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,
2018, 2017, 2016, 2015 and 2014 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,
2018, 2017, 2016, 2015 and 2014. In this Annual Report all dollars are expressed
in Canadian dollars unless otherwise stated.
|
|
August 31,
|
|
|
August 31,
|
|
|
August 31,
|
|
|
August 31,
|
|
|
August 31,
|
|
|
|
2018
|
|
|
2017
|
|
|
2016
|
|
|
2015
|
|
|
2014
|
|
Operating Revenues
|
$
|
-
|
|
$
|
-
|
|
$
|
-
|
|
$
|
-
|
|
$
|
-
|
|
Loss before other items
|
|
(3,240,744
|
)
|
|
(3,357,321
|
)
|
|
(3,539,645
|
)
|
|
(3,176,374
|
)
|
|
(5,730,581
|
)
|
Net Loss and Total
Comprehensive Loss for the Year
|
|
(3,240,744
|
)
|
|
(3,357,321
|
)
|
|
(3,539,645
|
)
|
|
(3,176,374
|
)
|
|
(5,730,581
|
)
|
Loss per Share, Basic and Diluted
|
|
(0.015
|
)
|
|
(0.018
|
)
|
|
(0.021
|
)
|
|
(0.023
|
)
|
|
(0.051
|
)
|
Total Assets
|
|
121,932,188
|
|
|
120,436,379
|
|
|
118,515,050
|
|
|
119,223,274
|
|
|
116,837,367
|
|
Total Liabilities
|
|
4,616,480
|
|
|
4,125,269
|
|
|
1,498,030
|
|
|
1,935,054
|
|
|
3,742,967
|
|
Share Capital
|
|
173,600,797
|
|
|
169,593,205
|
|
|
167,181,354
|
|
|
164,695,991
|
|
|
158,553,485
|
|
Total Equity
|
|
117,315,708
|
|
|
116,311,110
|
|
|
117,017,020
|
|
|
117,288,220
|
|
|
113,094,400
|
|
Weighted Average Number of
Common Shares Outstanding
|
|
215,152,381
|
|
|
187,869,637
|
|
|
167,184,272
|
|
|
139,893,312
|
|
|
112,724,520
|
|
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$X), calculated by using the average of the
exchange rates on the last day of each month during each financial year.
Year Ended August 31,
|
|
Average
|
|
2014
|
|
US$
|
|
|
0. 9276
|
|
2015
|
|
US$
|
|
|
0. 8202
|
|
2016
|
|
US$
|
|
|
0. 7550
|
|
2017
|
|
US$
|
|
|
0. 7589
|
|
2018
|
|
US$
|
|
|
0.7801
|
|
The following table sets forth
the high and low exchange rate for the past six months. As of November 23, 2018,
the exchange rate was US$0.7560 for each CDN$1.
|
Month
|
|
High
|
|
|
Low
|
|
|
May 2018
|
|
US$
|
|
|
0.7828
|
|
|
US$
|
|
|
0.7680
|
|
|
June 2018
|
|
US$
|
|
|
0.7744
|
|
|
US$
|
|
|
0.7513
|
|
|
July 2018
|
|
US$
|
|
|
0.7682
|
|
|
US$
|
|
|
0.7544
|
|
|
August 2018
|
|
US$
|
|
|
0.7742
|
|
|
US$
|
|
|
0.7603
|
|
|
September 2018
|
|
US$
|
|
|
0.7749
|
|
|
US$
|
|
|
0.7583
|
|
|
October 2018
|
|
US$
|
|
|
0.7811
|
|
|
US$
|
|
|
0.7609
|
|
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.
As at August 31, 2018, the
Company has current assets of $625,244 and current liabilities of $848,309. The
holder of the A1, B1 and C1 Preferred Shares is entitled to demand repayment of
the applicable redemption value per share in cash (which totaled $3,195,000 as
at August 31, 2018) upon the occurrence of certain Redemption Events. Excluding
the deferred flow-through share premium of $52,157, the Companys adjusted
working capital deficit was $170,908 (calculated by adding back the deferred
flow-through share premium of $52,157 to the working capital deficit of
$223,065). 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 deficit figure
provides useful information in assessing the Companys liquidity risk.
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;
|
13
|
|
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.
|
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 2019, 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 Assessments of the Separation
Rapids Lithium Project and the East Kemptville Project are preliminary in nature
and there is a risk that these projects will not continue to a positive
feasibility stage.
The Preliminary Economic
Assessments (PEA) of the Separation Rapids Lithium Project and the East
Kemptville Project are preliminary in nature. The metallurgical processes
developed for the projects require further work to confirm that a commercially
acceptable product can be consistently produced and sold in the marketplace.
There is no certainty that either 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 Nechalacho Project,
the East
Kemptville Project and the Separation Rapids Lithium Project.
14
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 Project, the
East Kemptville Project 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 these
Projects.
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.
15
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.
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 and 2018, 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.
17
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.
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, 2018
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.
18
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.
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:
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actual mineralization or ore grade could be
different from those predicted by drilling, sampling, feasibility studies
or technical reports;
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increases in the capital or operating costs of
the mine;
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changes in the life-of-mine plan;
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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
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metallurgical performance could differ from
forecast.
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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 Special Licence was renewed in Fiscal 2018 while the
Company continues the process toward applying for a mining lease to replace the
Special Licence and secure full surface tenure. 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.
20
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.
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:
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establish ore reserves through drilling and
metallurgical and other testing techniques;
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determine metal content and metallurgical
recovery processes to extract metal from the ore;
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conduct environmental, social, economic and
technical studies; and
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construct, renovate or expand mining and
processing facilities.
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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.
21
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.
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:
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environmental protection;
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management, transportation and use of toxic,
hazardous and/or radioactive substances and explosives;
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management of tailings and other wastes
generated by the Companys operations;
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management of natural resources;
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exploration and development of mines,
production and post-closure reclamation;
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exports;
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price controls;
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taxation;
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regulations concerning business dealings with
native groups;
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labour standards and occupational health and
safety, including mine safety; and
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historic and cultural preservation.
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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.
22
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. 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, 2018, 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.
23
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.
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 transfer of the Companys common shares from the OTCQX to the
OTCQB in fiscal 2019 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.
In addition, the holder of the
outstanding A1 and B1 Preferred shares has the right to convert these shares and
has the right to convert all of the outstanding C1 Preferred Shares after the C1
Hold Period. The number of common shares to be issued would be 59,235,294 if all
of the outstanding A1, B1 and C1 Preferred Shares had been converted into common
shares based on the closing price of the Companys common shares on the TSX of
$0.075 on August 31, 2018.
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:
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changes in the overall market for those
securities;
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changes in the Companys financial performance
or prospects;
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changes or perceived changes in the Companys
creditworthiness;
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the prospects for companies in the Companys
industry generally;
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the number of holders of those securities;
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the interest of securities dealers in making a
market for those securities; and
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prevailing interest rates.
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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 OTCQB® Venture Market (the OTCQB) 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 and Nova Scotia.
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 $2,272,883,
$2,670,248 and $4,085,283 in Fiscal 2018, 2017, and 2016 respectively.
26
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.
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.
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. 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, continued to be developed internally.
In fiscal 2018, the renewed
demand for Nd-Pr motivated Avalon to re-activate the Project to look
specifically at Nd-Pr potential in the near-surface T-Zone and Tardiff Zones.
Some preliminary work on this possibility has been initiated.
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 fiscal 2016 the Company designed an innovative hydrometallurgical process
to produce a lithium product from the petalite concentrate. During fiscal 2017
the Company completed a positive Preliminary Economic Assessment (PEA) on which
it had spent most of its efforts in fiscal 2016.
During fiscal 2018, the Company
completed an updated PEA for the Separation Rapids Lithium Project. The updated
PEA reflects a simplified business model that focuses on initial production of
lithium mineral concentrates, with potential for future expansion into production of the
battery materials lithium carbonate and lithium hydroxide. This smaller scale
development model reduces capital expenditure requirements substantially from
the original model completed in September 2016, while generating attractive
returns and reducing overall business and permitting risk.
27
East Kemptville Tin-Indium
Project
The 100% owned East Kemptville
Tin-Indium Project is located 55km northeast of Yarmouth, Nova Scotia, Canada.
The property consists of 4 exploration licences and a Special Licence covering
over 10,000 acres in aggregate. East Kemptville was an operating tin mine from
1985-1992 and was North Americas only large primary tin producer, before
closing prematurely in 1992 due to a collapse in tin prices after the
international cartel was disbanded. Increasing global demand for tin and
tightening supplies have resulted in strengthening tin prices, creating an
opportunity for Avalon to consider re-developing East Kemptville.
Avalon is presently in the
process of securing full tenure to the site under a mining lease to put the
company in a position to re-start production at a small scale, utilizing the
existing stockpile resources for initial feed to a gravity concentrator,
supplemented by accessing near-surface higher grade tin resources. The present
model provides for small scale re-development that will remediate the existing
environmental liability and ultimately result in the full rehabilitation of the
site.
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 in fiscal 2016. During fiscal 2017, project
work was focused on preparing an internal study on the economic viability of
re-developing the site at this small-scale by initially focusing on the readily
accessible low-grade stockpile material.
During fiscal 2018 the Company
completed a PEA for the East Kemptville Tin-Indium Project reflecting this
small-scale re-development model.
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
seventh comprehensive sustainability report entitled Refocus, Revive and
Restore (the "2018 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 the Nechalacho Rare Earth
Elements Project, the Separation Rapids Lithium Project and the East Kemptville
Tin-Indium 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.
28
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 T cho 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.
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.
While the Nechalacho Project has
been relatively inactive since 2014, the Company continues to monitor REE
markets closely and there have been some recent indications of renewed demand.
The anticipated increase in demand for electric vehicles (EVs) in the coming
years, and the need for rare earth magnets in the electric motors for these
vehicles sparked a significant increase in price for neodymium (Nd) and
praseodymium (Pr) through three quarters of 2017. In Q4 2017 prices retreated
when China released some stockpiled material into the market, however, the rapid
transition to electric vehicles we are witnessing bodes well for future growth
in demand for Nd and Pr. The renewed demand for Nd-Pr motivated Avalon to
re-activate the Project in 2018, to look specifically at Nd-Pr potential in the
near-surface T-Zone and Tardiff Zones. Some preliminary work on this possibility
has been initiated.
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 and
operating 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.
29
During fiscal 2018, the Company
completed an updated PEA for the project. The updated PEA reflects a simplified
business model that focuses on initial production of lithium mineral
concentrates, with potential for future expansion into production of the battery
materials lithium carbonate and lithium hydroxide. This smaller scale
development model reduces capital expenditure requirements substantially from
the original model completed in September 2016, while generating attractive
returns and reducing overall business risk.
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.
East Kemptville Tin-Indium
Project
The 100% owned East Kemptville
Tin-Indium Project is located approximately 55 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 presently 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.
The Company first acquired its
Special Licence at East Kemptville in 2005 and it has been subsequently renewed
multiple times while the Company negotiated access to the site. Subsequent to
the end of fiscal 2018, the Special Licence was renewed while the Company
continues the process toward applying for a mining lease to replace the Special
Licence and secure full surface tenure. The lease application will be formally
submitted in late 2018. Once received, the Mining Lease will allow Avalon to
proceed with final feasibility study work and Project financing.
During fiscal 2018 the Company
completed a PEA for the East Kemptville Tin-Indium Project. The PEA reflects a
small-scale re-development model which contemplates a production schedule of
approximately 1,300 tonnes per annum of a 55% tin concentrate for 19 years, with
tin concentrates being sold to international markets. The redevelopment model
primarily involves processing of the 5.87 million tonne stockpile of
previously-mined oxidized low-grade mineralization grading 0.112% Sn,
supplemented by the selective mining of 9.2Mt of near-surface fresh higher-grade
tin mineralization from the Main and Baby Zone deposits.
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, 2018, the Company had adjusted working capital of
$170,908 (which is calculated by adding back the deferred flow-through share
premium of $52,157). 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.
30
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, northern Ontario and Nova Scotia. 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 seventh comprehensive
Sustainability Report. The 2018 Sustainability Report is available for view or
download on the Companys website at:
http://www.avalonadvancedmaterials.com
. The 2018 Sustainability Report
does not form part of this annual report.
31
The 2018 Sustainability Report
was prepared in accordance with the streamlined October 2016 Global Reporting
Standards. The 2018 Report incorporates a self-assessment of Fiscal 2017
performance and sets targets for 2019 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 2018. In recognition of its sustainability efforts,
Avalon was recognized again in 2018 (as it was in 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, the
Separation Rapids Lithium Project and the East Kemptville Tin-Indium 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).
32
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.
33
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.
34
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.
35
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
|
36
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.
37
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.
38
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).
39
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.
40
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.
|
41
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 ZrO2 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
.
|
42
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
.
|
43
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
|
44
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%
|
La2O3
|
0.256%
|
0.256%
|
0.256%
|
Ce2O3
|
0.570%
|
0.567%
|
0.568%
|
Pr2O3
|
0.072%
|
0.071%
|
0.071%
|
Nd2O3
|
0.284%
|
0.283%
|
0.283%
|
Sm2O3
|
0.065%
|
0.065%
|
0.065%
|
Eu2O3
|
0.008%
|
0.008%
|
0.008%
|
Gd2O3
|
0.062%
|
0.061%
|
0.061%
|
Tb2O3
|
0.010%
|
0.010%
|
0.010%
|
Dy2O3
|
0.058%
|
0.056%
|
0.056%
|
Ho2O3
|
0.011%
|
0.010%
|
0.010%
|
Er2O3
|
0.029%
|
0.027%
|
0.028%
|
45
Mineral Reserve
Estimate as at May 3, 2013
|
Description
|
Mineral
Reserve Category
|
Proven
|
Probable
|
Proven and
Probable
|
Tm2O3
|
0.004%
|
0.004%
|
0.004%
|
Yb2O3
|
0.023%
|
0.022%
|
0.022%
|
Lu2O3
|
0.003%
|
0.003%
|
0.003%
|
Y2O3
|
0.259%
|
0.249%
|
0.251%
|
ZrO2
|
&3.440%
|
3.309%
|
3.342%
|
Nb2O5
|
0.425%
|
0.413%
|
0.416%
|
Ta2O5
|
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.
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
(%)
|
Measured
|
Basal
|
12.56
|
1.71
|
0.38
|
22.50
|
3.20
|
0.405
|
0.0404
|
Upper
|
Nil
|
Nil
|
Nil
|
Nil
|
Nil
|
Nil
|
Nil
|
Total Measured
|
12.56
|
1.71
|
0.38
|
22.50
|
3.20
|
0.405
|
0.0404
|
Indicated
|
Basal
|
49.33
|
1.62
|
0.35
|
21.27
|
3.07
|
0.405
|
0.0398
|
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
|
Measured and Indicated
|
Basal
|
61.90
|
1.64
|
0.35
|
21.53
|
3.10
|
0.405
|
0.0399
|
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
|
Inferred
|
Basal
|
58.16
|
1.38
|
0.26
|
18.89
|
2.80
|
0.380
|
0.0351
|
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
|
46
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.
|
Nechalacho Deposit
Measured, Indicated and Inferred Rare Earth Oxide Grades as at August 15,
2013
above a US$345/tonne NMR Cut-Off
|
Category
|
Zone
|
Tonnes
(millions)
|
La2O3
(%)
|
CeO2
(%)
|
Pr6O11
(%)
|
Nd2O3
(%)
|
Sm2O3
(%)
|
Eu2O3
(%)
|
Gd2O3
(%)
|
Tb4O7
(%)
|
Dy2O3
(%)
|
Ho2O3
(%)
|
Er2O3
(%)
|
Tm2O3
(%)
|
Yb2O3
(%)
|
Lu2O3
(%)
|
Y2O3
(%)
|
Measured
|
Basal
|
12.56
|
0.266
|
0.622
|
0.078
|
0.295
|
0.066
|
0.0082
|
0.060
|
0.0094
|
0.047
|
0.008
|
0.022
|
0.003
|
0.017
|
0.002
|
0.207
|
Upper
|
Nil
|
Nil
|
Nil
|
Nil
|
Nil
|
Nil
|
Nil
|
Nil
|
Nil
|
Nil
|
Nil
|
Nil
|
Nil
|
Nil
|
Nil
|
Nil
|
Total Measured
|
12.56
|
0.266
|
0.622
|
0.078
|
0.295
|
0.066
|
0.0082
|
0.060
|
0.0094
|
0.047
|
0.008
|
0.022
|
0.003
|
0.017
|
0.002
|
0.207
|
Indicated
|
Basal
|
49.33
|
0.258
|
0.603
|
0.074
|
0.283
|
0.061
|
0.0076
|
0.055
|
0.0084
|
0.043
|
0.007
|
0.019
|
0.002
|
0.015
|
0.002
|
0.187
|
Upper
|
47.21
|
0.279
|
0.653
|
0.080
|
0.297
|
0.057
|
0.0061
|
0.041
|
0.0045
|
0.017
|
0.002
|
0.006
|
0.001
|
0.004
|
0.001
|
0.071
|
Total Indicated
|
96.54
|
0.268
|
0.627
|
0.077
|
0.290
|
0.059
|
0.0068
|
0.048
|
0.0065
|
0.030
|
0.005
|
0.012
|
0.002
|
0.010
|
0.001
|
0.130
|
Measured and
Indicated
|
Basal
|
61.90
|
0.260
|
0.607
|
0.075
|
0.285
|
0.062
|
0.0077
|
0.056
|
0.0086
|
0.043
|
0.008
|
0.019
|
0.003
|
0.015
|
0.002
|
0.191
|
Upper
|
47.21
|
0.279
|
0.653
|
0.080
|
0.297
|
0.057
|
0.0061
|
0.041
|
0.0045
|
0.017
|
0.002
|
0.006
|
0.001
|
0.004
|
0.001
|
0.071
|
Total Measured and Indicated
|
109.11
|
0.268
|
0.627
|
0.077
|
0.291
|
0.060
|
0.0070
|
0.049
|
0.0068
|
0.032
|
0.005
|
0.014
|
0.002
|
0.010
|
0.001
|
0.139
|
Inferred
|
Basal
|
58.16
|
0.223
|
0.528
|
0.066
|
0.252
|
0.051
|
0.0064
|
0.046
|
0.0067
|
0.033
|
0.006
|
0.014
|
0.002
|
0.011
|
0.002
|
0.136
|
Upper
|
102.09
|
0.243
|
0.608
|
0.072
|
0.271
|
0.049
|
0.0054
|
0.036
|
0.0038
|
0.015
|
0.002
|
0.005
|
0.001
|
0.004
|
0.001
|
0.061
|
Total Inferred
|
160.25
|
0.236
|
0.579
|
0.070
|
0.264
|
0.050
|
0.0058
|
0.040
|
0.0049
|
0.021
|
0.003
|
0.008
|
0.001
|
0.007
|
0.001
|
0.088
|
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
|
47
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.
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.
48
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.
|
|
|
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.
49
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.
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.
50
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.
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.
51
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:
|
|
Ensure through comprehensive monitoring that
the water released from the Project into the receiving environment does
not cause significant impacts;
|
52
|
|
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.
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.
53
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
|
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
|
54
Nechalacho Project
Capital Cost Summary
|
Cost Category
|
NWT
(1)
($ million)
|
LA
(2)
($ million)
|
Total
($
million)
|
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.
A summary of the Life of Mine
cash flows and the cumulative discounted and undiscounted cash flows is
presented below.
55
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.
|
|
|
Potential to separate lanthanum and cerium at
the hydrometallurgical plant and stockpile for future sales.
|
56
|
|
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.
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.
57
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.
58
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.
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.
Prior to 2017 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.
59
Interest in rare earth projects
outside China (including Avalons) has resurfaced recently following the US
National Defense Authorization Act banning the purchase of rare earths and rare
earth magnets from China for the US Department of Defense. Furthermore the
ongoing US trade dispute with China has created additional risk for supply chain
disruptions of these critical elements.
Rare earth magnets remain vital
to many clean technology applications requiring high efficiency, lightweight
electric motors and generators. This includes motors for electric vehicles,
which can require 5-10kg of rare earth magnets per vehicle. The growing market
for electric vehicles, especially in China, has created new demand for these
high strength magnets, resulting in rising prices for neodymium (US$47/kg FOB
China in early October 2018 according to Asian Metal) and praseodymium (US$
59/kg FOB China according to Asian Metal). The world still largely relies on
China for rare earth supply, yet China reportedly may soon become an importer of
neodymium concentrates.
Neodymium Potential
Previous work on the Project has
identified high-grade, near-surface neodymium mineralization associated with the
light rare earth ore mineral bastnaesite in both the North T and Tardiff Zones.
The former was extensively explored by previous owners of the property in
1982-85 and the Nechalacho Basal Zone Deposit was extensively drilled by Avalon
in 2007-12. However, there was little systematic analytical work for rare earths
during the early exploration in the 1980s in the area of the T-Zone.
In 2007, Avalon reported on
historical resources in the North T Deposit which included a small, but high
grade, neodymium resource in the F-Subzone, averaging 6.5% Total Rare Earth
Oxides (TREO) including 1.5% Nd2O3. A decline was driven by previous operators
into the North T Deposit to conduct underground exploration and recover a bulk
sample. The decline also intersected the near-surface neodymium-rich F-Subzone
closer to surface, making it readily accessible for additional bulk sample work,
once it is partially de-watered.
The T-Zone also contains
significant lithium resources (mainly in polylithionite mica or lepidolite),
that historically were not considered an economic opportunity, but now deserve a
more thorough evaluation.
In the near-surface North Tardiff
Zone, partially drilled by Avalon in the course of the Basal Zone work,
bastnaesite-rich mineralization was intersected indicating an exploration target
with resource potential for half a million to more than one million tonnes at
2.5 -3.5% TREO with 8 kg/tonne Nd2O3+Pr2O3. Highlights from the drilling include
3.03% TREO over 27.9m starting from 14.1m and 4.97% TREO over 29.75m from
15.25m. Such mineralization, which starts at surface, is readily accessible for
small-scale open pit mining. Work is commencing to estimate the resources in the
location.
60
The South Tardiff Zone contains
two trenches which gave surface chip samples ranging from 2.7 -8% TREO,
including 0.7 -1.9% Nd2O3+Pr2O3. One nearby drill hole intersected 3.48% TREO
over 9.8m including 0.86% Nd2O3+Pr2O3, starting from just 23m below surface,
indicating similar small-scale open pit potential.
Lithium Potential
Nechalacho is a polymetallic
property with, in addition to rare earths, significant quantities of other rare
metals including niobium, tantalum and lithium. Lithium occurs in the mineral
polylithionite, which is similar to lepidolite, in the S and T Zones. The
resources of lithium at Nechalacho have never been estimated and Avalon intends
to complete sampling of historic drill core in Fall 2018 to establish the
distribution of this element in the T deposit. This is anticipated to enable
estimation of a T Zone lithium resource. Historic mineral analyses of the
polylithionite at the project have shown over 6% Li2O. The S Zone, which has
coarse polylithionite mineralization in outcrop, has never been drilled.
Development and Permitting
Plans
Avalon plans to investigate the
possibility of developing Nechalacho as a near-term, small-scale producer of
Nd-Pr rich concentrates for export involving potentially a simple mining,
crushing and ore-sorting operation. This has significant advantages over the
already-approved Basal Zone Project development plan from an environmental
standpoint. The barren waste rock generated from mining and the ore-sorting
process anticipated to be benign based on historical testing of similar ore and
waste materials, would negate the need for the originally proposed aggregate
quarry for site development and the proposed airstrip extension and tailing
management. In 2018, Avalon reapplied for and received an Exploration and
Airstrip Extension Permit which is valid for 5 years.
The Company is currently
participating in an independent scoping study, supported in part by the
Territorial Government, on the East Arm-Yellowknife Road and hydro
infrastructure corridor in order to provide clean power, year-round access to
site and greatly simplified Project logistics. It would also provide significant
cost savings to Nechalacho and northern communities such as Lutsel Ke through
improved access. This is driven in part by Federal government initiatives to
reduce greenhouse gas emissions that would result from replacing diesel power
with clean hydro power.
Specific Company objectives for
2018/2019 include:
|
|
confirming Nd-Pr resources in the F-Subzone and
Tardiff Zones and preparing a scoping study on a small-scale development
model focused on Nd-Pr concentrate production;
|
|
|
re-sampling existing drill core from 1980s
drilling to analyze for lithium and establishing an initial T-Zone lithium
resource estimate;
|
|
|
investigating neodymium, praseodymium,
dysprosium (the other magnet rare earth) and lithium potential in the
North T and S zone deposits;
|
|
|
metallurgical testing (ore sorting) of near
surface rare earth mineralization with high neodymium and praseodymium
values, and
|
|
|
continuing the permitting process and community
engagement toward identifying local Indigenous business partners.
|
During 2018 Avalon successfully
renewed its Exploration Land Use Permit, including the extension of the existing
airstrip, and completed the perimeter survey of several contiguous mineral
claims in order to bring them to lease. The lease application has been submitted
and approval is expected by late November. Avalon completed a field program in
September to conduct additional sampling in the area of the T-Zone and Tardiff
Lakes Zones to begin assessing their potential as sources of neodymium and
praseodymium (Nd-Pr) rich concentrates currently in high demand for magnet
applications. Sampling was also done in the T-Zone to begin assessing the
resource potential of widespread lithium mineralization occurring as the lithium
mica polylithionite.
61
Separation Rapids Lithium Project
(A)
Summary
of Technical Report
The most recent technical report
on the property is entitled NI 43-101 Technical Report on the Preliminary
Economic Assessment for the Production of Petalite Concentrate from the
Separation Rapids Lithium Project Kenora, Ontario dated September 26, 2018,
effective August 21, 2018 (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, EurIng, Bruce Pilcher, CEng,
FIMMM, FAusIMM(CP) and Jane Spooner, P.Geo, all of Micon, and William Mercer,
Ph.D., P.Geo, each of whom is a qualified person pursuant to NI 43-101.
In accordance with the
regulations under NI 43-101, it is noted that the PEA must be considered
preliminary in nature, as it includes 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,
and there is no certainty that the PEA will be realized.
The current Technical Report
follows an earlier PEA in 2017, also by Micon, which was done to exclusively
evaluate the lithium battery materials market opportunity and the economics of
producing a lithium hydroxide product from the petalite concentrate. An earlier
Pre-feasibility Study (PFS) completed in 1999 and updated in 2000, also by
Micon 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.
1.1
Introduction
The objective of this PEA is to
demonstrate the economic potential of a revised production schedule which
includes sales of three flotation concentrate products (petalite, lepidolite and
feldspar) only. This study excludes conversion of petalite to lithium hydroxide
for use in the production of Lithium Ion Batteries, although if market demand
requires, and subject to financing availability, Avalon could proceed in the
future with the development of a lithium hydroxide demonstration plant, followed
by a full-scale lithium hydroxide production plant.
The PEA is based on processing
475,000 tonnes of mineralized material per year to produce approximately 1.32
million tonnes (Mt) of petalite, 220,000 t of lepidolite and 1.31 Mt of feldspar
over a 20-year total operating life.
Avalon is proposing a phased
development program for the Project starting with the development of the mine
and a flotation concentrator for petalite and lepidolite production. A feldspar
recovery circuit will be added in operating Year 5.
This PEA has been prepared by
Micon under the terms of its agreement with Avalon. As discussed in the relevant
sections of the report, Micon has prepared a mine plan and schedule and has
prepared an economic analysis of the Project. Micon has reviewed the
metallurgical testwork and the mineral processing flowsheet, the infrastructure
requirements, and the capital and operating cost estimates prepared by Avalon
and its retained consultants.
The PEA is based on updated
mineral resource estimates for lithium and feldspar contained in the Separation
Rapids Lithium Deposit (SRLD), prepared by Avalon dated 23 May, 2018. This
updated estimate is considered not materially different from the previous
independent one reported in a NI 43-101 Technical Report dated 10 November,
2016.
The Separation Rapids property is
located in north-western Ontario, 55 km due north of Kenora and about 79 km by
road. It is centred on latitude 50 15 30 N, longitude 94 35 W (UTM
coordinates: 388441E 5568996N in NAD 83, Zone 15N15). The property consists of
eight mineral claims and one Mining Lease. The claims comprise 153 claim units,
totalling 2,448 ha (6,049 acres).
62
Other than minor and largely
funded reclamation requirements under the Advanced Exploration Permit, there are
no known environmental liabilities associated with the Separation Rapids
property. Avalon holds all necessary permits required to access the Separation
Rapids property and to conduct exploration. Exploration permits will be required
for additional drilling in the future. 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. Shipment of concentrates from
the site will be by truck. However, a rail loading trans-shipment facility will
be required in order to access rail transportation for product shipment and some
inbound supplies. This loading site trans-shipment facility is planned to be
located on the CNR line in the vicinity of Redditt, Ontario, approximately 55 km
by road from the Separation Rapids site.
1.2
Physiography
and Climate
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 masl. 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.
The closest centre with
significant services is Kenora. Forestry, tourism and mining are the three
largest sectors of the Kenora economy. The closest community is Whitedog, home
of the Wabaseemoong Independent Nations of One Man Lake, Swan Lake and White
Dog. The SRLD is situated in the Traditional Land Use Area of these First
Nations as recognized under an agreement signed in 1983 with the Province of
Ontario.
1.3
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. Avalon acquired its initial interest in the property
through an option agreement with local prospectors who had staked the original
claims in 1996.
Exploration on the SRLD, by
Avalon, in the late-1990s was accompanied by a scoping level metallurgical study
by Lakefield Research Limited and a marketing study by Equapolar Resource
Consultants which concluded that the petalite mineralization was suitable as an
industrial mineral product in thermal shock resistant glass applications.
Additional exploration and drilling programs were completed by Avalon in 2017
and 2018.
Since 2014, Avalon has not only
investigated market opportunities for petalite in the glass and ceramics
industries, it has also developed processes for recovering concentrates of
lepidolite and feldspars as well as a process for converting petalite into
lithium carbonate and hydroxide.
1.4
Geological
Setting and Mineralization
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 further
subdivided the SRLD into three sub-zones, namely the Separation Rapids Pegmatite
(SRP), Western Pegmatite and Eastern Swarm. Based on lithological, mineralogical
and textural variations, the SRP itself has been subdivided into five distinct
lithological units and subunits, 3a, 3b, 4, 5 and 6.
63
The Separation Rapids area is
underlain predominantly by a mafic metavolcanic sequence (amphibolite or
Avalons Unit 1), consisting of flows, tuffs, subordinate epiclastic
metasediments and rare iron formation horizons and rhyolites. Locally, on the
Avalon property itself, the metavolcanic sequence is restricted to amphibolite.
In the SRP, petalite, potassium
feldspar and sodium feldspar are major rock-forming minerals, with subordinate
amounts of other minerals including spodumene, lithian muscovite, lepidolite,
and quartz of which some occur as potentially economically recoverable
minerals.
The petalite-bearing Unit 6 is
the principal unit of interest within the SRP. Geological mapping and assays for
surface and drill core samples show that mineralogy and lithium oxide (Li2O)
grades of the mineralization (average 4.78% Li2O) in the SRP are relatively
homogeneous and that the petalite is close to the theoretical (stoichiometric)
chemical composition (4.88% Li2O), as well as being very pure, with marked
absence of deleterious elements such as iron.
Potassium feldspars in the SRP
have been shown to be rubidium-rich, high-purity end-members.
The Li2O content of the micas
ranges from very low to over 6%. The highest Li2O values are in the micas found
in Subunit 6d. This includes the pink to red mica referred to as lepidolite that
is the distinctive identifying feature of Subunit 6d.
1.5
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 process testwork and, consequently, the main activities at site
were collection of samples, up to bulk sample size, for mineral product
development.
Avalon completed a field program
in July and August, 2017, on the Paterson Lake claim group. Lithogeochemical and
biogeochemical surveys were undertaken over the claims, in conjunction with
prospecting for new lithium pegmatites.
1.6
Drilling
Avalon has drilled at the
Separation Rapids Lithium Project in a number of campaigns between 1997 and
2018. The total number of diamond drill holes is 80 for a cumulative total of
13,192 m.
Three of these holes were drilled
during April and May, 2001 for the purposes of a geotechnical investigation of
the rock at the proposed open pit mine and to determine preliminary pit slope
design parameters. The potential for water inflow into the open pit was also
evaluated.
1.7
Sample Preparation, Analyses and Security
Surface samples taken in the
1990s were shipped to Chemex Labs Ltd. in Thunder Bay, Ontario for preparation
then to Chemexs laboratories in Mississauga, Ontario and Vancouver, British
Columbia for subsequent assaying for lithium and a range of other elements.
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, depending on lithology, to a maximum of 3 m. Split core samples were
shipped to XRAL where they were assayed for lithium, rubidium using ICP and AA
for rubidium and cesium.
In 2016, Avalon resampled drill
core from the 1990s programs. The objective was to re-assay the core with
modern methods and inserted lithium rock standards for comparison to the
historic data.
64
In both the 2017 and 2018 diamond
drill programs, all lithium bearing pegmatites (Unit 6) and representative
non-mineralized pegmatite intercepts were sampled on continuous 2 m intervals,
with shorter intervals where constrained by geologic contacts and amphibolite
host rock. Samples were transported in sealed bags to the ALS preparation
laboratory in Thunder Bay then pulps, including standards and blanks, were
shipped to ALS in Vancouver for analysis.
The drill database contains 185
specific gravity (SG) values for various lithologies on the SRLD. Based on these
measurements, the average SG for pegmatite and amphibolite (waste) was 2.62 and
3.04, respectively. The SG measurements showed low variability.
1.8
Data
Verification
The mineral resource estimation
is based on the original drilling by Avalon in 1997 to 2001 as well as the
additional 2017 and 2018 drill program results. The 2018 assay database has been
updated using the one created by Micon in 1999 as a basis. There were certain
quality assurance/quality control (QA/QC) procedures applied and reported on at
the time of creation of the database that included check assays at a second
laboratory and independent assaying by Micon.
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 re-assaying drill core splits with
internally-inserted, certified lithium standards.
The assay laboratory comparison
(XRAL and Chemex) undertaken in the 1990s using duplicate coarse rejects from
drill core gave similar results. Despite some small differences, both the
lithium and rubidium analyses from XRAL and Chemex were close and showed similar
trends with high R
2
values for the correlation. This indicated high
and acceptable reliability in the analyses.
For the purpose of this PEA,
Avalon 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 database used for resource estimation.
Drill hole angle, direction and the maximum hole depth were also verified.
1.8.1 Certified Standard
Avalon prepared a certified rock
lithium analysis standard by shipping 16 kg of SRP to CDN Resource Laboratories
Ltd. (CDN) in Langley, British Columbia. 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.
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% Li2O with a standard deviation of 0.03% Li2O.
In 2016, Avalon completed a
program of re-assaying a limited amount of drill core with the insertion of the
certified lithium standard. Comparing the 2016 re-assays for Li2O of 42 samples
with the 1990s results showed a small positive bias for the 2016 samples at
smaller Li2O concentrations and identical mean values for each laboratory. These
results confirmed the historic data.
1.9
Mineral
Processing and Metallurgical Testing
A number of phases of
metallurgical testing since 1997 have been completed by Avalon using samples
obtained from of the SRLD. The work prior to 2014 was mainly undertaken by SGS
Mineral Services at Lakefield, Ontario (SGS-L). This work not only included the
recovery of petalite, but also a number of other mineral products which also can
be found in the lithium bearing pegmatite.
The work since 2014 was mainly
undertaken by Dorfner Analysenzentrum und Anlagenplanungsgesellschaft mbH
(ANZAPLAN), a German company that specializes in the processing of high purity
industrial and strategic minerals. This work focussed 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.
65
The lepidolite, petalite and
feldspar recovery processes utilized for this PEA were developed and tested by
ANZAPLAN. Approximately 20 testwork programs were undertaken by ANZAPLAN between
2014 and 2018, including the production of 1 t of petalite concentrate in a
pilot program conducted in 2016. ANZAPLAN also developed the process to recover
a mixed Na/K-feldspar product and completed preliminary testwork on this
material which indicated the suitability of this product in not only the
ceramics industry but also as filler in paint, fibreglass and other products.
Using the results generated by this testwork, Avalon is able to
demonstrate the following:
|
|
Optical sorting can be used to remove amphibolite host
rock material ahead of the flotation process.
|
|
|
|
|
|
A petalite concentrate assaying over 4% Li2O can be
produced which, because of its low impurity levels, is potentially an
excellent feed material to the specialized glass/ceramics industries. In
addition, a high grade 4.5% Li2O petalite concentrate can also be produced
(with low sodium and potassium levels).
|
|
|
|
|
|
Lepidolite concentrates containing approximately 4.5%
Li2O can be produced.
|
|
|
|
|
|
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 micas contained in the magnetic fraction.
|
1.10
Mineral
Resource Estimate
Lithium, rubidium, tantalum,
cesium and feldspar mineral resource estimates for the Separation Rapids Lithium
Project have been prepared by Avalon under the supervision of Dr. William
Mercer, P.Geo. (ON), Vice President, Exploration of Avalon, who is the Qualified
Person (QP) for the estimates. This updated mineral resource estimate is based
on the eight diamond drill holes drilled by Avalon in 2017 and 2018, in
combination with the data from the 1997 to 2001 drill holes, which were used in
previous resource estimates.
The Separation Rapids Lithium
Project overall Measured plus Indicated mineral resource is estimated to be 8.41
Mt at a grade of 1.41% Li2O, using a 0.6% Li2O cut-off grade, as summarized in
Table 1.1. The Inferred mineral resource is 1.79 Mt at a grade of 1.35% Li2O.
The total feldspar content of the mineralized zone is estimated at 43%. The two
main mineralogical zones in the deposit, the petalite zone (6a, b, c) and the
lepidolite + petalite zone (6d) have been estimated separately and contain
combined Measured and Indicated resources of 6.42 Mt grading 1.41% Li2O and 1.99
Mt grading 1.41% Li2O, respectively (Table 1.1) . This mineral resource estimate
was presented in an Avalon news release on May 23, 2018 and is deemed not to be
materially different from the previous estimate dated October, 2016.
Table 1.1
Separation Rapids, Mineral Resource
Estimate at 0.6% Li
2
O Cut-off Grade
(As at 23 May, 2018)
Class
|
Rock unit
|
Tonnes
(Mt)
|
%
Li
2
O
|
%
Ta
2
O
5
|
%
Cs
2
O
|
%
Rb
2
O
|
Wt. %
feldspar
|
Measured
|
6a,b,c
|
2.425
|
1.440
|
0.005
|
0.010
|
0.322
|
44
|
6d
|
0.939
|
1.410
|
0.008
|
0.027
|
0.473
|
40
|
Total
|
3.364
|
1.431
|
0.006
|
0.015
|
0.365
|
43
|
Indicated
|
6a,b,c
|
3.992
|
1.391
|
0.006
|
0.012
|
0.338
|
44
|
6d
|
1.049
|
1.402
|
0.009
|
0.025
|
0.469
|
40
|
Total
|
5.041
|
1.393
|
0.007
|
0.014
|
0.366
|
43
|
Measured
+Indicated
|
6a,b,c
|
6.416
|
1.409
|
0.006
|
0.011
|
0.332
|
44
|
6d
|
1.989
|
1.406
|
0.009
|
0.026
|
0.471
|
40
|
Total
|
8.405
|
1.408
|
0.007
|
0.015
|
0.365
|
43
|
Inferred
|
6a,b,c
|
1.308
|
1.351
|
0.007
|
0.017
|
0.342
|
44
|
6d
|
0.483
|
1.346
|
0.008
|
0.020
|
0.427
|
40
|
Total
|
1.791
|
1.349
|
0.007
|
0.018
|
0.365
|
43
|
66
Notes:
1.
|
This resource estimate is valid as of May 23,
2018.
|
2.
|
CIM definitions were followed for Mineral
Resources.
|
3.
|
The Qualified Person for this Mineral Resource estimate
is William Mercer, PhD, P.Geo. (ON).
|
4.
|
The resource estimate is based on Avalons drilling of 74
previous holes totalling 11,644 m drilled between 1997 and 2017 and a
further four holes totalling 1,282 m in 2018.
|
5.
|
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.
|
6.
|
The geological units were modeled as outlined by drill
core logs.
|
7.
|
Resources were estimated by interpolating composites
within a block model of 10 x 10 x 3 m blocks oriented along the deposit
strike.
|
8.
|
Grade interpolation used the Ordinary Kriging method
combined with variograms and search ellipses modeled for each rock unit.
For PZ unit, search ellipses of 50 x 35 x 15 m and 175 x 125 x 45 m were
used for Passes 1 and 2, respectively. For LPZ unit, search ellipses of 35
x 25 x 8, 75 x 50 x 15 and 115 x 75 x 25 were used for Passes 1, 2 and 3,
respectively.
|
9.
|
Measured material was defined as blocks interpolated
using Passes 1 and 2, using composites from ≥ 4 drill holes and a distance
≤ 25 m to the nearest composite and additional blocks with excellent
geological and grade continuity. Indicated material includes blocks
interpolated with Pass 1 and 2 search ellipses, using ≥ 3 drill holes and
a distance ≤ 35 m to the nearest composite and blocks with geological and
grade continuity. Inferred material was defined as blocks interpolated
with all Passes, composites from ≥ 2 drill holes and interpolated
geological continuity up to 40 m below diamond drill holes.
|
10.
|
Two-metre composites were used, and no capping was
necessary.
|
11.
|
The mean density of 2.65 t/m
3
was used for
unit 6a,b,c and 2.62 t/m
3
for unit 6d.
|
12.
|
The cut-off grade reported in this resource estimate,
0.6% Li
2
O, is consistent with the previously published resource
estimates by Avalon (Preliminary Economic Assessment, 2016; November 15,
2017 resource estimate).
|
13.
|
The total feldspar contents were estimated utilizing
QEMSCAN
®
analysis of 38 drill core intervals distributed
throughout the deposit.
|
14.
|
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.
|
The primary lithium-bearing
minerals, petalite and lepidolite, are found within the ~600 m by ~80 m SRP.
Surface mapping and results from 80 diamond drill holes 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 GEMS 6.8.1.
The Project database contains 80
diamond drill holes over a total length of 13,192 m drilled between 1997 and
2018 by Avalon. Assay values for Li2O, Rb2O, Cs2O and Ta2O5 were recorded for
3,243 mineralized samples and 148 country rock samples which were studied for
environmental impact assessment purposes.
1.11
Mining
Methods
1.11.1 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.
The pit optimization indicated
that the economic cut-off grade was approximately 1.20% Li2O and the
optimization run suggested a life of mine (LOM) plant feed tonnage of
approximately 8.6 Mt at a grade of 1.39% Li2O.
67
1.11.2 Pit Design,
Development and Schedule
A conceptual pit design was
conducted from the bottom up using PEA design parameters and the selected
optimum pit shell as a template. Figure 1.1 shows a plan and view of the pit
design.
Figure 1.1
Plan View of the Pit Design
The proposed method of mining is
by conventional open pit methods using drilling and blasting, loading with
excavators and shovels and hauling with rigid dump trucks. Waste from the pit
will initially be composed of overburden and will be dumped in the topsoil
stockpile. As the pit is developed harder waste rock will be excavated and will
be stored on separate waste dumps.
The Project will be undertaken by
contractor-operated equipment and labour. 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 conceptual production schedule
has been produced using MineSched software. The production schedule is based on
mining 475,000 t/y of petalite and lepidolite mineralized material. The life of
the mine is expected to be 19 years with approximately 6.2 Mt of petalite
material at 1.39% Li2O and 2.4 Mt of lepidolite mineralization at 1.41% Li2O
mined over the length of the Project.
68
1.12
Recovery Methods
The Separation Rapids Lithium
Project PEA mineral recovery flowsheet is based on the process testwork
completed to-date. The process selected for the PEA comprises the mineral
separation and recovery of a lepidolite concentrate, a petalite concentrate
(both containing between 4.0% and 4.50% Li2O), and thirdly, a mixed
Na/K-feldspar industrial mineral product.
This PEA is based on the
processing of 475,000 t/y of mineralized material over a 19-year mine life to
produce approximately 220,000 t of lepidolite concentrate, 1.32 Mt of petalite
and 1.34 Mt of feldspar. The lepidolite is to be sold into the lithium chemicals
industry to customers in Canada and Asia, while the petalite will be sold to
customers in the glass/ceramics industries in Europe, Asia and North America.
The feldspar will be sold to customers for a range of applications in North
America and Europe.
A single milling and flotation
circuit is provided for processing both lepidolite/petalite (LPZ) mineralization
and petalite (PZ) material on a campaign basis. Tailings from the flotation of
lepidolite ore will be stockpiled for future re-processing to recover petalite.
Some of the final tailings from the petalite ore flotation process will feed a
second, dedicated feldspar flotation circuit with the balance of the petalite
tailings reporting to the tailings management facility (TMF).
A simplified block flow diagram
showing the main process steps within the overall Separation Rapids flowsheet is
presented in Figure 1.2
Figure 1.2
Simplified Process Block Flow Diagram
1.12.1 Process Design
Criteria
The process plant design, PEA
report and financial evaluation are based on the following process design
criteria that have been derived from the testwork results:
|
|
Optical sorting mass waste rejection is 1.8%
with lithium losses of also 1.8%.
|
69
|
|
For petalite PZ mineralization, the mass pull to slimes
after comminution and attritioning is 7.9% of mill feed with an 8.6%
lithium loss. For the lepidolite LPZ mineralization, mass and lithium
losses are 8.4% and 6.5% respectively.
|
|
|
|
|
|
Mass pull to magnetics (petalite PZ only) is 13% of
sorted mineralized material tonnage with lithium losses of 13.8%.
|
|
|
|
|
|
The lepidolite concentrates contains 4.5% Li2O% while 50%
of the petalite concentrate will be 4.5% (with low sodium and potassium
levels) and the balance being 4.0% for an average life of mine grade of
4.25% Li2O.
|
|
|
|
|
|
Lithium recovery to lepidolite concentrate (LPZ) is 78%.
Lithium recovery to petalite concentrate from lepidolite tailings is 70%.
|
|
|
|
|
|
Lithium recovery to petalite concentrate (PZ) is 65.2% of
flotation feed content.
|
|
|
|
|
|
Mass pull to feldspar concentrate is 82.9% of feldspar
flotation feed.
|
|
|
|
|
|
Plant availabilities of 90% for the flotation plant
although the crushing plant has been suitably sized to run on a single
12-hour shift per day.
|
1.13
Project
Infrastructure
The property is readily
accessible with a total road distance from Kenora to the site of 79 km. However,
development of the project will require upgrading of the 9.5 km long Avalon Road
to accommodate the mining, concentrate removal and consumable delivery trucks.
The flotation concentrator will
be located at the mine site with the various concentrates (petalite, lepidolite
and feldspar) being dried, bagged and trucked to an existing CN rail siding at
Redditt for shipping to customers.
The site is predominately bedrock
exposure with a minimum of top soil or organic cover. The site buildings are
anticipated to include crusher and concentrator buildings, change room and
ablution facilities, office and laboratory, electrical MMCs, maintenance
building and warehouse.
Fresh water and fire water for
the site will be provided from the English River. Water treatment facilities
will be provided as required to supply potable water to the site.
Approximately 10 MW of
(operating) power will be required during operations and this will be supplied
from the existing 115 kV system running from Caribou Falls to Whitedog Falls. A
stepdown transformer will be installed at the connection point to the 115-kV
line and approximately 25 km of transmission line will be installed to bring the
power to the mine site.
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
fuel for the concentrate driers.
1.14
Market
Studies and Contracts
This PEA is based on the recovery
of lepidolite, petalite and mixed sodium/feldspar (Na/K) feldspar concentrates
at the following approximate annual rates:
|
|
Lepidolite
|
11,800 t/y
|
|
|
|
|
|
|
Petalite
|
73,000 t/y
|
|
|
|
|
|
|
Na/K feldspar
|
100,000 t/y
|
It is anticipated that the
lepidolite concentrate will be sold to a new lithium carbonate producer in
Canada or possibly China, while the petalite will be sold to customers in the
glass and ceramics industries in North America, Europe and Asia. The feldspar concentrate will be sold for
applications in glass, ceramics, frits and glazes and fillers in North America
and Europe.
70
At this stage of development of
the Separation Rapids property, there are no material contracts in place.
However, in February, 2017, Avalon entered into a non-binding letter of intent
with Lepidico Ltd. (Lepidico) for the supply of up to 15,000 t/y of lepidolite
concentrate for its demonstration plant planned for Sudbury, ON.
1.15
Environmental
Studies, Permitting and Social or Community Impact
The Project site lies in an area
adjacent to the English River, a regionally significant waterbody which supports
a variety of wildlife and fisheries as well as tourism. The area surrounding the
mine site is undeveloped and forested.
1.15.1 Project Approvals and
Permitting
A Project Description and
comprehensive Environmental Baseline Report of the mine and concentrator site
was completed in March, 2007, updated from the July, 1999 draft. The 2007 report
included a preliminary environmental impact assessment and, although this was
based on a different project development model to that presently envisaged, it
is expected that the vast majority of this study work is still valid.
Avalon has an Advanced
Exploration Approval based on an approved closure plan, though it is presently
in a state of inactivity and is permitted for 15,000 t of material. Exploration
permits for additional drilling on site were acquired for drill programs in 2016
and 2017. There programs were successfully completed without any environmental
impacts. The present permit allows for nearby future expanded nearby areas of
exploration on recently acquired claims.
Due to the relatively small scale
of the Project and the site being located well away from any federally protected
areas, and because the capacity of the mine and concentrator are approximately
half the tonnage triggers in the Federal Environmental Assessment Act 2012,
permitting under this act does not apply. As such, permitting time lines are
significantly reduced.
1.15.2 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. Plans are in place to
further update or validate this information in the next project phase, in
consultation with all communities of interest.
1.15.3 Closure and
Rehabilitation
For mines located on previously
undisturbed sites, ecological restoration is a fundamental component of site
reclamation. The main aspects of the closure and reclamation plans for the
Project include:
|
|
Flooding of the open pit following the
cessation of mining, primarily through inflows of groundwater and surface
water runoff.
|
|
|
|
|
|
Closure and rehabilitation of the TMF in a safe
and secure manner in full accordance with government regulations and good
engineering practice.
|
|
|
|
|
|
Progressive rehabilitation of benches of the
coarse rock aggregate storage areas, particularly on the river view sides.
|
|
|
|
|
|
Breaching and revegetation of all sediment
basins associated with the TMF and the mine rock aggregate stockpiles.
|
71
|
|
Removal for reuse, salvage or disposal of all
machinery and equipment from the crusher, process plant and other
ancillary facilities.
|
|
|
|
|
|
Responsible removal or demolishing of all
buildings and site infrastructure.
|
|
|
|
|
|
Maintain the mine access road during the closure and
post-closure monitoring period to provide access to the site. Following
completion of post-closure monitoring, the road will be scarified and
re-vegetated, and culverts removed.
|
A 5-year post-closure monitoring
program will follow closure of the mine that includes maintenance of the
revegetated areas.
1.15.4 Community and
Indigenous Peoples Engagement
Consultation with local First
Nations Bands and the public was initiated during the 1999 baseline study. This
continued in a reduced manner during the period of inactivity but was again
ramped up in 2013. A memorandum of understanding 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.
1.16
Capital and Operating Costs
1.16.1 Capital Costs
The basis for the PEA capital
cost estimate is a processing facility and related infrastructure with a nominal
throughput rate of 475,000 t/y of mineralized material, comprising either
petalite mineralized material (PZ) or lepidolite mineralized material (LPZ).
Initial capex requirements are
summarized in Table 1.2. All costs are reported as Canadian dollars (CAD). It
should be noted that, apart from the feldspar flotation plant in Years 5 and 6,
provisions for what might normally be designated as sustaining capital are
included in the operating costs.
The Project is at a green fields
location and so will require construction of new tailings and waste rock storage
facilities as well as an up-grade to an existing access road and the
installation of an electrical power supply line.
The capex for the open-pit mine
is assumed to be zero as the operation will engage a contract miner and all
mining capex will be built into the contract mining operating costs.
The concept of having most of the
plant pre-assembled off-site and delivered in modules (fully or partly
assembled) has been assumed for much of the equipment (particularly the
flotation plant) and facilities in order to reduce on-site construction
activities.
72
Table 1.2
Initial Capital Cost Estimate
Area
|
Capex CAD x
1,000
|
Initial Plant
|
Feldspar
Flotation
(Years 5/6)
|
Pre-construction
|
500
|
0
|
Mining
|
0
|
0
|
Concentrator
|
39,696
|
8,450
|
Tailings Disposal
|
6,519
|
0
|
Infrastructure
|
5,750
|
0
|
Total Direct Costs
|
51,965
|
8,450
|
EPCM
|
3,204
|
845
|
Freight & Transportation
|
1,398
|
327
|
Other Indirects
|
5,076
|
1,199
|
Total Indirect Costs
|
9,677
|
2,371
|
Owners Costs
|
2,000
|
500
|
Buildings
|
1,000
|
250
|
Contingency
|
12,528
|
2,164
|
Total Capital Costs
|
77,671
|
13,735
|
1.17
Operating
Costs
Operating costs have been
determined by Avalon and reviewed by Micon and are expressed in Canadian
dollars. A summary of the estimated LOM average annual operating costs is
presented in Table 1.3.
Table 1.3
Summary of Operating Costs
Category
|
Ave. Annual Costs
(CAD000)
|
CAD/t
Milled
|
Petalite and Lepidolite
|
Mining and Reclaim
|
18,181
|
40.0
|
Concentrate Production and Shipping
|
35,826
|
78.8
|
General and Administration
|
1,830
|
4.0
|
Total Production Costs CAD
|
55,837
|
122.8
|
Total Production Cost USD
|
42,951
|
94.4
|
Feldspar Production and Trucking
|
CAD
|
9,707
|
87.7
|
USD
|
7,467
|
67.5
|
1.18
Economic
Analysis
Micon has prepared this
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.
Figure 1.3 shows the annual
tonnages of petalite and lepidolite produced during operations.
73
Figure 1.3 Annual Petalite/Lepidolite Production Schedule
(tonnes)
Annual production of feldspar
concentrates and intended markets are presented in Figure 1.4.
Figure 1.4
Annual Feldspar Production Schedule
Figure 1.5 presents a summary of
the Project cash flow while the key project economic indicators and performance
are summarized in Table 1.4.
74
Figure 1.5
Net Annual Cash Flow (After Tax)
Table 1.4
Key Project Indicators
Item
|
Units
|
LOM
|
Mine Production
|
|
|
Plant feed (Pre Sorter)
|
t
|
8,567,928
|
Waste
|
t
|
52,344,381
|
Total Mined
|
t
|
60,912,309
|
|
|
|
Processing
|
|
|
Mill Feed
|
t
|
8,413,705
|
Lepidolite Concentrate Grade
|
% Li2O
|
4.50%
|
Lepidolite Concentrate Sold
|
t
|
218,529
|
Petalite Concentrate Grade
|
%Li2O
|
4.25%
|
Petalite Concentrate Sold
|
t
|
1,322,849
|
Feldspar Concentrate Sold
|
t
|
1,307,500
|
|
|
|
Exchange Rate
|
CAD/USD
|
1.30
|
|
|
|
Total Sales Revenue
|
CAD'000
|
1,745,717
|
75
Item
|
Units
|
LOM
|
Operating Costs
|
CAD/t milled
|
CAD'000
|
Lithium Concentrate Production
|
122.77
|
1,032,979
|
Feldspar Production
|
16.79
|
141,236
|
|
|
|
Total Operating Costs
|
139.56
|
1,174,215
|
|
|
|
Capital Costs
|
|
CAD'000
|
Construction - Initial Capital
|
|
77,671
|
Feldspar Plant (Yrs 5&6)
|
|
13,735
|
|
|
|
Total Capital Expenditure
|
CAD'000
|
91,406
|
Working Capital
|
|
10,000
|
Site Closure
|
|
7,500
|
|
|
|
|
Pre-tax
|
After Tax
|
Net Cash Flow (CAD000)
|
472,595
|
327,758
|
|
|
|
Net Present Value (at 8% disc. rate)
|
155,562
|
102,191
|
|
|
|
Internal Rate of Return (IRR)
|
27.1
|
22.7
|
|
|
|
Payback Period (after tax, undisc.)
|
Years
|
4.4
|
Sensitivity analyses on product
prices, recoveries, capital costs and operating costs suggest that the Project
is most sensitive to revenue drivers, namely price and recovery which are
essentially identical. At a discount rate of 8%, the Project NPV is negative
when all product prices are reduced by 20%. The Project is also quite sensitive
to changes in operating cost while sensitivity to capex is relatively low.
Project NPV remains positive for adverse changes of up to 20% in either capital
or operating costs.
1.19
Adjacent
Properties
Although the SRLD is reported to
be the largest rare metal pegmatite of the petalite sub-type discovered in
Ontario, there are a large number of other rare metal pegmatite occurrences
within a few kilometres of the Separation Rapids property. The principal
occurrences are the Big Mack Pegmatite, the Southwestern Pegmatite Subgroup
which includes the SRLD, Great White North and the Swamp pegmatites, and the
Eastern Pegmatite Subgroup which includes Markos Pegmatite, Lous Pegmatite and
others.
1.20
Interpretation
and Conclusions
The PEA suggests that the
Separation Rapids Project can be developed as an economically viable supplier of
the lithium minerals petalite and lepidolite into the ceramics and lithium
chemical industries for almost 20 years. Production of a third, feldspar
concentrate further enhances the Project economics by supplying product into
various industrial mineral markets.
The initial capital estimate for
the Project is CAD77.7 million with a further CAD10 million required for initial
working capital. The addition of the feldspar recovery circuit in Years 5/6 (or
potentially sooner if funding is available) requires an additional CAD13.7
million.
Capital costs have been reduced
by treating the 2 different types of lithium mineralization on a campaign basis
rather than having 2 parallel processing plants.
76
The Project is relatively small
and low in capex for a mining project, but the economic performance estimated by
this report indicates a post-tax IRR of 22.7% and an NPV of CAD102 million. A
sensitivity analysis suggests that the Project is most sensitive to revenue
drivers, namely price and recovery (identical), and also quite sensitive to
changes in operating cost while sensitivity to capex is relatively low.
The Project will provide over 70
full time employment opportunities, as well as a number of additional
opportunities for local industries to grow through the provision of support
services.
Consideration has been given in
the design to the number and nature of the chemicals used in the flotation
process and how best to minimise their consumption through recovery and
recycling, as well as via water treatment to remove dissolved metals.
The site layout takes into
account the various waste streams produced by the processes with all being
relatively inert and free from toxic materials and sulphides. Flotation tailings
are filtered and washed before being dry-stacked so as not to present a source
of future ground and run-off water contamination.
Market demand for the lithium
mineral products is increasing as more and more lithium is required for the
expanding battery and energy storage industries and this is resulting in a
squeeze on supply into the ceramics industry. In addition to a non-binding
letter of intent for the lepidolite concentrate from a Canadian based customer,
Avalon has identified a number of potential markets for the feldspar and is also
in discussions with four potential major petalite customers.
The Project enjoys strong support
from the community as well as from local politicians, First Nations and
environmental NGOs. Avalon is also in discussions with a number of local
businesses towards collaboration on future opportunities including contractor
mining, power supply, local fabrication and product transportation.
The start of operations is not
anticipated to be subject to approvals under the Canadian Environmental
Assessment Act 2012 (CEAA) as the mine does not exceed any of the CEAA triggers
including mine and mill tonnages. The Project will not have any new impacts to
fish or fish habitat, nor will it impact on any Federal Wildlife Areas or
Migratory Bird Sanctuaries. Final Permitting and Approval for the Project is
therefore expected to be relatively short and simple.
1.21
Recommendations
The preliminary economic
assessment presents a potentially viable project and the opportunity to generate
significant revenue for Avalon. It is recommended therefore that the Project
continues to the next stage of development, which is the completion of a full
Feasibility Study (FS).
1.21.1 Recommendations for
the Next Phase of Project Development
The next step in developing the
Project is the completion of a full economic and technical FS in order to
confirm these initial findings and to help source the necessary capital required
for project implementation.
In order to maintain the proposed
production levels and mine life, additional measured and indicated resources are
required for an FS. It is probable that this requirement can largely be achieved
by up-grading the inferred material through further, in-fill drilling and by
mining deeper. Additional exploration drilling is also recommended in order to
evaluate the potential for further, new near surface material in order to
potentially reduce waste quantities and reduce mining costs.
The FS will require a more
detailed mine plan and mining contract proposal based upon the revised mineral
resource resulting from the above recommended work. A trade-off study for open
pit vs. underground mining should also be conducted to determine if underground
mining can be made economically viable and at what depth.
77
Further mini-pilot flotation
work is recommended to confirm petalite recovery figures from the lepidolite
mineralization and to better define the composition of the feldspar product from
this material.
Additional reagent recovery and
water treatment investigations are also proposed in order to maximise recycling
potential and to confirm the quality of the recycled water.
The modular,
pre-assembled/containerized package concept assumed in the PEA should be carried
forward into the FS although a trade-off study may be warranted just to confirm
and quantify the economic benefits of such an approach.
The validation and update of the
2007 baseline data is required and anticipated to be completed in the near
future. Additional drilling to further develop and finalize the site hydrology
and groundwater management plan is needed. Based on the results of the ongoing
humidity cell and other test work on the anticipated waste materials and the
plant and site water balance, a final design of the water management facilities
is required. In consultation with regulators and other stakeholders, limited
ongoing monitoring for surface and groundwater quality and quantity is
recommended.
Based on the above and this PEA,
a Certified Closure Plan is required for submission to the Ontario Ministry of
Energy, Northern Development and Mines (MNDM).
In order to expedite the
permitting process, the recommended trade off study and feasibility level design
for the TMF containment structures should be initiated for the Environmental
Compliance Approval (ECA) permit applications for these structures. The route
for the power line must be finalized and obtaining all required information for
permitting should be initiated in consultation with Ministry Natural Resources
and Forestry (MNRF). Similarly, detailed engineering for the air and water
emissions equipment are required to initiate the Provincial Ministry of
Environment, Conservation and Parks (MECP) air and water ECAs.
1.21.2 Budget
The budget prepared by Avalon for
the next phase of the Project development for the Separation Rapids Project is
presented in Table 1.5.
Table 1.5
Budget for the Next Phase of the Project
Expense
|
Amount
(CAD000)
|
Drilling
|
Geotech & Hydrology
|
450
|
Testwork
|
Process
|
350
|
Water Treatment
|
50
|
Engineering
|
Mine Design
|
75
|
Process Plant & Site
|
175
|
Studies
|
Power Supply
|
50
|
Market Studies
|
30
|
Hydrology
|
175
|
Tailings & Waste Rock
|
120
|
Environmental Permitting
|
140
|
Final Report Compilation
|
75
|
Avalon Expenses
|
30
|
78
Expense
|
Amount
(CAD000)
|
Total
|
1,720
|
Micon concurs with the proposed
work program budget and recommends that it be implemented.
(B)
Current
Work and Future Plans
(a) Snowbank
Lithium Pegmatite Discovery
During fiscal 2018, the Company
discovered a new lithium pegmatite on the Separation Rapids Lithium Property.
The new discovery, named the Snowbank Pegmatite, occurs on the 100% owned
Paterson Lake claims acquired by Avalon in 2017, approximately four kilometres
northwest of the main Separation Rapids lithium deposit. It was discovered in a
large outcrop area traceable for over 100 metres along strike (open under
overburden at both ends) averaging 6 metres wide. Like the main deposit, the
lithium occurs primarily in the ore mineral petalite, which occurs as large
crystals up to 15 centimetres in diameter. Individual channel samples have
yielded assays of up to 2.51% Li2O over 1.1 metres, indicating that petalite
comprises approximately 50% of the mineral content in the rock sampled.
The Snowbank Pegmatite was
discovered in the course of a summer geological mapping and geochemical sampling
program on the Paterson Lake claims, following up on other known petalite
pegmatite occurrences in the area. The new discovery illustrates how challenging
even coarse grained petalite can be to recognize in the field (due to its
similar appearance to common feldspar) and how much potential there may be for
more discoveries in the Separation Rapids area to extend the life and production
capacity for the new operation planned for the main deposit. Next steps will
include a first phase drilling program tentatively planned for 2019.
Following the discovery, a
preliminary channel sampling program was carried out, focused on the petalite
mineralized areas (the results are compiled in the Companys News Release of
September 4th, 2018). The main Snowbank Pegmatite zone is up to 9 metres wide,
but pinches and swells with some sections bifurcating into two to three smaller
parallel dykes from 1 to 3 metres in width, for a combined average width of 6
metres, over the 100 metre long exposure. Individual dykes exhibit classic
pegmatite zoning features, with an internal assemblage of coarse petalite,
potassium feldspar, albite and quartz, flanked by narrow albitic border and wall
zones. Three channel samples collected from the petalite mineralized sections of
the main Snowbank Pegmatite zone average 1.40% Li2O, while three other parallel
dykes, also sampled, locally host similar mineralization over narrower
widths.
Highlights include lithium values
of 1.53% Li2O over 2.6 metres; 1.61% Li2O over 2.3 metres; and 1.07% Li2O over
2.9 metres - comprising six out of 11 analysed samples. The channel samples are
all close to right angles to the strike of the pegmatite and thus approximate
true widths. The values can be compared with the 0.6% Li2O cutoff grade and 1.4%
Li2O resource grade at the main Separation Rapids lithium pegmatite deposit. The
three channels are distributed over a strike length of just over 30 metres, with
spacing averaging about 10 metres, in one discrete pegmatite dyke. Visible
petalite is exposed continuously for about 100 metres. Sampling methods and
analysis details are included as footnotes to the table below.
Avalons Paterson Lake claims,
contiguous with the claims and mining lease hosting the Separation Rapids
lithium deposit, host three previously-known pegmatite occurrences: the Glitter,
Wolf and Rattler (of which the Glitter is known to contain petalite). These
occurrences fall within the same geological structure that hosts Avalons main
Separation Rapids deposit. The new Snowbank Pegmatite is located two kilometres
southeast of the Glitter and four kilometres northwest of Separation Rapids,
with potential for more petalite pegmatite discoveries along this minimum six
kilometre trend.
The next steps for advancing
Avalons knowledge of the Snowbank Pegmatite, along with the nearby Glitter,
Wolf and Rattler pegmatite occurrences, are further rock sampling, possibly
accompanied by trenching, and finally drilling. Avalon now has multiple drill targets on the western
part of the property that would be most easily accessed in winter.
79
(b)
Metallurgical Process Testwork
The new petalite flotation
process developed by Avalon in late 2017, that successfully produced a high
grade petalite concentrate (4.5% Li2O) with greatly reduced levels of sodium and
potassium, has attracted considerable interest from potential customers as there
is no comparable product available in the market today. This high purity
petalite concentrate (which the Company has branded as Super Petalite) will be
a premium quality material for certain specialty glass applications. The updated
PEA has incorporated this flowsheet and product in the business model. Further
optimization of the process will be carried out during a final pilot plant
program, when feasibility study work commences.
(c)
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).
Industry analysts continue to
debate the near-term rate of growth in lithium demand versus supply. While new
production is forecast, there is considerable uncertainty as to how rapidly this
new supply will be brought on-line. It is clear that many new lithium supply
sources will be needed to ultimately meet the rapidly 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. However, the mineralogy of the Separation Rapids resource allows for
flexibility in the lithium products that can be produced, with petalite
concentrate having considerable demand as an industrial mineral in specialty
glass applications. This offers a simpler, lower risk and lower cost development
alternative that was the focus of the updated PEA.
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. In the June 2018 Review, Benchmark Minerals Intelligence
stated that the current price (FOB North America) for lithium hydroxide in May
was US$17,250/t, a 58% increase since 2016. Prices in China have fallen in Q2
2018 and are now more in line with prices in the rest of the world, around
US15,000 for carbonate. While Spodumene prices (6% Li2O), FOB Australia
strengthened to US915/tonne, they have recently fallen just below the US$ 900
level. While petalite prices are not reported, petalite concentrates - with an
average 4.5% Li2O content, a petalite concentrate (compared to spodumene at 6%),
could attract a price of US$650/tonne, based purely on lithium content.
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
lithium in high strength glass products are also expected to grow. Many existing
and new high strength glass formulations for automotive, aircraft, cell phones,
and video displays where durability and light weight are key, require lithium to
achieve the desired properties. Avalons new Super Petalite product is
well-suited for this market.
Numerous expressions of interest
have been received from potential customers for the Companys lithium industrial
mineral products and discussions on off-take commitments are ongoing. These have
helped to define the probable market size for the petalite product, allowing the
Company to finalize an appropriate production capacity for the Phase 1 plant for
the purposes of the updated PEA. 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.
80
(d) Environmental
Assessment and Community Engagement Update
Avalon is committed to developing
the Separation Rapids 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, 2017 and
October, 2017 that successfully advanced the validation of the 1999
environmental baseline study. Initial leachate work has validated that the site
rock is not acid generating, and additional work on neutralized tailings is
ongoing. The original baseline environmental study prepared in 1999 and updated
in 2007, required the spring and fall 2017 and summer 2018 data collection to
further update this study and align it with recent regulatory changes. A Draft
Project Description and Environmental Impact Assessment was produced in 2017.
Additional assessment work for the new Tailing Management Area was completed to
accommodate the updated PEA. Recent project modifications will not significantly
change environmental designs at the mine site, but will significantly reduce to
eliminate the permitting and environmental risk from processing facilities at
other sites.
Permitting has been 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 2012 (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. Avalon is carefully monitoring the developments of the Impact
Assessment Act that could soon replace CEAA. No serious concerns have been
identified. Similarly, the new Federal Metal and Diamond Mines Effluent
Regulation, replacing the Metal Mining Effluent Regulation, will not negatively
impact the project. Ongoing engagement is planned to coincide with the approvals
process to review the simpler and lower impact business model of the recent PEA.
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 business opportunities and
providing training for community members. The Company has also initiated
dialogue with the Métis Nation of Ontario which 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 Métis 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. The staged development approach is also advantageous to Avalons
potential Indigenous partners by providing time to consider opportunities for
direct participation in project development and time for individual members to
obtain the necessary training for jobs at the site. Engagement is ongoing with
local Indigenous communities, regulators, and local government who continue to
be supportive of the project.
The development model designed
for the PEA results in a smaller environmental footprint, including low GHG
emissions and almost non-existent air emissions. There are no anticipated
environmental impacts of concern at the project, with the mineral deposit and
waste rock being non-toxic and non-acid generating and minimal water discharge
being anticipated. Avalon will continue to update and validate its 2007
environmental baseline study and the tailing management system design in the
context of the new development model. Avalon is currently working with Hydro One
to determine the optimal route to deliver clean hydro-electric power to the site
from one of the nearby dams on the English River. The Company is already
studying the potential for beneficial new uses of the site as part of its
closure strategy, including re-purposing the waste areas for agricultural use
such as wild rice habitat.
The Company is planning to
formally start the permitting process this fall, once sufficient engineering
data and project financing are in place. Overall, the Company does not
anticipate any delays in securing the necessary permits and approvals to proceed
with the proposed PEA production facility.
81
(e) Future
Work
The next step in the Projects
development is to proceed with a short pilot program to finalize reagent
recycling and water treatment processes, after which a bankable feasibility
study will be completed. This work is expected to proceed later in 2019 after
off-take agreements are concluded and additional project financing is in place.
Some additional drilling is contemplated to bring more of the Inferred resources
into the Measured and Indicated categories. In addition, Avalon continues to
explore for new lithium pegmatites, particularly on the western extension of the
property, where a number of new petalite occurrences have been identified, but
never previously drilled, including the Glitter pegmatite. A detailed mapping
and sampling program on the western extension area is currently in progress.
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.
East Kemptville Tin-Indium Project
(A)
Summary
of Technical Report
The technical report on the
property is entitled The East Kemptville Tin Production and Site Remediation
Project Preliminary Economic Assessment, Nova Scotia, Canada dated August 30,
2018, effective July 24, 2018 (the Technical Report) and prepared by Richard
Gowans, P.Eng., Christopher Jacobs, CEng, MIMMM, Dayan Anderson, M.S., MMSA and
Jane Spooner, P.Geo, all of Micon, Donald H. Hains, BSc, MBA, P. Geo of Hains
Engineering Company Limited, Reid Smith, M.A.Sc. P.Geo. of Stantec Consulting
Ltd. and William Mercer, Ph.D., P.Geo, each of whom is a qualified person
pursuant to NI 43-101.
In accordance with the
regulations under NI 43-101, it is noted that the PEA must be considered
preliminary in nature, as it includes 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,
and there is no certainty that the PEA will be realized.
The PEA has been prepared by
Micon under the terms of its agreement with Avalon. As discussed in the relevant
sections of the report, Micon has prepared a mine plan and schedule, has
reviewed the metallurgical testwork carried out on the property, the mineral
processing flowsheet, has reviewed infrastructure requirements, prepared capital
and operating cost estimates and an economic analysis of the project.
The PEA is based on the open pit
mining and processing of mineral resources contained within two existing pits
and an existing low-grade stockpile to produce a tin concentrate only. One
important aspect of this relatively small-scale mining project is that it
provides for a reduction in the long-term environmental liability and eventual
full rehabilitation of the brownfield site.
The effective date of the mineral
resource estimate on which this PEA is based, is 7 May, 2018 (see Avalon press
release dated 28 June, 2018). This resource estimate was prepared by Avalon and
is considered not to be materially different from the previous mineral resource
by Hains Engineering Company Limited (Hains Engineering), which is described in
an Avalon press release dated 31 October, 2014. Hains Engineering is independent
of Avalon.
1.1
East
Kemptville Property
The East Kemptville tin-indium
project is located on NTS map sheet 21A/04A and /05B in Yarmouth County,
southwestern Nova Scotia. The property is located approximately 180 km southwest
of Halifax, the provincial capital, and 55 km northeast of the town of Yarmouth. The site
accessed from Yarmouth via Nova Scotia paved Highways 340 to Carleton and then
203 to the site. Yarmouth lies on Highways 103 and 101, approximately 300 km by
road from Halifax.
82
Avalon holds a 100% interest in
the property via Special Licence 50462. The area covered by Special Licence
50462 includes the Closure Area represented by the former East Kemptville Tin
Mine property, which is currently under the management of Rio Algom Ltd (RAL),
the surface rights holder. The Special Licence 50462 issued to Avalon on 24
April, 2015 by the Government of Nova Scotia, is for a term of three years,
renewable twice for one year. While Avalons Special Licence 50462 is active,
the Mineral Resources Act provides protection against competing applications to
parties with active applications under consideration. As of the date of this
report, the Special Licence 50462 has been renewed by the Government of Nova
Scotia to 2 February 2019.
1.2
History
Significant, greisen-style tin
mineralization was discovered in granitic outcrop in the East Kemptville area,
in 1978, by Shell Canada Resources Limited (Shell). Shell initially drilled a
total of 136 diamond drill holes for a total of 12,450 m during 1979 and 1980,
followed by a further 23 diamond drill holes totalling 1,840 m in the centre of
the deposit to test for grade continuity between existing holes. Subsequently,
an additional four diamond drill holes totalling 490 m were drilled as part of
an underground exploration and bulk sample program conducted between September,
1981 and February, 1981.
The south-central part of the
deposit was also tested by 975 m of underground drifting during the period from
September, 1980 to February, 1981. The ramp access tested an area of
approximately 500 m by 350 m to a vertical depth of 50 m. A total of 31,600 t of
material was extracted as a bulk sample and four underground diamond drill holes
totalling 490 m were drilled for comparative purposes. (RAL, 1983)
In 1982, the East Kemptville
Deposit and surrounding claims were purchased from Shell by Riocanex, the
Canadian exploration arm of RAL. During 1982 to 1983, RAL conducted a detailed
due diligence of Shells work and drilled a total of 15 drill holes totalling
1,305 m during 1983 in preparation for a feasibility study and production
decision also completed in 1983.
The open-pit operation at East
Kemptville commenced in the fall of 1985 with a reported planned 17 years of
production at rates of 9,000 t/d of plant feed material and 5,000 t/d of waste.
This operation produced high (50% Sn) and low (21.4% Sn) grade tin concentrates
a copper concentrate (25% Cu) and a zinc concentrate (50% Zn). Shortly after
commencing production, the operation ran into serious problems related to the
recovery of tin by gravity methods. A dramatic price decline of approximately
50% for tin on world markets in the fall of 1985 put added pressure on the
operation. Continued poor tin prices resulted in cessation of operations in
early 1992.
1.3
Geology
and Mineralization
The East Kemptville Project is
located within the Cambro-Ordovician aged, Meguma Terrane of mainland Nova
Scotia. The East Kemptville deposit is a greisen hosted Sn-Cu-Zn-Ag-In deposit
with the alteration and mineralization mostly affecting the East Kemptville
leucogranite (EKL).
Tin and base metal (Zn-Cu-Ag-W)
mineralization within the deposit is primarily fine to medium-grained and is
associated with northeast-trending, sub-vertical and zoned, quartz-topaz,
sulphide-bearing greisens, veins, and stockworks that occur primarily in the
sericite-silica-topaz altered portions of the EKL near where the East Kemptville
Shear Zone (EKSZ) meet the roof zone in contact with surrounding metasediments.
The overall gross dimensions of
the original potential economic mineralization at the Main and Baby Zones based
on a cut-off grade of approximately 0.05% Sn are in the order of 1,500 m long,
350 m wide and 75 m to 150 m deep. Most of this volume is represented by the
larger, Main Zone. The smaller and discrete Baby Zone occurs a few hundred
metres southwest of the Main Zone within what is believed to be a structurally
controlled, satellite intrusion.
83
Mineralization between the Main
Zone and the Baby Pit is referred to as the Southwestern Extension of the Main
Zone and is not exposed at surface but intersected in drilling.
Cassiterite accounts for most
(>90%) of the tin mineralization with stannite accounting for the remainder.
Zinc is primarily found as sphalerite and indium is associated with the
sphalerite. Copper is primarily present as chalcopyrite and other copper
sulphide minerals.
1.4
Exploration
Prior to the 2014 and 2015 drill
programs, exploration by Avalon has been limited to regional reconnaissance
geochemical sampling and limited diamond drilling on the exploration licences
outside of the Special Licence area.
1.4.1 Avalon 2014 Drilling
Program
Avalon completed an in-fill/twin
hole program consisting of seven HQ diamond drill holes totalling 986 m in 2014.
The purpose of Avalons 2104 drill program was to investigate mineralization
between the Main Zone pit and Baby Pit, referred to as the Southwestern
Extension of the Main Zone, and at depth, and to twin some selected historic
holes as part of a due diligence program to validate the historical drill
results.
In general, the geology and
polymetallic Sn + Zn + Cu zones encountered in the drilling are considered to be
typical of historic drill results reported by Shell and RAL in the Baby and
Southwest Extension Zone Areas. Drilling was successful in confirming the known
geology and the mineralization associated with the Southwest Extension of the
Main Zone
1.4.2 Avalon 2015 Drilling
Program
In 2015, Avalon completed the
drilling of twenty-two HQ diamond drill holes totalling 4,514 m. The objectives
of this program were to further definition of mineral resources, obtain
additional geotechnical information for mine planning and geochemical
information for waste rock handling planning, and obtain a bulk sample for
potential pilot scale metallurgical testing.
The drill hole sample preparation
and assays conducted under best practice QA/QC procedures with insertion of
blanks and standards, as well as duplicate coarse sample analyses at a secondary
laboratory and core duplicates.
1.5
Sample
Preparation, Analyses and Security
1.5.1 Avalon 2014 Drilling
Program
Core was placed in numbered and
marked core boxes at the drill site and a quick log prepared. Avalon personnel
transferred boxes to the core logging area where drill core was logged in detail
and marked for sampling and all core photographed prior to sampling.
Sampling was typically undertaken
on 1.5 m intervals within mineralized sections. Core was split using a manual
core splitter, with the remaining ½-core reassembled in order in the core box.
Sample material was placed in plastic sample bags with sample number marked on
the outside of the bag and a sample tag stapled to the inside fold of the bag. A
duplicate tag was placed in the core box. Duplicate samples were obtained from
drill core by splitting core in half, with one half noted as the main sample and
the other half noted as the duplicate in the sample log. Standards and blanks
were inserted in the sample list on a pre-determined basis.
Bagged samples were placed in
20-L plastic pails. The pails were sealed with secure lids and taped closed and
the sample numbers noted on the outside of the pail. Once a sufficient number of
samples had been prepared, samples were shipped by courier to ALS Canada Ltd.
(ALS) in Sudbury for initial sample preparation. After initial sample
preparation, ALS shipped the samples to its Vancouver facility for assaying.
Check sample splits were shipped by ALS to SGS Canada in Lakefield, Ontario, and
to Activation Laboratories Ltd. (Actlabs) in Ancaster, Ontario.
84
A total of 404 samples (excluding
the 57 duplicates, standards and blank samples) were submitted to ALS for
multi-element analyses. Sixteen blanks, 15 standards and 13 field duplicates
were inserted into the three sample shipments to monitor contamination, accuracy
and precision.
1.5.2 Avalon 2015 Drilling
Program
For the 2015 drill program, the
sample treatment at the core logging facility was similar to 2014, with the
exception that the samples were shipped to Actlabs sample preparation facility
in either New Brunswick or Ontario, with the New Brunswick facility utilized
except in some cases where a backlog had built up in New Brunswick. In the
latter case, the samples were shipped direct to the Actlabs laboratory in
Ancaster, Ontario.
For the 2014 program, only a
limited amount of sampling was undertaken in non-mineralized sections (limestone
and greywacke). However, in 2015, in light of the occurrence of mineralization
to the boundary of sampling, prior to the start of the 2015 drill program,
additional sections of unsampled 2014 core were split and assayed and, in some
cases, contained significant mineralization that was contiguous with existing
known mineralization.
The initial sample processing and
analysis was completed by Actlabs (Ancaster, Ontario) and the check samples sent
to ALS (Vancouver, BC) for analysis.
1.5.3 Low Grade Stockpile Surface
Sampling Program
In order to verify the metal
grade of the low-grade stockpile, a surface sampling program was completed in
2015. A program was completed with two samplers to reduce sample bias, each
independently taking a sample 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 the two individuals from each site were kept
separate for analysis in order to investigate any sampling bias on the part of
one or other sampler. A total of approximately 270 kg was collected with each
sample being about 5 kg.
Samples collected from each site
were shipped to Actlabs for analysis. Comparing these analyses with the RAL
Closure Plan (RAL, 1993) showed that the Avalon estimates for Sn and Zn grades
are within 11% of the surface samples quoted by RAL.
1.6
Data
Verification
Data verification for the 2014 drill program and the resource
database included the following:
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1.
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Comparison of 2014 drill core sample numbers against
assay sample shipment lists and sample receipt list.
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2.
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Survey of drill collar coordinates by a qualified Nova
Scotia land surveyor.
|
|
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|
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3.
|
Site visit and inspection of 2014 drilling procedures,
core logging, and sampling by Hains Engineering.
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|
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4.
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Collection of due diligence ¼-core samples and
independent assaying of samples by Hains Engineering.
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5.
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Comparison of 2014 drill core assays against assay
certificates.
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6.
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Comparison of historic drill logs and assay certificates
against the historic Excel database used in the resource
estimate.
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7.
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Verification of historic Rio Algom Limited (RAL) QA/QC
data.
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8.
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Inspection of selected historic drill core stored at the
NSDNR Core Library in Stellarton, Nova Scotia and verification of
descriptions in historic drill logs by Hains Engineering.
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9.
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Collection of due diligence ¼-core samples and
independent assaying of samples from selected drill core intervals of
historic drill core stored at Stellarton by Hains
Engineering.
|
85
In the opinion of author, the 2014, sampling and assay data and
the historic drill hole and assay data, as represented in the resource database,
are reliable and can be used in resource estimation.
QA/QC measures employed for the 2014 drill program included the
following:
|
1.
|
Insertion of standards and blanks in the main sample
batches.
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2.
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Assays of coarse duplicates to check sample preparation
procedures and laboratory precision.
|
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3.
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Assays of pulp duplicates to laboratory analytical
precision.
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4.
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Coarse check samples assayed at two separate laboratories
to check sample preparation procedures and analytical bias.
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5.
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Insertion of certified standard reference materials in
check sample assay batches.
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6.
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Internal laboratory QA/QC protocols incorporating the use
of certified standards and blanks and duplicate and repeat
assays.
|
The review of the QA/QC data
indicates no significant issues with respect to sample preparation, assaying and
laboratory precision.
Similar QA/QC protocols were
followed in the 2015 drill program as previously used in 2014. The results on
the standards and duplicates suggest that Actlabs may have a slight negative
bias in analyses in tin. As all biases present are indicated at levels below 10%
and in most cases less than 5%, the analytical data is considered acceptable for
resource estimation.
Data verification of the historic
sampling and assay data consisted of checking the reported assay values
contained in the QA/QC appendix of the RAL feasibility study against the current
assay data base and the available drill logs. The current assay data base is a
compilation undertaken by Avalon of all available assay certificates, drill logs
and survey data. The Shell and RAL drill core assays are considered as
acceptable for resource estimation purposes.
1.7
Mineral
Processing and Metallurgical Testing
Avalon has conducted a number of
testwork programs on samples representing the East Kemptville deposit. Work
began with SGS UK in Cornwall, UK, to develop a comprehensive flowsheet to
produce tin, copper, and zinc/indium concentrates using mineralized samples from
the Baby Zone deposit. This set the baseline for a subsequent test campaign, in
2016, at Met-Solve, who investigated recovering tin (only) from the existing
low-grade stockpile.
Testwork was undertaken by SGS UK
using a 290 kg blended composite from 1,140 kg of material comprising 394 split
drill core from the Baby Zone. The testwork completed included heavy liquid
sink/float tests, Bond rod and ball mill grindability tests, gravity separation
tests and flotation tests.
SGS UK was able to develop a
flowsheet for the East Kemptville deposit to produce copper, zinc and tin
concentrates. Copper recovery was estimated at 86.4% into a 20.7% grade copper
concentrate, zinc recovery was estimated at 84.5% into a 51.4% grade zinc
concentrate and tin recovery into a 50.5% Sn concentrate was estimated at 76.8%
.
Using the SGS UK test results as
a basis, Avalon contracted Met-Solve in Langley, BC (Met-Solve), in 2016, to
undertake further flowsheet development testwork to recover tin from East
Kemptville mineralization. The testwork program was divided into three phases:
|
|
Phase I: Use of falcon gravity concentrators at
3 different grind sizes (200, 150 and 100 µm) to determine the samples
response to gravity concentration for the recovery of tin.
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Phase II: Grind material to 200 µm for the
gravity rougher stage, followed by a regrind to 100 µm for gravity
scavenging. Gravity tailings were then floated to attempt to recover
additional tin.
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86
|
|
Phase III: Locked Cycle tests of the best
flowsheet configuration previously identified in Phases I and II.
|
The sample provided by Avalon for
the Met-Solve testwork comprised approximately 178 kg of crushed samples from
the East Kemptville low-grade stockpile.
The testwork resulted in the
development of a flowsheet capable of producing a tin concentrate containing up
to 55% Sn with a tin recovery of approximately 60%. The material will be milled
to P80 ±80 microns before being put through a series of centrifugal gravity
concentrators. The gravity concentrates will feed a magnetic separation circuit
followed by a simple sulphide flotation circuit to remove sulphides. The
non-sulphide flotation tailings will be cleaned using final shaking table
gravity circuit, the concentrates from which will be collected and dewatered
before being shipped to potential customers.
Testwork also showed that
tailings from the gravity circuit can be treated through a bulk sulphide
flotation process to reduce contained sulphur to approximately 0.05% S, making
it a suitable material for capping of the tailings dam
1.8
Mineral
Resource Estimates
An updated mineral resource
estimate for the East Kemptville project was completed on 7 May, 2018 (see
Avalon news release dated 28 June, 2018). The mineral resource estimate is based
on a block model prepared by Avalon and is summarized in Table 1.1. The deposit
was subdivided into the Main Zone and the Baby Zone, which were interpolated
separately. The in situ unmined tin resources were estimated using historic
drill holes, data from drill holes completed by Avalon in 2014 and 2015, and a
post-mining topographic model. A tin cut-off grade of 0.10% was considered as
reasonable based on current mine plans and historic cut-off grade used at the
East Kemptville mine.
Table 1.1
Updated Mineral Resource Estimate for
the Main and Baby Zones
Classification
|
Cut-off
grade Sn
(%)
|
Main Zone
NE
|
Baby
Zone
|
Total
|
Tonnes
(Mt)
|
Sn (%)
|
Tonnes
(Mt)
|
Sn (%)
|
Tonnes
(Mt)
|
Sn (%)
|
Measured
|
0.08
|
0.40
|
0.173
|
0.22
|
0.241
|
0.61
|
0.197
|
0.10
|
0.38
|
0.177
|
0.20
|
0.251
|
0.58
|
0.203
|
0.12
|
0.32
|
0.188
|
0.19
|
0.259
|
0.51
|
0.214
|
Indicated
|
0.08
|
27.89
|
0.133
|
1.72
|
0.194
|
29.61
|
0.137
|
0.10
|
20.91
|
0.148
|
1.48
|
0.211
|
22.39
|
0.152
|
0.12
|
14.84
|
0.163
|
1.27
|
0.228
|
16.11
|
0.168
|
Measured +
Indicated
|
0.08
|
28.28
|
0.134
|
1.93
|
0.199
|
30.22
|
0.138
|
0.10
|
21.29
|
0.148
|
1.68
|
0.216
|
22.97
|
0.153
|
0.12
|
15.16
|
0.164
|
1.46
|
0.232
|
16.62
|
0.170
|
Inferred
|
0.08
|
18.54
|
0.125
|
0.90
|
0.153
|
19.43
|
0.126
|
0.10
|
13.56
|
0.137
|
0.69
|
0.172
|
14.25
|
0.139
|
0.12
|
8.11
|
0.156
|
0.51
|
0.193
|
8.62
|
0.158
|
Notes:
1.
|
CIM Definition Standards for Mineral Resources, 2014,
were followed.
|
2.
|
The Qualified Person for this Mineral Resource estimate
is William Mercer, Ph.D., P. Geo. (Nova Scotia). The mineral resources are
current as of May 7, 2018.
|
3.
|
The mineral resource estimate is based on 194 drill holes
totalling 21,456 m drilled between 1979 and 1991 by previous operators and
23 holes totalling 4190 m drilled by Avalon in 2014 and 2015.
|
4.
|
Drill data were organized in Maxwell DataShed and for
estimation purposes were transferred to the Geovia GEMS 6.8.1 software,
wherein the block model was developed.
|
5.
|
Resources were estimated by interpolating composites
within block models of 24 m by 24 m by 12 m blocks in the Main Zone and 6
m by 6 m by 6 m in the Baby Zone. Interpolation used the Ordinary Kriging
method.
|
6.
|
In the Main Zone, Measured material was defined as blocks
interpolated with a search ellipse with radii of 40x20x15 m using 18-36
samples, corresponding to 3-6 drill holes, indicated material with a
120x40x18 m search ellipse and the same number of samples, and inferred
material with a 315x85x18 m search ellipse using 12-24 samples
corresponding to 2-4 drill holes. In the Baby Zone,
Measured material was defined as blocks interpolated with a search
ellipse with radii of 30x20x8 m using 6-12 samples, corresponding to 3-6
drill holes, indicated material with a 48x33x12 m search ellipse and the
same number of samples, and inferred material with a 95x65x24 m search
ellipse using 4-8 samples corresponding to 2-4 drill holes (see Section
1.12 Resource Classification).
|
87
7.
|
Prior to compositing, the assays were capped at 1% Sn,
which corresponds to the 99th percentile of the tin assay data, reducing
the length- weighted mean of the tin assays by 9.4%.
|
8.
|
Mean density values of available data of 2.728 t/m
3
and 2.784 t/m
3
were used for the Main and Baby Zones,
respectively.
|
9.
|
The resource estimate has been constrained using the
Whittle pit described previously (Avalon News Release 15-02, February 25,
2015).
|
10.
|
Several possible cut-off grades are reported in this
resource estimate. Based on past mining practice at East Kemptville, a
cut-off grade of 0.1% Sn is reasonable and preliminary cost and revenue
values at the time of estimation also suggest this is
reasonable.
|
11.
|
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.
|
The Qualified Person (QP) for the
Baby and Main Zone mineral resources reported in the PEA is William Mercer, P.
Geo. who is not independent from Avalon. However, these current resource
estimates have not changed significantly since the previous versions that were
prepared independently by Hains Engineering with its principal, Donald H. Hains
(P.Geo), serving as the independent QP for the purpose of NI 43-101 (News
Release 14-13, October 31, 2014).
There has been no change of the
mineral resource estimate for the low-grade stockpile since the previous
estimate by Hains Engineering with an effective date of 16 November, 2015 (see
Table 1.2) .
Table 1.2
Low Grade Stockpile Estimated Inferred
Mineral Resource
Category
|
Tonnes
(Mt)
|
Grade
(%)
|
Sn
|
Zn
|
Cu
|
Inferred
|
5.87
|
0.112
|
0.100
|
0.61
|
Notes:
1.
|
This estimate is as of 16 November 2015.
|
2.
|
CIM Definition Standards 2014 were followed for mineral
resources.
|
3.
|
The independent Qualified Person for this Mineral
Resource estimate is Donald Hains, P.Geo., of Hains Engineering.
|
4.
|
Resources were estimated by examination of historical RAL
data and Avalons 2015 sampling of the Low-Grade Stockpile.
|
5.
|
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.
|
1.9
Mineral
Reserve Estimates
No mineral reserves have been
estimated for the East Kemptville tin project.
1.10
Mining Methods
Avalon plans to engage a locally
(Eastern Canada) based mining contractor to mine material from the Rio Algom
Ltd. (RAL) legacy stockpile, the Baby Zone pit and the Main Zone pit. This
contractor will be responsible for supplying, operating and maintaining all
mining equipment, trucks and mining related infrastructure.
The mine is envisaged as an open
pit operation using a conventional drill and blast process and conventional
truck and shovel methods for material movement.
For the PEA, the life-of-mine
(LOM) open pit mineable plant feed material within the conceptual pit designs is
9.22 Mt, inclusive of Measured, Indicated and Inferred resources, with a total
waste movement of 3.24 Mt for an average stripping ratio of 0.35:1. With the
inclusion of an additional 5.87 Mt of Inferred resource from the RAL legacy
stockpile, the mine life is extended to 19 years. The mill feed rate used for
the design is 806,000 t/y.
The economic parameters used as
inputs for the mine optimization and design are summarized in Table 1.3.
88
Table 1.3
Pit Optimization Criteria East
Kemptville Tin Project
Parameter
|
Unit
|
Value
|
Mining Cost (Mill Feed)
|
CAD/t mined
|
4.70
|
Mining Cost (Waste)
|
CAD/t mined
|
4.70
|
Legacy Stockpile Rehandle
|
CAD/t moved
|
1.25
|
Process Cost (Concentrator)
|
CAD/t mill feed
|
7.85
|
Process Cost (Sulphide Flotation)
|
CAD/t mill feed
|
0.63
|
G&A
|
CAD/t mill feed
|
1.54
|
Overall Pit Slope
|
degrees
|
48
|
Processing Recovery (Sn)
|
%
|
60.0
|
Metal Price (Sn)
|
USD/t
|
20,656
|
Treatment Charge
|
CAD/t conc
|
455
|
Transportation
|
CAD/t conc
|
225
|
Exchange Rate
|
USD to CAD
|
1.30
|
1.11
Recovery
Methods
The metallurgical process
flowsheet for the Project is based on the mineral separation and recovery of a
tin concentrate with a target grade of 55 wt.% Sn. A small portion of the
copper, zinc, iron and indium will be collected into a sulphide concentrate
which will be appropriately disposed of in the tailings facility unless a buyer
for the material is found. Data gathered from both the SGS UK and Met-Solve
metallurgical test programs along with historical information from previous
operations and operating personnel was reviewed and used as the basis for
developing the flowsheet.
Avalons objective is to
construct a simple plant with as few unit operations as possible and focused
purely on tin recovery. It is acknowledged that this approach will result in a
lower than possible metal recovery, but it is believed that the low costs
associated with such an approach will out-weigh any drop in recovery.
The PEA is based on the following
assumptions derived from the testwork results:
|
|
806,000 t/y of stockpiled mineralized material
will be fed to the concentrator at a rate of 100 t/h.
|
|
|
Target primary grind P80= 80 Microns.
|
|
|
The tin gravity concentrate grade of 55% Sn and
tin recovery to concentrate of ~60%.
|
|
|
Plant availability of 91.3% for the
concentrator (8,000 h/y operating time).
|
|
|
Preliminary tin recovery will be by centrifugal
concentrators with shaking tables used to produce the final product.
|
|
|
Concentrate cleaning will include magnetic
separation and flotation to remove iron, copper and zinc sulphides.
|
A copy of the simplified
flowsheet is included in Figure 1.1. The flowsheet consists of several
conventional processes to produce a tin concentrate. This includes crushing,
milling and classification, a series of gravity circuits using high-speed
centrifugal concentrators (HSCCs), magnetic separation and flotation to remove
the metal sulphide before going through a series of shaking tables. A bulk
sulphide flotation circuit is also included in Year 6 of the operation to remove
sulphides from the gravity tailings.
Benign flotation tailings will be
filtered and used for capping the tailings facility. The bulk sulphides
concentrate removed from the gravity tailings will be combined with the sulphide
concentrate from the tin gravity circuit and stored under a cover of water to
prevent oxidation.
89
Figure 1.1
Simplified Flowsheet
1.12
Project
Infrastructure
Existing roads on site allow easy
access to the entire site for operations and maintenance. A new haul road will
be required from the mine pits to the processing plant. There is sufficient
infrastructure in the area to support the labour force required for the project
operations and no need is seen for accommodations at site.
1.12.1 Power, Fuel and Water
Primary power to the site will be
provided by Nova Scotia Power via an existing line which will feed a new
substation at site. Emergency/back-up power will be provided by a diesel
generator.
Diesel storage and fueling
stations will be provided on site for mobile equipment.
Raw water from the Tusket River
will supply potable, fire and process water requirements. Process water will be
recycled to keep make-up water requirements to a minimum. Process water will
also be extracted from the 2 existing pits or recycled from the TMF in order to
minimize raw water consumption and to also make the pits accessible for mining.
The existing water treatment
facility which treats run-off from the tailing facility will be maintained for
ongoing operations and modified as required to meet the new project demands,
although minimal changes are anticipated to be required.
1.12.2 Buildings, Communication
and Waste Handling
The intention is to erect a
single pre-engineered and pre-fabricated building that can house the main
processing plant (excluding crushing circuit), stores and workshop areas all
under a single roof.
Proven, reliable and
state-of-the-art telecommunications systems will be provided at the site for
permanent operations and maintenance.
90
Waste materials (organic waste,
hazardous and recyclable wastes, etc.) will be sorted on site and disposed of
off-site using local contracting companies or existing municipal handling
facilities.
1.12.3 Concentrate Storage
and Shipping
Concentrate will be bagged,
containerized and stored at site before shipment on a regular basis to the
laydown area at the port in Shelburne or Halifax. On average, approximately 120
t of concentrate will be produced per month requiring the transportation of 4-5
truckloads per month from the site to the port.
1.13
Market Studies and Contracts
For the purposes of the PEA,
Avalon has undertaken an in-house analysis of the markets for tin concentrates
during the course of which it has consulted with industry participants and
specialist consultants.
A tin price of USD21,038 /tonne
has been used for the PEA, which is not only the World Bank forecast for 2020,
but also is consistent with the LME price for tin during the first quarter of
2018 (USD21,187).
1.14
Environmental Studies, Permitting and Social or Community Impact
Following the completion of an
environmental baseline study, impact assessment and permitting, the East
Kemptville mine operated between 1983 and 1992 at a production rate
approximately 4 times higher than that envisioned for this project. The overall
site is currently considered a brownfields site with ongoing perpetual treatment
of runoff water.
The East Kemptville site has long
term environmental liabilities that are the result of sulphide minerals that
remain in the pit walls, low grade and waste rock stockpiles, and tailings, all
of which generate acid mine drainage (AMD) to greater or lesser extents. At this
time, these liabilities are being effectively managed by the surface rights
holder through the collection, treatment and release of treated water.
An agreement between Avalon, the
surface rights holder and the Government of Nova Scotia will be required, prior
to development of this project, which details how and when Avalon will assume
care and custody of the closed site. A letter describing this requirement was
signed by the Ministry of Natural Resources (now Nova Scotia Energy and Mines).
The start of operations is not
anticipated to be subject to approvals under the Canadian Environmental
Assessment Act 2012 (CEAA) as the mine does not exceed any of the CEAA triggers,
including mine and mill tonnages. The project is not anticipated to have any new
impacts to terrestrial, fish or fish habitat, and will not impact any federally
designated wildlife conservations areas. The project will be subject to the Nova
Scotia Environment Act and associated regulations (including the Environmental
Assessment Regulations), via the provincial One Window approach to mineral
resource development chaired by Nova Scotia Energy and Mines.
Planned operations are an
integral component of the overall mine rehabilitation strategy and to mitigate
the present and ongoing sources of environmental liability. The brownfields site
has known sources of AMD to both surface and groundwater. These are now well
understood by Avalon and appropriate mitigations and closure plans identified
for these historical impacts have been developed, as well as for any impacts
anticipated from future operations.
Avalon is recognized for its
leadership in Indigenous Engagement. It has already reached out to the Mikmaq
First Nation to make them aware of recent small drill programs and to initiate
dialog with them. Avalon has also initiated engagement with the local community.
91
1.15
Capital and Operating Costs
1.15.1 Capital Cost Estimate
The estimated Project capital
requirements are summarized in Table 1.4. All costs are reported as Canadian
Dollars (CAD or $) with a base date of first quarter, 2018. It should be noted
that, apart from the sulphide removal circuit in Year 5, provisions for what
might normally be designated as sustaining capital are included in the
operating costs.
The capital cost estimate for
this Project is considered to be at a scoping level with an accuracy of
+50%/-35% and carrying an average contingency of 18.6% on total initial
estimated capital.
Table 1.4
Initial Capital Cost Estimate
Area
|
Capex CAD x
1,000
|
Initial Plant
|
Sulphide
Removal
(Year 5)
|
Mining
|
0
|
0
|
Concentrator
|
18,472
|
4,076
|
Tailings Disposal
|
544
|
0
|
Infrastructure
|
946
|
0
|
Total Direct Costs
|
19,962
|
4,076
|
EPCM
|
1,497
|
306
|
Freight & Transportation
|
861
|
188
|
Other Indirects
|
1,778
|
446
|
Total Indirect Costs
|
4,136
|
940
|
Owners Costs
|
1,000
|
500
|
Buildings & Tailings
|
750
|
100
|
Contingency
|
4,820
|
1,003
|
Total Capital Costs
|
30,688
|
6,620
|
Mining capital costs are assumed
to be zero as the operation will engage a contract miner and all mining related
capital costs are built into the contract mining operating costs.
Excluded from the pre-production
capital cost estimate is the allowance for dewatering the two pits. This amount
is estimated at CAD850,000, which increases the estimate to CAD31.5 million.
1.15.2 Operating Cost
Estimate
A summary of the LOM average
annual costs is presented in Table 1.5.
92
Table 1.5
Summary of Operating Costs
Category
|
Ave. Annual
Costs
(CAD000)
|
CAD/t
Milled
|
CAD/t
Tin
|
CAD/t
Conc.
|
Stockpile Reclaim & Mining
|
3,588
|
4.40
|
5,076
|
2,792
|
Concentrator Processing
|
6,556
|
8.04
|
9,274
|
5,102
|
Concentrate Transport
|
289
|
0.36
|
409
|
225
|
Remediation & Site Management
|
848
|
1.04
|
1,200
|
660
|
General & Administration
|
340
|
0.42
|
480
|
264
|
Total Production Costs CAD
|
11,583
|
14.25
|
16,439
|
9,044
|
Total Production Cost USD
|
8,910
|
10.96
|
12,646
|
6,957
|
1.16
Economic Analysis
Micon has prepared this PEA 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.
The technical parameters,
production forecasts and estimates described elsewhere in this report are
reflected in the base case cash flow model.
1.16.1 Macro-Economic
Assumptions
An exchange rate of CAD1.30/USD
is applied in the base case, approximately equal to current rates and to the
trailing average over the past two years.
Micon has applied a real discount
rate of 8% in its base case evaluation, approximating the weighted average cost
of capital (WACC) for the Project.
The base case cash flow
projection assumes a constant price of USD21,038/t tin metal.
Nova Scotia mining taxes, and
Canadian federal and provincial income taxes payable on the Project have been
provided for in the cash flow forecast.
No royalty has been provided for
in the cash flow model.
The base case Project annual cash
flows are presented in Figure 1.2.
This PEA is preliminary in
nature; it includes 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, and there is no
certainty that the preliminary economic assessment will be realized.
Before tax, the base case
demonstrates an undiscounted payback period of 6.7 years, and an IRR of 15.0% .
At an annual discount rate of 8%, the Project has a net present value (NPV8)
before tax of CAD17.8 million, and the payback period extends to 9.2 years.
After tax, the base case
undiscounted payback period is 8.0 years, leaving a tail of 11 years planned
production, and the Project has an IRR of 10.6% . The NPV8 after tax is CAD5.6
million, and the payback period extends to 13.6 years.
93
Figure 1.2
Annual Cash Flow
1.17
Risks
and Opportunities
The Project as currently
envisaged presents the following risks and opportunities.
1.17.1 Head Grade to Mill
The opportunity presented by the
drill hole spacing is that there may be areas of potential high-grade mining
that are poorly defined and unrecognised at present due to the wide drill hole
spacing thus increasing the mine life and financial return. The operating cost
schedule provides CAD250,000 in each of Years 2 and 3 for conducting suitable
drill programs within both pits once they are dewatered.
1.17.2 Resources
Opportunities exist to increase
resources for the Project. This includes expanding the existing deposit
resources as well as additional areas, such as the Duck Pond Zone and area west
of the Baby Pit.
There has been no examination of
the possibility of underground mining. Deep drilling on the Baby Zone has
suggested that tin mineralization continues close to 100 m below the bottom of
the presently planned pits. A detailed examination of this data may reveal
underground mining potential in this and other areas of the property.
There are additional very
low-grade stockpiles on surface which could potentially be processed if methods
such as ore-sorting are demonstrated to have the ability to pre-concentrate the
tin prior to the milling circuit.
94
1.17.3 Tin Price
An analysis of recent historical
tin prices indicates that the LME listed price for tin has been above that value
virtually continuously for more than the past 10 years. The LME listed price as
of 1 May 2018 is USD21,395 and the World Bank Commodity Price forecast indicates
tin a long-term price forecast of USD20,169 for 2025.
1.17.4 Tin Recovery
The tin recovery of 60% is based
on the testwork program by Met-Solve, and Avalon believes that once the plant is
up and running, this figure can be improved upon. With bench scale testwork, it
is difficult to simulate the impact of recirculating streams and to optimize
recovery over time so material that would be captured from such streams often
reports to tailings during bench testing. With an operating plant, these streams
are fully recycled, and operators have the opportunity to optimize recovery.
1.17.5 Mining
The forecast mining costs
represent almost 30% of total production costs and are estimated using typical
industry contractor rates for open pit operations of this size. Upon completion
of the proposed drilling to update the resource model, further mine design work
and haulage analyses are required before costing of the final tonnages of
material (plant feed plus waste) to be mined can be more accurately defined.
1.17.6 Stockpile Grade
The grade of the material in the
stockpile has been estimated by two surface sampling programs and by reviewing
historical information, all of which produced similar results, and as a
consequence an inferred resource has been determined by an external
consultant. It is, however, planned to complete a drill program of the stockpile
as soon as financing is available, partly to confirm the overall grade, but more
importantly to map the internal grade distributions and produce a more
representative schedule of feed grades shipped to the processing plant from this
source.
1.17.7 Operating Life
The current operating life is
18.5 years; however, Avalon is confident that additional feed sources will be
identified, and that the operating life will be extended.
1.17.8 Purchasing
Used/Refurbished Equipment
The capital cost estimate has
assumed all equipment is purchased new, but there are significant opportunities
to reduce equipment costs, particularly for the crushers and mill, by purchasing
used/refurbished items. Avalon is also aware of a number of used screens and
gravity concentrators that could potentially be acquired.
1.17.9 Revenue from By-products
No provision has been made for
up-grading the sulphide concentrate into marketable copper and zinc/indium
concentrates for sale.
95
1.17.10 Foreign Exchange
Rate
A lot of the mechanical equipment
is being sourced from outside Canada and is priced in American dollars.
Similarly, all revenue is in USD. An exchange rate of CAD1.30:USD1 has been
used. Should the Canadian dollar strengthen this would be positive in terms of
initial capex, but then negative with respect to subsequent revenue once in
production.
1.17.11 Environmental Liability
By re-activating the Project,
Avalon will be inheriting a number of (currently) long term environmental
liabilities. However, by removing the low-grade stockpile, capping the tailings
facility and depositing the balance of the tailings along with waste rock into
the two pits, Avalon believes a walk-away closure strategy has been developed,
eliminating these long-term liabilities.
1.18
Conclusions
Avalon has the opportunity to
re-commence commercial tin production from the East Kemptville mine by
establishing a small-scale operation processing an on-surface, low-grade
stockpile and higher grade, near surface occurrences within the existing
pits.
Avalon considers the tin
concentrate produced (see Table 1.6) to be highly marketable. In early 2018,
Avalon has entered into a non-binding MOU for the sale of all its forecast
production with a well-known company that owns a large tin smelter. The formula
used by this customer for determining concentrate pricing has been used by
Avalon in the financial model.
Table 1.6
Final Tin Concentrate Analysis
Element
|
Sn
|
Cu
|
Zn
|
Fe
|
S
|
Pb
|
As
|
Cd
|
Value (%)
|
55.22
|
0.009
|
0.014
|
0.57
|
0.08
|
0.005
|
0.002
|
<0.0001
|
Element
|
Ni
|
Co
|
Bi
|
Hg
|
Se
|
SiO
2
|
Mn
|
CaF
2
|
Value (%)
|
0.006
|
<0.001
|
<0.0001
|
<0.0001
|
0.0001
|
9.04
|
0.35
|
0.55
|
The re-development model, as
presently conceived, is an environmental remediation Project that will be
financed through the sale of tin concentrates recovered in large part from
previously-mined mineralized material on the site.
The Project enjoys strong support
from the community as well as from local politicians, First Nations and
environmental NGOs. Avalon is also in discussions with a number of local
businesses towards collaboration on future opportunities including, among
others, a long-term vision for re-development of the rehabilitated site.
The start of operations is not
anticipated to be subject to approvals under the Canadian Environmental
Assessment Act 2012 (CEAA) as the mine does not exceed any of the CEAA triggers
including mine and mill tonnages. The Project will not have any new impacts to
fish or fish habitat, nor will it impact on any Federal Wildlife Areas or
Migratory Bird Sanctuaries. Final Permitting and Approval for the Project is
therefore expected to be relatively short and simple.
1.19
Recommendations
The preliminary economic
assessment presents an attractive Project and the opportunity to generate
significant revenue for Avalon as well as remediating an environmental problem.
It is recommended therefore that the Project continues to the next stage of
development.
96
1.19.1 Recommendations for the
Next Phase of Project Development
1.19.1.1 Resources
|
|
The low-grade stockpile should be drilled, sampled and
assayed to increase the confidence of the mineral resource estimate from
an inferred category.
|
|
|
|
|
|
Once de-watered, a program of infill drilling is
recommended for the Main and Baby zones in order to improve the geological
data base and to improve understanding of the controls on mineralization
and variability of grade. Also, it is likely there are other areas of
shallow, high grade material which could be added to the feed stock
particularly if the tin price continues to trend upwards.
|
|
|
|
|
|
During the course of operations, additional exploration
should be conducted on other areas within and adjacent to the current
property boundary in order to identify additional resources (e.g., Duck
Pond area where prospective economic mineralization has already been
identified).
|
1.19.1.2 Mining
|
|
The mine designs and Project schedules should
be completed to a more detailed level using the revised mineral resources
resulting from the work recommended above.
|
|
|
|
|
|
Mining contractors should be requested to
provide a more detailed mining contract proposal using these updated
detailed mine plans and schedules.
|
|
|
|
|
|
The economic potential of mining deeper (either
through open pit or underground methods) should be investigated for the
Main and Baby Zone mineralization.
|
1.19.1.3 Processing Plant
|
|
During the next phase of engineering, the proposed
modular off-site fabrication and assembly philosophy should be adhered to
as it will not only keep the up-front capital cost lower than normal but
will also facilitate either future expansion or plant relocation to
elsewhere once the East Kemptville resources have been exhausted.
|
|
|
|
|
|
There is an opportunity to run a short pilot campaign to
assess and optimize the initial rougher tin recovery performance. The
purpose of this will be predominantly to fully optimize the grinding and
classification circuit as minimizing over-grinding of the cassiterite is a
key operating component. The rougher circuit operation will also provide
an opportunity to optimize performance and confirm the expectation that a
recovery >60% is achievable.
|
|
|
|
|
|
The potential for using ore-sorting to upgrade the plant
feed should be further investigated. This could have significant impacts
on capital and/or operating costs either through the use of a smaller,
cheaper processing plant or by significantly increasing the tin output
through the same plant but over a shorter time frame. The pre-treatment by
ore-sorting, of the very low grade stockpiles may also generate a
suitably graded material to allow plant operations over a longer period.
|
1.19.1.4 Project
Implementation
|
|
The current 16-18-month implementation schedule is tight,
and where possible, development activities should continue whilst Project
funding is being secured. Such activities could include finalizing fixed
equipment prices, confirming fabricators to be used and negotiating
various service and supply contracts.
|
|
|
|
|
|
There are various minor permitting studies which still
need to be completed in order to gain site access for initiating
construction activities. These studies should be completed as soon as
possible in order to prevent any potential impact on the implementation
schedule.
|
97
|
|
Securing a final agreement with BHP still needs to be
completed but this must be subject to finalizing a mutually beneficial
transition arrangement to minimize Avalons up-front exposure to the
existing environmental liability.
|
|
|
|
|
|
The start of operations is not anticipated to be subject
to approvals under the Canadian Environmental Assessment Act 2012 (CEAA)
as the mine does not exceed any of the CEAA triggers including mine and
mill tonnages. The Project will not have any new impacts to fish or fish
habitat, nor will it impact on any Federal Wildlife Areas or Migratory
Bird Sanctuaries. Final Permitting and Approval for the Project is
therefore expected to be relatively short and simple.
|
1.19.2 Budget
The budget prepared by Avalon for
the next phase of work to develop the East Kemptville Project towards production
is presented in Table 1.7.
Table 1.7
Budget for the Next Phase of Project
Development
Proposed Work
|
Estimated Cost
(CAD)
|
Drilling and Resources Update
|
Drilling Stockpile
|
250,000
|
Economic Study Update
|
Mini Pilot Plant Trial
|
100,000
|
Preliminary Engineering and
detailed cost estimates
|
300,000
|
Updated economic study and NI
43-101 report
|
100,000
|
Environmental
|
General studies and permitting
applications
|
100,000
|
Total Proposed Budget (all items)
|
850,000
|
Micon has reviewed Avalons
budget for the next phase of work on the East Kemptville Project and considers
it to be reasonable.
(B)
Current Work and Future Plans
(a) Project
Financing Plans
The East Kemptville Project has
attracted strong interest from a number of potential financial partners,
including equipment manufacturers interested in supplying the modular gravity
plant and the ore-sorting technology, as well as others that have expressed
interested in securing off-take of the tin concentrates (which are in short
supply from non-conflict sources). Other parties have expressed interest in
equity participation based on the site rehabilitation concept and the compelling
precedent that it will set for how closed mine sites, now treated as perpetual
liabilities, can be profitably rehabilitated through application of new and
innovative process technologies and remediation strategies.
(b)
Permitting and Environmental Studies
Environmental studies have
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 prepared for
the small-scale re-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. Metallurgical testwork to validate the
ability to produce a clean (low sulfur) low permeability cover to prevent the
release of further acid mine drainage from the existing tailings management area
was successfully completed. This low permeability cover has the additional
benefit of lowering the water table in the tailing management area, further
improving the long term stability of this facility.
98
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 post closure. Additional drilling was completed by the surface
rights owner to validate the stability of the coarse tailings pile and eliminate
the potential need for future stabilization work during operations. 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.
During 2018, the Species at Risk
Act study was completed at the Project site. Engagement continues by meeting
with regulators, NGOs and local communities with continued strong support for
the Project. With the update of the mine plan, permitting is well advanced with
the mineral lease and Crown Land lease transfer planned for submission by the
end of November, 2018. The closure plan was updated to incorporate changes to
the mine plan. The overall objective of full site rehabilitation on closure has
been validated in the PEA and is a key objective for Avalon.
(c) Project
Development
Avalon received positive results
from an ore-sorting testwork program conducted on samples of tin mineralization
from the East Kemptville Project. These results provide further encouragement
that ore-sorting technology can be successfully implemented at East Kemptville
to reduce both capital and operating costs and to reduce the volume of tailings
generated from the proposed operation.
Sensor-based ore-sorting (SBS)
is an emerging technology seeing increasing application in the mining industry.
It involves the scanning of individual rock particles on a conveyor using
various types of available sensor technologies. Depending on the chemical,
mineralogical or physical characteristics, the particles of value are
individually identified and separated from the rejects by applying either a
mechanical, hydraulic or, in the case of East Kemptville, a pneumatic
process.
The successful application of an
ore-sorting process offers a number of potential benefits through the rejection
of low or non-mineralized waste rock before it is fed into the processing plant.
This can lead to a significant reduction in the size of the plant, along with
attendant reductions in both capital and operating costs. It may also allow for
the economic processing of low grade feed materials that would otherwise be
un-economic to treat and the associated overall higher density waste products
increases the capacity of waste management areas.
The recent work was conducted by
Cronimet Mining Processing SA (Pty) Ltd (CMPSA), who are providing technical
and metallurgical services to Avalon in relation to the East Kemptville Project.
CMPSA has also expressed interest in partnering with Avalon on the development
of the Project.
Drill core samples from the
in-ground resources at East Kemptville were delivered in July 2018 to a test
facility in Kentucky, USA in order to determine the amenability of East
Kemptville tin mineralization for beneficiation utilizing sorting technology.
Samples varying from relatively high-grade to low-grade tin concentrations were
scanned using a multisensory sorter platform. Based on these scans an algorithm
was developed to allow for the separation of the material during the test
campaign.
The feed stock used during the
test campaign contained 0.11% Sn, 0.06% Cu and 0.11% Zn. The first step of the
testwork produced an upgraded product containing 0.47% Sn and a product mass
yield of 12%. Recovery versus grade data also showed that SBS can be used to
recover the zinc ore mineral sphalerite (which also contains indium) from this resource. The zinc-indium feed was successfully
upgraded to 0.23% Zn in the first step, while copper content remained low.
99
Similar positive results were
achieved in a preliminary ore sorting test program conducted in 2017 using
material from the low grade stockpile, confirming that SBS can be successfully
employed to upgrade both the in-ground tin resource as well as the stockpiled
material.
(d) Next
Steps
Based on these results, CMPSA has
recommend that a detailed sampling campaign be conducted on the low grade
stockpile, followed by an extensive bulk testwork program using a pilot scale
ore sorting plant to test the recovery of valuable minerals on a pilot scale.
CMPSA will be visiting the East Kemptville site in September to meet with Avalon
and site representatives in order to design and schedule the sampling program
which is likely to involve the extraction of a bulk (~10 tonne) composite sample
sometime in December 2018. The test program, including writing of the technical
report, is expected to take five to six months to complete. This testwork,
combined with a confirmation drilling program on the stockpile, will be utilized
to finalize the small-scale site re-development model to the Feasibility level
of confidence, following which it is contemplated Avalon and Cronimet would
enter into a partnership for the joint development of the project. In addition
to the Mining Lease and Crown Land Lease transfer, work will be initiated on the
Industrial Approval.
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 Persons under NI 43-101.
Other Properties and Assets
In addition to the Nechalacho
Project, the Separation Rapids Lithium Minerals Project and the East Kemptville
Tin-Indium Project the Company owns two other rare metals and minerals projects
which are inactive: the Warren Township Calcium Feldspar Project and the Lilypad
Lakes Tantalum-Cesium Project. 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.
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.
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.
100
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 Cesium Project
consists of 166 new claim units, totalling slightly over 3,200 ha, covering a
field of lithium, 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. Previous owners of the property drilled some 50
shallow drill holes and Avalon completed 32 drill holes totaling 4,781 metres in
2000 and 2001 in a program focused primarily on tantalum potential that produced
encouraging initial results.
The project has been inactive
since 2002 awaiting a recovery in tantalum prices or new demand for cesium
minerals. Two recent developments have encouraged Avalon to resume exploration
at the property. Firstly, because of recent increasing market interest in both
lithium and cesium, a field program is justified primarily to further
investigate the cesium potential of the property due to a global supply
shortage. Secondly, development plans for the Ring of Fire area, north of the
property, increase the probability of new road access being developed into the
area in the near future.
Renewed exploration work now
planned for summer 2019 will comprise geological mapping and geochemical
sampling to better understand cesium distribution, identify new drill targets
and to obtain samples suitable for metallurgical testwork. The 2000 and 2001
work program recognized exceptional cesium potential over a broad area on the
property with drill intercepts assaying up to 6.205% Cs2O over 1.70 metres in
one mineralized dyke known as the Pollucite Dyke.
The Project is located in the
traditional territory of the Eabametoong First Nation. Discussions with them
have been initiated.
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, 2018 consolidated
financial statements for a detailed description of our accounting policies.
101
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.
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.
102
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.
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:
103
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.
104
(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, 2018, 2017 and 2016, 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, 2018 compared with the year ended
August 31, 2017
|
|
2018
|
|
|
2017
|
|
Revenue
|
|
|
|
|
|
|
Interest income
|
$
|
61,777
|
|
$
|
28,211
|
|
|
|
|
|
|
|
|
Expenses
|
|
|
|
|
|
|
Corporate and administrative
expenses
|
|
2,724,759
|
|
|
2,877,792
|
|
Impairment loss on exploration and evaluation
assets
|
|
-
|
|
|
178,118
|
|
General exploration
|
|
17,269
|
|
|
23,677
|
|
Depreciation
|
|
18,538
|
|
|
35,656
|
|
Share based compensation
|
|
149,286
|
|
|
183,108
|
|
Foreign exchange loss (gain)
|
|
2,705
|
|
|
5,137
|
|
Financing transaction costs
|
|
634,912
|
|
|
601,335
|
|
Increase in fair value of convertible
redeemable preferred shares
|
|
535,500
|
|
|
131,250
|
|
Increase (Decrease) in fair
value of derivative liabilities
|
|
(562,216
|
)
|
|
(333,073
|
)
|
|
|
|
|
|
|
|
|
|
3,520,753
|
|
|
3,703,000
|
|
|
|
|
|
|
|
|
Net Loss before Income
Taxes
|
|
(3,458,976
|
)
|
|
(3,674,789
|
)
|
Deferred Income Tax Recoveries
|
|
218,232
|
|
|
317,468
|
|
|
|
|
|
|
|
|
Net Loss and Total Comprehensive Loss for
the year
|
$
|
(3,240,744
|
)
|
$
|
(3,357,321
|
)
|
During the year ended August 31,
2018 (Fiscal 2018 or the Year), the Companys net loss decreased by $116,577
from a net loss of $3,357,321 for the year ended August 31, 2017 (Fiscal 2017)
to a net loss of $3,240,744 for Fiscal 2018. The overall decrease in the net loss as
compared to the prior year was due to the factors discussed below:
105
Corporate and administrative expenses
Corporate and Administrative
expenses totalled $2,724,759 during Fiscal 2018, a 5% decrease from the amount
incurred in Fiscal 2017 ($2,877,792). The main areas of decreased operating
expenses for the Year were expenses on salaries and benefits and public and
investor relations.
Salaries and benefits for the
Year decreased by approximately 8% to $1,387,249 compared to $1,509,865 in
Fiscal 2017. The decrease in salaries and benefits was primarily related to the
reduced staffing levels.
Expenses on public and investor
relations for the Year decreased slightly by $40,251 (9%) to $389,885 compared
to $430,136 in Fiscal 2017, primarily due to a reduction in the number of
investment conferences participated in by the Company in 2018. Investor
relations remains a priority due to the ongoing need to attract investment
capital but recent efforts have focused more on sophisticated investors and
family offices than retail investors due to overall market conditions.
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 had
been written off as an impairment loss in Fiscal 2017. 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 in Fiscal 2017,
accordingly the cost incurred to-date of $39,929 had been written off as an
impairment loss.
No properties were abandoned
during the Year and no impairment loss was recognized in Fiscal 2018.
Share based Compensation
Share based compensation
decreased to $149,286 for Fiscal 2018 compared to $183,108 for Fiscal 2017. This
decrease is primarily related to the decrease in the number of options earned
during the Year compared to Fiscal 2017.
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 A1 Preferred Shares) at a price of $5,000 per share for gross
proceeds of $2,500,000.
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).
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 in Fiscal 2017.
The fair values of the A1
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 in Fiscal 2017.
In Fiscal 2018, the Company
completed two private placements with Lind and issued 300 Series B1 Preferred
Shares (the B1 Preferred Shares) and 150 Series C1 Preferred Shares (the C1
Preferred Shares), both at a price of $5,000 per share for total gross proceeds
of $2,250,000. In conjunction with these two private placements, Lind received commitment fees of $112,500, 6,250,000 B1 common share
purchase warrants (the B1 Warrants) and 3,750,000 C1 common share purchase
warrants (the C1 Warrants).
106
Cash issuance costs incurred
relating to these two private placements totaled $165,208 and had been recorded
in the Statement of Comprehensive Loss as financing transaction costs in Fiscal
2018.
The fair values of the B1
Preferred Shares, C1 Preferred Shares, the B1 warrants and C1 warrants at
issuance totaled $2,719,704 and the excess of this amount over the gross
proceeds ($2,250,000) of $469,704 had been recorded as a financing transaction
cost in the Statement of Comprehensive Loss as a financing transaction cost in
Fiscal 2018.
Increase in fair value of convertible redeemable
preferred shares
The fair value of
the A1, B1 and C1 Preferred Shares had been re-measured as at August 31, 2018
and August 31, 2017, which resulted in an increase of $535,500 for Fiscal 2018
compared to an increase of $131,250 for Fiscal 2017.
Increase (Decrease) in fair value of derivative
liabilities
The fair values of the Companys
outstanding derivative liabilities (which included the warrants denominated in
US$, the A1 Warrants, B1 Warrants and C1 Warrants) were re-measured
using the Black-Scholes pricing model as at August 31, 2018 and August 31, 2017,
which resulted in a decrease of $562,216 for the Year compared to a decrease of
$333,073 for Fiscal 2017.
Deferred Income Tax Recoveries
In Fiscal 2018, the Company has
incurred Canadian Exploration Expenditures (CEE) of $1,658,336 related to
certain flow-through equity financings completed in Fiscal 2017 and Fiscal 2018.
Accordingly, the Company has recognized a pro rata amount of the flow-through
share premium of $218,232 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 2017, the Company had
recognized a deferred income tax recovery of $317,468 resulting from the CEE of
$2,255,184 incurred in Fiscal 2017 related to certain flow-through equity
financings completed in Fiscal 2016 and Fiscal 2017.
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 (gain) loss
|
|
5,137
|
|
|
(9,274
|
)
|
Financing transaction costs
|
|
601,335
|
|
|
10,598
|
|
Increase in fair value of convertible
redeemable preferred shares
|
|
131,250
|
|
|
-
|
|
Increase (Decrease) in fair
value of derivative liabilities
|
|
(333,073
|
)
|
|
122,561
|
|
|
|
|
|
|
|
|
|
|
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
|
)
|
107
In Fiscal 2017 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 2017. The
overall decrease in the net loss as compared to the prior year was due to the
factors discussed below:
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 Fiscal 2017 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 Fiscal
2017 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 Fiscal
2017 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 Fiscal 2017 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
American in December 2015.
Legal and related advisory fees
decreased by 58% to $18,679 during Fiscal 2017 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 had
been written off as an impairment loss in Fiscal 2017. 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 Fiscal 2017,
accordingly the cost incurred to-date of $39,929 had been written off as an
impairment loss in Fiscal 2017.
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.
108
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 Fiscal 2017 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 A1 Preferred Shares) at a price of $5,000 per share for gross
proceeds of $2,500,000.
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).
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 in Fiscal 2017.
The fair values of the A1
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 in Fiscal 2017.
Increase in fair value of convertible redeemable
preferred shares
As discussed above
under financing transaction costs, the fair value of the A1 Preferred Shares had
been remeasured as at August 31, 2017 to be $2,646,000, resulting in an increase
of $131,250 in the fair value of the Preferred Shares being recognized on the
Statement of Comprehensive Loss for Fiscal 2017.
Increase (Decrease) in fair value of derivative
liabilities
The fair values of the Companys
outstanding derivative liabilities (which included the warrants denominated in
US$ and the A1 Warrants) were re-measured using the Black-Scholes
pricing model as at August 31, 2017 and August 31, 2016, which resulted in a
decrease of $333,073 for Fiscal 2017 compared to an increase of $122,561 for
Fiscal 2016.
Deferred Income Tax Recoveries
In Fiscal 2017, the Company had
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 $317,468 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.
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.
109
As at August 31, 2018, the Company has current assets of
$625,244 and current liabilities of $848,309. The holder of the A1, B1 and C1
Preferred Shares is entitled to demand repayment of the applicable redemption
value per share in cash (which totaled $3,195,000 as at August 31, 2018) upon
the occurrence of certain Redemption Events. Excluding the deferred flow-through
share premium of $52,157, the Companys adjusted working capital deficit was
$170,908 (calculated by adding back the deferred flow-through share premium of
$52,157 to the working capital deficit of $223,065). 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 deficit 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 cash and short term
guaranteed investment certificates bearing an annual interest rate of 1.4% . As
at August 31, 2017, the Company had adjusted working capital of $556,112 and
cash and cash equivalents on hand of $1,073,574.
The Companys current operating
expenditures, excluding expenditures on resource property work programs, are
approximately $290,000 per month. The Companys current anticipated resource
property expenditures planned to be incurred during the year ending August 31,
2019 are budgeted at approximately $1,500,000 (excluding capitalized salaries
and benefits), with approximately $850,000 of these expenditures being allocated
to the Separation Rapids Lithium Project.
The Company believes its present
resources are sufficient to meet all of its current contractual obligations,
administrative and overhead expenditures, and planned exploration programs until
the end of January, 2019. 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.
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 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. As at August 31, 2018, the Company
is also required to incur additional CEE of $237,922 (the remaining balance of
the required expenditures resulting from the private placement completed in July
2018) by December 31, 2019.
Subsequent to the end of the
Year, the Company completed a private placement and issued 5,375,000
non-flow-through units at a price of $0.07 per unit for gross proceeds of
$376,250 (of which 1,000,000 were subscribed by a director and officer of the
Company).
During Fiscal 2018, the Company
completed the following financing transactions:
i)
In November 2017, 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 (the November 2017 Private Placement).
ii)
In December 2017, the Company completed a private placement and issued 3,737,400
flow-through common shares at $0.145 per share for gross proceeds of $541,923
(the December 2017 Private Placement).
110
iii) In
July 2018, the Company completed a private placement and issued 2,400,000
non-flow-through units (NFT Unit) at a price of $0.10 per NFT Unit and
3,500,000 flow-through units (FT Unit) at a price of $0.10 per FT Unit for
total gross proceeds of $590,000 (the July 2018 Private Placement).
iv)
In January 2018, the Company completed a private placement and issued 300 B1
Preferred Shares at a price of $5,000 per share for gross proceeds of $1,500,000
(the January 2018 Private Placement).
v) In
June 2018, the Company completed a private placement and issued 150 C1 Preferred
Shares at a price of $5,000 per share for gross proceeds of $750,000 (the June
2018 Private Placement).
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.
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,
|
|
2019
|
|
$
|
238,796
|
|
|
|
|
2020
|
|
$
|
333,275
|
|
|
|
|
2021
|
|
$
|
348,155
|
|
|
|
|
2022
|
|
$
|
351,875
|
|
|
|
|
2023
|
|
$
|
359,315
|
|
|
|
|
2024 and thereafter
|
|
$
|
484,047
|
|
C.
Research
and Development, Patents and Licenses, etc.
Research and development
expenditures incurred during Fiscal 2018 and Fiscal 2017 totaled $262,900 and
$428,900 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. During fiscal 2018, 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.
111
After a significant upward spike
in prices in 2011, rare earth prices fell back almost as quickly in 2012 and
trended downward to mid-2015. Prices remained flat until mid-2017 where they
started to increase (specifically neodymium) again due to increasing demand for
magnets for motors of hybrid and electric vehicles and Chinese actions to
eliminate illegal mining. Neodymium prices gave up most of their gains by the
end of 2017 and have been relatively flat in during the first 10 months of 2018.
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, and geopolitical
events such as the burgeoning US-China trade war. 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 Global
Weighted Average price lithium carbonate price shows lithium at US$5,500/tonne
in early 2015 and at US$15,000/tonne in July 2018. 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.
Tin prices in 2017 remained near
the US$20,000/t mark and have fallen in 2018 (following most base metals) to a
level closer to $19,000/t with little new production expected in the near
future. Demand for tin in electronics, robotics and EVs could increase
consumption in the future.
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, 2018, 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
|
$
|
796,152
|
|
$
|
796,152
|
|
$
|
-
|
|
$
|
-
|
|
$
|
-
|
|
Operating Lease
|
|
2,195,062
|
|
|
318,395
|
|
|
681,430
|
|
|
711,190
|
|
|
484,047
|
|
Total
|
$
|
2,991,214
|
|
$
|
1,114,547
|
|
$
|
681,430
|
|
$
|
711,190
|
|
$
|
484,047
|
|
112
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 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 237,018,428 common shares were outstanding as at August 31, 2018 and
25,000,000 preferred shares, of which 180 Series A1 Preferred Shares, 240 Series B1 Preferred Shares, 150
Series C1 Preferred Shares were outstanding as at August 31, 2018. As of
November 23, 2018, Avalon had 248,488,382 common shares issued and outstanding,
150 Series A1 Preferred Shares, 220 Series B1 Preferred Shares, and 140 Series
C1 Preferred Shares issued and outstanding.
141
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.
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 A1 Preferred Shares that were subject
to that conversion for the redemption amount in cash plus a 5% premium.
Series B1 Preferred Shares
The
holder of the Series Bl Preferred Shares (the B1 Holder) then outstanding
shall not be entitled to receive any dividend on Series Bl Preferred Shares. The
B1 Holder may not transfer, sell or trade the Series Bl Preferred Shares. The
Series Bl 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
January 15, 2020 to a cap of $6,750 per share. The B1 Holder may convert the
Series Bl 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 B1 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 B1 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 B1 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 B1 Preferred Shares
that were subject to that conversion for the redemption amount in cash plus a 5%
premium.
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Series C1 Preferred Shares
The
holder of the Series Cl Preferred Shares (the C1 Holder) then outstanding
shall not be entitled to receive any dividend on Series Cl Preferred Shares. The
Cl Holder may not transfer, sell or trade the Series Cl Preferred Shares. The
Series Cl 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 June
29, 2020, to a cap of $6,750 per share. The Cl Holder may convert the Series Cl
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 Cl 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 Cl 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 Cl 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.
143
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.
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.
144
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.
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.
145
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.
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.
146
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:
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an individual who is a citizen or resident of
the U.S.;
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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;
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an estate whose income is subject to U.S.
federal income taxation regardless of its source; or
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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.
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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); (h) a person required to accelerate the recognition of an
item of income with respect to the common shares as a result of such income
being recognized on an applicable financial statement; or (i) own or have owned
(directly, indirectly, or by attribution) 10% or more of the total combined
voting power or value 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.
147
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.
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, 2018, 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.
148
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.
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.
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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.
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).
150
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).
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.
151
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.
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.
152
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.
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 24%, 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.
153
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.
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.