine’s production history dates to 1986. Following a rehabilitation period, the mine re-started production in April 2017 and achieved commercial production in December 2017. FCMI is a 100% owned subsidiary of Alio Gold. Alio Gold acquired FCMI through its acquisition of Rye Patch Gold Inc on May 27, 2018.

The land package owned or leased by FCMI covers a total of 29,370 acres (including Alio Gold’s adjacent Standard Mine Project, which is not included in the Florida Canyon Report). Fee lands total 5,520.4 acres, while 19 patented claims total 359.9 acres. FCMI maintains 877 unpatented claims that total 23,875 acres. Two patented claims are also leased. The fee lands and patented claims, and most of the unpatented claims, are surveyed. The Florida Canyon Report only considers the Florida Canyon area.

Mineral titles are held by a combination of unpatented mining claims, patented mining claims (fee owned lands), fee-simple owned lands, and two leased patented mining claims.

Royalty agreements affecting the project are listed in Table 1-2. All material processed at the Florida Canyon Mine is subject to three royalties: a 2.5% NSR royalty payable to Able and York International Corporation, LLC; a 3.25% royalty payable to Maverix Metals Inc, and the 10.0% McCullough (formerly “ASARCO”) royalty area of the Florida Canyon deposit as summarized in Table 1-2. Holding costs for the entire land package of patented claims, unpatented claims and fee lands are summarized in Table 1-1.

Table 1-1: FCMI Land holding costs

Source: MDA, 2017

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Additionally, both the Bureau of Land Management’s (“BLM”) 43 CFR § 3809 and State of Nevada’s mine reclamation regulations (NAC 519A) require closure and reclamation for mineral projects, and a reclamation permit must include a financial surety to ensure that reclamation will be completed. FCMI has a reclamation surety to fund short-term closure and reclamation of the disturbance associated with mining operations and is currently permitting for reclamation under the state Reclamation Permit #0126, and by the BLM under approval of APO 20 and the FCMI APO 20 EA.

SRK is not aware of any known environmental issues that could materially impact FCMI’s ability to extract the mineral reserves. However, at least one environmental issue is significantly relevant to the operations and merits inclusion herein. Identified during routine site monitoring in 2000, the migration of nitrate from beneath the Florida Canyon HLP has been an issue with the Nevada Division of Environmental Protection – Bureau of Regulation and Reclamation since that time. Several Findings of Alleged Violation and Administrative Orders have been issued on this matter. A trust fund has been established to financially deal with this issue.

With respect to required permits and their status, SRK was provided a comprehensive list of current authorizations, as this is an established, operating mine in a jurisdiction that is regulatorily advanced and enforced. A review of the permits indicated that FCMI is fully permitted for the current operations, though several minor “expired” permits are undergoing renewal as of the publication of the Florida Canyon Report. FCMI also has water rights and appropriations, as well as monitor well waivers issued by the Nevada Division of Water Resources for 25 production and monitoring wells at both mines.

Accessibility, Climate, Physiography, Local Resources and Infrastructure

Florida Canyon Mine year-round access is available via I-80, with numerous small towns close by. Winnemucca, a city of 8,000 residents, is 42 miles northeast of the Florida Canyon Mine and is a source for labor, fuel, groceries, accommodation, and aircraft services. Lovelock, a city of 1,900 residents, is 31 miles southwest along I-80 and is also a source for labor, fuel, groceries, and accommodation. The major city of Reno is 125 miles southwest via I-80.

The climate in the project area is classified as semi-arid, characterized by low rainfall, low humidity, and relatively large annual and daily temperature ranges. Bright sunny days and cool clear nights frequently occur. Average temperatures range from the 30s (°F) in January to the 70s (°F) in July. Winter minimum temperatures are generally in the teens (°F), and summer maximums in the 90s (°F). Average annual precipitation for 1935 through August 2009, obtained for the nearby Rye Patch Dam weather station from the Western Regional Climate Center, has been 7.8 inches, with most of the precipitation falling as snow in the winter months. The minimum annual precipitation was 3.3 inches, and the maximum was 16.2 inches over this period.

Florida Canyon Mine is in the northwest portion of the Great Basin and on the western flank of the Humboldt Range. The terrain is a series of alternating mountain ranges and sagebrush covered valleys, with the mine located in the Basin and Range physiographic province. Elevations range from 4,200 ft near the plant and base of the leach pad to over 6,000 ft to the east. Star Peak is located to the southeast of the mine with an elevation approaching 10,000 ft.

History

Gold was discovered in 1860 in Humboldt Canyon, which led to the organization of the Imlay Mining District. Mining in the district was limited until 1906 when the Imlay Gold Mine and the Black Jack Mercury Mine were discovered. The most productive mine in the district was the Standard Mine which produced more than $1M in gold and silver between 1939 and 1949. The Valerie fluorspar deposit near the head of Black Canyon produced about 723 tons of 44% CaF₂.

In 1969, Homestake Mining Company obtained a lease on property in the Florida Canyon area. Seven widely spaced rotary holes were drilled with marginal results, and the property was dropped. Cordilleran Explorations (“Cordex”) next leased the property between 1972 and 1978. A comprehensive program of geologic mapping, geochemical sampling, and trenching was completed. A total of 25 of 37 drill holes completed were in a mineralized zone referred to as the “West Trend”, on the site of the present-day Florida Canyon Mine. When Cordex dropped their lease in 1978, Flying J Mines carried out a limited heap leach operation on the “West Trend” material.

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Between 1969 and 1982, three major mining companies explored the property and chose not to proceed with development of the deposit. For example, during 1980 and 1981, ASARCO completed a drill program of 69 rotary holes that significantly expanded the known mineralization. ASARCO dropped its interest in the property, except for a portion of Section 11, where a 1% NP royalty, now known as the McCullough royalty, remains in effect.

In 1982, Montoro Gold Company, a subsidiary of Pegasus Gold Corporation (“Pegasus”), acquired the property. Montoro began an aggressive program to expand resources and enlarge the property position. Detailed geologic mapping and geochemical sampling led to discovery of other anomalous gold occurrences throughout the property. By the end of 1985, 241 drill holes were completed totaling 87,569 ft in the “West Trend” and adjacent deposits. In addition, 46 holes were completed on other exploration targets to the south and east.

In November 1985, a decision was made by Pegasus to put the property into production. Permitting and project development followed with the start-up of a new mine in 1986. Since the original permit was granted in 1986, a total of 16 amendments to the operating plan have been made. Work on processing facilities began in May 1986, with the first ore crushed and delivered to the leach pad in November 1986. During the years that followed, additional drilling added resources to the project. Most of the known oxide mineralization in the Florida Canyon area has been explored. However, new areas in the south of the current operation present opportunities for future development of the Standard Mine mineralized zones. Pegasus operated the Florida Canyon Mine until January 1998.

In January 1998, Pegasus was unable to service $213M in debt and filed for bankruptcy under Chapter 11 of the US Bankruptcy Code. Under two separate plans of reorganization approved by major creditors and confirmed by the court, certain former Pegasus affiliates emerged from bankruptcy protection during February 1999. The first involved the reorganization of Pegasus Gold International Inc. (the international exploration affiliate of Pegasus), which was reincorporated as Apollo Gold Inc (“Apollo”). Apollo became the holding company for three former Pegasus subsidiaries, including FCMI.

Apollo was acquired during the second quarter of 2002 by Nevoro Gold, Inc. (“Nevoro”). Nevoro became a publicly traded company on the Toronto Stock Exchange and subsequently changed its name to Apollo. Apollo operated the Florida Canyon Mine and the Standard Mine until Jipangu International acquired the Florida Canyon Mine and Standard Mine properties on November 18, 2005. Jipangu International operated the properties through its wholly owned subsidiaries FCMI and SGMI.

In September 2015, Jipangu became majority owned by Admiral Financial Group. Rye Patch Gold agreed to acquire the Florida Canyon Mine property and related assets from Admiral Financial Group and Jipangu International through the acquisition of their three subsidiary companies, FCMI, SGMI, and Jipangu Exploration in consideration for payment of $US15.0M and 20 million common shares of Rye Patch Gold at closing. Rye Patch Gold agreed to assume certain liabilities of the acquired companies to a maximum aggregate amount; all obligations and payments have subsequently been satisfied by Alio since the acquisition of Rye Patch Gold.

In mid-2016, Rye Patch Gold resumed open pit mining operations and heap leach gold recovery. Rye Patch Gold declared commercial production in December 2017. In May 2018, Alio Gold acquired Rye Patch Gold by way of a Plan of Arrangement transaction and now owns 100% of the Florida Canyon property, which includes the Florida Canyon Mine and the Standard mines, operated by FCMI and SGMI, respectively.

A publicly stated mineral resource estimate was prepared for Rye Patch Gold by Mine Development Associates, dated January 27, 2017 (MDA, 2017). That stated mineral resource is presented in Table 1-3 and is considered a historical mineral resource. It is presented here for historical purposes only. The below stated historical mineral resources are not reliable or relevant; they are historically reported information only.

Table 1-3: Historical Mineral Resource – Florida Canyon – MDA, 2017

Source: MDA, 2017; formatted by SRK, 2018

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Geological Setting and Mineralization

The Florida Canyon Mine area is situated in northwestern Nevada within the Basin and Range physiographic province, which is typified by a series of northward-trending elongate mountain ranges separated by alluvial valleys. The region was subjected to three major pre-Cenozoic periods of deformation, characterized by large-scale folding and thrust faulting, with intervening periods of substantial carbonate and clastic sedimentation. The late Devonian to early Mississippian Antler orogeny shed sediment westward into a marine transgressive environment. At the end of the Paleozoic era (late Permian) and into the early Triassic period, the Sonoma orogeny resulted in deep-water strata thrust eastward tens of miles over rocks of the Antler highlands. During this period, thick sequences of greenstone and rhyolitic flows, tuff, and breccia of the Koipato Group were deposited in a shallow marine setting. Continuing sedimentation in the Triassic period was characterized by shallow-water marine carbonate deposition (Prida and Natchez Pass formations) grading westward to deeper-water clastic sedimentation, predominantly mudstones. During the late Triassic to early Jurassic periods, sediments of the Grass Valley Formation, grading from fluvial sandstone in the east to fine-grained mudstone in the west, were unconformably deposited over the Prida and Natchez Pass formation.

The last major compressional event was the Sevier orogeny, during the late Triassic period. During this time, sandstone and mudstone of the Grass Valley Formation were weakly metamorphosed to quartzite, argillite, and slate, with a north-northeast metamorphic foliation. The Grass Valley Formation is host to gold mineralization at Florida Canyon. Cenozoic volcanism and later Basin and Range faulting have complicated and, locally, obscured the older structural features.

The Florida Canyon area is dominated by a major regional structural zone, termed the Humboldt Structural Zone, which is interpreted to be a 200-km wide north-easterly-trending structural zone with left-lateral strike slip movement. One of the principal structural features within the Humboldt Structural Zone is the Midas Trench lineament, which abruptly terminates the north end of the Humboldt Range. Mineralization and alteration in the Florida Canyon Mine is localized where the Midas Trench lineament is intersected by the north-south trending Basin and Range frontal faults on the northwest side of the Humboldt range.

There is a strong N30°E to N50°E structural fabric prevalent in and adjacent to the Florida Canyon Mine, as evidenced by the alignment of quartz veining, shear zones, and well-developed joint sets. The north to north-northeast trending Basin and Range fault system limits the western near-surface part of the Florida Canyon Mine oxide gold mineralization.

At Florida Canyon, the location and geometry of the mineralized bodies are a result of structure and the presence of favorable silty argillite, quartzite, and limestone host rocks relative to structural conduits. The higher-grade zones of mineralization tend, in general, to follow the high-angle, northeast and northwest-trending fault and shear zones. The more moderate- or lower-grade zones are controlled by favorable host rocks more distal to feeder structures.

Hypogene mineralization at Florida Canyon consists of native gold and electrum associated with quartz, iron oxides, and minor pyrite, marcasite, and arsenopyrite. Quartz as veins, veinlets and silicification of host rocks is the major gangue mineral. Secondary minerals identified in the Florida Canyon deposits to date include gypsum (likely remobilized from the Grass Valley Formation), alunite, barite, native sulfur, calcite, dolomite, fluorite, anhydrite, pyrargyrite, pyrrhotite, and stibnite. There are two types of hydrothermal epithermal quartz veins at Florida Canyon. The most important are vein swarms and stockworks that contain mist of the gold mineralization. These veins are often randomly oriented, though generally follow a north-northeast trend and are characterized by colorless, euhedral to subhederl quartz, or banded chalcedonic white to colorless quartz that contains limonite after pyrite.

The second type of hydrothermal quartz veining occurs as large, through-going, banded fissure veins that follow the original north-northeast structural fabric. These veins are interpreted to represent a late hydrothermal event that overprinted the earlier episode of gold-bearing quartz veining and stockworks. These veins are characterized by bands of coarse, prismatic quartz alternating with bands of cherty chalcedony and only occasionally contain economic gold grades. Milky white bull-quartz veins, considered to be metamorphic in origin, may also be present in the mineralized zones, but they are not hold bearing. Locally, pervasive silicification is generally associated with areas of high-density quartz veining and/or intense hydrothermal brecciation. Sericite, adularia, clay, and chlorite occur locally in quartz

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veins, breccia matrix, and on fracture surfaces. There is extensive argillization and bleaching throughout the deposit area, with pervasive hematization that is largely confined to silty units marginal to the bleached areas.

Exploration Programs

The primary period of historical exploration, through the 1980s and 1990s was by RC drilling by two companies, Pegasus (2445 drillholes), and successor Apollo (987 drillholes up through year 2004). Jipangu was the successor owner after Apollo and they drilled an additional 684 drillholes from 2006 through 2014.

Drilling was the primary method of historical exploration as alteration and low-grade gold mineralization outcropped, and similarly was encountered in shallow drilling. There are 4,273 historical RC/rotary drillholes for 1,905, 082 ft and 55 historical core holds for 34,522 ft. Since the Florida Canyon Gold Mine is an active mine, ongoing exploration is primarily targeted as in-fill and peripheral drilling to known mineralized areas. Grassroots exploration targets exist outside the known mineralized areas.

Drilling

FCMI drilled 18 RC holes (FCR-010-001 to FCR-017-018) in 2017, for 7,130 feet, ranging from 150 to 890 ft in drill depth. Three were vertical holes, and the remainder were angle holes predominantly oriented to the east or southeast at -45 to -70° angles, intended to cross the primary mineralized structural control trends.

Total project drilling in the database is 4,340 drillholes for 1,946,804 ft, completed from 1969 through 2017; most of the drilling occurred in the 1980s and 1990s as RC drilling. Of the total number of drillholes, there were 55 historical core holes for 34,522 ft. Thus, the eighteen 2017 in-fill RC drillholes have added additional information for definition of local mineralization continuity but have minimal impact on the total drillhole database and the mineral resource.

The drilling database, including the 2017 drillholes that were drilled after the previous published Mineral Resource by MDA in 2017, was provided by FCMI, and used by SRK for the current resource estimation.

The 2017 RC drilling was conducted by HD Drilling LLC, an independent contractor located in Winnemucca, Nevada. A majority of the total project drilling was conducted on a nominal 100-ft drillhole collar spacing.

SRK did not observe the drilling procedures for the 2017 drilling; however, it was described by FCMI as standard RC drilling, and the contractor is known to SRK. SRK believes the drilling procedures employed by FCMI are appropriate and follow industry standard practices.

RC drilling is down-hole-hammer wet-drilling with water injections to recover cuttings to a rotary splitter for sample collection. Dill diameter varies from 5 to 6 inches, depending upon the drill bit used.

Collar locations are determined with FCMI mine surveying equipment, by the Mine Engineering department.

RC sampling was done by collection of a split from the rotary splitter at the rig, bagging and labeling the sample, which typically will range from 10 to 15 pounds in weight. Samples are collected at five-foot drill intervals by the drilling contractor. Small samples of the cuttings are collected for geologic logging by FCMI geologists.

Downhole surveys for hole deviation were conducted by independent contractor, IDS LLC, using a surface recording gyro instrument, which is a non-magnetic method that determines deviations downhole relative to a surface defined reference azimuth. IDS has an office in Elko, Nevada and has been providing borehole deviation surveys to the mining industry for decades. Surveys at Florida Canyon were performed after completion of the drillholes.

SRK has reviewed the 2017 drilling results and considers them consistent with historical drilling. The 2017 drilling procedures are sufficient to include these holes in the drillhole database for use in mineral resource estimation.

SRK has also reviewed previous reports and internal documents on the historical drilling that comprises the drillhole database and concludes the historical drilling procedures at Florida Canyon Mine have been conducted by industry standard procedures and are adequate for use in mineral resource estimation.

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SRK concludes that historical and current drilling at Florida Canyon Mine has been of sufficient type, orientation, and density of drill spacing to adequately define the gold mineralization at Florida Canyon Mine.

Sampling, Analysis and Data Verification

This section is applicable to the sample preparation, analysis and security of just the drilling samples of the 18 drillholes completed by FCMI in 2017 and the data generated since the last Mineral Resource estimate in 2016.

Drill samples are collected at the drill rig by the drill contractor and stored temporarily at the drill rig until delivered to FDMI geology staff. Samples collected at the drill rig and transferred to FCMI are maintained securely within the confines of the FCMI mine site, until picked-up by the contractor lab for transportation to the lab for analysis. For the 2017 drilling the samples were collected at the mine site by AAL, of Sparks Nevada.

Samples were dried, crushed, and pulverized at AAL in Sparks, Nevada. AAL is an accredited analytical lab. AAL has been FCMI’s primary analytical lab since 1990, and is a reputable Nevada based analytical lab servicing the mining industry. AAL is an ISO/IEC 17025:2005 accredited analytical lab and is Nevada Department of Environmental Protection approved.

Standard preparation procedure is to crush the entire dried sample to -3/4-inch size and split in a riffle splitter to produce several pounds of coarse crushed material for further crushing, and pulverization. The pulverized sub-sample is used for analysis. The pulps are retained for further use or check assays if deemed necessary, and eventually archived. Coarse reject material is typically not saved. Sample analytical procedures used are fire assay lead-collection methods for a 30-gram sample size, with ICP-AES determinations; having a 0.03 ppm or 0.001 oz/ston detection limit. Analytical certificates from AAL provide the gold assays in both ppm and equivalent oz/ston values. The drillhole database used gold values as oz/ston Au.

Quality assurance (“QA”) and quality control (“QC”) procedures are in place at AAL and include insertion of sample blanks, duplicates, and Standard Reference Materials (SRM or standards) into each batch of drill samples collected at the drill rig and transported to the lab. The QA/QC program consists of inserting a minimum of one analytical standard, one blank, and at least four sample duplicates for every batch of 50 samples assayed. Sample duplicated are repeat analysis of a second split of the coarse reject material. The results of the QQ/QC samples are examined by AAL and FCMI to determine the pass or fail of a particular batch of samples. There were no issues identified in the QA/QC assay results from the eighteen holes drilled in 2017, consisting of 1,426 five-foot drill samples.

The sample preparation and analytical procedures used by AAL are commonly used by most analytical labs. SRK is of the opinion that the sample preparation and analytical procedures used are adequate to define the gold mineralization at Florida Canyon Gold Mine and are common industry practice. SRK has reviewed the QA/QC procedures in place and the results and concludes that the program in place is adequate to verify the accuracy and precision of the analytical data that is the foundation of the drillhole database.

Data Verification

SRK’s data verification process consisted of the following:

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Procedures

A site visit was conducted on July 12, 2018, including a visit to mining areas and exposures in pit walls for the Central, and Radio Tower pit areas. Mineralized and altered Grass Valley formation siltstone and argillite were observed, along with mineralized structures, quartz veining, silicification, hematite alteration and clay alteration; providing an understanding of the lithology and alteration coding used in the drillhole database.

Upon import into Leapfrog® Geo software, the previous drilling and the new 2017 drilling were visually compared. The new drilling mineralized intervals for all 18 holes average 0.033 oz/ston; higher grade than the existing mineral resource average grade of 0.012 oz/ston, but in line with surrounding drillholes, providing improved continuity to a higher-grade area.

The current geological model compares reasonably well visually to the previous model, with the enhancement of lithology and alteration solids defined directly from the drill data, avoiding some of the sectional rectification problems previously noted.

The previous mineralized shape used to confine mineralization compares with the current mineralized shape, with enhancements along preferred mineralized structural trends providing more continuity of mineralization along the east-northeast to northeast structural fabric. Mineralized intervals were visually checked against logged drillhole lithology and alteration codes, and appears reasonable; for instance, as with higher grades generally correlating with silicified Grass Valley Formation lithology.

For the 2017 drilling, SRK examined copies of the assay certificates for 27% of the assays, or 369 individual five-foot assay intervals, selected randomly, against the drillhole database assays. No errors were found, and only nine rounding differences at 0.001 opt.

Limitations

SRK did not complete an audit or verification of the entire drillhole database, as it was deemed not necessary. Previous third-party reviewers have completed more in-depth audits of the various drilling programs over the life of the property, comparisons of the various analytical labs used, and audits of the database. SRK has reviewed the previous work and found no significant issues or concerns that would materially affect the mineral resource.

SRK notes that the resource cut-off grade of approximately 0.006 oz/ston Au is nearing the reliable assay detection limit for gold by analytical labs. AAL has a lower detection limit of 0.001 oz/ston gold for the assay method currently in use. And AAL assays accounts for approximately two thirds of the drillhole database. The cut-off grade is at an adequate buffer above the assay lower detection limit of 0.001 oz/ston; however, any future desires to lower the cut-off grade should be done with caution, as values in the 0.001 to 0.003 oz/ston gold range may not be that reliable or should have a degree of uncertainty applied to them.

Metallurgy

Ore processing and gold recovery operations commenced at Florida Canyon in 1986. Ore was crushed and stacked on lined heap leach pads between 1986 and 2011. The ore was leached with dilute alkaline cyanide solution, and gold and silver were recovered from solution by carbon adsorption and Merrill-Crowe (zinc precipitation) processing methods. In addition, un-crushed run-of-mine (“ROM”) material was placed on the heap leach pads and leached between 1989 and 2011. Ore crushing re-commenced in 2016 and continues through the date of publication of the Florida Canyon Report. The mine-to-date overall gold recovery for all materials placed on the heap leach pads at Florida Canyon averaged 67.4% through June 30, 2018. The overall gold recovery between 1986 and 2015 (before re-starting operations) averaged 68.3%.

Owing to co-mingling of process solutions from the crushed and ROM heap leaching operations, it is not possible to estimate the individual gold recoveries from crushed and ROM ore. An assessment of historical column leach testing data and other operating information indicates that the crushed ore gold recovery has varied between 64 and 74%, increasing with finer particle size. ROM ore gold recovery has varied between 50 and 58%.

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Historical processing recovery information is relevant to the Florida Canyon Report on mineral reserves as it is used in the pit optimization process to define the pit shell which is the basis for mineral reserves.

Mineral Resource and Reserve Estimates

Mineral Resource Estimate

The mineral resource estimate was conducted by Mr. Timothy Carew, P.Geo., a SRK Principal Consultant, using Geovia GEMS® modeling software for block modeling, Sage2001 for variography and X10-Geo® for statistical analysis.

In summary, SRK:

Upon consideration of data quality, drill hole spacing and the interpreted continuity of grades within the deposit, SRK classified the deposit into “Measured”, “Indicated” and “Inferred” mineral resource categories.

SRK applied basic economic considerations to restrict the mineral resource to material that has reasonable prospects for economic extraction by open-pit and underground mining methods. To determine this, the mineral resource was subject to a pit optimization study using Whittle^TM software and a set of assumed technical and economic criteria which were selected based on site experience and benchmarking against similar projects.

Drillhole Database

The drill hole database provided by FCMI consists of 4,286 RC/rotary drill holes totaling 1,912,604.5 ft of drilling and 53 core holes totaling 34,239.5 ft of drilling, for a total of 4,339 holes totaling 1,946,844 ft of drilling. The average drill hole spacing is approximately 100-ft centers for the mineralized areas.

The average assay interval is approximately five feet in length, with samples being assayed at 10 different assay laboratories, including the mine laboratory. More than 67% of the samples have, however, been assayed by AAL.

Samples have been assayed using a fire assay method for all samples and a cyanide soluble gold methodology for selected samples. There is a total of 359,737 assay records in the drill hole database. A total of 12 holes were removed from the database used for estimation purposes. These holes had a single assay interval that was the length of the hole and had been assigned a default ‘place holder’ value of zero.

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Table 1-4 : Gold assay statistics by mining area

Source: SRK, 2018

The coefficient of variation (“CV”) for all areas is high, which is indicative of a highly positively skewed distribution. As well, the mean is typically greater than or equal to the upper quartile, which is another indication of a highly skewed distribution, which is common for gold deposits of this type. Given these indications, a reduction of the CV will be considered necessary – this will be achieved by capping outlier grades and compositing the 5-ft sample lengths to 10-ft composites.

Geological Model

The geological framework for SRK’s resource estimate was generated by SRK geologists, utilizing Leapfrog® implicit modeling software to generate 3-D solids modeling lithology and alteration, as described above. These solids were used to code lithology and alteration integer attributes in the block model, using majority rules assignation, with precedence’s assigned to solids to resolve any overlaps. The July 2018 end of month topographic surface was used as the current topography for modeling purposes. FCMI provided an ‘as-mined’ surface based on previous mining information that was modified by SRK to reflect the most recent production information (blast hole data) as of the July 2018 EOM. This surface was used to locate, and model backfill and dump material in the block model.

A grade shell generated using LeapFrog® implicit modeling software was used to separate populations of grade values and spatially constrain estimated values. Blocks within the shell received estimated values for fire assay gold, if the drillhole data was sufficient, using composites falling within the grade shell. For implicit modeling purposes, the grade shell assay values were capped with generalized values, then composited to 20-ft lengths. The composited values were used to generate meshes around intervals that exceed the respective grade threshold. Structural trends related to mineralization were incorporated to reflect the influence of these structures/trends.

A single gold grade shell at a threshold value of 0.003 oz/ston was built for all areas of the model but was subdivided into three sub-domains based on the orientation of various structural trends that are considered to be associated with mineralization. Statistical analysis of assay data within the grade shells indicate that the grades are similar across the deposit.

Composites were, however, tagged with the sub-domain codes for use in variographic analysis, in consideration of the interpreted orientation differences. The 0.003 oz/ston grade shell, with sub-domains. The grade domain grade shells were used to code an integer block model item identifying the domain, in addition to a percentage item storing the percentage of a block falling within the grade shell.

Assay Capping and Compositing

A capping analysis was conducted on AUFA values by domain prior to compositing to determine suitable capping values to minimize the effect of outlier values. A variety of analyses methods were considered, including a ‘metal-at-risk’ approach (this compares the gold metal contribution of each sample to its tonnage contribution as a ratio, with a guidance that the ratio should not exceed 10:1), in conjunction with examination of log probability plots of the domain distributions that identify breaks in the distribution corresponding to high-grade outlier populations.

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The capped assay data for AUFA gold was composited as 10-ft equal length composites starting at the DH collar and broken at the 0.003 oz/ston gold grade shell contacts. Any short residual intervals less than 4 ft in length (40% of nominal composite length) created in this process were merged into the previous interval. Composite intervals internal and external to the grade shells were assigned unique identifying rock type codes.

Average density values provided by FCMI were assigned to blocks based on modeled alteration code, which includes codes for surface fill/dump material and alluvium.

Variogram Analysis and Modelling

The spatial continuity of composites within the grade shell domains was investigated through variographic analysis using the SAGE 2001® variography package. Down-the-hole corellograms were calculated to determine appropriate nugget values, in addition to 3-D directional corellograms for use in variogram modeling. The corellogram measures the correlation coefficient between two sets of data, comprising values at the heads and values at the tails of vectors with similar direction and magnitude, and has been found to provide a stable estimate of spatial continuity. For ease of modelling, the correlogram value is subtracted from one and is presented in a similar graphical form to the variogram. In this report the correlograms presented this way are referred to as variograms.

Block Model

A 3-D block model was defined to cover the volume of interest, approximately 2 by 2 miles in plan view and 3,000 ft vertically, and with a block size of 30 x 30 x 20 ft.

Estimation Methodology

Block grades were estimated by domain (grade shell) for AUFA using Ordinary Kriging (OK). The interpolation process utilized 10ft composites tagged with corresponding rock type codes to enable the use of hard boundaries to prevent interpolation across the 0.003 oz/ston grade shell boundary. No restrictions were specified between the sub-domains, as statistical comparisons indicated that the distributions were not markedly different in the sub-domains. Composite tagging also allowed the use of semi-soft boundaries between the high-grade shapes modeled internal to the 0.003 oz/ston grade shell – this method allows the influence of some composites external to the high grade shells to be used within a specified distance tolerance. The interpolations were done in three passes, with progressively larger search distances and with protection of blocks estimated in earlier passes. A Nearest Neighbor gold fire assay block value was also estimated for comparison/validation purposes, using the same estimation parameters as the OK interpolations.

A high-grade search distance constraint was also implemented in interpolation, where more constrained search distances are considered for composites within the initial search ellipsoid that exceed a specified threshold value, as detailed below:

Domain 1 (NNE) – 10 x 10 x 10 ft with a high-grade threshold of 0.30 OPT

Domain 2 (MID) – 20 x 20 x 20 ft with a high-grade threshold of 0.25 OPT

Domain 3 (NE) – 20 x 20 x 20 ft with a high-grade threshold of 0.20 OPT

Blocks were estimated by OK with a minimum of 6 composites and a maximum of 18 and using a block discretization of 3 x 3 x 2.

Given that the percentage of a block within the 0.003 oz/ston grade shell was variable, a final diluted fire assay gold block value was calculated as:

Diluted fire assay gold grade = fire assay gold grade x Gradeshell Percentage/100 The percentage of a block falling external to the grade shell is assumed to be at zero grade.

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Model Validations

Model validation was approached through visual and statistical methods. Visual comparison was done on sections and in plan for each area of the deposit. Statistical comparison was achieved using comparative population statistics and swath plots. A visual inspection of the model in plan and section confirmed that grades generally correlate well between the blocks and the composite data in each area.

Statistics by interpolation domain (grade shell) were used to compare the Nearest Neighbour (“NN”) and OK fire assay block grades against each other. The NN interpolation method provides a declustered representation of the sample grades and therefore, the modeled mean grades of any other method should be similar to the mean grade of the NN estimate at a zero-cut-off grade. For fire assay gold, the OK estimates were within acceptable tolerances of the NN; approximately ±2% for each domain. The global mean estimated OK grade at zero cut-off was within ~5% of the NN estimate.

The Florida Canyon Mine mineral resource estimate is within a $1,350/oz gold sales price pit shape and is reported using the net smelter return cut-off in Table 1-5. Mr. Timothy Carew, P.Geo., an SRK Principal Consultant, conducted the mineral resource estimate, using Geovia GEMS® modeling software for block modeling, Sage2001 for variography, and X10-Geo® for statistical analysis. A standard block model was constructed, using kriging for grade estimation and assignment to the block model.

A swath plot is a graphical display of the grade distribution derived from a series of bands, or swaths, generated in several directions through the deposit. Using the swath plot, estimated grades from the OK model are compared to the distribution derived from the Nearest NN grade model.

On a local scale, the NN model does not provide reliable estimations of grade, but on a much larger scale it represents an unbiased estimation of the grade distribution based on the underlying data. Therefore, if the OK model is unbiased, the grade trends may show local fluctuations on a swath plot, but the overall trend of the OK data should be similar to the NN distribution of grade.

Swath plots were generated along east-west and north-south directions, and for elevation. Swath widths were 150 ft wide for both east-west and north-south orientations, and 60 ft wide in the vertical. Gold grades were plotted by OK (green traces) and NN (blue traces) for all estimated blocks.

Based on the swath plots, there is a reasonable correlation between the modeling methods. The degree of smoothing in the OK model is evident in the peaks and valleys shown in some swath plots; however, this comparison shows a reasonable agreement between the OK and NN models in terms of overall grade distribution as a function of easting, northing, and elevation, with zones of marked divergence restricted to swaths where there are low tonnages (as shown by the block counts – vertical bars on the plots).

Mineral Resource Estimate

Given that process recoveries and costs in the resource model are grade and/or domain dependent, the application of standard cut-off grades for resource reporting purposes is not feasible. The resources are, therefore, reported with respect to a block NSR value which is calculated on a block-by-block basis. The resource is also constrained by an optimized (Whittle^TM) resource pit, in accordance with the requirement to demonstrate that the defined resources have reasonable prospects of eventual economic extraction, a CIM criteria. All classification categories (Measured, Indicated and Inferred) were considered in the resource pit optimization.

Gold recoveries used in resource estimate were calculated for each block and varied with grade based on the recovery assumptions in the SRK resource report (SRK, 2018a). Additional analysis of recoveries continued in parallel with mine planning subsequent to the release of the resource report. This analysis altered the understanding of the controls on recovery and led to a new recovery projection of 71% for all material types.

The resource pit optimization parameters by mining area are tabulated in Table 1-5. These parameters were also used in the calculation of block NSR values for reporting purposes. Nominal slopes of 45° were utilized for in-situ rock and 37° for fill/dump material.

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Table 1-5: Resource pit optimization parameters

Table 1-6: Mineral Resource statement, Florida Canyon Gold Mine, Pershing County, SRK Consulting, effective date July 31, 2018

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Notes:

Mineral Reserve Estimate

SRK assisted FCMI with mine planning from 2016 through the present time. In 2017, SRK produced an updated internal LOM plan (SRK, 2017). SRK used standard mine planning processes to establish mineral reserves. Initial inputs were used to define economic pit limits. The assumptions used to define economic pit limits were refined during the development of this reserve estimation, as additional efforts were conducted to develop further understanding of metallurgical recovery for the operation, as well as the impact and sources of dilution.

Key Assumptions, Parameters and Methods

Whittle^TM pit optimization software, utilizing the industry standard Lerchs-Grossmann pit optimization algorithm, is used by SRK to perform the pit optimization and determine the economic limit. SRK worked with other consulting team members, outside consulting firms, Florida Canyon Mine team members, and Alio Gold representatives to develop key inputs for the optimization including metal price, metal recovery, pit slope parameters, as well as operating cost and capital cost data.

The deposit hosts a significant number of existing open pits in steep terrain, so mining costs vary based on available access and haulage routes. Therefore, the mine was divided into seven areas: Central, Central North, Jasperoid Hill, Main, Radio Tower North, Radio Tower and Radio Tower Two. Separate mining costs were assigned to each of these areas for mine planning purposes.

SRK used pricing assumptions that were confirmed by Alio Gold. A gold selling price of $1,250 per troy ounce of gold was applied to all seven areas, as well as the selling cost of $2.80 per troy ounce of gold and a royalty of 5.01%.

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Gold recoveries used in the pit optimization runs were calculated for each block and varied with grade based on the recovery assumptions in the SRK 2018 report on mineral resource. Additional analysis of recoveries continued in parallel with mine planning subsequent to the release of the resource report. This analysis altered the understanding of the controls on recovery and led to a new recovery projection of 71% for all material types, as described in Section 13.5 of this report. Pit optimization is based on the initial variable grade recoveries, while the detailed mine plan and production schedule utilize the refined recovery number of 71%. This recovery value is higher than the average recovery presented in the resource report.

With the new recovery values, Alio Gold requested that detailed mining planning move forward without running new pit optimizations. Therefore, the results of the current optimization study provide a smaller, lower risk, ultimate pit limit for the reserve estimate.

Geotechnical design criteria for the deposit is provided in Golder’s 2016 Geotechnical Memo (Golder, 2016), which includes recommended slopes based on rock types, alteration, and orientation of the highwall. Golder recommends slopes for rock (45°), fill and alluvium (38°), and reduced 35°slopes for non-silicified rock with northwest facing highwalls at an orientation between 305° and 355°. Additionally, Golder requires a 50ft step-in at the base of fill rock.

A significant number of existing open pit excavations are available for observation and in general, provide sufficient information for geotechnical characterization of the deposit for this level of study. Most of the pits occur in areas with significant existing exposure due to mining, except for one pit in the Central North area.

The northwest facing walls in the existing Central and Radio Towers pits have experienced planar-type failures associated with the interaction of faults, regional fabric, alteration regime and lithological contact.

SRK is of the opinion that the geology and alteration model in the immediate vicinity of the planned Central high-wall is not defined to a level that would allow accurate assignment of localized variable slopes based on rock type and alteration. Additionally, SRK recommends that a geotechnical catch bench be included in the final design, since the highwall is about 1,000 ft high. In light of these considerations, SRK reduced the slope to 32.5° in that zone which is less than the 35° slope recommended by Golder.

Past mining in the upper benches of the Central pit in the failure zone indicates that the failure may be attributed to a structure running parallel to the highwall. A steeper highwall may be possible by mining behind this structure if the structure is the failure mechanism.

The failure zone in the existing Radio Towers pit is similar in nature to the failure zone in the Central pit. This pit is at the extents of the geological model. Golder’s 2016 report indicates that the design will likely cut into Natchez Pass Limestone which is expected to be relatively strong and support steeper slopes. The Radio Towers pit is designed using the standard 45° rock and 38° fill slopes per Golder’s assumption that the limestone can support steeper slopes.

In 2018, Golder supplied an updated report, recommending an observational approach to adapt to any changes in ground conditions as they are encountered. This is considered by SRK to be a sound engineering approach; however, more aggressive slopes may be possible with more geotechnical work and unforeseen changes in ground conditions could require design changes that affect the reserve.

A detailed geotechnical analysis focused on optimizing the pit slope angles for all mining areas has not been conducted. This analysis should be performed with a focus on evaluating risk, and on optimizing slopes, ultimately resulting in a new set of specific design criteria for all mining areas. There is a significant potential to either improve project economics and/or reduce project risk by performing such a study. At a minimum, the Central and Radio Towers designs should be evaluated by a qualified geotechnical engineer prior to construction.

SRK developed an updated groundwater surface for the mine. Water is only encountered in the lower benches of the Main pit, where the modeled groundwater surface rises towards the existing pit floor. For geotechnical purposes, the highwalls are assumed to be dry. This area warrants slope stability work and will require additional permitting prior to construction. Consequently, no mining is planned below the water table until 2021.

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FCMI continues to evaluate the reconciliation of actual mine production against the resource model. As of the writing of this report, this work is still ongoing. Therefore, a clear description of dilution and ore loss at the mine is not available. For the purposes of pit optimization, dilution and ore loss factors of 3% and 2%, respectively, were applied.

For the detailed mine plan, blanket factors of 5% dilution and 5% ore loss were applied. The increase was based on SRK’s engineering judgement with input from the site technical staff.

For both the pit optimization and the detailed mine plan, dilution material was assumed to be zero grade.

Open pit optimization is used to generate data to help identify the optimum economic pit shape based on the highest project cash flow for a given scenario. The pit optimization process seeks a solution to a complex 3-D mathematical relationship involving the mineral resource model, geotechnical slope guidelines, product revenue, project constraints, modifying factors, and costs. SRK used Whittle^TM software to perform the pit optimizations.

Key outputs from the open pit optimization process are the identification of the project economic drivers, ultimate pit shapes and guidance on strategic logic to reach the final pit limits.

Practical mining considerations such as access and minimum mining widths are not captured in LG pit optimization. For the Florida Canyon Mine, access considerations and minimum mining widths affect the pit limits. These changes were incorporated in the next iteration of mine planning when a practical strategic plan is developed using the results of this pit optimization work as a guideline.

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Notes:

A metal price of $1,250/oz Au;

Ore mining costs by area ranging from $1.42 to $2.67/ston;

Waste mining costs by area ranging from $1.24 to $1.83/ston;

Crushing and processing costs of $2.85/ston ore;

General and administration costs of $1.02/ston milled;

Pit slope angles varying from 32.5 to 45°; and

Process recoveries of 70%.

Table 1-8: Florida Canyon Mine Reserves by mining Area, Pershing County, Nevada, effective date November 1, 2018

Notes:

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- A metal price of $1,250/oz Au;

- Ore mining costs by area ranging from $1.42 to $2.67/ston;

- Waste mining costs by area ranging from $1.24/to $1.83/ston;

- Crushing and processing costs of $2.85/ston ore;

- General and administration costs of $1.02/ston milled;

- Pit slope angles varying from 32.5 to 45°; and

- Process recoveries of 70%.

Factors Affecting Mineral Reserves

SRK is not aware of any existing environmental, permitting, legal, socio-economic, marketing, political, or other factors are likely to materially affect the mineral reserve estimate.

In addition to the mine and processing facility development, all infrastructure required to support the stated Mineral Reserve have been accounted for in this PFS.

Mineral reserves have been economically tested to ensure that they are economically viable. The project remains economic across a range of key input parameters.

The pit design for establishing mineral reserves also encompassed Inferred Mineral Resources. Inferred Mineral Resources are too speculative to be the basis of mineral reserves. While there is the opportunity that future exploration may result in upgrading some of Inferred Mineral Resources to Indicated or Measured, there is no guarantee that this may occur.

Operational Data

Production to Date

SRK’s production schedule starts with the November 1^st, 2018 as-mined surface. The current operation is delivering between 650,000 tpm to 700,000 tpm of ore to the crusher. The PFS production schedule ramps up to 800,000 tpm delivered to the crusher in April 2019 and continues that mining rate through the end of the mine life in 2028. The mine schedule was limited by truck hours, with only 10 trucks for production mining in 2019 and ramping up to 12 trucks from 2020 through LOM. In 2026 stripping requirements mandate a 16-size truck fleet. It is expected that as replacement equipment is brought in, older equipment will be maintained well enough to meet the stripping requirement.

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Mine Plans and Activities

Florida Canyon Mine operates as an open pit and has done so for over twenty years. The nature of the orebody is a large, low grade, near-surface orebody, so the Florida Canyon Mine project is developed as an open pit mining operation in the Florida Canyon Report. Waste and ore are drilled and blasted, loaded by front end wheel loaders, and transported by haul trucks to external waste rock storage facilities, stockpiles, or a primary crusher for mineral processing.

During a strategic mine planning study prior to the PFS, Alio Gold established that an optimal processing throughput rate was 800,000 tons per month (tpm) and is possible after implementing several adjustments to the crushing circuit as described in Section 13. This became the basis of mine planning in the PFS.

Crushed ore is loaded into haul trucks and stacked on the heap leach pad facility where it is irrigated with a dilute cyanide solution and recovered with carbon columns.

The current mining operation utilizes 24-yd³ front-end loaders to load 150-ton haul trucks. Rock is drilled by diesel powered rotary blast hole drills. Replacement equipment is included in sustaining capital to replace aging equipment. Replacement equipment is leased as the equipment reaches its assumed age threshold through the remainder of the mine life. Replacement equipment is assumed to be the same size as the present fleet. The mine will keep some of the older equipment to maintain or supplement production if necessary.

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Processing

Ore is crushed in two stages to 80% passing 1-1/2 inches. ROM ore is delivered from the mine via truck to the ROM stockpile adjacent to the primary crusher. A loader feeds ore from the stockpile to the primary crusher dump pocket. Capital expenditures are planned in 2019 to eliminate the rehandling of ore ahead of the primary crusher. Ore passes over a primary vibratory grizzly with nominal bar spacing of 6 to 4.5 inches. The grizzly undersize reports directly to the primary crusher product conveyor. The grizzly screen oversize reports to the primary crusher (44” x 48” Telsmith jaw crusher) with a closed sized setting of 4 inches. Ore from the primary crusher product conveyor is split into two streams which feed two secondary screen feed conveyors operating in parallel. The secondary screen feed conveyors discharge to the secondary screens (8 ft by 20 ft Telsmith double deck screens). Screen oversize reports to the secondary crushers, two Metso HP 400 cone crushers operating in parallel. Screen undersize reports to the one of the two secondary crusher product belts which is then transferred to the product conveyor belt. Lime is added to the ore for pH control which then reports to the agglomeration blender where agglomeration aid is added. Material from the agglomeration unit is deposited on a small stockpile and subsequently loaded into haul trucks for stacking on the heap leach pads.

The planned crushing plant throughput is 800,000 tons/month. The average instantaneous crushing plant throughput is 1,400 t/h at the planned crushing plant operating availability of 78%.

Column leach tests are conducted on monthly crusher composite samples of the crushed ore stacked on the heap. The columns are operated as close as possible to the actual production leaching process with respect to solution chemistry and solution application rate. The column results indicated average gold extractions of 69.9% after an average of 107 days of leaching. Median column test gold recovery after the same average leach time of 107 days was 71.1 percent. Since much of the historical column leach testing reported in section 13.2 is based on a fixed 28-day period of column leaching, the historical extractions are not fully representative of expected leaching performance on the production heap.

Infrastructure, Permitting and Compliance Activities

Project Infrastructure

The Florida Canyon Mine has a well-established project infrastructure and is located adjacent to I-80, a major highway crossing the United States, traversing the active gold mining areas of Northern Nevada. In general, the site parallels I-80 in a northeast/southwest direction, the Union Pacific Railroad runs parallel to the highway approximately one-half mile northwest of the interstate. Existing infrastructure includes power, water, maintenance facilities, lab, office, gold processing and refining plants. Other existing infrastructure include open pits, waste rock repositories, heap leach pads, ponds and roads.

The site is easily accessible by roads and logistics for mining goods and services are excellent. Major mining vendors are in Winnemucca, Nevada, Elko, Nevada, Reno, Nevada and Salt Lake City, Utah. Major components for mine mobile equipment are rebuilt in Reno and exchange components are typically available within one day. Process goods and services are also available either locally in Winnemucca or Elko and most parts are available within one day. Parts can be delivered by “hot shot” vendors that drive from airports or vendor locations in Reno, Salt Lake City and Elko, 24r hours per day, seven days a week. Doré bars are shipped from site to a refiner in Salt Lake City by a security firm that services multiple mines in the area.

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Power is transmitted via a 60-kV overhead transmission line owned, operated and maintained by NV Energy, who is the major provider of energy in the state of Nevada. NV Energy supplies most of the mines in Nevada, as well as the cities of Reno and Las Vegas. The utility is governed by the Nevada Public Utilities Commission who provides oversight on behalf of customers. Power is received from the 60-kV line by an onsite substation. FCMI bears the responsibility for owning, operating and maintaining the onsite substation, as well as all the power infrastructure on the mine side of the onsite substation. This infrastructure includes both underground and overhead power lines that feed 25-kV of electricity to distribution transformers after the voltage is stepped down from 60 to 25kV by the onsite transformer. Several distribution transformers drop the voltage down to operational requirements at the crusher, process plant, refinery and ancillary facilities. Critical areas of the process plant and refinery are backed up with diesel generators. Switch gear is installed in critical areas to isolate line power from generated power in the event of a power outage or interruption. FCMI employs personnel to maintain the mine electrical system and hires contractors to repair major issues with the system. Contractors are in Winnemucca, Elko, Reno and Salt Lake City, typically within a maximum of one day’s notice of a major power event.

Water supply requirements are met with ground water wells. Water is pumped from the wells to supply leaching, process, dust control and drinking water. Florida Canyon has 2,415 acre-feet of water rights, which are adequate to meet the mines needs. Some groundwater is geothermal in nature and is pumped to two cooling ponds before distribution via a pipe to a water tank. Water is transported by pipe from the water tank to leaching, crushing, processing and stand pipes that supply water to large water trucks that apply water to haul roads.

Multiple open pits and waste rock storage facilities exist on the site. Some of the previously mined open pits are partially backfilled. Future mining primarily mines the outer edges and below existing pits. Four primary mine areas comprise future and past open pits; jasperoid, main, central and radio tower. Mining waste is currently hauled to the South Waste Rock Storage Facility (South WRSF), in the future waste will continue to be hauled to the South WRSF, North WRSF, and backfill the Jasperoid pit once it is mined out. Reclaimed WRSFs also exist on the site.

Two heap leach pads are located on the site and referred to as the North Pad and South Pad. The North Pad is filled to capacity and all crushed material is now placed on Phase 1 of the South Pad. Two more phases will be built in the future to process the current reserve, Phase 2 and Phase 3, respectively. Solution is applied to approximately one-third of the North Pad system and a contained piping system allows for solution to flow to the South Pad, providing operational flexibility. South Pad makeup water can flow directly from the fresh water system or use solution from the North Pad to South Pad. Approximately one-third of the North Pad is available to leach material should economics warrant and an engineering review confirm the feasibility of doing so. The remainder of the North Pad is reclaimed.

Both the North and South Pad systems have existing pregnant, barren, storage and contingency ponds. Several ponds are not in use in the North Pad system, ponds in the South Pad system will be used for the remainder of the mine life.

A total of six sets of carbon columns are onsite, four at the North Pad system and two at the South. The maximum capacity is approximately 9,000 gallons per minute. Gold adsorption is almost exclusively done at the two South Pad column sets with a maximum flow of 5,000 gallons per minute. Carbon is transferred from the carbon columns to a gold recovery plant and stripped of gold in the elution and electrowinning circuits of the plan. The barren carbon is then acid washed, regenerated and returned to the carbon columns. Gold captured through the elution and electrowinning process is refined at the plant. A lab is also located at the plant processing pit samples, solution samples and bullion assays. Metallurgical testing is also housed in the laboratory facility.

A crushing plant was moved from the Standard Mine to the South Pad. The plant consists of a jaw crusher, two cone crushers, two screens, an agglomerator, as well as belts that transport crushed material to a radial stacker. Trucks haul the crushed material from the radial stacker to the leach pad.

A mobile maintenance shop, process maintenance shop, warehouse, offices, truck wash pad and fuel farm comprise the majority of ancillary facilities at the site. The mobile maintenance shop includes two bays and the warehouse includes supplies for mobile equipment, crushing equipment, process parts and smaller items for support departments

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Environmental

SRK Environmental Specialist, Mark Willow, a Qualified Person in accordance with Companion Policy 43-101CP to National Instrument 43-101 – Standards of Disclosure for Mineral Projects, has visited the Florida Canyon Mine on several occasions over the past few years, and is familiar with the conditions on the property and any potentially available material information that could affect project development.

Since the Florida Canyon Mine is partially located on public lands administered by BLM of the mine Plan of Operations or any amendment thereto, requires an assessment and disclosure of potential environmental and limited social impacts as part of the BLM’s obligations under the National Environmental Policy Act. Baseline data collection and impact assessment have been completed on the property in accordance with NEPA, including an assessment of cumulative impacts. Given our extensive experience with EA development for mining projects in Nevada, and specifically for the BLM, it is SRK’s opinion that the environmental studies and baseline data collected for the project (specifically APO 20) are appropriate and have adequately identified the environmental impacts associated with project implementation. Comprehensive environmental management plans are required as part of the state and federal permitting efforts.

SRK is not aware of any known environmental issues that could materially impact the FCMI’s ability to extract the mineral reserves. However, at least one environmental issue is significantly relevant to the operations, and merits inclusion herein: Identified during routine site monitoring in 2000, the migration of nitrate from beneath the Florida Canyon Heap Leach Pad has been an issue with the Nevada Division of Environmental Protection – Bureau of Regulation and Reclamation since that time, this facility is identified as the North HLP in this document. Several Findings of Alleged Violation and Administrative Orders have been issued on this matter. A trust fund has been established to financially deal with this issue.

Permits

SRK was provided a comprehensive list and copies of current permits and authorizations for the Florida Canyon Mine. A review of the permits indicated that FCMI is fully permitted for the current operations, though several minor “expired” permits are undergoing renewal as of the publication of the Florida Canyon Report. FCMI also has water rights and appropriations, as well as monitor well waivers issued by the Nevada Division of Water Resources for 25 production and monitoring wells.

The following is a summary of the Florida Canyon Mine permits:

Table 1-9: Current permits for Florida Canyon (as of August 20, 2018)

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FCMI also has water rights and appropriations, as well as monitor well waivers issued by the Nevada Division of Water Resources for 25 production and monitoring wells at both mines.

Social and Community Requirements

Employees for the operating work force of the Florida Canyon Mine generally come from Winnemucca or Lovelock, Nevada. The FCMI APO 20 EA determined that the mine would result in a temporary positive effect on mine-related employment and income in terms of labor income and secondary employment. It was also concluded that net mineral proceeds, property and sales and use taxes would also increase during the life of the assessed action.

Other current projects in central Nevada have clearly demonstrated the need for open and transparent communications and negotiations with the local government, businesses, and residences, as well as the need for a clearly defined Social Management Plan. Without the support of this close-knit community, the approval within the local community and other stakeholders to operate may not be earned.

Capital and Operating Costs

Capital Cost Estimate

The Florida Canyon Mine is an ongoing operation. For the purposes of the Florida Canyon Report, all capital spent to date is considered a sunk cost. Additional capital is now needed to replace current equipment, construct leach pads, replace process equipment and improve crusher production. These capital costs are required to sustain operations. A summary of mine capital expenditures is shown in Table 1-10.

Table 1-10: LOM capital costs estimates