Most of the technical work programs planned to optimize a 2013 feasibility study have been completed and an updated feasibility study is in preparation. Completion of this study awaits a decision on a location for the hydrometallurgical plant and revised cost estimates for this facility.

The only significant technical work remaining is to carry out a pilot plant trial of the new hydrometallurgical process flow-sheet to finalize engineering and plant design criteria. A bulk sample of Basal Zone material required for this work has been recovered, and the trial will proceed once arrangements with a suitable facility are confirmed and the funding required (in the order of C$4 million) is in place. Efforts to arrange project financing and product off-take agreements continue along with project implementation planning and permitting.

Avalon said depressed commodity prices generally, and reduced demand for rare earths in particular, have made accessing capital for large-scale resource development projects like Nechalacho very challenging in recent months.

However, the company remains optimistic that rare earth demand will recover sufficiently in 2015 to attract project financing and allow construction work to begin by next summer.

A one-month drilling program was completed at the Nechalacho site in August to acquire a further bulk sample for future metallurgical pilot plant purposes. Seven large diameter PQ drill holes totaling 1,773 meters were completed, resulting in three metric tons of Basal Zone ore material being collected. This brings the total bulk sample now in inventory to about eight metric tons. The material is being stored in Yellowknife and Lakefield, Ont.

The drill core also was assayed for rare earths as usual, and the data will be included in the resource model. The only other significant work done at the site in 2014 was a program of tree-clearing to prepare several areas for initial construction work. These areas are for the planned fuel storage site and the accommodations, the ramp portal site and an area that will be used as a quarry. This will enable immediate start-up on the construction of a larger camp and the driving of the underground ramp once permits and financing are in place.

The exploration camp is being closed for the winter as no further drilling or site development work is planned before next summer.

Metallurgy

Metallurgical test-work on a number of optimization processes for both the concentrator and hydrometallurgical plants is essentially complete.

Recent investigations on the flotation circuit in the concentrator have raised the total rare earth oxide flotation recovery to 91.5 percent (vs. the 89 percent reported December 2013 and the 78 percent in the feasibility study). Test-work on the hydrometallurgical process has further improved overall heavy rare earth oxide recoveries to 93 percent and, more importantly, has established cost-efficient processes for recovering and recycling about 80 percent of the hydrochloric acid, 90 percent of the magnesia and 100 percent of the limestone additions.

Further work on recovering a readily marketable zirconium chemical product (zirconium basic sulphate) has been successful.

A final pilot plant trial of the complete process flow sheet will be conducted using the bulk sample material now in inventory once project financing is in place. This integrated pilot plant will combine all the unit operations already developed and proven in mini-pilot campaigns plus include the reagent recovery and recycle processes to confirm the suitability of the recycled re-agents. It will also generate additional operating and engineering design data.

A suitable facility has been identified and a preliminary budget has been developed with an estimated total cost of $4 million. Engineering work for the mine and concentrator is complete and revised capital and operating costs are currently being finalized.

The process design for the final hydrometallurgical plant is being updated with all the final test results, however work on engineering and costing has been placed on temporary hold pending a final decision on the location for the hydrometallurgical plant. The original proposed site for the hydrometallurgical plant (used in the Feasibility Study) was Pine Point, NWT, but the new process design involves significant additional infrastructure requirements and chemical re-agents that are presently unavailable in the NWT.

Avalon currently has an option on a parcel of land in Geismar, La. (originally considered for the proposed rare earths refinery) that also could accommodate the new hydrometallurgical plant design. However, it has the disadvantage of high transportation costs for the large volumes of mineral concentrate that need to be shipped there by rail.

Accordingly, Avalon has been investigating less-remote alternative potential sites in western Canada for the facility with emphasis on industrial locations in Saskatchewan. Several attractive locations have been identified that can meet the necessary infrastructure requirements.

Avalon also has engaged in discussions with several suppliers of chemical re-agents in this region and management is confident that a cost-effective solution is available. A decision on a hydrometallurgical plant site location will be made upon completion of due-diligence investigations into the three most promising potential Saskatchewan locations.

This information is needed in order to complete the revised cost estimates being developed for the updated feasibility study, and the study will be completed once this information is in hand.

Permitting

The overall project development schedule remains at about three years, commencing from whenever project financing is in place to allow construction to begin.

Since receiving its Type A land use permit in April from the Mackenzie Valley Land and Water Board, Avalon also received its Type B water license in May. In addition, all necessary associated environmental management plans have been approved. These authorize Avalon to complete, in a phased approach, low impact activities including site preparation, early camp erection, portal development and associated infrastructure upgrades such as roads, power and water treatment. These pre-construction activities would take about one year to complete and are ready to begin once project financing is in place.

Technical review sessions related to the full (“Type A”) construction and operations land use permit and water license were held in Yellowknife on July 22 to 24, and Avalon has since responded to all requests for additional information. Next steps include further community engagement work, finalizing comprehensive construction and operations environmental management plans and responding to recent comments received from interveners in the MVLWB permitting process. The final public hearings will be scheduled in early 2015 once this work has been completed.

Market conditions

In 2010, China reduced export quotas for rare earths by 70 percent, initiating a period of increasing prices for rare earths and significant concern in the rest of the world about its reliance on China as a sole source of supply of these critical raw materials. Global demand at that time was 123,000 metric tons, according to one independent market analyst in Australia.

By 2013, it was reported that global demand had fallen to 115,000 metric tons due to increased substitution, recycling, inventory drawdowns from stockpiles and more efficient use of rare earths by consumers, as well as a slowdown in the overall global economy.

Prices for rare earths have fallen from the peaks reached in 2010-11; however, prices remain well above pre-2010 levels. Industrial Minerals Company of Australia forecasts that global demand for rare earths will increase to 152,500 metric tons in 2017 and to 190,000 tons by 2020; driven largely by demand in the high strength permanent magnet market. However, an oversupply of the two most abundant light rare earths: (lanthanum and cerium) is forecast in 2017 continuing to 2020, while a deficit is forecast for those rare earths in higher demand: notably praseodymium, neodymium, europium, terbium and dysprosium. If new supply sources do not soon emerge for these “critical” rare earths, then it is inevitable that there will be upward pressure on prices again before long.