AVLNF Avalon Advanced Materials Inc (QB)

B. Capitalization and Indebtedness

Not Applicable.

C. Reasons for the Offer and Use of Proceeds

Not Applicable.

D. Risk Factors

The Nechalacho Project, the Separation Rapids Lithium Project and the East Kemptville Tin-Indium Project are the Company's 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.

Please note that in fiscal 2019, the Company and Cheetah entered into a definitive agreement under which Cheetah will acquire ownership of the near surface resources principally in the T-Zone and Tardiff Zones of the Nechalacho property. These zones are not part of the resources which are contemplated to be developed in this technical report, and any direct references to these zones have been omitted from this summary.

2. Property Description and Location
   
   

The Nechalacho Deposit is situated on the Company's Thor Lake property, located in Canada's 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°06'30"N and 112°35'30"W (Zone 12, 6,886,500N, 417,000E - NAD83).

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.

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 Oak's 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 Highwood's 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.

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.

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, Avalon's 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:

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 geologist's 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.

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. 

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 2's Group 4A is a whole rock characterization package comprising four separate analytical tests. Lab 2's 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). 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.

The following table shows the interlab comparison for the period June 2010 and December 2011.

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.

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.

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.

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: Y₂O₃, Eu₂O₃, Gd₂O₃, Tb₂O₃, Dy₂O₃, Ho₂O₃, Er₂O₃, Tm₂O₃, Yb₂O₃ and Lu₂O₃.

5. Total rare earth oxides ("TREO") is HREO plus light rare earth oxides ("LREO"): La₂O₃, Ce₂O₃, Pr₂O₃, Nd₂O₃ and Sm₂O₃.

6. Rare earths were valued at an average net price of US$62.91/kg, ZrO₂ at US$3.77/kg, Nb₂O₅ at US$56/kg, and Ta₂O₅ 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. ZrO₂ refers to zirconium oxide, Nb₂O₅ refers to niobium oxide and Ta₂O₅ refers to tantalum oxide.

8. Note references to the Upper Zone have been omitted. Please see section 1.

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: Y₂O₃, Eu₂O₃, Gd₂O₃, Tb₂O₃, Dy₂O₃, Ho₂O₃, Er₂O₃, Tm₂O₃, Yb₂O₃ and Lu₂O₃.

5. Total rare earth oxides ("TREO") is HREO plus light rare earth oxides ("LREO"): La₂O₃, Ce₂O₃, Pr₂O₃, Nd₂O₃ and Sm₂O₃.

6. Rare earths were valued at an average net price of US$62.91/kg, ZrO₂ at US$3.77/kg, Nb₂O₅ at US$56/kg, and Ta₂O₅ 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. ZrO₂ refers to zirconium oxide, Nb₂O₅ refers to niobium oxide, and Ta₂O₅ refers to tantalum oxide.

8. Note references to the Upper Zone have been omitted. Please see section 1.

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 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.

Note that references to the Upper Zone have been omitted. Please see section 1.

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/m³.

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.

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 Y₂O₃, Eu₂O₃, Gd₂O₃, Tb₂O₃, Dy₂O₃, Ho₂O₃, Er₂O₃, Tm₂O₃, Yb₂O₃, and Lu₂O₃. TREO grade comprises all HREO and La₂O₃, Ce₂O₃, Nd₂O₃, Pr₂O₃, and Sm₂O₃.

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, ZrO₂ at US$3.77/kg, Nb₂O₅ at US$56/kg, and Ta₂O₅ 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 Micon's 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.

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: Y₂O₃, Eu₂O₃, Gd₂O₃, Tb₄O₇, Dy₂O₃, Ho₂O₃, Er₂O₃, Tm₂O₃, Yb₂O₃ and Lu₂O₃.
4. TREO (Total Rare Earth Oxides) is HREO plus: La₂O₃, CeO₂, Pr₆O₁₁, Nd₂O₃ and Sm₂O₃.
5. Rare earths were valued at an average net price of US$62.91/kg, ZrO₂ at US$3.77/kg, Nb₂O₅ at US$56/kg, and Ta₂O₅ 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. ZrO₂ refers to Zirconium Oxide, Nb₂O₅ refers to Niobium Oxide, Ta₂O₅ 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.
11. Note that references to the Upper Zone have been omitted. Please see section 1.

1. Note that references to the Upper Zone have been omitted. Please see section 1.

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 Avalon's 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. 

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.

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^oC. 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.

The separation plant design will produce 10 different pure rare earth oxides products in accordance with the specifications indicated in the following table.

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. 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 June 19, 2019, a new exploration Land Use Permit was issued, valid until 2023, which also included the extension of the airstrip.

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 2019,  the Land Use Permit was renewed and is valid until May 21, 2021, and similarly, the Water License was renewed and is valid until May 21, 2021.

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;

• 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 Company's 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 socio-economic 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 MVEIRB's 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 and again in 2019, a site maintenance and cleanup campaign was completed at the exploration camp. Commentary was submitted to the Government of the NWT related to proposed regulatory initiatives with potential to impact the project and the draft caribou management plan on an ongoing basis.

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.

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

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.

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.

The table below shows the results of the economic evaluation of the FS projected cash flows.

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.
• 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.

 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.

 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 Company's 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, 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 Company's 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. 

Mineral Reserves

As part of its annual procedures the Company analyzes price trends and factors as they may impact the determination of its mineral reserves. As part of this analysis, the Company has indications that the REE average net price forecast would be now in the US$45/kg - US$55/kg compared to the US$62.91/kg used in the resource estimate. Although most individual REEs are now forecasted to be below those used in the resource estimate, praseodymium and neodymium prices are generally forecasted to be higher than those used in the resource estimate and these have a significant impact on the average price. Furthermore, the exchange rate used in the resource estimate was US$1=CAD$1.05 and current forecasts for the exchange rate are closer to US$1=CAD$1.25. As all of the projected revenue, and less than a third of the projected costs are expected to be denominated in US dollars, this has a significantly beneficial effect on the determination of the mineral reserves. Zirconium prices are also currently in the US$7/kg range compared to the US$3.77/kg used in the mineral estimate. Niobium and Tantalum do not have a significant impact on the resource estimate. Accordingly the Company is of the opinion that its resource estimate is still valid.

 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.

Interest in rare earth projects outside China (including Avalon's) 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 and praseodymium.

Current Development and Permitting Plans

In 2018, Avalon reapplied for and received an Exploration and Airstrip Extension Permit which is valid for 5 years. In 2019, Avalon also renewed its early works Land use Permit and Water License, now valid until April 21, 2021 and May 21, 2021 respectively.

Avalon and Cheetah are now in the process of closing the sale. If Cheetah implements additional infrastructure development at site, this could reduce Avalon's future development costs on its own portion of the Project.

Avalon completed a brief geological program in July 2019 at the project on behalf of Cheetah. This work assisted in drill targeting for a drill program planned and completed by Avalon in September-October, 2019 on behalf of Cheetah.

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 Separation Rapids property consists of seventeen mineral new mineral claims and one mining lease covering a combined area of approximately 3,712 910 hectares ("ha")(9,172 acres) in the Paterson Lake Area, Kenora Mining Division, Ontario, all of which are owned 100% by Avalon. The claims are referred to as "new" claims as the Ontario government changed the claim system in 2019 with the change having no material effect on Avalon's property. The lease covers an area of 420.39 hectares over the area of the lithium pegmatite deposit and adjacent lands that may be used for mine development infrastructure.

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 Canada's 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.

The Separation Rapids area is underlain predominantly by a mafic metavolcanic sequence (amphibolite or Avalon's 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 Chemex's 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.

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 R² 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 1990's 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. 

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.

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 Avalon's 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/m³ was used for unit 6a,b,c and 2.62 t/m³ for unit 6d.
12. The cut-off grade reported in this resource estimate, 0.6% Li₂O, 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.

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.

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%.

• 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:

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.

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. Additional environmental baseline information was collected in 2017 to meet the requirements of new regulation and this data validated the results of the 2007 report. 

Avalon has an advanced exploration approval based on an approved closure plan is permitted for 15,000 t of material. Exploration permits for additional drilling on site were acquired for drill programs in 2016 and 2017. These programs were successfully completed without any environmental impacts. The present permit allows for nearby future expanded nearby areas of exploration on recently acquired claims. An update of the advanced exploration closure plan was requested by the regulator and was submitted for approval in 2019. This updated plan proposes a significant reduction in financial assurance.

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. This information was updated and validated with recent baseline studies  in consultation with the identified 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 and associated sediment basis 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. 

• 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. Engagement with the Metis Nation of Ontario has also been initiated.

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.

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.

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.

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.

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 Marko's Pegmatite, Lou's Pegmatite and others.

1.20 Interpretation and Conclusions

The PEA suggests that the Separation Rapids Lithium 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 two different types of lithium mineralization on a campaign basis rather than having two parallel processing plants.

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.

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 Lithium Project is presented in Table 1.5.

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 2020.

Following the discovery, a preliminary channel sampling program was carried out, focused on the petalite mineralized areas (the results are compiled in the Company's 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.

Avalon's 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 Avalon's 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 Avalon's 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.

(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.

The ability to up-grade the ore using dense medium separation (DMS) technology is being investigated and early results are quite positive when processing the coarse grained material. The testwork has successfully up-graded crushed ore with a head grade of 1.98% Li₂O by over 50% to >3% Li₂O at a recovery of over 50% and a mass yield of 37%. The balance of the material remains a future feed material for recovering further mineralization.

(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$600/tonne, based on lithium content and lack of impurities.

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 growing. 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. Petalite as a pure lithium aluminum silicate mineral is the desired lithium product for addition to many glass and ceramics formulations because the alumina and silica are also batch ingredients and the mineral form introduces all three in a pre-mixed form lacking in any undesired impurities. Avalon can offer two grades of petalite product; a standard grade product at 4.2% lithium oxide and a high purity product averaging 4.5% lithium oxide with exceptionally low impurity levels.

Numerous expressions of interest have been received from potential customers for the Company's lithium industrial mineral products and discussions on specific product requirements are ongoing before finalizing off-take commitments. These discussions have helped to estimate the probable market size for the petalite product, allowing the Company to define 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 with potential to increase production as demand grows.

(d) Environmental Assessment and Community Engagement Update

Avalon is committed to developing the Separation Rapids Lithium 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. Preliminary packer testing completed in 2018 indicates the rock around the pit area has low permeability and thus indicates a low risk of water infiltration into the pit. 

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"), recently replaced with the Impact Assessment Act,  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.   Similarly, the new Federal Metal and Diamond Mines Effluent Regulation, replacing the Metal Mining Effluent Regulation, will not negatively impact the project, and recent amendments under the Fisheries Act (Canada) should streamline this approvals required under this Act. 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 Avalon's 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. Additional engagement was conducted during the approval process to update the advanced exploration closure plan, during which no concerns were identified.

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 completed the update and validation of 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.

(e) Future Work

The next step in the Project's 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. It is planned to obtain a bulk sample, of the order of 2,500 tonnes, in order to supply large test samples requested by potential industrial customers for large scale testing in their glass or ceramics manufacturing processes. Permitting for quarrying and shipment of this sample is underway and the sample is expected to be extracted at site in early 2020.

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 Snowbank and Glitter pegmatites.

Unless otherwise noted, the technical information on the Separation Rapids Lithium Project has been reviewed and approved by the Company's 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.

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 Avalon's 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 February 2, 2020.

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, 1980 and February, 1981.

The south-central part of the deposit was tested in the underground exploration and bulk sample program by 975 m of 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 Shell's 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. 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 Avalon's 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. 

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:

1. Comparison of 2014 drill core sample numbers against assay sample shipment lists and sample receipt list.

2. Survey of drill collar coordinates by a qualified Nova Scotia land surveyor.

3. Site visit and inspection of 2014 drilling procedures, core logging, and sampling by Hains Engineering.

4. Collection of due diligence ¼-core samples and independent assaying of samples by Hains Engineering.

5. Comparison of 2014 drill core assays against assay certificates.

6. Comparison of historic drill logs and assay certificates against the historic Excel database used in the resource estimate.

7. Verification of historic Rio Algom Limited (RAL) QA/QC data.

8. 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.

9. 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.

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.

2. Assays of coarse duplicates to check sample preparation procedures and laboratory precision.

3. Assays of pulp duplicates to laboratory analytical precision.

4. Coarse check samples assayed at two separate laboratories to check sample preparation procedures and analytical bias.

5. Insertion of certified standard reference materials in check sample assay batches.

6. 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 sample's response to gravity concentration for the recovery of tin.

• 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.

• 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.

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).
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/m³ and 2.784 t/m³ 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

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 Avalon's 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. 

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.

Avalon's 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.

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 limited 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.

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), recently replaced by the Impact Assessment Act 2019 (IAA), as the mine does not exceed any of the CEAA/IAA 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. A Nova Scotia Mineral Lease and Crown Land Transfer will be required followed by an Industrial Approval for operations.

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 Mi'kmaq 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.

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.