Item 3. Key Information
A. Selected Financial Data
The
selected historical consolidated financial information set forth below has been
derived from our annual audited consolidated financial statements.
For
the years ended August 31, 2017, 2016, 2015, 2014 and 2013 we have prepared our
consolidated financial statements in accordance with IFRS as issued by the
IASB.
The
selected historical consolidated financial information presented below is
condensed and may not contain all of the information that you should consider.
This selected financial data should be read in conjunction with our annual
audited consolidated financial statements, the notes thereto and the sections
entitled Item 3. Key Information D. Risk Factors and Item 5 - Operating and
Financial Review and Prospects.
The
table below sets forth selected consolidated financial data under IFRS as issued
by the IASB, which differ in certain respects from the principles the Company
would have followed had its consolidated financial statements been prepared in
accordance with US GAAP. The information has been derived from our annual
audited consolidated financial statements, including as set forth in Item 18 -
Financial Statements.
The
tables below set forth selected consolidated financial data under IFRS for the
years ended August 31, 2017, 2016, 2015, 2014, and 2013. In this Annual Report
all dollars are expressed in Canadian dollars unless otherwise stated.
|
|
August 31,
|
|
|
August 31,
|
|
|
August 31,
|
|
|
August 31,
|
|
|
August 31,
|
|
|
|
2017
|
|
|
2016
|
|
|
2015
|
|
|
2014
|
|
|
2013
|
|
Operating Revenues
|
$
|
-
|
|
$
|
-
|
|
$
|
-
|
|
$
|
-
|
|
$
|
-
|
|
Loss before other items
|
|
(3,357,321
|
)
|
|
(3,539,645
|
)
|
|
(3,176,374
|
)
|
|
(5,730,581
|
)
|
|
(11,199,164
|
)
|
Net Loss and Total
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Comprehensive Loss for the Year
|
|
(3,357,321
|
)
|
|
(3,539,645
|
)
|
|
(3,176,374
|
)
|
|
(5,730,581
|
)
|
|
(11,199,164
|
)
|
Loss per Share, Basic and
Diluted
|
|
(0.018
|
)
|
|
(0.021
|
)
|
|
(0.023
|
)
|
|
(0.051
|
)
|
|
(0.108
|
)
|
Total Assets
|
|
120,436,379
|
|
|
118,515,050
|
|
|
119,223,274
|
|
|
116,837,367
|
|
|
111,845,946
|
|
Total Liabilities
|
|
4,125,269
|
|
|
1,498,030
|
|
|
1,935,054
|
|
|
3,742,967
|
|
|
2,878,631
|
|
Share Capital
|
|
169,593,205
|
|
|
167,181,354
|
|
|
164,695,991
|
|
|
158,553,485
|
|
|
149,379,724
|
|
Total Equity
|
|
116,311,110
|
|
|
117,017,020
|
|
|
117,288,220
|
|
|
113,094,400
|
|
|
108,967,315
|
|
Weighted Average Number of Common Shares
Outstanding
|
|
187,869,637
|
|
|
167,184,272
|
|
|
139,893,312
|
|
|
112,724,520
|
|
|
103,683,356
|
|
Dividends declared
|
|
Nil
|
|
|
Nil
|
|
|
Nil
|
|
|
Nil
|
|
|
Nil
|
|
11
Exchange Rates
The
following table sets forth the average exchange rates for the Canadian Dollar
and U.S. Dollar for the five most recent financial years indicated based on the
noon buying rate per the Bank of Canada (1 Canadian dollar = US$X), calculated
by using the average of the exchange rates on the last day of each month during
each financial year.
Year Ended August 31,
|
Average
|
2013
|
US$ 0.9848
|
2014
|
US$ 0.9276
|
2015
|
US$ 0.8202
|
2016
|
US$ 0.7552
|
2017
|
US$ 0.7589
|
The
following table sets forth the high and low exchange rate for the past six
months. As of November 21, 2017, the exchange rate was US$0.7826 for each CDN$1.
Month
|
High
|
Low
|
May 2017
|
US$ 0.7437
|
US$ 0.7276
|
June 2017
|
US$
0.7706
|
US$
0.7405
|
July 2017
|
US$ 0.8034
|
US$ 0.7703
|
August 2017
|
US$
0.8012
|
US$
0.7840
|
September 2017
|
US$ 0.8245
|
US$ 0.8013
|
October 2017
|
US$
0.8018
|
US$
0.7756
|
B. Capitalization and Indebtedness
Not
Applicable.
C. Reasons for the Offer and Use of Proceeds
Not
Applicable.
D. Risk Factors
An
investment in securities of Avalon is highly speculative and involves
significant risks. Exploration activities are based on professional judgments
and statistically-based tests and calculations, and often yield few rewarding
results. Mineral properties are often non-productive for reasons that cannot be
anticipated in advance and operations may be subject to risks including labour
disputes, environmental hazards, safety issues, geological issues, weather
conditions and changing regulatory requirements as examples. Avalon is subject
to competitive risk as its ability to finance its activities and generate
profitable operations or proceeds from disposal of assets are subject to world
prices for rare metals, rare earth elements (REE), lithium and other specialty
minerals and the economic forces that influence capital markets. Any one of the
following risk factors could materially affect business, financial condition
and/or future operating results and prospects and could cause actual events to
differ materially from those described in forward-looking statements relating to
Avalon. Additional risks and uncertainties not currently identified by Avalon or
that Avalon currently believes not to be material also may materially and
adversely affect Avalons business, financial condition, operations or
prospects.
We have no operating revenues and a history of losses.
The
Company has had no operating revenues and a history of losses, and no operating
revenues are anticipated until one of the Companys projects comes into
production, which may or may not occur. The Company will continue to experience losses unless and until it can
successfully develop and begin profitable commercial production at one of its
mining properties. There can be no assurance that the Company will be able to do
so.
12
We have no history of mineral production.
Avalon
is an exploration and development company and has no history of mining or
refining mineral products from its properties. As such, any future revenues and
profits are uncertain. There can be no assurance that the Nechalacho Project,
the East Kemptville Project, the Separation Rapids Lithium Project or any other
project will be successfully placed into production, produce minerals in
commercial quantities or otherwise generate operating earnings. Advancing
projects from the exploration stage into development and commercial production
requires significant capital and time and will be subject to further technical
studies, permitting requirements and construction of mines, processing plants,
roads and related works and infrastructure. The Company will continue to incur
losses until mining-related operations successfully reach commercial production
levels and generate sufficient revenue to fund continuing operations. There is
no certainty that the Company will generate revenue from any source, operate
profitably or provide a return on investment in the future.
There is material uncertainty regarding our ability to
continue as a going concern.
The
business of mining and exploring for minerals involves a high degree of risk and
there can be no assurance that current exploration programs will result in
profitable mining operations. The recoverability of the carrying value of
exploration and evaluation assets and the Company's ability to continue as a
going concern is dependent upon the preservation of its interest in the
underlying properties, the discovery of economically recoverable reserves, the
achievement of profitable operations or the ability of the Company to raise
alternative financing.
The
Company is currently in the exploration and development stage of its properties.
If the Company determines based on its most recent information that it is
feasible to begin operations on its properties, the Company will be required to
raise additional capital in order to develop and bring the properties into
production. Our ability to raise funds will depend on several factors,
including, but not limited to, current economic conditions, our properties, our
prospects, metal prices, businesses competing for financing and our financial
condition. There can be no assurance that we will be able to raise funds, or to
raise funds on commercially reasonable terms.
The development of the Nechalacho Project,
the East Kemptville Project and the Separation Rapids Lithium Project
involve numerous uncertainties and there are no guarantees that we will be
successful.
Mine
development projects typically require long time frames and significant
expenditures before production is possible. Bringing any of the Nechalacho
Project, the East Kemptville Project and the Separation Rapids Lithium Project
into successful operation is dependent on many factors such as:
-
the availability of funds to finance construction and other capital
expenditures and to provide working capital;
-
the timing and availability of permits and other approvals to proceed with
construction and to operate the mine and processing facilities;
-
the completion of negotiations with First Nations and other Aboriginal
groups and stakeholders affected by such project;
-
the completion of acquisition of a property or properties for the
processing facilities and the availability of infrastructure necessary for
construction and operation;
-
the negotiation of sales or off-take contracts for the planned production
from such project; and
-
the completion of negotiations with strategic partners for the provision
of additional investment and/or the provision of technical assistance or
services.
13
Other
unanticipated problems and delays may arise in the development of the Nechalacho
Project, the East Kemptville Project or the Separation Rapids Lithium Project
and, accordingly, the Company may not be successful in establishing mining and
processing operations.
Additional financing will be needed for our business
operations and there are no guarantees that we will be able to raise sufficient
funds.
The
Company does not have sufficient funds to complete permitting, development and
construction of the Nechalacho Project, the East Kemptville Project or the
Separation Rapids Lithium Project, or to complete exploration or feasibility
studies on any of its other properties. The Company believes its existing
financial resources, will be adequate to fund general and administrative
expenses and planned exploration and development expenses through the end of
January 2018, but unanticipated expenses or other developments could cause its
existing resources to be depleted prior to that time. Accordingly, the Company
will need to raise additional financing, which may be sought through sales of
equity or debt securities, asset sales, joint ventures, project financing or
other arrangements. The recent climate for financing in the mineral industry in
general and for rare earth minerals projects in particular has been difficult,
and there can be no assurance that the Company will be able to complete
necessary financings on a timely basis or at all. Failure to complete adequate
financing on a timely basis could result in delay or indefinite postponement of
the development of the Nechalacho Project, the East Kemptville Project or the
Separation Rapids Lithium Project, and could require the Company to reduce
general and administrative expenses or impair the Companys ability to continue
as a going concern. Future financings may result in significant dilution to
existing shareholders.
We may fail to identify joint venture partners or may
fail to successfully manage joint ventures.
As
part of the Company's development strategy, the Company is considering a number
of alternatives to access development capital for its mineral properties,
including joint ventures with strategic partners. However, there can be no
assurance that the Company will be able to identify joint venture candidates or
that it will succeed at effectively managing the operation of any joint venture.
Unprofitable joint ventures may adversely affect the price of the Companys
Common Shares and negatively affect the Company's results of operations.
The Preliminary Economic Assessment of the Separation
Rapids Lithium Project is preliminary in nature and there is a risk that this
project will not continue to a positive feasibility stage.
The
Preliminary Economic Assessment (PEA) of the Separation Rapids Lithium Project
is preliminary in nature, as the metallurgical processes developed require
further work to confirm that a commercially acceptable product can be
consistently produced and sold in the marketplace, and there is no certainty
that the preliminary economic assessment model will be realized. There is no
assurance that the Company will be able to obtain the financing necessary or
gathering all the technical information needed to support the completion of a
feasibility study. Even if a feasibility study is completed there is no
assurance that the economic scenario envisioned therein will be sufficiently
positive to warrant execution of the project.
We will need to enter into off-take agreements and
failure to secure and enter into favourable off-take agreements with customers
could have a material adverse effect on, and could result in delay or suspension
of the development of, the both the Nechalacho and Separation Rapids
Projects.
The
Company intends to pursue entering into off-take agreements with industrial
consumers of the minerals it intends to produce in order to have assurance of
future sales of its products. It is likely that it will be necessary to have
some of the off-take agreements in place in order to secure project financing
for the Nechalacho and Separation Rapids Projects in order to demonstrate the
economic viability of the project to lenders. Failure to secure and enter into
favourable off-take agreements with customers could have a material adverse
effect on, and could result in delay or suspension of the development of either
Project.
14
The ore types at both the Nechalacho Project and
Separation Rapids Project are unique and there is a risk that the metallurgical
process that we anticipate using will not perform at commercial scale as
expected.
The
ore types on both projects are unique for which well-established metallurgical
processes have not previously been applied. Accordingly, there is a risk that
the process designed at the bench and pilot scale will not perform at commercial
scale as expected. The failure of such metallurgical process, could materially
and adversely affect the Companys expected project development and production
schedules.
Title to some of our mineral properties may be challenged
or defective. Aboriginal groups may raise title disputes in relation to land
claims and any impairment or defect in title could have a negative impact on our
results of operations and financial condition.
The
Companys title to its properties may be subject to disputes or other claims
including Aboriginal land title claims. Although the Company has exercised the
usual due diligence with respect to determining title to properties in which it
has a material interest, there is no guarantee that title to such properties
will not be challenged or impugned. There may be valid challenges to the title
of the Companys properties, which, if successful, could impair the Companys
ability to explore, develop and/or operate its properties or to enforce its
rights with respect to its properties. Aboriginal rights and title may be
claimed with respect to Crown properties or other types of tenure with respect
to which mining rights have been conferred. In addition, other parties may
dispute the Companys title to the properties in which it has an interest and
such properties may be subject to prior unregistered agreements or transfers or
land claims by Aboriginal peoples, and title may be affected by undetected
encumbrances or defects or government actions.
An
impairment to or defect in the Companys title to its properties could have a
material adverse effect on the Companys business, financial condition or
results of operations. In addition, such claims, whether or not valid, will
involve additional costs and expenses to defend or settle which could adversely
affect the Companys profitability.
The
Company will need to enter into agreements with applicable Aboriginal groups to
complete the development of the Nechalacho Project. The Company has entered into
an accommodation agreement with the Deninu Kue First Nation (
DKFN
)
which provides for business and employment opportunities for the DKFN and
contains measures to mitigate the environmental and cultural impacts of the
project. The Company is seeking to enter into similar agreements with the Lutsel
Ke Dene First Nation (the
LKDFN
) and Yellowknives Dene First Nation
(the
YKDFN
), but there is no assurance that these agreements will be
completed in a timely manner or at all. Even after the accommodation agreements
are entered into, the continuing co-operation of the First Nations will be
required to implement the terms of the agreements and proceed with the
Nechalacho Project. Any failure of co-operation by these or any other
potentially impacted Aboriginal groups could result in delay of work on the
Nechalacho Project. The Company also has entered into a Participation Agreement
with the Northwest Territory Métis Nation (
NWTMN
). This agreement
provides for training, employment, and business opportunities for the NWTMN
related to the Project and associated facilities in the Northwest Territories.
The Participation Agreement also contains measures to mitigate environmental and
cultural impacts that may result from the project development.
The
Company will need to enter into agreements with applicable Aboriginal groups to
complete the development of the Separation Rapids Lithium Project. The Project
is located in the traditional land use area of the Wabaseemoong Independent
Nations (WIN) for which they have stewardship under an agreement with the
Province. The Company first signed an MOU with WIN in 1999 which was renewed
when the Project was reactivated in 2013. Avalon management has been keeping WIN
leadership informed on Project activities and remains committed to fulfilling
its community consultation obligations and partnering with WIN on Project
business opportunities. The Company has also initiated dialogue with the Métis
Nation of Ontario who hold Aboriginal rights in the area.
We may need to acquire additional properties for our
hydrometallurgical plant and separation plant, which may significantly delay the
development of the Nechalacho Project as a whole.
15
As
part of the Nechalacho Project, in the current Feasibility Study (FS), the
Company planned for a hydrometallurgical plant to be located at Pine Point, 85
kilometres east of Hay River, Northwest Territories and a rare earth refinery to
be located in Geismar, Louisiana. It is presently considering alternative sites
for both facilities. Any grants and surface leases, if granted, may be subject
to the rights of holders of exploration claims or other subsurface rights, which
may be inconsistent with the use of the property for the hydrometallurgical
plant. In addition, economic factors such as power cost and infrastructure
factors such as the adequacy of road and/or rail access may cause the Company
not to proceed with acquiring the Pine Point surface leases.
The
Companys purchase option on the land parcel in Geismar, Louisiana expired on
December 15, 2014. Several sites in western Canada are under consideration for
the location of an updated hydrometallurgical plant.
If
the properties in Pine Point, Geismar or a suitable alternative are not
acquired, the Company will need to identify and acquire another suitable site or
sites for its hydrometallurgical plant and rare earth refinery, which may
significantly delay the development of the Nechalacho Project as a whole.
In
addition the Company will also need to obtain a parcel of land similar to the
previously identified land parcel in Geismar, Louisiana, or elsewhere, to build
its own rare earth refinery.
Our feasibility study relies upon estimates based on
assessments of market conditions and available technical information concerning
the Nechalacho Project, which are only historical projections and are inherently
uncertain.
The
Companys expected production schedules, capital costs, engineering and
construction estimates and operating costs which are included in this Annual
Report are contained in the Feasibility Study which was completed in 2013. The
FS relied upon estimates based on assessments of market conditions at that time
and available technical information concerning the Nechalacho Project.
Accordingly, the results indicated by the FS are historical projections only and
are inherently uncertain. In particular, actual capital costs may significantly
exceed those estimated by the FS, and engineering and construction estimates and
schedules set forth in the FS may prove materially inaccurate.
Anticipated
operating costs and production schedules set forth in the FS are based upon a
variety of factors, including:
-
anticipated tonnage, grades and metallurgical characteristics of the ore
to be mined and processed;
-
anticipated recovery rates of REE and other minerals from the ore;
-
cash operating costs of comparable facilities, supplies/consumables and
equipment;
-
anticipated climatic conditions; and
-
forecasts for foreign exchange markets, and discount rates.
Capital
costs, operating costs, production and economic returns, and other estimates
contained in studies or estimates prepared by or for the Company in the future
may differ significantly from those anticipated by the Companys current
estimates, and there can be no assurance that the Companys actual capital and
operating costs will not be higher than currently anticipated. The Companys
actual costs and production may vary from estimates for a variety of reasons,
including: lack of availability of raw material or equipment; unexpected
construction or operating problems; metallurgical performance; unanticipated
geologic features; short-term operating factors; delays in delivery of
consumables; revisions to mine plans; risks and hazards associated with mining;
natural phenomena, such as inclement weather conditions, water availability,
floods, and earthquakes; and unexpected labour shortages or strikes. Costs may
also be affected by a variety of factors, including: changing waste-to-ore
ratios, ore grade metallurgy, labour costs, the cost and consumption rate of
commodities, general inflationary pressures and currency exchange rates. Many of
these factors are beyond the Companys control. Failure to achieve estimates or
material increases in costs could have an adverse impact on the Companys future
cash flows, business, results of operations and financial condition.
16
Furthermore,
delays in the construction and commissioning of mining projects or other
technical difficulties may result in even further capital expenditures being
required. Any delay in the development of a project or cost overruns or
operational difficulties once the project is developed may have a material
adverse effect on the Companys ability to finance or complete construction of
the Nechalacho Project and on the Companys business, results of operations and
financial condition.
Changes in the market price of rare earth minerals, which
in the past has fluctuated widely, will affect the profitability of our
operations and financial condition.
The
Companys revenues, if any, from the Nechalacho Project and Separation Rapids
Project, are expected to be derived in large part from the mining and sale of
rare metals and minerals. Demand for and the prices of those commodities has
fluctuated widely, particularly in recent years, and is affected by numerous
factors beyond the Companys control, including international economic and
political conditions (such as the complaint filed with the World Trade
Organization and won by the United States, the European Union and Japan against
Chinas REE export restrictions in 2014), expectations of inflation,
international currency exchange rates, interest rates, global or regional
consumption patterns, speculative activities, levels of supply and demand,
increased production of rare metals and minerals due to new mine developments
and improved mining and production methods, availability and costs of lithium,
REE and other rare mineral substitutes; lithium, REE and other rare mineral and
other stock levels maintained by producers and others and inventory carrying
costs. The effect of these factors on the price of rare metals and minerals and
therefore the Companys ability to finance the construction of the Nechalacho
Project, pursue the East Kemptville Project or Separation Rapids Lithium Project
and economic viability of the Companys operations cannot be accurately
predicted.
REE
prices increased significantly during 2010 and most of 2011 and experienced a
significant drop in 2012, due in part to a reported reduction in speculative
buying of REE products as concerns about continuing price escalation abated.
Between 2012 and 2015 prices continued to slowly fall and remained steady from
mid-2015 to late 2016. Prices have begun to increase for many of the REEs in
2017, but only marginally. Future price trends for rare earths still depend on
decisions made in China. China remains the dominant producer at approximately
90% of supply. Prices could continue to increase as demand increases and if
China continues to restrict output from illegal producers and continues to
restrict output from producers who do not follow environmental regulations.
Prices could be maintained or even fall as demand increases if China decides to
release stockpiles of rare earths it has apparently accumulated during the last
few years, or if it instructs government approved producers to increase
supply.
Demand
for REE products may be impacted by demand for products incorporating rare
earths, including hybrid and electric vehicles, wind power equipment and other
clean technology products, as well as demand in the general automotive and
electronic industries. Lack of growth in these markets may adversely affect the
demand for REE products, which would have a material adverse effect on the
Nechalacho Project and the Companys business. In contrast, extended periods of
high commodity prices may create economic dislocations that may be destabilizing
to rare earth minerals supply and demand. Strong REE prices, as well as real or
perceived disruptions in the supply of REE, also create economic incentives to
identify or create alternate technologies that ultimately could depress future
long-term demand for REE products, and at the same time may incentivize
development of additional mining properties to produce REE. For example,
automobile manufacturers have previously announced plans to develop motors for
electric and hybrid cars that do not require REE products due to concerns about
the available supply of rare earths. If the automobile industry or other
industries reduce their reliance on rare earth products, the resulting change in
demand could have a material adverse effect on the Companys business. In
particular, if prices or demand for rare earths were to decline, this could
impair the Companys ability to obtain financing for the Nechalacho Project and
its ability to find purchasers for its products at prices acceptable to the
Company.
Volatility in lithium prices and lithium demand may make
it commercially unfeasible for the Company to develop its Separation Rapids
Lithium Project.
The
development of the Separation Rapids Lithium Project is dependent on the
continued growth of the lithium market, and the continued increased demand for
lithium chemicals by emerging producers of electric vehicles and other users of lithium-ion batteries. These producers and
the related technologies are still under development and a continued sustained
increase in demand is not certain. To the extent that such demand does not
manifest itself, and the lithium market does not continue to grow, or existing
producers increase supply to satisfy this demand, then the Companys ability to
develop its Separation Rapids Project will be adversely affected. The Companys
lithium exploration and development activities may be significantly adversely
affected by volatility in the price of lithium. Mineral prices fluctuate widely
and are affected by numerous factors beyond its control such as global and
regional supply and demand, interest rates, exchange rates, inflation or
deflation, fluctuation in the value of the United States dollar and foreign
currencies, and the political and economic conditions of mineral-producing
countries throughout the world. The exact effect of these factors cannot be
accurately predicted, but the combination of these factors may result in the
Companys lithium activities not producing an adequate return on invested
capital to be profitable or viable.
17
We operate in a highly competitive industry and some of
our competitors may engage in predatory pricing behaviour or manipulation of the
available supply of REE, tin or lithium.
An
increase in the global supply of rare metal and REE products, tin and lithium,
dumping and predatory pricing by our competitors may materially adversely affect
our ability to raise capital and construct and profitably operate the Nechalacho
Project, the Separation Rapids Lithium Project or the East Kemptville Project.
The pricing and demand for rare metal and REE products, tin and lithium is
affected by a number of factors beyond the Companys control, including growth
of economic development and the global supply and demand for rare metal and REE
products. Currently China provides the majority of the worlds supply of REE. In
2010 China reduced its export quotas and imposed heavier taxes on the
production/or export of REE. These steps resulted in REE scarcity and
significant increases in the prices of rare earth elements and minerals during
2011, with a peak reached in August 2011 for most elements. These high rare
earth prices caused demand to contract and prices to fall during 2012 and early
2013. Prices have started to recover in early 2017 with the increased demand for
magnets for motors of hybrid and electric vehicles, but only marginally. Higher
rare earth prices in 2017 and beyond could bring about renewed interest in
exploration and development of REE projects which, if brought to production,
would, in the long term, increase the supply of REE and lead to downward
pressure on prices. Further, the prospect of the Nechalacho Project, the East
Kemptville Project the Separation Rapids Lithium Project and other development
projects achieving production may lead our competitors to engage in predatory
pricing behaviour or manipulation of the available supply of REE, tin and/or
lithium. Any increase in the amount of rare earth products exported from China
or from mines outside China, or produced in Indonesia and China in the case of
tin or South America or Australia in the case of lithium, and increased
competition may result in price reductions, reduced margins and loss of
potential sales, any of which could materially adversely affect the
profitability of the Nechalacho Project or our ability to further pursue, the
East Kemptville Project or the Separation Rapids Lithium Project. As a result of
these factors, the Company may not be able to compete effectively against future
competitors.
Any unexpected costs or delays in the commercialization
of rare earth products could have a material adverse effect on our ability to
finance construction of and successfully operate the Nechalacho Project.
The
success of the Nechalacho Project will depend, in part, on the establishment of
new markets by the Company or third parties for certain rare earth products that
may be in low demand, the creation of new markets and the successful
commercialization of REE products in existing and emerging markets. Any
unexpected costs or delays in the commercialization of any of the foregoing
products and applications could have a material adverse effect on our ability to
finance construction of and successfully operate the Nechalacho Project.
Our mineral resource and mineral reserves are only
estimates and are subject to significant risks and uncertainties.
Mineral
resource and mineral reserve estimates are based upon estimates made by Company
personnel and independent geologists. These estimates are inherently subject to
uncertainty and are based on geological interpretations and inferences drawn
from drilling results and sampling analyses and may require revisions based on
further exploration or development work. There is no certainty that any of the
mineral resources or mineral reserves identified on the Nechalacho Project, the
East Kemptville Project or Separation Rapids Lithium Project will be realized,
that any anticipated level of recovery of minerals will in fact be realized, or
that an identified mineral reserve or mineral resource will ever qualify as a commercially
mineable (or viable) deposit which can be legally and economically exploited.
Evaluations of drilling results are ongoing, but until a deposit is actually
mined and processed, the quantity of mineral resources and mineral reserves and
grades must be considered as estimates only.
18
In
addition, the grade of mineralization which may ultimately be mined may differ
from that indicated by drilling results and such differences could be material.
The quantity and resulting valuation of mineral reserves and mineral resources
may also vary depending on, among other things, metal prices (which may render
mineral reserves and mineral resources uneconomic), cut-off grades applied and
estimates of future operating costs (which may be inaccurate). Production can be
affected by such factors as permitting regulations and requirements, weather,
environmental factors, unforeseen technical difficulties, unusual or unexpected
geological formations and work interruptions. Any material change in quantity of
mineral resources, mineral reserves, grade, or stripping ratio may also affect
the economic viability of any project undertaken by the Company. In addition,
there can be no assurance that metal recoveries in small scale, and/or pilot
laboratory tests will be duplicated in a larger scale test under on-site
conditions or during production.
The
Companys estimated mineral resources and mineral reserves should not be
interpreted as assurances of commercial viability or potential or of the
profitability of any future operations. Readers should be cautioned not to place
undue reliance on these estimates. The Company cannot be certain that its
mineral resource and mineral reserve estimates are accurate and cannot guarantee
that it will recover the expected quantities of metals. Future production could
differ dramatically from such estimates for the following reasons:
-
actual mineralization or ore grade could be different from those predicted
by drilling, sampling, feasibility studies or technical reports;
-
increases in the capital or operating costs of the mine;
-
changes in the life-of-mine plan;
-
the grade of ore may vary over the life of the mine and the Company cannot
give any assurances that any particular mineral reserve estimate will
ultimately be recovered; or
-
metallurgical performance could differ from forecast.
The
occurrence of any of these events may cause the Company to adjust its mineral
resource and reserve estimates or change its mining plans, which could
negatively affect the Companys financial condition and results of operations.
Moreover, short-term factors, such as the need for additional development of the
ore body or the processing of new or different grades, may adversely affect the
Company.
Our inability to secure the required mineral tenure
licenses at the East Kemptville Project could have a material adverse effect on
our ability to conduct further studies and exploration activities on the East
Kemptville Project.
Avalon
holds mineral rights at the East Kemptville Project through a Special Licence,
a form of mineral tenure granted by the Province of Nova Scotia in circumstances
where there is a history of previous industrial land use activity (such as
mining) in the area of interest. It does not immediately convey surface land
rights and, accordingly, access must be arranged with the permission of surface
rights holders, which was done in in the past. Ultimately, with sufficient work
and information on the property, a form of mining lease is obtainable from the
government to secure the requisite surface land rights. The Company is currently
in discussions with the surface rights holders with respect to obtaining full
title to the lands covered by the Special Licence, however there can be no
assurance that full title to the lands covered by the Special Licence will be
obtained. The Company first acquired a Special Licence at the East Kemptville
Project in 2005 and it has been subsequently renewed multiple times while the
Company negotiated access to the site. The current special licence has a term of
three years beginning February 2, 2015 and includes a requirement to incur $5.25
million in expenditures by January 31, 2018 (of which only $3,152,858 had been
incurred by August 31, 2017). The Company will need to negotiate with the
government to renew or replace the special licence. The Company has commenced
the process of applying for a mining lease but there is no assurance that this
application will be successful. These factors could have a material adverse
effect on the Companys plans for the East Kemptville Project, which may, as a
result, not be further explored or ultimately developed.
19
We may not be able to obtain all required permits and
licenses to place our properties into production.
The
construction and operation of the Nechalacho Project and the other exploration
and development operations of the Company, such as on the East Kemptville
Project and Separation Rapids Lithium Project, require licenses and permits from
various governmental authorities. Obtaining the necessary governmental permits
is a complex and time consuming process involving numerous jurisdictions. There
can be no assurance that the Company will be able to obtain all necessary
licenses and permits that may be required to carry out exploration, development,
mining and processing operations at its projects. If the Company proceeds to
production on the Nechalacho Project or any other project, licenses and permits
may contain specific operating conditions and there can be no assurance that
these conditions will not result in material increases in capital or operating
costs or reductions in anticipated production, or that the Company will be able
to comply with any such conditions. Costs related to applying for and obtaining
permits and licenses or complying with the requirements they impose may be
prohibitive and could delay planned exploration, development, construction or
operation activities. Failure to comply with applicable laws, regulations and
permitting requirements or with the conditions contained in licenses or permits
may result in enforcement actions, including orders issued by regulatory or
judicial authorities, causing operations to cease or be curtailed, and may
include corrective measures requiring capital expenditures, installation of
additional equipment, or remedial actions.
Parties
engaged in exploration, development, mining or processing operations may be
required to compensate those suffering loss or damage by reason of those
activities and may have civil or criminal fines or penalties imposed for
violations of applicable laws or regulations. Amendments to current laws,
regulations and permits governing operations and activities of mining companies,
or more stringent implementation thereof, could have a material adverse impact
on our operations and cause increases in capital expenditures or production
costs, reductions in levels of production at producing properties or require
abandonment or delays in the development of new mining properties.
Our activities are subject to environmental laws and
regulations that may increase our costs of doing business and restrict our
operations.
All
phases of the Companys exploration and development activities are subject to
regulation by governmental agencies under various environmental laws in the
various jurisdictions in which it operates. These laws and the regulations
adopted thereunder address emissions into the air, discharges into water,
management of waste, management of hazardous substances, the transportation of
hazardous and/or radioactive substances, protection of natural resources,
antiquities and endangered species, and reclamation of lands disturbed by mining
operations. Environmental legislation and regulation is evolving in a manner
which will require stricter standards and enforcement, increased fines and
penalties for non-compliance, more stringent environmental assessments of
proposed projects, and a heightened degree of responsibility for companies and
their officers, directors and employees. Compliance with environmental laws and
regulations may require significant capital outlays on behalf of the Company and
may cause material changes or delays in the Companys intended activities. There
is no assurance that future changes in environmental regulation, if any, will
not adversely affect the Companys operations or result in substantial costs and
liabilities to the Company in the future. Furthermore, environmental hazards
which are unknown to the Company at present and which have been caused by
previous or existing owners or operators may exist on the Companys properties.
We do not maintain insurance with respect to certain
high-risk activities, which exposes us to significant risk of loss.
In
the course of exploration and development of, and production from, mineral
properties, certain risks, and in particular, unexpected or unusual geological
operating conditions including rock bursts, cave-ins, fire, flooding and
earthquakes may occur. It is not always possible to fully insure against such
risks as a result of high premiums or other reasons. Should such events arise,
they could reduce or eliminate any future profitability and result in increasing
costs and a decline in the value of the Companys securities.
20
Competition for recruitment and retention of qualified
personnel, for which we compete with other exploration companies, many of which
have greater financial resources than us, and a shortage of equipment and
supplies could adversely affect our ability to operate our business.
The
Company will be dependent on various supplies, equipment, parts and labour and
the services of contractors to carry out construction of the Nechalacho Project
and to carry out its other exploration and development projects such as the East
Kemptville Project and the Separation Rapids Lithium Project. The availability
and cost of such supplies, equipment, parts or labour or the services of
contractors could have a material adverse effect on the Companys ability to
successfully construct and operate the Nechalacho Project and carry out its
other exploration and development activities on the East Kemptville Project and
the Separation Rapids Lithium Project.
The loss of key management personnel may adversely affect
our business and results of operations.
The
Company is dependent on the services of key executives including the Companys
President and Chief Executive Officer and other highly skilled and experienced
executives and personnel focused on managing the Companys interests and the
advancement of the Nechalacho Project and other projects such as the East
Kemptville Project and the Separation Rapids Lithium Project, as well as the
identification of new opportunities for growth and funding. Due to the Companys
relatively small size, the loss of these persons or the Companys inability to
attract and retain additional highly skilled employees required for the
development of the Companys activities may have a material adverse effect on
the Companys business or future operations.
The mineral industry is highly speculative and involves
substantial risks.
Mineral
exploration and development is highly speculative, and certain inherent
exploration risks could have a negative effect on the Company. Most exploration
projects do not result in the discovery of commercially mineable ore deposits
and no assurance can be given that any particular level of recovery of ore
reserves will be realized or that any identified mineral deposit will ever
qualify as a commercially mineable (or viable) ore body which can be legally and
economically exploited. Estimates of reserves, mineral deposits and production
costs can also be affected by such factors as environmental permitting
regulations and requirements, weather, environmental factors, unforeseen
technical difficulties, unusual or unexpected geological formations and work
interruptions. Material changes in ore reserves, grades, stripping ratios or
recovery rates may affect the economic viability of any project.
The
Companys future growth and productivity will depend, in part, on its ability to
identify and acquire additional mineral rights, and on the costs and results of
continued exploration and development programs. Mineral exploration is highly
speculative in nature and is frequently non-productive. Substantial expenditures
are required to:
-
establish ore reserves through drilling and metallurgical and other
testing techniques;
-
determine metal content and metallurgical recovery processes to extract
metal from the ore;
-
conduct environmental, social, economic and technical studies; and
-
construct, renovate or expand mining and processing facilities.
In
addition, if the Company discovers a mineral deposit, it would take several
years from the initial phases of exploration until production is possible.
During this time, the economic feasibility of production may change. As a result
of these uncertainties, there can be no assurance that the Company will
successfully acquire additional mineral rights.
We operate in a highly competitive industry.
The
mineral exploration and development industry is intensely competitive.
Significant competition exists for the marketing of the minerals that the
Company intends to produce as well as the acquisition of mineral concessions,
claims, leases and other mineral interests. The Company may be at a competitive
disadvantage in arranging for the sale of products intended to be produced at
the Nechalacho Project or other properties, such as the East Kemptville Project and Separation Rapids Lithium Project, or in acquiring
additional mining properties because it must compete with other individuals and
companies, many of which have greater financial resources, operational
experience and technical capabilities than the Company. The Company may also
encounter increasing competition from other mining companies in its efforts to
hire experienced mining professionals. Competition for exploration resources at
all levels is currently very intense, particularly affecting the availability of
manpower, drill rigs and helicopters. Increased competition could adversely
affect the Companys ability to attract necessary capital funding or acquire
suitable producing properties or prospects for mineral exploration in the
future.
21
Our exploration activities are subject to various
federal, provincial, state and local laws and regulations.
The
Companys operations and exploration and development activities in Canada and
the United States are subject to extensive federal, state, provincial,
territorial and local laws and regulations governing various matters, including:
-
environmental protection;
-
management, transportation and use of toxic, hazardous and/or radioactive
substances and explosives;
-
management of tailings and other wastes generated by the Companys
operations;
-
management of natural resources;
-
exploration and development of mines, production and post-closure
reclamation;
-
exports;
-
price controls;
-
taxation;
-
regulations concerning business dealings with native groups;
-
labour standards and occupational health and safety, including mine
safety; and
-
historic and cultural preservation.
Failure
to comply with applicable laws and regulations may result in civil or criminal
fines or penalties or enforcement actions, including orders issued by regulatory
or judicial authorities enjoining or curtailing operations or requiring
corrective measures, installation of additional equipment or remedial actions,
any of which could result in the Company incurring significant expenditures. The
Company may also be required to compensate private parties suffering loss or
damage by reason of a breach of such laws, regulations or permitting
requirements. It is also possible that future laws and regulations, or changes
to or a more stringent enforcement of current laws and regulations by
governmental authorities, could cause additional expense, capital expenditures,
restrictions on or suspensions of the Companys operations and delays in the
development of the Companys properties.
Exploration activities depend on adequate infrastructure
and we cannot be assured that our properties will maintain adequate
infrastructure.
Mining,
processing, development and exploration activities depend on adequate
infrastructure. Reliable roads, bridges, power sources and water supply are
important determinants, which affect capital and operating costs. Unusual or
infrequent weather phenomena, sabotage, government or other interference in the
maintenance or provision of such infrastructure could adversely affect the
Companys operations, financial condition and results of operations.
Mining and resource exploration is inherently hazardous
and subject to conditions or events beyond our control, which could have a
material adverse effect on our business and plans.
Mineral
exploration, the development and construction and operation of mines and mining
involves many risks, which even a combination of experience, knowledge and
careful evaluation may not be able to overcome. The work which the Company is
undertaking and proposes to undertake will be subject to all the hazards and
risks normally incidental to exploration, development and production of
resources, any of which could result in work stoppages and damage to persons or
property or the environment and possible legal liability for any and all damage.
22
Fires, power outages, labour disruptions, flooding, explosions
and cave-ins, are risks involved in the operation of mines and the conduct of
exploration programs. Although the Company has secured liability insurance and
will, when appropriate, secure property insurance in an amount which it
considers adequate, the nature of these risks is such that liabilities might
exceed policy limits, the liabilities and hazards might not be insurable, or the
Company might elect not to insure itself against such liabilities due to high
premium costs or other reasons, in which event the Company could incur
significant costs or uninsured losses that could have a material adverse effect
upon its financial condition.
Changes in critical accounting estimates could adversely
affect financial results.
Avalons
most significant accounting estimates relate to the carrying value of the
Companys metal and mineral property assets. The accounting policies in relation
to metal and mineral properties are set out in full in the Companys annual
financial statements. Management regularly reviews the net carrying value of
each metal and mineral property. Where impairment indicators exist, management
assesses if carrying value can be recovered. Managements estimates of metal and
mineral prices, mineral resources and operating, capital and reclamation costs
are subject to certain risks and uncertainties which may affect the
recoverability of metal and mineral property costs. Although management has made
its best estimate of these factors, it is possible that changes could occur in
the near term, which could adversely affect the future net cash flows to be
generated from the properties. Other significant estimates relate to accounting
for stock based compensation and warrant valuation. Option and warrant pricing
models require the input of highly subjective assumptions including the expected
price volatility. Changes in the subjective input assumptions can materially
affect the fair value estimate, and therefore the existing models do not
necessarily provide a reliable single measure of the fair value of the Companys
stock options granted/vested during the year, or of the value of the Companys
derivative financial instruments.
Certain officers and directors may be in a position of
conflicts of interest.
Certain
of the Companys directors and officers also serve as directors and/or officers
of other companies or other managerial positions involved or related to natural
resource exploration and development and consequently there exists the
possibility for such directors and officers to be in a position of conflict. Any
decision made by any of such directors and officers involving the Company will
be made in accordance with their duties and obligations to deal fairly and in
good faith with a view to the best interests of the Company and its
shareholders. In addition, each of the Companys directors is required to
declare any interest in any matter in which such directors may have a conflict
of interest in accordance with the procedures set forth in the
Canada
Business Corporations Act
(CBCA) and other applicable laws.
We believe that we may be a "passive foreign investment
company" for the current taxable year which may result in materially adverse
United States federal income tax consequences for United States investors.
U.S.
investors in the Companys common shares and warrants should be aware that the
Company believes it was classified as a passive foreign investment company (a
PFIC) under the meaning of Section 1297 of the United States Internal Revenue
Code of 1986, as amended during its tax year ended August 31, 2017, and based on
current business plans and financial expectations, the Company believes that it
may be a PFIC for the current and future taxable years. If the Company is a PFIC
for any taxable year during which a United States person holds its common shares
or warrants it may result in materially adverse United States federal income tax
consequences for such United States person. The potential consequences include,
but are not limited to, re-characterization of gain from the sale of the common
shares, warrants, and those common shares received upon exercise of warrants as
ordinary income and the imposition of an interest charge on such gain and on
certain distributions received on the common shares or common shares received
upon exercise of warrants. Certain elections may be available under U.S. tax
rules to mitigate some of the adverse consequences of holding shares in a
PFIC.
A
U.S. taxpayer that makes a qualified electing fund (a QEF) election with
respect to the Company generally will be subject to U.S. federal income tax on
such U.S. taxpayers pro rata share of the Companys net capital gain and
ordinary earnings (as specifically defined and calculated under U.S. federal
income tax rules), regardless of whether such amounts are actually distributed
by the Company. U.S. taxpayers should be aware, however, that there can be no assurance that the Company will
satisfy record keeping requirements under the QEF rules or that the Company will
supply U.S. taxpayers with required information under the QEF rules, if the
Company is a PFIC and a U.S. taxpayer wishes to make a QEF Election.
Alternatively, a U.S. taxpayer may make a mark-to-market election (a
Mark-to-Market Election) if the Company is a PFIC and the common shares are
marketable stock (as specifically defined). A U.S. taxpayer that makes a
Mark-to-Market Election generally will include in gross income, for each taxable
year in which the Company is a PFIC, an amount equal to the excess, if any, of
(a) the fair market value of the common shares as of the close of such taxable
year over (b) such U.S. taxpayers adjusted tax basis in the common shares.
23
This
risk factor is qualified in its entirety by the discussion herein under the
heading Certain United States Federal Income Tax Consequences.
Investors
should consult their own tax advisor regarding the PFIC rules and other U.S.
federal income tax consequences of the acquisition, ownership, and disposition
of common shares and warrants.
We are subject to foreign currency fluctuations.
It
is expected that a significant portion of the Companys revenue from the sale of
its products from the Nechalacho Project will likely be priced in U.S. dollars,
whereas most of its operating costs will likely be incurred in Canadian dollars
and other international currencies. In addition, a significant portion of the
capital costs for the construction of the mining plant at the Nechalacho Project
will also likely be priced in U.S. dollars. The fluctuation in the exchange rate
between the U.S. dollar and the Canadian dollar and other international
currencies may have a significant impact on the future profitability of the
Company and it may also significantly increase or decrease the capital costs for
the Nechalacho Project.
Our Common Shares have experienced volatility in share
price and there can be no assurance that an active market for the Companys
securities will be sustained.
In
recent years, the securities markets in Canada have experienced a high level of
price and volume volatility and the market price of securities of many
companies, particularly those considered development stage companies, have
experienced wide fluctuations in price which would not have necessarily been
related to the operating performance, underlying asset values or prospects of
such companies.
The
market price of the Company's securities may fluctuate significantly based on a
number of factors, some of which are unrelated to the financial performance or
prospects of the Company. These factors include macroeconomic developments in
North America and globally, market perceptions of the attractiveness of
particular industries, short-term changes in commodity prices, other precious
metal prices, the attractiveness of alternative investments, currency exchange
fluctuation, the political environment and the Company's financial condition or
results of operations as reflected in its financial statements. Other factors
unrelated to the performance of the Company that may have an effect on the price
of the securities of the Company include the following: the extent of analytical
coverage available to investors concerning the business of the Company may be
limited if investment banks with research capabilities do not follow the
Company's securities; lessening in trading volume and general market interest in
the Company's securities may affect an investor's ability to trade significant
numbers of securities of the Company; the size of the Company's public float may
limit the ability of some institutions to invest in the Company's securities;
the Company's operating performance and the performance of competitors and other
similar companies; the public's reaction to the Company's press releases, other
public announcements and the Company's filings with the various securities
regulatory authorities; changes in estimates or recommendations by research
analysts who track the Company's securities or the shares of other companies in
the resource sector; the arrival or departure of key personnel; acquisitions,
strategic alliances or joint ventures involving the Company or its competitors;
the factors listed in this Form 20-F under the heading "Cautionary Statement
Regarding Forward
-
Looking Statements"; and a substantial decline in the
price of the securities of the Company that persists for a significant period of
time could cause the Company's securities to be delisted from any exchange on
which they are listed at that time, further reducing market liquidity.
Furthermore, the voluntary delisting of the Companys common shares from the
NYSE MKT in 2015 could result in a less active market for the Companys common shares.
If there is no active market for the securities of the Company, the liquidity of
an investor's investment may be limited and the price of the securities of the
Company may decline. If such a market does not develop, investors may lose their
entire investment in the Company's securities.
24
Additional financing may be needed for our business
operations which may lead to dilution of our current shareholders.
The
Company will require additional funds to fund further exploration and/or
development activities or to fulfill its obligations under any applicable
agreements. If the Company raises additional funding by issuing additional
equity securities, such financing will dilute the holdings of the Companys
shareholders. Future sales of common shares or warrants of the Company in public
or private markets could adversely affect the trading price of the Companys
common shares and its ability to continue to raise funds by new offerings of
common shares or warrants.
We do not currently intend to pay cash dividends.
The
Company has not paid any dividends on its Common Shares. Any decision to pay
dividends on its Common Shares in the future will be dependent upon the
financial requirements of the Company to finance future growth, the financial
condition of the Company and other factors which the Companys Board of
Directors may consider appropriate in the circumstances.
We are a foreign corporation and most of our directors
and officers are outside of the United States, which may make enforcement of
civil liabilities difficult.
The
Company is a Canadian corporation and U.S. investors may have difficulty
bringing actions and enforcing judgments under U.S. securities laws. Investors
in the United States or in other jurisdictions outside of Canada may have
difficulty bringing actions and enforcing judgments against the Company, its
directors, its executive officers and some of the experts named in this Annual
Report based on civil liabilities provisions of the federal securities laws or
other laws of the United States or any state thereof or the equivalent laws of
other jurisdictions of residence outside of Canada.
There is no market for our warrants.
There
is no existing trading market for warrants to purchase the common shares of the
Company. As a result, there can be no assurance that a liquid market will
develop or be maintained for those securities, or that an investor will be able
to sell any of those securities at a particular time (if at all). The Company
may not list any of its warrants on any Canadian or U.S. securities exchange,
and the Common Shares could be delisted or suspended. The liquidity of the
trading market in those securities, and the market price quoted for those
securities, may be adversely affected by, among other things:
-
changes in the overall market for those securities;
-
changes in the Companys financial performance or prospects;
-
changes or perceived changes in the Companys creditworthiness;
-
the prospects for companies in the Companys industry generally;
-
the number of holders of those securities;
-
the interest of securities dealers in making a market for those
securities; and
-
prevailing interest rates.
25
Item 4. Information on the Company
A. History and Development of the Company
The
Company was amalgamated on July 24, 1991 under the British Columbia Company Act
(now the British Columbia Business Corporations Act (BCA) under the name Keith
Resources Ltd. pursuant to the amalgamation of Rockridge Mining Company and
Meadfield Mining Corp..
On
September 29, 1994, the Company consolidated its share capital on a five-for-one
basis and changed its name to Avalon Ventures Ltd..
On
July 18, 2005, the Company carried out a transition under the BCA by filing
Notice of Articles and at the same time adopted new Articles to bring them in
line with the requirements and alternatives available under the BCA, including
increasing its authorized share structure to an unlimited number of common
shares without par value and 25,000,000 preferred shares without par value. The
new Articles also reduced the percentage of votes required from 75% to 66 2/3%
to pass special and separate resolutions and gave authority to the Board of
Directors to make capital alterations and changes to the Companys name as
permitted under the BCA.
On
February 17, 2009, the Company changed its name to Avalon Rare Metals Inc..
On
February 9, 2011, the Company continued under the CBCA.
On
February 24, 2016, the Company changed its name to Avalon Advanced Materials
Inc..
The
Companys head and registered office is located at Suite 1901, 130 Adelaide
Street West, Toronto, Ontario, M5H 3P5, (416) 364-4938.
The
Company is a reporting issuer in all of the provinces (except for the Province
of Quebec) and territories of Canada. The Companys shares are listed and posted
for trading on the Toronto Stock Exchange in Canada (the TSX or the
Exchange) under the symbol AVL, trade on the OTCQX® Best Market (the
OTCQX) in the United States under the symbol AVLNF and are also traded on
the Frankfurt Stock Exchange in Germany under the symbol OU5.
The
Company operates principally in Canada and is currently extra-provincially
registered to carry on business in Ontario, British Columbia, Northwest
Territories, Nova Scotia and New Brunswick.
Avalon
is a mineral exploration and development company with a primary focus on rare
metals and minerals with high technology and environmentally beneficial
applications. Avalon operates primarily in Canada with a focus on rare metals
and minerals, including lithium, tantalum, niobium, cesium, indium, gallium,
germanium, rare earth elements (REE), yttrium, zirconium as well as tin.
The
Company is in the process of exploring or developing three of its five mineral
resource projects. For at least the last three fiscal years the Company has
expended substantially all of its efforts on the development of its Nechalacho
Rare Earth Elements Project (Nechalacho or the Nechalacho Project), the East
Kemptville Tin-Indium Project and Separation Rapids Lithium Project. The
Companys principal capital investments have been in its resource properties,
with expenditures totalling $2,670,248, $4,085,283, and $3,485,658 in Fiscal
2017, 2016, and 2015 respectively.
Nechalacho
Project
The
Company completed its feasibility study (FS) on the Nechalacho Project in
April 2013, and its Report of Environmental Assessment (the Report of EA) was
approved by the Minister of Aboriginal Affairs and Northern Development Canada
(AANDC) in November 2013. Nechalacho is the Companys most advanced project. A
preliminary site preparation water license and land use permit has been issued
which provides approval for first year site preparation work at the Nechalacho site. Full construction
and operational license and permit for the Nechalacho site will take
approximately 4-6 months to obtain once the Company commences the final
application process.
26
Since
the completion of the FS, Avalon has been focused on optimization work on the
project development model, including metallurgical process optimization work and
mine plan optimization. This has included work on recovery of other mineral
products, notably zirconium. Although preliminary estimates of the capital and
operating costs associated with these new processes may be higher than those
contained in the FS, it is anticipated that the increased revenues from the
additional heavy rare earths, europium through lutetium (HREE) production
may yield an overall improvement in project economics. Demand for some of the
other rare metals present in the Nechalacho resource such as zirconium, may see
demand increases to justify further work on product development. Markets for
rare earth elements, however, have remained quiet since the FS was issued and it
is only since the start of 2017 that prices for certain REE (Nd, Pr, Dy) have
begun to increase due to increased demand for magnets for motors of hybrid and
electric vehicles. The quiet market since 2013 which led to the bankruptcy of at
least two potential new producers outside China and a dramatic decline in
investor interest has significantly reduced the amount of capital available for
new rare earths development projects like Nechalacho. Consequently, expenditures
on Avalons Nechalacho Project have remained minimal in 2016 and 2017.
In
fiscal 2016 Avalon conducted metallurgical testwork investigations related to
the potential recovery of zirconium and production of marketable quality
zirconium basic sulphate (ZBS) and zirconium oxychloride (ZOC) products.
During fiscal 2017 a brief site visit was conducted to do the camp maintenance
work and do some sampling on known lithium occurrences on the northern part of
the property. Other activities centered around assisting regulators with
regulatory development and caribou management planning that is important to the
communities of interest. Reworking of the process design criteria, plant designs
and cost estimates for both the Concentrator and Hydrometallurgical Plant, along
with any revisions to the mine plan, are continuing to be developed internally
Separation
Rapids Lithium Project
Growing
demand for rechargeable batteries in electric vehicles and home energy storage
is expected to result in continued growth in consumption of lithium. There is
general consensus among industry analysts that demand for lithium will at least
double over the next 10 years and that a supply deficit will emerge in the
market as existing producers struggle to meet the rapidly growing demand.
Several companies in the lithium business have already expressed interest in
participating in the future development of the Separation Rapids Project. The
potential exists for the Company to serve both the glass-ceramics and the
battery materials markets going forward as the petalite mineral concentrate
(which represents the final product for the glass-ceramics industry) is the
intermediate product for making a battery material.
The
potential for production of high purity lithium hydroxide was demonstrated in
the 2015 work program and a scaled-up test to further evaluate this process and
generate cost information for a PEA focused on the battery materials market
opportunity was completed. During 2016 the Company designed an innovative
hydrometallurgical process to produce a lithium product from the petalite
concentrate.
In
addition to the extensive environmental baseline work previously completed for
the 2007 Project Description and Environmental Baseline Report, baseline studies
were completed in 2017 to validate the historical work. Initial tailings and
waste rock analysis test work was completed in 2016 and 2017 and is ongoing. A
low risk zero discharge tailing management facility was designed. A water
treatment system was designed for the updated process flowsheet. Work was
advanced related to open pit mine design that allowed a waste rock management
strategy to be developed. Any mitigation required for potential impacts to
aquatic habitat near the site will be prepared for project permitting if
required. No Species at Risk Act concerns were identified at the site, though
additional baseline work may be required for the access road and potential power
transmission line. The Company is also investigating alternatives for delivery
of clean energy to the project site, utilizing local hydro-electric power
generation capacity and/or power from waste wood products. Engagement with local
indigenous peoples continued, including a valued components workshop and project
updates, discussion of closure opportunities as well as preliminary discussions
related to the potential development of a new run-of-river hydro power
generation facility on the English River near the Project site. Further engagement
on energy options is planned. A multi-ministry meeting was held to review the
project with all applicable regulators, identify concerns and gaps and to ensure
the appropriate permits and approvals are requested.
27
During
the year ended August 31, 2017, the Company completed a positive Preliminary
Economic Assessment on the Separation Rapids Lithium Project, on which it had
spent most of its efforts in fiscal 2016. Subsequent to the PEA the Company
completed a small drill program and completed an updated mineral resource
estimate subsequent to the end of fiscal 2017. The Company has also been
proceeding with a series of metallurgical testwork to optimize its flowsheet
design. The Company is primarily focused on the next steps required to move
forward with the Phase 1 demonstration scale production facility. Several models
for this plant are under consideration involving different throughput rates and
variations of the flowsheet depending on the product mix to be recovered.
The
Company has embraced the principles of sustainability as core to its business
practice and has made a strong commitment toward implementing corporate social
responsibility (CSR) best practices. Contemporaneously with this filing, the
Company is releasing its sixth comprehensive sustainability report entitled
Concentrating on Cleantech Materials Production (the "2017 Sustainability
Report").
The
Company believes that industrial demand for the advanced materials products it
seeks to produce, particularly lithium compounds, is growing rapidly due to
their importance in an expanding array of applications in new clean technology
notably energy storage and electric vehicles.
B. Business Overview
Operations and Principal Activities
The
Company is a mineral exploration and development company with a primary focus on
rare metals and minerals. Avalon presently owns six rare metals and mineral
projects in Canada, three of which are under active development, but none of
which are in production. It also owns royalty interests in two exploration
projects which are not in production. For at least the last three years the
Company has expended substantially all of its efforts on the development of
Nechalacho Rare Earth Elements Project, its East Kemptville Tin-Indium Project
and Separation Rapids Lithium Project.
Nechalacho
Project
The
Nechalacho Project is located at Thor Lake in the Mackenzie Mining District of
the Northwest Territories (NWT), about five kilometres north of the Hearne
Channel of Great Slave Lake and approximately 100 kilometres southeast of the
city of Yellowknife. The property is comprised of five contiguous mining leases
totalling 10,449 acres (4,249 hectares) and three claims totalling 4,597 acres
(1,869 hectares). The leases are subject to one underlying 2.5% Net Smelter
Returns (NSR) royalty agreement. Avalon has the contractual right to buy out
this royalty on the basis of a fixed formula, which is currently approximately
$1.5 million and which will increase at a rate equal to the Canadian prime rate
until the royalty is bought out.
The
property is situated in an area referred to as the Akaitcho Territory, an area
which is subject to comprehensive native land claim negotiations between the
Government of Canada and the Treaty 8 Tribal Corporation, which consists of the
Yellowknives Dene First Nation (YKDFN), the Deninu Kue First Nation (DKFN)
and the Lutsel Ke Dene First Nation (LKDFN). The Company has signed an
Accommodation Agreement with the DKFN. The Company also recognizes that the
Tiicho First Nation (TFN) has a settled land claim with the Government of
Canada which provides for certain harvesting rights in the area of the
Nechalacho site. The general area around the Nechalacho site is subject to
Aboriginal rights asserted by two Métis organizations: the Northwest Territory
Métis Nation (NWTMN) and the North Slave Métis Alliance (NSMA). During 2014,
Avalon concluded a Participation Agreement with the NWTMN and commenced
discussions with the NSMA.
28
Avalons
next steps are primarily focused on continuing its process optimization work and
new product development, with a view to producing an updated technical report
incorporating the results of such work. Other goals include completing the
acquisition of the land use permit and water license, carrying out an additional
pilot plant trial of the new hydrometallurgical plant flowsheet (to confirm
reagent recycle performance), finalize detailed plant designs and engineering,
securing commitments on off-take and arranging project financing.
The
key factors going forward influencing the timely execution of the Nechalacho
Project are securing one or more strategic or financial partners, securing
sufficient binding agreements for off-take to support project financing, the
availability of equity and debt financing at a reasonable cost and receipt of
all requisite construction permits.
Separation
Rapids Lithium Project
The Separation Rapids property consists of fifteen
mineral claims and one mining lease covering a combined area of approximately
2,869 hectares (7,091 acres) in the Paterson Lake Area, Kenora Mining Division,
Ontario, all of which are owned 100% by Avalon. The lease covers an area of
421.44 hectares over the area of the lithium pegmatite deposit and adjacent
lands that may be used for mine development infrastructure. The original vendors
retained a 2.0% NSR interest in the property, which was acquired in 2012 by a
wholly-owned subsidiary of the Company for $220,000. The deposit is a potential
source of lithium minerals for use in the glass and ceramics industry and
specialty composite materials as well as lithium chemicals for the battery
industry.
Growing
demand for rechargeable batteries in electric vehicles and home energy storage
is expected to result in continued growth in consumption of lithium. There is
general consensus among industry analysts that demand for lithium will at least
double over the next 10 years and that a supply deficit will emerge in the
market as existing producers struggle to meet the rapidly growing demand.
Several companies in the lithium business have already expressed interest in
participating in the future development of the Separation Rapids Project. The
potential exists for the Company to serve both the glass-ceramics and the
battery materials markets going forward as the petalite mineral concentrate
(which represents the final product for the glass-ceramics industry) is the
intermediate product for making a battery material.
The
potential for production of high purity lithium hydroxide was demonstrated in
the 2015 work program and a scaled-up test to further evaluate this process and
generate cost information for a PEA focused on the battery materials market
opportunity was completed. During 2016 the Company designed an innovative
hydrometallurgical process to produce a lithium product from the petalite
concentrate.
During
the year ended August 31, 2017, the Company completed a positive Preliminary
Economic Assessment on the Separation Rapids Lithium Project, on which it had
spent most of its efforts in fiscal 2016. The Company completed a small drill
program in the spring of 2017 and updated its mineral resource estimate
subsequent to the end of fiscal 2017. It also continues to optimize its
metallurgical processes through a series of ongoing testing, with the intention
of proceeding with a Phase 1 plant possibly as early as 2018. The key factors
going forward influencing the timely execution of the Project are: securing
sufficient product offtake commitments to support Project financing; the
availability of sufficient equity and/or debt financing and receipt of all
requisite operating permits and approvals.
The
Company currently relies on equity markets to raise capital to finance its
exploration and development programs. The Company has no debt and no sources of
revenue at the present time to finance its development programs other than
investment income on its cash balances. As at August 31, 2017, the Company had
adjusted working capital of $556,112 (which is calculated by adding back the
deferred flow-through share premium of $49,467). As the de-recognition of the
balance of the deferred flow-through share premium will not require the future
out flow of resources by the Company, it is managements belief that the
adjusted working capital figure provides useful information in assessing the
Companys liquidity. The Company also may potentially finance exploration and/or
development of its properties through joint ventures or other arrangements with
third parties.
29
Significant Acquisitions and Significant Dispositions
The
Company has not made any significant acquisitions or dispositions since the end
of its 2015 fiscal year.
Competition
The
mineral industry in which we are engaged is highly competitive. Competitors
include well capitalized mining companies, exploration companies and other
companies having financial and other resources far greater than those of the
Companys. The Company competes with other mineral development companies in
connection with the acquisition of rare metals and mineral properties. In
general, those properties with defined process flowsheets to produce a
commercially acceptable product at a competitive cost have a competitive
advantage for market access and access to development capital. . Thus, a degree
of competition exists between companies looking to acquire properties with such
potential.
Dependence on Customers and Suppliers
The
Company is not dependent upon a single or few customers or suppliers for
revenues or its operations.
Seasonality
Certain
of the Companys operations are conducted in the NWT and northern Ontario. The
weather during the spring and fall seasons can cause interruptions or delays in
the Companys operations. As a result, the preferable time for activities in
these regions is the winter and summer when costs are more reasonable and access
to the properties is easier. In the summer months, however, if the weather has
been unusually hot and dry, access to the Companys properties may be limited as
a result of access restrictions being imposed to mitigate the risks of forest
fires. Seasonality concerns can and will be designed into potential future
operations to minimize impact on long term production.
Government and Environmental Regulation
The
current and anticipated future operations of the Company, including development
activities and commencement of production on its properties, require permits
from various federal, territorial or provincial and local governmental
authorities and such operations are and will be governed by laws and regulations
governing prospecting, development, mining, production, exports, taxes, labor
standards, occupational health, waste disposal, toxic substances, land use,
environmental protection, mine safety and other matters. Companies engaged in
the development and operation of mines and related facilities generally
experience increased costs and delays in production and other schedules as a
result of the need to comply with applicable laws, regulations and permits. Such
operations and exploration activities are also subject to substantial regulation
under these laws by governmental agencies and may require that the Company
obtain permits from various governmental agencies. The Company believes it is in
substantial compliance with all material laws and regulations which currently
apply to its activities. There can be no assurance, however, that all permits
which the Company may require for construction of mining facilities and conduct
of mining operations will be obtainable on reasonable terms or that such laws
and regulations, or that new legislation or modifications to existing
legislation, would not have an adverse effect on any exploration or mining
project which the Company might undertake.
See also Item 3. Key Information D. Risk Factors
Regulations and Mining Law, Governmental Regulation.
Corporate Social Responsibility (CSR)
Contemporaneously
with the filing of this annual report, the Company released its sixth
comprehensive Sustainability Report. The 2017 Sustainability Report is available
for view or download on the Companys website at:
http://www.avalonadvancedmaterials.com
. The 2017
Sustainability Report does not form part of this annual report.
30
The
2017 Sustainability Report was prepared in accordance with the streamlined
October 2016 Global Reporting Standards. The 2017 Report incorporates a
self-assessment of Fiscal 2017 performance and sets targets for 2018 against the
applicable Mining Association of Canada's Toward Sustainable Mining
indicators.
In
addition to the Companys safety performance, the report includes many other
accomplishments such as energy efficiency initiatives, community outreach, and
metallurgical process improvements that contribute to improved environmental
performance. Avalon is committed to working closely with its Aboriginal partners
to create lasting economic and social benefits in the communities. In addition
to its partners in the NWT, dialogue has been initiated with the Acadia First
Nation in Nova Scotia as it relates to the East Kemptville Project and with
Wabaseemoong Independent Nations (WIN) and Métis Nation of Ontario with
respect to the Separation Rapids Lithium Project.
To
provide independent advice as to the efficacy of the Companys CSR work, the
Company maintains an independent Sustainability Advisory Committee (SAC) that
meets intermittently to review all of the Companys sustainability-oriented work
at all its projects. No meetings were held in Fiscal 2017. In recognition of its
sustainability efforts, Avalon was recognized for two straight years (2015 and
2016) by Corporate Knights Future 40 Responsible Corporate Leaders in
Canada.
C. Organizational Structure
The
Company has three directly wholly-owned subsidiaries - Nolava Minerals Inc.
(Nolava) (a Delaware company), Avalon Rare Metals Ltd. (a Delaware company),
and 8110131 Canada Inc. (8110131) (a Canada company). None of these
subsidiaries has carried on any operations since their incorporation except for
the staking and exploration of certain mining claims in Utah, USA by Nolava and
the acquisition of certain royalties by 8110131.
D. Property, Plants and Equipment
The
Nechalacho Project and the Separation Rapids Lithium Project are the Companys
material properties.
Nechalacho Project
(A)
Summary of Technical Report
1.
Current Technical Report
The
most recent technical report on the property is entitled Technical Report
Disclosing the Results of the Feasibility Study on the Nechalacho Rare Earth
Elements Project dated May 31, 2013, effective April 17, 2013, and prepared by
Tudorel Ciuculescu, M.Sc., P.Geo. of RPA, Kevin Hawton, P.Eng. of Knight Piesold
Limited, and Bernard Foo, P.Eng., Richard Gowans, P.Eng., Christopher Jacobs,
C.Eng., MIMMM, and Jane Spooner, P.Geo., all of Micon, each of whom is a
qualified person pursuant to NI 43-101.
2.
Property Description and Location
The
Nechalacho Deposit is situated on the Companys Thor Lake property, located in
Canadas Northwest Territories (NWT), 100 kilometres southeast of the capital
city of Yellowknife and five kilometres north of the Hearne Channel on the East
Arm of Great Slave Lake. The property is within the Mackenzie Mining District of
the NWT and Thor Lake is shown on National Topographic System (NTS) map sheet
85I/02 at approximately 62°0630N and 112°3530W (Zone 12, 6,886,500N,
417,000E - NAD83).
31
The
Thor Lake property consists of five contiguous mineral leases (totalling 4,249
hectares or 10,449 acres) and three claims (totalling 1,869 hectares, or 4,597
acres). The claims were staked in 2009 to cover favourable geology to the west
of the mining leases.
The
mining leases have a 21-year life and each lease is renewable in 21-year
increments. Annual payments of $4.94 per hectare ($2.00 per acre) are required
to keep the leases in good standing. Avalon owns the leases subject to various
legal agreements described below. The mineral claims are in good standing with
the next renewal date being October 24, 2015. As the required work is $5 per
hectare, the total required annually on the claims is $9,301.31 and the fee due
is $465.07.
Two
underlying royalty agreements were inherited with the title to the Thor Lake
property: the Murphy Royalty Agreement and the Calabras/Lutoda Royalty
Agreement. The Murphy Royalty Agreement is a 2.5% NSR royalty and has a
provision for Avalon to buy out the royalty at the principal amount of $150,000
compounded annually at the average Canadian prime rate from May 2, 1982 to the
buyback date (as at August 31, 2015 this amounted to approximately $1.4
million). The Calabras/Lutoda Royalty Agreement totals 3% NSR. In June, 2012,
8110131 Canada Inc., a wholly owned subsidiary of the Company, acquired the NSR
under the Calabras/Lutoda Royalty Agreement for $2.0 million.
3.
Exploration History
The
Thor Lake area was first mapped by J. F. Henderson and A. W. Joliffe of the
Geological Survey of Canada (GSC) in 1937 and 1938. According to National
Mineral Inventory records of the Mineral Policy Sector, Department of Energy,
Mines and Resources, the first staking activity at Thor Lake dates from July
1970 when Odin 1-4 claims were staked by K. D. Hannigan for uranium.
32
In
1971, the GSC commissioned an airborne radiometric survey over the Yellowknife
region that outlined a radioactive anomaly over the Thor Lake area (GSC Open
File Report 124). Simultaneously, A. Davidson of the GSC initiated mapping of
the Blatchford Lake Intrusive Complex. It has subsequently become clear that
this radiometric anomaly is largely due to elevated thorium levels in the T
Zone.
In
1976, Highwood Resources Ltd., (Highwood) in the course of a regional uranium
exploration program, discovered niobium and tantalum on the Thor Lake property
and the property was staked in 1976 and 1977. From 1976 to 1979, exploration
programs included geological mapping, sampling and trenching on the Lake,
Fluorite, R, S and T Zones. Twenty-two drill holes were also completed, seven of
these on the Nechalacho Deposit (referred to as the Lake Zone in the historic
reports). This work resulted in the discovery of significant concentrations of
niobium, tantalum, yttrium and REE.
Recognizing
a large potential resource at Thor Lake, Placer Development Ltd. (Placer)
optioned the property from Highwood in March 1980 to further investigate the
tantalum and related mineralization. Placer conducted geophysical surveys on the
Nechalacho Deposit. Eighteen holes were drilled in 1980 and 1981. Preliminary
metallurgical scoping work was also conducted, but when the mineralization did
not prove amenable to conventional metallurgical extractions of tantalum, Placer
relinquished its option in April 1982.
From
1983 to 1985, work on the property was concentrated on the T Zone and included
geochemical surveys, surface mapping, significant drilling, surface and
underground bulk sampling, metallurgical testing and a detailed evaluation of
the property by Unocal Canada. Five holes were also drilled in the Nechalacho
Deposit to test for high grade tantalum-niobium mineralization and to determine
zoning and geological continuity. Two additional holes were completed at the
northeast end of Long Lake to evaluate high yttrium and REE values obtained from
nearby trenches.
In August 1986, the property was joint ventured with Hecla Mining Company of
Canada Ltd. (Hecla). In 1988, earlier holes were re-assayed and 19 more holes
were drilled into the Nechalacho Deposit, primarily in the southeast corner, to
further test for yttrium and REE. However, in 1990, after completing this and
considerable work on the T Zone, including some limited in-fill drilling,
extensive metallurgical testing and conducting a marketing study on beryllium,
Hecla withdrew from the project. In 1990, control of Highwood passed to Conwest
Exploration Company Ltd. (Conwest) until 1996, at which time Conwest divested
itself of its mineral holdings. Mountain Minerals Company Ltd. (Mountain), a
private company controlled by Royal Oak Mines Ltd. (Royal Oak), acquired the
34% controlling interest of Highwood.
In
late 1999, the application was withdrawn. Royal Oaks subsequent bankruptcy in
1999 resulted in the acquisition of the control block of Highwood shares by
Dynatec Company (Dynatec). In 2000, Highwood initiated metallurgical,
marketing and environmental reviews by Dynatec.
In
2001, Navigator Exploration Corp. (Navigator) entered into an option agreement
with Highwood. Navigator's efforts were focused on conducting additional
metallurgical research at a third party geotechnical consultant firm in order to
define a process for producing a marketable tantalum concentrate from the
Nechalacho Deposit. These efforts produced a metallurgical grade tantalum
(Ta)/zirconium (Zr)/niobium (Nb)/yttrium (Y) /REE bulk concentrate. The option
was dropped in 2004, however, in view of falling tantalum prices and low
tantalum contents in the bulk concentrate.
Beta
Minerals Inc. (Beta) acquired Highwoods interest in the Thor Lake property in
November 2002 under a plan of arrangement with Dynatec. No work was conducted at
Thor Lake by Beta and in May of 2005 Avalon purchased from Beta a 100% interest
and full title, (subject to royalty interests), to the Thor Lake property.
4.
Geology and Mineralization
The
Nechalacho rare metals deposit is hosted by the peralkaline Blachford Lake
intrusion, an Aphebian-age ring complex emplaced in Archean-age supracrustal
rocks of the Yellowknife Supergroup. The principal rock types in the intrusion
are syenites, granites and gabbros and associated pegmatitic phases hosting rare
metal mineralization. The key rock units in the vicinity of the mineralization
are the Grace Lake Granite, the Thor Lake Syenite and nepheline-sodalite syenite
referred to by Avalon as the Nechalacho Nepheline Syenite. The Grace Lake
Granite surrounds the Thor Lake Syenite with the two separated by the enigmatic
"Rim Syenite". The host of the Nechalacho Deposit mineralization, the Nechalacho nepheline syenite, is
within and below the Thor Lake Syenite, and exposed locally in the northwest
part of the Thor Lake Syenite.
33
Five
distinct zones or deposits of rare metal mineralization have been identified as
being of potential economic interest: the Nechalacho Deposit and smaller North
T, South T, S and R Zones. The Nechalacho Deposit is the largest, containing
significant yttrium, tantalum, niobium, gallium and zirconium mineralization.
The Nechalacho Deposit is particularly notable for its enrichment in the more
valuable HREEs such as europium, terbium and dysprosium, relative to light rare
earth elements (LREEs) such as lanthanum and cerium.
The
Nechalacho nepheline syenite that hosts the Nechalacho Deposit has the following
key distinctive features which contrast it to the Thor Lake Syenite and Grace
Lake Granite:
-
It has a distinct chemical composition showing undersaturation in quartz,
with nepheline and sodalite variously as rock-forming minerals.
-
It has cumulate layering.
-
It contains zircono-silicates including eudialyte.
-
It is the host to the Nechalacho zirconium-niobium-tantalum-rare earth
mineralization.
This
syenite is only exposed at surface in a window through the Thor Lake Syenite in
the area encompassing Long Lake to Thor Lake. It is believed to dip underneath
the Thor Lake Syenite in all directions. This is supported by drilling north of
Thor Lake, within and close to Cressy Lake. Also, the Nechalacho Deposit
mineralization, which occurs in the top, or apex, of the syenite, is also
present in throughout this window through the Thor Lake Syenite. This unnamed
syenite is referred to in the AIF as the "Ore (Nechalacho) Nepheline Sodalite
Syenite".
The
Nechalacho Deposit is a tabular hydrothermal alteration zone extending typically
from surface to depths of approximately 200, characterized by alternating
sub-horizontal layers of relatively high and lower grade REE mineralization.
HREEs are present in the Nechalacho Deposit in fergusonite ((Y, HREE) NbO4) and
zircon (ZrSiO4), whereas the LREEs are present in bastnaesite, synchysite,
allanite and monazite. Niobium and tantalum are hosted in columbite as well as
fergusonite.
There
is a gradual increase in HREE from surface to depth within the Nechalacho
Deposit with the lowermost sub-horizontal layer, which is also the most
laterally continuous, being referred to as the Basal Zone. Accordingly typical
proportions of heavy rare earth oxides (HREO) relative to total rare earth
oxides (TREO) in Upper Zone can be 6% to 10%, but in the Basal Zone averaging
over 20% and reaching as high as 50% in individual samples. There is also a
tendency for the Basal Zone, which undulates to some extent, to increase in HREO
with depth.
The
Nechalacho Nepheline Syenite consists of a layered series of increasingly
peralkaline rocks with depth. A consistent downward progression is observed from
hanging wall sodalite cumulates, through coarse grained to pegmatitic nepheline
aegirine syenites which are locally enriched in zirconosilicates, to foayaitic
syenite with a broad zone of altered pseudomorphs-after-eudialyte cumulates
(referred to above as the Basal Zone). This upper sequence is strongly to
intensely hydrothermally altered by various sodic and iron-rich fluids.
Pre-existing zircon-silicates (eudialyte) are completely replaced by zircon,
allanite, bastnaesite, fergusonite and other minerals. Below the Basal Zone
cumulates, mineralization decreases rapidly, but alteration decreases more
gradually, with relict primary mineralogy and textures increasingly preserved.
Aegirine and nepheline-bearing syenites and foyaitic syenites progress downward
to sodalite foyaites and naujaite. Drilling has not extended beyond this
sodalite lithology to date. Minerals related to agpaitic magmatism identified
from this lower unaltered sequence include eudialyte, catapleite, analcime, and
possibly mosandrite.
The
part of the Nechalacho Deposit alteration system that is enriched in REEs varies
between 80 metres and 190 metres in vertical thickness, with the alteration
usually starting from the surface. The whole alteration system is enriched to
varying degrees in rare earth elements, zirconium (Zr), niobium (Nb) and
tantalum (Ta), relative to unaltered syenite, with average values over the
whole approximately 200 metres thick alteration package of approximately 0.75%
to 1.0% total rare earth oxides.
34
Within this alteration envelope, there are sub-horizontal zones of increased
alteration accompanied by increased REE enrichment alternating with less
enriched REE zones. Within the more intensely altered zones, the effect is that
the original textures and mineralogy of the host rock are no longer apparent.
These
zones of increased alteration, which can vary in thickness from a few metres to
tens of metres, can frequently contain TREO grades in the range of 2% and
higher. The lowermost band, referred to as the Basal Zone, contains the highest
proportion of HREO. Overall, the HREO proportion of the TREO within the 80
metres to 190 metres thick alteration system is typically between 7% and 15%.
However, within the Basal Zone, this proportion is typically greater than 20%
and can locally exceed 30% over the full width.
5.
Exploration
In
2005, Avalon conducted extensive re-sampling of archived Nechalacho Deposit
drill core to further assess the yttrium and heavy REE resources on the
property. In 2006, TetraTech-WEI (formerly Wardrop Engineering Inc.)
(TetraTech) was retained to conduct a Preliminary Economic Assessment of the
Nechalacho Deposit (Preliminary Economic Assessment on the Thor Lake Rare Metals
Project, NT Wardrop Document No. 0551530201-REP-R0001-03). In 2007, Avalon
commenced further drilling of the Nechalacho Deposit. Apart from support of
geoscience graduate theses which included mapping of the property, Avalons
exploration activities at the site were confined to drilling.
6.
Drilling
Avalon
has carried out the following drilling on the Nechalacho Deposit, summarized to
August 31, 2015:
Year
|
Diameter
|
Drill holes
|
Metres
|
2007
|
BTW
|
13
|
2,440.47
|
|
TOTAL
|
13
|
2,440.47
|
2008
|
NQ2
|
70
|
14,033.65
|
|
TOTAL
|
70
|
14,033.65
|
2009
|
HQ
|
43
|
8,794.32
|
2009
|
NQ
|
26
|
5,476.78
|
|
TOTAL
|
69
|
14,271.10
|
2010
|
HQ
|
86
|
23,840.43
|
2010
|
PQ
|
20
|
3,754.00
|
|
TOTAL
|
106
|
27,594.43
|
2011
|
HQ
|
43
|
10,967.22
|
2011
|
NQ
|
21
|
3,923.96
|
2011
|
PQ
|
46
|
10,864.60
|
|
TOTAL
|
110
|
25,755.78
|
2012
|
HQ
|
73
|
18,100.90
|
2012
|
PQ
|
13
|
3,160.45
|
|
TOTAL
|
86
|
21,261.35
|
2013
|
HQ
|
16
|
2,977.30
|
|
TOTAL
|
16
|
2,977.30
|
2014
|
HQ
|
15
|
3,135.00
|
2014
|
PQ
|
7
|
1,773.00
|
|
TOTAL
|
22
|
4,908.00
|
Total to August 31, 2015
|
|
492
|
113,242.08
|
35
Minor differences to previous tables disclosing historic drilling statistics are
due to previous errors and decisions by the data compilers as whether to exclude
or include abandoned holes with no assays.
Resource
estimates with the effective date of May 3, 2013 included drill results up to
August 27, 2012 and the updated resource estimates, completed after the FS,
included drill results up to March 2, 2013. See Nechalacho Project - Mineral
Resource Update. There was no drilling done in 2015.
7.
Sampling, Analysis and Security of Samples
A
comprehensive core logging and sampling protocol was established for the July
2007 drilling program. This protocol has been strictly applied for all of the
drilling programs since 2007. In addition, a comprehensive geotechnical logging
protocol was introduced at the start of the summer 2009 drill program. The
Company's Vice President, Exploration, William Mercer, Ph.D., P.Geo. (Ontario),
P. Geo (NWT), provided overall direction on the project and is responsible for
monitoring the QA/QC protocol for the laboratory analyses and provided overall
direction on the project.
Core
sizes range from BTW diameter for the initial 2007 drill program to NQ2 in the
winter/summer 2008 program and NQ2 or HQ in 2009 and 2010. Since 2011, a second
rig recovering very large PQ sized core was mobilized to site to maximize the
amount of material available for the bulk sample while the first rig continued
with HQ equipment.
Core
is placed in standard wooden core boxes at the drill by the driller helper, with
a wooden marker placed at the end of each core run marking the metreage from the
surface. Throughout the BTW-NQ programs drill rods were imperial lengths of 10
feet, and core markers were written in feet on one side of the wooden block, and
using a metric conversion chart, written in metres on the opposite side of the
block. The HQ drilling initially used both imperial and metric rods, so markers
were in both feet and metres to ensure proper measurement.
In
general, in the mineralized zones, core recovery is very high, effectively 100%.
As a result, core handling is not expected to materially affect the results in
terms of accuracy or reliability. In addition, as the mineralization is
disseminated, there is not expected to be a significant sampling effect on
accuracy or reliability.
After
inspection by the geologist at the drill, the boxes are closed with wooden lids
and taken to the core logging facility at the camp by snowmobile in the winter
and by boat and ATV in the summer. At camp, the boxes are opened by the
geologist on outdoor racks. In good weather, logging and other geotechnical
measurements are done outside; in poor weather and in winter, core is processed
in a heated core shack. Core is initially measured to determine recoveries, and
marked incrementally every metre. This marking serves as a guide for magnetic
susceptibility, rock quality determinations (RQD), and density measurements.
Magnetic susceptibility is measured every metre with a hand-held KT- 10
magnetic susceptibility meter. Density is measured every five metres by
weighing a section of drill core in air and then weighing by submersing the
sample in water and comparing the difference between dry and submersed weight. A
typical core sample for density measurement averages 10 centimetres in length.
Geotechnical logging, comprising RQD, are performed for each run.
Core
is generally very clean when brought to camp, and requires no washing except for
occasional sprays of water when mud is present. The geologist marks out major
rock units and completes a written description for the entire core sequence.
Frequent readings using a handheld Thermo-Scientific Niton® XLP-522K hand held
analyzer act as a guide to areas of mineralization and general chemistry of a
specific interval. The final task is to mark out with a china marker specific
sample intervals for the length of the entire drill hole. On average, assay
samples are two metres long except where, in the geologists opinion, it is
advisable to follow lithological boundaries. Due to the long widths of
mineralization with the Basal Zone averaging over 20 m thick, even spaced
sampling is not considered a significant factor in resource estimation.
Consequently, individual samples can vary in length when encountering
lithological changes, as efforts are made not to split across well-defined
lithological boundaries. A list is made of all sample intervals as a record and
also a guide to the core splitting technicians. All geological, geophysical and
geotechnical data was originally entered into a custom designed database,
provided and maintained by an external consulting firm.
Subsequently,
starting in 2012, Avalon started using Maxwell Geoservices software (LogChief
and DataShed) to enter and control data into the Datashed database.
36
At
the first step of data entry, the data is checked for corrected and completed
required fields which are necessary to import into LogChief. Adjusted procedures
for different fields in LogChief can be considered control manager on data entry
and possible available errors. Those parts of the data which includes errors are
rejected and sent back to field geologists for correction. The data is then
synchronized from LogChief to DataShed. An exception to the sampling process
described above is that for PQ core. Due to the weight of the core, about 18 kgs
per metre, and for safety reasons related to lifting heavy samples, samples were
restricted to 1 metre core lengths.
Due
to the strong hydrothermal alteration of all lithologies, identifying specific
precursor lithologies has proven quite difficult, particularly in the early
drill programs. Early lithological coding tended to incorporate hydrothermal
alteration, commonly making it difficult to correlate units between drill holes.
As more information became available from deeper drilling and specific textures
and lithologies were compared to other unaltered, alkaline deposits elsewhere,
such as Illimausaq in Greenland, a new lithological code was produced using, as
a basis, the recognizable precursor lithologies. This has greatly advanced the
understanding of the lithology, mineralogy, and to a lesser degree the
petro-genesis of the deposit.
After
all tests and core observations are completed, and prior to splitting, the core
is photographed outdoors using a hand-held digital camera. Down-hole distance
and hole number are marked so as to be visible in all photos. Core is generally
photographed in groups of six boxes. Starting in the 2009 summer drill program,
drill core was also logged for geotechnical characteristics. This was initiated
with the guidance of external geotechnical consultants. Some of the holes were
logged from top to bottom, while others were logged above, below, and within the
Basal Zone, to determine rock quality characteristics of both the mineralized
zones and country rocks. Efforts were made to select holes with varying
orientations to provide comprehensive orientation characteristics of planar
structural features. The geotechnical logging was done on core logging sheets
and entered electronically in to a custom-designed Excel spreadsheet provided by
the geotechnical consultants. A total of 385 holes were logged in whole or in
part. Holes which were partially logged included the Basal Zone and a minimum 10
metre interval above and below. When the core has been logged and photographed,
it is stored in core racks outside the core splitting tent, from which they are
then brought in to the core shack to be split and sampled. Core photos are
stored on the camp computer in addition to an external hard drive.
For
all core except PQ, the core splitter would break the core into smaller lengths
to fit into the mechanical core splitter, split the core in half, and placed one
half in a plastic sample bag with the other half placed back into the core box
in sequence to serve as a permanent record. In programs after 2009, for
mineralized intervals, the core was split initially into halves and then one
half into quarters. One quarter was utilized as an assay sample, a second
quarter retained as a library sample, and the full half core bagged in intervals
identical to the sample interval, as a metallurgical sample. The sample interval
is marked on a sample tag in a three-part sample book and a tag with the
corresponding sample number is placed in the sample bag. The sample bag is also
marked with the corresponding sample number using a felt marker. The bag is then
either stapled or zip-tied closed, and placed in a rice bag with two other
samples. Most rice bags contain three samples to keep weight to a manageable
level. The rice bag is then marked on the outside with corresponding sample
numbers contained within, and a second number identifying the rice bag itself. A
sample shipment form is then completed, generally in increments of 50 rice bags,
which constitutes a single shipment. The sample form is enclosed in an
appropriately marked rice bag, with a duplicate paper copy kept in camp, and
also kept on electronic file.
Starting
in winter 2010, a second drill was added, also using HQ core. This core was
sampled as above. From July 2010 on, this rig was converted to PQ diameter core
in order to obtain more metallurgical sample. This core, weighing about 18 kg
per metre, was initially sawn in order to acquire an assay sample of about 1.5
kgs, with a second cut for a library sample of about 1.5 kg, leaving about 14 kg
for metallurgical purposes. However, due to the hardness of the rock, it was
deemed that sawing the core was impractical due to low productivity.
Consequently a test was completed of coarse crushing the whole core to 3.3 mm in
1 metre samples. Then an assay sample and a library sample were split out and
the remaining 3.3 mm material retained for metallurgical purposes. The results
of the test that studied the particle size distribution and the homogeneity of
the sample indicated that this was a satisfactory procedure for both assaying
and metallurgy, and for mineralized intervals this PQ core procedure continued
to be followed. For unmineralized core, a section was sawn off weighing about
3-5 kg per sample to avoid the cost of crushing whole core and the remaining
core stored at site.
37
Standards
are inserted routinely every 15
th
sample with the primary laboratory
and every 35
th
sample with the secondary laboratory. Blanks, composed
of split drill core of unaltered and un-veined diabase dyke intersected in
drilling beneath Thor Lake, are inserted every 40th sample. Samples are shipped
by air from Thor Lake to Yellowknife. The standard shipment is 50 rice bags, or
a total of 150 samples per shipment. The rice bags are zip-tied for security,
and are met and unloaded in Yellowknife by a representative of a third-party
expediter. The expediter takes the samples to its warehouse and inventories all
samples and produces a manifest which is sent electronically to Thor Lake camp,
and accompanies the shipment. The samples are then taken by the expediter to the
core processing lab facilities. At this point, the laboratories take custody of
the samples. Core is sent to the preparation laboratory with specification that
all core should be crushed to 90% passing 10 mesh with a supplementary charge if
necessary. For samples from drill holes completed in 2007, every sample pulp was
duplicated and sent to the secondary laboratory for check analyses. Subsequent
to this (2008 to 2009), approximately every tenth pulp was sent for duplicate
analysis in the secondary laboratory. Standards are inserted in the duplicate
sample stream by Avalon employees prior to shipping to the secondary laboratory.
All
remaining drill core is stored on site at Thor Lake. Core is temporarily racked
at the exploration camp while being logged. In summer 2012, a large core storage
facility was constructed at the T Zone Mine site that was sufficiently large to
store all drill core from the project. In addition, sample rejects were brought
from Yellowknife in wooden bins, each of about one tonne. Pulp samples and
further sample rejects are stored in a locked secure facility within Yellowknife
airport. Historic core, particularly T-Zone core, is stored at the mine site,
while Nechalacho Deposit core is stored at the camp storage.
Any
assay results obtained prior to 2007 (holes 1 to 51) are referred to as the
older holes. These did not have internal Quality Assurance/Quality Control
(QA/QC) and were analyzed for a limited set of elements; however, six of the
old holes were reassayed in 2008 for the complete suite of elements. Avalon has
changed the laboratories used for analysis over time. For the first year of
drilling by Avalon (2007), the primary laboratory was an independent laboratory
located in Ancaster, Ontario (Lab 1), and the secondary laboratory was in
Vancouver, British Columbia (Lab 2). Samples were shipped to the Lab 1
facility in Ancaster, Ontario for preparation, and a duplicate pulp was
submitted to Lab 2 in Vancouver for complete check analysis.
For
the 2008 winter and summer programs, the preparation laboratory was a different
laboratory in Yellowknife, Northwest Territories (Lab 3) and the primary
analytical laboratory was Lab 2 in Vancouver, British Columbia. A split of every
tenth sample reject was sent to a different independent laboratory in Vancouver,
British Columbia (Lab 4) for check analyses. All core was analyzed by Lab 2
using two analytical packages: Group 4A and Group 4B. Lab 4 analyzed the samples
with the MS81 method. Lab 2s Group 4A is a whole rock characterization package
comprising four separate analytical tests. Lab 2s Group 4B is a Total Trace
Elements by Inductively Coupled Plasma-Mass Spectrometry (ICP-MS). This
package comprises two separate analyses. For 2008, secondary samples, comprising
roughly every tenth reject sample supplied by Lab 2, were shipped to Lab 4,
where the samples were analyzed by the package MS81. This is a combination of
lithium metaborate/ICP atomic emission spectrometry (ICP-AES) for whole rock
values, lithium borate/ICP-MS for refractory mineral values and other elements,
and aqua regia/ICP-MS for volatile elements.
Starting
with the winter 2009 drilling campaign, all samples were prepared at the a
different preparation facility in Yellowknife, Northwest Territories (Lab 5),
and a subsample shipped and analyzed at Lab 4 in Vancouver, British Columbia by
lithium metaborate/tetraborate fusion and dilute nitric acid digestion, followed
by whole rock and 45 element multi-element ICP analysis (Lab 4 sample method
ME-MS81). All samples contained within intercepts above the 1.6% cutoff criteria
and any additional samples exceeding analytical limits or of geological
significance are re-run using similar Lab 4 method ME-MS81H for higher
concentration levels. ME-MS81H is a similar method but with greater dilution in
the analytical procedure. Every tenth sample has a duplicate pulp prepared from
the sample reject which, with inserted standards and blanks, was sent to Lab 2
in Vancouver, British Columbia for check analyses. Results were monitored for
key elements, and in cases of QA/QC issues, re-analysis was requested. Values
were reported by the laboratories in parts per million (ppm) and converted to
rare earth and rare metal oxides by Avalon geologists.
Since
2007, Avalon has commissioned a specialist laboratory from British Columbia to
generate standards called AVL-H, AVL-M or AVL-L (2007), S0409 (2010) (sometimes
referred to as H2) and S229 and S236 (2010).
38
For the 2007 standards and S0409, Avalon then commissioned an
independent consultant to review the round robin and assess the quality of the
data and for S339 and S336 another independent consultant was similarly
commissioned.
Statistics
on QA/QC samples submitted during the period January 2011 to August 2012 are
presented below.
QA/QC Samples Submitted From January, 2011 to
August, 2012
|
QC Category
|
DH Sample Count
|
QC Sample Count
|
Ratio of QC Samples to
DH Samples
|
Company Standards
|
16,914
|
1,117
|
1:15
|
Company Blanks
|
16,914
|
453
|
1:37
|
Laboratory Duplicates
|
16,914
|
2,019
|
1:8
|
Field Duplicates
|
16,914
|
88
|
1:192
|
The
following table shows the interlab comparison for the period June 2010 and
December 2011.
Laboratory Comparison
Results for All Elements
|
Element
|
No. of
Samples
|
Mean 1
(Lab
4)
|
Mean 2
(Lab
2)
|
SD 1
(Lab 4)
|
SD 2
(Lab 2)
|
CV 1
(Lab 4)
|
CV 2
(Lab 2)
|
RPHD%
(1)
|
La
|
453
|
1996.72
|
1882.70
|
1153.64
|
1076.56
|
0.58
|
0.57
|
2.69
|
Ce
|
451
|
4398.52
|
4184.67
|
2535.14
|
2392.85
|
0.58
|
0.57
|
2.24
|
Pr
|
453
|
558.23
|
518.04
|
331.16
|
300.76
|
0.59
|
0.58
|
3.21
|
Nd
|
453
|
2166.97
|
2069.39
|
1297.18
|
1223.40
|
0.60
|
0.59
|
1.97
|
Sm
|
453
|
456.80
|
422.45
|
290.66
|
265.58
|
0.64
|
0.63
|
3.56
|
Eu
|
453
|
52.32
|
49.91
|
34.33
|
32.65
|
0.66
|
0.65
|
2.07
|
Gd
|
453
|
357.29
|
359.70
|
257.90
|
256.03
|
0.72
|
0.71
|
-0.80
|
Tb
|
453
|
48.63
|
48.37
|
44.61
|
43.68
|
0.92
|
0.90
|
0.01
|
Dy
|
452
|
240.93
|
235.89
|
258.54
|
252.82
|
1.07
|
1.07
|
1.05
|
Ho
|
453
|
41.09
|
38.98
|
50.96
|
50.06
|
1.24
|
1.28
|
5.24
|
Er
|
453
|
101.74
|
96.24
|
137.84
|
132.60
|
1.35
|
1.38
|
4.59
|
Tm
|
453
|
13.25
|
13.25
|
18.48
|
18.48
|
1.39
|
1.39
|
-0.44
|
Yb
|
453
|
80.59
|
81.97
|
112.45
|
112.15
|
1.40
|
1.37
|
-3.44
|
Lu
|
453
|
11.37
|
11.08
|
15.76
|
15.32
|
1.39
|
1.38
|
-0.39
|
Y
|
453
|
964.62
|
914.19
|
1144.75
|
1072.82
|
1.19
|
1.17
|
2.22
|
Zr-
ICPMSh
|
451
|
16794.83
|
16441.79
|
11635.23
|
11661.55
|
0.69
|
0.71
|
1.51
|
Zr-XRF
|
497
|
22748.89
|
20472.55
|
11023.60
|
9747.00
|
0.48
|
0.48
|
5.16
|
Nb-
ICPMSh
|
452
|
2045.91
|
1937.76
|
1173.36
|
1158.36
|
0.57
|
0.60
|
2.82
|
Nb-XRF
|
228
|
3645.18
|
3169.35
|
1189.18
|
994.35
|
0.33
|
0.31
|
7.00
|
Ta
|
453
|
217.29
|
207.36
|
169.17
|
157.83
|
0.78
|
0.76
|
1.45
|
Hf
|
453
|
380.31
|
369.85
|
274.54
|
268.91
|
0.72
|
0.73
|
1.47
|
NOTES:
(1) RPHD: Relative Percent Half Difference
Avalon
monitors the results of its internal standards during routine analysis of drill
core. Due to the large number of elements involved, it would be impractical to
apply a normal logic table of failures where an analysis batch is failed on the
basis of issues with one element. Avalon followed the following procedure for
assessing analytical data: Batches were not failed if the samples analysed were
clearly far below any economic levels (not mineralized), unless the standards
results were very grossly out.
39
The
results of the standards were reviewed to see how many elements were out of
acceptable range as recommended in the standard certification, and if four
elements were out of range (greater than three standard deviations), but two
high and two low, and the remaining 14 elements were in range, the batch was
accepted.
If
five elements or more elements were out of acceptable range (greater than three
standard deviations), and all in the same direction, either biased all high or
all low, then the batch was re-analysed.
More
recently, subsequent to the May 3, 2013 resource estimate, Avalon added an
additional criterion as follows: If the overall Net Metal Return (NMR) of the
standard is outside the range of +/-10% of the recommended value, then the batch
is considered for reanalysis.
8.
Mineral Processing and Metallurgical Testing
Extensive
metallurgical testwork has been completed at a number of different laboratories
and a large number of testwork reports have been issued to summarize this work.
Much of the pertinent metallurgical and mineralogical development studies have
been undertaken using bulk composite samples that represent the Nechalacho
deposit mineralization spatially and in terms of lithology. These selected
composite samples tended to be selected to represent mineralization at different
depths in the deposit in terms of elevation. The composites designated UZ were
from Upper Zone mineralization and BZ were from Basal Zone mineralization.
Since
2010, Avalon has completed four flotation pilot plant tests at two different
labs. All of these pilot plants were conducted using bulk samples sourced from
drill core.
Mineralogy
The
mineralogy of the Nechalacho deposit has been studied using QEMSCAN®, a scanning
electron microscope (SEM) and an electron microprobe (EMP). Nechalacho
mineralization is hosted in nepheline syenite that has been extensively
hydrothermally altered in areas of mineralization. The payable elements of the
Nechalacho deposit are typically hosted in a number of minerals, summarized as
follows:
-
LREEs dominantly occur in bastnaesite, synchisite, monazite and allanite.
-
HREEs dominantly occur in zircon, fergusonite and rare xenotime.
-
Zirconium (Zr), along with HREE, niobium and tantalum occurs in zircon and
other zircono-silicates (eudialyte).
-
Niobium and tantalum occur in columbite and ferrocolumbite, fergusonite
and zircon.
The
mineralogy of the Nechalacho ore is complex and guides metallurgical development
and performance.
Hydrometallurgical
Testwork
Six
hydrometallurgical pilot plant campaigns were conducted between June and
October, 2012. The main objectives of these campaigns were to:
-
Test a continuous version of the hydrometallurgical flow-sheet.
-
Optimize REE extraction in the pregnant solution.
-
Remove target contaminants (iron, uranium and thorium).
-
Ensure the final mixed rare earth precipitate product had an acceptable
grade of REE while reducing the uranium and thorium contents below 500 ppm.
-
Ensure the concentrations of species in the filtrate from the tailings
circuit met target environmental levels.
40
The
final pilot plant campaign, which operated between September 24 and October 5,
2012, demonstrated the technical viability of the process and provided crucial
input for the final hydrometallurgical flowsheet, process design criteria and
process engineering adopted for the FS.
Refinery
The
refinery comprises two plants, the leaching and the separation plants. The
leaching plant removes impurities from the hydrometallurgical precipitate in
order to attain a purified feed to the separation plant where the individual
rare earth products will be produced.
A
large number of testwork reports have been issued to summarize the testwork that
has been undertaken at a number of different laboratories. All relevant testwork
has been completed using the rare earth precipitate produced during the
hydrometallurgical pilot plant testwork program.
9.
Mineral Resource and Mineral Reserve Estimates
Resource
Estimate in the Feasibility Study
The
mineral resource estimate for the Nechalacho Project presented in the FS based
on the block model prepared by Avalon was audited originally by Roscoe Postle
Associates Inc. (RPA) on November 21, 2012. Subsequent to this, Avalon updated
the database and re-estimated the resource as of May 3, 2013. The update
included correction of some minor assay data entry errors and drill hole
locations. The net effect of these changes is considered immaterial as the
resource change was less than 1% in most individual parameters. The largest
changes were for ZrO
2
grade, and the effect was an increase in grade
in Measured and Indicated resources of between 0.1% and 3.2% of the overall
grade in the various categories.
The
resource estimated by Avalon and accepted by RPA that was the basis for the
mineral reserves estimate given below (See Nechalacho Project Mineral Reserve
Estimate) for the Nechalacho deposit is summarized in the table below. The
mineral resource is reported at a cut-off value of US$320/t. The effective date
of the mineral resource estimate is May 3, 2013. This resource has been
subsequently updated as of August 15, 2013 (See Nechalacho Project Mineral
Reserve Estimate). The tables of the May 3, 2013 mineral resource have been
provided for completeness purposes.
Nechalacho Deposit Mineral Resource Estimate as at May
3, 2013
|
Category
|
Zone
|
Tonnes
(million)
|
TREO
(%)
|
HREO
(%)
|
ZrO
2
(%)
|
Nb
2
O
5
(%)
|
Ta
2
O
5
(%)
|
Measured
|
Basal
|
10.86
|
1.67
|
0.38
|
3.23
|
0.40
|
0.04
|
Upper
|
-
|
-
|
-
|
-
|
-
|
-
|
Total Measured
|
10.86
|
1.67
|
0.38
|
3.23
|
0.40
|
0.04
|
Indicated
|
Basal
|
55.81
|
1.55
|
0.33
|
3.01
|
0.40
|
0.04
|
Upper
|
54.59
|
1.42
|
0.14
|
1.96
|
0.28
|
0.02
|
Total Indicated
|
|
110.40
|
1.49
|
0.24
|
2.49
|
0.34
|
0.03
|
Measured and Indicated
|
Basal
|
66.67
|
1.57
|
0.34
|
3.05
|
0.40
|
0.04
|
Upper
|
54.59
|
1.42
|
0.14
|
1.96
|
0.28
|
0.02
|
Total Measured and Indicated
|
121.26
|
1.50
|
0.25
|
2.56
|
0.34
|
0.03
|
Inferred
|
Basal
|
61.09
|
1.29
|
0.25
|
2.69
|
0.36
|
0.03
|
Upper
|
122.28
|
1.26
|
0.12
|
2.21
|
0.32
|
0.02
|
Total Inferred
|
183.37
|
1.27
|
0.17
|
2.37
|
0.33
|
0.02
|
1.
|
CIM definitions were followed for Mineral Resources.
|
2.
|
Mineral Resources are estimated at a NMR cut-off value of
US$320/t. NMR is defined as Net Metal Return or the in situ value of all
payable metals, net of estimated metallurgical recoveries and off-site
processing costs.
|
3.
|
An exchange rate of US$1=CAD1.05 was used.
|
4.
|
Heavy rare earth oxides (HREO) is the total
concentration of: Y
2
O
3
, Eu
2
O
3
,
Gd
2
O
3
, Tb
2
O
3
,
Dy
2
O
3
, Ho
2
O
3
,
Er
2
O
3
, Tm
2
O
3
,
Yb
2
O
3
and Lu
2
O
3
.
|
41
5.
|
Total rare earth oxides (TREO) is HREO plus light rare
earth oxides (LREO): La
2
O
3
,
Ce
2
O
3
, Pr
2
O
3
,
Nd
2
O
3
and Sm
2
O
3
.
|
6.
|
Rare earths were valued at an average net price of
US$62.91/kg, ZrO
2
at US$3.77/kg, Nb
2
O
5
at
US$56/kg, and Ta
2
O
5
at US$256/kg. Average REO price
is net of metallurgical recovery and payable assumptions for contained
rare earths, and will vary according to the proportions of individual rare
earth elements present. In this case, the proportions of REO as final
products were used to calculate the average price.
|
7.
|
ZrO
2
refers to zirconium oxide,
Nb
2
O
5
refers to niobium oxide and
Ta
2
O
5
refers to tantalum
oxide.
|
Mineral Resource Estimate Grades of
Individual Rare Earth Oxides and Specific Gravity
|
Category
|
Zone
|
Tonnes
(million)
|
La
2
O
3
(ppm)
|
Ce
2
O
3
(ppm)
|
Pr
2
O
3
(ppm)
|
Nd
2
O
3
(ppm)
|
Sm
2
O
3
(ppm)
|
Eu
2
O
3
(ppm)
|
Gd
2
O
3
(ppm)
|
Tb
2
O
3
(ppm)
|
Measured
|
Basal
|
10.86
|
2,629
|
5,878
|
745
|
2,928
|
652
|
82
|
594
|
91
|
Upper
|
-
|
-
|
-
|
-
|
-
|
-
|
-
|
-
|
-
|
Total Measured
|
|
10.86
|
2,629
|
5,878
|
745
|
2,928
|
652
|
82
|
594
|
91
|
|
|
|
|
|
|
|
|
|
|
|
Indicated
|
Basal
|
55.81
|
2,522
|
5,605
|
701
|
2,761
|
596
|
73
|
529
|
80
|
Upper
|
54.59
|
2,686
|
5,970
|
740
|
2,853
|
539
|
58
|
387
|
42
|
Total Indicated
|
|
110.40
|
2,603
|
5,786
|
720
|
2,806
|
568
|
66
|
459
|
61
|
|
|
|
|
|
|
|
|
|
|
|
Measured and Indicated
|
Basal
|
66.67
|
2,539
|
5,649
|
708
|
2,788
|
605
|
75
|
539
|
82
|
Upper
|
54.59
|
2,686
|
5,970
|
740
|
2,853
|
539
|
58
|
387
|
42
|
Total Measured and
Indicated
|
|
121.26
|
2,605
|
5,794
|
723
|
2,817
|
575
|
67
|
471
|
64
|
|
|
|
|
|
|
|
|
|
|
|
Inferred
|
Basal
|
61.09
|
2,110
|
4,760
|
608
|
2,390
|
487
|
60
|
439
|
63
|
Upper
|
122.28
|
2,312
|
5,367
|
661
|
2,576
|
465
|
51
|
340
|
35
|
Total Inferred
|
|
183.37
|
2,245
|
5,165
|
643
|
2,514
|
473
|
54
|
373
|
44
|
|
|
|
|
|
|
|
|
|
|
|
Category
|
Zone
|
Tonnes
(million)
|
Dy
2
O
3
(ppm)
|
Ho
2
O
3
(ppm)
|
Er
2
O
3
(ppm)
|
Tm
2
O
3
(ppm)
|
Yb
2
O
3
(ppm)
|
Lu
2
O
3
(ppm)
|
Y
2
O
3
(ppm)
|
SG
|
Measured
|
Basal
|
10.86
|
471
|
84
|
221
|
29
|
174
|
24
|
2,061
|
2.85
|
Upper
|
-
|
-
|
-
|
-
|
-
|
-
|
-
|
-
|
-
|
Total Measured
|
|
10.86
|
471
|
84
|
221
|
29
|
174
|
24
|
2,061
|
2.85
|
|
|
|
|
|
|
|
|
|
|
|
Indicated
|
Basal
|
55.81
|
413
|
72
|
182
|
24
|
141
|
20
|
1,813
|
2.88
|
Upper
|
54.59
|
160
|
23
|
54
|
6
|
39
|
5
|
649
|
2.80
|
Total Indicated
|
|
110.40
|
288
|
48
|
119
|
15
|
91
|
13
|
1,237
|
2.84
|
|
|
|
|
|
|
|
|
|
|
|
Measured and Indicated
|
Basal
|
66.67
|
422
|
74
|
189
|
25
|
147
|
20
|
1,853
|
2.88
|
Upper
|
54.59
|
160
|
23
|
54
|
6
|
39
|
5
|
649
|
2.80
|
Total Measured and
Indicated
|
|
121.26
|
304
|
51
|
128
|
16
|
98
|
14
|
1,311
|
2.84
|
|
|
|
|
|
|
|
|
|
|
|
Inferred
|
Basal
|
61.09
|
315
|
55
|
132
|
18
|
106
|
15
|
1,327
|
2.83
|
Upper
|
122.28
|
137
|
20
|
46
|
6
|
40
|
6
|
560
|
2.81
|
Total Inferred
|
|
183.37
|
196
|
32
|
75
|
10
|
62
|
9
|
816
|
2.82
|
1
|
CIM definitions were followed for Mineral Resources.
|
2.
|
Mineral Resources are estimated at a NMR cut-off value of
US$320/t. NMR is defined as Net Metal Return or the in situ value of all
payable metals, net of estimated metallurgical recoveries and off-site
processing costs.
|
3.
|
An exchange rate of US$1=CAD1.05 was used.
|
4.
|
Heavy rare earth oxides (HREO) is the total
concentration of: Y
2
O
3
, Eu
2
O
3
,
Gd
2
O
3
, Tb
2
O
3
,
Dy
2
O
3
, Ho
2
O
3
,
Er
2
O
3
, Tm
2
O
3
,
Yb
2
O
3
and Lu
2
O
3
.
|
5.
|
Total rare earth oxides (TREO) is HREO plus light rare
earth oxides (LREO): La
2
O
3
,
Ce
2
O
3
, Pr
2
O
3
,
Nd
2
O
3
and Sm
2
O
3
.
|
42
6.
|
Rare earths were valued at an average net price of
US$62.91/kg, ZrO
2
at US$3.77/kg, Nb
2
O
5
at
US$56/kg, and Ta
2
O
5
at US$256/kg. Average REO price
is net of metallurgical recovery and payable assumptions for contained
rare earths, and will vary according to the proportions of individual rare
earth elements present. The proportions are based on the actual planned
production from the Nechalacho project.
|
7.
|
ZrO
2
refers to zirconium oxide,
Nb
2
O
5
refers to niobium oxide, and
Ta
2
O
5
refers to tantalum
oxide.
|
The
cutoff grade was determined using both rare metals and rare earths as they all
contribute to the total revenue of the Nechalacho deposit. An economic model was
created, using metal prices that were updated from those used in the
pre-feasibility study, flotation and hydrometallurgical recoveries, the effects
of payable percentages, and any payable Net Smelter Return (NSR) royalties.
The payable percentages of elements (Zr, Nb, Ta) contained within the Enriched
Zirconium Concentrate (EZC) were also included. The net revenue generated by
this model is termed the NMR. The mineral resource estimate is based on the
minimum NMR value being equal to an operating cost of US$320/t, a break-even
cut-off value.
Resource
Database
The
database for the November 21, 2012 mineral resource estimate for the Nechalacho
deposit contained 490 drill holes totalling 104,918.7 m. The database included
51 historic drill holes amounting to 5,588 m and 439 recent drill holes with a
total length of 99,330.6 m. The estimate was based on 33,236 samples assayed for
rare metals, rare earths, and other elements, from 450 drill holes, 48
historical and 402 recent. Samples from 41 historical drill holes have
incomplete or no REE assays results. Only 21 of the historical drill holes
sampled the Basal Zone, as it was not a target at that time.
The
up-dated database and re-estimated resource for the Nechalacho Deposit made by
the Company as of May 3, 2013 are based upon detailed core logging, assays and
geological interpretation by Avalon geologists and independently audited by RPA.
The only change from the November 2012 Update is correction of some minor errors
in the database that had no material effect, except to change some numbers in
the second decimal place as noted above. The drill holes and their related
assays form the basis for the creation of two domains of REE mineralization: an
upper LREE-enriched domain (Upper Zone) and a lower HREE enriched domain
(Basal Zone).
Resource
Classification
For
all domains, blocks populated using a 240m X 240m X 120m search ellipse and up
to 120 m away from a drill hole were classified as inferred.
Within the Upper Zone, blocks populated using a 60m X 60m X 30m
search ellipse and a minimum of 2 drill holes were classified as Indicated. A
manually digitized contour was used to reclassify isolated blocks or patches of
Indicated material into the Inferred category. No Upper Zone material was
classified as Measured.
Within
the Basal Zone, blocks populated using a 60m X 60m X 30m search ellipse and up
to 60 m away from a drill hole were classified as Indicated. A manually
digitized contour was used to select and reclassify isolated blocks or patches
of Indicated material to the Inferred category. In the Basal Zone, two separate
areas supported by diamond drilling spaced at 25 m were manually digitized to
define the Measured blocks.
The
classification details are outlined in the table below.
Zone
|
Classification
|
Distance to Nearest Drill
hole
|
Minimum Number of Drill
holes
|
Basal
|
Measured
|
≤30m (by manually digitized
contour)
|
1
|
|
Indicated
|
≤60m
|
1
|
|
Inferred
|
≤120m
|
1
|
Upper
|
Measured
|
N/A
|
N/A
|
|
Indicated
|
≤60m
|
2
|
|
Inferred
|
≤120m
|
1
|
43
Mineral
Reserve Estimate
The
mineral reserve estimate for the Nechalacho Project presented in the feasibility
study was estimated from the block model prepared by Avalon and audited
originally by RPA on November 21, 2012 which was updated and re-estimated as of
May 3, 2013. The mineral reserve estimate is derived from this block model by
applying the appropriate technical and economic parameters to extraction of the
REE with proven underground mining methods.
The
mineral reserve has been estimated based on conversion of the high grade mineral
resources at a cut-off value greater than US$320/t NMR. Payable elements include
the REE, zirconium, niobium and tantalum. No Inferred mineral resources were
converted to mineral reserves. The high grade mineral resources are 34.7% and
14.7% of the total Measured and Indicated mineral resources, respectively.
The
key design criteria set for the Nechalacho mine are:
-
Initial design based on a 20-year life-of-mine (LOM) of high grade
material.
-
Mechanized cut or drift and fill and long hole mining methods with paste
backfill.
-
Minimum mining thickness of 5 m.
-
Extraction ratio of 94.2%.
-
Internal dilution of 8.5%.
-
External dilution of 5% applied to all stopes.
-
Estimated total average dilution for the life of mine of approximately
11%.
-
Production rate of 2,000 t/d ore (730,000 t/y).
-
Ore bulk density of 2.91 t/m
3
.
The
mineral reserve estimate for the Nechalacho Project shown in the table below has
an effective date of May 3, 2013. The figures in the table are rounded to
reflect that the numbers are estimates. The conversion of mineral resources to
mineral reserves includes technical information that requires subsequent
calculations or estimates to derive sub-totals, totals and weighted averages.
Such calculations or estimations inherently involve a degree of rounding and
consequently introduce a margin of error. Where these occur, Micon International
Limited (Micon) does not consider them to be material.
Mineral Reserve Estimate as
at May 3, 2013
|
Description
|
Mineral Reserve Category
|
Proven
|
Probable
|
Proven and
Probable
|
Tonnage (Mt)
|
3.68
|
10.93
|
14.61
|
TREO (%)
|
1.7160
|
1.6923
|
1.6980
|
HREO (%)
|
0.4681
|
0.4503
|
0.4548
|
HREO/TREO
|
27.28%
|
26.61%
|
26.78%
|
La
2
O
3
|
0.256%
|
0.256%
|
0.256%
|
Ce
2
O
3
|
0.570%
|
0.567%
|
0.568%
|
Pr
2
O
3
|
0.072%
|
0.071%
|
0.071%
|
Nd
2
O
3
|
0.284%
|
0.283%
|
0.283%
|
Sm
2
O
3
|
0.065%
|
0.065%
|
0.065%
|
Eu
2
O
3
|
0.008%
|
0.008%
|
0.008%
|
Gd
2
O
3
|
0.062%
|
0.061%
|
0.061%
|
Tb
2
O
3
|
0.010%
|
0.010%
|
0.010%
|
Dy
2
O
3
|
0.058%
|
0.056%
|
0.056%
|
Ho
2
O
3
|
0.011%
|
0.010%
|
0.010%
|
Er
2
O
3
|
0.029%
|
0.027%
|
0.028%
|
44
Mineral Reserve Estimate as
at May 3, 2013
|
Description
|
Mineral Reserve Category
|
Proven
|
Probable
|
Proven and
Probable
|
Tm
2
O
3
|
0.004%
|
0.004%
|
0.004%
|
Yb
2
O
3
|
0.023%
|
0.022%
|
0.022%
|
Lu
2
O
3
|
0.003%
|
0.003%
|
0.003%
|
Y
2
O
3
|
0.259%
|
0.249%
|
0.251%
|
ZrO
2
|
3.440%
|
3.309%
|
3.342%
|
Nb
2
O
5
|
0.425%
|
0.413%
|
0.416%
|
Ta
2
O
5
|
0.046%
|
0.045%
|
0.045%
|
1.
|
CIM definitions were followed for Mineral Reserves.
|
2.
|
Mineral Reserves are based on Mineral Resources published
by Avalon in News Release dated November 26
th
, 2012 and audited
by Roscoe Postle Associates Inc., and modified as of May 3, 2013.
|
3.
|
Mineral Reserves are estimated using price forecasts for
2016 for rare earth oxides given below.
|
4.
|
HREO grade comprises Y
2
O
3
,
Eu
2
O
3
, Gd
2
O
3
,
Tb
2
O
3
, Dy
2
O
3
,
Ho
2
O
3
, Er
2
O
3
,
Tm
2
O
3
, Yb
2
O
3
, and
Lu
2
O
3
. TREO grade comprises all HREO and
La
2
O
3
, Ce
2
O
3
,
Nd
2
O
3
, Pr
2
O
3
, and
Sm
2
O
3
.
|
5.
|
Mineral Reserves are estimated using a NMR cash cost
cut-off value of US$320/t.
|
6.
|
Rare earths were valued at an average net price of
US$62.91/kg, ZrO
2
at US$3.77/kg, Nb
2
O
5
at
US$56/kg, and Ta
2
O
5
at US$256/kg. Average REO price
is net of metallurgical recovery and payable assumptions for contained
rare earths, and will vary according to the proportions of individual rare
earth elements present. In this case, the proportions of REO as final
products were used to calculate the average price.
|
7.
|
Mineral reserves calculation includes an average internal
dilution of 8.5% and external dilution of 5% on secondary stopes.
|
8.
|
The mine plan was developed by Avalon Advanced Materials
Inc. engineers and reviewed by Micon International Limited. The QP for
this Mineral Reserve is Barnard Foo., P. Eng., M. Eng., MBA, Senior Mining
Engineer, Micon International Limited.
|
Micon
believes the key assumptions, parameters and methods used to convert mineral
resource to mineral reserve are appropriate. To the best of Micons knowledge
there are no known mining, metallurgical, infrastructure, permitting or other
relevant factors that may materially affect the mineral reserve estimate.
Mineral
Resource August 15, 2013 Update
Subsequent
to the FS, an internal resource update was completed and released on August 15,
2013. This update reflects the improved understanding of the geometry of the
resource. It incorporates drill results from the eight-hole winter 2013 drill
program and the final 41 holes from the 2012 summer drill program. These holes
were not incorporated into the resource model used in the FS.
The
estimated Measured Mineral Resources in the base case now stand at 12.56 million
tonnes averaging 1.71% TREO, 0.38% HREO and 22.5% HREO/TREO. The only change of
consequence in methodology from the November 26, 2012 Resource estimate was that
the base case cut-off grade, expressed as Net Metallurgical Return (NMR),
increased from US$320 to US$345 per tonne due to minor changes in estimated
operating costs, as per the FS. Work is continuing on optimizing the mine plan
to incorporate more of the high grade ore identifiable at higher NMR cut-offs
into the early years of production.
The
mineral resource estimate was prepared by a senior resource geologist employed
by Avalon Advanced Materials Inc., under the supervision of the Company's
Vice-President, Exploration, William Mercer, Ph.D., P.Geo. (Ont), P. Geo. (NWT)
who is the qualified person for Avalon for this resource estimate. Dr. Mercer is
also providing overall direction on the project and monitoring of the QA/QC on
the laboratory analyses.
45
Nechalacho Deposit Mineral Resources as
at August 15, 2013 above a US$345/tonne NMR Cut-Off
|
Category
|
Zone
|
Tonnes
(millions)
|
TREO
(%)
|
HREO
(%)
|
HREO/
TREO
(%)
|
ZrO
2
(%)
|
Nb
2
O
5
(%)
|
Ta
2
O
5
(%)
|
|
Basal
|
12.56
|
1.71
|
0.38
|
22.50
|
3.20
|
0.405
|
0.0404
|
Measured
|
Upper
|
Nil
|
Nil
|
Nil
|
Nil
|
Nil
|
Nil
|
Nil
|
Total Measured
|
12.56
|
1.71
|
0.38
|
22.50
|
3.20
|
0.405
|
0.0404
|
|
Basal
|
49.33
|
1.62
|
0.35
|
21.27
|
3.07
|
0.405
|
0.0398
|
Indicated
|
Upper
|
47.21
|
1.52
|
0.15
|
10.11
|
2.12
|
0.291
|
0.0195
|
Total Indicated
|
96.54
|
1.57
|
0.25
|
16.00
|
2.61
|
0.349
|
0.0299
|
|
Basal
|
61.90
|
1.64
|
0.35
|
21.53
|
3.10
|
0.405
|
0.0399
|
Measured and Indicated
|
Upper
|
47.21
|
1.52
|
0.15
|
10.11
|
2.12
|
0.291
|
0.0195
|
Total Measured and Indicated
|
109.11
|
1.59
|
0.27
|
16.81
|
2.67
|
0.356
|
0.0311
|
|
Basal
|
58.16
|
1.38
|
0.26
|
18.89
|
2.80
|
0.380
|
0.0351
|
Inferred
|
Upper
|
102.09
|
1.38
|
0.13
|
9.70
|
2.38
|
0.334
|
0.0204
|
Total Inferred
|
160.25
|
1.38
|
0.18
|
13.07
|
2.53
|
0.351
|
0.0257
|
|
1.
|
CIM definitions were followed for Mineral
Resources.
|
|
2.
|
The Qualified Person for this Mineral Resource estimate
is William Mercer, PhD, P.Geo. (Ontario), P. Geo.(NWT), VP, Exploration,
Avalon Advanced Materials Inc..
|
|
3.
|
HREO (Heavy Rare Earth Oxides) is the total concentration
of: Y
2
O
3
, Eu
2
O
3
,
Gd
2
O
3
, Tb
4
O
7
,
Dy
2
O
3
, Ho
2
O
3
,
Er
2
O
3
, Tm
2
O
3
,
Yb
2
O
3
and Lu
2
O
3
.
|
|
4.
|
TREO (Total Rare Earth Oxides) is HREO plus:
La
2
O
3
, CeO
2
,
Pr
6
O
11
, Nd
2
O
3
and
Sm
2
O
3
.
|
|
5.
|
Rare earths were valued at an average net price of
US$62.91/kg, ZrO
2
at US$3.77/kg, Nb
2
O
5
at
US$56/kg, and Ta
2
O
5
at US$256/kg. Average REO price
is net of metallurgical recovery and payable assumptions for contained
rare earths, and will vary according to the proportions of individual rare
earth elements present. In this case, the proportions of REO as final
products were used to calculate the average price.
|
|
6.
|
The changes in methodology from the November 26, 2012
Resource were the cut-off grade and the interpolation method. The cut-off
grade, expressed as Net Metallurgical Return (NMR), increased from
US$320 to US$345 per tonne. NMR is defined as "Net Metal Return" or the in
situ value of all payable metals, net of estimated metallurgical
recoveries, and in the case of Nb, Ta and Zr, off-site processing costs.
The revised interpolation method utilized the elevation above the lower
contact of the Basal Zone to provide better geologic continuity of the ore
zone. The effect on overall tonnage and grade is not material.
|
|
7.
|
ZrO
2
refers to Zirconium Oxide,
Nb
2
O
5
refers to Niobium Oxide, Ta
2
O
5
refers to Tantalum Oxide.
|
|
8.
|
See the table below for individual rare earth oxide
details.
|
|
9.
|
See the table for Basal Zone tonnes and TREO grades at
higher NMR cut-off values.
|
|
10.
|
Values for HREO/TREO may differ due to
rounding.
|
46
Nechalacho Deposit Measured, Indicated and Inferred
Mineral Resources for Basal Zone by NMR Cut-Off
Value as at
August 15, 2013 at NMR Cut-off Values over $345/tonne
|
Zone
|
NMR
Cut-Off
($USD)
|
Tonnes
(millions)
|
TREO
(%)
|
HREO
(%)
|
HREO/
TREO
(%)
|
ZrO
2
(%)
|
Nb
2
O
5
(%)
|
Ta
2
O
5
(%)
|
Measured
|
Basal
|
≥345
|
12.56
|
1.71
|
0.38
|
22.50
|
3.20
|
0.405
|
0.0404
|
Basal
|
≥600
|
8.28
|
1.98
|
0.48
|
24.29
|
3.79
|
0.468
|
0.0480
|
Basal
|
≥800
|
5.11
|
2.20
|
0.58
|
26.17
|
4.23
|
0.520
|
0.0544
|
Basal
|
≥1000
|
2.49
|
2.49
|
0.68
|
27.38
|
4.77
|
0.586
|
0.0620
|
Indicated
|
Basal
|
≥345
|
49.33
|
1.62
|
0.35
|
21.27
|
3.07
|
0.405
|
0.0398
|
Basal
|
≥600
|
28.66
|
1.95
|
0.45
|
23.21
|
3.68
|
0.472
|
0.0479
|
Basal
|
≥800
|
16.15
|
2.20
|
0.55
|
24.87
|
4.13
|
0.521
|
0.0542
|
Basal
|
≥1000
|
6.99
|
2.52
|
0.66
|
26.03
|
4.66
|
0.583
|
0.0614
|
Measured and
Indicated
|
Basal
|
≥345
|
61.90
|
1.64
|
0.35
|
21.53
|
3.10
|
0.405
|
0.0399
|
Basal
|
≥600
|
36.94
|
1.96
|
0.46
|
23.46
|
3.70
|
0.471
|
0.0479
|
Basal
|
≥800
|
21.27
|
2.20
|
0.55
|
25.19
|
4.15
|
0.521
|
0.0543
|
Basal
|
≥1000
|
9.48
|
2.52
|
0.66
|
26.38
|
4.69
|
0.584
|
0.0616
|
Inferred
|
Basal
|
≥345
|
58.16
|
1.38
|
0.26
|
18.89
|
2.80
|
0.380
|
0.0351
|
Basal
|
≥600
|
22.41
|
1.74
|
0.37
|
21.09
|
3.40
|
0.453
|
0.0431
|
Basal
|
≥800
|
6.68
|
2.04
|
0.49
|
24.26
|
3.84
|
0.502
|
0.0506
|
Basal
|
≥1000
|
1.81
|
2.42
|
0.61
|
25.31
|
4.17
|
0.547
|
0.0570
|
The
main change in estimation method utilized in this resource estimate was relative
elevation. This methodology is one way to adapt the estimation method to the
rolling nature of the bottom of the Basal Zone.
10.
Mining Operations
Underground
mining of the Measured and Indicated mineral resource of the Basal Zone was
investigated for the FS. The majority of the mineral resource of the Basal Zone
contemplated for development lies directly beneath and to the north of Long
Lake, approximately 200 m below surface. Thus, the deposit is to be mined using
underground mining methods.
The
planned mine production rate is 2,000 t/d (730,000 t/y) of ore and the mine life
based on that portion of the Mineral Resources that have been defined in
sufficient detail to qualify as Mining Reserves is 20 years.
Geotechnical
information for the mine design was based on geotechnical data collection
completed in conjunction with Avalons on-going exploration drill program. The
analysis indicated that excavations 15 m wide, 5 m high and 100 m in length will
be stable with the proper installation of ground support and mitigation
strategies.
The
deposit at the Nechalacho Project is relatively flat lying and will be mined
with a combination of longhole stoping, and cut and fill methods. The mine will
be accessed through a mine portal located near the concentrator. The dimensions
of the 1,600 metre main ramp were designed to accommodate the overhead conveyor
system and access for men and equipment.
Sub-zones
less than 10 metres thick will be mined by cut or drift and fill methods in a
primary and secondary mining sequence. Sub-zones over 10 metres thick will be
mined with longhole stoping. Secondary stopes would be mined after the adjoining primary stopes have been filled. The
mining of the secondary stopes would be the same as the mining of the primary
stope.
47
Blasted
material would be mucked and transported by rubber tired equipment to the
crusher station. The crushed ore would be transported to the surface by
conveyor.
Paste
backfill will be used to improve the overall mine stability, reduce the surface
footprint for the Nechalacho TMF, and enable the extraction of secondary stopes
for increased mining recovery.
11.
Processing and Recovery Operations
The
metallurgical processing described below is that in the FS.
Processing
Flotation Concentrator
The
grinding circuit was designed to be a conventional rod mill/ball mill operation.
The rod mill will be operated in open circuit, and the ball mill in closed
circuit with classifying hydrocyclones. A final grind p80 of 38µm is targeted.
The
cyclone overflow was designed to gravitate to two stages of magnetic separation,
followed by a desliming circuit. The magnetics from the magnetic separation
circuit and the fines from desliming will be routed to tailings. The deslimed
slurry will feed the flotation circuit.
This
flotation circuit design comprises three stages of bulk flotation, four stages
of cleaner flotation and a single cleaner scavenger stage. Flotation concentrate
would be pumped to a gravity separation circuit for further enrichment before
being thickened and filtered to final product concentrate. The light material
(gravity tailings) would be recycled to the bulk rougher flotation circuit.
Concentrate
production will be stored in a covered bulk storage facility and shipped to the
hydrometallurgical processing plant each summer using barges to cross Great
Slave Lake at the rate of 145,000 wet tonnes per year (10% moisture is
assumed).
The
tailings will be thickened, the overflow from which will be pumped to the
process water tank although a portion will be fed to a water treatment plant to
remove impurities. The tailings thickener underflow will be directed to either
the TMF or the paste backfill plant. The paste backfill plant has been designed
to produce 1,738 t/d of backfill using concentrator tailings.
Processing
Hydrometallurgical Plant
A
hydrometallurgical plant in the FS was designed to be built at Pine Point to
produce mixed rare earth concentrate from the flotation concentrate at the
planned rate of 49,900 tonnes per year (at approximately 16.5% TREO and a
secondary product of EZC at the rate of approximately 103,800 tonnes per year
(containing 12.5% Zr).
The
hydrometallurgical plant designed for Pine Point comprises the following process
sections:
-
Pre-leach.
-
Sulphuric acid bake.
-
Water leach.
-
Neutralization and impurity removal.
-
Impurity removal re-dissolution.
-
Rare earth precipitation.
48
-
Waste water treatment.
-
Tailings neutralization.
The
concentrate barged from Nechalacho would be fed to the pre-leach section of the
plant where excess sulphuric acid produced in the water leach section will be
used to neutralize the base materials. The product from the pre-leach circuit
would be filtered and the solids fed to the acid bake system while the filtrate
would feed the iron reduction circuit.
The
filter cake from the pre-leach circuit would be mixed with concentrated
sulphuric acid and fed into the acid baking rotary kiln where the REE in the
concentrate would be converted to sulphates at a temperature of
220
o
C. The discharge from the acid bake kiln would be leached in
water to recover approximately 80% of the LREE and 50% of the HREE. The solids
containing the balance of the REE, along with most of the zirconium, niobium and
tantalum, would be filtered, washed, neutralized and dried to approximately 8%
moisture. This dried product would be packaged and shipped to customers as
EZC.
The
rare earth filtrate from the water leach process would be cleaned through
several neutralization and impurity removal steps. The resulting slurry would be
filtered and washed and the final rare earth precipitate dried to approximately
8% moisture.
In
order to minimize process water usage in the plant, tailings water would be
recycled into the water leach circuit. Pilot plant results showed no negative
changes in REE recoveries with recycled tailings water.
The
mixed rare earth concentrate is envisioned in the FS to be shipped in 35-40
tonne capacity sealed containers and taken by truck to the rail head at Hay
River and then by rail to a REE Separation Plant and Refinery in Geismar,
Louisiana. The Company has investigated the potential for sales of EZC directly
to customers, primarily in China.
Tailings
from the hydrometallurgical process would be stored in a tailings management
facility to be constructed within a historic open pit. Decant water from the
tailings management facility will be discharged to an adjacent historic open pit
for natural infiltration into the groundwater aquifer.
Rare
Earth Separation Plant and Refinery
In
August 2011, the Company concluded that rare earth separation and refining
should be a part of its development plan and a PFS on the rare earth separation
plant and refinery was commissioned and subsequently completed in March 2012.
The FS also included a rare earth separation plant and refinery.
In
the FS, the separation plant and refinery is planned to be situated adjacent to
an existing industrial facility in Geismar, Louisiana where Avalon had a
purchase option on a suitably-sized property. Electrical power, fresh water,
sodium hydroxide and hydrochloric acid would be supplied via tie-in to an
adjacent third party chemical production facility and rail spurs connected to
the existing rail line in the adjacent facility would accommodate shipment of
concentrate feed stock to and shipment of marketable product from the separation
plant. The design capacity in the FS has been based on the PFS capacity of
10,000 tonnes per year of TREO although forecast average annual production from
the FS would be approximately 6,800 tonnes of TREO.
The
rare earth refinery design consists of two key sections, the leaching plant to
remove impurities, and the separation plant where products are separated and
refined to the quality required for the customers.
The
leaching plant design comprises a series of processes, including re-dissolution
of the mixed rare earth precipitate, re-precipitation, solvent extraction and
selective precipitation. Impurities, principally uranium and thorium, would be
removed in a series of dissolution, selective precipitation, filtration and
solvent extraction steps.
49
The separation plant design uses solvent extraction circuits based
on the common Chinese configuration of stages and is divided into 16 extraction
steps, each with a specific number of stages for loading, extraction, washing
and stripping, and sized according to the feed composition. The design of entire
extraction circuits comprises a total of approximately 1,000 mixer/settlers.
The
separation plant design will produce 10 different pure rare earth oxides
products in accordance with the specifications indicated in the following table.
List of Products from the Rare Earth Separation Plant
and Refinery
|
Product
|
Design Plant
Production (t/y)
|
Product
Distribution (%)
|
Feasibility Study
Specification
(1)
|
La Oxide
|
1,583
|
16.0
|
3 N
|
Ce Oxide
|
3,572
|
36.0
|
3 N
|
Pr Oxide
|
451
|
4.0
|
3 N
|
Nd Oxide
|
1,783
|
18.0
|
3 N
|
Sm Oxide
|
391
|
4.0
|
2 N
|
Eu Oxide
|
49
|
0.5
|
4 N
|
Gd Oxide
|
371
|
4.0
|
3 N
|
Tb Oxide
|
54
|
0.5
|
4 N
|
Dy Oxide
|
271
|
3.0
|
4 N
|
Y Oxide
|
1,170
|
11.0
|
5 N
|
Lu Oxide
|
14
|
0.1
|
3 N
|
Er/Ho/Tm/Yb
Carbonate Mix
(2)
|
292
|
3.0
|
2 N
|
Total
|
10,000
|
100.0
|
|
NOTES:
(1)
|
N stands for the number of nines purity produced as
final product, for example 3 N = 99.9%.
|
(2)
|
This stream containing four different rare earth
carbonates for which there is limited market at the present time will be
stockpiled initially and eventually disposed of if markets are not
forthcoming.
|
A
kerosene mixture is used as the extracting agent for most separations.
Hydrochloric acid is used as the stripping agent. Deionized water is added in
the washing and stripping stages to dilute and adjust the reagent
concentrations.
The
purified strip solution from the respective solvent extraction stage would feed
the atmospheric precipitation tanks where soda ash or oxalic acid is added in
order to precipitate the pure REE as carbonates or oxalates, respectively. The
slurry streams containing the precipitates are thickened, filtered, dried and
calcined to produce pure rare earth oxides. The filtrate is then forwarded to
the water treatment facility. The mixed holmium, erbium, thulium, and ytterbium
stream will be precipitated as carbonate and, hence, would not be calcined.
The
dry rare earth oxide or carbonate products are cooled and then packaged in drums
ready for shipment to customers. The product storage facility would provide two
weeks capacity, to interface between plant production and continuous product
dispatch via rail, air or ocean transportation.
12.
Infrastructure, Permitting and Compliance Activities
Permit
Status and Environmental Issues
The
Nechalacho property is situated in an area known as the Akaitcho Territory, an
area which is subject to a comprehensive land claim negotiation involving four
communities of the Dene Nation. The area is also subject to a settled Land Claim
of the Tli Cho Government who refer to the area as the Monfwe overlap.
50
Under
the Mackenzie Valley Resource Management Act (MVRMA) and Regulations, the
Mackenzie Valley Land and Water Board (MVLWB) administers land use permits and
water licenses. Upon completion of a preliminary screening process, projects
deemed to potentially have significant adverse impacts are referred to the
Mackenzie Valley Environmental Impact Review Board (MVEIRB) to initiate an
environmental assessment process. The MVRMA allows local and particularly
Aboriginal input into land and water use permitting. The MVRMA establishes a
three-part environmental assessment process:
-
Preliminary screening (MVLWB)
-
Environmental assessment (MVEIRB)
-
Environmental impact review (MVEIRB, if necessary)
Subsequent
to the acquisition of the Thor Lake property, and continuation of community
engagement meetings, Avalon applied to the MVLWB for an exploration permit, and
a two year permit was granted as of July 2007. It was under this permit that the
drilling programs in 2007 to April 2009 were conducted. Avalon applied for an
extension of this permit in early 2009, and a two year extension was granted by
the MVLWB making the permit valid to July 2011. In December 2009, Avalon applied
for an addendum to the existing exploration permit to allow for a second drill
unit to be added to the program and the construction of a short take-off and
landing (STOL) airstrip. The permit addendum and a separate airstrip land use
permit were granted and issued in January 2010 and valid to July 2011. The land
use permit for the construction of the airstrip has since been satisfactorily
concluded. Current exploration activities at Thor Lake are under a new land use
permit issued by the MVLWB on June 23, 2011, that was originally issued for a
period of five years beginning on July 5, 2011. However, on July 7, 2016, the
MVLWB granted Avalon an extension of this permit to July 4, 2018.
On
April 23, 2010, Avalon submitted a land use and water license permit application
through the MVLWB, for the mining, flotation processing and hydrometallurgical
processing in the NWT. Upon completion of the MVLWB preliminary screening
process, the Nechalacho Project was referred to the MVEIRB on June 11, 2010, for
environmental assessment.
On
May 20, 2011, the Company submitted the Developers Assessment Report (DAR),
(more commonly referred to as an Environmental and Social Impact Statement). In
November, 2011, the DAR was deemed by MVEIRB to be in conformity with the terms
of reference. First Round information requests were received and addressed from
November 2011 to May 2012. In mid-August 2012, Avalon participated in the
environmental assessment process technical sessions organized by MVEIRB for
various regulators and community representatives. Subsequently, Avalon completed
and submitted all additional work and undertakings requested by MVEIRB and other
regulators for clarification purposes at the technical sessions. Avalon then
entered and completed the Second Round Information Requests stage. The
environmental assessment process ended with public hearings held on February 18
20, 2013 in Yellowknife, NWT and February 22, 2013 in Fort Resolution, NWT.
The final Report of Environmental Assessment (the Report of EA) was released
by MVEIRB on July 26, 2013, recommending approval by the responsible Ministers.
This approval was received on November 4, 2013. Applications for the necessary
construction and operating permits and licences were submitted in December 2013,
and were subsequently amended into a two phase permitting process of 1) low
impact site preparation activities and; 2) the full construction and operations
permits. A Class A Land Use Permit and Class B Water Licence were approved on
April 24, 2014 and May 22, 2014 respectively for identified low impact
activities including site preparation, early camp erection, portal development
and associated infrastructure such as roads, power and water treatment expected
to take up to a full year, pending financing. Avalon submitted a $50,000
security payment for the first phase of this activity and completed the site
clearing phase of the project. The additional phases may proceed with the filing
of additional site security. The permitting process for the full construction
and operating permits continued to advance, including public Technical Review
Sessions held in Yellowknife July 22-24, 2014. Responses to intervener comments
were initiated in 2014; however since these technical review sessions the work
on these permits has since been progressing intermittently to conserve
resources. Approximately 4-6 months would be required to finalize these permits,
once the Company commences the final application process. This would not in any
way limit the first year of pre-construction activity as approved under the
existing permits, qualified by the filing of identified financial assurance.
In
its 220 page Report of EA, MVEIRB set out five measures that, when implemented,
will mitigate any predicted environmental impacts so that they are no longer
significant. These measures require the Company to:
51
-
Ensure through comprehensive monitoring that the water released from the
Project into the receiving environment does not cause significant impacts;
-
Develop and implement a wildlife and wildlife habitat protection plan and
wildlife effects monitoring program, with an emphasis on caribou, and
mitigation if required; and
-
Complete a socio-economic agreement with the Government of the Northwest
Territories ("GNWT") before construction begins.
Work
on advancing plans to implement the measures identified above has been well
advanced, including engagement with the Companys Aboriginal partners and
regulators. As part of its philosophy of open and transparent communications,
engagement with Aboriginal partners on the environmental management plans
required as part of the permitting process was initiated prior to submission to
the regulators, helping to both improve the quality of the plans and facilitate
the permitting process. Following the technical review sessions with regulators
and the communities of interest, the Company has submitted proposed and updated
water quality monitoring programs, wildlife and wildlife habitat protection
plans and a wildlife effects monitoring program for which discussions are
ongoing. The socioeconomic agreement has been put on hold pending finalizing of
the project designs. Updates to plans were submitted in late 2014 in response to
intervener comments and annual reports are submitted to the government as per
the water license requirement.
A
copy of all information submitted by the Company can be found on MVEIRBs public
registry at
www.reviewboard.ca.
Avalon
has received a letter from Transport Canada that confirmed that the water bodies
located within the tailings management facility (TMF) are not considered
navigable and do not require any additional authorizations from Transport
Canada. A section 35(2) fisheries authorization or letters of advice from the
Department of Fisheries and Oceans (DFO) under the
Fisheries Act
(Canada) may be required, though the ponds within the TMF are not considered
as fisheries habitat (do not contain fish). In addition, a response from DFO to
the MVEIRB stated that DFO has not identified any activities or components of
the project that require an authorization or permit under the Fisheries Act.
Past exploration activity on the Thor Lake property included underground bulk
sampling, drilling and trenching on a separate rare metals resource called the
North T deposit. Stockpiles of waste rock from underground development have been
progressively reclaimed by Avalon without obligation. Three old construction
camp trailers have been sent to Yellowknife for disposal while three remaining
trailers have been refurbished for future use by Avalon, and a building is being
used to store equipment. There is little surface disturbance from historical
exploration activities apart from miscellaneous buildings, a 60,000 gallon
capacity fuel tank farm (empty), a tent camp and a core storage area left on the
Thor Lake property. There are no significant environmental liabilities left by
past exploration activities. The diesel fuel remaining in the tank farm was
consumed during the 2007 and 2008 exploration programs. The Company has
undertaken extensive general cleanup of material left from previous exploration
utilizing First Nations labour. During 2014, a fire break was constructed around
the property and a fire sprinkler system installed on the core storage area as a
precaution against forest fires concerns during the year. In 2017, a site
maintenance and cleanup campaign was completed at the exploration camp and
commentary was submitted to the Government of the NWT related to proposed
regulatory initiatives and the draft caribou management plan.
Accessibility,
Climate, Physiography and Planned Infrastructure
The
Thor Lake property is characterized by low relief, between 230 m and 255 m above
sea level and relatively subdued topography. The area is a typical boreal forest
of the Canadian Shield and is primarily covered by open growths of stunted
spruce, birch, poplar and jack pine which mantle isolated, glaciated rocky
outcrops. Approximately one third of the property is occupied by lakes and
swamps. Thor Lake is generally shallow with typical depths of the order of three
to four metres.
Topography
is typical of the Canadian Shield, gently rolling with abundant bedrock exposure
with glacial till cover, and numerous shallow lakes. Vegetation is dominated by
spruce and poplar which do not grow to a size to be harvested economically.
52
Air temperature at the Nechalacho site recorded from June, 2008 to
October, 2010 displayed typical seasonal fluctuations, with warm temperatures
occurring from late May to August, with the coldest period occurring from
December to February. The monthly average temperatures expected at site range
from -26°C in January to 16°C in July. Monthly average temperatures rise above
0°C for significant periods of time in May and fall below 0°C for significant
periods in October.
Average
annual total precipitation at Thor Lake is approximately 275 mm. Rainfall
predominates during May to October, and snowfall predominates during October to
April. Six snow courses were established throughout the Nechalacho site in
March, 2009. Mean snow depths varied from 31.3 cm to 66.6 cm in the vicinity of
Thor Lake. Forested areas that were generally less exposed to wind had a
tendency to accumulate the thickest snowpacks.
Relative
humidity is generally highest during the winter months, while summers are
generally drier.
The
dominant wind direction at the site is from the east-northeast during November
to June. Wind directions had a tendency to be more dispersed from July to
October; however, an east-northeast trend was still evident. The average hourly
wind speed at 20 m above ground level is 4.54 m/s. Wind speeds at 20 m above
ground are generally in the range of 2 to 6 m/s, with occasional wind speeds
exceeding 10 m/s.
The
Thor Lake site has no road access from Yellowknife, although there is a
historical 5 kilometre road from the Thor Lake site to the shore of Great Slave
Lake. This road is presently used to haul supplies shipped by barge or trucked
on an ice road to the Thor Lake site. At the present time, year round access is
primarily achieved by aircraft. The use of winter ice roads on Great Slave Lake
is also feasible, but is not included as an integral part of the FS. A temporary
barge dock and a materials storage area will be constructed on the shore of
Great Slave Lake. A camp, offices, shops, yards, diesel tank farm, propane
storage facility, and access roads to the tailings management facility and the
barge dock on Great Slave Lake will be developed. Electrical power at the site
will be initially provided by a diesel power generating station, supplemented if
possible by renewable energy sources including solar power. The diesel plant
design is based upon having spare capacity at any given time. Opportunities for
the construction of a road to site will continue to be monitored due to the
potential financial and safety benefits, though this would be the subject of an
additional environmental assessment process.
The
proposed location of the hydrometallurgical plant contemplated in the FS is at
Pine Point, NWT, which is a brownfield site formerly used as a lead/zinc mining
operation located 90 kilometres east of Hay River in the NWT. This proposed site
is accessible by all-weather roads and highways. A temporary barge dock and yard
at the shore of Great Slave Lake would be developed for the movement of
concentrate and supplies. Offices, shops, yards, and access roads to the
tailings management facility and the temporary barge dock on Great Slave Lake
would need to be developed. Clean (low GHG) electrical power would be obtained
from the southern NWT power grid, from the Taltson Dam hydroelectric facility.
The use of diesel generators to supplement the grid power is planned for times
when hydroelectric power availability is limited at the expanded production
rate.
13.
Capital and Operating Costs
Capital
Cost Estimate
A
summary of the FS capital cost estimate for the Nechalacho Project is presented
in the following table.
Nechalacho Project Capital Cost
Summary
|
Cost Category
|
NWT
(1)
($
million)
|
LA
(2)
($
million)
|
Total
($ million)
|
Mine development
|
81.58
|
-
|
81.58
|
Main process facilities
|
351.24
|
192.51
|
543.75
|
Infrastructure
|
150.68
|
78.82
|
229.50
|
EPCM
|
119.27
|
38.57
|
157.84
|
Indirect construction costs
|
175.56
|
27.25
|
202.81
|
53
Nechalacho Project Capital Cost
Summary
|
Cost Category
|
NWT
(1)
($ million)
|
LA
(2)
($ million)
|
Total
($
million)
|
Owner's costs
|
36.76
|
18.95
|
55.71
|
Contingency
|
120.91
|
44.90
|
165.81
|
Closing costs / bond
|
13.00
|
3.16
|
16.16
|
Pre-production capital cost
|
1,049.00
|
404.16
|
1,453.16
|
Sustaining capital
|
102.72
|
19.12
|
121.84
|
Total capital cost
|
1,151.72
|
423.28
|
1,575.00
|
NOTES
:
(1)
|
NWT Costs applicable to the Nechalacho and Pine Point
sites in the Northwest Territories.
|
(2)
|
LA Costs applicable to Geismar,
Louisiana.
|
The
scope of the estimate encompasses the engineering, administration, procurement
services, construction, pre-commissioning and commissioning of the project. The
estimate was completed to a level consistent with an AACEI (Association of
Advanced Cost Engineering International) Class 3 estimate with target accuracy
level of ±15%, based on second quarter 2012 prices, excluding escalation.
The
total estimated pre-production capital cost is $1.453 million. The life-of-mine
sustaining capital is estimated at $122 million.
Operating
Cost Estimate
A
summary showing the average annual and life-of-mine unit operating costs by
project cost area is presented below.
Life of Mine Average Operating Costs per
Project Cost Area
|
Project Section
|
Average Annual
Costs
($ million)
|
LOM Average Unit
Costs
($/t milled)
|
Reagents & Consumables
|
97.2
|
133.20
|
Fuel & power
|
50.7
|
69.48
|
Labour
|
36.7
|
50.26
|
Freight
|
29.4
|
40.31
|
G&A
|
26.8
|
36.74
|
Other
|
23.7
|
32.29
|
Project total
|
264.5
|
362.28
|
The
FS operating cost estimates have been prepared on an annual basis for the life
of the mine. The operating cost estimate has been prepared with an estimated
level of accuracy of ±15% based on the design of the plant and facilities as
described in detail in the FS.
Cash
Flow Analysis
An
assessment of the project has been prepared on the basis of a discounted cash
flow model, from which net present value (NPV), internal rate of return
(IRR), payback and other measures of project viability can be determined.
Assessments of NPV are generally accepted within the mineral industry as
representing the economic value of a project after allowing for the cost of
capital invested. A 10% discount rate is commonly used for the base case.
54
A
summary of the Life of Mine cash flows and the cumulative discounted and
undiscounted cash flows is presented below.
The
table below shows the results of the economic evaluation of the FS projected
cash flows.
Feasibility Study Economic Evaluation
|
|
Discount rate
(%/year)
|
Pre-Tax
$ million
|
After Tax
$ million
|
Payback
(years)
|
Undiscounted Cash Flow
|
|
6,052
|
4,381
|
4.3
|
Net Present Value
|
8
|
1,833
|
1,262
|
5.5
|
|
10
|
1,351
|
900
|
6.3
|
|
12
|
981
|
620
|
7.2
|
Internal Rate of Return
|
|
22.5%
|
19.6%
|
|
The FS estimates that the Nechalacho Project provides a payback of
4.3 years on the undiscounted cash flow, or 6.3 years on the cash flow
discounted at 10%/year, leaving a considerable reserve tail. The cash
operating margin is seen to remain positive over the whole Life of Mine period,
and is particularly strong in the first four years of full production.
14.
Exploration, Development and Production
Optimization
of the FS
During
the course of executing the FS, Avalon had identified a number of opportunities
for project optimization that may improve project economics, reduce technical
risk, enhance metallurgical recoveries, improve operational efficiencies and to
meet environmental requirements. These include:
-
Reviewing the current mine plan and design in particular the crusher
location, access ramp and paste backfill system.
-
Optimization of the crushing and grinding circuit, plant layouts and
materials of construction.
-
Laboratory testwork on the concentrator flowsheet to further improve
reagent selection and flotation recoveries.
-
Improvements to the hydrometallurgical plant processes.
-
Alternative impurity removal scenarios.
55
-
Potential to separate lanthanum and cerium at the hydrometallurgical plant
and stockpile for future sales.
-
Potential to reintroduce cracking of zircon to increase direct production
of HREE and separate the by-products from the EZC.
-
Potential sales of magnetite by-product from the concentrator.
-
Potential to defer construction of the refinery and toll process mixed
rare earth concentrate through a refinery or refineries built and operated by
others.
-
Potential to use excess capacity in the refinery to toll process third
party production and reduce operating costs.
-
Updated environmental studies, including water treatment testing to
demonstrate compliance with regulatory requirements.
-
Energy options and other potential cost reductions associated with road
access.
These
opportunities are under consideration and will continue to be investigated as
the Nechalacho Project proceeds.
(B)
Current Work and Future Plans
Subsequent
to the completion of the FS in April 2013, the Company has been investigating
optimization opportunities identified in the FS and conducting
testwork/technical studies necessary to confirm potential benefits and with a
view to potentially updating the development model of specific opportunities
among those noted above. A number of design optimization activities were
initiated that have focused primarily on improving project economics, improving
operation efficiency and reducing project risk. These include the following:
-
Underground mine plan, including mining method, underground equipment and
facilities
-
Nechalacho site and concentrator building layout and design
-
Hydrometallurgical plant location
-
Concentrate handling and shipping
-
Metallurgical process development for both the concentrator and
hydrometallurgical plant
In addition two further
drill programs were completed in winter (HQ rig) and summer (PQ rig), 2014.
These programs, totalling 22 holes and 4,908 metres, were mainly for the purpose
of collecting further mineralized drill core for metallurgical purposes. The
geological drill database has been updated but no new resource has been
estimated.
Underground
Mine
An
initial study was carried out to determine the most appropriate mining method to
be used. Particular consideration was given to the mining cost, the undulating
floor of the Basal Zone, the changing Basal Zone thickness, and the need to be
able to maintain a relatively constant grade of ore. A hybrid mining method
consisting of drift and fill primary stopes, and up-hole bulk mining (uppers
for the secondary stopes) was selected and a new mine plan developed accordingly
for a 2,000 tonnes of ore per day, 20 year life-of-mine operation.
Concentrator
Plant
The
crushing and milling circuits have also been re-examined. The milling circuit
can be revised to include a SAG mill allowing the removal of secondary and
tertiary crushing and resulting in more energy efficient comminution circuit. A
further study concluded that there were both cost and operability advantages in
moving the primary crusher from the underground location previously considered,
to an above ground location near the SAG mill. This change also included
replacing the conveyor system with haul trucks to bring the ore to the surface.
56
Laboratory
testwork and a pilot plant trial of an updated Concentrator flowsheet have also
been completed. This work has confirmed a potential overall improvement in REE
flotation recoveries to approximately 89% (compared to approximately 78% in the
FS) using a simpler and easier to operate flowsheet.
These
results were achieved using a flowsheet without de-sliming ahead of flotation,
with no gravity enrichment of final concentrate and with zero recycling of
tailings from the four stages of cleaner flotation; all of which will result in
a simpler plant to operate. The principal change has been the introduction of a
superior reagent suite together with an increase in the flotation mass pull from
18.0% to 21.4% .
Environmental
testing of the new tailings composition from the modified reagent suite has
indicated no negative impacts on environmental performance. A simplified
flowsheet is anticipated to improve environmental performance through reduced
energy use, reduced carbon dioxide emissions and improvements in water treatment
efficiencies.
As
part of the optimization work, potential modifications are expected to be made
to the site layout and the concentrator including revising the milling equipment
and developing the surface ore handling/crushing area, modifying the equipment
layout in the concentrator building and reducing the required size and volume of
the building.
Hydrometallurgical
Plant Flowsheet
Significant
modifications to the Hydrometallurgical Plant flowsheet are now envisaged based
on the extensive testwork program undertaken since the FS.
This
flowsheet optimization work for the Hydrometallurgical Plant has resulted in the
development of an alkali cracking process to potentially replace the sulphuric
acid baking used to treat the flotation concentrate in the FS. Optimization of
this flowsheet is nearly completed with the details around reagent recovery and
recycling being the only outstanding items. Work here has indicated an 80%
reduction in hydrochloric acid (HCl), 90% reduction in magnesium oxide and
almost 100% reduction in calcium carbonate could be achievable.
The
sulphuric acid baking process utilized in the FS resulted in approximately 47%
of the HREE contained in the flotation concentrate (as well as the niobium and
tantalum) remaining trapped in the Enriched Zirconium Concentrate (EZC)
specialty by-product. The alkali cracking process successfully alters (or
cracks) the zircon in the flotation concentrate which enables the contained
HREE (and most of the zirconium) to be released into solution. Total HREE
recoveries reporting to the Refinery
could now be
in excess of 90%
of the HREE in the flotation concentrate, as opposed to the approximately 52%
recovery contemplated in the FS. In addition, the alkali cracking process would
allow for the recovery of zirconium in a form for which there is already
established markets.
A
further benefit of this alternative process is that the hydrochloric acid will
be recovered without the use of sulphuric acid and the production of large
volumes of gypsum waste. Instead, a clean sodium chloride (salt) waste product
is produced which is easier to dispose of and could potentially be of some use.
The reduction in HCl transport achieved through re-cycling is an additional cost
and sustainability advantage.
Light
rare earth element (LREE) leach recoveries are also generally improved with
the updated flowsheet (with the exception of cerium which becomes oxidized
during the cracking process, making it less amenable to the acid leaching).
Hydrometallurgical
Plant Location.
Several
sites in western Canada are under consideration for the location of a potential
new Hydrometallurgical Plant design. The original design contemplated in the FS
was planned to be located in Pine Point, NWT, but this area has insufficient
infrastructure to support the new potential plant design. Geismar was also
considered as a potential location, but costs for transporting the concentrate
to Louisiana remain high. Eventually a number of potential sites meeting the necessary infrastructure
requirements were identified in Saskatchewan and Alberta and these are now
undergoing further evaluation. An excellent potential site was identified in
Saskatchewan, but nothing has yet been finalized.
57
The
potential for re-locating the Hydrometallurgical Plant outside the Pine Point,
NWT area would likely require the shipment of concentrate by rail from Hay
River, NWT. The entire shipping process has been carefully looked at including
the containers required both for barge shipment and rail shipment, the
concentrate loading requirements at Nechalacho, barging across Great Slave Lake,
rail car requirements for shipment from Hay River, and a storage/trans-shipment
facility at Hay River. A concept has been developed to include all of the
shipping components from container loading at Nechalacho to railcar loading in
Hay River in a single contract, potentially reducing project capital costs and
simplifying the shipping operation.
It
is noted that these changes have been presented to the regulators, Aboriginal
groups and other communities of interest and due to the environmental benefits
of these changes associated with lower energy use, fewer reagents and water
treatment benefits, are not considered significant and will not impact on the
permitting process in the NWT.
Metallurgical
Process Development
Metallurgical
testwork since the FS has been conducted under the direction of the Companys
Senior Vice President, Metallurgy and Technology Development, Mr. David Marsh.
Recent work has focused on various optimization opportunities within the FS base
case flowsheets for the Concentrator and in particular for the
Hydrometallurgical Plant.
A
further integrated pilot plant campaign has been planned, but will only proceed
when funding becomes available. This is designed to fully evaluate process
performance particularly with the incorporation of the acid recovery circuit(s)
and associated recycle streams and would include all unit operations from
crushing of ore right through to the generation of a mixed rare earth
precipitate. The total bulk sample of ore required for this pilot plant is
approximately eight tonnes. The material is being stored in Yellowknife and
Lakefield, Ontario, until such time as the funding becomes available to proceed
with the pilot plant work, presently estimated at approximately $4.0 million.
There is no firm timeline for when this work will be carried out.
Efforts
to recover the niobium and tantalum from the solid residue after acid leaching
have so far proved unsuccessful and work in this regard has been placed on hold.
This latest work has confirmed that total HREE recoveries of approximately 93%
can be achieved in the hydrometallurgical plant directly from the flotation
concentrate.
The
final economics for the potential revised process are still being determined.
However, initial estimates of increased power and reagent consumption associated
with the processes and logistical issues have necessitated consideration of
alternative locations for the hydrometallurgical plant with better
infrastructure and reagent availability.
In
fiscal 2016 Avalon conducted metallurgical testwork investigations related to
the potential recovery of zirconium and production of marketable quality
zirconium basic sulphate (ZBS) and zirconium oxychloride (ZOC) products.
Refinery
In
early 2014 the Company entered into an agreement which would have had Solvay
toll-process the Companys rare earth concentrate into separated and purified
rare earth oxides rather than the Company building its own refinery. In early
2016 Avalon and Solvay mutually terminated their refining agreement and left the
door open to initiate discussions on an updated refining toll contract when
market conditions became favorable for such discussions to take place.
58
Markets
Update
The
Company continues to monitor developments in the global rare earths market.
Illegal production in China is reported to be at least 20,000 tonnes per year
and some estimates go as high as 40,000 tonnes. Verification of the exact
quantity being produced or sold illegally is very difficult. As a result of the
illegal activity, the market price for all rare earths has fallen dramatically
and availability out of China is reported to be good. This has lowered the
pressure on non-Chinese consumers to seek outside China sources of supply and
has led, in part, to the Chapter 11 filing of Molycorp Inc., one of the two
major producers of rare earths outside China. In 2016 very few consumers of rare
earths were concerned about the availability of rare earths. Low pricing levels
and product availability has reduced the interest of consumers in investing in
rare earth projects outside China. However, since the start of 2017 prices for
certain REE (Nd, Pr, Dy) have begun to increase due to increased demand for
magnets for motors of hybrid and electric vehicles. Future price trends for rare
earths still depend on decisions made in China. China remains the dominant
producer at approximately 90% of supply. Prices could continue to increase as
demand increases and if China continues to restrict output from illegal
producers and continues to restrict output from producers who do not follow
environmental regulations. Prices could be maintained or even fall as demand
increases if China decides to release stockpiles of rare earths it has
apparently accumulated during the last few years or if it instructs government
approved producers to increase supply.
2017
Work Program
During
fiscal 2017 a brief site visit was conducted to do the camp maintenance work and
do some sampling on known lithium occurrences on the northern part of the
property. There are three mineralized zones on the property immediately north of
Thor Lake with geology similar to classic pegmatite deposits, referred to
historically as the R-, S- and T-Zones. It was known that these zones contain
lithium-bearing minerals but no systematic mapping and sampling had previously
been conducted. The work in this short program concentrated on the S Zone, which
is exposed in outcrop and old trenches. Continuous chip samples were collected
in the trenches and thirteen selected samples sent for analysis as an initial
test for lithium enrichment. The remaining samples will be analyzed in the next
phase of analytical work. The thirteen initial samples were submitted to a lab
in Yellowknife for preparation and analysis yielding encouraging results. The
average Li
2
O content of all thirteen samples was 1.0% Li
2
O with two samples
containing over 2% Li
2
O. Understanding of the overall distribution of lithium in
the S Zone will improve with further analytical work and mineralogical studies.
Separation Rapids Lithium Project
(A)
Summary of Technical Report
1.
Current Technical Report
The
most recent technical report on the property is entitled NI 43-101 Technical
Report on the Preliminary Economic Assessment of Lithium Hydroxide Production
Separation Rapids Lithium Project Kenora, Ontario dated November 10, 2016,
effective October 21, 2016 (the Technical Report) and prepared by Steven R.
Aiken, P.Eng. and Kevin E. Hawton, P.Eng. of Knight Piesold Limited, Richard
Gowans, P.Eng., Christopher Jacobs, CEng, MIMMM, Eur Ing, Bruce Pilcher, CEng,
FIMMM, FAusIMM(CP) and Jane Spooner, P.Geo, all of Micon, and David L. Trueman,
Ph.D., P.Geo, each of whom is a qualified person pursuant to NI 43-101.
The
current Technical Report follows an earlier, Pre-feasibility Study (PFS)
completed in 1999 and updated in 2000, also by Micon. The PFS was based on the
original development model of producing a lithium mineral product for
glass-ceramics applications and did not consider battery materials as a
potential primary product. The Technical Report was prepared to exclusively
evaluate the lithium battery materials market opportunity and the economics of
producing a lithium hydroxide product from the petalite concentrate, something
which has not been done previously to the knowledge of the Company. It does not
preclude the possibility of producing petalite concentrate for the
glass-ceramics market, since it is an intermediate product for battery materials
production. Future work will consider both markets as opportunities.
59
2.
Project Description, Location and Access
The
Separation Rapids property is located in northwestern Ontario, 55 km due north
of Kenora and about 70 km by road. It is centred on latitude 50 15 30 N,
longitude 94 35 W (UTM coordinates: 388441E 5568996N in Zone 15, NAD83). In the
Technical Report, the property consists of eight mineral claims and one Mining
Lease. The claims comprised 90 claim units, totalling 1,440 ha (3,558 acres).
The Mining Lease encompasses the mineralized zone and is referred to as Lease or
Licence Number 108395 (Paterson Lake CLM469). The lease covers an area of
421.441 ha over the area of the Separation Rapids Lithium Deposit (SRLD) and
adjacent lands. Subsequent to the Technical Report Avalon acquired an additional
seven claims bringing the property to fifteen mineral claims comprising 153
claim units totalling 2,448 hectares. With the Mining Lease the total area is
now 2,869 hectares.
Other
than minor reclamation requirements that are largely funded under the existing
Advanced Exploration Approval (presently called Bulk Sample Permission), there
are no known environmental liabilities associated with the Separation Rapids
property. Avalon has the right to access the Separation Rapids property to
conduct routine exploration work, although additional Exploration permits will
be required for larger scale work programs such as diamond drilling in the
future. This involves further consultation with Indigenous peoples. There are no
known factors or risks that may affect access, title or the right or ability to
perform work on the property.
Mining
and mineral concentration will take place at the Separation Rapids property.
Petalite concentrate will be shipped by truck to a hydrometallurgical processing
plant planned to be located in the City of Kenora, Ontario. A trans-shipment
facility will be required in order to access rail transportation for product
shipment and inbound supplies. Avalon has not made the final site selection for
the hydrometallurgical plant and trans-shipment facility and has not acquired
ownership or rights to any land for these facilities.
The
Separation Rapids area is typical of much of northwestern Ontario and the
Canadian Shield. The property is relatively flat with an average elevation of
approximately 350 m asl. Local topographic relief is limited to 50 m or less
with typical Precambrian glaciated terrain. The English River system is proximal
to all claim groups. The area is located within the Boreal Hardwood Transition
or Mixed Boreal Forest. A Species at Risk Act assessment was completed and no endangered or at risk species were identified
in the area of the proposed project. The climate is typical of Canadas
mid-latitudes with long, cold winters and comparatively short spring-summer-fall
periods.
60
The
closest centre with significant services is Kenora. Forestry, tourism and mining
are the three largest sectors of the Kenora economy.
Properties
immediately adjacent to the property were held by Avalon, Pacific Iron Ore
Corporation, GoldON Resources Ltd. and Gossan Resources Ltd. Subsequent to the
completion of the Technical Report Avalon has acquired the claims owned by
GoldON.
3.
History
Rare-element
mineralization in the area was first encountered along the English River near
Separation Rapids in 1932. The petalite-bearing SRLD and an associated group of
rare-metal pegmatites, were discovered by Dr. Fred Breaks of the Ontario
Geological Survey (OGS) as a result of a detailed study of rare-metal pegmatites
in the region between 1994 and 1996.
4.
Geological
Setting, Mineralization and Deposit Types
The
Late Archean SRLD belongs to the petalite sub-type of the complex-type class of
rare-metal pegmatites. The SRLD, its parent granite, the Separation Rapids
Pluton, and associated rare-metal pegmatites occur within the Archean Separation
Lake Metavolcanic Belt (SLMB) which forms the boundary between the English River
subprovince to the north and the Winnipeg River subprovince to the south. Both
subprovinces are part of the larger Archean Superior Province of the Canadian
Shield. Avalon has divided the SRLD into the Separation Rapids Pegmatite, the
Western Pegmatite and the Eastern Swarm.
As
described in the Technical Report, petalite, potassium feldspar and sodium
feldspar are the major rock-forming and primary minerals in the Separation
Rapids Pegmatite (SRP), with subordinate amounts of other minerals including
spodumene, lithian muscovite, lepidolite, and quartz. The petalite-bearing Unit
6 is the principal unit of interest within the Separation Rapids Pegmatite (SRP).
Geological mapping and assays for surface and drill core samples show that
mineralogy and lithium oxide (Li
2
O) grades of the mineralization in the SRP are
relatively homogeneous and that the petalite is close to the theoretical (stoichiometric)
chemical composition, as well as being very pure, with marked absence of
deleterious elements such as iron. Subsequent to the completion of the Technical
Report Avalon has completed further work on the mineralogy and resources and
also drilling as reported in Section (B)(c) below due to recognition of the
abundance and importance of lepidolite increased since the completion of the
report.
5.
Exploration
Following
the discovery of the SRLD in 1996, Avalon carried out a brief prospecting and
sampling program in November, 1996. This was followed by a program of geological
mapping, trenching, line-cutting and magnetometry in 1997 and 1998.
In
the period from 2000 to 2014, little work of a geoscientific nature was carried
out at the property. The main activity relating to advancing the project was
metallurgical and, consequently, the main activities at site were collection of
samples, up to bulk sample size, for metallurgical testing.
6.
Drilling
Avalon
undertook a number of drilling campaigns between 1997 and 2001. In the Technical
Report the total number of drill holes is 72 for a cumulative total of 10,708 m,
as summarized in table 6.1. Three of these holes were drilled between 26 April
and 4 May, 2001 for the purposes of a geomechanical investigation of the rock
mass at the proposed open pit mine and to develop suitable pit slope design
parameters. The potential for water inflow into the open pit was also evaluated.
61
Table 6.1
Summary Drilling Statistics, Separation
Rapids Pegmatite
Year
|
Purpose
|
Number of
Holes
|
Metres
|
Size
|
1997
|
Geological/resources
|
30
|
4,922
|
NQ
|
1998
|
Geological/resources
|
27
|
3,829
|
NQ
|
2001
|
Geotechnical
|
3
|
537
|
NQ
|
2001
|
Geological/resources
|
12
|
1,420
|
NQ
|
Total
|
|
72
|
10,708
|
|
7.
Sampling, Analysis and Data Verification
Surface
samples taken in the 1990s were shipped to independent laboratories, the one in
Thunder Bay, Ontario for preparation then to other independent laboratories in
Mississauga, Ontario and Vancouver, British Columbia for subsequent assaying.
Surface samples were analysed for lithium and a range of other elements
including tin, rubidium, cesium, tantalum, gallium and niobium.
In
the 1990s, drill core was logged and split with half of the core being sent for
assay and the other half being stored in core boxes on site. Core sample
intervals were varied according to the lithology, to a maximum of 3 m. Split
core samples were shipped to a laboratory in Don Mills, Ontario, where they were
assayed for lithium, rubidium, cesium and tantalum. A total of 2,516 drill core
samples were assayed with an additional 223 duplicate analyses. Check-assaying
was routinely carried out for lithium and rubidium in an independent laboratory.
The
drilling database contains 185 specific gravity values for various lithologies
on the SRLD. This comprises 118 measurements on pegmatite, 66 on amphibolite and
one measurement which was considered an outlier and was rejected. The average SG
for pegmatite is 2.62 for the 118 samples (one high outlier at 3.16 removed).
The average SG for amphibolite (waste) is 3.04 based on the 66 measurements. The
SG measurements show low variability (standard deviation of 0.08, or 3% for
pegmatite and 0.05 or 2% for amphibolite) indicating that the risk of
significant error is also low.
The
mineral resource estimate completed was based on the original drilling by Avalon
in 1997 to 2001, and the assay database created in 1999. Quality
assurance/quality control procedures were applied and included check assays at a
second laboratory and independent assaying. Subsequently, Avalon completed
further verification of the drill data, including cross-checking the database
against original field records, such as drill logs, cross-checking the assays
against laboratory assay certificates and reassaying drill core splits with
inserted internally certified lithium standards. The comparison of the different
independent laboratory data sets is favourable. This indicates high and
acceptable reliability in the analyses.
Avalon
also verified the drill hole database against historic data records such as
drill logs, assay certificates, and other original sources of data in order to
ensure that there were no errors present in the Avalon database used for
resource estimation. Drill hole angle, direction and the maximum hole depth were
also verified.
As
of 6 July, 2016, the Avalon database contained records for 2,790 downhole
samples which were assayed for the 1997, 1998 and 2001 drill programs. A random
sample of 12% of the assay values contained in the Avalon database were compared
against the values as reported on the original certificates of analysis. No
errors were found in the downhole assay values as entered into the Avalon
database from the original historic database.
Avalon
prepared a certified rock lithium analysis standard by shipping 16 kg of
Separation Rapids Pegmatite to an independent laboratory in Langley, British
Columbia that specializes in preparing samples for rock analysis standards. A
Round Robin analysis procedure was then completed with five samples of the
material being shipped to each of six laboratories for lithium analysis, with
associated analytical methods performed.
62
It
was concluded that the lithium standard was a suitable standard for QA/QC of
Separation Rapids drill core samples. The certified value for the standard
SR2016 is 1.48%Li
2
O with a standard deviation of 0.03%
Li
2
O for future analyses of Separation Rapids samples.
8.
Mineral Processing and Metallurgical Testing
A
number of phases of metallurgical testing since 1997 have been completed by
Avalon using samples obtained from the SRLD. The work prior to 2014 was mainly
undertaken at a lab in Ontario. This work not only included the recovery of
petalite, but also a number of other mineral products which can be found in the
lithium bearing pegmatite as well. The work since 2014 has focused on the
recovery of a petalite flotation concentrate and the subsequent processing of
this concentrate to produce a high quality lithium hydroxide product suitable
for the lithium battery industry.
Avalon
utilized a German company that specializes in the processing of high purity
industrial and strategic minerals to develop a process for recovering the
petalite and achieving target product grade of >4%
LiO
2
. This
contractor also investigated the recovery of a low impurity feldspar
by-product and tested this product to determine its suitability in a number of
industrial applications.
Avalon
investigated the potential to use petalite as a source of both lithium carbonate
and lithium hydroxide. Initial investigations for producing these lithium
chemicals were completed by two separate independent contractors.
Table
8.1 lists all the flotation/concentrator testwork reports issued since the
project was re-activated in 2014. Table 8.2 lists the hydrometallurgical
testwork programs.
Table 8.1
List of Mineral Processing Testwork
Reports
Date
|
Title
|
Remarks
|
June 2014
|
Processing of Petalite Ore from Separation Rapids
|
Petalite and feldspar flotation testwork on coarse
grained mineralized material.
|
August 2014
|
Physical Processing of Fine Grained Ore from Separation
Rapids
|
As above but using fine grained mineralized material.
|
September 2014
|
Processing of Petalite Ceramic Application Tests
|
Sample of petalite was tested to determine key
physical/chemical characteristics for ceramic applications.
|
September 2014
|
Sample Production of Petalite and Feldspar Concentrate
|
20 kg of both materials were produced for providing
samples to potential clients.
|
November 2014
|
Flowsheet and Core Machinery
|
Base flotation flowsheet and preliminary equipment
recommendations.
|
December 2014
|
Locked Cycle Petalite Flotation Tests on Fine Grained Ore
(FGO)
|
Bench scale determination of petalite flotation recovery
with locked cycle tests.
|
June 2015
|
Pretests Pilot Scale Sample Production of Petalite and
Feldspar Concentrates
|
To determine optimum conditions for magnetic separation
and product filtration.
|
July 2015
|
Analysis of Nb/Ta in Magnetic Fraction of Separation
Rapids Ore
|
Determination of nature of Nb and Ta in magnetics discard
stream.
|
December 2015
|
Testing and characterization of a feldspar filler
|
Sample of feldspar was tested to determine key
physical/chemical characteristics for flier applications.
|
May 2016
|
Pilot Scale Sample Production of 1t Petalite Concentrate
|
Bulk sample processed to produce a 1 t sample of
petalite.
|
June 2016
|
Evaluation of HPQ Potential of Flotation Tailings from
the Big Whopper Pegmatite
|
Testwork investigations to determine if tailings from
pilot plant could be used to
|
63
Date
|
Title
|
Remarks
|
|
|
produce a high purity quartz (HPQ) product.
|
May 2016
|
Testing of Feldspar sample as potential paint filler
|
Note confirming tests indicating Avalon feldspar matches
existing paint fillers.
|
2015/2016
|
Various flotation tests analyses
|
Excel spreadsheets with test results plus various small
petalite sample production tests.
|
October 2016
|
Sample Production Feldspar Filler
|
Feldspar concentrate with lower silica content produced
by introducing a number of cleaner flotation stages. This was then milled
to a d50 of 6 µm and determined to have a SWERF value of 0.6%.
|
Table 8.2
List of Recent Hydrometallurgical
Testwork Reports
Date
|
Title
|
Remarks
|
May 2015
|
Preliminary Li leaching, purification and Li carbonate
and hydroxide preparation from petalite concentrate
|
Testwork to determine if battery specification carbonate
and hydroxide can be produced from petalite.
|
December 2015
|
Li Carbonate Production from Petalite Concentrate
|
Bench optimization of process to produce battery
specification lithium carbonate.
|
December 2015
|
Process Alternatives- High Level Operating Cost
Assessment
|
Compared various lithium hydroxide production processes
to identify most cost efficient.
|
September/October 2016
|
Hydrometallurgical Bench Scale Test Program/Process
Simulation and Economic Model
|
Bench scale assessment of most favourable conditions for
main stream unit operations including electrodialysis and development of
process design criteria.
|
Through the completion of these testwork programs Avalon was
able to demonstrate the following:
-
A petalite concentrate assaying over 4% Li
2
O can be produced
which, because of its low impurity levels, is potentially an excellent feed
material to the specialized glass/ceramics industries.
-
A low impurity mixed (sodium/potassium) feldspar concentrate can also be
produced which has applications in a number of ceramic applications as well as
a filler in paints and other products.
-
There is potential to produce other by-products from the mineralized
material, including a high purity quartz, and for additional lithium recovery
from the magnetic fraction.
-
The petalite can be used as a feed source to produce both lithium
carbonate and lithium hydroxide for the battery and energy storage industries.
-
The use of electrodialysis has been shown as a viable for producing
lithium hydroxide from a lithium sulphate solution.
There
remain a number of areas within the process flowsheet that have the potential
for improvement and optimization in terms of lower costs and increased process
efficiencies.
9.
Mineral Resource Estimates
Lithium
and feldspar mineral resource estimates for the Separation Rapids project have
been prepared by Benjamin Webb, P.Geo. (B.C.), Principal of BMW Geoscience LLC.
The mineral resource estimates have been reviewed in detail by David L. Trueman,
Ph.D., P.Geo., who is the Qualified Person for the resource estimates.
64
Lithium
Mineral Resource Estimate
The
Technical Report project database contains 69 drill holes for 10,171 m with 2,790 assay results.
The data were used to create a 3D model of the host lithology which was used to
constrain the interpolation of assays. The project database is maintained in
Maxwell DataShed software and the resource estimation utilized MineSight 3D.
The
Separation Rapids Lithium Project Measured plus Indicated and Inferred mineral
resource effective October 21, 2106 are presented in the table 9.1 below.
Table 9.1
Separation Rapids, Mineral Resource
Estimate at 0.6%
Li
2
O Cut-off Grade
As at 21 October, 2016
Class
|
Tonnes
(Mt)
|
Li
2
O
(%)
|
Total
Feldspar
(%)
|
Ta
2
O
5
(%)
|
Cs
2
O
(%)
|
Rb
2
O
(%)
|
SG
|
Measured
|
4.03
|
1.32
|
39
|
0.006
|
0.017
|
0.343
|
2.66
|
Indicated
|
3.97
|
1.26
|
39
|
0.007
|
0.025
|
0.362
|
2.67
|
Measured plus Indicated
|
8.00
|
1.29
|
39
|
0.006
|
0.021
|
0.352
|
2.66
|
Inferred
|
1.63
|
1.42
|
39
|
0.008
|
0.016
|
0.360
|
2.64
|
Notes:
|
1.
|
CIM Definition Standards for Mineral Resources and
Mineral Reserves, 10 May, 2014 were followed for this mineral resource
estimate.
|
|
2.
|
The Qualified Person for this mineral resource is David
L. Trueman, Ph.D.,P.Geo.(MB).
|
|
3.
|
The resource estimate is constrained by a 3D geologic
model of the mineralized material.
|
|
4.
|
Assay intervals for Li
2
O,
Ta
2
O
5
, Cs
2
O and Rb
2
O were
interpolated using the Inverse Distance Weighted method to create a 3D
block model.
|
|
5.
|
The resource cut-off grade of 0.6% Li
2
O was
chosen to capture mineralization that is potentially amenable to mining,
mineral concentration and off-site processing.
|
|
6.
|
Li, Ta, Cs and Rb were originally analyzed on all samples
at an independent laboratory in Thunder Bay, Ontario utilizing ICP (Li,
Ta) and AA (Rb and Cs) and check analyses completed at a second
independent laboratory in Don Mills, Ontario utilizing AA (Li) and ICP
(Rb).
|
|
7.
|
As well as due diligence to verify historic data, Avalon
completed additional check analyses of historic drill core in 2016
utilizing an independent laboratory in Vancouver with a combination of
fusion and ICP (method CCP-PKG01). Included as QA/QC procedures was a
lithium rock standard within the check analysis batches.
|
|
8.
|
Total Feldspar is the total of potassium feldspar
(microcline) and sodium feldspar (albite) and the value reflects the mean
and median value of all samples with quantitative mineralogy
determined.
|
|
9.
|
The percentage of Total Feldspar is based on analyses
completed utilizing X-Ray diffraction and Qemscan® instrumentation on
samples representing all lithological subunits of the mineral deposit.
These analyses were completed at a Canadian university in 1999 (method:
XRD) and an independent laboratory in 2016 (XRD and Qemscan®, Kamloops).
This is supported by quantitative mineralogy of metallurgical samples
determined at two independent facilities.
|
|
10.
|
All figures are rounded to reflect the relative accuracy
of the estimates. Summation of individual columns may not add-up due to
rounding.
|
|
11.
|
Mineral Resources are not Mineral Reserves and do not
have demonstrated economic viability. There is no certainty that all or
any part of the Mineral Resource will be converted into Mineral
Reserves.
|
|
12.
|
In addition, while the terms measured, indicated and
inferred mineral resources are required pursuant to National Instrument
43- 101, the U.S. Securities and Exchange Commission does not recognize
such terms. Canadian standards differ significantly from the requirements
of the U.S. Securities and Exchange Commission, and mineral resource
information contained herein is not comparable to similar information
regarding mineral reserves disclosed in accordance with the requirements
of the U.S. Securities and Exchange Commission. U.S. investors should
understand that inferred mineral resources have a great amount of
uncertainty as to their existence and great uncertainty as to their
economic and legal feasibility. In addition, U.S. investors are cautioned
not to assume that any part or all of Avalons mineral resources
constitute or will be converted into reserves.
|
65
Variographic
analysis was undertaken to support the classification of the resource.
A
block model covering the entire Separation Rapids Pegmatite consisting of 10 m
by 3 m by 10 m blocks was constructed using MineSight 3D software. Blocks were
elongated east-west to fit the strike of the deposit and were not rotated.
Interpolation
of block values was done in two passes using the Inverse Distance Weighted with
a power parameter of 2 (IDW2) method and block matching on ore code (OREC). A
mineralization code of 6 was assigned to all blocks at least 1% within the 3D
geological model of Unit 6 and a mineralization code of 1 was assigned for all
other blocks. This ensures that all blocks containing mineralization received an
interpolated grade. The search ellipsoid was rotated 105° to match the strike of
the deposit so that the narrowest search distance was at a 15° azimuth
perpendicular to strike.
Estimated
Feldspar Resources
The
Separation Rapids Project is a potential producer of high purity feldspar, a
mixture of albite and potassium feldspar, in addition to lithium chemicals
and/or petalite. In order to determine the feldspar content of the SRLD various
mineralogical studies have been completed. As reported in the technical report,
these included Qemscan and X-Ray diffraction. It is considered that Qemscan®
measurement of 39% on individual samples can be accepted as a reasonable
estimate of the feldspar content of the whole pegmatite body. In addition,
Qemscan of bulk metallurgical test samples gave similar values with a mean of
41.3% total feldspar and a median of 39.7% total feldspar.
10.
Mining Operations
Pit
Optimization
Pit
optimization was undertaken using the mineral resource block model imported into
Surpac to create a block model compatible with the pit optimization software. A
preliminary optimization was performed using Whittle software. Cost parameters
were applied to the optimization model to assess the volume of mineral resources
available for economic development. The purpose of the modelling was to generate
an estimate of the mineable tonnage based on the mineral resources.
As
a result of optimization, a number of ultimate pit shells were produced. Pit
shell 6 was chosen as the optimum pit. A conceptual pit design was conducted
using recommended slope design parameters and the optimum pit shell 6 as a
template. The bench to bench face angle is 80
o
. A safety berm width
of 4 m was applied every 10 m bench except where an 8 m safety berm has been
used every third bench. A haul road width of 15 m was used from the pit base, to
the surface on the assumption that two-way traffic would be operating in the
mine.
Mining
Method
Conventional
open pit methods using drilling and blasting, loading with excavators and
shovels and hauling with rigid dump trucks are proposed. Waste from the pit will
initially be composed of overburden and will be dumped in the topsoil
stockpile.
The
project will be undertaken by contractor-operated equipment and labour. This was
selected as the base case following a cost comparison of Owner versus contractor
mining operations.
Preproduction
waste rock will be used to construct site roads, including the main haul roads
and will also be used for the construction of tailing, concentrate and settling
basin dam walls.
A
production schedule has been produced in MineSched software. The production
schedule is based on mining 700,000 t/y of high grade and 250,000 t/y of low
grade material. The life of the mine is expected to be 10 years with approximately 7.0 Mt of high grade ore at 1.41%
Li
2
O and 2.4 Mt of low grade ore at 0.66% Li
2
O mined over
the length of the project.
66
11.
Processing
and Recovery Operations
Recovery Methods
The
process selected for the PEA comprises the mineral separation and recovery of a
petalite concentrate containing >4.0% Li
2
O and a mixed
sodium/potassium feldspar from petalite tailings. The process includes
processing of petalite by hydrometallurgical methods to produce battery grade
lithium hydroxide.
Results
from the testwork programs have been used to develop a processing flowsheet,
mechanical equipment list and reagent consumptions. In addition a Metsim
simulation model of the entire process has been generated, data from which has
been used for sizing process equipment and calculating heat and energy balances.
The selected flowsheet is shown in Figure 11.1.
The
process design is based on the following assumptions:
-
Optical sorting mass waste rejection is 14.8% with lithium losses of 1.9%.
-
Mass pull to slimes after comminution is 6% of sorted ore with 6.5%
lithium losses.
-
Mass pull to magnetics is 14.6% of sorted ore tonnage with lithium losses
of 14.5%.The petalite flotation concentrate contains 4.0% Li
2
O% and
lithium recovery to petalite is 65.2% of flotation feed content.
-
Water leach lithium extraction after decrepitation and roast is 93.8%.
-
Lithium losses from impurity removal is 3%.
-
A final lithium hydroxide product purity of 99.5% LiOH.H
2
O.
-
Plant availabilities of 93% for the concentrator and 85% for the
hydrometallurgical plant.
Figure 11.1
Simplified Process Block Flow Diagram
67
12.
Infrastructure, Permitting and Compliance Activities
Project
Infrastructure
The
Separation Rapids project includes four main facilities:
Mine
and Concentrator
Site
buildings will include separate buildings for the crusher and concentrator,
maintenance facilities and warehousing, change and lunch room facilities,
offices and laboratory and a guard house. Heating, ventilation and air
conditioning will be provided for all buildings as required. Propane will be
used to fuel the heating system. Fresh water and fire water for the site will be
provided from the English River. Sanitary waste water treatment will be provided
at the site using appropriately sized parallel septic tanks and field bed. The
septic tanks will be pumped periodically and material discharged to an
appropriately licensed facility.
Approximately
5 MW of electrical power will be required for the mine and concentrator and will
be supplied from the existing Whitedog Falls hydro dam. An emergency back-up
generator will also be provided at the site fueled either by diesel or propane.
Diesel fuel storage facilities will be provided to supply the mine equipment and
smaller site vehicles. A propane tank farm will also be installed to accommodate
the site heating and back-up power generation.
Hydrogen
fluoride is required in the flotation process. A facility will be constructed to
receive 49% aqueous hydrogen fluoride by truck and store it as required to meet
the process plant requirements.
A
telecommunications system will be installed at the site to provide telephone
service and internet access, and to support the site security and fire detection
systems. Distribution will be provided by a fibre optics system in the
concentrator and related facilities and a wireless system for the mine site.
No
camp facilities are envisioned for this project. It is anticipated that the work
force will live in Kenora and the surrounding area. Buses will be provided to
transport workers between Kenora and the mine site.
Trans-shipment
Facility
As
there is no rail access to the mine/concentrator site, delivery of reagents to,
and shipment of concentrates from, the site will be by truck. However, some of
the reagents are likely to be supplied by rail and rail access will be required
to get products to market. To accommodate this, a trans-shipment facility will
be constructed. One potential site is adjacent to the CNR line in the vicinity
of Redditt, Ontario, where there is good road access from both Kenora and the
mine site.
A
rail siding will be required at the site for the loading and unloading of rail
cars. The siding is expected to consist of two tracks approximately 1 km in
length with switches to access the mainline at each end.
Hydrofluoric
acid is required for the flotation process at the concentrator. It is expected
that anhydrous hydrofluoric acid will be provided by railcar from the United
States. The facility will also include the capability to dilute the acid to
produce a 49% aqueous hydrogen fluoride solution that will then be loaded on
trucks for delivery to the mine site.
68
Grid power is available in the Redditt area to meet the power
requirements for this facility. A small diesel generator will be provided to
supply emergency power if required. A small day tank will be provided for diesel
storage. Fresh water for the site will be provided either from a well or from
access to a local lake. Water treatment facilities will be provided as required.
Sanitary waste water treatment requirements will be minimal at the site as only
a small staff is required for operations. Sewage treatment facilities will be
provided as required.
It is anticipated that the site will access the communications
infrastructure in the area for telephone and internet. Back-up will be provided
with the use of a cellular modem.
Hydrometallurgical
Plant
Avalon
has identified several possible sites in or near Kenora that could be used for
the hydrometallurgical plant. One potential location is the site of the former
Abitibi paper mill an industrial site with good infrastructure having
approximately 27.5 ha in area providing ample space for the required
facilities.
Although
the site is currently supplied by power, water, natural gas and city sanitary
sewer services, most of these would need upgrading to meet the requirements of
the hydrometallurgical plant. However, the site is located within easy access of
the electrical power and natural gas needed for the plant.
Plant
and fire water requirements will be sourced from the Winnipeg River. Water
discharge is expected to be very small. It will be treated as necessary and can
be accommodated by the city sewer system.
A
new building will be required to house the hydrometallurgical plant. Three
existing buildings may be used for offices, laboratories, lunch/wash rooms,
warehouses, and product storage and load out facilities.
The
site was previously served by a rail siding off the Canadian Pacific Railways
(CPR) line. Although the rails have been removed it would be possible to
reactivate this line to provide rail service directly to the site if that was
required.
Telephone
and internet services will be available from local suppliers in the area.
Environmental
Studies, Permitting and Social or Community Impact
The
project site lies in an area adjacent to the English River which supports a
variety of wildlife and fisheries, as well as tourism. The area surrounding the
project site is undeveloped and forested.
The
Federal and Ontario Provincial permitting processes are well defined and
understood. The Ministry of Northern Development and Mines is responsible for
coordinating the various regulatory agencies in the mine permitting process.
The
project is small in scale without many of the risks frequently found at other
mines such as acid mine drainage. Based on the 2007 baseline work, all tailings,
mine rock, aggregate and concentrate materials are expected to be inert and air
and water quantities utilized and discharged are relatively small and can be
managed to acceptable standards with conventional technologies. Meetings,
including a multi-Ministry meeting, have already been held with all key
regulators to develop positive relationships early and to review the proposed
project. Similarly, positive relationships have already been developed with
Indigenous Peoples as well as political and community representatives.
Given
the relatively small size and low environmental risk, no permitting delays are
anticipated and all permits should be acquired in a timely manner that will not
negatively impact the project schedule. Based on discussions with the Canadian
Environmental Assessment Agency in 2017, once sufficient information is provided
to validate that the Canadian Environmental Protection Act 2012 (CEAA)
production triggers are not exceeded, the CEAA will not apply to the project. This means that primarily
Provincial permitting will be required which will be beneficial to the
permitting time line.
69
Environmental
Baseline
For
the mine and concentrator site, an environmental baseline study program has been
conducted, investigating regional and site specific aspects, such as water
quality, hydrology, vegetation, wildlife, fisheries, archaeology, and
socioeconomics. The ecology of the project area was investigated with field
visits carried out in all four seasons during 1998 and 1999. The majority of
these data remain valid, and additional 2017 spring and fall baseline studies
have been completed to validate this work. Some additional work has been
completed related to more recent regulatory changes. A draft Project Description
was produced in 2017 and utilized in consultation on the environmental programs
with regulators and indigenous organizations. Engagement will be ongoing with
respect to this process.
Given
that the proposed site for the metallurgical facility to be located in Kenora is
located at an existing industrially-zoned and previously operated site, an
environmental baseline study for the metallurgical site is not required. An
environmental risk study will be completed on the proposed site to ensure Avalon
is not inheriting liabilities from previous site use.
Tailings
and Concentrate Management
The
principal objective of the tailings and concentrate management area (TCMA) is to
provide safe and secure storage of the process waste products, while ensuring
the protection of the environment during operations and in the long-term after
closure.
Approximately
1.2 Mt of magnetic concentrates, 0.5 Mt of tailing slime, 1.4 Mt of
hydrometallurgical plant tailings, and 3.8 Mt of feldspar concentrate (partially
concentrated material rejected from the petalite circuit that will undergo
additional processing in future to produce a low impurity feldspar product) will
be produced over the life of the project. The magnetic concentrates and a
portion of the feldspar material will be stored separately due to their
potential to be reprocessed in the future.
The
TCMA will consist of valley impoundment type facilities located approximately
1.5 km southwest of the open pit. No fish or fish habitat will be impacted.
Tailings
will be filtered in the concentrator and the hydrometallurgical plant and
trucked to the TCMA as solids. The hydrometallurgical tailings will be stored
with the combined tailings in the central cell of the TCMA. There will be no
long term storage of tailings at the hydrometallurgical plant. The small amount
of runoff water resulting from precipitation on the TCMA will be recycled back
to the plant for process use, making this a zero discharge facility.
Mine
Rock Aggregate and Mineralized Material Management
Given
the inert nature of the waste material from the open pit and the scarcity of
aggregate in the area, all mine rock is considered as a potentially usable
aggregate product. Approximately 52 Mt of coarse mine rock aggregate and 1.3 Mt
of crushed and optically sorted rejects (fine aggregate) will be generated
during the life of the project. The aggregate materials will consist primarily
of amphibolite and pegmatitic granite rock, with a lesser amount of feldspathic
material. At this stage, these materials will be managed together. The coarse
mine rock aggregate will be placed in two storage areas to the west of the open
pit while the fine aggregate will be stored near the concentrator for easy
access for road maintenance, storage facility construction and pit road
construction. Any particulate in runoff water will be settled out in small ponds
adjacent to these facilities and the water will be returned to the original
drainage basins.
70
The
mine rock aggregate materials have been characterized as non-acid generating. No
fish or fish habitat will be impacted. A minimum 75 meter forested buffer will
be maintained along all fish habitat to minimize potential for impacts and to
allow transportation corridors for wildlife, as per consultation with aboriginal
communities and regulators.
Water
Management
The
design and implementation of a comprehensive water management plan for the mine
site will be fundamental to the project. The key water management issues are
runoff from and seepage associated with the open pit, the plant site, the waste
rock facilities and the TMCA. The principal objectives of the water management
plan will be to minimize the volume of potentially impacted water generated from
the site and minimize the amount of water extracted from the English River for
processing and general mine site use by maximizing the use of reclaimed runoff
water (for example, plant site runoff and mine dewatering flows) through
internal concentrator recycling and use of filtered tailing and concentrate
storage. To the extent that it is practical, all water that is impacted by
processing operations to a single point in order to minimize the locations that
require monitoring and treatment.
A
simple water balance for the Separation Rapids site was prepared to provide
estimates of the volumes of runoff reporting to each pond/basin on the site.
This model will be utilized to develop more detailed water management strategies
and ensure a zero discharge from the TCMA during operations.
Closure
and Rehabilitation
Following
the cessation of mining, the open pit would be allowed to flood. Flooding would
occur naturally through inflows of groundwater and surface water runoff.
The
TCMA will be closed and rehabilitated in a safe and secure manner in full
accordance with government regulations and good engineering practices. Following
closure, the TCMA will be a reclaimed landform that sheds runoff. Discussions
regarding opportunities for beneficial use of the pit and TCMA are ongoing with
the Indigenous stakeholders.
Progressive
rehabilitation of benches of the coarse rock aggregate storage areas is planned
to minimize the potential for aesthetic visual concerns during operations,
particularly on the river view sides. Full progressive rehabilitation of the
first rock dump will be completed utilizing material stripped for the
construction of the second rock dump to minimize reclamation costs, visual
impacts, replace habitat and reduce financial assurance liabilities.
All
sediment basins associated with the TCMA and the mine rock aggregate stockpiles
will be breached and revegetated as necessary for closure unless alternate
beneficial reuses are identified during engagement activities and permitting.
All
machinery and equipment from the crusher, process plant and other ancillary
facilities would be removed for reuse, salvage or disposal, and all buildings
and infrastructure will be removed or demolished. All chemicals or hazardous
materials will be returned to the supplier or removed to an appropriate waste
disposal facility by a licensed contractor. Petroleum storage tanks will be
removed in accordance with applicable regulations. General waste materials will
be disposed of in an offsite, licensed landfill site.
A
5 year post-closure monitoring program will follow closure of the mine that
includes maintenance of the revegetated areas, assessment of the physical
stability of the aggregate storage facilities and TCMA, surface water and
groundwater quality, and periodic biological monitoring of the aquatic and
terrestrial ecosystems in the immediate vicinity of the site. The monitoring
program will continue, as required, until the target objectives of the site
closure have been achieved.
71
In
the unlikely event that alternate feedstocks for the hydrometallurgical plant
are not identified, machinery would be removed from the hydrometallurgical plant
site. The buildings will continue to be usable in the industrial park setting.
Community
and Indigenous Peoples Engagement
Consultation
with local First Nations and the public was initiated in 1997. This continued in
a reduced manner during the period of inactivity, but was increased again in
2013. A Memorandum of Understanding (MOU), initially signed with the
Wabaseemoong Independent Nation (WIN) in 1999, was renewed in 2013.
Avalon
maintains an engagement log which records the numerous meetings held and
summaries of the meeting content, and reports this annually in its
Sustainability Report.
An
archaeological study was completed in 1998. This will be reviewed with the
communities of interest and updated if required. There may be a requirement to
complete additional traditional knowledge studies in the next phase of project
development. A socioeconomic assessment of the project is included in the 2007
environmental study. This will be updated in the next phase of the project.
Avalon
has a full time representative in Kenora who facilitates ongoing engagement with
Indigenous Peoples, communities, regulators and politicians and that contributes
to the strong support for the project.
13.
Capital and Operating Costs
Capital
Costs
The
basis for the capital cost estimate is contract mining, a 950,000 t/y
concentrator that recovers approximately 145,000 t/y of petalite concentrate and
100,000 t/y of feldspar concentrate, and a hydrometallurgical facility that
produces approximately 14,520 t/y of high purity lithium hydroxide product
suitable for the battery market. The life-of-mine (LOM) capital cost estimate is
summarised in Table 13.1. The estimate is given in Canadian dollars, with a base
date of third quarter, 2016. Owing to rounding of the estimates, some totals may
not agree.
Table 13.1
LOM Capital Estimate
|
Initial Capital
($ millions)
|
Sustaining Capital
($ millions)
|
Total Capital
($ millions)
|
Mining
|
2.0
|
|
2.0
|
Concentrator direct costs
|
112.9
|
|
112.9
|
Hydrometallurgical Facility direct costs
|
167.5
|
|
167.5
|
Tailings direct costs
|
7.3
|
6.0
|
13.3
|
Indirect costs
|
123.9
|
0.3
|
124.2
|
Owners costs
|
3.9
|
|
3.9
|
Closure Bond
|
5.5
|
|
5.5
|
Contingency
|
84.7
|
0.9
|
85.6
|
Total
|
507.7
|
7.2
|
514.9
|
The
capital cost estimate for this project presented herein is considered to be at a
scoping level with an accuracy of +50%/-35% and carrying a contingency of 20% on
total initial estimated capital.
72
Operating
Costs
Operating
costs have been determined by Avalons in-house technical personnel with the
exception of the mining costs which were determined by Micon. The estimated
costs are expressed in Canadian dollars and are based on:
-
Total tonnes mined as determined by mining schedule and typical industry
rates.
-
Anticipated labour complements and appropriate labour rates.
-
Reagent consumptions from testwork and budget supply prices.
-
Energy estimates calculated from electrical equipment loads and gas
consumptions.
-
Estimates for miscellaneous minor operating expenses.
The
estimated average annual project operating costs assuming a mine life of 9.83
years and unit costs for the first 10 years of production when both petalite and
feldspar are produced are summarized in Table 13.2
Table 13.2
Summary of LOM Operating Costs
Category
|
Annual
($000)
|
$/t
Processed
|
$/kg
Lithium
Hydroxide
|
Mining
|
29,416.53
|
30.96
|
1.98
|
Concentrator processing
|
36,738.53
|
38.67
|
2.46
|
TCMA, waste rock, water management
|
1,241.10
|
1.31
|
0.08
|
Concentrate transport
|
2,045.42
|
2.15
|
0.14
|
Hydrometallurgical processing
|
23,348.68
|
24.58
|
1.56
|
General and Administration
|
4,104.78
|
4.32
|
0.27
|
Total Cash Production Costs
|
96,895.05
|
101.99
|
6.49
|
Economic
Analysis
Micon
has prepared its assessment of the project on the basis of a discounted cash
flow model, from which Net Present Value (NPV), Internal Rate of Return (IRR),
payback and other measures of project viability can be determined. Assessments
of NPV are generally accepted within the mining industry as representing the
economic value of a project after allowing for the cost of capital invested. The
base case cash flow projection assumes a constant price of US$11,000/t lithium
hydroxide, LiOH.H
2
O. Feldspar sales are at a constant price of
US$170/t.
Annual
sales of lithium hydroxide and low impurity feldspar over the LOM period are
shown in Figure 13.1 Note that feldspar sales ramp up from 34,000 t in Year 1 to
100,000 t in Year 6, and remain at that level for the remainder of the 20 year
project life. On average over that period, feldspar sales represent 16% of total
sales revenue.
73
Figure 13.1
Annual Sales Revenues by Product
Annual cash flows over the whole LOM period are presented in Table
13.3 and shown graphically Figure 13.2.
Table 13.3
LOM Cash Flow Summary
|
LOM total
($000)
|
$/t milled
|
%
Gross
Revenue
|
Margin
(%)
|
$/t
LiOH.H
2
O
|
Mining (Contractor)
|
291,380
|
31.21
|
14%
|
|
1,985
|
Mill/Concentrator
|
410,980
|
44.02
|
20%
|
|
2,799
|
Tailings Management
|
12,200
|
1.31
|
1%
|
|
83
|
Conc. Transport
|
20,106
|
2.15
|
1%
|
|
137
|
Hydrometallurgical Plant
|
229,518
|
24.58
|
11%
|
|
1,563
|
G&A
|
51,026
|
5.46
|
2%
|
|
348
|
Direct Site Costs
|
1,015,210
|
108.73
|
48%
|
52%
|
6,915
|
Less
By-product credits
|
(399,458)
|
(42.78)
|
-19%
|
|
(2,721)
|
Cash Operating Costs
|
615,753
|
65.95
|
29%
|
71%
|
4,194
|
Royalties
|
-
|
-
|
0%
|
|
-
|
Production Taxes
|
-
|
-
|
0%
|
|
-
|
Total Cash Costs
|
615,753
|
65.95
|
29%
|
71%
|
4,194
|
Depreciation
|
512,986
|
54.94
|
24%
|
|
3,494
|
Mine ClosureReclamation
|
5,503
|
0.59
|
0%
|
|
37
|
Total Production Costs
|
1,134,242
|
121.48
|
54%
|
46%
|
7,726
|
Note
that this preliminary economic assessment is preliminary in nature; as the
metallurgical processes developed require further work to confirm that a
commercially acceptable product can be consistently produced and sold in the
marketplace. There is no certainty that the preliminary economic assessment
model will be realized.
74
Figure 13.2
Life-of-Mine Cash Flows
The
project demonstrates an undiscounted payback of 4.5 years, or approximately 6.2
years when discounted at 8.0%, leaving a tail of over 3.5 years of lithium
hydroxide production.
The
base case evaluates to an IRR of 19.3% before taxes and 16.5% after tax. At a
discount rate of 8.0%, the net present value (NPV
8
) of the cash flow
is $343.8 million before tax and $228.3 million after tax.
The
sensitivity of project returns to changes in all revenue factors (including
grades, recoveries, prices and exchange rate assumptions) and also to capital
and operating costs, was tested over a range of 30% above and below base case
values. The analysis suggests that the project is most sensitive to revenue
drivers, and is moderately sensitive to changes in operating costs and capital
cost. While the latter remain positive across the range of the sensitivity
analysis, NPV falls to zero for product prices of less than 78% of base case
assumptions.
Micon
concludes that this study demonstrates the potential viability of the project as
a producer of lithium hydroxide with by-product feldspar within the targeted
range of accuracy of the estimated capital and operating costs, as well as for
product prices above 78% of base case values.
Markets
Studies and Contracts
Lithium
The
U.S. Geological Survey (USGS) reports production of lithium minerals and
products. In terms of gross product weight, Australia is the largest single
producer of lithium minerals and chemicals, with output exceeding 400,000 t/y
spodumene. Chile is the second ranking producer with a range of lithium
chemicals recovered from subsurface brines. In terms of contained lithium,
Australia and Chile are also significant producers of lithium.
Lithium
consumption in batteries has increased significantly over the past five years,
to the point where it now surpasses demand in ceramics and glass. Rechargeable
lithium batteries are used in a wide range of applications including cell
phones, cameras, portable electronic devices, hand-held tools and increasingly,
in electric vehicles and electrical grid storage. It is expected that battery
demand will continue to outpace other lithium demand sectors and will drive
overall lithium demand. While the automotive sector is expected to show the most
rapid growth, projected growth in global lithium demand also includes consumer
electronics and grid energy storage sectors.
It
is projected that demand for lithium hydroxide will grow at a higher rate than
that for lithium carbonate based on changes in battery technologies. Avalon
considers that the Separation Rapids Lithium Project will be well-placed to
supply new battery production facilities in North America.
75
Lithium
Prices
Lithium
is not traded on any formally recognized exchange and there are few sources of
reliable publicly available price data. Transactions are negotiated directly
between seller and buyer and payment terms are rarely reported.
Apart
from a sharp correction in 2010, prices for both lithium carbonate and lithium
hydroxide have risen steadily over the past decade. Prices reported by
Industrial Minerals journal as of mid-August, 2016 were US$8,500-11,000/t
delivered in Europe, or US$8,300-10,000/t delivered in Europe for Chinese
material.
Avalon
has reviewed all publicly available lithium price forecasts. There is no
consensus among analysts on future lithium chemicals prices. For Lithium
hydroxide prices in 2019-2020, when Avalon may enter the market, forecasts range
from current price levels to as high as US$25,000/t, with the average being
around US$16,000-17,000/t. For the purposes of the PEA, Avalon has used a
relatively conservative average price assumption of US$11,000/t FOB plant for
lithium hydroxide consistent with reported current price levels.
Feldspar
The
feldspar group is by far the most abundant group of minerals in the earths
crust, forming about 60% of terrestrial rocks. They are widely produced with
global output estimated by the USGS in 2015 at 21.2 Mt. Turkey, Italy, India and
China are by far the largest producers. Production in the United States has
declined steadily over the past five years. The USGS does not report any
production from Canada.
Feldspar
is an important ingredient in the manufacture of glass and an important raw
material in ceramics because it acts as a fluxing agent, reducing the strength,
toughness, and durability of the ceramic body, and cements the crystalline phase
of other ingredients, softening, melting and wetting other batch constituents.
Feldspars also are used as fillers and extenders in applications such as paints,
plastics and rubber. The glass market for feldspar in the United States
represents the largest market at around 68% while ceramics account for 23% and
filler and other applications, including chemicals, paints, rubber and plastics,
represent less than 10%.
It
is projected that between 2015 and 2022, feldspar demand in the United States
will grow at a compound average annual growth rate of 3.8% to reach nearly
800,000 t/y. Through discussions with market participants and industry experts,
and evaluation of data provided in purchased reports and publicly available
information, Avalon estimates that 100,000 t/y of feldspar can be sold into the
glass, ceramics, frits/glazes and filler markets at an average price of
US$170/t. Sales will be built up to 100,000 t/y over a period of five years.
Contracts
At
this stage of development of the Separation Rapids Lithium Project, there are no
material contracts in place.
14.
Exploration, Development and Production
Project
Development Schedule
A
period of four years has been scheduled for project development from completion
of the PEA. Process design will be finalized and pilot plant work is scheduled
to start within three months when permitting will also commence. A period of 35
weeks has been allowed for completion of a feasibility study, followed by
engineering and procurement. A period of 78 weeks has been allowed for
construction. A period of 21 weeks has been allowed for commissioning and a
further 22 weeks for ramp-up to full production.
76
Interpretation
and Conclusions
The
PEA demonstrates that the SRLD can be developed into an economically robust
mining and processing operation to produce a lithium hydroxide feedstock for the
lithium ion battery and energy storage industries. It does not preclude the
possibility of producing other lithium products for glass-ceramics applications.
The
environmental impacts of the project are minor as a result of the low levels and
nature of impurities in the SRLD material. This is expected to reduce risk of
permitting delays.
The
site is well located with easy access to important infrastructure facilities for
power supply, skilled labour and material transportation. Engagement to date
with local communities has resulted in good support for the project and the
potential exists for greater engagement and utilization of local businesses.
Given
the potential for a range of products to be recovered from the SRLD, the
potential also exists to develop a staged approach to project development and
financing that will allow Avalon to adapt to market uncertainties as the project
advances. Such a staged approach may start with the production of lithium
mineral concentrates for glass-ceramics consumers, resulting in cash flow before
investing further in a hydrometallurgical plant to produce a derivative battery
material from the petalite concentrate. A petalite concentrate may be saleable
to a third party battery material producer equipped to process similar lithium
mineral concentrates. Such opportunities are likely to emerge over the next few
years as the market for battery materials grows. A staged approach has the
potential to reduce capital investment risk. A staged approach would also
include development of a demonstration plant in order to provide the required
volumes of product samples to potential customers for evaluation and acceptance,
as well as to provide improved operating and cost parameters, and potentially
improved prospects for project financing.
This
PEA has shown that the Separation Rapids Lithium Project offers a number of
other advantages that will contribute to reduced capital investment risk. These
include the relatively low environmental impacts and strong support for the
project within the local community due to the long history of engagement and the
positive relationships developed with local indigenous communities, notably
Wabaseemoong Independent Nation.
Recommendations
in the PEA
Given
the potential for a range of products to be recovered from the SRLD, it was
recommended by Micon that Avalon develops a staged approach to project
development and financing that will allow the Company to adapt to market
uncertainties as the project advances.
Recommendations
for different areas of the project are set out below.
Geology
and Mineral Resources
Detailed
mapping should be undertaken to the west and east of the SRLD to explore for
projected extensions of the lithium deposit to increase potentially recoverable
lithium resources and explore for new zones of related rare metal mineralization
such as tantalum and cesium. Further investigations into other potential sources
of petalite and lithium minerals in the region could potentially provide
additional feed material.
Detailed
mineralogical studies should be completed in order to further refine
mineralogical zonation patterns within the pegmatite Subunits 6a, b, c and d
using complementary methods such as XRD, Qemscan®, electron microprobe, spectral
analysis and optical methods. In particular, lithium mineral zonation patterns
may be important for maintenance of a consistent feed for the mill. Further
detailed petrography of the feldspar minerals is required for a better
understanding of the potentially economic feldspar content and quality.
Exploration
and Resource Definition Drilling
It
is recommended that a minimum 10,000 m diamond drill program be carried out with
two main objectives:
77
1.
Expand the known petalite/lithium resources to depth and laterally
to increase the confidence level of the inferred resources to the Measured and
Indicated categories.
2.
Test exploration targets along both the eastern and western
extensions of the SRLD, including the undrilled Western Pegmatite to delineate
additional lithium resources and discover other rare metal mineralized zones
that the geological model predicts could occur in the area.
The
program should include:
|
|
Detailed mineralogical mapping.
|
|
|
Geotechnical logging of the drill
holes for open pit design considerations.
|
|
|
Analysis of representative waste
rock for environmental considerations.
|
It
is recommended that geotechnical studies are undertaken concurrent with the
proposed drilling program to support the overall pit slopes and design of ramps
and haulways.
Metallurgical
Testwork
Metallurgical
testwork should continue with the overall objectives of optimizing the existing
flowsheets and studying variants that will create optionality as to what the
final product mix should be, bearing in mind that there are at least four
potential lithium products (minerals, carbonate, hydroxide, metal) that can be
recovered from the mineralization and multiple potential by-products (feldspars,
high purity quartz, tantalum, rubidium and cesium).
Further
optimization testwork is recommended in the following areas:
Concentrator:
|
|
Confirm efficiency and performance of ore sorting when
processing low grade material from the pit extremities and the low grade
material introduced into resources by the mining schedule.
|
|
|
Optimization and re-piloting of the flotation circuit to
improve recoveries and reduce reagent consumptions and costs.
|
|
|
Investigation of alternatives for further
pre-concentration ahead of flotation, such as gravity-based processes.
|
|
|
Investigation into the recovery of lithium micas
(including lepidolite) and other potential products from the magnetics
material and lepidolite-rich sub-zones in the deposit.
|
|
|
Determination of what the final lithium product mix
should be based on product pricing (determined through ongoing market
development work), future market demand and production costs.
|
|
|
Further work on the recovery of a
high purity quartz product from coarse-grained mineralization.
|
Hydrometallurgical
Plant:
There
are a number of opportunities to optimize the hydrometallurgical plant process
efficiencies and costs. These include:
|
|
Evaluation of fluidized bed
roasting as an alternative to the decrepitation kiln.
|
|
|
Optimization of membrane
selection for the electrodialysis cells.
|
|
|
Piloting of circuit to confirm
influence of recycle streams of overall flowsheet and efficiencies.
|
|
|
Optimization of heat balance and
recovery.
|
|
|
Detailed analysis of the leached
solids in order to determine whether this material is of economic value.
|
|
|
Consideration for optionality in
the process flowsheet to produce either a carbonate, hydroxide or
|
|
|
possibly another lithium
chemical/metal product for the battery market.
|
78
Demonstration
Plant:
Customers
in all potential markets will require significant sample material for detailed
evaluation before committing to any off-take agreements. Generation of such
samples in the required quantities can only be produced through the operation of
a demonstration-scale production plant. This also provides assurance of a
reliable process and the ability to manufacture products of consistent
quality.
In
addition, such a facility would provide significant information for reliable
scale-up to a full production facility and potentially reduce perceived investor
risk in the project.
Finally
it can also serve as an interim production facility to begin serving the market
at a low level and as a test facility for evaluation of other product
opportunities and other new development opportunities.
The
optimal scale of such a demonstration plant and the length of operation will
need to be determined based on market development work conducted in conjunction
with the feasibility study.
Marketing
Further
work is recommended in the following areas as the project proceeds to
prefeasibility and feasibility analysis:
-
Continued analysis of lithium markets and prices, and developments in
battery technologies and developments in glass-ceramics markets.
-
Assessment of opportunities to market lithium mineral (petalite)
concentrates in North America.
-
More detailed analysis of markets for feldspar in the United States,
Europe and Mexico in order to determine if it should be recovered as a co- or
by-product of lithium hydroxide and refine the potential unit revenue from a
range of feldspar products.
-
Analysis of opportunities in the rubidium chemicals market.
-
Assessment of markets for high purity quartz as a potential by-product.
-
Assessment of markets for other identified and potential products beyond
those included in this study.
These
plus other potential by-products currently being investigated not only give the
project the potential for further economic enhancement but also provide a strong
and flexible production base capable of reducing the impact of any future down
turns in any of the markets being targeted.
Environmental/Social
The
following should be undertaken as project development proceeds:
-
Continue to engage with the local Indigenous Peoples, community,
regulators and government to maximize local development opportunities and
minimize undesirable environmental impacts.
-
Conclude a partnership arrangement with the Wabaseemoong Independent
Nation as committed to under the existing MOU between WIN and Avalon, and
accommodate other Aboriginal groups with interests in the area.
-
Update socioeconomic studies as part of the proposed Environmental and
Social Impact Assessment (ESIA).
-
Complete historical environmental baseline validation and fill in
identified gaps. Complete a Project Description and ESIA.
-
Update the groundwater study and assess the geotechnical design parameters
for the pit, mine rock aggregate, concentrate and tailing management
facilities. Assess the potential for river water to enter the open pit and
make appropriate amendments as required.
79
-
Complete additional ABA and humidity cell leachate studies on the mine
rock aggregate, concentrate and tailings as required. Complete biological
toxicity testing of effluents and water treatment studies as required on pilot
or demonstration plant water and tailing when available.
-
Geotechnical and hydrogeological investigations for the TCMA and stockpile
locations, including identification and characterization of potential local
construction materials (i.e., till, sand and gravel).
-
Detailed topographic mapping should be obtained for the full project site.
(See geological mapping and drilling, above).
-
Additional laboratory testing of the tailings and concentrates to better
understand their physical properties as delivered to the TCMA (i.e.,
filterability, workability, placed density, strength, etc.).
-
Trade-off study to determine if filtered tailings is the preferred
disposal and storage method. Consideration should be given to operating in a
northern climate with long, cold winter months.
Proposed
Work Program in the PEA
Avalons
proposed work program and budget for ongoing project optimization and
feasibility studies contained in the PEA is summarized in Table 14.1
Table 14.1
Avalon Proposed Budget for Ongoing Work
Activity
|
Budget (Cdn$)
|
Exploration and drilling
|
1,500,000
|
Updated mineral resource estimate
|
35,000
|
Metallurgical testwork (bench scale)
|
850,000
|
Pilot plant studies
|
1,700,000
|
Access road studies
|
10,000
|
Hydro-electric study
|
25,000
|
TCMA studies and design
|
35,000
|
Geotechnical drill program
|
30,000
|
Geotechnical testing
|
10,000
|
Detailed mine design and planning
|
50,000
|
Hydrometallurgical plant site selection
|
10,000
|
Evaluate underground mining option
|
30,000
|
Hydrogeological study and ground water modelling
|
25,000
|
Environmental studies and data gathering
|
900,000
|
Local community and stakeholder engagement
|
50,000
|
Engineering, design, costing and report
|
4,000,000
|
Market development
|
900,000
|
Sub-total
|
10,160,000
|
Demonstration Plant
|
25,000,000
|
(B)
Current Work and Future
Plans
(a)
Spring 2017 Drilling Program
The
Spring 2017 drilling program was completed during the quarter ended May 31,
2017. Five holes (SR17-70 to 74) totaling 1,473 metres were drilled. Two holes
were drilled on each of the west and east extensions of the main deposit,
extending the resource and mapping the extent of the distinct lepidolite and
lithium mica rich sub-zones. These holes also contributed to developing a new
resource block model to identify target areas for future resource expansion. The
fifth hole (SR17-70) was drilled on an untested target located approximately 1km
west of the main deposit, but was not completed due to difficult ground
conditions. This hole and a second planned hole on the West Pegmatite will be
completed in a future program, when access conditions improve. The summer
geological mapping program outlined six new pegmatite targets based on either
lithogeochemical or biogeochemical (vegetation) sampling. The westernmost
occurrence, known as the Glitter pegmatite, has never been drill-tested and
yielded 1.18% Li
2
O over 14.8 metres in a continuous chip sample of petalite
mineralization collected this summer, confirming results obtained by previous
operators.
80
All
drill hole data is being brought into Avalons database and recent work on the
resource block model following the spring drilling program has focused on
generating a detailed mineralogical model of the deposit. The new drill hole
data also contributed to a better understanding of resource geometry for mine
planning purposes, in particular the spatial distribution of the lepidolite rich
sub-zone that comprises at least 20% of the known resource. The block model
created will help guide future drilling designed to expand the resource to
depth. A revised mineral estimate was also generated (presented below) that was
not materially different from the 2016 resource estimate based on the historical
drilling data except for differentiating resources contained in the two main
lithium mineralogical sub-zones.
(b)
Metallurgical Process Testwork
Mapping
mineralogical zonation in the deposit is integral to designing an appropriate
flowsheet for the planned Phase 1 production facility in order to maximize
recoveries of lepidolite and petalite which will need to be concentrated
separately. Initial testwork has shown that lepidolite can be recovered as the
first step in a sequential flotation process prior to flotation of petalite.
Concentrates of lepidolite are attracting increasing interest as a feedstock for
production of lithium carbonate due to innovative low cost process technology
such as the L-Max® process of Lepidico Ltd. Avalon signed a letter of intent
with Lepidico under which it is contemplated that Avalon would sell a minimum of
15,000 tonnes per annum of lepidolite concentrate produced from its Phase 1
plant to Lepidico for processing at Lepidicos planned Phase 1 commercial
lithium carbonate production facility. Lepidico now contemplates building this
facility in Ontario.
Avalon is proceeding with further testwork to optimize the
flowsheet designed for recovery of a concentrate of lepidolite. Previous
testwork has already demonstrated that a lepidolite flotation concentrate
assaying 4.5% lithium oxide (Li
2
O) can be readily recovered from
Separation Rapids ore. Additional testwork on the lepidolite flowsheet initiated
in November is designed to confirm or improve upon the 90% recovery previously
achieved, as well as to increase the Li
2
O content of the concentrate.
This work will include additional work on the petalite concentrate flowsheet
through further locked-cycle tests that will generate additional petalite
concentrate for product marketing purposes and hydrometallurgical process
optimization.
The
current flotation flowsheet for petalite includes a magnetic separation stage to
remove iron-bearing minerals which would otherwise report to the petalite
concentrate. Since the main iron-bearing minerals in the ore are micas that also
contain significant lithium, the magnetic material is effectively another
lithium concentrate. Additional testwork is planned to upgrade this concentrate
and create another potential economic feed for the production of lithium battery
materials from the Separation Rapids resource.
In
a separate flotation test program, Avalon is designing a process to produce a
high grade petalite concentrate (4.5% Li
2
O) with greatly reduced
levels of sodium and potassium to meet a potential customers requirements for a
specialized, high purity product. Initial results have already achieved
acceptable levels of 0.11% sodium oxide (Na
2
O) and 0.22% potassium
oxide (K
2
O) with the expectation that additional testwork could
further reduce these levels. This high purity petalite concentrate will be a
premium quality material for certain specialty glass applications.
Avalons
Phase 1 plant would also include a hydrometallurgical process circuit to produce
lithium hydroxide from petalite using the innovative new process flowsheet
developed by the Company in 2016. The Company recently filed an application for
patent protection of this new petalite hydrometallurgical process flowsheet.
Lithium hydroxide produced from the Separation Rapids petalite concentrate
material was sent to the National Research Council (NRC) who confirmed that it represents a suitable precursor for
lithium ion battery cathode materials. NRC determined that the material compared
well with another commercially available lithium battery material.
81
Hydrometallurgical
process optimization work continued during the quarter with a focus on the
potential use of fluidized bed roasting for pre-treating the petalite. In a new
program initiated in November, Avalon engaged the services of an international
specialist consultant in the field of membrane technology to conduct a series of
trials in their laboratory utilizing potential membrane alternatives. The work
will focus initially on simplifying the current three-stage impurity removal
processes, as well as generating a more concentrated intermediate lithium
sulphate stream ahead of conversion to lithium hydroxide. The introduction of
specially tailored membranes into the petalite hydrometallurgical flowsheet has
the potential to significantly reduce plant operating and capital costs, as well
as greatly lowering energy requirements and the overall environmental footprint
of the operation
(c)
Mineral Resources
The
Mineral Resources estimate for Separation Rapids was updated in the Q1 2018. The
main objectives of this work were to distinguish the lepidolite rich portion of
the deposit from that where lithium is hosted largely in petalite and
incorporate the data from results of the 2017 drill program into an updated
resource block model. With the additional drilling completed in 2017 the new
resource model is based on 74 drill holes totalling 11,641 metres.
The new estimate has total Measured and Indicated
Resources of 8.12 million tonnes at a grade of 1.37% Li
2
O at a 0.6% Li
2
O cutoff
grade. In addition, the Deposit includes an estimated Inferred Resource of 1.20
million tonnes at 1.33% Li
2
O. Within this total resource,
the estimated resource for the lepidolite rich Measured and Indicated portion of
the deposit is 1.85 million tonnes at 1.38% Li
2
O. This represents 23% of the
total tonnage of Measured and Indicated Resources at virtually the same Li
2
O
grade as the petalite rich portion of the deposit. Although there is no material
change in the overall tonnage of the resource, the drilling enabled improved
delineation of the deposit, it now includes a grade and tonnage estimate for the
lepidolite + petalite pegmatite and the more detailed geological modeling
resulted in an overall grade increase. The estimate of the feldspar content of
these resources has not changed and remains, as reported in the previous
resource estimate, at 39% feldspar.
The
Deposit is hosted within a large, highly-evolved pegmatite body of the rare
petalite sub-type, similar to the Tanco pegmatite: a rare metals producer
located 60 km to the west at Bernic Lake, Manitoba. The Separation Rapids
pegmatite forms a vertically-dipping body varying in thickness up to 70 metres
and is traceable for approximately 1.5 km along strike. Unlike the Tanco
pegmatite, it is highly deformed and was essentially flattened and stretched
into its present sub-vertical orientation. The Deposit exhibits typical
mineralogical zoning characteristics seen in other highly evolved rare metal
pegmatites like Tanco, such as well-developed wall zones and a petalite-rich
intermediate zone. Exploration potential exists to discover additional
mineralogical sub-zones typical for such pegmatites enriched in other rare
metals, notably tantalum and cesium. The Deposit has been partially delineated
by exploration drilling over 500 metres of strike length to a depth of 260
metres, and is open for expansion.
The
petalite rich pegmatite occurs in one main body which contains the largest part
of the resource and 11 smaller pegmatite bodies. The lepidolite rich pegmatite
occurs in two larger dikes to the northwest and northeast of the petalite
pegmatite and 14 smaller dikes. These zones are open to depth and along strike.
The primary lithium bearing minerals in the deposit are petalite
and lepidolite with minor spodumene. The feldspars include both albite and
potassium feldspar. The other major rock-forming minerals are quartz and
muscovite (also lithium-bearing). Accessory minerals include
columbite-tantalite, cassiterite, apatite and topaz. Results from 74 historic
diamond drill holes totalling 11,644 metres were used to create a 3-D model of
the host pegmatite.
The
model includes lithium resources with an average grade of below 1% Li
2
O. The
lower grade lithium mineralization consists of a swarm of narrow lithium-bearing
pegmatite dykes intruded into meta-volcanic rocks, where tests indicate the
lithium resource can be pre-concentrated using optical sorting technology.
The
previous 2016 resource block model has had an open pit mine design applied to it
using Whittle Pit optimization resulting in 9.34 million tonnes of mineralized
material at an average grade of 1.22% Li
2
O within the pit. The pit has a strip ratio of 1:5.6, resulting in 52 million tonnes of
waste rock for stockpiling for use as aggregate. For the purpose of the PEA, the
mine depth was limited to 260 metres. This open pit design includes inferred
resources that are too speculative geologically and thus cannot be relied
upon for economic considerations. The new resource estimate has not as yet had
an open pit mine plan applied to it.
82
The mine design has not been optimized and the appropriate timing
to transition the operation to underground mining has yet to be determined.
Further drilling is designed to identify additional resources at depth (as well
as along strike) which would create the opportunity to include an underground
mining operation in the development model.
Separation Rapids, Mineral Resource Estimate at 0.6%
Li
2
O Cut-off Grade
As at November 15, 2017
Class
|
Petalite Zone
|
Lepidolite-Petalite Zone
|
Total
|
Tonnes
|
Li
2
O
|
Rb
2
O
|
Tonnes
|
Li
2
O
|
Rb
2
O
|
Tonnes
|
Li
2
O
|
Rb
2
O
|
(Mt)
|
(%)
|
(%)
|
(Mt)
|
(%)
|
(%)
|
(Mt)
|
(%)
|
(%)
|
Measured
|
2.86
|
1.39
|
0.313
|
1.18
|
1.38
|
0.467
|
4.04
|
1.39
|
0.358
|
Indicated
|
3.42
|
1.36
|
0.338
|
0.67
|
1.40
|
0.484
|
4.09
|
1.37
|
0.362
|
Measured plus Indicated
|
6.28
|
1.37
|
0.327
|
1.85
|
1.38
|
0.473
|
8.12
|
1.37
|
0.360
|
Inferred
|
0.94
|
1.30
|
0.321
|
0.26
|
1.42
|
0.505
|
1.20
|
1.33
|
0.361
|
Footnotes:
1.
|
CIM definitions were followed for Mineral
Resources.
|
2.
|
The Qualified Person for this Mineral Resource estimate
is William Mercer, PhD, P.Geo. (ON)
|
3.
|
The resource estimate is based on 74 drill holes
totalling 11,644 metres drilled between 1997 and 2017 by Avalon.
|
4.
|
Drill data was organised in Maxwell DataShed and for
estimation purposes was transferred to the Geovia GEMS 6.8 software,
wherein the block model was developed.
|
5.
|
The geological units were modeled as outlined by drill
core logs.
|
6.
|
Resources were estimated by interpolating composites
within a block model of 10 x 10 x 3 metre blocks.
|
7.
|
Grade interpolation used the Ordinary Kriging method
combined with variograms and search ellipses modeled for each rock
unit.
|
8.
|
Measured material was defined as blocks using composites
from ≥ 4 drill holes and a distance ≤ 25 m to the nearest composite and
additional blocks with excellent geological and grade continuity, while
indicated material includes blocks using ≥ 3 drill holes and a distance ≤
35 m to the nearest composite and blocks with geological and grade
continuity, and inferred material was defined as blocks with composites
from ≥ 2 drill holes and interpolated geological continuity up to 40 m
below diamond drill holes.
|
9.
|
Two metre composites were used and no capping was
necessary.
|
10.
|
The mean density of 2.65 t/m
3
was used for
unit 6ABC and 2.62 t/m
3
for unit 6D.
|
11.
|
The cut-off grade reported in this resource estimate,
0.6% Li
2
O, is consistent with the previously published resource
estimate by Avalon (Preliminary Economic Assessment, 2016).
|
12.
|
Mineral resources do not have demonstrated economic
viability and their value may be materially affected by environmental,
permitting, legal, title, socio-political, marketing, or other
issues.
|
13.
|
All figures are rounded to reflect the relative accuracy
of the estimates. Summation of individual columns may not add-up due to
rounding.
|
(d)
Lithium Markets
The
demand for lithium chemicals, such as lithium carbonate and lithium hydroxide,
has been growing rapidly in recent years, driven predominantly by lithium ion
rechargeable battery technology now in high demand for electric vehicles and
other energy storage applications. Current projections indicate continued growth
in lithium demand from the battery sector for the foreseeable future. Because
lithium is marketed in different forms, (including lithium minerals used in
glass and ceramics) aggregate lithium demand and supply is usually expressed in
terms of lithium carbonate equivalent (LCE).
In
2017, several countries announced new policies to ban the sale of internal
combustion engine (ICE) vehicles in the future including Norway by 2025, India
by 2030 and France and the UK by 2040. China announced that it would also ban
the sale of ICE vehicles in the future without a target date, but further
announced minimum EV sales quotas beginning in 2019 at 10% of total vehicle sales.
Since some 26 million cars were sold in China in 2016, 10% of sales in 2019 is
expected to amount to at least 2.6 million vehicles, an ambitious target
83
So
far during 2017 several auto makers have made announcements revealing
significant increases in hybrid (HEV) and electric vehicle (EV) production
targets. BMW, Ford, GM, Honda, Mercedes, Volvo, Jaguar, Mazda and Volkswagen
have each made significant announcements. Volkswagen stated it would offer 80
electric models by 2025 and 300 models by 2030. A market observer estimated that
VW would require more than 50% of the lithium produced worldwide in 2015 to
produce the electric vehicles it expects to sell by 2030.
It
is clear that new lithium supply sources will be needed to meet the growing
demand for batteries for electric vehicles. The Separation Rapids Lithium
Project will be well-situated to serve new battery production facilities
contemplated in North America. Just one well-known example, the lithium battery
Gigafactory of Tesla Motors Inc. in Nevada which began production in early 2017,
is expected to consume up to 25,000 tonnes per year of lithium hydroxide after
it has reached full production.
For
the purposes of its 2016 PEA, Avalon used a price assumption of US$11,000 per
tonne FOB plant for lithium hydroxide consistent with price forecasts developed
in mid 2016 by Roskill Information Services. Prices as reported by other
services such as Benchmark Minerals Intelligence have continued to escalate
since that time due to rapidly growing demand from battery makers. Current
prices estimates by Benchmark Mineral Intelligence are US$17,500/t for lithium
carbonate in September 2017. (Lithium hydroxide typically carries a premium of
US$2,000/t over lithium carbonate to reflect the added processing cost of
converting carbonate to hydroxide)
Lithium
chemicals are getting most of the attention in the market and the media due to
the increased demand projected for lithium ion batteries in electric vehicles.
The markets for glass and ceramics (which commonly use lithium in the mineral
form) will also continue to be a growth market for lithium albeit not at the
rate anticipated for lithium battery applications. Many existing and new glass
formulations for automotive, cell phones, and video displays that require high
strength, contain lithium and this will remain an important market in years to
come.
Numerous
expressions of interest have been received from potential customers for the
Companys lithium products and discussions on off-take commitments are ongoing.
Once off-take commitments are secured that define the priority lithium product
lines, the Company can finalize the design and engineering of the Phase 1 plant.
With demand for lithium growing rapidly and few advanced lithium projects ready
to commence production, the Company is well-positioned to bring a new supply to
the market to serve priority customers, once project financing is in place.
(e)
Environmental Assessment and Community Engagement
Update
Avalon is committed to developing the Project based on modern CSR
principles and reporting on its performance in its annual Sustainability
Reports. These CSR principles include commitments to minimize environmental
impacts, ensuring the health and safety of employees, creating benefits for
local communities and providing full transparency in its social and
environmental performance. The Company and the Project are well known in the
local community.
The Company completed site water, sediment, fish, invertebrate and
endangered species studies in June and October that successfully advanced the
validation of the 1999 environmental baseline study. Sites for infrastructure,
including the tailing management facility, have been identified that do not
impact fish or other wildlife habitat. Leachate work has been initiated on the
site rock and tailings to confirm that these have a low risk of generating acid
rock drainage. The original baseline environmental study prepared in 1999 and
updated in 2007, required the spring and fall 2017 data collection to further
update this study and align it with recent regulatory changes. A Draft Project
Description and Environmental Impact Assessment was subsequently produced.
Permitting
was advanced through a multi-ministry meeting to review the completed Draft
Project Description, discuss the provincial permitting process and to obtain
regulator input into the project planning and confirm the proposed environmental
work program. Separate discussions were held with federal regulators which also
included the probable exemption of the project from the Canadian Environmental
Assessment Act (CEAA) due to the low environmental impact of the project and the fact that the
project does not exceed any of the regulated triggers under the Act. No fish or
fish habitat will be impacted by the project, eliminating the need for
associated permits under the Federal Fisheries Act.
84
Initial
studies suggest that aggregate stockpiles, tailing and concentrate storage areas
will not contribute effluents of environmental concern. Additional environmental
assessment of the waste rock and tailing materials, based on recent drilling and
metallurgical work, was initiated in an effort to validate the earlier work. Dry
stacking of tailing and concentrates will minimize long term storage risk, water
use and optimize effluent quantity. A final project description may not be
required if the Project is exempted from the CEAA process. The data will be
required to support the provincial permit applications only. This has the
advantage of shortening the permitting time line significantly.
The
Project is located in the traditional land use area of the Wabaseemoong
Independent Nations (WIN) for which they have stewardship under an agreement
with the Province. The Company first signed an MOU with WIN in 1999 which was
renewed when the Project was re-activated in 2013. Avalon management has been
keeping WIN leadership informed on Project activities and remains committed to
fulfilling its community consultation obligations and partnering with WIN on
Project business opportunities. The Company has also initiated dialogue with the
Métis Nation of Ontario who holds Aboriginal rights in the area. Following the
completion of the Draft Project Description, positive project review meetings
were held with the Wabaseemoong Chief and Council and with the Metis Nation of
Ontario at a Valued Components Workshop in order to review the project and
obtain guidance and comments on environmental aspects of the project.
Overall,
the Company does not anticipate any delays in securing the necessary permits and
approvals to proceed with the Phase 1 production facility.
(f)
Future Work
The
Company is primarily focused on the next steps required to move forward with the
Phase 1 demonstration scale production facility. Several models for this plant
are under consideration involving different throughput rates and variations of
the flowsheet depending on the product mix to be recovered. The nature of the
resource, with two main lithium minerals, offers considerable flexibility in
lithium products. Some consumers are interested in mineral concentrate (either
petalite or lepidolite) and some are more interested in the lithium derivative
products, either carbonate or hydroxide. The Company continues to talk to
potential strategic partners interested in securing lithium supplies. The
product mix, final flowsheet and production capacity will be determined in
collaboration with our partner(s).
Near
term priorities are all related to flowsheet optimization laboratory work and
production of small product samples for customer evaluation. Following
completion of the current testwork program, the Company will be in a position to
proceed with another bulk sample trial in order to generate the information
necessary to complete the final flowsheet design and engineering for the Phase 1
Plant. When this work is completed, financing is secured and any necessary
operating permits are in place the Company will be in a position to proceed with
Phase 1 plant construction possibly as early as 2018.
The
present concept is to build this facility at a scale that would facilitate
on-going profitable small-scale production. A throughput rate of in the order of
100,000 tonnes per annum of ore is envisioned which would require a capital
investment in the rate of $30-40 million. A Phase 1 Plant at this scale could
potentially be in operation before the end of 2019. Once the lithium products
are fully qualified and commitments on off-take received, the Company would then
proceed with scale-up of the operation to expand product output. This might be
done in two steps before full-scale production is achieved in order to ensure a
successful transition without compromising product quality.
Further
drilling is also contemplated in order to increase the total lithium resources
in the main Separation Rapids lithium deposit, which is open for expansion to
depth below 200 metres with the deepest holes at present indicating similar
widths and grades as in the near surface holes. In addition, the lepidolite-rich
sub-unit of the main pegmatite is also open for expansion to depth and along
strike. This work is considered a second priority since the existing resource is more than adequate to serve the
requirements for Phase 1 production start-up and there is a high degree of
confidence in the potential for delineating additional economic resources on the
property.
85
Unless otherwise noted, the technical information on the
Separation Rapids Lithium Project has been reviewed and approved by the
Companys Senior Vice President, Metallurgy and Technology Development, Mr.
David Marsh, FAusIMM (CP), or Dr. William Mercer, PhD, P.Geo. (Ontario), P. Geo.
(NS), Vice President, Exploration, who are both Qualified Persons under NI
43-101.
Other Properties and Assets
In
addition to the Nechalacho Project and the Separation Rapids Lithium Minerals
Project, the Company owns three other rare metals and minerals projects, one of
which (the East Kemptville Tin-Indium Project) is currently active. The
Companys other assets which are inactive are the Warren Township Calcium
Feldspar Project and the Lilypad Lakes Tantalum-Cesium Project. The Company
abandoned its interest in the New Brunswick Tin Exploration Project in fiscal
2017. The Company also owns royalty interests in two development projects which
are not in production.
Unless
otherwise stated, the technical information contained in this section of the
Annual Report in respect of other properties and assets of the Company has been
reviewed and approved by Dr. William Mercer, P.Geo., Vice President, Exploration
who is a qualified person for the purposes of NI 43-101.
East Kemptville Tin-Indium Project
The
100% owned East Kemptville Tin-Indium Project is located approximately 45
kilometres northeast of Yarmouth, in Yarmouth County, southwestern Nova Scotia
in the vicinity of the former East Kemptville Tin Mine. Highway #203, which
connects the Town of Yarmouth to the southwest with the Town of Shelburne to the
east, passes a short distance to the northwest of the project area. The East
Kemptville Tin mine was developed in 1985 on a resource of tin-copper-zinc
mineralization known geologically as a greisen. Greisens are hydrothermal
mineral deposits associated with granites consisting of a stockwork of
mineralized veins and replacement zones in altered and mineralized granitic
rocks.
The
Company holds mineral rights at East Kemptville through a Special Licence, a
form of mineral tenure granted by the Province of Nova Scotia in circumstances
where there is a history of previous industrial land use activity (such as
mining) in the area of interest. It does not immediately convey surface land
rights and, accordingly, access must be arranged with the permission of surface
rights holders (which was done in 2014 and renewed for 2015 and 2016).
Ultimately, with completion of a feasibility study and related environmental
assessment work, a form of mining lease is obtainable from the government to
secure the requisite surface land rights. Negotiations with the surface rights
holders toward securing full tenure to the East Kemptville site are advancing
steadily, (including a detailed due diligence review on environmental
liabilities).
The
Company first acquired a Special Licence at East Kemptville in 2005 and it has
been subsequently renewed multiple times while the Company negotiated access to
the site. During the year ended August 31, 2015, by Order in Council, the
Government of Nova Scotia approved an application for a new Special Licence
reflecting the entire original mine site. The total area covered by the new
Special Licence is 2,880 acres. The new Special Licence designated Special
Licence No. 50462, has a term of three years beginning February 2, 2015, is
renewable for an additional two one-year periods and includes an obligation to
incur $5.25 million in expenditures by January 31, 2018 (of which $3,152,858 had
been incurred by August 31, 2017). The Company is unlikely to meet the
expenditure requirements of the Special Lease by and the Company will need to
negotiate with the government to renew or replace the special licence.
Subsequent to the end of fiscal 2017, the Company commenced the process toward
converting the Special Licence into a mining lease which it anticipates
completing in the first half of 2018.
A
drilling program was completed in the summer and early fall of 2014. It
comprised of seven drill holes totaling 984 metres on the Baby Zone. The
objective of the drill program was verification of historic drill data by 86 twinning in some cases, of historic drill holes, but applying
quality control and quality assurance processes as specified under CIM
guidelines for resource estimation.
In October 2014, the Company completed its first resource estimate
prepared in accordance with NI 43-101 for the East Kemptville Project. As
announced in the Companys news release dated October 31, 2014, the estimated
Indicated Mineral Resources are 18.47 million tonnes averaging 0.176% tin,
0.173% zinc and 0.064% copper and the estimated Inferred Mineral Resources are
16.95 million tonnes averaging 0.148% tin, 0.122% zinc and 0.062% copper at a
0.10% tin cut-off grade, as more fully detailed in Table 1 below. Note that the
0.10% tin cut-off grade employed in the base case simply reflects the cut-off
grade used historically.
Table 1: Mineral Resources, East Kemptville Main and Baby Zones
Classification
|
Sn Cut-off Grade
|
Tonnes (mT)
|
Sn %
|
Zn %
|
Cu %
|
IN SITU
INDICATED
|
>= 0.05
|
46.07
|
0.104
|
0.132
|
0.051
|
>=
0.10
|
18.47
|
0.176
|
0.173
|
0.064
|
>= 0.15
|
6.83
|
0.239
|
0.204
|
0.077
|
>= 0.20
|
3.16
|
0.337
|
0.268
|
0.093
|
>= 0.25
|
2.93
|
0.344
|
0.275
|
0.092
|
|
IN SITU
INFERRED
|
>= 0.05
|
34.29
|
0.102
|
0.104
|
0.052
|
>=
0.10
|
16.95
|
0.148
|
0.122
|
0.062
|
>= 0.15
|
2.66
|
0.203
|
0.130
|
0.075
|
>= 0.20
|
0.82
|
0.311
|
0.138
|
0.120
|
>= 0.25
|
0.58
|
0.342
|
0.171
|
0.117
|
Notes:
|
1.
|
CIM definitions were followed for Mineral
Resources.
|
|
2.
|
The Independent Qualified Person for this Mineral
Resource estimate is Donald Hains, P. Geo..
|
|
3.
|
The resource estimate is based on 275 drill holes
totalling 29,587 metres drilled between 1979 and 1991 by previous
operators and 7 holes totalling 984 metres drilled by the Company in
2014.
|
|
4.
|
Drill data was organized in Maxwell DataShed and for
estimation purposes was transferred to MineSight 3D software, wherein the
block model was developed.
|
|
5.
|
Resources were estimated by interpolating composites
within a block model of 5x5x3 m blocks. Interpolation used the inverse
distance squared method with localization of higher grades.
|
|
6.
|
Indicated material was defined as blocks with an average
distance to interpolated composites of ≤ 50 m while inferred material was
defined as blocks with an average distance to interpolated composites of ≤
75 m, thus limiting the depth of the resource to 75 m below drill
holes.
|
|
7.
|
Three metre composites were capped at 1% Sn, 1% Zn, and
0.5% Cu which are the 99
th
percentiles of assay data for those
elements, reducing contained tin by about 1% compared to uncapped
resource.
|
|
8.
|
The median density of available data of 2.78 t/m
3
was used for all mineralized material.
|
|
9.
|
Several possible cut-off grades are reported in this
resource estimate and it has yet to be determined what cut-off grade will
be appropriate in the context of present-day metal prices and operating
costs. The cut-off grade of 0.1% Sn reflects past mining practice at East
Kemptville.
|
|
10.
|
Mineral resources that are not mineral reserves do not
have demonstrated economic viability and their value may be materially
affected by environmental, permitting, legal, title, socio-political,
marketing, or other issues.
|
In
February 2015, the Company completed a Conceptual Redevelopment Study (the
Study), on the East Kemptville Tin Deposit (the Deposit) to confirm the
business case for re-development of the Deposit. The Study was prepared by Hains
Engineering Company Limited of Toronto (Hains) and indicated that, given the
preliminary assumptions used on costs and revenues, there is potential for
attractive economics. The Study was very preliminary in nature and included inferred mineral resources that are
considered too speculative geologically to have the economic considerations
applied to them that would enable them to be categorized as mineral reserves.
Further definition drilling will be required before these mineral resources can
be incorporated into a mining reserve and relied upon in an economic analysis
for feasibility study purposes. There is no certainty that these inferred
resources will be converted to reserves or that the preliminary economics
indicated in the Study will be realized.
87
Hains
proposed model assumes conventional open pit mining with milling rate at 10,000
tonnes per day. Whittle pit optimization based on the NI 43-101 resource
released in October 2014 indicated a pit containing 49.3 million tonnes of
mineral resources (which includes resources classified both as Indicated and
Inferred) within the pit at average diluted grades of 0.113% tin. 0.131% zinc
and 0.053% copper, including 5.87 million tonnes of low grade stockpile
material.
A
2015 drilling program was completed in November 2015 and had the objective of
upgrading inferred mineral resources in the Main and Baby Zones into the
indicated and measured categories as well as testing other known tin occurrences
in the area. In addition, the drilling program provided further samples for
metallurgical testing and assisted in developing geotechnical knowledge of the
deposit. Twenty-two drill holes totalling 4,514 metres were completed, on the
Main, Baby and Duck Pond Zones with assay results from the Baby Zone holes
released on November 3, 2015. Results were in line with expectations and confirm
continuity of the mineralized zone to depth. During the Quarter, the surface ore
stockpiles were resampled and the historical estimate of average grades was
confirmed. During 2016 a series of grab samples were collected from the surface
ore stockpiles and the results provided a confirmation of the reported
historical estimate of the average grade of the stockpiles as given in the table
below. In addition, bulk samples were collected from the stockpile for
metallurgical testwork. A drilling program will be required to more
systematically sample the stockpiles and map the internal grade distribution in
more detail. This information will be included in a future resource update.
The
estimate of resources present in the Low Grade Stockpile at East Kemptville
reported by Rio Algom Limited in the East Kemptville Closure Plan Report dated
December 1993 and filed with the Government of Nova Scotia was verified. In
order to verify the tonnage a volume estimate was completed utilizing the
original 1983 topography prior to mining, topography from the 1992 topographic
survey and present topography to estimate the volume of the stockpile. A density
(SG) of 1.6 t/m
3
was then applied as this was considered reasonable
from past experience with estimating resources in stockpiles and dumps. The
estimate of tonnage is within 5.5% overall of that given by Rio Algom in the
mine closure document.
In
order to verify the metal grade of the low grade stockpile, a surface sampling
program was completed. A program was completed with two independent samples at
points at 50 m intervals across the length and width of the low grade stockpile,
plus samples around one side of the bottom of the pile. The two samples from
each site were kept separate in order to investigate any sampling bias on the
part of one or other sampler. The samples collected totalled 270 kgs in weight.
Locations were determined by chain, compass and handheld GPS. Samples collected
from each site were shipped to Activation Laboratories Limited for analysis
including multielement Ultratrace-7 (56 elements) and XRF for Sn (plus 19
elements including whole rock analysis). The grades estimated by Avalon in 2015
are in reasonable agreement to the average resource grade reported by Rio Algom
Limited in the above mentioned Closure Plan (1993) and thus confirm the estimate
of Sn, Zn and Cu grade of the Low Grade Stockpile. For example, the RAL Closure
Plan quotes Sn grades of 0.091% Sn estimated from the block model during mining
and 0.106% Sn from surface sampling by RAL. The comparison shows that Sn is
within 11% of the surface samples quoted by RAL and higher than the block model
estimate. Zinc as measured by Avalon is also within 11% of the RAL value. Copper
is close to the block model estimate and slightly below the RAL surface sample
estimates.
Given
the likely heterogeneity of the material in the stockpiles, largely due to the
variable grades of the mineralization, the agreement is considered acceptable to
verify the estimates in the Closure Plan and to class the Low Grade Stockpile as
an Inferred Mineral Resource. Additional measurement and sampling of the
stockpile is required to confirm the historic tonnage and grade data.
88
On
the basis of its investigation, Avalon considers that the Low Grade Stockpile
may be reported as an inferred mineral resource as summarized in Table EK 2.
Metal grades are the average of the RAL and Avalon surface sampling, as shown
previously in Table EK 1.
Table EK 2
Low Grade Stockpile Estimated Mineral
Resource
Tonnes
(Mt)
|
Grade
(%)
|
|
Sn
|
Zn
|
Cu
|
5.87
|
0.112
|
0.100
|
0.61
|
Notes:
|
1.
|
The resource is classified as Inferred following CIM
Definition Standards 2014 for mineral resources.
|
|
2.
|
The Qualified Person for this mineral resource estimate
is Donald Hains, P.Geo., of Hains Engineering Company Limited.
|
|
3.
|
Resources were estimated by examination of historical RAL
data and Avalons 2015 sampling of the Low Grade Stockpile.
|
|
4.
|
Mineral resources do not have demonstrated economic
viability and their value may be materially affected by environmental,
permitting, legal, title, socio-political, marketing or other
issues.
|
It
is recommended by Hains that a drill program be completed on the stockpile to
verify the grade with depth within the pile with drill holes on a grid at 50-m
intervals. This would require 2,000 to 4,000 m in about 75 120 drill holes at
an estimated cost of about $300,000 to $600,000, or $0.05 -0.10/t. The drilling
could be with a reverse circulation drill or similar, depending on the size
distribution of the rock in the pile. In addition, mineralogical and
metallurgical work is required to assess the degree of oxidation of the sulphide
minerals present in the stockpile.
Bench
scale metallurgical testing, using sample material collected during the 2014
drill program, was carried out a commercial laboratory located in Cornwall,
England with expertise in tin metallurgy, and was completed late in December,
2015. This work program investigated all aspects of the flowsheet including
milling, copper and zinc sulphide flotation as well as tin recovery by both
gravity and flotation processes. The recovery of indium to the zinc concentrate
was also monitored. This test program will eventually lead to larger scale pilot
plant testing (if metal prices increase sufficiently) using representative bulk
samples collected from future drilling and existing ore stockpiles at the site.
The results from this test program confirmed the ability to produce a tin
concentrate with >50% tin, a zinc concentrate of >50% zinc (also
containing 0.175% Indium) and a copper concentrate at >20% copper with scope
for further grade improvements.
During
fiscal 2017, project work was focused on preparing an internal study on the
economic viability of redeveloping the site at this small-scale by initially
focusing on the readily accessible low-grade stockpile material. The Companys
detailed sampling of the surface of the stockpile has provided more confidence
in the average grade estimate reported in the historical records. A drilling
program will be carried out on the stockpile before production is initiated to
map the internal grade distribution in more detail for future process plant
scheduling.
This
recent work has confirmed that the small scale development scenario has economic
potential at current tin prices. The model contemplates processing of almost 6
million tonnes of surface ore stockpiles at the rate of 100 tonnes per hour
(tph) for the recovery of a tin concentrate through a small, modular-designed
gravity process plant. The model also included the eventual processing of higher
grade, near surface ore from both the Main and Baby Zone pits which would extend
the operating life in the model to 13 years. Testwork on a simple gravity only
circuit has demonstrated that a tin recovery of +/-60% is achievable by such a
flowsheet. The initial concentrate produced was 44.6% tin but this was increased
to 68% by flotation to remove the contained sulphides; a target of 55% tin has
been set for the operating plant. This scenario offers the potential for near
term production at a relatively low capital expenditure with positive
environmental impact by removing sources of on-site acid mine drainage and by
taking advantage of existing tailings management facilities and the open pits.
Processing of the stockpiles would contribute to the long term environmental
remediation of the site.
Avalon
has begun commercial discussions with several parties interested in new sources
of supply of tin concentrate or interested in tin development opportunities.
Samples of the tin mineralization from the stockpiles have been sent to one interested party and others are waiting for
tin concentrate samples. Given the expected quality of the tin concentrate to be
produced, off-take contracts are expected to be achieved once financing for the
project is in place, or as a part of a debt financing arrangement.
89
Environmental
studies examined the nature of the waste material generated from renewed
operations, as well as the conditions required for bringing the existing
operation into readiness for future production. A closure strategy has now been
identified for the small scale development scenario to significantly reduce the
existing site environmental liability through innovative management of future
waste rock and tailings and through the processing and elimination of
sulphide-bearing material presently stored on surface that is contributing to
the need for costly ongoing water treatment.
All future potentially acid generating waste produced will be disposed of
sub-aqueously to eliminate oxidation and the need for long term treatment
requirements. These are anticipated to significantly reduce or eliminate the
need for ongoing site care and maintenance. Additional drilling was completed by
the surface rights owner to validate the stability of the coarse tailing pile
and eliminate the potential need for future stabilization work during
operations. Samples from the drilling will be analysed for tin to evaluate the
potential for re-processing the tailings to recover additional tin concentrates.
The detailed due diligence review of the historic environmental liability, led
by Mark Wiseman, Vice-President, Sustainability, related to the acquisition of
the surface rights was completed with no fatal flaws identified.
Unless
otherwise noted, the technical information on the East Kemptville Tin-Indium
Project has been reviewed and approved either by the Companys Senior Vice
President Metallurgy and Technology Development, Mr. David Marsh, FAusIMM (CP),
or Dr. William Mercer, PhD, P.Geo. (Ontario), P. Geo. (NS), Vice President,
Exploration, who are both Qualified Person under NI 43-101.
New Brunswick Tin Exploration Project
Mount Douglas Tin-Tungsten Property
During the year ended August 31,
2016, the Company entered into an option agreement to earn a 100% interest
(subject to a 2.0% NSR, which can be bought back for $1.0 million) in certain
mineral claims located in Charlotte County, New Brunswick. The Company wrote off
its investment in the project in fiscal 2017 and returned the claims to the
original owner in September 2017.
Mascarene Copper-Nickel-Cobalt Property
During
the year ended August 31, 2016, the Company entered into an option agreement to
earn a 100% interest (subject to a 2.0% NSR, of which half (1%) can be bought
back for $1.0 million) in certain mineral claims located in the Mascarene
Peninsula, Charlotte County, southern New Brunswick. The property is located
near Highway 772 south of Saint George. Access is possible on the property on
old logging roads and trails, plus a powerline that intersects the property can
be used for access on foot or ATV. During fiscal 2017 the Company terminated the
option agreement and returned these claims to the original owners.
Warren Township Calcium Feldspar Project
The
Warren Township Calcium Feldspar Project is a mineral development opportunity
located near the Village of Foleyet, 100 kilometres west of Timmins, Ontario.
The project consists of a mining lease totalling 687.736 hectares which is 100%
owned by the Company. The lease covers a portion of the Shawmere Anorthosite
Complex hosting a large historic resource (not prepared in accordance with NI
43-101) of a high purity anorthosite.
Anorthosite
is an unusual mafic igneous intrusive rock consisting of greater than 90%
plagioclase feldspar. Previous work has demonstrated that this material can be
processed to produce a high quality calcium feldspar raw material for the manufacture of reinforcing glass fibre and
other industrial products such as mineral fillers. The location of the property
near both road and rail transportation infrastructure and its proximity to
markets in southern Ontario and the northeastern United States offers the
potential for development of a low-cost, highly profitable industrial minerals
operation.
90
In
June 2012, Avalon received a permit under the
Aggregate Resources Act
(Ontario) to operate a quarry at Warren Township on 240 hectares of land.
The
Company does not plan any further work on the project until it identifies
renewed market interest in the calcium feldspar product.
Lilypad Lakes Tantalum-Cesium Project
The
Lilypad Lakes Tantalum-Cesium Project consists of 14 claims, totalling 3,107.99
hectares, covering a field of tantalum and cesium mineralized pegmatites, and
located 150 kilometres northeast of Pickle Lake, Ontario. The claims were staked
by the Company between January 1999 and October 2000 and are 100% owned by the
Company with no underlying royalties.
The
project has been inactive since 2001 awaiting a recovery in tantalum prices or
new demand for cesium minerals before considering further expenditures. The
Company has no plans for the work on the project for the foreseeable future.
Wolf Mountain Platinum-Palladium Property Royalty
The
Wolf Mountain Platinum-Palladium Project is located approximately 90 kilometres
northeast of Thunder Bay, Ontario. In November 2003, Avalon sold its 40% working
interest in the project to its joint venture partners for $20,000 and a 0.4% NSR
interest in the two properties. The joint venture can purchase this NSR interest
from the Company at any time for $1,000,000. In August, 2014, Avalon purchased
an additional 2% NSR, which was held by the original vendor of the property, for
$15,000, of which up to 1.0% can be purchased by the joint venture partners for
$1,000,000.
East Cedartree Gold Property Royalty
The
Company holds a 2% NSR interest in five claims, which it retained after selling
these claims to a third party, comprising part of the East Cedartree Gold
Property located 70 kilometres southeast of Kenora, Ontario. The title holder to
the claims can re-purchase a 1% NSR from the Company at any time for
$1,000,000.
Item 5. Operating and Financial Review and Prospects
(i)
Critical Accounting Policies
Some
of our critical accounting policies are as follows. See Note 3 to the August 31,
2017 consolidated financial statements for a detailed description of our
accounting policies.
Exploration
and evaluation assets
The
Company is in the exploration and development stage with respect to its mineral
properties. The exploration and evaluation assets on the Companys consolidated
statement of financial position relate to mineral rights acquired and exploration and evaluation expenditures
incurred in respect to resource projects that are in the exploration and
evaluation stage.
91
Exploration
and evaluation expenditures include costs which are directly attributable to
acquisition, surveying, geological, geochemical, geophysical, exploratory
drilling, land maintenance, sampling, and assessing technical feasibility and
commercial viability. These expenditures are capitalized as exploration and
evaluation assets until the technical feasibility and commercial viability of
extracting the mineral resource of a project are demonstrable. During the
exploration period, exploration and evaluation assets are not amortized.
Exploration
and evaluation assets are allocated to cash generating units (CGUs) for the
purpose of assessing such assets for impairment and each project is identified
as a separate CGU. A project is tested for impairment when facts and
circumstances suggest that the carrying amount of that project may exceed its
recoverable amount, and the recoverable amount of the project is estimated. If
the recoverable amount of the project is estimated to be less than its carrying
amount, the carrying amount of the project is reduced to its recoverable amount,
and an impairment loss is recognized immediately in the consolidated statement
of comprehensive loss.
Once
the technical feasibility and commercial viability of extracting a mineral
resource of a project are demonstrable, the relevant exploration and evaluation
asset is assessed for impairment, and any impairment loss is recognized, prior
to the balance being reclassified as a development asset in property, plant and
equipment (PPE).
The
determination of the demonstration of technical feasibility and commercial
viability is subject to a significant degree of judgment and assessment of all
relevant factors. In general, technical feasibility may be demonstrable once a
positive feasibility study is completed. When determining the commercial
viability of a project, in addition to the receipt of a feasibility study, the
Company also considers factors such as the existence of markets and/or long term
contracts for the product and the ability to obtain the relevant operating
permits.
All
subsequent expenditures to ready the property for production are capitalized
within development assets, other than those costs related to the construction of
property, plant and equipment.
Once
production has commenced, all costs included in development assets are
reclassified to mining properties.
Exploration
and evaluation expenditures incurred prior to the Company obtaining the right to
explore the property are recorded as an expense in the period in which they are
incurred.
Impairment
of Non-Financial Assets
At
the end of each reporting period, the Company reviews the carrying amounts of
its non-financial assets with finite lives at the CGU level to determine whether
there is any indication that those assets have suffered an impairment loss. If
any such indication exists, the recoverable amount of the relevant CGU is
estimated in order to determine the extent of the impairment loss, if any. A CGU
is the smallest identifiable group of assets that generates cash inflows that
are largely independent of the cash inflows from other assets or groups of
assets. The Companys CGUs are typically its significant individual exploration
and evaluation assets, development projects or mines. In certain circumstances,
when the recoverable amount of an individual asset can be determined, impairment
assessment is performed at the individual asset level. Where a reasonable and
consistent basis of allocation can be identified, corporate assets are also
allocated to individual CGUs, or otherwise they are allocated to the smallest
group of CGUs for which a reasonable and consistent allocation basis can be
identified.
The
recoverable amount of an asset is the higher of fair value less costs of
disposal and value in use. In assessing value in use, the estimated future cash
flows are discounted to their present value using a pre-tax discount rate that
reflects current market assessments of the time value of money and the risks
specific to the asset for which the estimates of future cash flows have not been
adjusted.
92
If
the recoverable amount of an asset (or CGU) is estimated to be less than its
carrying amount, the carrying amount of the asset (or CGU) is reduced to its
recoverable amount, and an impairment loss is recognized immediately in profit
or loss.
At
the end of each reporting period, the Company assesses whether there is any
indication that impairment losses that were recognized in prior periods may no
longer exist or have decreased. If such an indication exists, the estimated
recoverable amount of the asset (or CGU) is revised and the carrying amount of
the asset (or CGU) is increased to the revised estimate of its recoverable
amount, to the extent that the increased carrying amount does not exceed the
carrying amount that would have been determined had no impairment loss been
recognized for the asset (or CGU) in prior years. A reversal of an impairment
loss is recognized immediately in profit or loss.
Site
Closure and Reclamation Provision
The
Companys mining exploration activities are subject to various governmental laws
and regulations relating to the protection of the environment. These
environmental regulations are continually changing and are generally becoming
more restrictive. The Company has made, and intends to make in the future,
expenditures to comply with such laws and regulations or constructive
obligations. Provision for site closure costs is recorded at the time an
environmental disturbance occurs, and is measured at the Companys best estimate
of the expected value of future cash flows required to reclaim the disturbance
upon site closure, discounted to their net present value. The net present value
is determined using a pre-tax discount rate that is specific to the liability.
The estimated net present value is re-measured at the end of each reporting
period, or when changes in circumstances occur and/or new material information
becomes available. Increases or decreases to the provision arise due to changes
in legal, constructive or regulatory requirements, the extent of environmental
remediation required and cost estimates. The net present value of the estimated
costs of these changes is recorded in the period in which the change is
identified and quantifiable.
Upon
initial recognition of site closure provision there is a corresponding increase
to the carrying amounts of related assets and the cost is amortized as an
expense on a units-of-production basis over the life of the related assets. The
value of the provision is progressively increased over the life of the operation
as the effect of discounting unwinds and such increase is recognized as an
interest expense.
Critical
accounting judgements and estimation uncertainties
The
preparation of the consolidated financial statements in conformity with IFRS
requires that the Companys management make critical judgments, estimates and
assumptions about future events that affect the amounts reported in the
consolidated financial statements and the related notes thereto. Actual results
may differ from those estimates. Estimates and assumptions are reviewed on an
on-going basis based on historical experience and other factors that are
considered to be relevant under the circumstances. Revisions to estimates are
accounted for prospectively.
The
Company has identified the following significant areas where critical accounting
judgments, estimates and assumptions are made and where actual results may
differ from these estimates under different assumptions and conditions and may
materially affect financial results or the financial position reported in future
periods.
Further
details of the nature of these assumptions and conditions may be found in the
relevant notes to the consolidated financial statements.
(ii)
Key Sources of Estimation Uncertainty
Information
about assumptions and estimation uncertainties that have a significant risk of
resulting in a material adjustment are included in the following notes:
93
Recoverability
of Exploration and Evaluation Assets, Development Assets and Property, Plant
and
Equipment
The
Company assesses all exploration and evaluation assets, development assets and
PPE at each reporting date to determine whether any indication of impairment
exists. Where an indicator of impairment exists, a formal estimate of the
recoverable amount is made, which is the higher of the fair value less costs of
disposal and value in use. These assessments require the use of estimates and
assumptions such as long term commodity prices, discount rates, foreign exchange
rates, future capital requirements, exploration potential and operating
performance.
Determination
of Reserve and Resource Estimates
Mineral
reserves and resources are estimates of the amount of ore that can be
economically and legally extracted from the Companys exploration and
development properties. The estimation of recoverable reserves is based upon
factors such as estimates of commodity prices, production costs, production
techniques, future capital requirements and foreign exchange rates, along with
geological assumptions and judgments made in estimating the size and grade of
the ore body. Changes in the reserve or resource estimates may impact the
carrying value of exploration and evaluation assets, development assets, PPE,
site closure and reclamation provision and amortization expense.
Fair
Value of Share Based Payments and Warrants
The
Company follows IFRS 2, Share-based Payment, in determining the fair value of
share based payments. This calculated amount is not based on historical cost,
but is derived based on assumptions (such as the expected volatility of the
price of the underlying security, expected hold period before exercise, dividend
yield and the risk-free rate of return) input into a pricing model. The model
requires that management make forecasts as to future events, including estimates
of: the average future hold period of issued stock options and compensation
warrants before exercise, expiry or cancellation; future volatility of the
Companys share price in the expected hold period; dividend yield; and the
appropriate risk-free rate of interest. The resulting value calculated is not
necessarily the value that the holder of the option or warrant could receive in
an arms length transaction, given that there is no market for the options or
compensation warrants and they are not transferable. Similar calculations are
made in estimating the fair value of the warrant component of an equity unit.
The assumptions used in these calculations are inherently uncertain. Changes in
these assumptions could materially affect the related fair value estimates.
Site
Closure and Reclamation Provision
The
Companys accounting policy for the recognition of a site closure and
reclamation obligation requires significant estimates and assumptions such as:
requirements of the relevant legal and regulatory framework, the magnitude of
possible disturbance and the timing thereof, extent and costs of required
closure and rehabilitation activity, and discount rate. These uncertainties may
result in future actual expenditures differing from the amounts currently
provided.
Site
closure and reclamation provision recognized is periodically reviewed and
updated based on the facts and circumstances available at the time. Changes to
the estimated future costs are recognized in the Statement of Financial Position
by adjusting both the site closure and reclamation asset and provision.
Property,
Plant and Equipment - Estimated Useful Lives
Management
estimates the useful lives of PPE based on the period during which the assets
are expected to be available for use. The amounts and timing of recorded
expenses for depreciation of PPE for any period are affected by these estimated
useful lives. The estimates are reviewed at least annually and are updated if
expectations change as a result of physical wear and tear, technical or
commercial obsolescence and legal or other limits to use. It is possible that
changes in these factors may cause significant changes in the estimated useful
lives of the Companys PPE in the future.
94
(iii)
Critical Judgments
Information
about critical judgments in applying accounting policies that have most
significant effect on the consolidated financial statements are as follows:
Capitalization
of Exploration and Evaluation Costs
Exploration
and evaluation costs incurred during the year are recorded at cost. Capitalized
costs include costs directly attributable to exploration and evaluation
activities, including salaries and benefits of employees who are directly
engaged in the exploration and evaluation activities. Administrative and other
overhead costs are expensed. Exploration and evaluation costs incurred that have
been determined to have future economic benefits and can be economically
recovered are capitalized. In making this judgment, management assesses various
sources of information including, but not limited to, the geologic and
metallurgic information, history of conversion of mineral deposits to proven and
probable mineral reserves, scoping and feasibility studies, proximity of
operating facilities, operating management expertise and existing permits.
A. Operating Results
The
following discussion is intended to supplement the audited consolidated
financial statements of the Company for the years ended August 31, 2017, 2016
and 2015, and the related notes thereto, which have been prepared in accordance
with IFRS as issued by the IASB. This discussion should be read in conjunction
with the audited consolidated financial statements contained in this Annual
Report on Form 20-F. This contains forward-looking statements that are subject
to risk factors set out under the heading Item 3. Key Information D. Risk
Factors. See Cautionary Note Regarding Forward-Looking Statements above.
Year ended August 31, 2017 compared with the year ended
August 31, 2016
|
|
2017
|
|
|
2016
|
|
Revenue
|
|
|
|
|
|
|
Interest income
|
$
|
28,211
|
|
$
|
35,160
|
|
|
|
|
|
|
|
|
Expenses
|
|
|
|
|
|
|
Corporate and administrative
expenses
|
|
2,877,792
|
|
|
3,221,418
|
|
Impairment loss on exploration and evaluation
assets
|
|
178,118
|
|
|
223,938
|
|
General exploration
|
|
23,677
|
|
|
37,987
|
|
Depreciation
|
|
35,656
|
|
|
38,282
|
|
Share based compensation
|
|
183,108
|
|
|
345,435
|
|
Foreign exchange loss (gain)
|
|
5,137
|
|
|
(9,274
|
)
|
Financing transaction costs
|
|
601,335
|
|
|
10,598
|
|
Increase (Decrease) in fair value of warrants
denominated in foreign currency
|
|
(229,747
|
)
|
|
122,561
|
|
Increase (Decrease) in fair
value of convertible redeemable preferred shares
|
|
131,250
|
|
|
-
|
|
Increase (Decrease) in fair value of
derivative liabilities
|
|
(103,326
|
)
|
|
-
|
|
|
|
|
|
|
|
|
|
|
3,703,000
|
|
|
3,990,945
|
|
|
|
|
|
|
|
|
Net Loss before Income Taxes
|
|
(3,674,789
|
)
|
|
(3,955,785
|
)
|
Deferred Income Tax
Recoveries
|
|
317,468
|
|
|
416,140
|
|
|
|
|
|
|
|
|
Net Loss and Total
Comprehensive Loss for the year
|
$
|
(3,357,321
|
)
|
$
|
(3,539,645
|
)
|
95
During
the year ended August 31, 2017 (Fiscal 2017 or the Year), the Companys net
loss decreased by $182,324 from a net loss of $3,539,645 for the year ended
August 31, 2016 (Fiscal 2016) to a net loss of $3,357,321 for Fiscal 2016. The
overall decrease in the net loss as compared to the prior year was due to the
factors discussed below:
Interest income
Lower
cash balances resulted in interest income decreasing to $28,211 for Fiscal 2017
compared to $35,160 for Fiscal 2016.
Corporate and administrative expenses
Corporate
and Administrative expenses totalled $2,877,792 during Fiscal 2017, a 12%
decrease from the amount incurred in Fiscal 2016 ($3,221,418). The main areas of
decreased operating expenses for the Year were expenses on public and investor
relations, salaries and benefits, insurance expense, filing and transfer fees,
and legal and related advisory fees.
Expenses
on public and investor relations for the Year decreased by $126,841 (23%) to
$430,136 compared to $556,977 in Fiscal 2016. The decrease was primarily related
to the decreased amount of work provided by consultants. Higher consulting fees
were incurred in Fiscal 2016 for investor relations activities to build investor
awareness about the Companys shift in focus back to its lithium business and
the Company name change which was approved by shareholders in February 2016.
Salaries
and benefits for the Year decreased by approximately 6% to $1,509,865 compared
to $1,607,078 in Fiscal 2016. The decrease in salaries and benefits was
primarily related to the reduced staffing levels and to the decrease in the
provision for accrued vacation days.
Insurance
expenses for the Year decreased by approximately 21% to $130,787 compared to
$165,613 for Fiscal 2016. This decrease is related to the reduction to the
directors and officers liability insurance coverage from $30,000,000 to
$20,000,000 for the 2016/2017 policy year.
Filing
and transfer fees decreased by 20% to $93,633 during the Year compared to
$116,484 for Fiscal 2016. The decrease is primarily related to the decrease in
the decrease in annual listing fees paid and the elimination of services
provided by a US-based transfer agent after the Companys move to the OTCQX Best
Market from the NYSE MKT in December 2015.
Legal
and related advisory fees decreased by 58% to $18,679 during the Year compared
to the $44,635 for fiscal 2016. As part of its continuing effort to reduce
costs, more routine matters and filings are now handled in-house.
Impairment loss on exploration and evaluation
assets
As
at August 31, 2017, the Company had decided to terminate the option agreement on
its Mount Douglas Tin-Tungsten Property, and accordingly the cost incurred
to-date of $135,109 has been written off as an impairment loss in the Year.
These claims were returned to the original owner in September 2017. The Company
also terminated an option agreement in certain mineral claims located south of
St. George, New Brunswick and returned these claims to the original owners
during the Year, accordingly the cost incurred to-date of $39,929 has been
written off as an impairment loss.
As
at August 31, 2016, the Company decided not to renew the mineral claims of its
Miramichi Tin Property which were due for renewal in September 2016, accordingly
the cost incurred to-date of $218,620 was written off as an impairment loss in
Fiscal 2016.
96
Share based Compensation
Share
based compensation decreased to $183,108 for Fiscal 2017 compared to $345,435
for Fiscal 2016. This decrease is primarily related to the decrease in the
estimated fair values of options earned during the Year compared to Fiscal 2016.
Financing transaction costs
In
March 2017, the Company entered into a preferred share purchase agreement (the
Agreement) with an entity managed by the Lind Partners (Lind) and issued 500
Series A1 Preferred Shares (the Preferred Shares) at a price of $5,000 per
share for gross proceeds of $2,500,000. Pursuant to Canadian securities laws,
the securities issuable under this private placement will be subject to a hold
period, which expired on July 11, 2017 (the Hold Period).
The
Preferred Shares do not carry a dividend and have a redemption value that starts
at $5,000 per share and increases by $250 per share each quarter over a 24
months period ending on March 10, 2019, to a cap of $6,750 per share. After the
Hold Period, the Preferred Shares can be converted by Lind into common shares of
the Company at a price per common share equal to 85% of the five-day volume
weighted average price (VWAP) of the common shares on the TSX immediately
prior to the date that notice of conversion is given (the Conversion Option).
In
conjunction with this private placement, Lind received a commitment fee of
$125,000 and 6,900,000 common share purchase warrants (the A1 Warrants). Each
A1 Warrant entitles the holder to purchase one common share of the Company at a
price of $0.23 per common share until March 10, 2022.
After
the Hold Period, Lind has the basic right to convert 25 Preferred Shares into
common shares of the Company on a monthly basis, subject to certain conversion
limits set out in the Agreement, however Lind is permitted to convert up to 100
Preferred Shares on a monthly basis in the event such amount does not exceed 20%
of the Company's 20-day traded volume of common shares on the TSX immediately
prior to the date of delivery of a conversion notice.
Lind
is also entitled to accelerate its conversion right to the full amount of the
redemption value applicable at such time, or demand repayment of the applicable
redemption value per share in cash (the Put Option), upon the occurrence of
certain events as set out in the Agreement (most of which are beyond the
Companys control) (the Redemption Events). The triggering Redemption Events
include certain key financial and non-financial conditions, which include change
of control, insolvency and liquidity conditions etc. as defined in the
Agreement. These Redemption Events also limit the Company from obtaining other
debt or preferred share financings that are not junior to the Preferred Shares
other than certain project-related financings, as well as other at-the-market,
equity lines or credit type of common share offerings, or convertible security
financings where the price of the common share is not fixed at a predetermined
price. In addition, if the Redemption Event is a change of control event, the
redemption amount will be equal to 110% of the applicable redemption amount at
that time. No Redemption Event had occurred since the issuance of the Preferred
Shares.
The
Company has the right to redeem all of the outstanding Preferred Shares at any
time after the Hold Period at a 5% premium to the redemption value (the Call
Option). The Company also has floor price protection such that if any
conversion results in an effective conversion price of less than $0.10 per
common share, then the Company has the right to deny the conversion and instead
redeem the Preferred Shares that were subject to that conversion for the
redemption amount in cash plus a 5% premium.
At
any time while any Preferred Shares are outstanding, Lind has the option of
subscribing for up to an additional 165 Series A2 Preferred Shares at a price of
$5,000 per share and under the same terms and conditions as the initial
financing, subject to certain triggering events and subject to the prior
approval of the TSX (Series A2 Option). Lind will also receive a certain
number of Series A2 warrants (A2 Warrants) when it exercised the Series A2
Option. The number of A2 Warrants to be issued and the exercise price of A2
Warrants will be calculated by using similar formulas used in determining the
number and the exercise price of the A1 Warrants.
97
The
Preferred Share is a hybrid instrument that contains multiple embedded
derivatives: the Conversion Option, Put Option and Call Option. The Company had
designated the entire hybrid contract (the Preferred Share and all of the
embedded derivatives) as a financial liability at FVTPL in accordance with IAS
32,
Financial Instruments: Presentation
(IAS 32) and IAS 39,
Financial Instruments: recognition and measurement
(IAS 39) and
remeasured at each financial statement reporting date, with the resulting change
in value being recorded as increase or decrease in fair value of convertible
redeemable preferred shares in the consolidated statement of comprehensive loss.
The Company had determined that the total fair value of the Preferred Shares at
issuance at $2,625,000.
The
A1 Warrant had also been classified as a financial liability at FVTPL and
re-measured at each financial statement reporting date using the Black-Scholes
pricing model, with the resulting change in value being recorded as increase or
decrease in fair value of derivative liabilities in the consolidated statement
of comprehensive loss. The fair value of the A1 Warrants was estimated at
$236,488 (or $0.0343 for each warrant) at issuance.
Cash
issuance costs incurred relating to this private placement totaled $239,847 and
had been recorded in the Statement of Comprehensive Loss as financing
transaction costs.
The
fair values of the Preferred Shares and the A1 warrants at issuance totaled
$2,861,488 and the excess of this amount over the gross proceeds ($2,500,000) of
$361,488 had been recorded as a financing transaction cost in the Statement of
Comprehensive Loss as a financing transaction cost.
Increase in fair value of convertible redeemable
preferred shares
As
discussed above under financing transaction costs, the fair value of the
Preferred Shares had been remeasured as at August 31, 2017 to be $2,646,000,
resulting in an increase of $131,250 in the fair value of the Preferred Shares
being recognized on the Statement of Comprehensive Loss for Fiscal 2017.
Increase (Decrease) in fair value of warrants denominated
in foreign currency and derivative liabilities
The
derivative liabilities consist of the warrants denominated in foreign currency
and the A1 warrants.
In
June 2014, the Company completed the US$ Unit Offering and issued 9,237,875
Units of the Company at a price of $0.469 (US$0.433) per Unit pursuant to the
security purchase agreement for gross proceeds of $4,331,200 (US$4,000,000).
Each Unit is comprised of a common share and 0.70 of an US$ Warrant. Each US$
Warrant is exercisable into a common share of the Company at an exercise price
of US$0.56 per share commencing on December 13, 2014 until June 13, 2021, and is
subject to certain anti-dilution provisions, which may reduce the exercise
price, with a limit of US$0.5095.
In
accordance with IAS 32 and IAS 39, the fair value of the US$ Warrant component
of the Unit totaling $2,200,946 had been classified and recorded as a financial
liability at the time of issuance, and are re-measured at fair value using the
Black-Scholes pricing model at each financial statement reporting date, with the
resulting change in fair value being recorded in the statement of comprehensive
loss. Using the Black-Scholes pricing model, the total fair value of these
warrants had been re-measured at $181,671, $411,418, and $288,857 as at August
31, 2017, August 31, 2016 and August 31, 2015, respectively, which resulted in a
gain of $229,747 for Fiscal 2017 (being the decrease in the estimated value of
the US$ Warrants between August 31, 2016 and August 31, 2017), and a loss of
$122,561 for Fiscal 2016 (being the increase in the estimated value of these
warrants between August 31, 2015 and August 31, 2016).
As
discussed above under financing transaction costs, the fair value of the A1
Warrants had been re-measured as at August 31, 2017 to be $133,162, resulting in
a decrease (gain) of $103,326 being recorded on the Statement of Comprehensive
Loss for Fiscal 2017.
98
Deferred Income Tax Recoveries
In
Fiscal 2017, the Company has incurred Canadian Exploration Expenditures (CEE)
of $2,255,184 related to certain flow-through equity financings completed in
Fiscal 2016 and Fiscal 2017. Accordingly, the Company has recognized a pro rata
amount of the flow-through share premium of $416,140 through the consolidated
statement of comprehensive loss as a deferred income tax recovery with a
corresponding reduction to the deferred flow-through share premium liability. In
Fiscal 2016, the Company had recognized a deferred income tax recovery of
$416,140 resulting from the CEE of $3,854,975 incurred in Fiscal 2016 related to
certain flow-through equity financings completed in Fiscal 2015 and Fiscal 2016.
Year ended August 31, 2016 compared with the year ended
August 31, 2015
|
|
2016
|
|
|
2015
|
|
Revenue
|
|
|
|
|
|
|
Interest income
|
$
|
35,160
|
|
$
|
66,014
|
|
|
|
|
|
|
|
|
Expenses
|
|
|
|
|
|
|
Corporate and administrative
expenses
|
|
3,221,418
|
|
|
3,949,320
|
|
Impairment loss on exploration and evaluation
assets
|
|
223,938
|
|
|
6,425
|
|
Write-off of land acquisition
option payments
|
|
-
|
|
|
212,960
|
|
General exploration
|
|
37,987
|
|
|
33,782
|
|
Depreciation
|
|
38,282
|
|
|
55,730
|
|
Share based compensation
|
|
345,435
|
|
|
788,880
|
|
Foreign exchange (gain) loss
|
|
(9,274
|
)
|
|
(25,355
|
)
|
Financing transaction costs
|
|
10,598
|
|
|
-
|
|
Increase (Decrease) in fair
value of warrants denominated in foreign currency
|
|
122,561
|
|
|
(1,431,765
|
)
|
|
|
|
|
|
|
|
|
|
3,990,945
|
|
|
3,589,977
|
|
|
|
|
|
|
|
|
Net Loss before Income
Taxes
|
|
(3,955,785
|
)
|
|
(3,523,963
|
)
|
Deferred Income Tax Recoveries
|
|
416,140
|
|
|
347,589
|
|
|
|
|
|
|
|
|
Net Loss and Total Comprehensive Loss for
the year
|
$
|
(3,539,645
|
)
|
$
|
(3,176,374
|
)
|
During
Fiscal 2016 the Companys net loss increased by $363,271 from a net loss of
$3,176,374 for the year ended August 31, 2015 (Fiscal 2015) to a net loss of
$3,539,645 for Fiscal 2016. The overall decrease in the net loss as compared to
the prior year was due to the factors discussed below:
Interest income
Lower
cash balances resulted in interest income decreasing to $35,160 for Fiscal 2016
compared to $66,014 for Fiscal 2015.
Corporate and administrative expenses
Corporate
and Administrative expenses totalled $3,221,418 during Fiscal 2016, an 18%
decrease from the amount incurred in Fiscal 2015 ($3,949,320). The main areas of
decreased operating expenses for the Year were salaries, benefits and directors
fees, filing and transfer fees, audit assurance and related services, financing
advisory services and expenses, occupancy costs and marketing and sales
expenses.
99
Salaries,
benefits and directors fees for the Year decreased by approximately 20% to
$1,693,399 compared to $2,107,173 in Fiscal 2015. The decrease in salaries,
benefits and directors fees was primarily related to reduced staffing levels
and the further reduction in directors fees starting in January 2016.
Filing
and transfer fees decreased by 32% to $116,484 during Fiscal 2016 compared to
$170,600 for Fiscal 2015. The decrease is primarily related to the decrease in
participation fees paid to the Ontario Securities Commission and the decrease in
annual listing fees paid due to the Companys move to the OTCQX Best Market from
the NYSE MKT. The participation fee paid during Fiscal 2016 was based on the
Companys average market capitalization in Fiscal 2015, whereas the
participation fee paid in fiscal 2015 was based on the Companys average market
capitalization in fiscal 2011.
Fees
for audit assurance and related compliance services for Fiscal 2016 decreased by
approximately 33% to $115,391 compared to $171,755 in Fiscal 2015. The decrease
is primarily related to the elimination of quarterly financial statement review
services and related compliance services in Q2 to Q4 of Fiscal 2016 to conserve
cash resources as these services are no longer required following the expiry of
the 2013 shelf prospectus in October 2015 and after the Company became a
non-accelerated filer in the USA under the Dodd-Frank Wall Street Reform and
Consumer Protection Act of 2010.
No
financial advisory fees and expenses were incurred during Fiscal 2016 compared
to $37,853 for the Fiscal 2015. This decrease is related to a decreased amount
of work with respect to financing initiatives related to the Project provided by
third party consultants.
Occupancy
costs decreased by 11% to $303,096 during Fiscal 2016 compared $340,322 in
Fiscal 2015. The decrease is primarily related to the closing of the Companys
office in Delta, BC in May of 2015.
Marketing
and sales related expenses decreased by $61,730 (44%) during the Year compared
to Fiscal 2015, which primarily related to the reduction in travel and to the
decrease in fees paid to consultants in assisting the Company in sales and
market development and government relations work. This was achieved by
performing a higher portion of the work in-house.
Expenses
on public and investor relations Fiscal 2016 increased by $91,834 (20%) to
$556,977 compared to $465,144 in Fiscal 2015. The increase was primarily related
to the increase number of investor conferences and roadshows undertaken during
the Year to increase investor awareness about the Companys shift in focus back
to its lithium business and the Companys name change which was approved by
shareholders in February 2016.
Impairment loss on exploration and evaluation
assets
As
at August 31, 2016, the Company decided not to renew the mineral claims of its
Miramichi Tin Property which were due for renewal in September 2016, accordingly
the cost incurred to-date of $218,620 was written off as an impairment loss in
Fiscal 2016.
In
Fiscal 2015, property holding costs of $6,425 incurred on Warren Township were
written off as an impairment loss.
Write-off of land acquisition option payments
During
the year ended August 31, 2014, the Company entered into an option agreement to
purchase a land parcel in Geismar, Louisiana. In Fiscal 2015, the option
payments made totaling $212,960 were written off after the option agreement had
expired.
100
Share based Compensation
Share
based compensation decreased to $345,435 for Fiscal 2016 compared to $788,880
for Fiscal 2015. This decrease is primarily related to the decrease in the
estimated fair values and the number of options earned during the Year compared
to Fiscal 2015.
Increase (Decrease) in fair value of warrants denominated
in foreign currency
As
discussed above, the US$ Warrants had been re-measured at each financial
statement reporting date using the Black-Scholes pricing model, resulting in a
loss of $122,561 for Fiscal 2016 and a gain of $1,431,765 for Fiscal 2015.
Deferred Income Tax Recoveries
In
Fiscal 2016, the Company has incurred Canadian Exploration Expenditures (CEE)
of $3,854,975 related to certain flow-through equity financings completed in
Fiscal 2015 and Fiscal 2016 as disclosed in in Note 13 of the Consolidated
Financial Statements. Accordingly, the Company has recognized a pro rata amount
of the flow-through share premium of $416,140 through the consolidated statement
of comprehensive loss as a deferred income tax recovery with a corresponding
reduction to the deferred flow-through share premium liability. In Fiscal 2015,
the Company had recognized a deferred income tax recovery of $347,589 resulting
from the CEE incurred in Fiscal 2015 related to the December 2014 Private
Placement as disclosed in Note 13 of the Consolidated Financial Statements.
B. Liquidity and Capital Resources
In
managements view, given the nature of the Companys operations, which consist
of the exploration and development of mining properties, the most relevant
financial information relates primarily to current liquidity, solvency, and
planned property expenditures. The Companys financial success will be dependent
on the economic viability of its resource properties and the extent to which it
can discover and develop new mineral deposits. Such development may take several
years to complete and the amount of resulting income, if any, is difficult to
determine. The sales value of any mineralization discovered by the Company is
largely dependent on factors beyond the Companys control, including the market
value of the metals and minerals to be produced.
As
at August 31, 2017, the Company has current assets of $1,367,481 and current
liabilities of $1,042,507. As disclosed earlier under Administration and
Other, the holder of the Preferred Shares is entitled to demand repayment of
the applicable redemption value per share in cash (which totaled $2,520,000 as
at August 31, 2017) upon the occurrence of certain Redemption Events. Excluding
the deferred flow-through share premium of $49,467 and the liability for
warrants denominated in foreign currency of $181,671, the Companys adjusted
working capital was $556,112 (calculated by adding back the deferred
flow-through share premium of $49,467 and the liability for warrants denominated
in foreign currency of $181,671 to the working capital of $324,974). As the
de-recognition of the balance of the deferred flow-through share premium and the
liability for warrants denominated in foreign currency will not require the
future out flow of resources by the Company, it is managements belief that the
adjusted working capital figure provides useful information in assessing the
Companys liquidity risk. Substantially all of the Companys cash and cash
equivalents are held at a major Canadian chartered bank in cashable guaranteed
investment certificates bearing an annual interest rate of 1.1% . As at August
31, 2016, the Company had adjusted working capital of $1,160,471 and cash and
cash equivalents on hand of $1,360,487.
The
Companys current operating expenditures, excluding expenditures on resource
property work programs, are approximately $300,000 per month. The Companys
current anticipated resource property expenditures planned to be incurred during
the year ending August 31, 2018 are budgeted at approximately $1,800,000
(excluding capitalized salaries and benefits), with approximately $1,500,000 of
these expenditures being allocated to the Separation Rapids Lithium Project.
The
Company believes its present cash resources are sufficient to meet all of its
current contractual obligations, administrative and overhead expenditures, and
planned exploration programs until the end of January, 2018. Initiatives to raise additional capital are in progress
although there can be no assurances that the Company will be able to raise
additional funds required for all planned expenditures. As a result, certain
expenditures may have to be delayed until sufficient funding has been raised.
Given the continuation of weak investor sentiment and capital market conditions
in the junior resource sector, there exists an uncertainty as to the Companys
ability to raise additional funds on favourable terms or at all. This condition
indicates the existence of a material uncertainty that raises substantial doubt
about the Companys ability to continue as a going concern. The Companys
expenditures on other discretionary exploration and development activities have
some scope for flexibility in terms of amount and timing, which can be adjusted
accordingly.
101
The
Company continues to work on attracting more substantial project financing
through the participation of one or more strategic partners, a long term
construction debt financing facility, and/or through the equity markets. If the
Company is not able to secure financing on satisfactory terms, expenditures on
the development of its projects will need to be delayed.
All
of the Companys resource properties, with the exception the Mount Douglas
Tin-Tungsten property and its cobalt prospect in New Brunswick, are owned,
leased or licenced with minimal holding costs. The most significant holding
costs being annual lease rental fees on Nechalacho of $20,998 and the annual
expenditures related to the mining leases at Separation Rapids and Warren
Township totalling $3,327. The Company is required to incur certain exploration
expenditures on the East Kemptville Project in order to keep the new Special
Licence in good standing. As at August 31, 2017, the Company is also required to
incur additional CEE of $538,510 (the remaining balance of the required
expenditures resulting from the private placements completed in June and August
2017) by December 31, 2018. The Company is also required to incur additional CEE
of $466,175 by December 31, 2018 relating to the private placement completed
subsequent to the end of the Year.
Subsequent
to the end of the Year, the Company completed a private placement and issued
3,215,000 flow-through common shares at a price of $0.145 per share (of which
305,000 flow-through common shares were subscribed by certain directors and
officers of the Company) and 4,800,000 non-flow-through units at a price of
$0.12 per unit for gross proceeds of $1,042,175.
During
Fiscal 2017, the Company completed the following financing transactions:
i)
On November 7, 2016, the Company completed a private placement and issued
4,545,454 flow-through common shares at $0.22 per share for gross proceeds of
$1,000,000.
ii)
On December 23, 2016, the Company completed a private placement
and issued 2,500,000 flow-through common shares at $0.15 per share for gross
proceeds of $375,000.
iii)
On June 12, 2017, the Company completed a private placement and issued 3,400,000
flow-through common shares at $0.15 per share for gross proceeds of $510,000.
iv)
On August 16, 2017, the Company completed a private placement and
issued 3,100,000 flow-through common shares at $0.145 per share for gross
proceeds of $449,500.
v)
In March 2017, as discussed under Operating Results for 2017, the
Company entered into the Agreement with Lind and issued 500 Series A1 Preferred
Shares at a price of $5,000 per share for gross proceeds of $2,500,000.
A
joint venture with an industry partner or end-user may represent an attractive
alternative for financing the further stages in the development of the Project
as well as the projects at Separation Rapids, East Kemptville, or Warren
Township, once the capital requirements become relatively large.
102
The Company has an operating lease for its premises. As at the
date of this Annual Report, the minimum lease commitments under these leases are
as follows:
Fiscal year ended August
31,
|
2018
|
$
|
236,996
|
|
|
2019
|
$
|
315,995
|
|
|
2020
|
$
|
105,332
|
|
|
2021 and thereafter
|
$
|
-
|
|
C. Research and Development, Patents and Licenses, etc.
Research
and development expenditures incurred during Fiscal 2017 and Fiscal 2016
totalled $428,900 and $1,120,656 respectively.
The
Company has invested significant amounts of resources in researching, developing
and optimizing the metallurgical processes to recover the REE from the
Nechalacho mineral deposit. The bulk of these R&D investigations have been
conducted at a commercial laboratory in Lakefield Ontario, although further work
has also been conducted at other globally recognized research institutes
elsewhere in Ontario, USA and South Africa.
The
areas investigated have included ore comminution and froth flotation to produce
a mineral concentrate, followed by numerous hydrometallurgical processes aimed
at firstly leaching the REE and then removing the various impurities such that a
high purity bulk REE precipitate can be produced for toll treating by others.
None of the processes developed or implemented are known to be protected by any
third party patents or licences as they are commonly applied to other
metallurgical systems. However, Avalon is investigating the potential merit of
patenting the overall combination of processes for the treatment of similar ore
bodies or mineral concentrates.
Leading
up to the compilation of the PEA for the Separation Rapids Lithium Project
extensive testwork was conducted to develop the flotation process for producing
concentrates of both petalite and a mixed feldspar. This work included both
bench scale and pilot scale work programs. In addition process testwork was
conducted with regards the development of processes to produce both lithium
carbonate and lithium hydroxide from the petalite concentrate. Processes to
produce both products were developed with further attention then paid to the
hydroxide process and production of final hydroxide crystals which meet battery
grade specifications. In fiscal 2017, Avalon filed a provisional application
(number 62419532) for patent under 37 CFR 1.29 which covers the process of
producing lithium hydroxide from petalite with corresponding recycling of
sulphuric acid. Subsequent to the end of fiscal 2017, the Company filed an
International Patent Application for this process.
D. Trend Information
While
the Company does not have any producing mines it is directly affected by trends
in the metal industry. After a significant upward spike in prices in 2011, rare
earth prices fell back almost a quickly in 2012 and trended downward to
mid-2015. Prices remained flat until 2017 where they started to increase again
due to increasing demand for magnets for motors of hybrid and electric vehicles.
Future prices for rare earths are difficult to predict as they are influenced by
demand for REE containing products such as electric motors for hybrid and
electric vehicles, but also by Chinese government policy. Increased demand for
hybrid and electric vehicles should lead to higher prices for rare earths,
however the Chinese government may not want a repeat of very high REE prices
which occurred in 2012 and so may release REEs into the market that some
observers believe they have accumulated, or instruct Chinese producers to
increase output to keep prices stable. Demand for REE products may be impacted
by demand for some of the products incorporating rare earths. Lack of growth in
these markets may adversely affect the demand for REE products.
Lithium
is not traded on any formally recognized exchange and there are few sources of
reliable publicly available price data. Transactions are negotiated directly
between seller and buyer and payment terms are rarely reported. According to
Benchmark Mineral Intelligence the price for lithium has tripled since early
2015. Their lithium index shows lithium at US$5,500/tonne in early 2015 and at
US$16,500/tonne in September 2017. Demand for lithium ion batteries for electric
vehicles (EVs) is the main driver of increased demand for lithium and the demand for EVs is expected to continue. The impact on future lithium
prices will be determined by the actual future demand for EVs and the speed at
which new production of lithium that is required to meet the EV demand comes
into the market.
103
Tin
prices in 2017 have remained constant near the US20,000/t mark with little
change in demand or new production expected in the near future. No significant
new trend in the tin market is expected in the short or medium term.
Overall
market prices for securities in the mineral resource sector and factors
affecting such prices, including base metal prices, political trends in the
countries such companies operate, and general economic conditions, may have an
effect on the terms on which financing is available to the Company, if at all.
Except
as disclosed, the Company does not know of any trends, demands, commitments,
events or uncertainties that will result in, or that are reasonably likely to
result in, its liquidity either materially increasing or decreasing at present
or in the foreseeable future. Material increases or decreases in liquidity are
substantially determined by the success or failure of the Companys exploration
and development programs. The Company currently does not and also does not
expect to engage in currency hedging to offset any risk of currency
fluctuations.
E. Off-balance sheet arrangements
The
Company has no off-balance sheet arrangements.
F. Tabular disclosure of contractual obligations
As
of August 31, 2017, the Company had the following contractual obligations:
|
|
Payment due by period
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
More than
5
|
|
|
|
Total
|
|
|
<1 year
|
|
|
1-3 years
|
|
|
3-5 years
|
|
|
years
|
|
Trade payables and other
payables
|
$
|
811,369
|
|
$
|
811,369
|
|
$
|
-
|
|
$
|
-
|
|
$
|
-
|
|
Operating Lease
|
|
737,322
|
|
|
315,995
|
|
|
421,327
|
|
|
-
|
|
|
-
|
|
Total
|
$
|
1,548,691
|
|
$
|
1,127,364
|
|
$
|
421,327
|
|
$
|
-
|
|
$
|
-
|
|
G. Safe Harbor
The
Company seeks safe harbor for our forward-looking statements contained in Items
5.E and F. See the heading Cautionary Note Regarding Forward-Looking
Statements above.
Item 6. Directors, Senior Management and Employees
A. Directors and Senior Management
The
following is a list of the Companys directors and senior management as of the
date of this annual report. The directors were elected by the Shareholders on
February 22, 2017, with the exception of Ms. Mohr who was appointed by the Board
on March 23, 2017, and are elected for a term of one year, which term expires at
the election of the directors at the next annual meeting of shareholders.
104
Name, Present Position
|
|
|
with the Company and
|
|
Director/Officer
|
Country of
Residence
|
Principal Occupation
|
Since
|
DONALD S. BUBAR
|
President and CEO of the Company
|
February 17, 1995
|
Director, Chief Executive
|
|
|
Officer and President
|
|
|
Ontario, Canada
|
|
|
|
|
|
ALAN FERRY
(1)
(2)
|
Self-employed businessperson
since July 2007.
|
February 24, 2000
|
Director
|
|
|
Ontario, Canada
|
|
|
|
|
|
BRIAN D. MACEACHEN
(1)
|
Executive Consultant since July
2012; prior thereto, Executive
|
November 16, 1998
|
Director and Chairman
|
Vice President of Brigus Gold
Corp. (formerly Linear Gold Corp.,
|
|
Nova Scotia, Canada
|
a mining exploration company)
since October 2009 and President
|
|
|
and CEO of Linear Metals Company
(a mining exploration
|
|
|
company) from January 2008 to
April 2012; prior thereto, CFO
|
|
|
and Vice-President of Finance of
Brigus Gold Corp. and Linear
|
|
|
Metals Company.
|
|
|
|
|
PATRICIA MOHR
(1)
|
Retired. Prior thereto Vice
President, Economics and Commodity
|
March 23, 2017
|
Director
|
Market Specialist at Scotiabanks
Executive Offices in Toronto
|
|
British Columbia,
Canada
|
from 1985 to 2016.
|
|
|
|
|
JANE PAGEL
(2)
|
Self-employed businessperson;
Interim President and CEO
|
February 24, 2016
|
Director
|
Sustainable Development
Technology Canada June 2014 - June
|
|
Ontario, Canada
|
2015; President and CEO Ontario
Clean Water 2010-2014; SVP
|
|
|
and Principal Jaques Whitford
2000-2009, acquired by Stantec,
|
|
|
Principal 2009-2010.
|
|
|
|
|
KENNETH G. THOMAS
(2)
|
President, Ken Thomas &
Associates Inc., a consulting firm to the
|
February 25, 2014
|
Director
|
mining industry since 2012 and
Senior Vice President, Projects,
|
|
Ontario, Canada
|
Kinross Gold Corporation from
December 2009 to July 2012;
|
|
|
prior thereto Global Managing
Director and Board Director,
|
|
|
Hatch, an international engineering and construction
company.
|
|
|
|
|
R. JAMES ANDERSEN
|
Chief Financial Officer and Vice
President, Finance of the
|
June 11, 2001
|
Chief Financial Officer
|
Company since June 2001
|
|
and Vice President,
|
|
|
Finance
|
|
|
Ontario, Canada
|
|
|
|
|
|
DAVID MARSH
|
Senior Vice President, Metallurgy
and Technology Development
|
August 1, 2012
|
Senior Vice President,
|
of the Company since August 2012;
prior thereto, General
|
|
Metallurgy and
|
Manager- Technical Projects
Development at Paladin Energy from
|
|
Technology Development
|
July 2006 to September 2011.
|
|
Ontario, Canada
|
|
|
|
|
|
WILLIAM MERCER
|
Vice President, Exploration of
the Company since June 2007,
|
June 21, 2007
|
Vice President,
|
prior thereto, self-employed
Geological Consultant from October
|
|
Exploration
|
2006 to December 2010.
|
|
Ontario, Canada
|
|
|
105
Name, Present Position
|
|
|
with the Company and
|
|
Director/Officer
|
Country of
Residence
|
Principal Occupation
|
Since
|
|
|
|
PIERRE NEATBY
|
Vice President, Sales and
Marketing of the Company since July
|
July 1, 2010
|
Vice President, Sales and
|
2010; prior thereto, Vice
President of Noranda Inc. and Managing
|
|
Marketing
|
Director of European Sales of
Noranda Inc. (an international
|
|
Ontario, Canada
|
mining company).
|
|
|
|
|
MARK WISEMAN
|
Vice President, Sustainability of
the Company since November
|
November 7, 2011
|
Vice President,
|
2011; prior thereto, Director
Health, Safety and Environment for
|
|
Sustainability
|
Xstrata Nickels Koniambo
Project, a division of Xstrata plc (an
|
|
Ontario, Canada
|
international mining company,
presently Glencore) from 1990 to
|
|
|
2010.
|
|
NOTES:
(1) Member of the Audit Committee
(2)
Member of the Compensation, Governance and Nominating Committee
Family Relationships
There
are no family relationships between any directors or executive officers of the
Company.
Arrangements
There
are no known arrangements or understandings with any major shareholders,
customers, suppliers or others, pursuant to which any of the Companys officers
or directors was selected as an officer or director of the Company.
Conflicts of Interest
To
the best of the Companys knowledge, and other than as disclosed in this annual
report, there are no known existing or potential conflicts of interest between
the Company and its directors, officers or promoters, except that certain of the
Companys directors, officers and promoters serve as directors and officers of
other public companies, and therefore it is possible that a conflict may arise
between their duties as a director, officer or promoter of the Company and their
duties as a director or officer of such other companies.
The
directors and officers of the Company are aware of the existence of laws
governing accountability of directors and officers for corporate opportunity and
requiring disclosures by directors of conflicts of interest and the Company will
rely upon such laws in respect of any directors and officers conflicts of
interest or in respect of any breaches of duty by any of its directors or
officers. All such conflicts will be disclosed by such directors or officers in
accordance with the CBCA, and they will govern themselves in respect thereof to
the best of their ability in accordance with the obligations imposed upon them
by law.
The
majority of the Companys directors are also directors, officers or shareholders
of other companies that are engaged in the business of acquiring, developing and
exploiting natural resource properties. Such associations may give rise to
conflicts of interest from time to time. Such a conflict poses the risk that the
Company may enter into a transaction on terms which place the Company in a worse
position than if no conflict existed. The directors of the Company are required
by law to act honestly and in good faith with a view to the best interest of the
Company and to disclose any interest which they may have in any project or
opportunity of the Company. However, each director has a similar obligation to
other companies for which such director serves as an officer or director. The
Company has no specific internal policy governing conflicts of interest.
106
Cease Trade Orders, Bankruptcies, Penalties or Sanctions
To
the Companys knowledge, no director or executive officer of the Company is, as
of the date hereof, or was within ten years before the date hereof, a director,
chief executive officer or chief financial officer of any company (including the
Company) that:
|
(i)
|
was subject to a cease trade order, an order similar to a
cease trade order, or an order that denied the relevant company access to
any exemption under securities legislation, that was in effect for a
period of more than 30 consecutive days (an Order) that was issued while
the director or executive officer was acting in the capacity as director,
chief executive officer or chief financial officer; or
|
|
|
|
|
(ii)
|
was subject to an Order that was issued after the
director or executive officer ceased to be a director, chief executive
officer or chief financial officer and which resulted from an event that
occurred while that person was acting in the capacity as director, chief
executive officer or chief financial officer.
|
To
the Companys knowledge, no director or executive officer of the Company, or a
shareholder holding a sufficient number of the Companys securities to affect
materially the control of the Company:
|
(i)
|
is, as at of the date hereof, or has been, within the ten
years before the date hereof, a director or executive officer of any
company (including the Company) that, while that person was acting in that
capacity, or within a year of that person ceasing to act in that capacity,
became bankrupt, made a proposal under any legislation relating to
bankruptcy or insolvency or was subject to or instituted any proceedings,
arrangement or compromise with creditors or had a receiver, receiver
manager or trustee appointed to hold its assets; or
|
|
|
|
|
(ii)
|
has, within the ten years before the date hereof, become
bankrupt, made a proposal under any legislation relating to bankruptcy or
insolvency, or become subject to or instituted any proceedings,
arrangement or compromise with creditors, or had a receiver, receiver
manager or trustee appointed to hold the assets of the director, executive
officer or shareholder.
|
To
the Company's knowledge, no director or executive officer of the Company, or a
shareholder holding a sufficient number of securities of the Company to affect
material the control of the Company, has been subject to:
|
(i)
|
any penalties or sanctions imposed by a court relating to
securities legislation or by a securities regulatory authority or has
entered into a settlement agreement with a securities regulatory
authority, or
|
|
|
|
|
(ii)
|
any other penalties or sanctions imposed by a court or
regulatory body that would likely be considered important to a reasonable
investor in making an investment decision.
|
Legal Proceedings and Regulatory Actions
The
Company is and has not been a party as a defendant to, and none of its
properties are or were the subject of, any legal proceedings during the
financial year of the Company ended August 31, 2017 that involve a claim for
damages which exceeds ten per cent of the current assets of the Company, and no
such legal proceedings are known to Avalon to be contemplated.
There
were no penalties or sanctions imposed against the Company by a court relating
to securities legislation or by a securities regulatory authority during the
financial year of the Company ended August 31, 2017, no other penalties or
sanctions have been imposed by a court or regulatory body against the Company
that would likely be considered important to a reasonable investor in making an
investment decision with respect to the securities of Avalon, and no settlement
agreements were entered into with a Court relating to securities legislation or
with a securities regulatory authority during the financial year of the Company
ended August 31, 2017.
107
Interest of Management and Others in Material
Transactions
The
Company is not aware of any material interest, direct or indirect, in any
transaction within the three most recently completed financial years involving
any director, executive officer, proposed nominee for election as a director or
any shareholder holding more than 10% of the voting rights attached to the
common shares or any associate or affiliate of any of the foregoing that has
materially affected or will materially affect the Company, other than as set
forth herein.
Transfer Agent and Registrar
The
Companys transfer agent and registrar is TSX Trust Company, with its principal
office at 100 Adelaide Street West, Suite 301, Toronto, ON M5H 1S3.
B. Compensation
During
the last completed fiscal year of the Company, the Company had five named
executive officers (NEOs), namely, its Chief Executive Officer (CEO) and
President, Donald Bubar, its Chief Financial Officer (CFO) and Vice President,
Finance, R. James Andersen, its Senior Vice President, Metallurgy and Technology
Development, David Marsh, its Vice President, Sales and Marketing, Pierre
Neatby, and its Vice President, Exploration, William Mercer.
1) Compensation Discussion and Analysis
Compensation,
Governance and Nominating Committee
The
Compensation, Governance and Nominating Committee (the CGN Committee) of the
Board is responsible for making recommendations to the Board with respect to the
compensation of the executive officers of the Company as well as, among other
things, with respect to the Companys stock option plan (the Stock Option
Plan) and any other employee benefits and/or plans and with respect to
directors compensation. The Board (exclusive of the CEO, who is also a member
of the Board) reviews such recommendations and gives final approval to the
compensation of the executive officers.
The
CGN Committee currently consists of Alan Ferry (Chair), Kenneth G, Thomas and
Jane Pagel, each of whom are independent, pursuant to the rules of the TSX. Each
of Mr. Ferry, Dr. Thomas and Ms. Pagel has direct and extensive experience in
corporate management and compensation issues in either the mining industry
and/or the financial industry. Mr. Ferry is a member of the committee
responsible for compensation matters of Guyana Goldfields Inc. and GPM Metals
Inc., which are publicly listed mineral exploration or mining companies. Dr.
Thomas served as Senior Vice President, Projects, Kinross Gold Corporation from
December 2009 to June 2012, Global Managing Director and Director, Hatch from
November 2005 to November 2009 and Chief Operating Officer, Crystallex
International Corporation from April 2003 to October 2005. In addition he served
in senior roles at Barrick Gold Corporation from 1987 to 2001, including Senior
Vice President, Technical Services, during which times he was responsible for
determining the compensation of those employees whom he directly and indirectly
supervised, which numbered in excess of several dozen. Ms. Pagel is a
self-employed businessperson and chair of the board of directors of BluMetric
Environmental Inc., a publically traded company in the fields of
water/wastewater treatment and professional environmental services. She served
as the Interim President and CEO Sustainable Development Technology Canada from
June, 2014 to June, 2015. Prior to that, she was president and CEO of the
Ontario Clean Water Agency from 2010 until her retirement in early 2014.
Previous industry positions held by Ms Pagel include Principal Government and
Industrial Relations at Stantec; Senior Vice President and Principal at Jacques
Whitford; Vice President Government Relations at Philip Services; and president
of Zenon Environmental Laboratories. This experience relating to executive
compensation matters collectively provides members of the CGN Committee with a
suitable perspective to make decisions on the appropriateness of the Companys
compensation policies and practices.
The
CGN Committee has not to date felt it necessary to engage any compensation
consultant or advisor to assist it in the performance of its duties.
108
Compensation Objectives and Structure
The overall compensation objective adopted by the CGN Committee is
to ensure that executive compensation is fair and reasonable, rewards management
performance and is, by being competitive, sufficient to attract and retain
experienced and talented executives. Due to the nature of the mineral industry,
executive talent has significant mobility and, as a result, competition for
experienced executives in the past has been great. The Companys compensation
policies are designed to recognize the foregoing. The foregoing objective also
recognizes the fundamental value added by a motivated and committed management
team in accomplishing the Companys principal corporate objectives.
Historically,
the compensation provided by the Company to its executive officers, including
the CEO, has had three components: base salary, bonuses and long term incentive
compensation in the form of stock options (see Stock Option Plan). Bonus
compensation is a cash component of management compensation in order to permit
the recognition of outstanding individual efforts, performance, achievements
and/or accomplishments by members of the Companys management team. Any specific
bonus amounts are awarded on the recommendation of the CGN Committee and
ultimately at the discretion of the Board, with bonus amounts for members of the
Companys management team other than the CEO being based primarily on the
recommendations of the CEO. The appropriateness and amount of any bonuses to the
CEO and/or management team members has to date been considered annually by the
CGN Committee and Board on a discretionary basis as no formal bonus plan based
on quantitative and/or qualitative benchmarks has been established for the
Company as yet.
Base
salary is the principal component of each executive officers overall
compensation and reflects the fixed component of pay that compensates the
relevant executive officer for fulfilling his or her day to day roles and
responsibilities. The CGN Committee has typically in the past reviewed the base
salary levels and considered the individual performance of the CEO and of each
other executive officer and historically has compared executive compensation for
other companies operating in the mineral industry.
Recently,
however, the overall financial condition of the Company and the overall
depressed nature of the junior resource sector in Canada and elsewhere has
significantly factored into the setting of the cash remuneration levels of the
Companys senior management and, in particular, has resulted in there being no
or minimal increases in the cash remuneration of senior management for the
calendar years 2014 2017, and a reduction in such cash remuneration during the
period 2014 2017 as outlined under Base Salary and Bonus below. Given the
nature of the Company as an exploration and development stage resource company
without existing mineral production and without any attendant revenues derived
thereon, compensation has in the past been generally based on comparative,
qualitative or subjective measures, rather than quantitative benchmarks. No
specific benchmarks, weights or percentages are assigned to any of the measures
or objectives upon which the executive compensation is generally based.
Annual salary adjustments, if any, have historically been made on
a calendar year basis, typically being determined towards the end of each
calendar year and made effective January 1 of the following year.
Compensation
Risk Management
The
CGN Committee evaluates the risks, if any, associated with the Companys
compensation policies and practices. Implicit in the mandate of the Board is
that the Companys policies and practices respecting compensation, including
those applicable to the Named Executive Officers, be designed in a manner which
is in the best interests of the Company and its shareholders.
In
particular, the Companys executive compensation policies incorporate a balanced
compensation program design (see Compensation Objectives and Structure) and
include elements of fixed and variable compensation and short and longer term
incentives.
109
The
base salary component of the compensation provided by the Company to its
executive officers is set annually. The bonus component of the compensation
provided by the Company to its executive officers in the past has been
discretionary, is currently based on qualitative or subjective measures rather
than quantitative benchmarks, and is subject to the prior approval of the CGN
Committee. Discretionary assessment of the performance of executive officers by
the Committee ensures that bonus awards align with both perceived and actual
performance and the risks associated with such performance and any bonus award.
No bonuses have been awarded to any members of senior management since 2014.
The
stock option component of the compensation provided by the Company to its
executive officers is both longer term and at risk and, accordingly, is
directly linked to the achievement of longer term value creation. Since the
benefits of such compensation, if any, are generally not realized by the
executive officers until a significant period of time has passed and that there
are typically deferred vesting provisions attached to each option grant (see
Stock Option Plan below), the incentive for executive officers to take
inappropriate or excessive risks with regard to their compensation that are
financially beneficial to them at the expense of the Company and its
shareholders is limited.
The
CGN Committee believes that it is unlikely that an executive officer would take
inappropriate or excessive risks at the expense of the Company and its
shareholders that would be beneficial to them with regard to their short term
compensation when their longer term compensation might be put at risk from their
actions. Due to the size of the Company, the CGN Committee is able to monitor
and consider any risks which may be associated with the Companys compensation
policies and practices. Risks, if any, may be identified and mitigated through
regular meetings of the Board during which financial and other information
relating to the Company are reviewed, and which includes senior executive
compensation. The CGN Committee has not identified any risks arising from the
Companys compensation policies and practices that it believes would be
reasonably likely to have a material adverse effect on the Company.
Although
the Company has not as yet adopted any specific policies in this regard, in the
event that a director or an executive officer purchases financial instruments
that are designed to hedge or offset a decrease in the market value of the
Companys equity securities granted as compensation or held, directly or
indirectly by the director or the executive officer, such purchases must be
disclosed in insider reporting filings. To date, no such purchases have been
disclosed by any director or executive officer of the Company.
Base
Salary and Bonus
The
CGN Committee, in respect of the setting of salaries for the Named Executive
Officers for 2017, recommended to the Board and the Board determined that, there
would be no salary increases for the Named Executive Officers in 2017. This
determination recognized the then current financial situation of the Company and
the overall depressed nature of the junior resource sector in Canada.
Effective
September 1, 2016, each of the Named Executive Officers agreed to receive 20% of
their base salary (25% in the case of Mr. Bubar) in non-cash compensation on an
indefinite basis in exchange for additional stock options, being in the case of
Mr. Bubar, options to purchase 300,000 common shares of Avalon, in the case of
Messrs. Andersen and Marsh, options to purchase 250,000 common shares and in the
case of Messrs. Mercer and Neatby, options to purchase 200,000 common shares.
All of the foregoing options were granted effective November 8, 2016, have an
exercise price of $0.17 per share, have a two year term and vested immediately.
No
discretionary bonuses were awarded to any Named Executive Officers of the
Company for 2017.
Options
The
CGN Committee is of the view that the granting of options is an appropriate
method of providing long-term incentives to senior management of the Company
and, in general, aligns the interests of senior management with those of the
shareholders by enabling senior management to participate in and be rewarded by
an increase in the market price of the Companys common shares. Participation in
the Stock Option Plan also provides a significant incentive to the participants to enter into and subsequently to
continue their employment with the Company, particularly when the Company may
not have the financial resources and/or pension and other benefit plans to
attract and retain experienced personnel. In addition, the CGN Committee is of
the view that the Companys compensation mix must be consistent with industry
norms which supports the provision by the Company of a longer term compensation
incentive. This longer term compensation incentive is best realized by providing
compensation linked to share price performance such as options. The number and
terms of options previously granted to the named executives have been and are
expected to continue to be taken into account, as well as the number and terms
of options granted by peer group companies in determining whether and in what
quantity new option grants should be made in any year. Also, as discussed under
Base Salary and Bonus above, additional options have been granted to members
of senior management in lieu of receipt by them of certain specified cash salary
amounts.
110
The
Companys current objective under the Stock Option Plan is to allot to the CEO
options to purchase 1,000,000 common shares, to the CFO and Senior Vice
President options to purchase 600,000 common shares and to officers at the Vice
President level options to purchase 400,000 common shares (the target
allotments). The foregoing allotments do not include the additional options
granted to the Named Executive Officers, as described under Base Salary and
Bonus above.
The
Company typically grants one fifth of an employees option allotment on an
annual basis The methodology applied by the Company permits exceptions to be
made, for example, to recognize exceptional employee contributions and to permit
flexibility in negotiating employment contracts.
Circumstances
Triggering Termination and Change of Control Benefits
As
noted below under the heading Employment Contracts, there are certain
circumstances that trigger payments and other benefits to the CEO upon
termination and change of control. The CGN Committee views such provisions as
not only being fair and necessary to protect the CEO, but also to encourage the
CEO to pursue those transactions such as mergers or take-overs that are
beneficial to the Company and its shareholders, but that may result in the
termination of the CEOs employment with the Company.
Stock
Option Plan
The
Stock Option Plan, approved by shareholders on February 22, 2017, is a fixed
percentage plan that provides that the maximum number of options which may be
outstanding at any time under the Stock Option Plan and any other compensation
arrangement of the Company is 10% of the Companys issued and outstanding common
shares. Eligible Participants under the Stock Option Plan include insiders or
employees of the Company or any of its subsidiaries, and any other person or
company engaged to provide ongoing management, consulting or advisory services
to the Company.
The
Company maintains the Stock Option Plan in order to provide effective incentives
to directors, officers and senior management personnel of the Company and to
enable the Company to attract and retain experienced and talented individuals in
those positions by permitting such individuals to directly participate in an
increase in share value created for the Companys shareholders.
Incentive
options granted under the Stock Option Plan entitle the purchase of shares at a
price and for the length of time determined by the Board provided that the price
cannot be lower than the market price of the common shares on the TSX on the day
prior to or on the day of the grant and the expiry date cannot be more than 10
years after the date of the grant. Further, the policies of the TSX also provide
that the said exercise price of any options so granted cannot be reduced without
shareholder approval.
Options
under the Stock Option Plan are typically granted in such numbers as reflect the
level of responsibility of the particular optionee and his or her contribution
to the business and activities of the Company. Options may also be granted under
the Stock Option Plan to consultants. Options granted under the Stock Option
Plan typically have a five year term and are typically made cumulatively
exercisable by the holders thereof in equal proportions of the aggregate number
of shares subject to the options over specified time periods. Historically,
after an initial grant, options have been re-granted upon such having
been exercised. In the event a take-over bid (within the meaning of the
Securities Act (Ontario)) is made for the common shares of the Company, then all
unvested options thereupon become exercisable by the holder. Options terminate
immediately upon an optionees employment with the Company being terminated
(unless otherwise determined by the Board) or unless such termination is a
result of death, disability or retirement, in which case termination occurs 12
months from the occurrence of the relevant event (subject to the earlier expiry
of the options in the normal course). The terms of the Stock Option Plan further
provide that the exercise price at which common shares may be issued under the
Stock Option Plan cannot be less than the current market price of the common
shares when the relevant options are granted.
111
As
at November 24, 2017, 10,435,000 common shares, being 5.0% of the currently
issued common shares of the Company, were issuable pursuant to unexercised
options granted to such date under the Stock Option Plan.
Incentives
to Participants under the Stock Option Plan may also be provided by the granting
of stock appreciation rights. Stock appreciation rights, which can be attached
to an option at the discretion of the Company at any time, entitle a Participant
in the Stock Option Plan to elect, in lieu of exercising an outstanding Option,
to receive the number of common shares equivalent in value to the difference
between his or her option exercise price and the then existing market value of
the shares multiplied by the number of common shares over which he or she could
otherwise exercise his or her option. No stock appreciation rights have been
granted under the Stock Option Plan to date.
The
rules of the TSX require that all unallocated options, rights or other
entitlements under plans such as the Stock Option Plan must be re-approved by a
majority of the relevant issuers directors and by shareholders every three
years after institution of the relevant plan. Under the policies of the TSX, if
the Company wishes to make certain amendments to the Stock Option Plan, it must
obtain shareholder approval.
2)
Summary Compensation Table
The
following table sets forth particulars concerning the compensation paid or
accrued for services rendered to the Company by its NEOs in all capacities
during the last three most recently completed financial years ended August 31:
Name and
principal
position
|
Year
|
Salary
($)
|
Share-
based
awards
($)
|
Option-
based
awards
($)
(1)
|
Non-equity
incentive
plan
compensation
($)
|
Pension
value
($)
(2)
|
All other
compensation
($)
(3)
|
Total
compensation
($)
|
DONALD
BUBAR
(4)
President
and CEO
|
2017
|
300,000
|
Nil
|
42,109
|
Nil
|
Nil
|
1,023
|
343,132
|
2016
|
300,000
|
Nil
|
21,578
|
Nil
|
Nil
|
998
|
322,576
|
2015
|
316,667
|
Nil
|
52,812
|
Nil
|
Nil
|
1,023
|
370,502
|
R. JAMES
ANDERSEN
CFO and
Vice
President,
Finance
|
2017
|
240,000
|
Nil
|
28,338
|
Nil
|
Nil
|
Nil
|
268,338
|
2016
|
240,000
|
Nil
|
23,423
|
Nil
|
Nil
|
Nil
|
263,423
|
2015
|
250,000
|
Nil
|
30,761
|
Nil
|
Nil
|
Nil
|
280,761
|
DAVID
MARSH
Senior Vice
President,
Metallurgy
and Technology
Development
|
2017
|
288,000
|
Nil
|
28,338
|
Nil
|
Nil
|
Nil
|
316,338
|
2016
|
290,286
|
Nil
|
23,423
|
Nil
|
Nil
|
1,023
|
314,732
|
2015
|
295,532
|
Nil
|
36,602
|
Nil
|
Nil
|
Nil
|
332,134
|
112
PIERRE
NEATBY
Vice
President,
Sales and
Marketing
|
2017
|
208,000
|
Nil
|
21,359
|
Nil
|
Nil
|
Nil
|
229,359
|
2016
|
208,000
|
Nil
|
16,507
|
Nil
|
Nil
|
Nil
|
224,507
|
2015
|
216,667
|
Nil
|
30,279
|
Nil
|
Nil
|
748
|
247,694
|
WILLIAM
MERCER
Vice
President,
Exploration
|
2017
|
194,133
|
Nil
|
21,949
|
Nil
|
Nil
|
1,023
|
217,105
|
2016
|
208,000
|
Nil
|
10,547
|
Nil
|
Nil
|
1,023
|
219,570
|
2015
|
210,758
|
Nil
|
18,048
|
Nil
|
Nil
|
Nil
|
228,806
|
NOTES:
________________
(1)
|
These amounts represent the grant date fair value of
options granted to the respective Named Executive Officer, which have been
determined by using the Black-Scholes model, a mathematical valuation
model that ascribes a value to an option based on a number of factors in
valuing the option-based awards, including the exercise price of the
option, the price of the underlying security on the date the option was
granted, and assumptions with respect to the volatility of the price of
the underlying security and the risk-free rate of return. Calculating the
value of options using this methodology is very different from a simple
in-the-money value calculation. In fact, options that are well out-of-
the-money can still have a significant grant date fair value based on a
Black-Scholes valuation, especially where, as in the case of the Company,
the price of the common shares underlying the option is highly volatile.
Accordingly, caution must be exercised in comparing grant date fair value
amounts with cash compensation or an in-the-money option value
calculation. The same caution applies to the total compensation amounts
shown in the last column above, which are based in part on the grant date
fair value amounts set out in the column for Option-based awards. These
values are consistent with the accounting values used in the Companys
financial statements. The Company selected the Black-Scholes model given
its prevalence of use within North America.
|
(2)
|
The Company does not have a pension plan.
|
(3)
|
Medical expenses paid by the Company on behalf of the
respective Named Executive Officer.
|
(4)
|
Mr. Bubar does not receive any additional compensation
for serving as a director of the Company.
|
Base
Salary for the NEOs are determined by the Board upon the recommendation of the
CGN Committee and its recommendations are reached primarily by informal
comparison with the remuneration paid by other reporting issuers with the same
size and industry and with publicly available information on remuneration that
the CGN Committee feels is suitable.
The
annual base salary paid to NEOs is, for the purpose of establishing appropriate
increases, reviewed annually by the Board upon the recommendation of the CGN
Committee as part of the annual review of executive officers. The decision on
whether to grant an increase to the executives base salary and the amount of
any such increase is in the sole discretion of the Board and the CGN Committee.
Non-Equity Incentive Plan Compensation
One
of the three components of the Companys compensation package is a discretionary
annual cash bonus, paid to recognize individual performance in attaining
corporate goals and objectives. The Company does not have a long-term incentive
plan.
Option Based Award
An
Option Based Award is in the form of an incentive stock option plan. The
objective of the incentive stock option is to reward NEOs, employees and
directors individual performance at the discretion of the Board upon the
recommendation of the CGN Committee.
The
Company currently maintains a formal stock option plan, under which stock
options have been granted and may be granted to purchase shares equal to 10% of
the Companys issued capital from time to time. For details of the stock option
plan please review the Companys Management Information Circular for the Annual
and Special Meeting of Shareholders held February 22, 2017 which is
available on the Companys SEDAR profile at
www.sedar.com
and on the Companys EDGAR profile at
www.sec.gov.
113
The
stock option plan is administered by the CGN Committee. The process the Company
uses to grant option based awards is outlined in the Companys Stock Option
Policy that was adopted by the Board on August 30, 2013.
3) Incentive Plan Awards
Outstanding share-based awards and option-based awards
The
following table sets forth the options granted to the NEOs to purchase or
acquire securities of the Company outstanding at the end of the most recently
completed financial year ended August 31, 2017:
|
Option-based Awards
|
Share-based Awards
|
Name
|
Number of
securities
underlying
unexercised
options
(#)
|
Option
exercise
price
($)
|
Option
expiration
Date
|
Value of
unexercised
in-the-
money
options
($)
(1)
|
Number
of
shares
or units
of
shares
that
have
not
vested
(#)
|
Market
or
payout
value
of
share-
based
awards
that
have
not
vested
($)
|
Market or
payout
value of
vested
share-
based
awards
not paid
out or
distributed
($)
|
DONALD BUBAR
Director, President
and CEO
|
200,000
(2)
|
1.19
|
Feb28/18
|
Nil
|
Nil
|
Nil
|
Nil
|
300,000
(5)
|
0.17
|
Nov07/18
|
Nil
|
Nil
|
Nil
|
Nil
|
150,000
(3)
|
0.59
|
Jan06/19
|
Nil
|
Nil
|
Nil
|
Nil
|
200,000
(2)
|
0.81
|
Mar04/19
|
Nil
|
Nil
|
Nil
|
Nil
|
150,000
(4)
|
0.22
|
Nov23/19
|
Nil
|
Nil
|
Nil
|
Nil
|
200,000
(2)
|
0.36
|
Feb29/20
|
Nil
|
Nil
|
Nil
|
Nil
|
150,000
(4)
|
0.12
|
Jan11/21
|
$3,000
|
Nil
|
Nil
|
Nil
|
200,000
(2)
|
0.13
|
Feb28/21
|
$2,000
|
Nil
|
Nil
|
Nil
|
200,000
(2)
|
0.18
|
Feb28/22
|
Nil
|
Nil
|
Nil
|
Nil
|
R. JAMES
ANDERSEN
CFO and Vice
President, Finance
|
120,000
(2)
|
0.88
|
May31/18
|
Nil
|
Nil
|
Nil
|
Nil
|
250,000
(5)
|
0.17
|
Nov07/18
|
Nil
|
Nil
|
Nil
|
Nil
|
150,000
(3)
|
0.59
|
Jan06/19
|
Nil
|
Nil
|
Nil
|
Nil
|
120,000
(2)
|
0.54
|
May31/19
|
Nil
|
Nil
|
Nil
|
Nil
|
125,000
(4)
|
0.22
|
Nov23/19
|
Nil
|
Nil
|
Nil
|
Nil
|
120,000
(2)
|
0.30
|
May31/20
|
Nil
|
Nil
|
Nil
|
Nil
|
125,000
(4)
|
0.12
|
Jan11/21
|
$2,500
|
Nil
|
Nil
|
Nil
|
120,000
(2)
|
0.25
|
May31/21
|
Nil
|
Nil
|
Nil
|
Nil
|
120,000
(2)
|
0.15
|
May31/22
|
Nil
|
Nil
|
Nil
|
Nil
|
DAVID MARSH
|
250,000
(5)
|
0.17
|
Nov07/18
|
Nil
|
Nil
|
Nil
|
Nil
|
114
|
Option-based Awards
|
Share-based Awards
|
Name
|
Number of
securities
underlying
unexercised
options
(#)
|
Option
exercise
price
($)
|
Option
expiration
Date
|
Value of
unexercised
in-the-
money
options
($)
(1)
|
Number
of
shares
or units
of
shares
that
have
not
vested
(#)
|
Market
or
payout
value
of
share-
based
awards
that
have
not
vested
($)
|
Market or
payout
value of
vested
share-
based
awards
not paid
out or
distributed
($)
|
Senior Vice
President,
Metallurgy and
Technology
Development
|
40,000
(2)
|
0.59
|
Jan06/19
|
Nil
|
Nil
|
Nil
|
Nil
|
120,000
(2)
|
0.54
|
May31/19
|
Nil
|
Nil
|
Nil
|
Nil
|
125,000
(4)
|
0.22
|
Nov23/19
|
Nil
|
Nil
|
Nil
|
Nil
|
120,000
(2)
|
0.30
|
May31/20
|
Nil
|
Nil
|
Nil
|
Nil
|
70,000
(4)
|
0.21
|
Aug06/20
|
Nil
|
Nil
|
Nil
|
Nil
|
125,000
(4)
|
0.12
|
Jan11/21
|
$2,500
|
Nil
|
Nil
|
Nil
|
120,000
(2)
|
0.25
|
May 31/21
|
Nil
|
Nil
|
Nil
|
Nil
|
120,000
(2)
|
0.15
|
May 31/22
|
Nil
|
Nil
|
Nil
|
Nil
|
PIERRE NEATBY
Vice President,
Sales and
Marketing
|
80,000
(2)
|
0.88
|
May31/18
|
Nil
|
Nil
|
Nil
|
Nil
|
200,000
(5)
|
0.17
|
Nov07/18
|
Nil
|
Nil
|
Nil
|
Nil
|
80,000
(2)
|
0.54
|
May31/19
|
Nil
|
Nil
|
Nil
|
Nil
|
50,000
(4)
|
0.22
|
Nov23/19
|
Nil
|
Nil
|
Nil
|
Nil
|
80,000
(2)
|
0.30
|
May31/20
|
Nil
|
Nil
|
Nil
|
Nil
|
100,000
(4)
|
0.21
|
Aug06/20
|
Nil
|
Nil
|
Nil
|
Nil
|
100,000
(4)
|
0.12
|
Jan11/21
|
$2,000
|
Nil
|
Nil
|
Nil
|
80,000
(2)
|
0.25
|
May31/21
|
Nil
|
Nil
|
Nil
|
Nil
|
80,000
(2)
|
0.15
|
May31/22
|
Nil
|
Nil
|
Nil
|
Nil
|
WILLIAM MERCER
Vice President,
Exploration
|
200,000
(5)
|
0.17
|
Nov07/18
|
Nil
|
Nil
|
Nil
|
Nil
|
80,000
(2)
|
0.70
|
Dec01/18
|
Nil
|
Nil
|
Nil
|
Nil
|
100,000
(4)
|
0.22
|
Nov23/19
|
Nil
|
Nil
|
Nil
|
Nil
|
80,000
(2)
|
0.22
|
Nov30/19
|
Nil
|
Nil
|
Nil
|
Nil
|
80,000
(2)
|
0.12
|
Nov30/20
|
$1,600
|
Nil
|
Nil
|
Nil
|
100,000
(4)
|
0.12
|
Jan11/21
|
$2,000
|
Nil
|
Nil
|
Nil
|
80,000
(2)
|
0.16
|
Nov30/21
|
Nil
|
Nil
|
Nil
|
Nil
|
(1)
|
In-the-Money Options is the difference between the market
value of the underlying securities at August 31, 2017 and the exercise
price of the option. The closing market price of the Company's common
shares as at August 31, 2017 was $0.14 per common share.
|
(2)
|
These options vest as to 25% thereof on each of the first
four anniversaries of the date of grant thereof and have a term of five
years.
|
(3)
|
These options vest as to 50% thereof on each of the date
of grant and the first anniversary thereof and have a term of five
years.
|
115
(4)
|
These options were 100% vested on the date of grant and
have a term of five years.
|
(5)
|
These options were 100% vested on the date of grant and
have a term of two years.
|
Incentive plan awards value vested or earned during the
year
An
incentive plan is any plan providing compensation that depends on achieving
certain performance goals or similar conditions within a specific period. An
incentive plan award means compensation awarded, earned, paid or payable under
an incentive plan.
The
following table sets forth the value vested or earned during the year of
option-based awards, share-based awards and non-equity incentive plan
compensation paid to NEOs during the most recently completed financial year
ended August 31, 2017:
Name
|
Option-based awards
Value
vested during the
year
($)
(1)
|
Share-based awards
Value
vested during the
year
($)
|
Non-equity incentive plan
compensation
Value earned during the
year
($)
|
DONALD BUBAR
Director, President and CEO
|
2,750
|
Nil
|
Nil
|
R. JAMES ANDERSEN
CFO and Vice President,
Finance
|
Nil
|
Nil
|
Nil
|
DAVID MARSH
Senior Vice President,
Metallurgy and
Technology
Development
|
Nil
|
Nil
|
Nil
|
PIERRE NEATBY
Vice President, Sales and
Marketing
|
Nil
|
Nil
|
Nil
|
WILLIAM MERCER
Vice President, Exploration
|
800
|
Nil
|
Nil
|
____________
(1) The value of the options vested during the
year for each NEO is based on the closing market price of the Companys common
shares on the TSX on the vesting date less the option exercise price.
4) Pension Plan Benefits
No
pension plan or retirement benefit plans have been instituted by the Company and
none are proposed at this time.
Use of Financial Instruments
The
Company does not have in place policies which restrict the ability of directors
or NEOs to purchase financial instruments, such as prepaid variable forward
contracts, equity swaps, collars, or units of exchange funds, that are designed
to hedge or offset a decrease in market value of equity securities granted as
compensation or held, directly or indirectly, by a director or NEO. Any such
purchases would be subject to applicable insider reporting requirements.
5) Termination and Change of Control Benefits
The
Company has entered into employment agreements with each of the NEOs. Employment
agreements can be terminated:
116
|
a)
|
by the employee by providing a minimum of 30 days notice
to the Company;
|
|
|
|
|
b)
|
by the Company by payment of termination benefits that
provide for a payment, which in the case of Donald Bubar, President and
CEO, and R. James Andersen, CFO and Vice President, Finance, of an amount
equal to three years the then current salary for each of Donald Bubar and
R. James Andersen, respectively, and, in the case of the other NEOs, equal
to twelve months salary plus one month per year to a maximum of 24
months;
|
A change of control shall be deemed to have occurred when any person, entity
or group becomes the beneficial owner of 50.1% or more of the combined voting
power of the Companys then outstanding voting securities entitled to vote
generally in the election of directors; or completion of the sale or other
disposition by the Company of all or substantially all of the Companys assets
or a reorganization or merger or consolidation of the Company with any other
entity or corporation, at which time the severance payment becomes due and
payable on closing of the transaction, other than:
|
(i)
|
a reorganization or merger or consolidation that would
result in the voting securities of the Company outstanding immediately
prior thereto continuing to represent, either by remaining outstanding or
by being converted into voting securities of another entity, more than
50.1% of the combined voting power of the voting securities of the Company
or such other entity outstanding immediately after such reorganization or
merger or consolidation; or
|
|
|
|
|
(ii)
|
a reorganization or merger or consolidation effected to
implement a recapitalization or reincorporation of the Company (or similar
transaction) that does not result in a material change in beneficial
ownership of the voting securities of the Company or its
successor.
|
The following amounts would have been required to be paid assuming a change of
control event took place on the last business day of the Companys most recently
completed financial year:
Name
|
Change of Control
|
Amount ($)
|
DONALD BUBAR
Director, President and CEO
|
3x annual salary
|
1,200,000
|
R. JAMES ANDERSEN
CFO and Vice President,
Finance
|
3x annual salary
|
900,000
|
DAVID MARSH
Senior Vice President,
Metallurgy and
Technology Development
|
12 months +
1 month per
year of employment
|
540,000
|
PIERRE NEATBY
Vice President, Sales and
Marketing
|
12 months +
1 month per
year of employment
|
433,333
|
WILLIAM MERCER
Vice President,
Exploration
|
12 months +
1 month per
year of employment
|
411,667
|
6) Director Compensation
Directors
of the Company (excluding Donald Bubar, who is an officer of the Company) are
paid a base yearly fee of $10,000 plus a fee of $400 per Board or Committee
meeting attended in person or by conference telephone. An additional fee of
$3,000 is paid to each of the Chair of the Board and the Chair of any other
permanent committee of the Board.
In
addition, pursuant to the Stock Option Plan, the Company typically grants
options to purchase common shares to directors of the Company. During the year
ended August 31, 2017, 225,000 options were granted to a new director and an
aggregate of 150,000 options were granted to certain directors to replace
options expired during the Year.
117
The
directors are indemnified by the Company against all costs, charges and expenses
reasonably incurred by such director in respect of any action or proceeding to
which such director is made a party by reason of being a director of the
Company, subject to the limitations in respect thereof contained in the Canada
Business Corporations Act.
The
Company maintains insurance coverage with respect of directors and officers
liability which is limited to $20,000,000 per claim and $20,000,000 per policy
period, subject to deductibles of $150,000 to $250,000 as defined in the policy.
The current policy is for a one-year term and expires on July 20, 2018. The
premium paid by the Company in respect of said insurance in fiscal 2017 was
$81,600.
The
following table sets forth the value of all compensation paid to the directors,
excluding Donald Bubar, President and CEO who is paid as an officer and not as a
director:
Name
|
Fees
earned
($)
|
Share-
based
awards
($)
(1)
|
Option-
based
awards
($)
(2)
|
Non-equity
incentive
plan
compensation
($)
(3)
|
Pension
value
($)
(4)
|
All other
compensation
($)
(5)
|
Total
($)
|
Alan Ferry *
|
16,700
|
Nil
|
3,889
|
Nil
|
Nil
|
Nil
|
20,589
|
Brian D. MacEachen *
|
21,200
|
Nil
|
3,889
|
Nil
|
Nil
|
Nil
|
25,089
|
Peter McCarter *
(6)
|
9,300
|
Nil
|
3,889
|
Nil
|
Nil
|
Nil
|
13,189
|
Patricia Mohr *
(7)
|
7,400
|
Nil
|
20,280
|
Nil
|
Nil
|
Nil
|
27,680
|
Jane Pagel*
|
13,200
|
Nil
|
Nil
|
Nil
|
Nil
|
Nil
|
13,200
|
Kenneth G. Thomas *
|
12,800
|
Nil
|
Nil
|
Nil
|
Nil
|
Nil
|
12,800
|
___________________________
*Independent and Non-Employee
Directors.
(1)
|
The Company does not currently have any share-based award
plans.
|
(2)
|
These amounts represent the grant date fair value of
options granted to the respective Named Executive Officer, which have been
determined by using the Black-Scholes model, a mathematical valuation
model that ascribes a value to an option based on a number of factors in
valuing the option-based awards, including the exercise price of the
option, the price of the underlying security on the date the option was
granted, and assumptions with respect to the volatility of the price of
the underlying security and the risk-free rate of return. Calculating the
value of options using this methodology is very different from a simple
in-the-money value calculation. In fact, options that are well out-of-
the-money can still have a significant grant date fair value based on a
Black-Scholes valuation, especially where, as in the case of the Company,
the price of the common shares underlying the option is highly volatile.
Accordingly, caution must be exercised in comparing grant date fair value
amounts with cash compensation or an in-the-money option value
calculation. The same caution applies to the total compensation amounts
shown in the last column above, which are based in part on the grant date
fair value amounts set out in the column for Option-based awards. These
values are consistent with the accounting values used in the Companys
financial statements. The Company selected the Black-Scholes model given
its prevalence of use within North America.
|
(3)
|
The Company does not have a non-equity incentive
plan.
|
(4)
|
The Company does not have any pension plans.
|
(5)
|
The Company does not have any other benefit plans for its
directors.
|
(6)
|
Mr. McCarter served as a director until February 22,
2017.
|
(7)
|
Ms. Mohr became a director on March 23,
2017.
|
The Company may grant incentive stock options to directors of the Company from
time to time pursuant to the stock option plan of the Company and in accordance
with the policies of the TSX.
Outstanding share-based awards and option-based
awards
The
following table sets forth the options granted to the directors to purchase or
acquire securities of the Company outstanding at August 31, 2017:
118
|
Option-based
Awards
|
Share-based Awards
|
Name
(1)
|
Number
of
securities
underlying
unexercised
options
(#)
|
Option
exercise
price
($)
|
Option
expiration
date
|
Value of
unexercised
in-the-
money
options
($)
(2)
|
Number
of
shares
or units
of shares
that
have not
vested
(#)
|
Market
or
payout
value of
share-
based
awards
that
have
not vested
($)
|
Market or
payout
value of
vested
share-
based
awards
not paid
out or
distributed
($)
|
Alan Ferry
|
50,000
(4)
|
0.99
|
Apr29/18
|
Nil
|
Nil
|
Nil
|
Nil
|
50,000
(4)
|
0.84
|
Mar05/19
|
75,000
(4)
|
0.48
|
Jul14/19
|
50,000
(5)
|
0.22
|
Nov23/19
|
50,000
(4)
|
0.16
|
Nov30/21
|
Brian D. MacEachen
|
50,000
(4)
|
1.01
|
Apr19/18
|
Nil
|
Nil
|
Nil
|
Nil
|
50,000
(4)
|
0.99
|
Apr29/18
|
50,000
(4)
|
0.72
|
Mar12/19
|
75,000
(4)
|
0.48
|
Jul14/19
|
60,000
(5)
|
0.22
|
Nov23/19
|
50,000
(4)
|
0.16
|
Nov30/21
|
Patricia Mohr
|
225,000
(3)
|
0.16
|
Apr16/22
|
Nil
|
Nil
|
Nil
|
Nil
|
Jane Pagel
|
225,000
(3)
|
0.14
|
Feb24/21
|
Nil
|
Nil
|
Nil
|
Nil
|
Kenneth G. Thomas
|
225,000
(3)
|
0.81
|
Mar04/19
|
Nil
|
Nil
|
Nil
|
Nil
|
50,000
(5)
|
0.22
|
Nov23/19
|
__________________
(1)
|
For the compensation of Donald Bubar who is a NEO of the
Company, see Incentive Plan Awards above.
|
(2)
|
In-the-Money Options is the difference between the market
value of the underlying securities at August 31, 2017 and the exercise
price of the option. The closing market price of the Company's common
shares as at August 31, 2017 was $0.14 per common share.
|
(3)
|
These options vest as to 25% thereof on each of the first
four anniversaries of the date of grant thereof and have a term of five
years.
|
(4)
|
These options vest as to 50% thereof on each of the date
of grant and the first anniversary thereof and have a term of five
years.
|
(5)
|
These options were 100% vested on the date of grant and
have a term of five years.
|
Incentive plan awards value vested or earned
during the year
An
incentive plan is any plan providing compensation that depends on achieving
certain performance goals or similar conditions within a specific period. An
incentive plan award means compensation awarded, earned, paid or payable under
an incentive plan.
The
following table sets forth the value vested or earned during the year of
option-based awards, share-based awards and non-equity incentive plan
compensation paid to directors during the year ended August 31, 2017:
119
|
|
|
Non-equity
|
|
Option-based
|
Share-based
|
incentive plan
|
|
awards Value
|
awards Value
|
compensation
|
|
vested during
|
vested during
|
Value earned
|
|
the year
|
the year
|
during the year
|
Name
(1)
|
($)
(2)
|
($)
|
($)
|
Alan Ferry
|
Nil
|
Nil
|
Nil
|
Brian D. MacEachen
|
Nil
|
Nil
|
Nil
|
Peter McCarter
|
Nil
|
Nil
|
Nil
|
Patricia Mohr
|
Nil
|
Nil
|
Nil
|
Jane Pagel
|
3,375
|
Nil
|
Nil
|
Kenneth G. Thomas
|
Nil
|
Nil
|
Nil
|
___________________
(1)
|
For the compensation of Donald Bubar who is a NEO of the
Company, see Incentive Plan Awards above.
|
(2)
|
The value of the options vested during the year for each
director is based on the closing market price of the Companys common
shares on the TSX on the vesting date less the option exercise
price.
|
C. Board Practices
The
Board is currently comprised of six directors. The size and experience of the
Board is important for providing the Company with effective governance in the
mineral industry. The Boards mandate and responsibilities can be effectively
and efficiently administered at its current size. The Board has functioned, and
is of the view that it can continue to function, independently of management as
required. Directors are elected for a term of one year at the annual meeting of
shareholders. At the Annual Meeting, held on February 22, 2017, the shareholders
elected Messrs. Bubar, Ferry, MacEachen, Thomas and Ms. Pagel as directors. Ms.
Mohr was appointed a director of the Company by the Board of Directors on March
23, 2017.
The
Board has considered the relationship of each director to the Company and
currently considers five of the six directors to be unrelated (Mr. Ferry, Mr.
MacEachen, Dr. Thomas, Ms. Pagel and Ms. Mohr). Unrelated director means a
director who is independent of management and free from any interest and any
business or other relationship which could reasonably be perceived to materially
interfere with the directors ability to act with a view to the best interest of
the Company, other than interests and relationships arising solely from
shareholdings.
Procedures
are in place to allow the Board to function independently. At the present time,
the Board has experienced directors that have made a significant contribution to
the Companys success, and are satisfied that it is not constrained in its
access to information, in its deliberations or in its ability to satisfy the
mandate established by law to supervise the business and affairs of the Company.
Committees meet independent of management and other directors.
Mandate of the Board of Directors,
its Committees and Management
The
role of the Board is to oversee the conduct of the Companys business, including
the supervision of management, and determining the Companys strategy.
Management is responsible for the Companys day to day operations, including
proposing its strategic direction and presenting budgets and business plans to
the Board for consideration and approval. The strategic plan takes into account,
among other things, the opportunities and risks of the Companys business.
Management provides the Board with periodic assessments as to those risks and
the implementation of the Companys systems to manage those risks. The Board
reviews the personnel needs of the Company from time to time, having particular
regard to succession issues relating to senior management. Management is
responsible for the training and development of personnel. The Board assesses
how effectively the Company communicates with shareholders, but has not adopted
a formal communications policy. Through the Audit Committee, and in conjunction
with its auditors, the Board assesses the adequacy of the Companys internal
control and management information systems. The Board looks to management to
keep it informed of all significant developments relating to or affecting the
Companys operations. Major financings, acquisitions, dispositions and
investments are subject to Board approval. The Board adopted a formal mandate
for the Board, the Chair of the Board and the CEO. The Board meets quarterly and
additionally as required. The Board and committees may take action at these
meetings or at a meeting by conference call or by written consent.
120
Majority Voting Policy
The
Board has adopted a policy providing that in an uncontested election of
directors, any nominee who receives a greater number of votes withheld than
votes for will tender his or her resignation to the Chairman of the Board
promptly following the shareholders meeting. The Compensation, Governance and
Nominating Committee (CGN Committee) of the Board will consider the offer of
resignation and will make a recommendation to the Board on whether to accept it.
In considering whether or not to accept the resignation, the CGN Committee will
consider all factors deemed relevant by members of such committee. The CGN
Committee will be expected to accept the resignation except in situations where
the considerations would warrant the applicable director continuing to serve on
the Board. The Board will make its final decision and announce it in a press
release within 90 days following the meeting. A director who tenders his or her
resignation pursuant to this policy will not participate in any meeting of the
Board or the CGN Committee at which the resignation is considered.
Board Effectiveness
Assessment
The
CGN Committee of the Board has implemented a process for periodically assessing
the effectiveness of the Board as a whole, as well as its committees and
individual directors. As part of the assessment process, each director receives
a comprehensive survey which covers, among other matters, the overall
functioning of the Board and each Board committee, including its composition,
structure and processes; the management structure and reporting functions; the
Companys strategic direction and commitment to sustainability; the Boards
operational oversight, the Boards relationship with management; and other
relevant aspects of the Boards responsibilities and processes. The completed
surveys are then compiled into a report which is provided to the CGN Committee.
The CGN Committee reviews the results of the Board surveys and puts forward any
recommendations it feels appropriate to address any comments or concerns
expressed by directors. The report, along with the recommendations of the CGN
Committee, is then presented to the Board for further discussion.
Committees
Audit Committee
The
Audit Committee assists the Board in its oversight of the Companys consolidated
financial statements and other related public disclosures, the Companys
compliance with legal and regulatory requirements relating to financial
reporting, the external auditors, qualifications and independence and the
performance of the internal audit function and the external auditors. The Audit
Committee has direct communications channels with the Companys auditors. The
Audit Committee reviews the Companys financial statements and related
managements discussion and analysis of financial and operating results. The
Audit Committee can retain legal, accounting or other advisors.
The
Audit Committee currently consists of three directors (Brian MacEachen (chair),
Alan Ferry and Patricia Mohr). All of the members are unrelated, financially
literate and at least one member has accounting or related financial expertise.
Financially literate means the ability to read and understand statements of
financial position, statements of operations and comprehensive loss, statements
of shareholders equity, statements of cash flow and notes to financial
statements. Accounting or related financial expertise means the ability to
analyze and interpret a full set of financial statements, including the notes
attached thereto.
Mr.
MacEachen is a Chartered Professional Accountant with over 20 years of
experience in overseeing the financial management of publicly traded companies.
He holds a BBA and a CPA designation.
Mr.
Ferry is a retired Chartered Financial Analyst with over 25 years of experience
as a mining analyst with various investment dealers. He holds a B.Sc. and serves
on the board of directors of four publicly traded companies and the audit
committee of three publicly traded companies.
121
Ms.
Mohr is the former Vice President, Economics and Commodity Market Specialist at
Scotiabanks Executive Offices in Toronto, before retiring in 2016 after 31
years with the bank. Prior to joining Scotiabank, Ms. Mohr spent a number of
years with Alberta Energy Co. Ltd. (now EnCana Corp.) in Calgary and with CP
Ships and Canadian Pacific Bermuda in London as Corporate Economist. She holds
an Honours B.A. Degree and an M.A. Degree in Economics from The University of
British Columbia.
The
Board has adopted a charter for the Audit Committee which is reviewed annually
and sets out the role and oversight responsibilities of the Audit Committee with
respect to:
-
its relationship with and expectation of the external auditors, including
the establishment of the independence of the external auditor and the approval
of any non-audit mandates of the external auditor;
-
determination of which non-audit services the external auditor is
prohibited from providing;
-
the engagement, evaluation, remuneration, and termination of the external
auditors;
-
appropriate funding for the payment of the auditors compensation and for
any advisors retained by the Audit Committee;
-
its relationship with and expectation of the internal auditor;
-
its oversight of internal control;
-
disclosure of financial and related information; and
-
any other matter that the Audit Committee feels is important to its
mandate or that which the Board chooses to delegate to it.
Compensation, Governance and Nominating Committee
The
CGN Committee is responsible for reviewing the compensation of the Companys
directors and officers and making recommendations to the Board with respect
thereto.
The
CGN Committee of the Board is responsible for making recommendations to the
Board with respect to the compensation of the executive officers of the Company
as well as, among other things, with respect to the Companys Stock Option Plan
and any other employee benefits and/or plans and with respect to directors
compensation. The Board (exclusive of the CEO, who is also a member of the
Board) reviews such recommendations and gives final approval to the compensation
of the executive officers.
The CGN Committee currently consists of Alan Ferry (Chair), Kenneth G. Thomas
and Jane Pagel, each of whom are independent. Each of Mr. Ferry, Dr. Thomas and
Ms. Pagel has direct and extensive experience in corporate management and
compensation issues in either the mineral industry and/or the financial
industry. Mr. Ferry is a member of the committee responsible for compensation
matters of Guyana Goldfields Inc. and GPM Metals Inc., which are publicly listed
mineral exploration or mining companies. Dr. Thomas served as Senior Vice
President, Projects, Kinross Gold Corporation from December 2009 to June 2012,
Global Managing Director and Director, Hatch from November 2005 to November 2009
and Chief Operating Officer, Crystallex International Corporation April 2003 to
October 2005. In addition he served in senior roles at Barrick Gold Corporation
from 1987 to 2001, including Senior Vice President, Technical Services, during
which times he was responsible for determining the compensation of those
employees whom he directly and indirectly supervised, which numbered in excess
of several dozen. Ms. Pagel is a self-employed businessperson and chair of the
board of directors of BluMetric Environmental Inc., a publically traded company
in the fields of water/wastewater treatment and professional environmental
services. She served as the Interim President and CEO Sustainable Development
Technology Canada from June, 2014 to June, 2015. Prior to that, she was
president and CEO of the Ontario Clean Water Agency from 2010 until her
retirement in early 2014. Previous industry positions held by Ms Pagel include
Principal Government and Industrial Relations at Stantec; Senior Vice President
and Principal at Jacques Whitford; Vice President Government Relations at Philip
Services; and president of Zenon Environmental Laboratories.
The
CGN Committee has not to date felt it necessary to engage any compensation
consultant or advisor to assist it in the performance of its duties. This
experience relating to executive compensation matters collectively provides members of the Committee with a suitable perspective
to make decisions on the appropriateness of the Companys compensation policies
and practices.
122
The
CGN Committee of the Board is responsible for recommending candidates for
nomination to the Board, and governing the desirable characteristics for
directors. In making such recommendations, the CGN Committee considers:
|
(a)
|
the competencies and skills that the Board considers to
be necessary for the Board, as a whole, to possess;
|
|
(b)
|
the competencies and skills that the Board considers each
existing director to possess; and
|
|
(c)
|
the competencies and skills each new nominee will bring
to the boardroom.
|
The
CGN Committee reviews compensation levels for all officers and in particular
compensation levels for the CEO. The CGN Committee is responsible for, among
other things, developing or approving performance indicators and corporate
objectives which the President and CEO is responsible for meeting, determining
or recommending to the Board the compensation of the President and CEO, and
reviewing the adequacy and form of compensation of the Board and members of the
committees of the Board in light of the responsibilities and risks involved in
being a director, in the case of the Board, and a chairman, in the case of Board
committees. The CGN Committee meets as often as is necessary to carry out its
responsibilities.
The
CGN Committee is permitted access to all records and corporate information that
it determines are required in order to perform its duties. The CGN Committee has
the authority to engage independent counsel and other advisors as it determines
necessary to carry out its duties and to set and pay the compensation for any
advisors engaged by it.
The
CGN Committee currently consists of three directors (Mr. Ferry, Dr. Thomas and
Ms. Pagel). All of the members are unrelated directors.
D. Employees
As at August 31, 2017, the Company has 13 employees (August 31, 2016 - 15,
August 31, 2015 - 21), all of the employees are located in Ontario.
E. Share Ownership
As of November 24, 2017, the Company had 208,494,080 common shares issued and
outstanding. The following table sets forth the share ownership of the
individuals referred to in Compensation as of November 24, 2017, who were
insiders as of that date:
Name of
Beneficial Owner
|
|
Number of Shares
|
|
Percent
|
R. James Andersen
|
|
300,000
|
|
0.0
|
Donald Bubar
|
|
5,961,100
|
|
2.9
|
Alan Ferry
|
|
225,000
|
|
0.0
|
Brian D. MacEachen
|
|
340,000
|
|
0.0
|
Patricia Mohr
|
|
65,000
|
|
0.0
|
William Mercer
|
|
106,234
|
|
0.0
|
Pierre Neatby
|
|
23,500
|
|
0.0
|
Jane Pagel
|
|
34,000
|
|
0.0
|
Kenneth G. Thomas
|
|
49,000
|
|
0.0
|
123
Outstanding Options
The
following information, as of November 24, 2017, reflects outstanding options
held by the individuals referred to in Compensation:
Name
|
Number of common
shares
underlying
unexercised options
(#)
|
Grant Date
|
Exercise Price ($)
|
Expiration Date
|
DONALD BUBAR
|
200,000
|
Mar01/13
|
1.19
|
Feb28/18
|
300,000
|
Nov08/16
|
0.17
|
Nov07/18
|
150,000
|
Jan07/14
|
0.59
|
Jan06/19
|
200,000
|
Mar05/14
|
0.81
|
Mar04/19
|
150,000
|
Nov24/14
|
0.22
|
Nov23/19
|
200,000
|
Mar02/15
|
0.36
|
Feb29/20
|
150,000
|
Jan12/16
|
0.12
|
Jan11/21
|
200,000
|
Mar01/16
|
0.13
|
Feb28/22
|
200,000
|
Mar01/17
|
0.18
|
Feb28/21
|
R. JAMES ANDERSEN
|
120,000
|
Jun01/13
|
0.88
|
May31/18
|
250,000
|
Nov8/16
|
0.17
|
Nov7/18
|
150,000
|
Jan07/14
|
0.59
|
Jan06/19
|
120,000
|
Jun05/14
|
0.54
|
May31/19
|
125,000
|
Nov24/14
|
0.22
|
Nov23/19
|
120,000
|
Jun1/15
|
0.30
|
May31/20
|
125,000
|
Jan12/16
|
0.12
|
Jan11/21
|
120,000
|
Jun01/16
|
0.25
|
May31/21
|
120,000
|
Jun01/17
|
0.15
|
May31/22
|
DAVID MARSH
|
250,000
|
Nov08/16
|
0.17
|
Nov07/18
|
40,000
|
Jan07/14
|
0.59
|
Jan06/19
|
120,000
|
Jun05/14
|
0.54
|
May31/19
|
125,000
|
Nov24/14
|
0.22
|
Nov23/19
|
120,000
|
Jun1/15
|
0.30
|
May31/20
|
70,000
|
Aug7/15
|
0.21
|
Aug6/20
|
125,000
|
Jan12/16
|
0.12
|
Jan11/21
|
120,000
|
Jun01/16
|
0.25
|
May31/21
|
120,000
|
Jun01/17
|
0.15
|
May31/22
|
PIERRE NEATBY
|
80,000
|
Jun01/13
|
0.88
|
May31/18
|
200,000
|
Nov8/16
|
0.17
|
Nov7/18
|
80,000
|
Jun05/14
|
0.54
|
May31/19
|
50,000
|
Nov24/14
|
0.22
|
Nov23/19
|
80,000
|
Jun1/15
|
0.30
|
May31/20
|
100,000
|
Aug7/15
|
0.21
|
Aug6/20
|
100,000
|
Jan12/16
|
0.12
|
Jan11/21
|
124
Name
|
Number of common
shares
underlying
unexercised options
(#)
|
Grant Date
|
Exercise Price ($)
|
Expiration Date
|
|
80,000
|
Jun01/16
|
0.25
|
May31/21
|
80,000
|
Jun01/17
|
0.15
|
May31/22
|
WILLIAM MERCER
|
200,000
|
Nov8/16
|
0.17
|
Nov7/18
|
80,000
|
Dec02/13
|
0.70
|
Dec01/18
|
100,000
|
Nov24/14
|
0.22
|
Nov23/19
|
80,000
|
Dec02/14
|
0.22
|
Nov30/19
|
80,000
|
Dec1/15
|
0.12
|
Nov30/20
|
100,000
|
Jan12/16
|
0.12
|
Jan11/21
|
80,000
|
Dec1/16
|
0.16
|
Nov30/21
|
ALAN FERRY
|
50,000
|
Apr29/13
|
0.99
|
Apr29/18
|
50,000
|
Mar06/14
|
0.84
|
Mar5/19
|
75,000
|
Jul15/14
|
0.48
|
Jul14/19
|
50,000
|
Nov24/14
|
0.22
|
Nov23/19
|
50,000
|
Dec01/16
|
0.16
|
Nov30/21
|
BRIAN D. MACEACHEN
|
50,000
|
Apr19/13
|
1.01
|
Apr19/18
|
50,000
|
Apr29/13
|
0.99
|
Apr29/18
|
50,000
|
Mar13/14
|
0.72
|
Mar12/19
|
75,000
|
Jul15/14
|
0.48
|
Jul14/19
|
60,000
|
Nov24/14
|
0.22
|
Nov23/19
|
50,000
|
Dec01/16
|
0.16
|
Nov30/21
|
PETER MCCARTER
|
50,000
|
Nov24/14
|
0.22
|
Nov23/19
|
PATRICIA MOHR
|
225,000
|
Apr 17/17
|
0.16
|
Apr 16/22
|
JANE PAGEL
|
225,000
|
Feb25/16
|
0.14
|
Feb24/21
|
KENNETH G. THOMAS
|
225,000
|
Mar05/14
|
0.81
|
Mar04/19
|
50,000
|
Nov24/14
|
0.22
|
Nov23/19
|
Outstanding Warrants
The
following information, as of November 24, 2017, reflects outstanding share
purchase warrants held by the individuals referred to in Compensation:
Name
|
Number of common
shares
underlying
unexercised warrants
(#)
|
Issuance Date
|
Exercise Price ($)
|
Expiration Date
|
DONALD BUBAR
|
Nil
|
n/a
|
n/a
|
n/a
|
R. JAMES ANDERSEN
|
Nil
|
n/a
|
n/a
|
n/a
|
DAVID MARSH
|
Nil
|
n/a
|
n/a
|
n/a
|
PIERRE NEATBY
|
Nil
|
n/a
|
n/a
|
n/a
|
WILLIAM MERCER
|
Nil
|
n/a
|
n/a
|
n/a
|
125
Name
|
Number of common
shares
underlying
unexercised warrants
(#)
|
Issuance Date
|
Exercise Price ($)
|
Expiration Date
|
ALAN FERRY
|
Nil
|
n/a
|
n/a
|
n/a
|
BRIAN D. MACEACHEN
|
Nil
|
n/a
|
n/a
|
n/a
|
PETER MCCARTER
|
Nil
|
n/a
|
n/a
|
n/a
|
PATRICIA MOHR
|
Nil
|
n/a
|
n/a
|
n/a
|
JANE PAGEL
|
Nil
|
n/a
|
n/a
|
n/a
|
KENNETH G. THOMAS
|
Nil
|
n/a
|
n/a
|
n/a
|
Item 10. Additional Information
Additional
information relating to the Company can be found under the Companys profile on
the SEDAR website at www.sedar.com. Additional information, including directors
and officers remuneration and indebtedness, principal holders of the Companys
securities and securities authorized for issuance under equity compensation
plans, if applicable, is contained in the Companys information circular for its
most recent annual meeting of shareholders. Additional financial information is
provided in the Companys audited consolidated financial statements and
managements discussion and analysis for its most recently completed financial
year.
A. Share Capital
Avalons
authorized share structure consists of an unlimited number of common shares, of
which 196,735,521 common shares were outstanding as at August 31, 2017 and
25,000,000 preferred shares, of which 480 Series A1 Preferred Shares were
outstanding as at August 31, 2017. As of November 24, 2017, Avalon had
208,494,080 common shares issued and outstanding and 405 Series A1 Preferred
Share issued and outstanding.
B. Memorandum and Articles of Association
Common Shares
All
issued and outstanding common shares are fully paid and non-assessable. Holders
of common shares of the Company are entitled to receive notice of any meetings
of shareholders of the Company, to attend and to cast one vote per common share
of the Company at all such meetings. Holders of common shares of the Company do
not have cumulative voting rights with respect to the election of directors and,
accordingly, holders of a majority of the common shares of the Company entitled to vote in any election
of directors may elect all directors standing for election. Holders of common
shares are entitled to receive on a pro-rata basis such dividends, if any, as
and when declared by the Board of Directors of the Company at its discretion
from funds legally available therefore and upon the liquidation, dissolution or
winding up of the Company are entitled to receive on a pro-rata basis the net
assets of the Company after payment of debts and other liabilities, in each case
subject to the rights, privileges, restrictions and conditions attaching to any
other series or class of shares ranking senior in priority to or on a pro-rata
basis with the holders of common shares of the Company with respect to dividends
or liquidation. The common shares of the Company do not carry any pre-emptive,
subscription, redemption or conversion rights, nor do they contain any sinking
or purchase fund provisions.
132
Series A1 Preferred Shares
The
holder of the Series Al Preferred Shares (the Holder) then outstanding shall
not be entitled to receive any dividend on Series Al Preferred Shares. The
Holder may not transfer, sell or trade the Series Al Preferred Shares. The
Series Al Preferred Shares redemption value that starts at $5,000 per share and
increases by $250 per share each quarter over a 24 month period ending on March
10, 2019, to a cap of $6,750 per share. The Holder may convert the Series Al
Preferred Shares into common shares from time to time at a price per common
share equal to 85% of the five-day volume weighted average price of the common
shares on the TSX immediately prior to the date that notice of conversion is
given. The Holder is entitled to certain adjustments if there shall occur any
reorganization, recapitalization, reclassification, consolidation, arrangement,
subdivision, amalgamation or merger involving the Company. In certain
circumstances, The Holder is entitled to accelerate its conversion right to the
full amount of the redemption value applicable at such time, or demand repayment
of the applicable redemption value per share in cash, upon the occurrence of
certain events (the Redemption Events). The triggering Redemption Events
include certain key financial and non-financial conditions, which include change
of control, insolvency and liquidity conditions. These Redemption Events also
limit the Company from obtaining other debt or preferred share financings that
are not junior to the Preferred Shares other than certain project-related
financings, as well as other at-the-market, equity lines or credit type of
common share offerings, or convertible security financings where the price of
the common share is not fixed at a predetermined price. In addition, if the
Redemption Event is a change of control event, the redemption amount will be
equal to 110% of the applicable redemption amount at that time. The Company has
the right to redeem all of the outstanding Series A1 Preferred Shares at any
time at a 5% premium to the redemption value. The Company also has floor price
protection such that if any conversion results in an effective conversion price
of less than $0.10 per common share, then the Company has the right to deny the
conversion and instead redeem the Series A Preferred Shares that were subject to
that conversion for the redemption amount in cash plus a 5% premium.
Powers and Duties of Directors
The
directors manage or supervise the management of the affairs and business of the
Company and have authority to exercise all such powers of the Company as are
not, by the
Canada Business Corporations Act
or by the Articles of
Continuance, required to be exercised by the Company in a general meeting.
Directors
will serve as such until the next annual meeting. A director who is, in any way,
directly or indirectly interested in an existing or proposed contract or
transaction with the Company whereby a duty or interest might be created to
conflict with his duty or interest as a director, shall declare the nature and
extent of his interest in such contract or transaction or the conflict or
potential conflict with his duty and interest as a director. Such director shall
not vote in respect of any such contract or transaction with the Company in
which he is interested and if he shall do so, his vote shall not be counted, but
he shall be counted in the quorum present at the meeting at which such vote is
taken. However, notwithstanding the foregoing, directors shall have the right to
vote on determining the remuneration of the directors. The Company is not aware
of any material interest, direct or indirect, in any transaction within the
three most recently completed financial years involving any director, executive
officer, or proposed nominee for election as a director or any associate or
affiliate of any of the foregoing.
The
directors may from time to time on behalf of the Company: (a) borrow money upon
the credit of the Company; (b) issue, re-issue, sell or pledge debt obligations
of the Company; (c) subject to the provisions of the Canada Business
Corporations Act, as now enacted or as the same may from time to time be
amended, re-enacted or replaced, give a guarantee on behalf of the Company to secure
performance of an obligation of any person; and (d)
mortgage,
hypothecate, pledge or otherwise create a security interest in all or any
property of the Company owned or subsequently acquired, to secure any obligation
of the Company.
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The
directors may from time to time delegate to a director, a committee of directors
or an officer of the Company any or all of the powers conferred on the board as
set out above, to such extent and in such manner as the Board shall determine at
the time of such delegation. Except in the case of any class or series of shares
of the Company listed on a stock exchange, the Company shall have a lien on the
shares registered in the name of a shareholder or his legal representative for a
debt of that shareholder to the Company. Between annual and general meetings of
the Company, the directors of the Company may appoint one or more additional
directors to serve until the next annual and general meeting, but the number of
additional directors shall not at any time exceed one-third of the number of
directors who held office at the expiration of the last annual and general
meeting.
Every
director shall be an individual 18 or more years of age, and no one who is of
unsound mind and has been so found by a court in Canada or elsewhere, or who has
the status of a bankrupt shall be a director. A director need not be a
shareholder. At least 25% of the directors of the Company must be resident
Canadians.
Shareholders
An
annual general meeting is held once in every calendar year at such time and
place as may be determined by the directors. A quorum for the transaction of
business at any meeting of shareholders is two persons present in person, each
being a shareholder entitled to vote thereat or a duly appointed proxy or
proxyholder for an absent shareholder so entitled, holding or representing in
the aggregate not less than 25% of the issued and outstanding shares of the
Company carrying voting rights at the meeting of shareholders. There is no
limitation imposed by the laws of Canada or by the charter or other constituent
documents of the Company on the right of a non-resident to hold or vote the
common shares, other than as provided in the
Investment Canada Act
(the
Investment Act) discussed below under Item 10. Additional Information, D.
Exchange Controls.
In
accordance with the laws of Canada, directors shall be elected annually by an
ordinary resolution which means a resolution passed by the shareholders of the
Company at an annual meeting by a simple majority of the votes cast in person or
by proxy. A director's term of office shall be from the date of the meeting at
which he is elected or appointed until the close of the annual meeting next
following, or until his successor is elected or appointed.
Under
the laws of the Canada Business Corporations Act and the
Securities Act
(Ontario) certain items such as an amendment to the Companys articles or
entering into a merger requires approval by a special resolution which means:
(a) a resolution passed by a majority of not less than two-thirds of the votes
cast by the shareholders of the Company who, being entitled to do so, vote in
person or by proxy at a general meeting of the Company; or (b) a resolution
consented to in writing by every shareholder of the Company who would have been
entitled to vote in person or by proxy at a general meeting of the Company, and
a resolution so consented to is deemed to be a special resolution passed at a
general meeting of the Company.
The
Company has adopted a by-law (By-law No. 2) relating to the nomination of
directors by shareholders of the Company in certain circumstances. By-Law No.2
provides a clear process for shareholders to follow for director nominations and
sets out a reasonable time frame for nominee submissions and the provision of
accompanying information. The purpose of By-law No.2 is to treat all
shareholders fairly by ensuring that all shareholders receive adequate notice of
the nominations to be considered at a meeting and can thereby exercise their
voting rights in an informed manner. In addition, By-law No.2 should assist in
facilitating an orderly and efficient meeting process.
C. Material Contracts
The
Company has not entered into any material contracts within the last two years
immediately preceding the date of this annual report, other than contracts
entered into in the ordinary course of business or that are summarized elsewhere
in this annual report.
134
D. Exchange Controls
Canada
has no system of exchange controls. There are no Canadian restrictions on the
repatriation of capital or earnings of a Canadian public company to non-resident
investors. There are no laws in Canada or exchange restrictions affecting the
remittance of dividends, profits, interest, royalties and other payments to
non-resident holders of the issuers securities, except as discussed below under
Item 10. Additional Information, E. Taxation.
There
are no limitations under the laws of Canada or in the organizing documents of
the Company on the right of foreigners to hold or vote securities of the
Company, except that the Investment Canada Act may require review and approval
by the Minister of Industry (Canada) of certain acquisitions of control of the
Company by a non-Canadian. The threshold for acquisitions of control is
generally defined as being one-third or more of the voting shares of the
Company. Non-Canadian generally means an individual who is not a Canadian
citizen, or a corporation, partnership, trust or joint venture that is
ultimately controlled by non-Canadians.
E. Taxation
Certain Canadian Federal Income Tax Considerations
The
following summarizes the principal Canadian federal income tax considerations
generally applicable to the holding and disposition of common shares in the
capital of the Company by a United States resident, who holds common shares
solely as capital property, and does not use or hold, and will not be deemed to
use or hold, the common shares in carrying on a business in Canada, referred to
as a "U.S. Holder". This summary is based on the current provisions of the
Income Tax Act
(Canada), referred to as the "Tax Act", the regulations
thereunder, all amendments thereto publicly proposed by the government of
Canada, the published administrative practices of the Canada Revenue Agency, and
the current provisions of the
Canada-United States Tax Convention, 1980
,
as amended, referred to as the "Treaty". Except as otherwise expressly provided,
this summary does not take into account any provincial, territorial or foreign
(including without limitation, any United States) tax law or treaty. It has been
assumed that all currently proposed amendments to the Tax Act will be enacted
substantially as proposed and that there is no other relevant change in any
governing law or practice, although no assurance can be given in these respects.
Each U.S. Holder is advised to obtain tax and legal advice
applicable to such U.S. Holders particular circumstances.
A
U.S. Holder will be liable to pay a Canadian withholding tax on every dividend
that is or is deemed to be paid or credited to the U.S. Holder on the U.S.
Holders common shares. The statutory rate of withholding tax is 25% of the
gross amount of the dividend. The Treaty reduces the statutory rate with respect
to dividends paid to a U.S. Holder, if that U.S. Holder is the beneficial owner
of the dividend and is eligible for benefits under the Treaty. Where applicable,
the general rate of withholding tax under the Treaty is reduced to 15% of the
gross amount of the dividend, but if the U.S. Holder is a company that
beneficially owns at least 10% of the voting stock of the Company, the rate of
withholding tax is reduced to 5% for dividends. The Company is required to
withhold the applicable tax from the dividend payable to the U.S. Holder, and to
remit the tax to the Receiver General of Canada for the account of the U. S.
Holder.
A
U.S. Holder generally will not be subject to income tax under the Tax Act in
respect of a capital gain realized on the disposition or deemed disposition of a
common share unless the common share constitutes taxable Canadian property of
the U.S. Holder for purposes of the Tax Act and the gain is not exempt from tax
pursuant to the terms of the Treaty.
Provided
that the common shares are listed on a designated stock exchange for purposes
of the Tax Act (which currently includes the TSX) at the time of disposition,
the common shares generally will not constitute taxable Canadian property of a
U.S. Holder, unless at any time during the 60 month period immediately preceding
the disposition: (i) the U.S. Holder, persons with whom the U.S. Holder did not
deal at arms length for the purposes of the Tax Act, partnerships in which
the U.S. Holder or a person with whom the U.S. Holder did not deal at arms
length held a membership interest directly or indirectly through one or more
partnerships, or the U.S. Holder together with all such persons, owned 25% or more of the issued shares of any
class of the Company and; (ii) more than 50% of the fair market value of the
common shares was derived directly or indirectly from one or any combination of
real or immovable property situated in Canada, Canadian resource properties
(as defined in the Tax Act), timber resource properties (as defined in the Tax
Act), or options in respect of, or interests in, or for civil law rights in,
such property whether or not such property exists.
135
U.S.
Holders who may hold common shares as taxable Canadian property should consult
their own tax advisors.
Certain United States Federal Income Tax Consequences
The
following is a general summary of certain material U.S. federal income tax
considerations applicable to a U.S. Holder (as defined below) arising from and
relating to the acquisition, ownership, and disposition of common shares of the
Company.
This
summary is for general information purposes only and does not purport to be a
complete analysis or listing of all potential U.S. federal income tax
considerations that may apply to a U.S. Holder arising from and relating to the
acquisition, ownership, and disposition of common shares. In addition, this
summary does not take into account the individual facts and circumstances of any
particular U.S. Holder that may affect the U.S. federal income tax consequences
to such U.S. Holder, including specific tax consequences to a U.S. Holder under
an applicable tax treaty. Accordingly, this summary is not intended to be, and
should not be construed as, legal or U.S. federal income tax advice with respect
to any U.S. Holder. This summary does not address the U.S. federal alternative
minimum, U.S. federal estate and gift, U.S. state and local, and non-U.S. tax
consequences to U.S. Holders of the acquisition, ownership, and disposition of
common shares. Except as specifically set forth below, this summary does not
discuss applicable tax reporting requirements. Each U.S. Holder should consult
its own tax advisor regarding the U.S. federal, U.S. federal alternative
minimum, U.S. federal estate and gift, U.S. state and local, and non-U.S. tax
consequences relating to the acquisition, ownership and disposition of common
shares.
No
legal opinion from U.S. legal counsel or ruling from the Internal Revenue
Service (the IRS) has been requested, or will be obtained, regarding the U.S.
federal income tax consequences of the acquisition, ownership, and disposition
of common shares. This summary is not binding on the IRS, and the IRS is not
precluded from taking a position that is different from, and contrary to, the
positions taken in this summary. In addition, because the authorities on which
this summary is based are subject to various interpretations, the IRS and the
U.S. courts could disagree with one or more of the positions taken in this
summary.
Scope of this Summary
Authorities
This
summary is based on the Internal Revenue Code of 1986, as amended, or the
Code, Treasury Regulations (whether final, temporary, or proposed), published
rulings of the IRS, published administrative positions of the IRS, the
Convention Between Canada and the United States of America with Respect to Taxes
on Income and on Capital, signed September 26, 1980, as amended, or the
Canada-U.S. Tax Convention, and U.S. court decisions that are applicable and,
in each case, as in effect and available, as of the date of this document. Any
of the authorities on which this summary is based could be changed in a material
and adverse manner at any time, and any such change could be applied on a
retroactive or prospective basis which could affect the U.S. federal income tax
considerations described in this summary. This summary does not discuss the
potential effects, whether adverse or beneficial, of any proposed legislation
that, if enacted, could be applied on a retroactive or prospective basis.
U.S. Holders
For
purposes of this summary, the term U.S. Holder means a beneficial owner of
common shares that is for U.S. federal income tax purposes:
136
-
an individual who is a citizen or resident of the U.S.;
-
a corporation (or other entity taxable as a corporation for U.S. federal
income tax purposes) organized under the laws of the U.S., any state thereof
or the District of Columbia;
-
an estate whose income is subject to U.S. federal income taxation
regardless of its source; or
-
a trust that (1) is subject to the primary supervision of a court within
the U.S. and the control of one or more U.S. persons for all substantial
decisions or (2) has a valid election in effect under applicable Treasury
Regulations to be treated as a U.S. person.
Non-U.S. Holders
For
purposes of this summary, a non-U.S. Holder is a beneficial owner of common
shares that is not a U.S. Holder. This summary does not address the U.S. federal
income tax consequences to non-U.S. Holders arising from and relating to the
acquisition, ownership, and disposition of common shares. Accordingly, a
non-U.S. Holder should consult its own tax advisor regarding the U.S. federal,
U.S. federal alternative minimum, U.S. federal estate and gift, U.S. state and
local, and non-U.S. tax consequences (including the potential application of and
operation of any income tax treaties) relating to the acquisition, ownership,
and disposition of common shares.
U.S. Holders Subject to Special U.S. Federal Income Tax
Rules Not Addressed
This
summary does not address the U.S. federal income tax considerations applicable
to U.S. Holders that are subject to special provisions under the Code,
including, but not limited to, U.S. Holders that: (a) are tax-exempt
organizations, qualified retirement plans, individual retirement accounts, or
other tax-deferred accounts; (b) are financial institutions, underwriters,
insurance companies, real estate investment trusts, or regulated investment
companies; (c) are broker-dealers, dealers, or traders in securities or
currencies that elect to apply a mark-to-market accounting method; (d) have a
functional currency other than the U.S. dollar; (e) own common shares as part
of a straddle, hedging transaction, conversion transaction, constructive sale,
or other arrangement involving more than one position; (f) acquired common
shares in connection with the exercise of employee stock options or otherwise as
compensation for services; (g) hold common shares other than as a capital asset
within the meaning of Section 1221 of the Code (generally, property held for
investment purposes); or (h) own or have owned (directly, indirectly, or by
attribution) 10% or more of the total combined voting power of the outstanding
shares of the Company. This summary also does not address the U.S. federal
income tax considerations applicable to U.S. Holders who are: (a) U.S.
expatriates or former long-term residents of the U.S.; (b) persons that have
been, are, or will be a resident or deemed to be a resident in Canada for
purposes of the Income Tax Act (Canada) (the Tax Act); (c) persons that use or
hold, will use or hold, or that are or will be deemed to use or hold common
shares in connection with carrying on a business in Canada; (d) persons whose
common shares constitute taxable Canadian property under the Tax Act; or (e)
persons that have a permanent establishment in Canada for the purposes of the
Canada-U.S. Tax Convention. U.S. Holders that are subject to special provisions
under the Code, including, but not limited to, U.S. Holders described
immediately above, should consult their own tax advisors regarding the U.S.
federal, U.S. federal alternative minimum, U.S. federal estate and gift, U.S.
state and local, and non-U.S. tax consequences relating to the acquisition,
ownership and disposition of common shares.
If
an entity or arrangement that is classified as a partnership (or pass-through
entity) for U.S. federal income tax purposes holds common shares, the U.S.
federal income tax consequences to such partnership and the partners of such
partnership generally will depend on the activities of the partnership and the
status of such partners (or owners). This summary does not address the tax
consequences to any such partnership or partner. Partners of entities or
arrangements that are classified as partnerships for U.S. federal income tax
purposes should consult their own tax advisors regarding the U.S. federal income
tax consequences arising from and relating to the acquisition, ownership, and
disposition of common shares.
Passive Foreign Investment Company Rules
If
the Company were to constitute a passive foreign investment company under the
meaning of Section 1297 of the Code, or a PFIC, as defined further below, for
any year during a U.S. Holders holding period, then certain different and
potentially adverse rules will affect the U.S. federal income tax consequences
to a U.S. Holder resulting from the acquisition, ownership and disposition of
common shares. In addition, in any year in which the Company is classified as a
PFIC, such holder will be required to file an annual report with the IRS
containing such information as Treasury Regulations and/or other IRS guidance
may require. A failure to satisfy such reporting requirements may result in an
extension of the time period during which the IRS can assess a tax. U.S. Holders
should consult their own tax advisors regarding the requirements of filing such
information returns under these rules, including the requirement to file an IRS
Form 8621.
137
PFIC Status of the Company
The
Company generally will be a PFIC if, for a tax year, (a) 75% or more of the
gross income of the Company is passive income (the income test) or (b) 50% or
more of the value of the Companys assets either produce passive income or are
held for the production of passive income, based on the quarterly average of the
fair market value of such assets (the asset test). Gross income generally
includes all sales revenues less the cost of goods sold, plus income from
investments and from incidental or outside operations or sources, and passive
income generally includes, for example, dividends, interest, certain rents and
royalties, certain gains from the sale of stock and securities, and certain
gains from commodities transactions.
Active
business gains arising from the sale of commodities generally are excluded from
passive income if substantially all of a foreign corporations commodities are
stock in trade of such foreign corporation or other property of a kind which
would properly be included in inventory of such foreign corporation, or property
held by such foreign corporation primarily for sale to customers in the ordinary
course of business and certain other requirements are satisfied.
For
purposes of the PFIC income test and asset test described above, if the Company
owns, directly or indirectly, 25% or more of the total value of the outstanding
shares of another corporation, the Company will be treated as if it (a) held a
proportionate share of the assets of such other corporation and (b) received
directly a proportionate share of the income of such other corporation. In
addition, for purposes of the PFIC income test and asset test described above,
and assuming certain other requirements are met, passive income does not
include certain interest, dividends, rents, or royalties that are received or
accrued by the Company from certain related persons (as defined in Section
954(d)(3) of the Code), to the extent such items are properly allocable to the
income of such related person that is not passive income.
In
addition, under certain attribution rules, if the Company is a PFIC, U.S.
Holders will be deemed to own their proportionate share of the stock of any
subsidiary of the Company that is also a PFIC, or a Subsidiary PFIC, and will
be subject to U.S. federal income tax on their proportionate share of (a) a
distribution on the stock of a Subsidiary PFIC and (b) a disposition or deemed
disposition of the stock of a Subsidiary PFIC, both as if such U.S. Holders
directly held the shares of such Subsidiary PFIC.
The
Company believes that it was classified as a PFIC during the tax year ended
August 31, 2017, and may be a PFIC in its current and future tax years. The
determination of whether any corporation was, or will be, a PFIC for a tax year
depends, in part, on the application of complex U.S. federal income tax rules,
which are subject to differing interpretations. In addition, whether any
corporation will be a PFIC for any tax year depends on the assets and income of
such corporation over the course of each such tax year and, as a result, cannot
be predicted with certainty as of the date of this document. Accordingly, there
can be no assurance that the IRS will not challenge any determination made by
the Company (or a Subsidiary PFIC) concerning its PFIC status. Each U.S. Holder
should consult its own tax advisors regarding the PFIC status of the Company and
any Subsidiary PFIC.
Default PFIC Rules Under Section 1291 of the Code
If
the Company is a PFIC, the U.S. federal income tax consequences to a U.S. Holder
of the acquisition, ownership, and disposition of common shares will depend on
whether such U.S. Holder makes an election to treat the Company and each
Subsidiary PFIC, if any, as a qualified electing fund or QEF under Section
1295 of the Code, or a QEF Election, or a mark-to-market election under
Section 1296 of the Code, or a Mark-to-Market Election. A U.S. Holder that does not make either a QEF Election or a
Mark-to-Market Election will be referred to in this summary as a Non-Electing
U.S. Holder.
138
A
Non-Electing U.S. Holder will be subject to the rules of Section 1291 of the
Code with respect to (a) any gain recognized on the sale or other taxable
disposition of common shares and (b) any excess distribution received on common
shares. A distribution generally will be an excess distribution to the extent
that such distribution (together with all other distributions received in the
current tax year) exceeds 125% of the average distributions received during the
three preceding tax years (or during a U.S. Holders holding period for our
common shares, if shorter).
Under
Section 1291 of the Code, any gain recognized on the sale or other taxable
disposition of common shares (including an indirect disposition of the stock of
any Subsidiary PFIC), and any excess distribution received on common shares,
must be ratably allocated to each day in a Non-Electing U.S. Holders holding
period for the respective common shares. The amount of any such gain or excess
distribution allocated to the tax year of disposition or distribution of the
excess distribution and to years before the entity became a PFIC, if any, would
be taxed as ordinary income. The amounts allocated to any other tax year would
be subject to U.S. federal income tax at the highest tax rate applicable to
ordinary income in each such year, and an interest charge would be imposed on
the tax liability for each such year, calculated as if such tax liability had
been due in each such year. A Non-Electing U.S. Holder that is not a corporation
must treat any such interest paid as personal interest, which is not
deductible.
If
the Company is a PFIC for any tax year during which a Non-Electing U.S. Holder
holds common shares, the Company will continue to be treated as a PFIC with
respect to such Non-Electing U.S. Holder, regardless of whether the Company
ceases to be a PFIC in one or more subsequent tax years. A Non-Electing U.S.
Holder may terminate this deemed PFIC status by electing to recognize gain
(which will be taxed under the rules of Section 1291 of the Code discussed
above), but not loss, as if such common shares were sold on the last day of the
last tax year for which the Company was a PFIC.
QEF Election
A
U.S. Holder that makes a timely and effective QEF Election for the first tax
year in which its holding period of its common shares begins generally will not
be subject to the rules of Section 1291 of the Code discussed above with respect
to its common shares. A U.S. Holder that makes a timely and effective QEF
Election will be subject to U.S. federal income tax on such U.S. Holders pro
rata share of (a) the net capital gain of the Company, which will be taxed as
long-term capital gain to such U.S. Holder, and (b) the ordinary earnings of the
Company, which will be taxed as ordinary income to such U.S. Holder. Generally,
net capital gain is the excess of (a) net long-term capital gain over (b) net
short-term capital loss, and ordinary earnings are the excess of (a) earnings
and profits over (b) net capital gain. A U.S. Holder that makes a QEF Election
will be subject to U.S. federal income tax on such amounts for each tax year in
which the Company is a PFIC, regardless of whether such amounts are actually
distributed to such U.S. Holder by the Company. However, for any tax year in
which the Company is a PFIC and has no net income or gain, U.S. Holders that
have made a QEF Election would not have any income inclusions as a result of the
QEF Election. If a U.S. Holder that made a QEF Election has an income inclusion,
such U.S. Holder may, subject to certain limitations, elect to defer payment of
current U.S. federal income tax on such amounts, subject to an interest charge.
If such U.S. Holder is not a corporation, any such interest paid will be treated
as personal interest, which is not deductible.
A
U.S. Holder that makes a timely and effective QEF Election with respect to the
Company generally (a) may receive a tax-free distribution from the Company to
the extent that such distribution represents earnings and profits of the
Company that were previously included in income by the U.S. Holder because of
such QEF Election and (b) will adjust such U.S. Holders tax basis in its common
shares to reflect the amount included in income or allowed as a tax-free
distribution because of such QEF Election. In addition, a U.S. Holder that makes
a QEF Election generally will recognize capital gain or loss on the sale or
other taxable disposition of common shares.
The
procedure for making a QEF Election, and the U.S. federal income tax
consequences of making a QEF Election, will depend on whether such QEF Election
is timely. A QEF Election will be treated as timely if such QEF Election is
made for the first year in the U.S. Holders holding period for our common
shares in which the Company was a PFIC. A U.S. Holder may make a timely QEF Election by
filing the appropriate QEF Election documents at the time such U.S. Holder files
a U.S. federal income tax return for such year. If a U.S. Holder does not make a
timely and effective QEF Election for the first year in the U.S. Holders
holding period for its common shares, the U.S. Holder may still be able to make
a timely and effective QEF Election in a subsequent year if such U.S. Holder
also makes a purging election to recognize gain (which will be taxed under the
rules of Section 1291 of the Code discussed above) as if such common shares were
sold for their fair market value on the day the QEF Election is effective.
139
A
QEF Election will apply to the tax year for which such QEF Election is timely
made and to all subsequent tax years, unless such QEF Election is invalidated or
terminated or the IRS consents to revocation of such QEF Election. If a U.S.
Holder makes a QEF Election and, in a subsequent tax year, the Company ceases to
be a PFIC, the QEF Election will remain in effect (although it will not be
applicable) during those tax years in which the Company is not a PFIC.
Accordingly, if the Company becomes a PFIC in another subsequent tax year, the
QEF Election will be effective and the U.S. Holder will be subject to the QEF
rules described above during any subsequent tax year in which the Company
qualifies as a PFIC.
U.S.
Holders should be aware that there can be no assurance that the Company will
satisfy record keeping requirements that apply to a QEF, or that the Company
will supply U.S. Holders with information that such U.S. Holders require to
report under the QEF rules, in event that the Company is a PFIC and a U.S.
Holder wishes to make a QEF Election. Thus, U.S. Holders may not be able to make
a QEF Election with respect to their common shares. Each U.S. Holder should
consult its own tax advisors regarding the availability of, and procedure for
making, a QEF Election.
Mark-to-Market Election
A
U.S. Holder may make a Mark-to-Market Election only if the common shares are
marketable stock. Our common shares generally will be marketable stock if our
common shares are regularly traded on (a) a national securities exchange that is
registered with the Securities and Exchange Commission, (b) the national market
system established pursuant to section 11A of the Securities and Exchange Act of
1934, or (c) a foreign securities exchange that is regulated or supervised by a
governmental authority of the country in which the market is located, provided
that (i) such foreign exchange has trading volume, listing, financial
disclosure, and meets other requirements and the laws of the country in which
such foreign exchange is located, together with the rules of such foreign
exchange, ensure that such requirements are actually enforced and (ii) the rules
of such foreign exchange ensure active trading of listed stocks. If such stock
is traded on such a qualified exchange or other market, such stock generally
will be regularly traded for any calendar year during which such stock is
traded, other than in de minimis quantities, on at least 15 days during each
calendar quarter.
A
U.S. Holder that makes a Mark-to-Market Election with respect to its common
shares generally will not be subject to the rules of Section 1291 of the Code
discussed above with respect to such common shares. However, if a U.S. Holder
does not make a Mark-to-Market Election beginning in the first tax year of such
U.S. Holders holding period for our common shares or such U.S. Holder has not
made a timely QEF Election, the rules of Section 1291 of the Code discussed
above will apply to certain dispositions of, and distributions on, our common
shares.
A
U.S. Holder that makes a Mark-to-Market Election will include in ordinary
income, for each tax year in which the Company is a PFIC, an amount equal to the
excess, if any, of (a) the fair market value of our common shares, as of the
close of such tax year over (b) such U.S. Holders tax basis in such common
shares. A U.S. Holder that makes a Mark-to-Market Election will be allowed a
deduction in an amount equal to the excess, if any, of (a) such U.S. Holders
adjusted tax basis in our common shares, over (b) the fair market value of such
common shares (but only to the extent of the net amount of previously included
income as a result of the Mark-to-Market Election for prior tax years).
A
U.S. Holder that makes a Mark-to-Market Election generally also will adjust such
U.S. Holders tax basis in our common shares to reflect the amount included in
gross income or allowed as a deduction because of such Mark-to-Market Election.
In addition, upon a sale or other taxable disposition of common shares, a U.S.
Holder that makes a Mark-to-Market Election will recognize ordinary income or
ordinary loss (not to exceed the excess, if any, of (a) the amount included in
ordinary income because of such Mark-to-Market Election for prior tax years over
(b) the amount allowed as a deduction because of such Mark-to-Market Election
for prior tax years).
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A
Mark-to-Market Election applies to the tax year in which such Mark-to-Market
Election is made and to each subsequent tax year, unless our common shares cease
to be marketable stock or the IRS consents to revocation of such election.
Each U.S. Holder should consult its own tax advisor regarding the availability
of, and procedure for making, a Mark-to-Market Election.
Although
a U.S. Holder may be eligible to make a Mark-to-Market Election with respect to
our common shares, no such election may be made with respect to the stock of any
Subsidiary PFIC that a U.S. Holder is treated as owning, because such stock is
not marketable. Hence, the Mark-to-Market Election will not be effective to
eliminate the application of the default rules of Section 1291 of the Code
described above with respect to deemed dispositions of Subsidiary PFIC stock or
distributions from a Subsidiary PFIC.
Other PFIC Rules
Under
Section 1291(f) of the Code, the IRS has issued proposed Treasury Regulations
that, subject to certain exceptions, would cause a U.S. Holder that had not made
a timely QEF Election to recognize gain (but not loss) upon certain transfers of
common shares that would otherwise be tax-deferred (e.g., gifts and exchanges
pursuant to corporate reorganizations). However, the specific U.S. federal
income tax consequences to a U.S. Holder may vary based on the manner in which
common shares are transferred.
Certain
additional adverse rules will apply with respect to a U.S. Holder if the Company
is a PFIC, regardless of whether such U.S. Holder makes a QEF Election. For
example under Section 1298(b)(6) of the Code, a U.S. Holder that uses common
shares as security for a loan will, except as may be provided in Treasury
Regulations, be treated as having made a taxable disposition of such common
shares.
Special
rules also apply to the amount of foreign tax credit that a U.S. Holder may
claim on a distribution from a PFIC. Subject to such special rules, foreign
taxes paid with respect to any distribution in respect of stock in a PFIC are
generally eligible for the foreign tax credit. The rules relating to
distributions by a PFIC and their eligibility for the foreign tax credit are
complicated, and a U.S. Holder should consult with its own tax advisor regarding
the availability of the foreign tax credit with respect to distributions by a
PFIC.
The
PFIC rules are complex, and each U.S. Holder should consult its own tax advisors
regarding the PFIC rules and how the PFIC rules may affect the U.S. federal
income tax consequences of the acquisition, ownership, and disposition of common
shares.
Ownership and Disposition of Common Shares
The
following discussion is subject to the rules described above under the heading
Passive Foreign Investment Company Rules.
Distributions on Common Shares
Subject
to the PFIC rules discussed above, a U.S. Holder that receives a distribution,
including a constructive distribution, with respect to a common share will be
required to include the amount of such distribution in gross income as a
dividend (without reduction for any Canadian income tax withheld from such
distribution) to the extent of the current or accumulated earnings and profits
of the Company, as computed for U.S. federal income tax purposes. A dividend
generally will be taxed to a U.S. Holder at ordinary income tax rates if the
Company is a PFIC. To the extent that a distribution exceeds the current and
accumulated earnings and profits of the Company, such distribution will be
treated first as a tax-free return of capital to the extent of a U.S. Holder's
tax basis in our common shares and thereafter as gain from the sale or exchange
of such common shares. (See Sale or Other Taxable Disposition of Common Shares
below). However, the Company may not maintain the calculations of earnings and profits in accordance with U.S. federal income tax principles,
and each U.S. Holder should therefore assume that any distribution by the
Company with respect to our common shares will constitute ordinary dividend
income. Dividends received on common shares generally will not be eligible for
the dividends received deduction. Subject to applicable limitations and
provided the Company is eligible for the benefits of the Canada-U.S. Tax
Convention, or the common shares are readily tradeable on a U.S. securities
market, dividends paid by the Company to non-corporate U.S. Holders, including
individuals, generally will be eligible for the preferential tax rates
applicable to long-term capital gains for dividends, provided certain holding
period and other conditions are satisfied, including that the Company not be
classified as a PFIC in the tax year of distribution or in the preceding tax
year. The dividend rules are complex, and each U.S. Holder should consult its
own tax advisor regarding the application of such rules.
141
Sale or Other Taxable Disposition of Common Shares
Subject
to the PFIC rules discussed above, upon the sale or other taxable disposition of
common shares, a U.S. Holder generally will recognize capital gain or loss in an
amount equal to the difference between the amount of cash plus the fair market
value of any property received and such U.S. Holder's tax basis in such common
shares sold or otherwise disposed of. Subject to the PFIC rules discussed above,
gain or loss recognized on such sale or other disposition generally will be
long-term capital gain or loss if, at the time of the sale or other disposition,
our common shares have been held for more than one year.
Preferential
tax rates apply to long-term capital gain of a U.S. Holder that is an
individual, estate, or trust. There are currently no preferential tax rates for
long-term capital gain of a U.S. Holder that is a corporation. Deductions for
capital losses are subject to significant limitations under the Code.
Additional Considerations
Additional Tax on Passive Income
Individuals,
estates and certain trusts whose income exceeds certain thresholds will be
required to pay a 3.8% Medicare surtax on net investment income including,
among other things, dividends and net gain from disposition of property (other
than property held in certain trades or businesses). Special Rules apply to
PFICs. U.S. Holders should consult with their own tax advisors regarding the
effect, if any, of this tax on their ownership and disposition of common shares.
Receipt of Foreign Currency
The
amount of any distribution paid to a U.S. Holder in foreign currency, or on the
sale, exchange or other taxable disposition of common shares, generally will be
equal to the U.S. dollar value of such foreign currency based on the exchange
rate applicable on the date of receipt (regardless of whether such foreign
currency is converted into U.S. dollars at that time). A U.S. Holder will have a
basis in the foreign currency equal to its U.S. dollar value on the date of
receipt. Any U.S. Holder who converts or otherwise disposes of the foreign
currency after the date of receipt may have a foreign currency exchange gain or
loss that would be treated as ordinary income or loss, and generally will be
U.S. source income or loss for foreign tax credit purposes. Different rules
apply to U.S. Holders who use the accrual method of tax accounting. Each U.S.
Holder should consult its own U.S. tax advisors regarding the U.S. federal
income tax consequences of receiving, owning, and disposing of foreign
currency.
Foreign Tax Credit
Subject
to the PFIC rules discussed above, a U.S. Holder that pays (whether directly or
through withholding) Canadian income tax with respect to dividends paid on our
common shares generally will be entitled, at the election of such U.S. Holder,
to receive either a deduction or a credit for such Canadian income tax paid.
Generally, a credit will reduce a U.S. Holders U.S. federal income tax
liability on a dollar-for-dollar basis, whereas a deduction will reduce a U.S.
Holders income subject to U.S. federal income tax. This election is made on a
year-by-year basis and applies to all foreign taxes paid (whether directly or
through withholding) by a U.S. Holder during a year.
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Complex
limitations apply to the foreign tax credit, including the general limitation
that the credit cannot exceed the proportionate share of a U.S. Holders U.S.
federal income tax liability that such U.S. Holders foreign source taxable
income bears to such U.S. Holders worldwide taxable income. In applying this
limitation, a U.S. Holders various items of income and deduction must be
classified, under complex rules, as either foreign source or U.S. source.
Generally, dividends paid by a foreign corporation should be treated as foreign
source for this purpose, and gains recognized on the sale of stock of a foreign
corporation by a U.S. Holder should be treated as U.S. source for this purpose,
except as otherwise provided in an applicable income tax treaty, and if an
election is properly made under the Code. However, the amount of a distribution
with respect to our common shares that is treated as a dividend may be lower
for U.S. federal income tax purposes than it is for Canadian federal income tax
purposes, resulting in a reduced foreign tax credit allowance to a U.S. Holder.
In addition, this limitation is calculated separately with respect to specific
categories of income. The foreign tax credit rules are complex, and each U.S.
Holder should consult its own U.S. tax advisors regarding the foreign tax credit
rules.
Backup Withholding and Information Reporting
Under
U.S. federal income tax law and Treasury Regulations, certain categories of U.S.
Holders must file information returns with respect to their investment in, or
involvement in, a foreign corporation. For example, U.S. return disclosure
obligations (and related penalties) are imposed on individuals who are U.S.
Holders that hold certain specified foreign financial assets in excess of
certain threshold amounts. The definition of specified foreign financial assets
includes not only financial accounts maintained in foreign financial
institutions, but also, unless held in accounts maintained by a financial
institution, any stock or security issued by a non-U.S. person, any financial
instrument or contract held for investment that has an issuer or counterparty
other than a U.S. person and any interest in a foreign entity. U.S. Holders may
be subject to these reporting requirements unless their common shares are held
in an account at certain financial institutions. Penalties for failure to file
certain of these information returns are substantial. U.S. Holders should
consult with their own tax advisors regarding the requirements of filing
information returns, including the requirement to file an IRS Form 8938.
Payments
made within the U.S. or by a U.S. payor or U.S. middleman, of dividends on, and
proceeds arising from the sale or other taxable disposition of, common shares
will generally be subject to information reporting and backup withholding tax,
at the rate of 28%, if a U.S. Holder (a) fails to furnish such U.S. Holders
correct U.S. taxpayer identification number (generally on Form W-9), (b)
furnishes an incorrect U.S. taxpayer identification number, (c) is notified by
the IRS that such U.S. Holder has previously failed to properly report items
subject to backup withholding tax, or (d) fails to certify, under penalty of
perjury, that such U.S. Holder has furnished its correct U.S. taxpayer
identification number and that the IRS has not notified such U.S. Holder that it
is subject to backup withholding tax. However, certain exempt persons generally
are excluded from these information reporting and backup withholding rules. Any
amounts withheld under the U.S. backup withholding tax rules will be allowed as
a credit against a U.S. Holders U.S. federal income tax liability, if any, or
will be refunded, if such U.S. Holder furnishes required information to the IRS
in a timely manner. Each U.S. Holder should consult its own tax advisors
regarding the information reporting and backup withholding rules.
F. Dividends and Paying Agents
Not
Applicable.
G. Statement by Experts
Not
Applicable.
H. Documents on Display
We
are subject to the informational requirements of the Exchange Act and file
reports and other information with the SEC. You may read and copy any of our
reports and other information at, and obtain copies upon payment of prescribed
fees from, the Public Reference Room maintained by the SEC at 100 F Street,
N.E., Washington, D.C. 20549. In addition, the SEC maintains a Website that
contains reports, proxy and information statements and other information regarding registrants that file electronically with
the SEC at http://www.sec.gov. The public may obtain information on the
operation of the Public Reference Room by calling the SEC at 1-800-SEC-0330.
143
We are required to file reports and other information with the securities
commissions in Canada. You are invited to read and copy any reports, statements
or other information, other than confidential filings, that we file with the
provincial securities commissions. These filings are also electronically
available from the Canadian System for Electronic Document Analysis and
Retrieval ("SEDAR") (www.sedar.com), the Canadian equivalent of the SEC's
electronic document gathering and retrieval system.
As
a foreign private issuer, we are exempt from the rules under the Exchange Act
prescribing the furnishing and content of proxy statements to shareholders.
We
will provide without charge to each person, including any beneficial owner, to
whom a copy of this annual report has been delivered, on the written or oral
request of such person, a copy of any or all documents referred to above which
have been or may be incorporated by reference in this annual report (not
including exhibits to such incorporated information that are not specifically
incorporated by reference into such information). Requests for such copies
should be directed to us at the following address: 130 Adelaide St. West, Suite
1901, Toronto, ON, M5H 3P5. The Company is required to file financial statements
and other information with the Securities Commission in each of the Provinces
and Territories of Canada, except Quebec, electronically through SEDAR which can
be viewed at www.sedar.com.
I. Subsidiary Information
Not
Applicable.