Mr. Don Bubar reports

AVALON ANNOUNCES RESULTS OF POSITIVE PRELIMINARY ECONOMIC ASSESSMENT FOR ITS SEPARATION RAPIDS LITHIUM PROJECT

Avalon Advanced Materials Inc. has completed a positive preliminary economic assessment for its 100-per-cent-owned Separation Rapids lithium project in Kenora, Ont. The PEA was prepared under the oversight of Micon International Ltd.

The Separation Rapids lithium deposit was originally evaluated by Avalon in 1997 to 2000 as a potential producer of lithium minerals for glass ceramics under a prefeasibility study (which was also prepared by Micon). The purpose of this 2016 PEA was to investigate the potential for recovery of a lithium product suitable for the battery market from the same lithium resource, and the results confirm a technically viable process and positive economics for the recovery of a battery-grade lithium hydroxide product.

Highlights

• An average mining rate (open pit) of 950,000 tonnes per year would yield an average annual production of 14,600 tonnes of lithium hydroxide for 10 years and 100,000 tonnes per year of feldspar mineral concentrate for 20 years, as it would continue to be recovered from previously processed material for an additional 10 years after the initial 10-year mine life.
• The discounted cash flow (DCF) analysis yields a 19-per-cent internal rate of return on a pretax basis and a 16-per-cent IRR on an after-tax basis, assuming 100-per-cent equity financing. The project's net present value at an 8-per-cent discount rate is $343-million pretax and $228-million after tax.
• Total project construction capital costs are estimated at $514-million, which is inclusive of $86-million in contingencies and $7-million in sustaining capital.
• The average lithium hydroxide price assumption used for this PEA was $11,000 (U.S.)/tonne and the Canadian-dollar/U.S.-dollar exchange rate assumption was $1 (U.S.) equals $1.30.
• Measured and indicated mineral resources, as currently delineated, total eight million tonnes averaging 1.29 per cent lithium oxide and 38 per cent feldspar. Inferred mineral resources contribute an additional 1.63 million tonnes at 1.42 per cent lithium oxide to a maximum vertical depth of 260 metres. The deposit is open to depth and along strike.

At the production rate modelled for this PEA, the currently delineated lithium resource would support lithium production for at least 10 years. There is sufficient high-quality feldspar (an industrial mineral) in the resource to support production for at least 20 years. If additional drilling on untested extensions of the deposit was to increase the resource and extend the initial 10-year lithium production period, each additional year of additional lithium production could add $200-million in revenues per year and significantly increase the NPV of the project.

Don Bubar, president and chief executive officer, stated: "I am delighted with the results of this PEA indicating that production of a high-purity lithium battery chemical from Separation Rapids is indeed economically viable in this model. Extraction of lithium chemicals such as lithium hydroxide from lithium pegmatites like Separation Rapids is an emerging business requiring innovative new process technology. Under the leadership of senior vice-president, metallurgy and technology development, Dave Marsh, over the past 12 months, we have successfully developed a new process flowsheet to extract a lithium hydroxide product from the rare high-purity lithium mineral petalite, something that had not been done before. We look forward to working with our partners in government, the battery materials sector and the local community to advance this project to the demonstration plant stage."

The PEA development model covers all aspects of project development, including mining, mineral concentration and hydrometallurgical processing, as well as all related infrastructure. Micon developed its capital and operating cost estimates from first principle capital quotations, estimates from suppliers, manufacturers, contractors and experience based on comparable operations in Canada and abroad. The capital and operating cost estimates were completed to a level consistent with an AACEI Class 4 estimate, with an intended level of accuracy of plus or minus 30 per cent, based on third quarter 2016 prices, excluding escalation.

Optimization opportunities and next steps

With the completion of a positive PEA on lithium hydroxide production, next steps are oriented primarily toward gathering all the technical information needed to support the completion of a feasibility study in 2017 and secure customer acceptance of the products, followed by operation of a demonstration-scale production facility. Commercial operations could begin by 2020. The key factors going forward influencing the timely execution of the project are: securing sufficient product off-take commitments to support project financing; the availability of sufficient equity and/or debt financing; and receipt of all requisite operating permits and approvals.

Avalon's first priority will be to carry out additional drilling with the objective of increasing the resources, while continuing to optimize metallurgical processes to confirm design parameters and product properties. While the economics contained in the PEA are positive, continuing metallurgical process development work and market research have identified opportunities to improve the overall project economics or reduce project risk. These include:

• Recovery of lithium from other lithium-bearing minerals in the resource;
• Defining a low-cost, clean energy solution for the operations;
• Improvements in lithium recovery rates in the flotation process and in the hydrometallurgical plant while maintaining high product quality;
• Expansion of feldspar markets through product research and market development work;
• The recovery of high-purity silica and tantalum byproducts;
• Integrating the production of petalite concentrate for glass-ceramics customers into the development model.

The development model presently contemplates connection to the hydroelectric grid near the Whitedog power generation station at a cost of $11-million, including construction of a 25-kilometre power transmission line and substation. The company has begun to investigate the potential to meet the power needs for the mine and concentrator (estimated at five megawatts) using local low-cost, run-of-river power generation supplemented by renewable energy delivered by an independent energy company. An initial reconnaissance study has identified a promising site close to the deposit capable of meeting most of the operation's energy requirements at a lower total cost.

Lithium and feldspar markets

Lithium compounds for batteries

The demand for lithium chemicals, such as lithium carbonate and lithium hydroxide, has been growing rapidly over recent years, driven predominantly by lithium-ion rechargeable battery technology now in high demand for the electric vehicle marketplace 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 are usually expressed in terms of lithium carbonate equivalent (LCE).

Market studies completed by the company in 2015 indicated that at least three different lithium chemicals are used in lithium-ion batteries, depending on the specific cathode chemistry the technology employs: lithium carbonate, lithium hydroxide and lithium metal. There are at least four battery cathode chemistries presently competing for market share: lithium-cobalt oxide, lithium-nickel-aluminum-cobalt oxide (NAC), lithium-nickel-manganese-cobalt oxide and lithium-iron phosphate. The lithium-ion battery now preferred by many electric vehicle manufacturers uses the NAC chemistry, for which lithium hydroxide is becoming the preferred lithium chemical feedstock. Demand for lithium hydroxide is projected by Stormcrow Capital Ltd. (August, 2015) to grow at a faster rate than lithium carbonate demand and to more than double from 82,000 tonnes LCE in 2016 to 186,000 tonnes LCE in 2025.

Based on these market observations, Avalon selected lithium hydroxide as its target lithium product and conducted process testwork to create a flowsheet to produce it cost-effectively from its lithium mineral (petalite) concentrate which contains few impurities requiring removal from the final product. Lithium hydroxide can also be produced directly from the mineral concentrate without first making an intermediate product such as lithium carbonate. New hydrometallurgical technologies offer an environmentally efficient and relatively low-cost extractive alternative to make lithium hydroxide from the mineral concentrate and achieve the high-purity requirements now demanded by battery makers.

It is clear that new lithium supply sources will be needed to meet the growing demand for batteries for electric vehicles. The Separation Rapids lithium project will be well situated to serve new battery production facilities contemplated in North America. Just one well-known example, the lithium battery Gigafactory of Tesla Motors Inc. in Nevada is expected to consume up to 25,000 tonnes per year of lithium hydroxide after it has reached full production.

Prices for both lithium hydroxide and lithium carbonate have increased significantly in recent years, with the growing demand from the battery sector exceeding supply growth. This is creating upward pressure on prices, a trend that analysts are predicting will likely continue until the market comes back into balance. Lithium hydroxide typically sells at a premium of $2 (U.S.) to $3 (U.S.)/kilogram to lithium carbonate, reflecting higher average production costs.

Avalon has reviewed all publicly available lithium price forecasts. While they all forecast increasing prices, there is considerable variability in absolute price levels predicted for battery-grade lithium chemicals in the future. Lithium hydroxide prices negotiated in 2019 to 2020 (when Avalon may be entering the market) are forecast to range from current price levels of around $11,000 (U.S.)/tonne to as high as $25,000 (U.S.)/tonne (Global Lithium LLC) with the average being around $16,000 (U.S.) to $17,000 (U.S.) /tonne (Benchmark and Global Lithium LLC).

For the purposes of this PEA, Avalon has used a price assumption of $11,000 (U.S.) per tonne FOB plant for lithium hydroxide. This is consistent with a recent price forecast for the period 2019 to 2020 prepared by Roskill Information Services.

Feldspar

Feldspar is an industrial mineral used commonly in the manufacture of glass and ceramics, also used as a filler and extender in the production of paints, plastics and rubber. The glass market for feldspar in the United States represents the largest market at around 68 per cent, while ceramics account for 23 per cent, and filler and other applications represent less than 10 per cent. Market access depends upon product quality and freight costs to individual markets.

Global Industry Analysts Inc. (GIAI) projects that between 2015 and 2022 feldspar demand in the United States will grow at a compound annual growth rate of 3.8 per cent to reach approximately 800,000 tonnes per year.

Testwork carried out by Dorfner Anzaplan GmbH, Germany, a specialist in industrial minerals process development, indicates that feldspar from the Separation Rapids deposit has a very low iron content and comparable quality with the feldspars marketed by other North American producers.

Through discussions with market participants and industry experts, and evaluation of data provided in purchased reports and publicly available information, Avalon estimates that 100,000 tonnes per year of feldspar can be sold into the glass, ceramics, frits/glazes and filler markets in the United States, and potentially other markets in Europe and Mexico. However, Avalon has sufficient feed material to produce much greater quantities of feldspar should there be sufficient market demand.

Pricing for feldspar in the United States currently ranges from $175 (U.S.)/tonne to $250 (U.S.)/tonne FOB plant. Avalon has based the feldspar revenue calculations for this PEA on a conservative price assumption of $170 (U.S.)/tonne FOB Separation Rapids plant.

Mineral resources

Mineral resources are essentially the same as used for the 1999 prefeasibility study, adapted to current resource reporting guidelines under National Instrument 43-101, and are summarized in the tables. Measured and indicated resources are estimated to total eight million tonnes at a grade of 1.29 per cent dilithium oxide using a 0.6-per-cent-Li2O cut-off grade. In addition, the deposit includes an estimated inferred resource of 1.63 million tonnes at 1.42 per cent Li2O. Within the same rock volume, there is also an estimated inferred resource of eight million tonnes averaging 38 per cent feldspar at a 30-per-cent-feldspar cut-off grade.

The deposit is hosted within a large, highly evolved pegmatite body of a rare petalite subtype, similar to the Tanco pegmatite, a rare metals producer located 60 km to the west at Bernic Lake, Manitoba. The Separation Rapids pegmatite forms a vertically dipping body varying in thickness up 70 metres and traceable for approximately 1.5 kilometres along strike. Unlike the Tanco pegmatite, it is highly deformed and was essentially flattened and stretched into its present subvertical orientation. The deposit exhibits typical mineralogical zoning characteristics seen in other highly evolved rare metal pegmatites like Tanco, such as well-developed wall zones and a petalite-rich intermediate zone. Exploration potential exists to discover additional mineralogical subzones typical for such pegmatites enriched in other rare metals, notably tantalum and cesium. The deposit has been delineated by exploration drilling over 500 metres of strike length to a depth of 260 metres and is open for expansion.

The primary lithium-bearing minerals in the deposit are petalite, lepidolite and locally spodumene formed from petalite. The feldspars include both albite and potassium feldspar. The other major rock-forming minerals are quartz and muscovite. Accessory minerals include columbite-tantalite, cassiterite, apatite and topaz. Results from 69 historic diamond drill holes totalling 10,152 metres were used to create a 3-D model of the host pegmatite.

           SEPARATION RAPIDS RESOURCE ESTIMATE 

Class                   Tonnes    Li2O  Specific gravity
                            (M)     (%)

Measured                  4.03    1.32              2.66      
Indicated                 3.97    1.26              2.67      
Measured plus indicated   8.00    1.29              2.66      
Inferred                  1.63    1.42              2.64      

1. Canadian Institute of Mining, Metallurgy and 
Petroleum definition standards for mineral resources and 
mineral reserves, dated May 10, 2014, were followed for 
this mineral resource estimate.
2. The qualified person for this mineral resource is 
Benjamin Webb, PGeo (British Columbia).
3. The resource estimate is constrained by a 3-D 
geologic model of the mineralized material.
4. Assay intervals were interpolated using the 
inverse-distance-weighted method to create a 3-D block 
model.
5. All figures are rounded to reflect the relative 
accuracy of the estimates. Summation of individual 
columns may not add up due to rounding. 
6. Mineral resources are not mineral reserves and do not 
have demonstrated economic viability. There is no 
certainty that all or any part of the mineral resource 
will be converted into mineral reserves.
7. In addition, while the terms measured, indicated and 
inferred mineral resources are required pursuant to 
National Instrument 43-101, the U.S. Securities and 
Exchange Commission does not recognize such terms. 
Canadian standards differ significantly from the 
requirements of the U.S. Securities and Exchange 
Commission, and mineral resource information contained 
herein is not comparable to similar information 
regarding mineral reserves disclosed in accordance with 
the requirements of the U.S. Securities and Exchange 
Commission. U.S. investors should understand that 
inferred mineral resources have a great amount of 
uncertainty as to their existence and great uncertainty 
as to their economic and legal feasibility. In addition, 
U.S. investors are cautioned not to assume that any part 
or all of Barrick's mineral resources constitute or will 
be converted into reserves.

SEPARATION RAPIDS FELDSPAR RESOURCE ESTIMATE

Classification     Tonnes           Feldspar
                       (M)                (%)

Inferred              8.0                 38     

1. CIM definition standards for mineral 
resources and mineral reserves, dated May 
10, 2014, were followed for this mineral 
resource estimate.
2. The qualified person for this mineral 
resource is Mr. Webb.
3. Feldspar is the total of potassium 
feldspar and albite.

The model includes lithium resources with an average grade of below 1 per cent Li2O. The lower-grade lithium mineralization consists of a swarm of narrow lithium-bearing pegmatite dikes intruded into meta-volcanic rocks, where tests indicate the resource can be preconcentrated using optical sorting technology.

The resource block model has had an open-pit mine design applied to it using Whittle pit optimization resulting in 9.34 million tonnes of mineralized material at an average grade of 1.22 per cent Li2O within the pit. The pit has a strip ratio of 1 to 5.6, resulting in 52 million tonnes of waste rock for stockpiling for use as aggregate. For the purpose of this PEA, the mine depth was limited to 260 metres.

The mine design has not been optimized and the appropriate timing to transition the operation to underground mining has yet to be determined. Further drilling is expected to identify additional resources at depth which would create the opportunity to ultimately rework the development model to include an underground mining operation to access the depth extensions of the deposit and reduce the amount of rock generated for stockpiling.

Summary of the PEA project development model

The PEA project development model consists of facilities located at two separate sites: an open-pit mine and concentrator located on the company's mining lease approximately 75 kilometres north of Kenora, Ont.; and a hydrometallurgical plant located at an industrial site near the city of Kenora.

The current development model contemplates an open-pit mine to a final depth of 260 metres providing 950,000 tonnes of mineralized plant feed per year for 10 years at an average diluted grade of 1.2 per cent Li2O. The mineralized plant feed will be crushed and processed at a concentrator constructed at the mine site. At full production the concentrator will produce an average of 144,400 tonnes per year of petalite concentrate and 100,000 tonnes per year of feldspar concentrate. The petalite will be transported by truck to the proposed hydrometallurgical plant presently contemplated for Kenora.

The hydrometallurgical plant site selected for the purposes of the PEA is in close proximity to sources of hydropower, natural gas and water needed for the processing of the petalite. The hydrometallurgical plant would have the capacity to produce an average of 14,600 tonnes per year of lithium hydroxide. The lithium hydroxide will be bagged at the hydrometallurgical plant and loaded on to rail cars for shipment to market.

Non-lithium-bearing rock produced in the mining operation will be stored at site for potential recovery of other industrial minerals or use as aggregate in the surrounding region. Tailings from both the concentrator and the hydrometallurgical plant will be stored in a tailings management facility located at the mine site. Future engineering, procurement and construction of both the concentrator and the hydrometallurgical plant will proceed in parallel.

Environmental assessment and community engagement update

Avalon is committed to developing the project based on modern corporate social responsibility (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, maximizing 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.

A detailed environmental baseline study was updated in 2007 and work has been continuing to further update this study to align it with recent regulatory changes. Following some additional baseline work to validate the 2007 study, a detailed project description and environmental impact assessment will be produced in consultation with regulators, indigenous peoples and other communities of interest. Initial studies suggest that aggregate stockpiles, tailing and concentrate storage areas will not contribute effluents of environmental concern. Dry stacking of tailing and concentrates will minimize long-term storage risk, water use and effluent quantity.

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 a memorandum of understanding with WIN in 1999 which was renewed when the project was reactivated in 2013. Avalon management has been keeping WIN leadership informed on project activities and remains committed to fulfilling its community consultation obligations and partnering with WIN on project business opportunities. The company has also initiated dialogue with the Metis Nation of Ontario, which holds aboriginal rights in the area.

Qualified persons

The PEA was prepared with contributions from the Avalon independent consultants shown in the table, who are qualified persons for the purposes of National Instrument 43-101, and have reviewed and approved this release.

                                                 QUALIFIED PERSONS

Qualified person                                   Consulting firm                            Contribution

Richard Gowans, PEng                       Micon International Ltd.                Process, infrastructure,
                                                                               capital and operating costs
Bruce Pilcher, EurIng, CEng, FAusIMM (CP)  Micon International Ltd.            Mining and mineral reserves,
                                                                         mine capital, and operating costs
Christopher Jacobs, CEng, MIMMM            Micon International Ltd.                      Economic analysis
Jane Spooner, PGeo                         Micon International Ltd.           Lithium and feldspar markets
Benjamin Webb, PGeo (B.C.)                      BMW Geoscience LLC                    Resource estimation
Kevin Hawton, PEng                              Knight Piesold Ltd.       Tailings management design, mine
                                                                                 rock and water management
Steve Aiken, PEng                               Knight Piesold Ltd.  Environmental studies, permitting and
                                                                     social or community impact assessment

The company has three advanced-stage projects, all 100 per cent owned, providing investors with exposure to lithium, tin and indium, as well as rare-earth elements, tantalum, niobium and zirconium. Avalon is currently focusing on its Separation Rapids lithium project, Kenora, Ont., and its East Kemptville tin-indium project, Yarmouth, N.S.

We seek Safe Harbor.