Prefeasibility Study

2011 Updated Prefeasibility Study: Nechalacho REE Deposit, Thor Lake, NWT

• The News Release of July 7, 2011 can be viewed here.

• To download the Executive Summary and Technical Summary of the NI 43-101 technical report's dated August 25, 2011, please click here (266 KB file).

• To download the full NI 43-101 technical report dated August 25, 2011, please click here (9.5 MB file).

Summary of Financial Analysis

The current study is an update to the original prefeasibility study prepared by independent consultants Roscoe Postle Associates Inc. (“RPA”), and disclosed in the news release dated June 21, 2010.  The updated Prefeasibility Study ("PFS") is based principally on an updated Mineral Reserve estimate that was derived from a new mine plan developed from the updated mineral resource estimate disclosed in January 2011. In addition to higher product price assumptions, the new economic analysis also incorporates related updates to operating costs, foreign exchange rates and production ramp-up time-lines as summarized below.  

The updated PFS produced a discounted cash flow (“DCF”) analysis yielding a 39% Internal Rate of Return (“IRR”) on a pre-tax basis (compared to 14% in the original study) and a 34% IRR on an after-tax basis (compared to 12% in the original study). The NPV at a 10% discount rate is now CAD$1.77 billion pre-tax and CAD $1.27 billion after-tax.

The updated 2011 PFS (like the original 2010 PFS) does not include a refinery/separation plant in the development model and revenues for rare earth oxides are discounted accordingly to account for the cost for separation. Construction of a separation plant and refinery will be included in the development model for the Bankable Feasibility Study to be completed in late 2012. Only a scoping level analysis of costs associated with a separation plant is presently available (see news release dated October 21, 2010) and therefore could not be included in the updated 2011 PFS. Work on a prefeasibility study for a separation plant is underway and is targeted for completion in early 2012. Significant differences in the parameters between the updated 2011 PFS and the original 2010 PFS are summarized as follows (not all inclusive): 

The resulting discounted cash flow ("DCF") analysis is summarized below:

The 20 year mine life is based on a new CIM-compliant Probable Mineral Reserve estimate of 14.5 million tonnes of 1.53% TREO¹, 2.90% zirconium oxide (ZrO2), 0.38% niobium oxide (Nb2O5) and 0.04% tantalum oxide (Ta2O5). The mining method was updated to include some long-hole stoping in the thicker parts of the reserve, but no changes were made to the metallurgical process flowsheets from the original 2010 PFS, where combined recoveries of TREO, ZrO2, Nb2O5 and Ta2O5 are 84.6% from the flotation plant and 90% from the hydrometallurgical plant. All four products are concentrated together and are only isolated into individual products in the final stages of the hydrometallurgical process and therefore, their recovery costs have been aggregated. 

The financial model assumes 100% equity financing, although Avalon plans to pursue various financing options including debt, upon completion of the bankable feasibility study. Financial analyses prepared for pre-feasibility studies are designed to determine if, after applying conservative assumptions on costs and revenues, the project stands up as an economically viable development opportunity. In this regard, management is pleased that the DCF for the updated 2011 PFS again yielded positive results that are considerably more robust than the results of the DCF analysis produced in the original 2010 PFS. Sensitivity analyses demonstrate that profitability is most sensitive to total revenue, exchange rate, operating costs and the metals prices.

¹ Total Rare Earth Oxides (TREO) refers to the elements lanthanum to lutetium, plus yttrium, expressed as oxides. See Avalon's website for conversion factors from elements to oxides. Heavy Rare Earth Oxides (HREO) refers to the elements europium to lutetium, plus yttrium, expressed as oxides. Light rare earths (LREO) refers to the elements lanthanum to samarium, expressed as oxides. HREO/TREO refers to the proportion of heavy rare earth oxides as a percentage of the total rare earth oxide content of the rock. 

Resources and Reserves

An updated Indicated and Inferred Mineral Resource estimate was prepared by Avalon and disclosed in the news release dated January 27, 2011. The reader is referred to the January 27, 2011 news release and the subsequent NI 43-101 report dated March 13, 2011 (filed on SEDAR on March 15, 2011 or click here to download the full report (13.6 MB)) for complete disclosure of the resource estimation methodology employed and other relevant context.

Probable Mineral Reserves were estimated by Avalon and audited by RPA, as summarized below. The Probable Mineral Reserves represent that portion of the Indicated Resources in the Basal Zone that are included in the Mine Development Plan. Future additions to the Probable Mineral Reserves are likely once all the detailed definition drilling being conducted in 2011 is incorporated into the resource model.

Note: Details of individual REE grades in the Probable Mineral Reserves along with a plan of the reserves and other relevant information are posted on our website.

Notes:

1. CIM definitions were followed for Mineral Reserves.
2. Mineral Reserves are estimated using price forecasts for 2015 for rare earth oxides (US$46.33/kg average), zirconium oxide (US$3.77/kg), tantalum oxide (US$255.63/kg) and niobium oxide (US$55.86/kg).
3. Mineral Reserves are estimated using a Net Metal Return cut-off value of CAD$260/tonnes.
4. Indicated Mineral Resources are inclusive of Mineral Reserves.
5. Although a general mining cut-off NMR value of CAD$300/tonne was utilized, the Probable Mineral Reserves were estimated by designing a mine plan that maximised the exploitation of resources at a Net Metal Return greater than CAD$600 (see table of resources at varying cut-off grades above). This was achieved by selecting areas of higher overall grade, but also mining the lower part of the Basal Zone, which has on average higher heavy rare earth contents. Thus the average HREO content relative to TREO for the reserves is 26% whereas the average for the resources is 21% at similar TREO grades.

Rare Metals Markets and Prices

Like the original 2010 PFS, the updated 2011 PFS assumes that Avalon will be selling a mixed rare earth oxide concentrate at a price derived using a model that discounts future individual oxide prices (by an average of 38%) to reflect the semi processed nature of the concentrate. In fact, Avalon now contemplates establishing its own separation and refining facility in North America, but has not yet completed a prefeasibility study on this facility to allow it to be incorporated into the present updated 2011 PFS. Work on this prefeasibility study has been initiated under a new contract with the same consultant that completed the scoping study in 2010.

The average “basket” price calculated for the Nechalacho mixed rare earth concentrate and used in the original 2010 PFS was US$21.94/kg.  The average “basket” price for the Nechalacho mixed rare earth concentrate using the updated price forecast for 2015 is US$46.33/kg.

The updated 2011 PFS bases the REE price assumption on a price forecast published by CIBC World Markets in its Rare Earth Industry Overview dated March 6, 2011, (except for the elements Ho, Er and Lu for which the original 2010 PFS price forecast was used).  The table below provides a comparison of the price forecasts used for each rare earth oxide in the original vs. the updated 2011 PFS.

Project Schedule (updated November 1, 2011)

Avalon has developed a critical path project schedule to estimate a possible start date for full capacity production in 2015.  Construction activities are predicted to last 24 to 30 months.  The start of construction is assumed to be in 2013 upon receipt of land and water permits and financing.  The schedule assumes that the issuance of permits, financing and delivery of equipment are the only external constraint that could modify the current schedule.

Original Prefeasibility Study: June 2010

• The News Release of June 21, 2010 can be viewed here.

• To download the full NI 43-101 technical report dated June 29, 2010, please click here (9.9 MB file).