Avalon Advanced Materials Inc.: Form 20-F - Filed by newsfilecorp.com

UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

FORM 20-F

☐		REGISTRATION STATEMENT PURSUANT TO SECTION 12(b) OR (g) OF THE SECURITIES EXCHANGE ACT OF 1934

OR

☒		ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

For fiscal year ended August 31, 2020

OR

☐		TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

For the transition period from _____________ to ______________

OR

☐		SHELL COMPANY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

Date of event requiring this shell company report: ______________

Commission file number: 001-35001

Avalon Advanced Materials Inc.

(Exact name of Registrant as specified in its charter)

Canada

(Jurisdiction of incorporation or organization)

130 Adelaide St. West, Suite 1901, Toronto, Ontario M5H 3P5, Canada

(Address of principal executive offices)

R. J. Andersen, Tel: 416-364-4938 Fax: 416-364-5162

130 Adelaide St. West, Suite 1901, Toronto, Ontario M5H 3P5, Canada

(Name, Telephone, E-mail and/or Facsimile number and Address of Company Contact Person)

Securities registered or to be registered pursuant to Section 12(b) of the Act: None

Securities registered or to be registered pursuant to Section 12(g) of the Act: Common Shares

If an emerging growth company that prepares its financial statements in accordance with U.S. GAAP, indicate by check mark if the registrant has elected not to use the extended transition period for complying with any new or revised financial accounting standards† provided pursuant to Section 13(a) of the Exchange Act. ☐

†The term "new or revised financial accounting standard" refers to any update issued by the Financial Accounting Standards Board to its Accounting Standards Codification after April 5, 2012.

If this is an annual report, indicate by check mark whether the Registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act).
Yes ☐ No ☒

This Annual Report contains "forward-looking statements" within the meaning of the Private Securities Litigation Reform Act of 1995 and within the meaning of applicable Canadian securities regulations. There are risks and uncertainties that could cause actual events or results to differ materially from estimated or anticipated events or results reflected in the forward-looking statements. Such statements reflect the Company's current views with respect to future events and include, among other things, statements regarding targets, estimates and/or assumptions in respect of reserves and/or resources, and are based on estimates and/or assumptions related to future economic, market and other conditions that, while considered reasonable by management, are inherently subject to risks and uncertainties, including significant business, economic, competitive, political and social uncertainties and contingencies. These estimates and/or assumptions include, but are not limited to:

Factors that could cause the Company's actual results, performance, achievements, developments or events to differ materially from those expressed or implied by forward-looking statements include, among others, the factors described or referred to under "Description of the Business - Risk Factors" herein and the following:

Most of the foregoing factors are beyond the Company's ability to control or predict. Although the Company has attempted to identify important factors that could cause actual results, performance achievements, developments or events to differ materially from those described in forward-looking statements, there may be other factors that cause actual results, performance, achievements, developments or events not to be as anticipated, estimated or intended. There can be no assurance that the estimates and/or assumptions upon which these forward-looking statements are based will occur.

Readers can identify many of these statements by looking for words such as "believe", "expects", "will", "intends", "projects", "anticipates", "estimates", "continues" or similar words or the negative thereof. There can be no assurance that the plans, intentions or expectations upon which these forward-looking statements are based will occur.

The forward-looking statements contained herein are made as of the date of this Annual Report and are expressly qualified in their entirety by this cautionary statement. Readers should not place undue reliance on the forward-looking statements, which reflect management's plans, estimates, projections and views only as of the date hereof. The Company undertakes no obligation to publicly revise these forward-looking statements to reflect subsequent events or circumstances, except as required by applicable law.

The reserve and resource estimates in this Annual Report have been prepared in accordance with the requirements of Canadian securities laws, which differ from the requirements of United States securities laws. Unless otherwise indicated, all reserve and resource estimates included in this Annual Report have been prepared in accordance with NI 43-101. NI 43-101 is a rule developed by the Canadian Securities Administrators which establishes standards for all public disclosure an issuer makes of scientific and technical information concerning mineral projects.

Canadian standards, including NI 43-101, differ significantly from the requirements of the United States Securities and Exchange Commission (the "SEC"), and reserve and resource information contained in this Annual Report may not be comparable to similar information disclosed by United States companies. In particular, and without limiting the generality of the foregoing, the term "resource" does not equate to the term "reserve". Under the SEC's Industry Guide 7 standards, mineralization may not be classified as a "reserve" unless the determination has been made that the mineralization could be economically and legally produced or extracted at the time the reserve determination is made. The SEC's Industry Guide 7 disclosure standards do not define the terms "measured mineral resources", "indicated mineral resources" or "inferred mineral resources" or other similar descriptions of the amount of mineralization in mineral deposits and United States companies have historically not been permitted to disclose mineral resources of any category in documents they file with the SEC. United States investors should also understand that "inferred mineral resources" have a great amount of uncertainty as to their existence and as to their economic and legal feasibility. It cannot be assumed that all or any part of an "inferred mineral resource" exists, is economically or legally mineable, or will ever be upgraded to a higher category. Under Canadian rules, estimated "inferred mineral resources" may not form the basis of feasibility or pre-feasibility studies except in rare cases. Disclosure of the amount of minerals contained in a resource estimate is permitted disclosure under Canadian regulations; however, the SEC normally only permits issuers to report mineralization that does not constitute "reserves" by SEC standards as in-place tonnage and grade without reference to unit measures. The requirements of NI 43-101 for identification of "reserves" are also not the same as those of the SEC, and reserves reported by Avalon in compliance with NI 43-101 may not qualify as "reserves" under SEC standards. Accordingly, information concerning mineral deposits set forth herein may not be comparable with information made public by companies that report in accordance with the SEC's Industry Guide 7 standards.

The SEC has adopted amendments to its disclosure rules to modernize the mineral property disclosure requirements for issuers whose securities are registered with the SEC. These amendments became effective February 25, 2019 (the "SEC Modernization Rules") and, following a two-year transition period, the SEC Modernization Rules will replace the historical property disclosure requirements for mining registrants that are included in SEC Industry Guide 7. Following the transition period, the Company may be subject to the SEC Modernization Rules which differ from the requirements of NI 43-101. Under the SEC Modernization Rules, the definitions of "proven mineral reserves" and "probable mineral reserves" have been amended to be substantially similar to the corresponding Canadian standards and the SEC has added definitions to recognize "measured mineral resources", "indicated mineral resources" and "inferred mineral resources" which are also substantially similar to the corresponding Canadian standards; however, there are differences in the definitions under the SEC Modernization Rules and the Canadian standards and therefore once the Company begins reporting under the SEC Modernization Rules there is no assurance that the Company's reserve and resource estimates will be the same as those reported under Canadian standards as contained in this Annual Report.

The annual audited consolidated financial statements contained in this Annual Report on Form 20-F are reported in Canadian dollars. For all periods up to and including the years ended August 31, 2020, we prepared our consolidated financial statements in accordance with International Financial Reporting Standards ("IFRS") as issued by the International Accounting Standards Board ("IASB"). Financial statements prepared in accordance with IFRS are not comparable in all respects with financial statements that are prepared in accordance with U.S. generally accepted accounting principles.

Item 3. Key Information

A. Selected Financial Data

The selected historical consolidated financial information set forth below has been derived from our annual audited consolidated financial statements.

For the years ended August 31, 2020, 2019, 2018, 2017 and 2016 ("Fiscal 2020", "Fiscal 2019", "Fiscal 2018", "Fiscal 2017" and "Fiscal 2016" respectively), we have prepared our consolidated financial statements in accordance with IFRS as issued by the IASB.

The selected historical consolidated financial information presented below is condensed and may not contain all of the information that you should consider. This selected financial data should be read in conjunction with our annual audited consolidated financial statements, the notes thereto and the sections entitled "Item 3. Key Information - D. Risk Factors" and "Item 5 - Operating and Financial Review and Prospects."

The table below sets forth selected consolidated financial data under IFRS as issued by the IASB, which differ in certain respects from the principles the Company would have followed had its consolidated financial statements been prepared in accordance with US GAAP. The information has been derived from our annual audited consolidated financial statements, including as set forth in "Item 18 - Financial Statements."

The tables below set forth selected consolidated financial data under IFRS for the years ended August 31, 2020, 2019, 2018, 2017 and 2016. In this Annual Report all dollars are expressed in Canadian dollars unless otherwise stated.

	August 31, 2020	August 31, 2019	August 31, 2018	August 31, 2017	August 31, 2016
Operating Revenues	$-	$-	$-	$-	$-
Loss before other items	(5,367,264 )	(3,386,335 )	(3,240,744 )	(3,357,321 )	(3,539,645 )
Net Loss and Total Comprehensive Loss for the Year	(5,367,264 )	(3,386,335 )	(3,240,744 )	(3,357,321 )	(3,539,645 )
Loss per Share, Basic and Diluted	(0.016 )	(0.012 )	(0.015 )	(0.018 )	(0.021 )
Total Assets	116,597,484	124,012,322	121,932,188	120,436,379	118,515,050
Total Liabilities	2,095,820	5,785,067	4,616,480	4,125,269	1,498,030
Share Capital	179,329,547	177,802,700	173,600,797	169,593,205	167,181,354
Total Equity	114,501,664	118,227,255	117,315,708	116,311,110	117,017,020
Weighted Average Number of Common Shares Outstanding	334,332,582	275,760,316	215,152,381	187,869,637	167,184,272
Dividends declared	Nil	Nil	Nil	Nil	Nil

An investment in securities of Avalon is highly speculative and involves significant risks. Exploration activities are based on professional judgments and statistically-based tests and calculations, and often yield few rewarding results. Mineral properties are often non-productive for reasons that cannot be anticipated in advance and operations may be subject to risks including labour disputes, environmental hazards, safety issues, geological issues, weather conditions and changing regulatory requirements as examples. Avalon is subject to competitive risk as its ability to finance its activities and generate profitable operations or proceeds from disposal of assets are subject to world prices for rare metals, rare earth elements ("REE"), lithium and other specialty minerals and the economic forces that influence capital markets. Any one of the following risk factors could materially affect business, financial condition and/or future operating results and prospects and could cause actual events to differ materially from those described in forward-looking statements relating to Avalon. Additional risks and uncertainties not currently identified by Avalon or that Avalon currently believes not to be material also may materially and adversely affect Avalon's business, financial condition, operations or prospects.

We have no operating revenues and a history of losses.

The Company has had no operating revenues and a history of losses, and no operating revenues are anticipated until one of the Company's projects comes into production, which may or may not occur. The Company will continue to experience losses unless and until it can successfully develop and begin profitable commercial production at one of its mining properties. There can be no assurance that the Company will be able to do so.

We have no history of mineral production.

Avalon is an exploration and development company and has no history of mining or refining mineral products from its properties. As such, any future revenues and profits are uncertain. There can be no assurance that the Nechalacho Project, the Separation Rapids Lithium Project or any other project will be successfully placed into production, produce minerals in commercial quantities or otherwise generate operating earnings. Advancing projects from the exploration stage into development and commercial production requires significant capital and time and will be subject to further technical studies, permitting requirements and construction of mines, processing plants, roads and related works and infrastructure. The Company will continue to incur losses until mining-related operations successfully reach commercial production levels and generate sufficient revenue to fund continuing operations. There is no certainty that the Company will generate revenue from any source, operate profitably or provide a return on investment in the future.

There is material uncertainty regarding our ability to continue as a going concern.

The business of mining and exploring for minerals involves a high degree of risk and there can be no assurance that current exploration programs will result in profitable mining operations. The recoverability of the carrying value of exploration and evaluation assets and the Company's ability to continue as a going concern is dependent upon the preservation of its interest in the underlying properties, the discovery of economically recoverable reserves, the achievement of profitable operations or the ability of the Company to raise alternative financing.

The Company is currently in the exploration and development stage of its properties. If the Company determines based on its most recent information that it is feasible to begin operations on its properties, the Company will be required to raise additional capital in order to develop and bring the properties into production. Our ability to raise funds will depend on several factors, including, but not limited to, current economic conditions, our properties, our prospects, metal prices, businesses competing for financing and our financial condition. There can be no assurance that we will be able to raise funds, or to raise funds on commercially reasonable terms.

The development of the Nechalacho Project and the Separation Rapids Lithium Project involve numerous uncertainties and there are no guarantees that we will be successful.

Mine development projects typically require long time frames and significant expenditures before production is possible. Bringing any of the Nechalacho Project and the Separation Rapids Lithium Project into successful operation is dependent on many factors such as:

the availability of funds to finance construction and other capital expenditures and to provide working capital;
the timing and availability of permits and other approvals to proceed with construction and to operate the mine and processing facilities;
the completion of negotiations with First Nations and other Aboriginal groups and stakeholders affected by such project;
the completion of acquisition of a property or properties for the processing facilities and the availability of infrastructure necessary for construction and operation;
the negotiation of sales or off-take contracts for the planned production from such project; and
the completion of negotiations with strategic partners for the provision of additional investment and/or the provision of technical assistance or services.

Other unanticipated problems and delays may arise in the development of the Nechalacho Project or the Separation Rapids Lithium Project and, accordingly, the Company may not be successful in establishing mining and processing operations.

Additional financing will be needed for our business operations and there are no guarantees that we will be able to raise sufficient funds.

The Company does not have sufficient funds to complete permitting, development and construction of the Nechalacho Project or the Separation Rapids Lithium Project, or to complete exploration or feasibility studies on any of its other properties. The Company believes its existing financial resources, will be adequate to fund general and administrative expenses and planned exploration and development expenses through the end of February 2021, but unanticipated expenses or other developments could cause its existing resources to be depleted prior to that time. Accordingly, the Company will need to raise additional financing, which may be sought through sales of equity or debt securities, asset sales, joint ventures, project financing or other arrangements. The recent climate for financing in the mineral industry in general and for rare earth minerals projects in particular has been difficult, and there can be no assurance that the Company will be able to complete necessary financings on a timely basis or at all. Failure to complete adequate financing on a timely basis could result in delay or indefinite postponement of the development of the Nechalacho Project or the Separation Rapids Lithium Project, and could require the Company to reduce general and administrative expenses or impair the Company's ability to continue as a going concern. Future financings may result in significant dilution to existing shareholders.

We may fail to identify joint venture partners or may fail to successfully manage joint ventures.

As part of the Company's development strategy, the Company is considering a number of alternatives to access development capital for its mineral properties, including joint ventures with strategic partners. However, there can be no assurance that the Company will be able to identify joint venture candidates or that it will succeed at effectively managing the operation of any joint venture. Unprofitable joint ventures may adversely affect the price of the Company's Common Shares and negatively affect the Company's results of operations.

Our business, results of operations and ability to raise capital may be adversely affected by the COVID-19 pandemic.

In March 2020, the World Health Organization declared the COVID-19 virus a pandemic, which has resulted in quarantines, travel restrictions, and the temporary closure of many businesses around the word. Government efforts to contain the spread of COVID-19 through city lockdowns or "stay-at-home" orders, widespread business closures, restrictions on travel and emergency quarantines, among others, have caused significant and unprecedented disruptions to the global economy and normal business operations across sectors and countries. In the first half of 2020, many businesses and social activities around the world were severely disrupted. Such disruption and the potential economic setbacks in a worldwide scale in 2020 could have a material adverse effect on our business, our results of operations and our ability to raise capital. Furthermore, if the outbreak persists or escalates, we may be subject to further negative impact on our business operations, including delays in receiving the necessary government permits and approvals, the ability to conduct field programs, the ability to conduct metallurgical testwork at third party labs and the ability to raise capital through the stock market.

The development plans of owner of the near surface resources of the Nechalacho Project may negatively impact the Company's own development plans.

During the year ended August 31, 2020, the Company sold the near-surface resources of the Nechalacho Project (which were not part of its own development plans). Although the parties have agreed to work together, and have even formed a jointly-owned company to temporarily hold the exploration permits and related authorizations, there is a risk that one company's development work could negatively impact the other's development plans. Such impacts may hinder the Company's ability to develop the Nechalacho Project.

The Preliminary Economic Assessment of the Separation Rapids Lithium Project is preliminary in nature and there is a risk that this project will not continue to a positive feasibility stage.

The Preliminary Economic Assessment ("PEA") of the Separation Rapids Lithium Project is preliminary in nature. The metallurgical processes developed for the project require further work to confirm that a commercially acceptable product can be consistently produced and sold in the marketplace. There is no certainty that the preliminary economic assessment model will be realized. There is no assurance that the Company will be able to obtain the financing necessary or gathering all the technical information needed to support the completion of a feasibility study. Even if a feasibility study is completed there is no assurance that the economic scenario envisioned therein will be sufficiently positive to warrant execution of the project.

We will need to enter into off-take agreements and failure to secure and enter into favourable off-take agreements with customers could have a material adverse effect on, and could result in delay or suspension of the development of, the Nechalacho Project and the Separation Rapids Lithium Project.

The Company intends to pursue entering into off-take agreements with industrial consumers of the minerals it intends to produce in order to have assurance of future sales of its products. It is likely that it will be necessary to have some of the off-take agreements in place in order to secure project financing for the Nechalacho Project and Separation Rapids Lithium Project in order to demonstrate the economic viability of the project to lenders. Failure to secure and enter into favourable off-take agreements with customers could have a material adverse effect on, and could result in delay or suspension of the development of these projects.

The ore types at both the Nechalacho Project and Separation Rapids Lithium Project are unique and there is a risk that the metallurgical process that we anticipate using will not perform at commercial scale as expected.

The ore types on both projects are unique for which well-established metallurgical processes have not previously been applied. Accordingly, there is a risk that the process designed at the bench and pilot scale will not perform at commercial scale as expected. The failure of such metallurgical process could materially and adversely affect the Company's expected project development and production schedules.

Title to some of our mineral properties may be challenged or defective. Aboriginal groups may raise title disputes in relation to land claims and any impairment or defect in title could have a negative impact on our results of operations and financial condition.

The Company's title to its properties may be subject to disputes or other claims including Aboriginal land title claims. Although the Company has exercised the usual due diligence with respect to determining title to properties in which it has a material interest, there is no guarantee that title to such properties will not be challenged or impugned. There may be valid challenges to the title of the Company's properties, which, if successful, could impair the Company's ability to explore, develop and/or operate its properties or to enforce its rights with respect to its properties. Aboriginal rights and title may be claimed with respect to Crown properties or other types of tenure with respect to which mining rights have been conferred. In addition, other parties may dispute the Company's title to the properties in which it has an interest and such properties may be subject to prior unregistered agreements or transfers or land claims by Aboriginal peoples, and title may be affected by undetected encumbrances or defects or government actions.

An impairment to or defect in the Company's title to its properties could have a material adverse effect on the Company's business, financial condition or results of operations. In addition, such claims, whether or not valid, will involve additional costs and expenses to defend or settle which could adversely affect the Company's profitability.

The Company will need to enter into agreements with applicable Aboriginal groups to complete the development of the Nechalacho Project. The Company has entered into an accommodation agreement with the Deninu K'ue First Nation ("DKFN") which provides for business and employment opportunities for the DKFN and contains measures to mitigate the environmental and cultural impacts of the project. The Company is seeking to enter into similar agreements with the Lutsel K'e Dene First Nation (the "LKDFN") and Yellowknives Dene First Nation (the "YKDFN"), but there is no assurance that these agreements will be completed in a timely manner or at all. Even after the accommodation agreements are entered into, the continuing co-operation of the First Nations will be required to implement the terms of the agreements and proceed with the Nechalacho Project. Any failure of co-operation by these or any other potentially impacted Aboriginal groups could result in delay of work on the Nechalacho Project. The Company also has entered into a Participation Agreement with the Northwest Territory Métis Nation ("NWTMN"). This agreement provides for training, employment, and business opportunities for the NWTMN related to the Nechalacho Project and associated facilities in the Northwest Territories. The Participation Agreement also contains measures to mitigate environmental and cultural impacts that may result from the project development.

During the year ended August 31, 2020, the DKFN's legal counsel sent a letter to the Company dated February 11, 2020, asserting that Avalon was in breach of its Accommodation Agreement with the DKFN, as the DKFN had not received advance notice regarding assignment and business opportunities related to the co-ownership agreement with Cheetah. The Company responded on February 20, 2020, explaining that the resources that were sold to Cheetah were not subject to the Agreement and accordingly Avalon was not in breach of the Accommodation Agreement. There has been no subsequent communication from the DKFN's legal counsel with respect to this matter.

The Company will need to enter into agreements with applicable Aboriginal groups to complete the development of the Separation Rapids Lithium Project. The project is located in the traditional land use area of the Wabaseemoong Independent Nations ("WIN") for which they have stewardship under an agreement with the Province. The Company first signed an MOU with WIN in 1999 which was renewed when the project was 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 project business opportunities. The Company has also initiated dialogue with the Métis Nation of Ontario who hold Aboriginal rights in the area.

We may need to acquire additional properties for our hydrometallurgical plant and separation plant, which may significantly delay the development of the Nechalacho Project as a whole.

As part of the Nechalacho Project, in the current Feasibility Study ("FS"), the Company planned for a hydrometallurgical plant to be located at Pine Point, 85 kilometres east of Hay River, Northwest Territories and a rare earth refinery to be located in Geismar, Louisiana. It is presently considering alternative sites for both facilities. Any grants and surface leases, if granted, may be subject to the rights of holders of exploration claims or other subsurface rights, which may be inconsistent with the use of the property for the hydrometallurgical plant. In addition, economic factors such as power cost and infrastructure factors such as the adequacy of road and/or rail access may cause the Company not to proceed with acquiring the Pine Point surface leases.

The Company's purchase option on the land parcel in Geismar, Louisiana expired on December 15, 2014. Several sites in western Canada are under consideration for the location of an updated hydrometallurgical plant.

If the properties in Pine Point, Geismar or a suitable alternative are not acquired, the Company will need to identify and acquire another suitable site or sites for its hydrometallurgical plant and rare earth refinery, which may significantly delay the development of the Nechalacho Project as a whole.

In addition, the Company will also need to obtain a parcel of land similar to the previously identified land parcel in Geismar, Louisiana, or elsewhere, to build its own rare earth refinery.

Our feasibility study relies upon estimates based on assessments of market conditions and available technical information concerning the Nechalacho Project, which are only historical projections and are inherently uncertain.

The Company's expected production schedules, capital costs, engineering and construction estimates and operating costs which are included in this Annual Report are contained in the Feasibility Study which was completed in 2013. The FS relied upon estimates based on assessments of market conditions at that time and available technical information concerning the Nechalacho Project. Accordingly, the results indicated by the FS are historical projections only and are inherently uncertain. In particular, actual capital costs may significantly exceed those estimated by the FS, and engineering and construction estimates and schedules set forth in the FS may prove materially inaccurate.

Anticipated operating costs and production schedules set forth in the FS are based upon a variety of factors, including:

anticipated tonnage, grades and metallurgical characteristics of the ore to be mined and processed;
anticipated recovery rates of REE and other minerals from the ore;
cash operating costs of comparable facilities, supplies/consumables and equipment;
anticipated climatic conditions; and
forecasts for foreign exchange markets, and discount rates.

Capital costs, operating costs, production and economic returns, and other estimates contained in studies or estimates prepared by or for the Company in the future may differ significantly from those anticipated by the Company's current estimates, and there can be no assurance that the Company's actual capital and operating costs will not be higher than currently anticipated. The Company's actual costs and production may vary from estimates for a variety of reasons, including: lack of availability of raw material or equipment; unexpected construction or operating problems; metallurgical performance; unanticipated geologic features; short-term operating factors; delays in delivery of consumables; revisions to mine plans; risks and hazards associated with mining; natural phenomena, such as inclement weather conditions, water availability, floods, and earthquakes; and unexpected labour shortages or strikes. Costs may also be affected by a variety of factors, including changing waste-to-ore ratios, ore grade metallurgy, labour costs, the cost and consumption rate of commodities, general inflationary pressures and currency exchange rates. Many of these factors are beyond the Company's control. Failure to achieve estimates or material increases in costs could have an adverse impact on the Company's future cash flows, business, results of operations and financial condition.

Furthermore, delays in the construction and commissioning of mining projects or other technical difficulties may result in even further capital expenditures being required. Any delay in the development of a project or cost overruns or operational difficulties once the project is developed may have a material adverse effect on the Company's ability to finance or complete construction of the Nechalacho Project and on the Company's business, results of operations and financial condition.

Changes in the market price of rare earth minerals, which in the past has fluctuated widely, will affect the profitability of our operations and financial condition.

The Company's revenues, if any, from the Nechalacho Project and Separation Rapids Lithium Project, are expected to be derived in large part from the mining and sale of rare metals and minerals from the Basal Zone deposit. Demand for and the prices of those commodities has fluctuated widely, particularly in recent years, and is affected by numerous factors beyond the Company's control, including international economic and political conditions (such as the complaint filed with the World Trade Organization and won by the United States, the European Union and Japan against China's REE export restrictions in 2014), expectations of inflation, international currency exchange rates, interest rates, global or regional consumption patterns, speculative activities, levels of supply and demand, increased production of rare metals and minerals due to new mine developments and improved mining and production methods, availability and costs of lithium, REE and other rare mineral substitutes; lithium, REE and other rare mineral and other stock levels maintained by producers and others and inventory carrying costs. The effect of these factors on the price of rare metals and minerals and therefore the Company's ability to finance the construction of the Nechalacho Project or the Separation Rapids Lithium Project and economic viability of the Company's operations cannot be accurately predicted.

REE prices increased significantly during 2010 and most of 2011 and experienced a significant drop in 2012, due in part to a reported reduction in speculative buying of REE products as concerns about continuing price escalation abated. Between 2012 and 2015 prices continued to slowly fall and remained steady from mid-2015 to late 2016. Prices have begun to increase for many of the REEs between 2017 and 2020, but only marginally for "non-magnet" REEs. Future price trends for rare earths still depend on decisions made in China. China remains the dominant producer at approximately 90% of supply. Prices could continue to increase as demand increases and if China continues to restrict output from illegal producers and continues to restrict output from producers who do not follow environmental regulations. Prices could be maintained or even fall as demand increases if China decides to release stockpiles of rare earths it has apparently accumulated during the last few years, or if it instructs government approved producers to increase supply.

Demand for REE products may be impacted by demand for products incorporating rare earths, including hybrid and electric vehicles, wind power equipment and other clean technology products, as well as demand in the general automotive and electronic industries. Lack of growth in these markets may adversely affect the demand for REE products, which would have a material adverse effect on the Nechalacho Project and the Company's business. In contrast, extended periods of high commodity prices may create economic dislocations that may be destabilizing to rare earth minerals supply and demand. Strong REE prices, as well as real or perceived disruptions in the supply of REE, also create economic incentives to identify or create alternate technologies that ultimately could depress future long-term demand for REE products, and at the same time may incentivize development of additional mining properties to produce REE. For example, automobile manufacturers have previously announced plans to develop motors for electric and hybrid cars that do not require REE products due to concerns about the available supply of rare earths. If the automobile industry or other industries reduce their reliance on rare earth products, the resulting change in demand could have a material adverse effect on the Company's business. In particular, if prices or demand for rare earths were to decline, this could impair the Company's ability to obtain financing for the Nechalacho Project and its ability to find purchasers for its products at prices acceptable to the Company.

Volatility in lithium prices and lithium demand may make it commercially unfeasible for the Company to develop its Separation Rapids Lithium Project.

The development of the Separation Rapids Lithium Project is dependent on the continued growth of the lithium market, and the continued increased demand for lithium chemicals by emerging producers of electric vehicles and other users of lithium-ion batteries. These producers and the related technologies are still under development and a continued sustained increase in demand is not certain. To the extent that such demand does not manifest itself, and the lithium market does not continue to grow, or existing producers increase supply to satisfy this demand, then the Company's ability to develop its Separation Rapids Lithium Project will be adversely affected. The Company's lithium exploration and development activities may be significantly adversely affected by volatility in the price of lithium. Mineral prices fluctuate widely and are affected by numerous factors beyond the Company's control such as global and regional supply and demand, interest rates, exchange rates, inflation or deflation, fluctuation in the value of the United States dollar and foreign currencies, and the political and economic conditions of mineral-producing countries throughout the world. The exact effect of these factors cannot be accurately predicted, but the combination of these factors may result in the Company's lithium activities not producing an adequate return on invested capital to be profitable or viable.

We operate in a highly competitive industry and some of our competitors may engage in predatory pricing behaviour or manipulation of the available supply of REE or lithium.

An increase in the global supply of rare metal and REE products and lithium, dumping and predatory pricing by our competitors may materially adversely affect our ability to raise capital and construct and profitably operate the Nechalacho Project or the Separation Rapids Lithium Project. The pricing and demand for rare metal and REE products and lithium is affected by a number of factors beyond the Company's control, including growth of economic development and the global supply and demand for rare metal and REE products. Currently China provides the majority of the world's supply of REE. In 2010 China reduced its export quotas and imposed heavier taxes on the production/or export of REE. These steps resulted in REE scarcity and significant increases in the prices of rare earth elements and minerals during 2011, with a peak reached in August 2011 for most elements. These high rare earth prices caused demand to contract and prices to fall during 2012 and early 2013. Prices have started to recover in early 2017 with the increased demand for magnets for motors of hybrid and electric vehicles, but only marginally. Higher rare earth prices in 2020 and beyond could bring about renewed interest in exploration and development of REE projects which, if brought to production, would, in the long term, increase the supply of REE and lead to downward pressure on prices. Lithium prices have dropped by approximately 30% from 2019 to 2020. Further, the prospect of the Nechalacho Project and the Separation Rapids Lithium Project and other development projects achieving production may lead our competitors to engage in predatory pricing behaviour or manipulation of the available supply of REE and/or lithium. Any increase in the amount of rare earth products exported from China or from mines outside China, or produced in South America or Australia in the case of lithium, and increased competition may result in price reductions, reduced margins and loss of potential sales, any of which could materially adversely affect the profitability of the Nechalacho Project or our ability to further pursue the Separation Rapids Lithium Project. As a result of these factors, the Company may not be able to compete effectively against future competitors.

Any unexpected costs or delays in the commercialization of rare earth products could have a material adverse effect on our ability to finance construction of and successfully operate the Nechalacho Project.

The success of the Nechalacho Project will depend, in part, on the establishment of new markets by the Company or third parties for certain rare earth products that may be in low demand, the creation of new markets and the successful commercialization of REE products in existing and emerging markets. Any unexpected costs or delays in the commercialization of any of the foregoing products and applications could have a material adverse effect on our ability to finance construction of and successfully operate the Nechalacho Project.

Our mineral resource and mineral reserves are only estimates and are subject to significant risks and uncertainties.

Mineral resource and mineral reserve estimates are based upon estimates made by Company personnel and independent geologists. These estimates are inherently subject to uncertainty and are based on geological interpretations and inferences drawn from drilling results and sampling analyses and may require revisions based on further exploration or development work. There is no certainty that any of the mineral resources or mineral reserves identified on the Nechalacho Project or Separation Rapids Lithium Project will be realized, that any anticipated level of recovery of minerals will in fact be realized, or that an identified mineral reserve or mineral resource will ever qualify as a commercially mineable (or viable) deposit which can be legally and economically exploited. Evaluations of drilling results are ongoing, but until a deposit is actually mined and processed, the quantity of mineral resources and mineral reserves and grades must be considered as estimates only.

In addition, the grade of mineralization which may ultimately be mined may differ from that indicated by drilling results and such differences could be material. The quantity and resulting valuation of mineral reserves and mineral resources may also vary depending on, among other things, metal prices (which may render mineral reserves and mineral resources uneconomic), cut-off grades applied and estimates of future operating costs (which may be inaccurate). Production can be affected by such factors as permitting regulations and requirements, weather, environmental factors, unforeseen technical difficulties, unusual or unexpected geological formations and work interruptions. Any material change in quantity of mineral resources, mineral reserves, grade, or stripping ratio may also affect the economic viability of any project undertaken by the Company. In addition, there can be no assurance that metal recoveries in small scale, and/or pilot laboratory tests will be duplicated in a larger scale test under on-site conditions or during production.

The Company's estimated mineral resources and mineral reserves should not be interpreted as assurances of commercial viability or potential or of the profitability of any future operations. Readers should be cautioned not to place undue reliance on these estimates. The Company cannot be certain that its mineral resource and mineral reserve estimates are accurate and cannot guarantee that it will recover the expected quantities of metals. Future production could differ dramatically from such estimates for the following reasons:

actual mineralization or ore grade could be different from those predicted by drilling, sampling, feasibility studies or technical reports;
increases in the capital or operating costs of the mine;
changes in the life-of-mine plan;
the grade of ore may vary over the life of the mine and the Company cannot give any assurances that any particular mineral reserve estimate will ultimately be recovered; or
metallurgical performance could differ from forecast.

The occurrence of any of these events may cause the Company to adjust its mineral resource and reserve estimates or change its mining plans, which could negatively affect the Company's financial condition and results of operations. Moreover, short-term factors, such as the need for additional development of the ore body or the processing of new or different grades, may adversely affect the Company.

We may not be able to obtain all required permits and licenses to place our properties into production.

The construction and operation of the Nechalacho Project and the other exploration and development operations of the Company, such as on the Separation Rapids Lithium Project, require licenses and permits from various governmental authorities. Obtaining the necessary governmental permits is a complex and time consuming process involving numerous jurisdictions. There can be no assurance that the Company will be able to obtain all necessary licenses and permits that may be required to carry out exploration, development, mining and processing operations at its projects. If the Company proceeds to production on the Nechalacho Project or any other project, licenses and permits may contain specific operating conditions and there can be no assurance that these conditions will not result in material increases in capital or operating costs or reductions in anticipated production, or that the Company will be able to comply with any such conditions. Costs related to applying for and obtaining permits and licenses or complying with the requirements they impose may be prohibitive and could delay planned exploration, development, construction or operation activities. Failure to comply with applicable laws, regulations and permitting requirements or with the conditions contained in licenses or permits may result in enforcement actions, including orders issued by regulatory or judicial authorities, causing operations to cease or be curtailed, and may include corrective measures requiring capital expenditures, installation of additional equipment, or remedial actions.

Parties engaged in exploration, development, mining or processing operations may be required to compensate those suffering loss or damage by reason of those activities and may have civil or criminal fines or penalties imposed for violations of applicable laws or regulations. Amendments to current laws, regulations and permits governing operations and activities of mining companies, or more stringent implementation thereof, could have a material adverse impact on our operations and cause increases in capital expenditures or production costs, reductions in levels of production at producing properties or require abandonment or delays in the development of new mining properties.

Our activities are subject to environmental laws and regulations that may increase our costs of doing business and restrict our operations.

All phases of the Company's exploration and development activities are subject to regulation by governmental agencies under various environmental laws in the various jurisdictions in which it operates. These laws and the regulations adopted thereunder address emissions into the air, discharges into water, management of waste, management of hazardous substances, the transportation of hazardous and/or radioactive substances, protection of natural resources, antiquities and endangered species, and reclamation of lands disturbed by mining operations. Environmental legislation and regulation is evolving in a manner which will require stricter standards and enforcement, increased fines and penalties for non-compliance, more stringent environmental assessments of proposed projects, and a heightened degree of responsibility for companies and their officers, directors and employees. Compliance with environmental laws and regulations may require significant capital outlays on behalf of the Company and may cause material changes or delays in the Company's intended activities. There is no assurance that future changes in environmental regulation, if any, will not adversely affect the Company's operations or result in substantial costs and liabilities to the Company in the future. Furthermore, environmental hazards which are unknown to the Company at present and which have been caused by previous or existing owners or operators may exist on the Company's properties.

We do not maintain insurance with respect to certain high-risk activities, which exposes us to significant risk of loss.

In the course of exploration and development of, and production from, mineral properties, certain risks, and in particular, unexpected or unusual geological operating conditions including rock bursts, cave-ins, fire, flooding and earthquakes may occur. It is not always possible to fully insure against such risks as a result of high premiums or other reasons. Should such events arise, they could reduce or eliminate any future profitability and result in increasing costs and a decline in the value of the Company's securities.

Competition for recruitment and retention of qualified personnel, for which we compete with other exploration companies, many of which have greater financial resources than us, and a shortage of equipment and supplies could adversely affect our ability to operate our business.

The Company will be dependent on various supplies, equipment, parts and labour and the services of contractors to carry out construction of the Nechalacho Project and to carry out its other exploration and development projects such as the Separation Rapids Lithium Project. The availability and cost of such supplies, equipment, parts or labour or the services of contractors could have a material adverse effect on the Company's ability to successfully construct and operate the Nechalacho Project and carry out its other exploration and development activities on the Separation Rapids Lithium Project.

The loss of key management personnel may adversely affect our business and results of operations.

The Company is dependent on the services of key executives including the Company's President and Chief Executive Officer and other highly skilled and experienced executives and personnel focused on managing the Company's interests and the advancement of the Nechalacho Project and other projects such as the Separation Rapids Lithium Project, as well as the identification of new opportunities for growth and funding. Due to the Company's relatively small size, the loss of these persons or the Company's inability to attract and retain additional highly skilled employees required for the development of the Company's activities may have a material adverse effect on the Company's business or future operations.

The mineral industry is highly speculative and involves substantial risks.

Mineral exploration and development is highly speculative, and certain inherent exploration risks could have a negative effect on the Company. Most exploration projects do not result in the discovery of commercially mineable ore deposits and no assurance can be given that any particular level of recovery of ore reserves will be realized or that any identified mineral deposit will ever qualify as a commercially mineable (or viable) ore body which can be legally and economically exploited. Estimates of reserves, mineral deposits and production costs can also be affected by such factors as environmental permitting regulations and requirements, weather, environmental factors, unforeseen technical difficulties, unusual or unexpected geological formations and work interruptions. Material changes in ore reserves, grades, stripping ratios or recovery rates may affect the economic viability of any project.

The Company's future growth and productivity will depend, in part, on its ability to identify and acquire additional mineral rights, and on the costs and results of continued exploration and development programs. Mineral exploration is highly speculative in nature and is frequently non-productive. Substantial expenditures are required to:

establish ore reserves through drilling and metallurgical and other testing techniques;
determine metal content and metallurgical recovery processes to extract metal from the ore;
conduct environmental, social, economic and technical studies; and
construct, renovate or expand mining and processing facilities.

In addition, if the Company discovers a mineral deposit, it would take several years from the initial phases of exploration until production is possible. During this time, the economic feasibility of production may change. As a result of these uncertainties, there can be no assurance that the Company will successfully acquire additional mineral rights.

We operate in a highly competitive industry.

The mineral exploration and development industry is intensely competitive. Significant competition exists for the marketing of the minerals that the Company intends to produce as well as the acquisition of mineral concessions, claims, leases and other mineral interests. The Company may be at a competitive disadvantage in arranging for the sale of products intended to be produced at the Nechalacho Project or other properties, such as the Separation Rapids Lithium Project, or in acquiring additional mining properties because it must compete with other individuals and companies, many of which have greater financial resources, operational experience and technical capabilities than the Company. The Company may also encounter increasing competition from other mining companies in its efforts to hire experienced mining professionals. Competition for exploration resources at all levels is currently very intense, particularly affecting the availability of manpower, drill rigs and helicopters. Increased competition could adversely affect the Company's ability to attract necessary capital funding or acquire suitable producing properties or prospects for mineral exploration in the future.

Our exploration activities are subject to various federal, provincial, state and local laws and regulations.

The Company's operations and exploration and development activities in Canada and the United States are subject to extensive federal, state, provincial, territorial and local laws and regulations governing various matters, including:

environmental protection;
management, transportation and use of toxic, hazardous and/or radioactive substances and explosives;
management of tailings and other wastes generated by the Company's operations;
management of natural resources;
exploration and development of mines, production and post-closure reclamation;
exports;
price controls;
taxation;
regulations concerning business dealings with Aboriginal groups;
labour standards and occupational health and safety, including mine safety; and
historic and cultural preservation.

Failure to comply with applicable laws and regulations may result in civil or criminal fines or penalties or enforcement actions, including orders issued by regulatory or judicial authorities enjoining or curtailing operations or requiring corrective measures, installation of additional equipment or remedial actions, any of which could result in the Company incurring significant expenditures. The Company may also be required to compensate private parties suffering loss or damage by reason of a breach of such laws, regulations or permitting requirements. It is also possible that future laws and regulations, or changes to or a more stringent enforcement of current laws and regulations by governmental authorities, could cause additional expense, capital expenditures, restrictions on or suspensions of the Company's operations and delays in the development of the Company's properties.

Exploration activities depend on adequate infrastructure and we cannot be assured that our properties will maintain adequate infrastructure.

Mining, processing, development and exploration activities depend on adequate infrastructure. Reliable roads, bridges, power sources and water supply are important determinants, which affect capital and operating costs. Unusual or infrequent weather phenomena, sabotage, government or other interference in the maintenance or provision of such infrastructure could adversely affect the Company's operations, financial condition and results of operations.

Mining and resource exploration is inherently hazardous and subject to conditions or events beyond our control, which could have a material adverse effect on our business and plans.

Mineral exploration, the development and construction and operation of mines and mining involves many risks, which even a combination of experience, knowledge and careful evaluation may not be able to overcome. The work which the Company is undertaking and proposes to undertake will be subject to all the hazards and risks normally incidental to exploration, development and production of resources, any of which could result in work stoppages and damage to persons or property or the environment and possible legal liability for any and all damage. Fires, power outages, labour disruptions, flooding, explosions and cave-ins, are risks involved in the operation of mines and the conduct of exploration programs. Although the Company has secured liability insurance and will, when appropriate, secure property insurance in an amount which it considers adequate, the nature of these risks is such that liabilities might exceed policy limits, the liabilities and hazards might not be insurable, or the Company might elect not to insure itself against such liabilities due to high premium costs or other reasons, in which event the Company could incur significant costs or uninsured losses that could have a material adverse effect upon its financial condition.

Changes in critical accounting estimates could adversely affect financial results.

Avalon's most significant accounting estimates relate to the carrying value of the Company's metal and mineral property assets. The accounting policies in relation to metal and mineral properties are set out in full in the Company's annual financial statements. Management regularly reviews the net carrying value of each metal and mineral property. Where impairment indicators exist, management assesses if carrying value can be recovered. Management's estimates of metal and mineral prices, mineral resources and operating, capital and reclamation costs are subject to certain risks and uncertainties which may affect the recoverability of metal and mineral property costs. Although management has made its best estimate of these factors, it is possible that changes could occur in the near term, which could adversely affect the future net cash flows to be generated from the properties. Other significant estimates relate to accounting for stock based compensation and warrant valuation. Option and warrant pricing models require the input of highly subjective assumptions including the expected price volatility. Changes in the subjective input assumptions can materially affect the fair value estimate, and therefore the existing models do not necessarily provide a reliable single measure of the fair value of the Company's stock options granted/vested during the year, or of the value of the Company's derivative financial instruments.

Certain officers and directors may be in a position of conflicts of interest.

Certain of the Company's directors and officers also serve as directors and/or officers of other companies or other managerial positions involved or related to natural resource exploration and development and consequently there exists the possibility for such directors and officers to be in a position of conflict. Any decision made by any of such directors and officers involving the Company will be made in accordance with their duties and obligations to deal fairly and in good faith with a view to the best interests of the Company and its shareholders. In addition, each of the Company's directors is required to declare any interest in any matter in which such directors may have a conflict of interest in accordance with the procedures set forth in the Canada Business Corporations Act ("CBCA") and other applicable laws.

We are subject to cybersecurity risks.

The Company is reliant on its information technology ("IT") systems for its operations. User access and security of all Company sites and IT systems can be critical elements to its operations, as is cloud security, security of all of the Company's IT systems, and protection against cyber security incidents. Any IT failure pertaining to availability, access or system security could potentially result in disruption of the activities of the Company and its personnel, and could adversely affect the reputation, operations or financial performance of the Company.

Potential risks to the Company's IT systems could include unauthorized attempts to extract sensitive business information, confidential or personal information, denial of access extortion, corruption of information or disruption of business processes, or by inadvertent or intentional actions by the Company's employees or vendors. A cybersecurity incident resulting in a security breach or failure to identify a security threat could disrupt business and could result in the loss of sensitive, confidential or personal information or other assets, as well as litigation, regulatory enforcement, violation of privacy or securities laws and regulations, and remediation costs, all of which could materially impact the Company's business or reputation.

We believe that we may be a "passive foreign investment company" for the current taxable year which may result in materially adverse United States federal income tax consequences for United States investors.

U.S. investors in the Company's common shares and warrants should be aware that the Company believes it was classified as a "passive foreign investment company" (a "PFIC") under the meaning of Section 1297 of the United States Internal Revenue Code of 1986, as amended during its tax year ended August 31, 2020, and based on current business plans and financial expectations, the Company believes that it may be a PFIC for the current and future taxable years. If the Company is a PFIC for any taxable year during which a United States person holds its common shares or warrants it may result in materially adverse United States federal income tax consequences for such United States person. The potential consequences include, but are not limited to, re-characterization of gain from the sale of the common shares, warrants, and those common shares received upon exercise of warrants as ordinary income and the imposition of an interest charge on such gain and on certain distributions received on the common shares or common shares received upon exercise of warrants. Certain elections may be available under U.S. tax rules to mitigate some of the adverse consequences of holding shares in a PFIC.

A U.S. taxpayer that makes a "qualified electing fund" (a "QEF") election with respect to the Company generally will be subject to U.S. federal income tax on such U.S. taxpayer's pro rata share of the Company's "net capital gain" and "ordinary earnings" (as specifically defined and calculated under U.S. federal income tax rules), regardless of whether such amounts are actually distributed by the Company. U.S. taxpayers should be aware, however, that there can be no assurance that the Company will satisfy record keeping requirements under the QEF rules or that the Company will supply U.S. taxpayers with required information under the QEF rules, if the Company is a PFIC and a U.S. taxpayer wishes to make a QEF Election. Alternatively, a U.S. taxpayer may make a "mark-to-market election" (a "Mark-to-Market Election") if the Company is a PFIC and the common shares are "marketable stock" (as specifically defined). A U.S. taxpayer that makes a Mark-to-Market Election generally will include in gross income, for each taxable year in which the Company is a PFIC, an amount equal to the excess, if any, of (a) the fair market value of the common shares as of the close of such taxable year over (b) such U.S. taxpayer's adjusted tax basis in the common shares.

This risk factor is qualified in its entirety by the discussion herein under the heading "Certain United States Federal Income Tax Consequences."

Investors should consult their own tax advisor regarding the PFIC rules and other U.S. federal income tax consequences of the acquisition, ownership, and disposition of common shares and warrants.

We are subject to foreign currency fluctuations.

It is expected that a significant portion of the Company's revenue from the sale of its products from the Nechalacho Project will likely be priced in U.S. dollars, whereas most of its operating costs will likely be incurred in Canadian dollars and other international currencies. In addition, a significant portion of the capital costs for the construction of the mining plant at the Nechalacho Project will also likely be priced in U.S. dollars. The fluctuation in the exchange rate between the U.S. dollar and the Canadian dollar and other international currencies may have a significant impact on the future profitability of the Company and it may also significantly increase or decrease the capital costs for the Nechalacho Project.

Our Common Shares have experienced volatility in share price and there can be no assurance that an active market for the Company's securities will be sustained.

In recent years, the securities markets in Canada have experienced a high level of price and volume volatility and the market price of securities of many companies, particularly those considered development stage companies, have experienced wide fluctuations in price which would not have necessarily been related to the operating performance, underlying asset values or prospects of such companies.

The market price of the Company's securities may fluctuate significantly based on a number of factors, some of which are unrelated to the financial performance or prospects of the Company. These factors include macroeconomic developments in North America and globally, market perceptions of the attractiveness of particular industries, short-term changes in commodity prices, other precious metal prices, the attractiveness of alternative investments, currency exchange fluctuation, the political environment and the Company's financial condition or results of operations as reflected in its financial statements. Other factors unrelated to the performance of the Company that may have an effect on the price of the securities of the Company include the following: the extent of analytical coverage available to investors concerning the business of the Company may be limited if investment banks with research capabilities do not follow the Company's securities; lessening in trading volume and general market interest in the Company's securities may affect an investor's ability to trade significant numbers of securities of the Company; the size of the Company's public float may limit the ability of some institutions to invest in the Company's securities; the Company's operating performance and the performance of competitors and other similar companies; the public's reaction to the Company's press releases, other public announcements and the Company's filings with the various securities regulatory authorities; changes in estimates or recommendations by research analysts who track the Company's securities or the shares of other companies in the resource sector; the arrival or departure of key personnel; acquisitions, strategic alliances or joint ventures involving the Company or its competitors; the factors listed in this Form 20-F under the heading "Cautionary Statement Regarding Forward-Looking Statements"; and a substantial decline in the price of the securities of the Company that persists for a significant period of time could cause the Company's securities to be delisted from any exchange on which they are listed at that time, further reducing market liquidity. If there is no active market for the securities of the Company, the liquidity of an investor's investment may be limited and the price of the securities of the Company may decline. If such a market does not develop, investors may lose their entire investment in the Company's securities.

Additional financing may be needed for our business operations which may lead to dilution of our current shareholders.

The Company will require additional funds to fund further exploration and/or development activities or to fulfill its obligations under any applicable agreements. If the Company raises additional funding by issuing additional equity securities, such financing will dilute the holdings of the Company's shareholders. Future sales of common shares or warrants of the Company in public or private markets could adversely affect the trading price of the Company's common shares and its ability to continue to raise funds by new offerings of common shares or warrants.

We do not currently intend to pay cash dividends.

The Company has not paid any dividends on its Common Shares. Any decision to pay dividends on its Common Shares in the future will be dependent upon the financial requirements of the Company to finance future growth, the financial condition of the Company and other factors which the Company's Board of Directors may consider appropriate in the circumstances.

We are a foreign corporation and most of our directors and officers are outside of the United States, which may make enforcement of civil liabilities difficult.

The Company is a Canadian corporation and U.S. investors may have difficulty bringing actions and enforcing judgments under U.S. securities laws. Investors in the United States or in other jurisdictions outside of Canada may have difficulty bringing actions and enforcing judgments against the Company, its directors, its executive officers and some of the experts named in this Annual Report based on civil liabilities provisions of the federal securities laws or other laws of the United States or any state thereof or the equivalent laws of other jurisdictions of residence outside of Canada.

There is no market for our warrants.

There is no existing trading market for warrants to purchase the common shares of the Company. As a result, there can be no assurance that a liquid market will develop or be maintained for those securities, or that an investor will be able to sell any of those securities at a particular time (if at all). The Company may not list any of its warrants on any Canadian or U.S. securities exchange, and the Common Shares could be delisted or suspended. The liquidity of the trading market in those securities, and the market price quoted for those securities, may be adversely affected by, among other things:

changes in the overall market for those securities;
changes in the Company's financial performance or prospects;
changes or perceived changes in the Company's creditworthiness;
the prospects for companies in the Company's industry generally;
the number of holders of those securities;
the interest of securities dealers in making a market for those securities; and
prevailing interest rates.

Item 4. Information on the Company

A. History and Development of the Company

The Company was amalgamated on July 24, 1991 under the British Columbia Company Act (now the British Columbia Business Corporations Act ("BCA") under the name Keith Resources Ltd. pursuant to the amalgamation of Rockridge Mining Company and Meadfield Mining Corp..

On September 29, 1994, the Company consolidated its share capital on a five-for-one basis and changed its name to Avalon Ventures Ltd..

On July 18, 2005, the Company carried out a transition under the BCA by filing Notice of Articles and at the same time adopted new Articles to bring them in line with the requirements and alternatives available under the BCA, including increasing its authorized share structure to an unlimited number of common shares without par value and 25,000,000 preferred shares without par value. The new Articles also reduced the percentage of votes required from 75% to 66 2/3% to pass special and separate resolutions and gave authority to the Board of Directors to make capital alterations and changes to the Company's name as permitted under the BCA.

On February 17, 2009, the Company changed its name to Avalon Rare Metals Inc..

On February 9, 2011, the Company continued under the CBCA.

On February 24, 2016, the Company changed its name to Avalon Advanced Materials Inc..

The Company's head and registered office is located at Suite 1901, 130 Adelaide Street West, Toronto, Ontario, M5H 3P5, (416) 364-4938.

The Company is a reporting issuer in all of the provinces (except for the Province of Quebec) and territories of Canada. The Company's shares are listed and posted for trading on the Toronto Stock Exchange in Canada (the "TSX" or the "Exchange") under the symbol "AVL", trade on the OTCQB® Venture Market (the "OTCQB") in the United States under the symbol "AVLNF" and are also traded on the Frankfurt Stock Exchange in Germany under the symbol "OU5".

The Company operates principally in Canada and is currently extra-provincially registered to carry on business in Ontario, British Columbia, Northwest Territories and Nova Scotia.

Avalon is a mineral exploration and development company with a focus on rare metals and minerals with high technology and environmentally beneficial applications. Avalon operates primarily in Canada with a focus on "Technology Metals" or "Cleantech Materials", including lithium, tantalum, cesium, indium, gallium, germanium, tin, rare earth elements ("REE"), yttrium and zirconium.

The Company has embraced the principles of sustainability as core to its business practice and has made a strong commitment toward implementing corporate social responsibility ("CSR") best practices. Contemporaneously with this filing, the Company is releasing its ninth comprehensive sustainability report (the "2020 Sustainability Report").

The Company believes that industrial demand for the advanced materials products it seeks to produce, particularly lithium compounds, is growing rapidly due to their importance in an expanding array of applications in new clean technology notably energy storage and electric vehicles.

The Company is in the process of exploring or developing three of its five mineral resource projects, including the re-activation of one early-stage project: Lilypad Cesium-Tantalum. For at least the last three fiscal years the Company has expended substantially all of its efforts on the development of its Nechalacho Rare Earth Elements Project, the East Kemptville Tin-Indium Project and the Separation Rapids Lithium Project. The Company's principal capital investments have been in its resource properties, with expenditures totalling $635,546, $1,031,100 and $2,272,883 in Fiscal 2020, 2019, and 2018 respectively.

Nechalacho Project

The Company completed its feasibility study ("FS") on the Nechalacho Project in April 2013, and its Report of Environmental Assessment (the "Report of EA") was approved by the Minister of Aboriginal Affairs and Northern Development Canada ("AANDC") in November 2013. Nechalacho is the Company's most advanced project, although it has been inactive over the past few years following the decline in rare earth prices in 2014-15, after China relaxed its export quotas. A preliminary site preparation water license and land use permit has been issued which provides approval for first year site preparation work at the Nechalacho site. Full construction and operational license and permit for the Nechalacho site will take approximately 4-6 months to obtain, once the Company commences the final application process.

Since the completion of the FS, Avalon has been focused on optimization work on the project development model, including metallurgical process optimization work and mine plan optimization. This has included work on recovery of other mineral products, notably zirconium. Although preliminary estimates of the capital and operating costs associated with these new processes may be higher than those contained in the FS, it is anticipated that the increased revenues from the additional "heavy" rare earths, europium through lutetium ("HREE") production may yield an overall improvement in project economics. Demand for some of the other rare metals present in the Nechalacho resource such as zirconium, may see demand increases to justify further work on product development. Markets for rare earth elements, however, have remained quiet since the FS was issued and it is only since the start of 2017 that prices for the "Magnet REE "(Nd, Pr, Dy) have begun to increase due to steadily growing demand for high-strength permanent magnets for motors of hybrid and electric vehicles.

In Fiscal 2016 Avalon conducted metallurgical testwork investigations related to the potential recovery of zirconium and production of marketable quality zirconium basic sulphate ("ZBS") and zirconium oxychloride ("ZOC") products. During Fiscal 2017 a brief site visit was conducted to do the camp maintenance work and do some sampling on known lithium occurrences on the northern part of the property. Reworking of the process design criteria, plant designs and cost estimates for both the Concentrator and Hydrometallurgical Plant, along with any revisions to the mine plan, continued to be developed internally.

In Fiscal 2018, the renewed demand for Nd-Pr motivated Avalon to re-activate the project to look specifically at near term, small-scale development potential in the near-surface Nd/Pr-rich T-Zone and Tardiff Zones, which were not part of the 2013 Feasibility Study development model.

During Fiscal 2019, the Company and a private Australian company, Cheetah Resources Pty Ltd. ("Cheetah"), entered into a definitive agreement (the "Agreement"), under which Cheetah acquired ownership of the near surface resources principally in the T-Zone and Tardiff Zones of the property ("Upper Zone Resources") for a total cash consideration of $5 million. Cheetah was subsequently acquired by Vital Metals Limited, a publicly-listed company in Australia (VML-ASX). The sale closed in Fiscal 2020.

The Company retained ownership of the mineral resources below a depth of 150 metres above sea level ("Basal Zone Resources"), a 3.0% NSR royalty (the "3.0% NSR Royalty") and will continue to have access to the property for exploration, development and mining purposes. Avalon has also agreed to waive the 3.0% NSR Royalty for the first five years of commercial production and to grant Cheetah the option to pay the Company $2 million within eight years of the transaction closing to extend the waiver of this royalty in perpetuity. This agreement also grants Cheetah an option to purchase the Company's option in the 2.5% NSR Royalty for an inflation adjusted fixed amount estimated at $1.5 million as at the agreement date, provided that, upon exercising the option, it extinguishes this royalty. The eight mining leases are jointly recorded in the names of Cheetah 50% and the Company 50%, while the beneficial ownership is held in trust by Cheetah and Avalon as to their respective beneficial ownership entitlement in and to the Upper Zone Resources and the Basal Zone Resources, respectively.

During Fiscal 2020, Avalon and Cheetah formed a jointly-owned corporation to hold the exploration permits and related authorizations related to Nechalacho. Avalon and Cheetah also entered into a co-ownership agreement governing each party's activities and management at site. The Company continues to provide Cheetah with assistance as needed in support of their permitting efforts and future development plans, for example by managing a drill program on the property in the fall of 2019. Cheetah has filed financial assurance that was approved by the NWT regulator for all their activities in the T Zone, which reduces Avalon's overall site closure liability. In addition, any improvements to infrastructure, such as road upgrades, done at site by Cheetah could potentially benefit the Avalon's own development plans. Once Cheetah successfully initiates production, Avalon anticipates there will be future opportunities to expand production at the site by re-activating work on its heavy rare earth rich Basal Zone resource.

Separation Rapids Lithium Project

Growing demand for rechargeable batteries in electric vehicles and home energy storage is expected to result in continued growth in the consumption of lithium. There is general consensus among industry analysts that demand for lithium will at least double over the next 10 years and that a supply deficit will emerge in the market as existing producers struggle to meet the rapidly growing demand. Several companies in the lithium business have already expressed interest in participating in the future development of the Separation Rapids Lithium Project. The potential exists for the Company to serve both the glass-ceramics and the battery materials markets going forward as the petalite mineral concentrate (which represents the final product for the glass-ceramics industry) is the intermediate product for making a battery material.

The potential for production of high purity lithium hydroxide was demonstrated in the 2015 work program and a scaled-up test to further evaluate this process and generate cost information for a PEA focused on the battery materials market opportunity was subsequently completed. During Fiscal 2016 the Company designed an innovative hydrometallurgical process to produce a lithium hydroxide product from the petalite concentrate. During Fiscal 2017 the Company completed a positive Preliminary Economic Assessment ("PEA") on which it had spent most of its efforts in Fiscal 2016.

During Fiscal 2018, the Company completed an updated PEA for the Separation Rapids Lithium Project. The updated PEA reflects a simplified business model that focuses on initial production of lithium mineral concentrates for glass-ceramics, while planning for a future expansion to also produce lithium battery materials (either lithium carbonate and lithium hydroxide, depending on market demand at the time). This smaller scale development model reduces capital expenditure requirements substantially from the original model completed in September 2016, while generating attractive returns and reducing overall business and permitting risk.

In 2020, in response to growing interest in establishing new lithium battery materials supply chains in Canada, Avalon began looking at opportunities to collaborate with other aspiring new lithium producers in northern Ontario on establishing a centrally-located lithium battery materials processing facility. Subsequent to year-end, Avalon announced that it had signed a letter of intent to collaborate with Rock Tech Lithium Inc. on establishing such a facility in Thunder Bay, Ontario. The two companies are now working together to finalize a development plan for this facility.

In the meantime, to further optimize its lithium hydroxide process flowsheet, Avalon has shipped a 50 kg sample of petalite concentrate to a lab in Sudbury, Ontario to generate leach solution for use in optimizing the final stages of the process, which involves the use of electrolysis to produce lithium hydroxide. The program will focus on an improved membrane alternative and efficient crystallization of the final high purity product. The results will enable finalizing equipment selection and design. Other testwork underway is focused on ways to reduce processing costs and energy consumption, including alternative milling technologies, and the use of a Dense Media Separation Process (DMS) to produce a petalite concentrate without the use of froth flotation.

There continues to be significant interest in Avalon's petalite product from major international glass and ceramic manufacturers, while the Company also looks at producing a lithium battery material and establishing a business with a diversified mix of lithium products. The glass-makers now require large product samples for evaluation before making firm commitments on offtake, which the Company intends to start producing in 2021 once a suitable sized process facility is identified.

East Kemptville Tin-Indium Project

The 100% owned East Kemptville Tin-Indium Project is located approximately 55 kilometres northeast of Yarmouth, in Yarmouth County, southwestern Nova Scotia in the vicinity of the former East Kemptville Tin Mine. Highway #203, which connects the Town of Yarmouth to the southwest with the Town of Shelburne to the east, passes a short distance to the northwest of the project area. The East Kemptville Tin mine was developed in 1985 on a resource of tin-copper-zinc mineralization known geologically as a "greisen". Greisens are hydrothermal mineral deposits associated with granites consisting of a stockwork of mineralized veins and replacement zones in altered and mineralized granitic rocks.

The Company presently holds mineral rights at East Kemptville through an exploration licence. It does not immediately convey surface land rights and, accordingly, access must be arranged with the permission of surface rights holders.

The Company completed a preliminary economic assessment during Fiscal 2018 with a development model of utilizing the existing tailings management area ("TMA") and had been in negotiation with the surface rights owner to secure full tenure to the project site. Agreement in principle was reached in Fiscal 2019, however, the surface rights owner subsequently refused to sign the agreement after putting on hold on any new work on TMAs on all of its closed mine sites. Not having access to the existing unused tailings ponds severely limits the possibilities for economic re-development of the site. This realization coupled with the continuing difficulties in getting surface access to the project site, caused the Company to decide to withdraw its lease application and has written off the costs incurred to-date of $5,587,210 as an impairment loss during Fiscal 2020.

Available Information

The SEC maintains an internet site (http://www.sec.gov) that contains report, proxy and information statements and other information regarding issuers that file electronically with the SEC. Such information can also be found on the Company's website (http://avalonadvancedmaterials.com/). The information on, or accessible through, our website is not part of this annual report on Form 20-F.

B. Business Overview

Operations and Principal Activities

The Company is a mineral exploration and development company with a focus on rare metals and minerals with high technology and environmentally beneficial applications, now commonly referred to as "Critical Minerals". Avalon presently owns five critical mineral projects in Canada, three of which are under active development, but none of which are in production. It also owns royalty interests in two exploration projects which are not in production. For at least the last three years the Company has expended substantially all of its efforts on the development of the Nechalacho Project, the Separation Rapids Lithium Project and the East Kemptville Tin-Indium Project.

The Company currently relies on equity markets to raise capital to finance its exploration and development programs. The Company has minimal debt and no sources of revenue at the present time to finance its development programs other than investment income on its cash balances. As at August 31, 2020, the Company had adjusted working capital of $770,381 (which is calculated by adding back the deferred flow-through share premium of $136,800 to the working capital of $633,581). As the de-recognition of the balance of the deferred flow-through share premium will not require the future out flow of resources by the Company, it is management's belief that the adjusted working capital figure provides useful information in assessing the Company's liquidity. The Company also may potentially finance exploration and/or development of its properties through joint ventures or other arrangements with third parties.

Nechalacho Project

The Nechalacho Project is located at Thor Lake in the Mackenzie Mining District of the Northwest Territories ("NWT"), about five kilometres north of the Hearne Channel of Great Slave Lake and approximately 100 kilometres southeast of the city of Yellowknife. The property is now comprised of eight contiguous mining leases 5,786 hectares (14,297 acres), after three mining claims totalling 332 hectares on the southwest side of the original five leases were converted to mining leases. The original five leases are subject to one underlying 2.5% Net Smelter Returns ("NSR") royalty agreement. Avalon has the contractual right to buy out this royalty on the basis of a fixed formula, which is currently approximately $1.6 million and which will increase at a rate equal to the Canadian prime rate until the royalty is bought out.

During Fiscal 2019, the Company and Cheetah entered into a definitive agreement, under which Cheetah acquired ownership of the near surface resources principally in the T-Zone and Tardiff Zones of the property ("Upper Zone Resources") for a total cash consideration of $5 million. The sale closed in Fiscal 2020. Cheetah was subsequently acquired by Vital Metals Limited, a publicly-listed company in Australia (VML-ASX).

The property is situated in an area referred to as the Akaitcho Territory, an area which is subject to comprehensive native land claim negotiations between the Government of Canada and the Treaty 8 Tribal Corporation, which consists of the Yellowknives Dene First Nation ("YKDFN"), the Deninu K'ue First Nation ("DKFN") and the Lutsel K'e Dene First Nation ("LKDFN"). The Company has signed an Accommodation Agreement with the DKFN. The Company also recognizes that the Tłįcho First Nation ("TFN") has a settled land claim with the Government of Canada which provides for certain harvesting rights in the area of the Nechalacho site. The general area around the Nechalacho site is subject to Aboriginal rights asserted by two Métis organizations: the Northwest Territory Métis Nation ("NWTMN") and the North Slave Métis Alliance ("NSMA"). During 2014, Avalon concluded a Participation Agreement with the NWTMN and commenced discussions with the NSMA.

Avalon's next steps are primarily focused on continuing its process optimization work and new product development, with a view toward producing an updated technical report incorporating the results of such work. Other goals include completing the acquisition of the land use permit and water license, carrying out an additional pilot plant trial of the new hydrometallurgical plant flowsheet (to confirm reagent recycle performance), finalize detailed plant designs and engineering, securing commitments on off-take and arranging project financing. Avalon continues to monitor regulatory changes in the NWT in order to prepare for and facilitate permitting for its development of the project.

While the Nechalacho Project has been relatively inactive since 2014, the Company continues to monitor REE markets closely and there have been some recent indications of renewed demand. The anticipated increase in demand for electric vehicles ("EV"s) in the coming years, and the need for high strength permanent magnets in the electric motors for these vehicles have sparked a significant increase in price for the "magnet rare earths" neodymium ("Nd") and praseodymium ("Pr") in recent years. In Fiscal 2019 and 2020, interest in creating new rare earth supply chains outside China has revived due to the ongoing uncertainty around security of supply in the wake of the recent US China "trade war" and permitting issues Lynas Corporation has faced in maintaining operations with its Rare Earth Separation Plant and Refinery in Malaysia.

The key factors going forward influencing the timely execution of the Nechalacho Project are securing one or more strategic or financial partners, securing sufficient binding agreements for off-take to support project financing, the availability of equity and debt financing at a reasonable cost and receipt of all requisite construction and operating permits.

Separation Rapids Lithium Project

The Separation Rapids property now consists of nineteen mineral claims and one mining lease covering a combined area of approximately 4,414 hectares (10,910 acres) in the Paterson Lake Area, Kenora Mining Division, Ontario, all of which are owned 100% by Avalon. The lease covers an area of approximately 421 hectares over the area of the lithium pegmatite deposit and adjacent lands that may be used for mine development infrastructure. Avalon also owns three aggregate permits along the road to the site, which cover a total area of approximately 16 hectares and are located within the area covered by the claims. The original vendors retained a 2.0% NSR interest in the property, which was acquired in 2012 by a wholly-owned subsidiary of the Company for $220,000. The deposit is a potential source of lithium minerals for use in the glass and ceramics industry and specialty composite materials as well as lithium compounds for the battery industry.

Growing demand for rechargeable batteries in electric vehicles and home energy storage is expected to result in continued growth in consumption of lithium. There is general consensus among industry analysts that demand for lithium will at least double over the next 10 years and that a supply deficit will emerge in the market as existing producers struggle to meet the rapidly growing demand. Several companies in the lithium business have already expressed interest in participating in the future development of the Separation Rapids Lithium Project. The potential exists for the Company to serve both the glass-ceramics and the battery materials markets going forward as the petalite mineral concentrate (which represents the final product for the glass-ceramics industry) is the intermediate product for making a battery material.

During Fiscal 2018, the Company completed an updated PEA for the project. The updated PEA reflects a simplified business model that focuses on initial production of lithium mineral concentrates, with potential for future expansion into production of the battery materials lithium carbonate and lithium hydroxide. This smaller scale development model reduces capital expenditure requirements substantially from the original model completed in September 2016, while generating attractive returns and reducing overall business and permitting risk.

To further optimize this flowsheet, Avalon has shipped a 50 kg sample of petalite concentrate to a lab in Sudbury, Ontario to generate leach solution for use in optimizing the final stages of the process, which involves the use of electrolysis to produce lithium hydroxide. The program will focus on an improved membrane alternative and efficient crystallization of the final high purity product. The results will enable finalizing equipment selection and design. Other testwork underway is focused on ways to reduce processing costs and energy consumption, including alternative milling technologies and the use of a Dense Media Separation Process (DMS) to produce a petalite concentrate without the use of froth flotation.

During Fiscal 2020, Avalon updated its Quarry License and filed an updated Advanced Exploration Closure Plan for the planned bulk sample that is required for further testing purposes with potential customers. The Quarry License allows for unlimited extractions and the financial assurance required from the regulator for the Closure Plan is significantly lower than already filed due to progressive rehabilitation and modifications to the Closure Plan.

The key factors going forward influencing the timely execution of the Separation Rapids Lithium Project are: securing sufficient product offtake commitments to support project financing; the availability of sufficient equity and/or debt financing and receipt of all requisite operating permits and approvals.

East Kemptville Tin-Indium Project

Significant Acquisitions and Significant Dispositions

The Company has not made any significant acquisitions since the end of its 2016 fiscal year.

During Fiscal 2019, the Company and Cheetah entered into a definitive agreement, under which Cheetah acquired ownership of the near surface resources of the Nechalacho Project principally in the T-Zone and Tardiff Zones of the property ("Upper Zone Resources") for a total cash consideration of $5 million. Cheetah was subsequently acquired by Vital Metals Limited, a publicly-listed company in Australia (VML-ASX). The sale closed in Fiscal 2020.

Competition

The mineral industry in which we are engaged is highly competitive. Competitors include well capitalized mining companies, exploration companies and other companies having financial and other resources far greater than those of the Company's. The Company competes with other mineral development companies in connection with the acquisition of rare metals and mineral properties. In general, those properties with defined process flowsheets to produce a commercially acceptable product at a competitive cost have a competitive advantage for market access and access to development capital. Thus, a degree of competition exists between companies looking to acquire properties with such potential.

Dependence on Customers and Suppliers

The Company is not dependent upon a single or few customers or suppliers for revenues or its operations.

Seasonality

Certain of the Company's operations are conducted in the NWT, northern Ontario and Nova Scotia. The weather during the spring and fall seasons can cause interruptions or delays in the Company's operations. As a result, the preferable time for activities in these regions is the winter and summer when costs are more reasonable and access to the properties is easier. In the summer months, however, if the weather has been unusually hot and dry, access to the Company's properties may be limited as a result of access restrictions being imposed to mitigate the risks of forest fires. Seasonality concerns can and will be designed into potential future operations to minimize impact on long term production.

Government and Environmental Regulation

The current and anticipated future operations of the Company, including development activities and commencement of production on its properties, require permits from various federal, territorial or provincial and local governmental authorities and such operations are and will be governed by laws and regulations governing prospecting, development, mining, production, exports, taxes, labour standards, occupational health, waste disposal, toxic substances, land use, environmental protection, mine safety and other matters. Companies engaged in the development and operation of mines and related facilities generally experience increased costs and delays in production and other schedules as a result of the need to comply with applicable laws, regulations and permits. Such operations and exploration activities are also subject to substantial regulation under these laws by governmental agencies and may require that the Company obtain permits from various governmental agencies. The Company believes it is in substantial compliance with all material laws and regulations which currently apply to its activities. There can be no assurance, however, that all permits which the Company may require for construction of mining facilities and conduct of mining operations will be obtainable on reasonable terms or that such laws and regulations, or that new legislation or modifications to existing legislation, would not have an adverse effect on any exploration or mining project which the Company might undertake.

See also Item 3. Key Information - D. Risk Factors - Regulations and Mining Law, Governmental Regulation.

Corporate Social Responsibility ("CSR")

Contemporaneously with the filing of this annual report, the Company released its ninth comprehensive Sustainability Report. The 2020 Sustainability Report is available for view or download on the Company's website at: http://www.avalonadvancedmaterials.com. The 2020 Sustainability Report does not form part of this annual report.

Subsequent to fiscal year-end the Company announced that it has engaged Sustainalytics, a Morningstar company, to conduct an independent audit of the Company's business practices and policies toward obtaining an Environmental, Social and Corporate Governance ("ESG") Risk Rating License. Sustainalytics' ESG Risk Ratings provide investors with third-party validation of the Company's sustainability performance along with insights into why certain ESG issues are considered material for a company and how well a company is managing those risks. The benefits of obtaining an ESG Risk Rating include the ability to provide better access to ESG investment capital, and the ability to gain commercial benefit from the rating externally with creditors, suppliers and other stakeholders. The six-week audit and review process is expected to be completed by mid-December, 2020.

The 2020 Sustainability Report is being prepared in accordance with the Global Reporting Initiative's Global Reporting Standards. The 2020 Sustainability Report will incorporate a self-assessment of Fiscal 2020 performance and sets targets for 2021 against the applicable and updated Mining Association of Canada "Toward Sustainable Mining" indicators. It also integrates the appropriate United Nations' 17 Sustainable Development Goals into our sustainability performance for the second time. Notably, Avalon completed risk assessments and updated all Emergency Response Plans for the sites where work was completed during the fiscal year. All work programs at project sites were completed without environmental or health and safety incidents. A risk assessment was completed related to the COVID 19 pandemic and detailed office re-opening procedures were develop and training completed for all employees. The office is largely closed in the short term and employees are largely working from home. No COVID 19 related illnesses have been reported.

In addition to the Company's safety and environmental performance in the field, the report includes many other accomplishments such as community outreach, and metallurgical process improvements that contribute to improved environmental performance. Avalon is committed to working closely with its Indigenous partners to create lasting economic and social benefits in the communities. Dialogue is ongoing with Wabaseemoong Independent Nations ("WIN") and Métis Nation of Ontario with respect to the Separation Rapids Lithium Project, and was restarted with new Eabametoong First Nation Chief, Chief Harvey Yesno for the Lilypad Cesium-Tantalum Project. During Fiscal 2020 the Company made a donation to secure a supply of hand sanitizer for Eabametoong First Nation to assist the community in managing the risk of spreading the COVID-19 virus to its members. Avalon has an MOU with the Chapleau Cree First Nation regarding work at the Warren Township Anorthosite project, and with the Wabaseemoong Independent Nation at Separation Rapids and agreements with the Deninu K'ue First Nation ("DKFN") and the Northwest Territory Métis Nation ("NWTMN") at the Nechalacho Project. Avalon continued discussions with the Acadia First Nation for the East Kemptville project and with the Metis Nation of Ontario for Separation Rapids.

Avalon's leading sustainability efforts are also benefitting the exploration industry. During Fiscal 2019, the Prospectors and Developers Association of Canada ("PDAC") adopted Avalon's energy monitoring system and published it for its members, as well as working with regulators to develop balanced regulations with applicability to Avalon projects. Avalon participated in a multi-stakeholder development of a climate change risk assessment and is utilizing it to augment existing risk assessments and project design to ensure resiliency to potential climate change impacts. Avalon also supported PDAC in the development of training materials for the Mining Association of Canada's Toward Sustainable Mining's Community of Interest Panel regarding the exploration industry. PDAC may further adapt them for a broad range of educational applications. Avalon is also supporting the PDAC and Mining Association of Canada in its efforts to educate regulators and policymakers regarding the need to update regulations in order to encourage more exploration and development of critical minerals resources in Canada that are vital for establishing the new clean economy in Canada and to ensure access to land for exploration purposes.

The Company's focus is on materials that enable clean technology, including electric vehicles, power storage, solar and wind power. In order to do this sustainably, Avalon designs its operations to minimize environmental impacts and greenhouse gas emissions, while planning for rehabilitation and productive use of the land post closure. The Company also now incorporates a staged-development approach to its cleantech materials projects, which involves starting production at a modest scale, to minimize project footprint and potential risks to environment, while also reducing investment risk and creating opportunities for its Indigenous business partners. Further, Avalon is a leader in looking at closed mine sites as opportunities to remediate long term environmental liabilities through economic extraction of valuable minerals from waste materials using new technologies such as sensor-based ore-sorting or the Precision Periodic extraction technology.

The Nechalacho Project and the Separation Rapids Lithium Project are the Company's material properties.

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.

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.

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.

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:

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 200m, 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 foayaitic syenites progress downward to sodalite foayaites 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.

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.

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.

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 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 re-assayed 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.

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.

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.

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:

The mineralogy of the Nechalacho ore is complex and guides metallurgical development and performance.

Six hydrometallurgical pilot plant campaigns were conducted between June and October, 2012. The main objectives of these campaigns were to:

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.

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.

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.

2. Mineral Resources are estimated at an 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.

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.

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.

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.

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").

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 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 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.

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 an NMR cash cost cut-off value of US$320/t.

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.

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.

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.

9. See the table for Basal Zone tonnes and TREO grades at higher NMR cut-off values.

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.

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.

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.

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:

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.

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 are 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.

(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.

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:

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 (Type B) 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 Class A Land Use Permit was renewed and is valid until April 23, 2021, and similarly, the Class B 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 Nechalacho 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.

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 greenhouse gas ("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.

A summary of the FS capital cost estimate for the Nechalacho Project is presented in the following table.

(1) NWT - Costs applicable to the Nechalacho and Pine Point sites in the Northwest Territories.

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.

A summary showing the average annual and life-of-mine unit operating costs by project cost area is presented below.

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.

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.

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:

These opportunities are under consideration and will continue to be investigated as the Nechalacho Project proceeds.

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:

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.

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.

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.

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).

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 testwork since the FS has been conducted under the direction of Avalon's consulting metallurgist, 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 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.

As part of its annual procedures the Company analyzes price trends and other factors as they may impact the determination of its mineral reserves. As part of this analysis, the Company obtained a new price forecast from a third party, which indicates that the long term REE average net price forecast would be now approximately US$46/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$1.27. 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$5.20/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. The Company also updated its expected capex and opex costs by using a variety of public inflation factors. Accordingly, the Company is of the opinion that its determination of its mineral reserve is still valid.

The Company continues to monitor developments in the global rare earths market. 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 largely depend on decisions made in China. China remains the dominant producer at approximately 90% of supply. Prices are expected to continue to increase as demand increases and as China continues to restrict output from illegal producers and continues to restrict output from producers who do not follow environmental regulations.

Interest in rare earth projects outside China (including Avalon's) has resurfaced recently, as a result of the US/China trade war and threats from China to again restrict rare earth exports to the US. Recently, the Pentagon awarded Defense Production Act Title III grants totaling $12.76 million to three companies looking to establish the complete rare earth magnets supply chain in the United States. This should create new opportunities for additional rare earth producers to emerge in North America.

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.

Avalon and Cheetah closed the sale of the near surface resources in Fiscal 2020. Avalon and Cheetah formed a jointly-owned corporation to hold the exploration permits and related authorizations related to Nechalacho. Avalon and Cheetah also entered into a co-ownership agreement governing each party's activities and management at site. If Cheetah implements additional infrastructure development at site, this could reduce Avalon's future development costs on its own portion of the Nechalacho Project. Cheetah has filed financial assurance that was approved by the NWT regulator for all their activities in the T Zone, which reduces Avalon's overall site closure liability.

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 23, 2021 and May 21, 2021 respectively.

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. Once Cheetah successfully initiates production on the T-Zone resource, Avalon anticipates there will be future opportunities to expand production at the site by re-activating work on its heavy rare earth rich Basal Zone resource.

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.

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 Separation Rapids Lithium 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 Separation Rapids Lithium 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 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.

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 Whitedog. 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.

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.

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.

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 Separation Rapids Lithium 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.

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.

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.

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 in the database used for resource estimation. Drill hole angle, direction and the maximum hole depth were also verified.

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.

A number of phases of metallurgical testing have been completed by Avalon since 1997 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:

Lithium, rubidium, tantalum, cesium and feldspar mineral resource estimates for the Separation Rapids Lithium Project have been prepared by Avalon under the supervision of Dr. William Mercer, P.Geo. (ON), Vice President, Exploration of Avalon, who is the Qualified Person (QP) for the estimates. This updated mineral resource estimate is based on the eight diamond drill holes drilled by Avalon in 2017 and 2018, in combination with the data from the 1997 to 2001 drill holes, which were used in previous resource estimates.

The Separation Rapids Lithium Project overall Measured plus Indicated mineral resource is estimated to be 8.41 Mt at a grade of 1.41% Li₂O, using a 0.6% Li₂O cut-off grade, as summarized in Table 1.1. The Inferred mineral resource is 1.79 Mt at a grade of 1.35% Li₂O. The total feldspar content of the mineralized zone is estimated at 43%. The two main mineralogical zones in the deposit, the petalite zone (6a, b, c) and the lepidolite + petalite zone (6d) have been estimated separately and contain combined Measured and Indicated resources of 6.42 Mt grading 1.41% Li₂O and 1.99 Mt grading 1.41% Li₂O, respectively (Table 1.1). This mineral resource estimate was presented in an Avalon news release on May 23, 2018 and is deemed not to be materially different from the previous estimate dated October, 2016.

Table 1.1
Separation Rapids, Mineral Resource Estimate at 0.6% Li₂O Cut-off Grade

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.

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.

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 Separation Rapids Lithium Project database is maintained in Maxwell DataShed™ software and the resource estimation utilized GEMS 6.8.1.

The Separation Rapids Lithium 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.

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.

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.

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 Separation Rapids Lithium 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 Separation Rapids Lithium Project.

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

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:

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.

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.

The Separation Rapids Lithium 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.

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 had an advanced exploration approval based on an approved closure plan 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 Separation Rapids Lithium 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.

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.

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 Separation Rapids Lithium Project include:

A 5-year post-closure monitoring program will follow closure of the mine that includes maintenance of the revegetated areas.

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 Separation Rapids Lithium Project is included in the 2007 environmental study. This will be updated in the next phase of the Separation Rapids Lithium Project.

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 Separation Rapids Lithium 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.

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.

Micon has prepared this assessment of the Separation Rapids Lithium 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.

Annual production of feldspar concentrates and intended markets are presented in Figure 1.4.

Figure 1.5 presents a summary of the Separation Rapids Lithium 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 Separation Rapids Lithium Project is most sensitive to revenue drivers, namely price and recovery which are essentially identical. At a discount rate of 8%, the Separation Rapids Lithium Project NPV is negative when all product prices are reduced by 20%. The Separation Rapids Lithium 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.

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.

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 Separation Rapids Lithium Project economics by supplying product into various industrial mineral markets.

The initial capital estimate for the Separation Rapids Lithium 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 Separation Rapids Lithium 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 Separation Rapids Lithium 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 Separation Rapids Lithium 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 Separation Rapids Lithium 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 Separation Rapids Lithium 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 Separation Rapids Lithium Project is therefore expected to be relatively short and simple.

The preliminary economic assessment presents a potentially viable project and the opportunity to generate significant revenue for Avalon. It is recommended therefore that the Separation Rapids Lithium Project continues to the next stage of development, which is the completion of a full Feasibility Study (FS).

The next step in developing the Separation Rapids Lithium 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.

The budget prepared by Avalon for the next phase of the Separation Rapids Lithium 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.

During Fiscal 2018, the Company discovered a new lithium pegmatite on the western part of 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 2021.

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.

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 to reduce costs by reducing the amount of feed requiring froth flotation. 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.

The next step in the project's development is to proceed with a pilot plant program on the bulk sample to finalize flowsheet parameters for engineering purposes including reagent recycling and water treatment processes, after which a feasibility study can be completed. This work will also generate product samples for customer qualification and acceptance and is now expected to proceed in 2021 subject to arranging project financing. Discussions on financing continue with several interested parties and planning for this program has been initiated.

The use of gravity concentration and ore sorting pre-concentration methods are to be further investigated, with the objective of reducing costs for the flotation circuit, reducing energy and waste volumes and overall environmental impacts by reducing the amount of feed reporting to the milling circuit. Some additional drilling is also contemplated to collect more geotechnical data for pit and infrastructure design work. Continued exploration including drilling on the Paterson Lake claims in the vicinity of the new Snowbank petalite pegmatite discovery and the Glitter pegmatite is planned, subject to financing.

In its 2016 Preliminary Economic Assessment, Avalon developed a proprietary process flowsheet to produce a high purity lithium hydroxide product from petalite for the lithium battery material market. The flowsheet has the advantage of generating limited waste by the recycling of the sulphuric acid solvent. To further optimize this flowsheet, Avalon has recently shipped a 50 kg sample of petalite concentrate to XPS (Expert Process Solutions) in Sudbury, Ontario to generate leach solution for use in optimizing the final stages of the process, which involves the use of electrolysis to produce lithium hydroxide. The program will focus on an improved membrane alternative and efficient crystallization of the final high purity product. The results (expected in January, 2021) will enable finalizing equipment selection and design.

In the glass-ceramics market, the innovation of new products is creating many new market opportunities for Avalon's petalite product. One such market requires a petalite product that has not been concentrated by froth flotation, as residual reagents on the surface of the product can compromise its performance in this specific glass-ceramic material. Recent testwork conducted at Met-Solve Laboratories, Langley, BC has successfully demonstrated that an acceptable quality petalite product to serve this market can be produced simply by using DMS. The Company's next step is to generate a larger product sample for evaluation by the customer that expressed interest in it.

Other testwork underway is focused on ways to reduce processing costs and energy consumption, including alternative milling technologies. Samples from three mineralogical sub-zones within the main Separation Rapids resource have been sent to Selfrag AG in Switzerland, for testing using their patented electric pulse disaggregation ("EPD") process. EPD uses high voltage electrical pulses to fragment broken rock along internal mineral grain boundaries. The result is a crushed mass of single mineral particles, as opposed to the less selective breakage that occurs with traditional mechanical comminution methods. Avalon believes EPD is the most relevant alternative milling method for reducing over-grinding and improving overall petalite recoveries as well as reducing energy consumption.

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 lithium battery materials 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. According to Benchmark Mineral Intelligence, their Global Weighted Average price lithium carbonate price shows lithium had increased to US$15,000/tonne by July 2018. This had fallen to near US$10,000/tonne in October 2019, and has declined a further 33% since then, with Argus Media reporting prices between US$6,000/tonne and US$8,000/tonne in November 2020. Prices are forecast to recover, as demand for lithium is forecast to grow significantly and supply will be challenged to keep pace. Lithium hydroxide often trades at a 30% premium to lithium carbonate. Spodumene prices (6% Li₂O, cif China) have dropped over the past two years from US$870-950 per tonne in January 2018 to US$370-400 per tonne in the September, 2020. While petalite prices are not generally reported, the Company has not received any indications of a change in potential petalite pricing with its potential customers.

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.

Recent marketing work has been focused mainly on high strength lithium glass-ceramics where a number of new market opportunities have been identified in aerospace technology. Production of petalite product samples for customer evaluation continues with strong interest from customers in Asia. Although recent reported global lithium carbonate prices remain soft, all lithium market forecasts continue to predict rapid growth in demand driven mainly by the battery market with supply shortages expected within the next 2-3 years. The Company is also revisiting the potential to produce a lithium hydroxide battery material, as outlined in Avalon's 2016 Preliminary Economic Assessment, because of the new interest in establishing lithium battery materials supply chains in Ontario.

With Ontario Premier Doug Ford recently announcing Ontario's interest in establishing new battery materials supply chains in the province, Avalon has been investigating collaborative opportunities to establish a lithium processing facility in Northwestern Ontario, and recently has signed a letter of intent with another aspiring lithium producer in Ontario; Rock Tech Lithium Inc.. The facility being planned would be adaptable for producing different lithium battery materials products, and would also be expandable to increase output and accept concentrates from other producers of lithium minerals from the many pegmatite deposits that occur in northern Ontario.

With demand for lithium growing rapidly and few advanced lithium projects ready to commence production, the Company remains well-positioned to bring a new supply of high-purity lithium minerals to the market to serve priority customers, once project financing and all required permits are in place. While project permitting has been progressing slowly, the Ontario government now recognizes that changes need to be made to the existing regulatory regime ("cutting the red tape") to differentiate critical minerals like lithium from traditional exchange-traded commodities and facilitate their more rapid development in Ontario. There is also growing interest in the Federal government to encourage development of critical minerals supply chains for clean technology in Canada, particularly in the context of supporting economic recovery post-COVID-19.

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 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, the 2020 updated Advanced Exploration Closure Plan, 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 2019 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 the 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 Separation Rapids Lithium 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 Separation Rapids Lithium 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 Indigenous rights in the area. Engagement is ongoing with local Indigenous communities, regulators, and local government most recently on the update of the closure plan for the planned bulk sample program. All the Indigenous groups continue to be supportive of the project.

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, and Quarry Permit update, during which no concerns were identified. An Ontario Mining Act Section 91 Exemption was approved by an Order in Council on September 13, 2019 to permit shipping of bulk samples outside of Canada. The exemption is valid for 2 years.

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. A dry stack tailing management facility, the lowest possible design risk option, is planned. 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.

Environmental studies of the proposed power transmission line route are planned and opportunities to reduce costs and GHG footprint with green energy supply are also being investigated. With the exception of the powerline route study, the environmental studies are largely complete. A plan to compensate for the small swamp area containing a small minnow population that will become part of the tailing management facility, is scheduled, but will not be required for several years following start of operations. Once applications are submitted, it is anticipated that all necessary permits for construction can be obtained in under a year. Construction activities for many project components can be initiated prior to receipt of all permits.

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 Separation Rapids Lithium Project. Specific engagement was carried out in 2020 related to the quarry permit update and closure plan.

Avalon has now received the necessary approvals to proceed with the minimum 2,500 tonne bulk sample extraction program, originally planned for 2019, to recover petalite product samples for testing and qualification by glass and ceramic companies that have expressed interest in the high-purity petalite mineral product. This includes acceptance for filing by the Ministry of Energy, Mines and Northern Development of the Company's revised Closure Plan for Advanced Exploration dated January 22, 2020, which was received on May 29, 2020, and the May 13 Mining Act Section 91 Exemption.

As a result of progressive rehabilitation and improvements to the closure plan, financial assurance to be filed with the plan is significantly less than that which is already filed for the existing advanced exploration permit. A maintenance agreement and Quarry Permit from the Ministry of Natural Resources and Forestry allows for any needed road maintenance work, if required for bulk sampling. In an effort to minimize site environmental impacts and reduce costs, an application for a quarry amendment was submitted. This amendment, approved on March 25, 2020, allows unlimited extraction of aggregate from its dimension stone quarry and would permit the bulk sample crushing at the quarry site. The COVID-19 lockdown delayed implementation of the program but Avalon does have sufficient inventory of sample material for its present needs. The Company now intends to proceed with the additional bulk sampling work later this year after freeze-up. As a result, planned upgrades to the access road can be delayed until 2021, reducing bulk sample acquisition cost.

The next step in the Separation Rapids Lithium Project's development is to proceed with a short pilot program to finalize reagent recycling and water treatment processes around the flotation circuit, after which a bankable feasibility study will be completed. This work is expected to proceed later in 2021 after off-take agreements are concluded and additional project financing is in place. It is planned to process a bulk sample, of the order of 2,500 tonnes, in order to supply large test samples of products requested by potential industrial customers for large scale testing in their glass or ceramics manufacturing processes. Permitting for quarrying and shipment of this sample has been completed and the sample is expected to be extracted at site in early 2021.

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.

The compensation plan required under the Fisheries Act and hydro line route selection and potentially required associated environmental baseline study, depending on the route and power line size, are also planned. Engagement with communities of interest will be ongoing.

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

In addition to the Nechalacho Project and the Separation Rapids Lithium Project, the Company owns three other rare metals and minerals projects: the East Kemptville Tin-Indium Project, the Warren Township Anorthosite Project and the Lilypad Cesium-Tantalum Project. The Company also owns royalty interests in two development projects which are not in production. The Company continues to look at other new specialty mineral project opportunities that fit the Company's criteria of offering near term revenue potential at low initial capital outlays.

Unless otherwise stated, the technical information contained in this section of the Annual Report in respect of other properties and assets of the Company has been reviewed and approved by Dr. William Mercer, P.Geo., Vice President, Exploration who is a qualified person for the purposes of NI 43-101.

The Lilypad Cesium-Tantalum Project consists of 14 claims, comprising 166 new claim units or cells, totalling slightly over 3,299 hectares (8,152 acres), covering a field of lithium, tantalum and cesium mineralized pegmatites, and located 150 kilometres northeast of Pickle Lake, Ontario. The claims were staked by the Company between January 1999 and October 2000 and are 100% owned by the Company with no underlying royalties. Previous owners of the property drilled some 50 shallow drill holes and Avalon completed 32 drill holes totalling 4,781 metres in 2000 and 2001 in a program focused primarily on tantalum potential that produced encouraging initial results including the discovery of significant cesium mineralization as the cesium ore mineral pollucite (Cs,Na)₂A_l2Si₄O₁₂·2H₂O) assaying up to 6.205% Cs₂O over 1.70 metres along with significant tantalum mineralization assaying over 0.10%Ta₂O5. Lithium commonly occurs in these pegmatites both as spodumene and as lepidolite in association with the pollucite and tantalite mineralization.

The project has been inactive since 2002 awaiting a recovery in tantalum prices or new demand for cesium minerals. New demand for cesium emerged in 2018 with the cessation of pollucite production at the Tanco mine in Manitoba. Then in 2019, Cabot Corp. announced the sale of its Specialty Fluids division (owner of the Tanco Mine) to Sinomine, a large Chinese mining and chemical company with a division focused on critical minerals supply. This potentially creates new market opportunities for Avalon to serve with its cesium, tantalum and lithium products. There is now also renewed interest in tantalum due to limited supply sources and growing demand in new technology.

Some 75% of cesium production has been used to make cesium formate: a high density, low viscosity fluid used in deep offshore oil drilling. Cesium formate has a value of approximately US$2,200/kg and is leased to oil well drilling companies and recycled after use. Other cesium products often sell at prices from US$200-1,000/kg. Cesium has a variety of other high technology applications, including extremely accurate atomic clocks, and great potential in a range of applications in the production of electricity, in electronics, and in chemistry.

Subsequent to fiscal year end, the Company carried out a brief field program to collect 200 kg of cesium mineralized pegmatite rock for study on how to efficiently concentrate the pollucite mineralization which, unlike most such occurrences, is found widely distributed throughout the many lithium-cesium-tantalum ("LCT") pegmatite dykes on the property. Planned follow-up work will initially involve mineralogical and analytical testwork to characterize in detail how the pollucite occurs, which will be followed by metallurgical process testwork to identify the most efficient methods for concentrating the pollucite and recovering by-product tantalum and lithium. This will include tests using the Selfrag AG EPD process.

Most of the 200 kg of sample material was collected from one occurrence known as the Pollucite Dyke. It was drilled by Avalon in 2001, is open to depth and along strike for expansion. Other similar pollucite-bearing LCT pegmatite dykes on the property remain untested.

Renewed exploration work is also planned, for summer 2021 and will include geological mapping and geochemical sampling to better understand cesium distribution and identify new tantalum and cesium drill targets. Preliminary environmental studies can also be initiated. Future development of the project would be positively impacted by new infrastructure development, including road access, to the Ring of Fire mineral projects located further to the north.

The project is located in the traditional territory of the Eabametoong First Nation (EFN), approximately 25 km west of the community of Fort Hope. The Company has been in communication with EFN Chief Harvey Yesno toward re-starting consultation with the EFN community leadership and discussions on exploration support services that community members can provide for the 2021 summer field program. As noted above, during Fiscal 2020 the Company made a donation to secure a supply of hand sanitizer for Eabametoong First Nation to assist the community in managing the risk of spreading the COVID-19 virus to its members.

The Company completed a preliminary economic assessment during Fiscal 2018 with a development model of utilizing the existing tailings management area ("TMA") and had been in negotiation with the surface rights owner to secure full tenure to the project site. Agreement in principle was reached in Fiscal 2019, however, the surface rights owner subsequently refused to sign the agreement after putting on hold on any new work on TMAs on all of its closed mine sites. Not having access to the existing unused tailings ponds severely limits the possibilities for economic re-development of the site. This realization coupled with the continuing difficulties in getting surface access to the project site, caused the Company to decide to withdraw its mineral lease application and has written off the costs incurred to-date of $5,587,210 as an impairment loss during Fiscal 2020.

The Warren Township Anorthosite Project is a mineral development opportunity located near the Village of Foleyet, 100 kilometres west of Timmins, Ontario. The project consists of a mining lease totalling 688 hectares (1,699 acres) which is 100% owned by the Company. The lease covers a portion of the Shawmere Anorthosite Complex hosting a large historic resource (not prepared in accordance with NI 43-101) of a high purity anorthosite.

Anorthosite is a mafic igneous intrusive rock consisting of greater than 90% plagioclase feldspar. The Shawmere Complex is an unusual type of anorthosite as the plagioclase is the high calcium variety called anorthite. Previous work has demonstrated that this material can be processed to produce a high quality calcium feldspar raw material for the manufacture of reinforcing glass fibre and other industrial products such as mineral fillers. The location of the property near both road and rail transportation infrastructure and its proximity to markets in southern Ontario and the northeastern United States offers the potential for development of a low-cost, highly profitable industrial minerals operation.

In June 2012, Avalon received a permit under the Aggregate Resources Act (Ontario) to operate a quarry at Warren Township on 240 hectares of land. A preliminary environmental baseline study has been completed, and an MOU was signed with the Chapleau Cree First Nation.

Avalon is also continuing to evaluate the opportunity to apply an innovative new extraction technology called NanoBeads® developed by Precision Periodics to recover rare earths and other metals from historic mine wastes including acid mine drainage. There are many such sites in North America where the waste may contain critical minerals that had no value when the mine was in operation but do today. This technology could have broad application at many of these sites. Avalon plans to collaborate with the innovators of the Precision Periodics technology to implement it on a trial basis at other closed base and precious metals mine sites in Canada or in the US. Several producing mining companies are also now looking at recovering additional metallic elements from current tailings streams.

Management sees enormous growth potential in this sector and good opportunities for accessing capital from the many government programs oriented towards cleantech development and from the growing international Impact/ESG investment community.

Government remains committed to supporting the establishment of new critical minerals supply chains in Canada. Avalon is continuing to support the efforts of policymakers to implement the needed regulatory changes to recognize critical minerals as a unique sub-sector of the mineral industry. The COVID-19 pandemic and the resulting shortages of medical supplies and pharmaceutical products has served as a reminder to Canada of the risks associated with relying on international sole supply sources of critical materials.

Exploration and evaluation expenditures include costs which are directly attributable to acquisition, surveying, geological, geochemical, geophysical, exploratory drilling, land maintenance, sampling, and assessing technical feasibility and commercial viability. These expenditures are capitalized as exploration and evaluation assets until the technical feasibility and commercial viability of extracting the mineral resource of a project are demonstrable. During the exploration period, exploration and evaluation assets are not amortized.

Exploration and evaluation assets are allocated to cash generating units ("CGUs") for the purpose of assessing such assets for impairment and each project is identified as a separate CGU. A project is tested for impairment when facts and circumstances suggest that the carrying amount of that project may exceed its recoverable amount, and the recoverable amount of the project is estimated. If the recoverable amount of the project is estimated to be less than its carrying amount, the carrying amount of the project is reduced to its recoverable amount, and an impairment loss is recognized immediately in the consolidated statement of comprehensive loss.

Once the technical feasibility and commercial viability of extracting a mineral resource of a project are demonstrable, the relevant exploration and evaluation asset is assessed for impairment, and any impairment loss is recognized, prior to the balance being reclassified as a development asset in property, plant and equipment ("PPE").

The determination of the demonstration of technical feasibility and commercial viability is subject to a significant degree of judgment and assessment of all relevant factors. In general, technical feasibility may be demonstrable once a positive feasibility study is completed. When determining the commercial viability of a project, in addition to the receipt of a feasibility study, the Company also considers factors such as the existence of markets and/or long term contracts for the product and the ability to obtain the relevant operating permits.

All subsequent expenditures to ready the property for production are capitalized within development assets, other than those costs related to the construction of property, plant and equipment.

Once production has commenced, all costs included in development assets are reclassified to mining properties.

Exploration and evaluation expenditures incurred prior to the Company obtaining the right to explore the property are recorded as an expense in the period in which they are incurred.

Impairment of Non-Financial Assets

At the end of each reporting period, the Company reviews the carrying amounts of its non-financial assets with finite lives at the CGU level to determine whether there is any indication that those assets have suffered an impairment loss. If any such indication exists, the recoverable amount of the relevant CGU is estimated in order to determine the extent of the impairment loss, if any. A CGU is the smallest identifiable group of assets that generates cash inflows that are largely independent of the cash inflows from other assets or groups of assets. The Company's CGUs are typically its significant individual exploration and evaluation assets, development projects or mines. In certain circumstances, when the recoverable amount of an individual asset can be determined, impairment assessment is performed at the individual asset level. Where a reasonable and consistent basis of allocation can be identified, corporate assets are also allocated to individual CGUs, or otherwise they are allocated to the smallest group of CGUs for which a reasonable and consistent allocation basis can be identified.

The recoverable amount of an asset is the higher of fair value less costs of disposal and value in use. In assessing value in use, the estimated future cash flows are discounted to their present value using a pre-tax discount rate that reflects current market assessments of the time value of money and the risks specific to the asset for which the estimates of future cash flows have not been adjusted.

If the recoverable amount of an asset (or CGU) is estimated to be less than its carrying amount, the carrying amount of the asset (or CGU) is reduced to its recoverable amount, and an impairment loss is recognized immediately in profit or loss.

At the end of each reporting period, the Company assesses whether there is any indication that impairment losses that were recognized in prior periods may no longer exist or have decreased. If such an indication exists, the estimated recoverable amount of the asset (or CGU) is revised and the carrying amount of the asset (or CGU) is increased to the revised estimate of its recoverable amount, to the extent that the increased carrying amount does not exceed the carrying amount that would have been determined had no impairment loss been recognized for the asset (or CGU) in prior years. A reversal of an impairment loss is recognized immediately in profit or loss.

Site Closure and Reclamation Provision

The Company's mining exploration activities are subject to various governmental laws and regulations relating to the protection of the environment. These environmental regulations are continually changing and are generally becoming more restrictive. The Company has made, and intends to make in the future, expenditures to comply with such laws and regulations or constructive obligations. Provision for site closure costs is recorded at the time an environmental disturbance occurs, and is measured at the Company's best estimate of the expected value of future cash flows required to reclaim the disturbance upon site closure, discounted to their net present value. The net present value is determined using a pre-tax discount rate that is specific to the liability. The estimated net present value is re-measured at the end of each reporting period, or when changes in circumstances occur and/or new material information becomes available. Increases or decreases to the provision arise due to changes in legal, constructive or regulatory requirements, the extent of environmental remediation required and cost estimates. The net present value of the estimated costs of these changes is recorded in the period in which the change is identified and quantifiable.

Upon initial recognition of site closure provision there is a corresponding increase to the carrying amounts of related assets and the cost is amortized as an expense on a units-of-production basis over the life of the related assets. The value of the provision is progressively increased over the life of the operation as the effect of discounting unwinds and such increase is recognized as an interest expense.

Critical accounting judgements and estimation uncertainties

The preparation of the consolidated financial statements in conformity with IFRS requires that the Company's management make critical judgments, estimates and assumptions about future events that affect the amounts reported in the consolidated financial statements and the related notes thereto. Actual results may differ from those estimates. Estimates and assumptions are reviewed on an on-going basis based on historical experience and other factors that are considered to be relevant under the circumstances. Revisions to estimates are accounted for prospectively.

The Company has identified the following significant areas where critical accounting judgments, estimates and assumptions are made and where actual results may differ from these estimates under different assumptions and conditions and may materially affect financial results or the financial position reported in future periods.

Further details of the nature of these assumptions and conditions may be found in the relevant notes to the consolidated financial statements.

(ii) Key Sources of Estimation Uncertainty

Information about assumptions and estimation uncertainties that have a significant risk of resulting in a material adjustment to the financial results or the financial positions reported in future periods are included in the following notes:

Recoverability of Exploration and Evaluation Assets, Development Assets and Property, Plant and Equipment

The Company assesses all exploration and evaluation assets, development assets and PPE at each reporting date to determine whether any indication of impairment exists. Where an indicator of impairment exists, a formal estimate of the recoverable amount is made, which is the higher of the fair value less costs of disposal and value in use. These assessments require the use of estimates and assumptions such as long term commodity prices, discount rates, foreign exchange rates, years to commencement of production, future capital requirements, exploration potential and operating performance.

Determination of Reserve and Resource Estimates

Mineral reserves and resources are estimates of the amount of ore that can be economically and legally extracted from the Company's exploration and development properties. The estimation of recoverable reserves is based upon factors such as estimates of commodity prices, production costs, production techniques, future capital requirements and foreign exchange rates, along with geological assumptions and judgments made in estimating the size and grade of the ore body. Changes in the reserve or resource estimates may impact the carrying value of exploration and evaluation assets, development assets, PPE, site closure and reclamation provision and amortization expense.

Fair Value of Share Based Payments and Warrants

The Company follows IFRS 2, Share-based Payment, in determining the fair value of share based payments. This calculated amount is not based on historical cost, but is derived based on assumptions (such as the expected volatility of the price of the underlying security, expected hold period before exercise, dividend yield and the risk-free rate of return) input into a pricing model. The model requires that management make forecasts as to future events, including estimates of: the average future hold period of issued stock options and compensation warrants before exercise, expiry or cancellation; future volatility of the Company's share price in the expected hold period; dividend yield; and the appropriate risk-free rate of interest. The resulting value calculated is not necessarily the value that the holder of the option or warrant could receive in an arm's length transaction, given that there is no market for the options or compensation warrants and they are not transferable. Similar calculations are made in estimating the fair value of the warrant component of an equity unit. The assumptions used in these calculations are inherently uncertain. Changes in these assumptions could materially affect the related fair value estimates.

Site Closure and Reclamation Provision

Site closure and reclamation provision recognized is periodically reviewed and updated based on the facts and circumstances available at the time. Changes to the estimated future costs are recognized in the Statement of Financial Position by adjusting both the site closure and reclamation asset and provision.

Property, Plant and Equipment - Estimated Useful Lives

Management estimates the useful lives of PPE based on the period during which the assets are expected to be available for use. The amounts and timing of recorded expenses for depreciation of PPE for any period are affected by these estimated useful lives. The estimates are reviewed at least annually and are updated if expectations change as a result of physical wear and tear, technical or commercial obsolescence and legal or other limits to use. It is possible that changes in these factors may cause significant changes in the estimated useful lives of the Company's PPE in the future.

(iii) Critical Judgments

Information about critical judgments in applying accounting policies that have most significant effect on the consolidated financial statements are as follows:

Capitalization of Exploration and Evaluation Costs

Exploration and evaluation costs incurred during the year are recorded at cost. Capitalized costs include costs directly attributable to exploration and evaluation activities, including salaries and benefits of employees who are directly engaged in the exploration and evaluation activities. Administrative and other overhead costs are expensed. Exploration and evaluation costs incurred that have been determined to have future economic benefits and can be economically recoverable are capitalized. In making this judgment, management assesses various sources of information including, but not limited to, the geologic and metallurgic information, history of conversion of mineral deposits to proven and probable mineral reserves, scoping and feasibility studies, proximity of operating facilities, operating management expertise and existing permits.

Management fees of $109,351 were earned in the Year (2019 - $10,204) related to the management of Cheetah's work programs at Nechalacho, which commenced towards the end of Fiscal 2019.

Corporate and administrative expenses

Corporate and Administrative expenses totalled $1,828,971 during Fiscal 2020, an 24% decrease from the amount incurred in Fiscal 2019 ($2,415,003). The main areas of decreased operating expenses for the Year were expenses on salaries and benefits and occupancy expenses, which were partly offset by higher public and investor relations costs and marketing and sales expense.

Salaries and benefits for the Year decreased by approximately 30% to $1,007,016 compared to $1,433,624 in Fiscal 2019 reflecting a reduced level of staffing and salary levels, and the Company's senior management agreeing to a 50% reduction in their salaries from April to August, 2020, as well as the Canada Emergency Wage Subsidy ("CEWS") that is expected to be received.

No occupancy expenses were recognized during the Year compared to $343,673 in Fiscal 2019. The decrease is primarily related to the adoption of IFRS 16, and is partly offset by the increase in depreciation expense for the leased office premise of $121,093 (net of $74,997 in rent forgiveness receivable under the Canada Emergency Commercial Rent Assistance program) and the increase of $43,530 in interest expense on lease obligation. The balance of the decrease is mostly due to the reduced size of the Company's office premises.

Directors' fees decreased by $51,740 (81%) to $12,060 compared to $63,800 for Fiscal 2019. Effective September 1, 2019, the base yearly Director's fee was reduced to $5,000 (from $10,000) and the meeting fees ($400 per meeting) and the Board and Committee Chair fees ($3,000) were eliminated.

Expenses on public and investor relations for the Year increased by $69,077 (38%) to $249,761 compared to $180,684 in Fiscal 2019. The increase is primarily related to the increased level of investor relations activities during the first six months of the Year that subsequently decreased substantially after the COVID-19 pandemic lockdown began in March, 2020. Activities since then have mostly involved participation in virtual investment conferences.

Marketing and sales related expenses for the Year increased by $120,429 (592%) to $140,774 compared to Fiscal 2019, with most of the increase being due to significantly increased government relations activities and increased level of market development activities performed by consultants after the departure of the Company's former Vice-President, Market Development and Sales at the end of Fiscal 2019. This is a result of new interest from both the Federal and Provincial governments on creating policy to enable new critical minerals supply chains to be established in Canada. With Avalon being one of the few Canadian companies with significant experience in this area, the Company has been frequently asked to support these efforts.

Impairment loss on exploration and evaluation assets

During Fiscal 2020, due to an inability to enter into an agreement with the surface rights holder to access the tailings management area of East Kemptville Special Licence, the company wrote off the costs incurred to-date of $5,587,210 as an impairment loss during the Year.

During Fiscal 2019, the Company has abandoned three peripheral exploration licences totalling approximately 2,137 hectares surrounding the East Kemptville Special Licence, accordingly the costs incurred to-date of $639,034 on the mineral claims under these exploration licences have been written off as an impairment loss during Fiscal 2019.

General Exploration

Expenses on general exploration increased by $115,492 to $127,353 during the Year compared to $11,861 in Fiscal 2019. This increase is primarily due to the increased level of activities undertaken to evaluate new opportunities with near term development potential such as extracting valuable products from mine wastes using new technologies.

Share based Compensation

Share based compensation decreased to $99,033 for the Year compared to $78,844 for Fiscal 2019. This increase is primarily related the increased number of options earned during the Year.

Financing transaction costs

The Company recognized a financing transaction cost expense of $177,503 during Fiscal 2019 relating to the issuance of the convertible note payable issued on November 30, 2018. No such transaction occurred in the Year and accordingly the financing transaction cost expense for the Year is $nil.

Increase in fair value of convertible redeemable preferred shares

The fair value of the A1, B1 and C1 Preferred Shares had been re-measured as at each financial statement reporting date, which resulted in an increase of $39,375 for Fiscal 2020 compared to an increase of $376,688 for Fiscal 2019. All of the remaining outstanding preferred shares were converted into common shares during the Year.

Increase (Decrease) in fair value of derivative liabilities

The fair values of the Company's outstanding derivative liabilities (which included the warrants denominated in US$ and warrants with exercise prices that are subject to adjustment from time to time in the event of certain common share rights offerings) were re-measured using the Black-Scholes pricing model as at August 31, 2020 and August 31, 2019, which resulted in an increase of $32,758 for the Year compared to a decrease of $126,951 for Fiscal 2019.

Deferred Income Tax Recoveries

In Fiscal 2020, the Company has incurred Canadian Exploration Expenditures ("CEE") of $221,580 related to certain flow-through equity financings completed in Fiscal 2019. Accordingly, the Company has recognized a pro rata amount of the flow-through share premium of $47,481 through the consolidated statement of comprehensive loss as a deferred income tax recovery with a corresponding reduction to the deferred flow-through share premium liability. In Fiscal 2019, the Company had recognized a deferred income tax recovery of $154,676 resulting from the CEE of $716,342 incurred in Fiscal 2019 related to certain flow-through equity financings completed in Fiscal 2019 and Fiscal 2018.

Year ended August 31, 2019 compared with the year ended August 31, 2018

		2019			2018
Revenue
Interest income	$	42,819		$	61,777
Management fee		10,204			-
		53,023			61,777

Expenses
Corporate and administrative expenses		2,415,003			2,724,759
Impairment loss on exploration and evaluation assets		639,034			-
General exploration		11,861			17,269
Depreciation		20,617			18,538
Share based compensation		78,844			149,286
Foreign exchange loss		1,435			2,705
Financing transaction costs		177,503			634,912
Increase in fair value of convertible redeemable preferred shares		376,688			535,500
Decrease in fair value of derivative liabilities		(126,951	)		(562,216	)

		3,594,034			3,520,753

Net Loss before Income Taxes		(3,541,011	)		(3,458,976	)
Deferred Income Tax Recoveries		154,676			218,232

Net Loss and Total Comprehensive Loss for the year	$	(3,386,335	)	$	(3,240,744	)

During Fiscal 2019, the Company's net loss increased by $145,591 from a net loss of $3,240,744 for the year ended August 31, 2018 ("Fiscal 2018") to a net loss of $3,386,335 for Fiscal 2019. The overall decrease in the net loss as compared to the prior year was due to the factors discussed below:

Corporate and administrative expenses

Corporate and Administrative expenses totalled $2,415,003 during Fiscal 2019, an 11% decrease from the amount incurred in Fiscal 2018 ($2,724,759). The main areas of decreased operating expenses for the Year were expenses on public and investor relations, marketing and sales, and insurance.

Expenses on public and investor relations for Fiscal 2019 decreased by $209,201 (54%) to $180,684 compared to $389,885 in Fiscal 2018. The decrease is primarily related to the reduced amount of work provided by consultants with respect to investor relations activities in the US and in Europe. The Company also participated in fewer capital and investment conferences during Fiscal 2019compared to Fiscal 2018.

Marketing and sales related expenses for Fiscal 2019 decreased by $55,373 (73%) to $20,346 compared to Fiscal 2018, which primarily related to the decrease in travel for meetings with potential customers. The Company also participated in fewer industry conferences.

Insurance expenses decreased by $35,072 (28%) to $91,751 during Fiscal 2019 compared to Fiscal 2018, which primarily related to the reduction in premium for the Company's directors' and officers' liability insurance policy.

Impairment loss on exploration and evaluation assets

The company has abandoned three peripheral exploration licences totalling approximately 2,137 hectares surrounding the East Kemptville Special Licence during Fiscal 2019, accordingly the costs incurred to-date of $639,034 on the mineral claims under these exploration licences have been written off as an impairment loss during Fiscal 2019.

No properties were abandoned during Fiscal 2018 and no impairment loss was recognized in Fiscal 2018.

Share based Compensation

Share based compensation decreased to $78,844 for Fiscal 2019 compared to $149,286 for Fiscal 2018. This decrease is primarily related to the decrease in the estimated fair values of options earned during Fiscal 2019 compared to Fiscal 2018.

Financing transaction costs

The Company recognized a financing transaction cost expense of $177,503 during Fiscal 2019 relating to the issuance of the convertible note payable issued on November 30, 2018, and the financing transaction cost expenses of $634,912 recognized in Fiscal 2018 was related to the issuances of 300 B1 Preferred Shares and 150 C1 Preferred Shares in January 2018 and June 2018, respectively.

Increase in fair value of convertible redeemable preferred shares

The fair value of the A1, B1 and C1 Preferred Shares had been re-measured as at August 31, 2019 and August 31, 2018, which resulted in an increase of $376,688 for Fiscal 2019 compared to an increase of $535,500 for Fiscal 2018.

B. Liquidity and Capital Resources

In management's view, given the nature of the Company's operations, which consist of the exploration and development of mining properties, the most relevant financial information relates primarily to current liquidity, solvency, and planned property expenditures. The Company's financial success will be dependent on the economic viability of its resource properties and the extent to which it can discover and develop new mineral deposits. Such development may take several years to complete and the amount of resulting income, if any, is difficult to determine. The sales value of any mineralization discovered by the Company is largely dependent on factors beyond the Company's control, including the market value of the metals and minerals to be produced.

As at August 31, 2020, the Company has current assets of $1,677,400 and current liabilities of $1,043,819, and its working capital is $633,581. Excluding the deferred flow-through share premium of $136,800, the Company's adjusted working capital as at August 31, 2020 was $770,381, (calculated by adding back the deferred flow-through share premium of $136,800 to the working capital of $633,581). As the de-recognition of the deferred flow-through share premium will not require the future out flow of resources by the Company, it is management's belief that the adjusted working capital figure provides useful information in assessing the Company's liquidity risk. Substantially all of the Company's cash and cash equivalents are held at a major Canadian chartered bank in cash and short term guaranteed investment certificates bearing nominal interest. As at August 31, 2019, the Company had adjusted working capital of $691,489 and cash and cash equivalents on hand of $1,881,841.

The Company's current operating expenditures, excluding expenditures on resource property work programs, are approximately $250,000 per month. The Company's current anticipated resource property expenditures planned to be incurred during the year ending August 31, 2021, assuming the requisite financing is in place, are budgeted at approximately $600,000 (excluding capitalized salaries and benefits).

The Company believes its present resources are sufficient to meet all of its current contractual obligations, administrative and overhead expenditures, and planned exploration programs until the end of February, 2021. Initiatives to raise additional capital are in progress although there can be no assurances that the Company will be able to raise additional funds required for all planned expenditures. As a result, certain expenditures may have to be delayed until sufficient funding has been raised. Given the continuation of weak investor sentiment and capital market conditions in the junior resource sector, there exists an uncertainty as to the Company's ability to raise additional funds on favourable terms or at all. This condition indicates the existence of a material uncertainty that raises substantial doubt about the Company's ability to continue as a going concern. The Company's expenditures on other discretionary exploration and development activities have some scope for flexibility in terms of amount and timing, which can be adjusted accordingly.

The Company continues to work on attracting more substantial project financing through the participation of one or more strategic partners, a long term construction debt financing facility, and/or through the equity markets. If the Company is not able to secure financing on satisfactory terms, expenditures on the development of its projects will need to be delayed.

All of the Company's resource properties are owned, leased or licenced with minimal holding costs. The most significant holding costs being annual lease rental fees on Nechalacho of $24,841 (which will now be shared 50/50 with Cheetah) and the annual expenditures related to the mining leases at Separation Rapids and Warren Township totalling $3,327. As at August 31, 2020, the Company is also required to incur additional CEE of $539,400 (the remaining balance of the required expenditures resulting from the private placement completed in Fiscal 2020) by December 31, 2021.

During Fiscal 2020, the Company completed a private placement and issued 6,000,000 flow-through units ("FT Unit") at a price of $0.09 per FT Unit for gross proceeds of $540,000. Each FT Unit was comprised of one flow-through common share and one-half of one common share purchase warrant. Each whole warrant entitles the holder to acquire one common share at a price of $0.12 until August 25, 2022.

A joint venture with an industry partner or end-user may represent an attractive alternative for financing the further stages in the development of any of the Company's projects once the capital requirements become relatively large.

The Company has a lease for its premises. As at the date of this Annual Report, the minimum lease commitments under these leases are as follows:

Fiscal year ended August 31, 2021 $ 165,158

2022 $ 222,556

2023 $ 229,181

2024 $ 233,563

2025 $ 63,280

C. Research and Development, Patents and Licenses, etc.

Research and development expenditures incurred during Fiscal 2020 and Fiscal 2019 totalled $304,802 and $152,200 respectively.

The Company has invested significant amounts of resources in researching, developing and optimizing the metallurgical processes to recover the REE from the Nechalacho mineral deposit. The bulk of these R&D investigations have been conducted at a commercial laboratory in Lakefield Ontario, although further work has also been conducted at other globally recognized research institutes elsewhere in Ontario, USA and South Africa.

The areas investigated have included ore comminution and froth flotation to produce a mineral concentrate, followed by numerous hydrometallurgical processes aimed at firstly leaching the REE and then removing the various impurities such that a high purity bulk REE precipitate can be produced for toll treating by others. None of the processes developed or implemented are known to be protected by any third party patents or licences as they are commonly applied to other metallurgical systems. However, Avalon is investigating the potential merit of patenting the overall combination of processes for the treatment of similar ore bodies or mineral concentrates.

Leading up to the compilation of the PEA for the Separation Rapids Lithium Project extensive testwork was conducted to develop the flotation process for producing concentrates of both petalite and a mixed feldspar. This work included both bench scale and pilot scale work programs. In addition, process testwork was conducted with regards to the development of processes to produce both lithium carbonate and lithium hydroxide from the petalite concentrate. Processes to produce both products were developed with further attention then paid to the hydroxide process and production of final hydroxide crystals which meet battery grade specifications. In Fiscal 2017, Avalon filed a provisional application (number 62419532) for patent under 37 CFR 1.29 which covers the process of producing lithium hydroxide from petalite with corresponding recycling of sulphuric acid. During Fiscal 2018, the Company filed an International Patent Application for this process but has since decided not to finalize this application process.

During Fiscal 2019 and 2020, Avalon's research and development work on various optimization strategies for the Separation Rapids Lithium Project planned production processes, including the flowsheet parameters, reagent recycling and water treatment processes. The use of gravity concentration and ore sorting pre-concentration methods are to be further investigated, with the objective of reducing costs for the flotation circuit, reducing energy and waste volumes and overall environmental impacts by reducing the amount of feed reporting to the milling circuit.

Avalon has shipped a 50 kg sample of petalite concentrate to a lab in Sudbury, Ontario to generate leach solution for use in optimizing the final stages of the planned flowsheet, which involves the use of electrolysis to produce lithium hydroxide. The program will focus on an improved membrane alternative and efficient crystallization of the final high purity product.

In the glass-ceramics market, the innovation of new products is creating many new market opportunities for Avalon's petalite product. One such market requires a petalite product that has not been concentrated by froth flotation, as residual reagents on the surface of the product can compromise its performance in this specific glass-ceramic material. Recent testwork has successfully demonstrated that an acceptable quality petalite product to serve this market can be produced simply by using DMS.

D. Trend Information

While the Company does not have any producing mines, it is directly affected by trends in the metal industry.

After a significant upward spike in prices in 2011, rare earth prices fell back almost as quickly in 2012 and trended downward to mid-2015. Prices remained flat until mid-2017 where they started to increase (specifically neodymium) again due to increasing demand for magnets for motors of hybrid and electric vehicles and Chinese actions to eliminate illegal mining. Neodymium prices gave up most of their gains by the end of 2019 and have been relatively flat at approximately their 2016 level throughout 2020. Future prices for rare earths are difficult to predict as they are influenced by demand for REE containing products such as electric motors for hybrid and electric vehicles, but also by Chinese government policy, and geopolitical events such as the burgeoning US-China trade war. Increased demand for hybrid and electric vehicles should lead to higher prices for rare earths, however the Chinese government may not want a repeat of very high REE prices which occurred in 2012 and so may release REEs into the market that some observers believe they have accumulated, or instruct Chinese producers to increase output to keep prices stable. Demand for REE products may be impacted by demand for some of the products incorporating rare earths. Lack of growth in these markets may adversely affect the demand for REE products.

Lithium is not traded on any formally recognized exchange and there are few sources of reliable publicly available price data. Transactions are negotiated directly between seller and buyer and payment terms are rarely reported. According to Benchmark Mineral Intelligence, their Global Weighted Average price lithium carbonate price shows lithium at US$5,500/tonne in early 2015 and at US$15,000/tonne in July 2018. This had fallen to near US$10,000/tonne in October 2019, and has declined a further 33% since then, with Argus Media reporting prices between US$6,000/tonne and US$8,000/tome in November, 2020. Demand for lithium ion batteries for electric vehicles ("EV"s) is the main driver of increased demand for lithium and the demand for EVs is expected to continue to increase. The impact on future lithium prices will be determined by the actual future demand for EVs and the speed at which new production of lithium that is required to meet the EV demand comes into the market.

Overall market prices for securities in the mineral resource sector and factors affecting such prices, including base metal prices, political trends in the countries such companies operate, and general economic conditions, may have an effect on the terms on which financing is available to the Company, if at all.

In the first half of 2020, many businesses around the world were severely disrupted due to the impacts of shutdowns and other restrictions designed to combat the spread of COVIDS-19. Such disruptions and the potential economic setbacks on a worldwide scale in 2020 and later years could impact on our business operations, including delays in receiving the necessary government permits and approvals, the ability to conduct field programs, the ability to conduct metallurgical testwork at third party labs and the ability to raise capital through the stock market.

Conflicts of Interest

To the best of the Company's knowledge, and other than as disclosed in this annual report, there are no known existing or potential conflicts of interest between the Company and its directors, officers or promoters, except that certain of the Company's directors, officers and promoters serve as directors and officers of other public companies, and therefore it is possible that a conflict may arise between their duties as a director, officer or promoter of the Company and their duties as a director or officer of such other companies.

The directors and officers of the Company are aware of the existence of laws governing accountability of directors and officers for corporate opportunity and requiring disclosures by directors of conflicts of interest and the Company will rely upon such laws in respect of any directors' and officers' conflicts of interest or in respect of any breaches of duty by any of its directors or officers. All such conflicts will be disclosed by such directors or officers in accordance with the CBCA, and they will govern themselves in respect thereof to the best of their ability in accordance with the obligations imposed upon them by law.

The majority of the Company's directors are also directors, officers or shareholders of other companies that are engaged in the business of acquiring, developing and exploiting natural resource properties. Such associations may give rise to conflicts of interest from time to time. Such a conflict poses the risk that the Company may enter into a transaction on terms which place the Company in a worse position than if no conflict existed. The directors of the Company are required by law to act honestly and in good faith with a view to the best interest of the Company and to disclose any interest which they may have in any project or opportunity of the Company. However, each director has a similar obligation to other companies for which such director serves as an officer or director. The Company has no specific internal policy governing conflicts of interest.

Cease Trade Orders, Bankruptcies, Penalties or Sanctions

To the Company's knowledge, no director or executive officer of the Company is, as of the date hereof, or was within ten years before the date hereof, a director, chief executive officer or chief financial officer of any company (including the Company) that:

(i) was subject to a cease trade order, an order similar to a cease trade order, or an order that denied the relevant company access to any exemption under securities legislation, that was in effect for a period of more than 30 consecutive days (an "Order") that was issued while the director or executive officer was acting in the capacity as director, chief executive officer or chief financial officer; or

(ii) was subject to an Order that was issued after the director or executive officer ceased to be a director, chief executive officer or chief financial officer and which resulted from an event that occurred while that person was acting in the capacity as director, chief executive officer or chief financial officer.

To the Company's knowledge, no director or executive officer of the Company, or a shareholder holding a sufficient number of the Company's securities to affect materially the control of the Company:

(i) is, as at of the date hereof, or has been, within the ten years before the date hereof, a director or executive officer of any company (including the Company) that, while that person was acting in that capacity, or within a year of that person ceasing to act in that capacity, became bankrupt, made a proposal under any legislation relating to bankruptcy or insolvency or was subject to or instituted any proceedings, arrangement or compromise with creditors or had a receiver, receiver manager or trustee appointed to hold its assets; or

(ii) has, within the ten years before the date hereof, become bankrupt, made a proposal under any legislation relating to bankruptcy or insolvency, or become subject to or instituted any proceedings, arrangement or compromise with creditors, or had a receiver, receiver manager or trustee appointed to hold the assets of the director, executive officer or shareholder.

To the Company's knowledge, no director or executive officer of the Company, or a shareholder holding a sufficient number of securities of the Company to affect material control of the Company, has been subject to:

(i) any penalties or sanctions imposed by a court relating to securities legislation or by a securities regulatory authority or has entered into a settlement agreement with a securities regulatory authority, or

(ii) any other penalties or sanctions imposed by a court or regulatory body that would likely be considered important to a reasonable investor in making an investment decision.

Legal Proceedings and Regulatory Actions

The Company is and has not been a party as a defendant to, and none of its properties are or were the subject of, any legal proceedings during the financial year of the Company ended August 31, 2020 that involve a claim for damages which exceeds ten per cent of the current assets of the Company, and no such legal proceedings are known to Avalon to be contemplated.

There were no penalties or sanctions imposed against the Company by a court relating to securities legislation or by a securities regulatory authority during the financial year of the Company ended August 31, 2020, no other penalties or sanctions have been imposed by a court or regulatory body against the Company that would likely be considered important to a reasonable investor in making an investment decision with respect to the securities of Avalon, and no settlement agreements were entered into with a Court relating to securities legislation or with a securities regulatory authority during the financial year of the Company ended August 31, 2020.

Interest of Management and Others in Material Transactions

The Company is not aware of any material interest, direct or indirect, in any transaction within the three most recently completed financial years involving any director, executive officer, proposed nominee for election as a director or any shareholder holding more than 10% of the voting rights attached to the common shares or any associate or affiliate of any of the foregoing that has materially affected or will materially affect the Company, other than as set forth herein.

Transfer Agent and Registrar

The Company's transfer agent and registrar is TSX Trust Company, with its principal office at 100 Adelaide Street West, Suite 301, Toronto, ON M5H 1S3.

B. Compensation

During the last completed fiscal year of the Company, the Company had four named executive officers ("NEOs"), namely, its Chief Executive Officer ("CEO") and President, Donald Bubar, its Chief Financial Officer ("CFO") and Vice President, Finance, R. James Andersen, its Vice President, Sustainability, Mark Wiseman and its former Senior Vice President, Metallurgy and Technology Development, David Marsh.

1) Compensation Discussion and Analysis

Compensation, Governance and Nominating Committee

The Compensation, Governance and Nominating Committee (the "CGN Committee") of the Board is responsible for making recommendations to the Board with respect to the compensation of the executive officers of the Company as well as, among other things, with respect to the Company's stock option plan (the "Stock Option Plan") and any other employee benefits and/or plans and with respect to directors' compensation. The Board (exclusive of the CEO, who is also a member of the Board) reviews such recommendations and gives final approval to the compensation of the executive officers.

The CGN Committee currently consists of Naomi Johnson (Chair), Alan Ferry and John E. Fisher, each of whom are independent, pursuant to the rules of the TSX. Each of Ms. Johnson, Mr. Ferry, and Mr. Fisher has direct and extensive experience in corporate management and compensation issues in either the mining industry and/or the financial industry. Ms. Johnson is a global CSR executive, international development specialist and a lawyer, lending a diverse and holistic perspective to developing leading-edge approaches to stakeholder risk and impact management across the private, public and not for profit sectors. Most recently Ms. Johnson held the position of Vice President of Community Relations at Titan Mining Corporation. Prior to this she worked for Barrick Gold Corporation from 2008 to 2017. The last position she held at Barrick was that of Partner and Senior Director of Community Relations. She has also worked for HATCH as Regional Practice Lead for the Americas - Social Impact. Mr. Ferry is a member of the committee responsible for compensation matters of Plateau Energy Metals Inc., which is a publicly listed mineral exploration company. Mr. Fisher has worked in base and precious metals exploration in western and northern Canada for companies including Noranda Exploration and United Keno Hill Mines. He also has extensive experience in the construction materials and waste management industries, most recently acting as President & CEO of Walker Industries, a private aggregates, waste disposal, and specialty chemical manufacturing company with over a thousand employees. This experience relating to executive compensation matters collectively provides members of the CGN Committee with a suitable perspective to make decisions on the appropriateness of the Company's compensation policies and practices.

The CGN Committee has not to date felt it necessary to engage any compensation consultant or advisor to assist it in the performance of its duties.

Compensation Objectives and Structure

The overall compensation objective adopted by the CGN Committee is to ensure that executive compensation is fair and reasonable, rewards management performance and is, by being competitive, sufficient to attract and retain experienced and talented executives. Due to the nature of the mineral industry, executive talent has significant mobility and, as a result, competition for experienced executives in the past has been great. The Company's compensation policies are designed to recognize the foregoing. The foregoing objective also recognizes the fundamental value added by a motivated and committed management team in accomplishing the Company's principal corporate objectives.

Historically, the compensation provided by the Company to its executive officers, including the CEO, has had three components: base salary, bonuses and long term incentive compensation in the form of stock options (see "Stock Option Plan"). Bonus compensation is a cash component of management compensation in order to permit the recognition of outstanding individual efforts, performance, achievements and/or accomplishments by members of the Company's management team. Any specific bonus amounts are awarded on the recommendation of the CGN Committee and ultimately at the discretion of the Board, with bonus amounts for members of the Company's management team other than the CEO being based primarily on the recommendations of the CEO. The appropriateness and amount of any bonuses to the CEO and/or management team members has to date been considered annually by the CGN Committee and Board on a discretionary basis as no formal bonus plan based on quantitative and/or qualitative benchmarks has been established for the Company as yet.

Base salary is the principal component of each executive officer's overall compensation and reflects the fixed component of pay that compensates the relevant executive officer for fulfilling his or her day to day roles and responsibilities. The CGN Committee has typically in the past reviewed the base salary levels and considered the individual performance of the CEO and of each other executive officer and historically has compared executive compensation for other companies operating in the mineral industry.

Recently, however, the overall financial condition of the Company and the overall depressed nature of the junior resource sector in Canada and elsewhere has significantly factored into the setting of the cash remuneration levels of the Company's senior management and, in particular, has resulted in there being no or minimal increases in the cash remuneration of senior management for the calendar years 2014 - 2018, and a reduction in such cash remuneration during the period 2014 - 2017, and deferral of certain salaries as outlined under "Base Salary and Bonus" below. Given the nature of the Company as an exploration and development stage resource company without existing mineral production and without any attendant revenues derived thereon, compensation has in the past been generally based on comparative, qualitative or subjective measures, rather than quantitative benchmarks. No specific benchmarks, weights or percentages are assigned to any of the measures or objectives upon which the executive compensation is generally based.

Annual salary adjustments, if any, have historically been made on a calendar year basis, typically being determined towards the end of each calendar year and made effective January 1 of the following year.

Compensation Risk Management

The CGN Committee evaluates the risks, if any, associated with the Company's compensation policies and practices. Implicit in the mandate of the Board is that the Company's policies and practices respecting compensation, including those applicable to the Named Executive Officers, be designed in a manner which is in the best interests of the Company and its shareholders.

In particular, the Company's executive compensation policies incorporate a balanced compensation program design (see "Compensation Objectives and Structure") and include elements of fixed and variable compensation and short and longer term incentives.

The base salary component of the compensation provided by the Company to its executive officers is set annually. The bonus component of the compensation provided by the Company to its executive officers in the past has been discretionary, is currently based on qualitative or subjective measures rather than quantitative benchmarks, and is subject to the prior approval of the CGN Committee. Discretionary assessment of the performance of executive officers by the Committee ensures that bonus awards align with both perceived and actual performance and the risks associated with such performance and any bonus award. No bonuses have been awarded to any members of senior management since 2014.

The stock option component of the compensation provided by the Company to its executive officers is both "longer term" and "at risk" and, accordingly, is directly linked to the achievement of longer term value creation. Since the benefits of such compensation, if any, are generally not realized by the executive officers until a significant period of time has passed and that there are typically deferred vesting provisions attached to each option grant (see "Stock Option Plan" below), the incentive for executive officers to take inappropriate or excessive risks with regard to their compensation that are financially beneficial to them at the expense of the Company and its shareholders is limited.

The CGN Committee believes that it is unlikely that an executive officer would take inappropriate or excessive risks at the expense of the Company and its shareholders that would be beneficial to them with regard to their short term compensation when their longer term compensation might be put at risk from their actions. Due to the size of the Company, the CGN Committee is able to monitor and consider any risks which may be associated with the Company's compensation policies and practices. Risks, if any, may be identified and mitigated through regular meetings of the Board during which financial and other information relating to the Company are reviewed, and which includes senior executive compensation. The CGN Committee has not identified any risks arising from the Company's compensation policies and practices that it believes would be reasonably likely to have a material adverse effect on the Company.

Although the Company has not as yet adopted any specific policies in this regard, in the event that a director or an executive officer purchases financial instruments that are designed to hedge or offset a decrease in the market value of the Company's equity securities granted as compensation or held, directly or indirectly by the director or the executive officer, such purchases must be disclosed in insider reporting filings. To date, no such purchases have been disclosed by any director or executive officer of the Company.

Base Salary and Bonus

The CGN Committee, in respect of the setting of salaries for the Named Executive Officers for 2020, recommended to the Board and the Board determined that there would be no salary increase for the Named Executive Officers in 2020. This determination recognized the then current financial situation of the Company and the overall depressed nature of the junior resource sector in Canada.

Effective November 1, 2019, Mr. Bubar agreed to reduce his annual cash compensation from $300,000 to $250,000 indefinitely.

To assist the Company navigate the early stages of the COVID-19 pandemic, the Named Executive Officers forgave half of their compensation for the period from April 1, 2020 to August 31, 2020

No discretionary bonuses were awarded to any Named Executive Officers of the Company for 2020.

Options

The CGN Committee is of the view that the granting of options is an appropriate method of providing long-term incentives to senior management of the Company and, in general, aligns the interests of senior management with those of the shareholders by enabling senior management to participate in and be rewarded by an increase in the market price of the Company's common shares. Participation in the Stock Option Plan also provides a significant incentive to the participants to enter into and subsequently to continue their employment with the Company, particularly when the Company may not have the financial resources and/or pension and other benefit plans to attract and retain experienced personnel. In addition, the CGN Committee is of the view that the Company's compensation mix must be consistent with industry norms which supports the provision by the Company of a longer term compensation incentive. This longer term compensation incentive is best realized by providing compensation linked to share price performance such as options. The number and terms of options previously granted to the Named Executive Officers have been and are expected to continue to be taken into account, as well as the number and terms of options granted by peer group companies in determining whether and in what quantity new option grants should be made in any year. Also, as discussed under "Base Salary and Bonus" above, additional options have been granted to members of senior management in lieu of receipt by them of certain specified cash salary amounts.

The Company's current objective under the Stock Option Plan is to allot to the CEO options to purchase 2,000,000 common shares, to the CFO and Senior Vice President options to purchase 1,200,000 common shares and to officers at the Vice President level options to purchase 1,000,000 common shares (the "target allotments"). The foregoing allotments do not include the additional options granted to the Named Executive Officers, as described under "Base Salary and Bonus" above.

The Company typically grants one fifth of an employee's option allotment on an annual basis. The methodology applied by the Company permits exceptions to be made, for example, to recognize exceptional employee contributions and to permit flexibility in negotiating employment contracts.

Circumstances Triggering Termination and Change of Control Benefits

As noted below under the heading "Employment Contracts", there are certain circumstances that trigger payments and other benefits to the CEO upon termination and change of control. The CGN Committee views such provisions as not only being fair and necessary to protect the CEO, but also to encourage the CEO to pursue those transactions such as mergers or take-overs that are beneficial to the Company and its shareholders, but that may result in the termination of the CEO's employment with the Company.

Stock Option Plan

The Stock Option Plan, approved by shareholders on February 25, 2020, is a fixed percentage plan that provides that the maximum number of options which may be outstanding at any time under the Stock Option Plan and any other compensation arrangement of the Company is 10% of the Company's issued and outstanding common shares. Eligible Participants under the Stock Option Plan include insiders or employees of the Company or any of its subsidiaries, and any other person or company engaged to provide ongoing management, consulting or advisory services to the Company.

The Company maintains the Stock Option Plan in order to provide effective incentives to directors, officers and senior management personnel of the Company and to enable the Company to attract and retain experienced and talented individuals in those positions by permitting such individuals to directly participate in an increase in share value created for the Company's shareholders.

Incentive options granted under the Stock Option Plan entitle the purchase of shares at a price and for the length of time determined by the Board provided that the price cannot be lower than the market price of the common shares on the TSX on the day prior to or on the day of the grant and the expiry date cannot be more than 10 years after the date of the grant. Further, the policies of the TSX also provide that the said exercise price of any options so granted cannot be reduced without shareholder approval.

Options under the Stock Option Plan are typically granted in such numbers as reflect the level of responsibility of the particular optionee and his or her contribution to the business and activities of the Company. Options may also be granted under the Stock Option Plan to consultants. Options granted under the Stock Option Plan typically have a five year term and are typically made cumulatively exercisable by the holders thereof in equal proportions of the aggregate number of shares subject to the options over specified time periods. Historically, after an initial grant, options have been re-granted upon such having been exercised. In the event a take-over bid (within the meaning of the Securities Act (Ontario)) is made for the common shares of the Company, then all unvested options thereupon become exercisable by the holder. Options terminate immediately upon an optionee's employment with the Company being terminated (unless otherwise determined by the Board) or unless such termination is a result of death, disability or retirement, in which case termination occurs 12 months from the occurrence of the relevant event (subject to the earlier expiry of the options in the normal course). The terms of the Stock Option Plan further provide that the exercise price at which common shares may be issued under the Stock Option Plan cannot be less than the current market price of the common shares when the relevant options are granted.

As at November 20, 2020, 13,695,000 common shares, being 43.9% of the currently issued common shares of the Company, were issuable pursuant to unexercised options granted to such date under the Stock Option Plan.

Incentives to Participants under the Stock Option Plan may also be provided by the granting of stock appreciation rights. Stock appreciation rights, which can be attached to an option at the discretion of the Company at any time, entitle a Participant in the Stock Option Plan to elect, in lieu of exercising an outstanding Option, to receive the number of common shares equivalent in value to the difference between his or her option exercise price and the then existing market value of the shares multiplied by the number of common shares over which he or she could otherwise exercise his or her option. No stock appreciation rights have been granted under the Stock Option Plan to date.

The rules of the TSX require that all unallocated options, rights or other entitlements under plans such as the Stock Option Plan must be re-approved by a majority of the relevant issuer's directors and by shareholders every three years after institution of the relevant plan. Under the policies of the TSX, if the Company wishes to make certain amendments to the Stock Option Plan, it must obtain shareholder approval.

2) Summary Compensation Table

The following table sets forth particulars concerning the compensation paid or accrued for services rendered to the Company by its NEOs in all capacities during the last three most recently completed financial years ended August 31:

Name and principal position	Year	Salary ($)	Share-based awards ($)	Option-based awards ($)⁽¹⁾	Non-equity incentive plan compensation ($)	Pension value ($)⁽²⁾	All other compensation ($)⁽³⁾	Total compensation ($)
Donald Bubar ⁽⁴⁾ President and CEO	2020	206,250	Nil	15,352	Nil	Nil	Nil	221,602
	2019	300,000	Nil	29,010	Nil	Nil	Nil	329,010
	2018	300,000	Nil	15,001	Nil	Nil	1,023	316,024
R. James Andersen CFO and Vice President, Finance	2020	190,000	Nil	13,842	Nil	Nil	Nil	203,842
	2019	240,000	Nil	9,090	Nil	Nil	Nil	249,090
	2018	240,000	Nil	7,052	Nil	Nil	Nil	247,052
Mark Wiseman Vice President, Sustainability	2020	164,667	Nil	6,619	Nil	Nil	Nil	171,286
	2019	187,000	Nil	3,760	Nil	Nil	Nil	190,760
	2018	172,000	Nil	6,044	Nil	Nil	1,023	179,067
David Marsh⁽⁵⁾ Former SVP, Metallurgy and Technology Development	2020	151,523	Nil	3,411	Nil	Nil	Nil	154,934
	2019	86,022	Nil	9,090	Nil	Nil	Nil	95,112
	2018	283,249	Nil	7,052	Nil	Nil	Nil	290,301

	Option-based Awards				Share-based Awards
Name	Number of securities underlying unexercised options (#)	Option exercise price ($)	Option expiration Date	Value of unexercised in-the-money options ($)⁽¹⁾	Number of shares or units of shares that have not vested (#)	Market or payout value of share-based awards that have not vested ($)	Market or payout value of vested share-based awards not paid out or distributed ($)
Donald Bubar Director, President and CEO	150,000⁽⁴⁾	0.12	Jan11/21	Nil	Nil	Nil	Nil
	200,000⁽²⁾	0.13	Feb28/21	Nil	Nil	Nil	Nil
	200,000⁽²⁾	0.18	Feb28/22	Nil	Nil	Nil	Nil
	200,000⁽²⁾	0.14	Feb28/23	Nil	Nil	Nil	Nil
	200,000⁽²⁾	0.10	Feb28/24	Nil	Nil	Nil	Nil
	500,000⁽²⁾	0.08	Jul8/24	Nil	Nil	Nil	Nil
	900,000⁽²⁾	0.08	Feb 28/25	Nil	Nil	Nil	Nil
R. James Andersen CFO and Vice President, Finance	100,000⁽³⁾	0.10	Nov30/20	Nil	Nil	Nil	Nil
	125,000⁽⁴⁾	0.12	Jan11/21	Nil	Nil	Nil	Nil
	120,000⁽²⁾	0.25	May31/21	Nil	Nil	Nil	Nil
	120,000⁽²⁾	0.15	May31/22	Nil	Nil	Nil	Nil
	120,000⁽²⁾	0.11	May31/23	Nil	Nil	Nil	Nil
	120,000⁽²⁾	0.12	May31/24	Nil	Nil	Nil	Nil
	300,000⁽²⁾	0.08	Feb 28/25	Nil	Nil	Nil	Nil
	240,000⁽²⁾	0.08	May31/25	Nil	Nil	Nil	Nil
Mark Wiseman Vice President, Sustainability	100,000⁽³⁾	0.10	Nov30/20	Nil	Nil	Nil	Nil
	100,000⁽⁴⁾	0.12	Jan11/21	Nil	Nil	Nil	Nil
	80,000⁽²⁾	0.20	Aug31/21	Nil	Nil	Nil	Nil
	80,000⁽²⁾	0.14	Aug31/22	Nil	Nil	Nil	Nil
	80,000⁽²⁾	0.10	Aug31/23	Nil	Nil	Nil	Nil
	80,000⁽²⁾	0.10	Aug31/24	Nil	Nil	Nil	Nil
	300,000⁽²⁾	0.08	Feb 28/25	Nil	Nil	Nil	Nil
David marsh⁽⁵⁾ Former SVP, Metallurgy and Technology Development	100,000⁽⁴⁾	0.10	Nov30/20	Nil	Nil	Nil	Nil
	125,000⁽³⁾	0.12	Jan11/21	Nil	Nil	Nil	Nil
	120,000⁽²⁾	0.25	May31/21	Nil	Nil	Nil	Nil
	120,000⁽²⁾	0.15	May31/22	Nil	Nil	Nil	Nil
	120,000⁽²⁾	0.11	May31/23	Nil	Nil	Nil	Nil
	120,000⁽²⁾	0.10	May31/24	Nil	Nil	Nil	Nil
	200,000⁽²⁾	0.08	Feb 28/25	Nil	Nil	Nil	Nil

(1) In-the-Money Options is the difference between the market value of the underlying securities at August 31, 2020 and the exercise price of the option. The closing market price of the Company's common shares as at August 31, 2020 was $0.065 per common share.

(2) These options vest as to 25% thereof on each of the first four anniversaries of the date of grant thereof and have a term of five years.

(3) These options were 100% vested on the date of grant and have a term of two years.

(4) These options were 100% vested on the date of grant and have a term of five years.

(5) Mr. Marsh left the Company on June 1, 2020, however as he is still providing consulting services to the Company, he is still an eligible person under the Stock Option Plan, and accordingly his options remained in place after the cessation of his employment.

An "incentive plan" is any plan providing compensation that depends on achieving certain performance goals or similar conditions within a specific period. An "incentive plan award" means compensation awarded, earned, paid or payable under an incentive plan.

A "change of control" shall be deemed to have occurred when any person, entity or group becomes the beneficial owner of 50.1% or more of the combined voting power of the Company's then outstanding voting securities entitled to vote generally in the election of directors; or completion of the sale or other disposition by the Company of all or substantially all of the Company's assets or a reorganization or merger or consolidation of the Company with any other entity or corporation, at which time the severance payment becomes due and payable on closing of the transaction, other than:

(i) a reorganization or merger or consolidation that would result in the voting securities of the Company outstanding immediately prior thereto continuing to represent, either by remaining outstanding or by being converted into voting securities of another entity, more than 50.1% of the combined voting power of the voting securities of the Company or such other entity outstanding immediately after such reorganization or merger or consolidation; or

(ii) a reorganization or merger or consolidation effected to implement a recapitalization or reincorporation of the Company (or similar transaction) that does not result in a material change in beneficial ownership of the voting securities of the Company or its successor.

The following amounts would have been required to be paid assuming a change of control event took place on the last business day of the Company's most recently completed financial year:

Name	Fees earned ($)	Share-based awards ($)⁽¹⁾	Option-based awards ($)⁽²⁾	Non-equity incentive plan compensation ($)⁽³⁾	Pension value ($)⁽⁴⁾	All other compensation ($)⁽⁵⁾	Total ($)
Alan Ferry *	5,000	Nil	5,223	Nil	Nil	Nil	10,223
Brian D. MacEachen *⁽⁶⁾	3,750	Nil	3,830	Nil	Nil	Nil	7,580
Naomi Johnson * ⁽⁷⁾	5,000	Nil	10,297	Nil	Nil	Nil	15,297
Jane Pagel*⁽⁶⁾	2,500	Nil	Nil	Nil	Nil	Nil	2,500
John E. Fisher*⁽⁷⁾	2,500	Nil	8,529	Nil	Nil	Nil	11,029
Marilyn Spink*⁽⁷⁾	1,250	Nil	16,638	Nil	Nil	Nil	17,888

_________________

*Independent and Non-Employee Directors.

(1) The Company does not currently have any share-based award plans.

(2) These amounts represent the "grant date fair value" of options granted to the respective director, which have been determined by using the Black-Scholes model, a mathematical valuation model that ascribes a value to an option based on a number of factors in valuing the option-based awards, including the exercise price of the option, the price of the underlying security on the date the option was granted, and assumptions with respect to the volatility of the price of the underlying security and the risk-free rate of return. Calculating the value of options using this methodology is very different from a simple "in-the-money" value calculation. In fact, options that are well out-of-the-money can still have a significant "grant date fair value" based on a Black-Scholes valuation, especially where, as in the case of the Company, the price of the common shares underlying the option is highly volatile. Accordingly, caution must be exercised in comparing grant date fair value amounts with cash compensation or an in-the-money option value calculation. The same caution applies to the total compensation amounts shown in the last column above, which are based in part on the grant date fair value amounts set out in the column for Option-based awards. These values are consistent with the accounting values used in the Company's financial statements. The Company selected the Black-Scholes model given its prevalence of use within North America.

(3) The Company does not have a non-equity incentive plan.

(4) The Company does not have any pension plans.

(5) The Company does not have any other benefit plans for its directors.

(6) Ms. Pagel and Mr. MacEachen ceased to be directors of the Company on February 25, 2020, and June 8, 2020, respectively.

(7) Ms. Johnson, Mr. Fisher and Ms. Spink became directors of the Company on September 20, 2019, February 25, 2020, and June 8, 2020, respectively.

The Company may grant incentive stock options to directors of the Company from time to time pursuant to the stock option plan of the Company and in accordance with the policies of the TSX.

Outstanding share-based awards and option-based awards

	Option-based Awards				Share-based Awards
Name⁽¹⁾	Number of securities underlying unexercised options (#)	Option exercise price ($)	Option expiration date	Value of unexercised in-the-money options ($)⁽²⁾	Number of shares or units of shares that have not vested (#)	Market or payout value of share-based awards that have not vested ($)	Market or payout value of vested share-based awards not paid out or distributed ($)
Alan Ferry	50,000⁽⁴⁾	0.16	Nov30/21	Nil	Nil	Nil	Nil
	50,000⁽⁴⁾	0.12	Apr29/23
	50,000⁽⁴⁾	0.10	Feb28/24
	75,000⁽⁴⁾	0.12	May31/24
	375,000⁽⁴⁾	0.08	Feb28/25
Naomi Johnson⁽⁵⁾	225,000⁽³⁾	0.08	Sep9/24	Nil	Nil	Nil	Nil
Naomi Johnson⁽⁵⁾	275,000⁽³⁾	0.08	Feb28/25	Nil	Nil	Nil	Nil
John E. Fisher⁽⁵⁾	500,000⁽³⁾	0.08	Feb28/25	Nil	Nil	Nil	Nil
Marilyn Spink⁽⁵⁾	500,000⁽³⁾	0.08	Jun15/25	Nil	Nil	Nil	Nil

(1) For the compensation of Donald Bubar who is a NEO of the Company, see "Incentive Plan Awards" above.

(2) In-the-Money Options is the difference between the market value of the underlying securities at August 31, 2019 and the exercise price of the option. The closing market price of the Company's common shares as at August 31, 2019 was $0.045 per common share.

(3) These options vest as to 25% thereof on each of the first four anniversaries of the date of grant thereof and have a term of five years.

(4) These options vest as to 50% thereof on each of the date of grant and the first anniversary thereof and have a term of five years.

(5) Ms. Johnson, Mr. Fisher and Ms. Spink became directors of the Company on September 20, 2019, February 25, 2020, and June 8, 2020, respectively.

Incentive plan awards - value vested or earned during the year

The following table sets forth the value vested or earned during the year of option-based awards, share-based awards and non-equity incentive plan compensation paid to directors during the year ended August 31, 2020:

Name⁽¹⁾	Option-based awards - Value vested during the year ($) ⁽²⁾	Share-based awards - Value vested during the year ($)	Non-equity incentive plan compensation - Value earned during the year ($)
Alan Ferry	Nil	Nil	Nil
Brian D. MacEachen⁽³⁾	Nil	Nil	Nil
Naomi Johnson⁽⁴⁾	Nil	Nil	Nil
Jane Pagel⁽³⁾	Nil	Nil	Nil
John E. Fisher⁽⁴⁾	Nil	Nil	Nil
Marilyn Spink⁽⁴⁾	Nil	Nil	Nil

(1) For the compensation of Donald Bubar who is a NEO of the Company, see "Incentive Plan Awards" above.

(2) The value of the options vested during the year for each director is based on the closing market price of the Company's common shares on the TSX on the vesting date less the option exercise price.

(3) Ms. Pagel and Mr. MacEachen ceased to be directors of the Company on February 25, 2020, and June 8, 2020, respectively.

(4) Ms. Johnson, Mr. Fisher and Ms. Spink became directors of the Company on September 20, 2019, February 25, 2020, and June 8, 2020, respectively.

Mandate of the Board of Directors, its Committees and Management

The role of the Board is to oversee the conduct of the Company's business, including the supervision of management, and determining the Company's strategy. Management is responsible for the Company's day to day operations, including proposing its strategic direction and presenting budgets and business plans to the Board for consideration and approval. The strategic plan takes into account, among other things, the opportunities and risks of the Company's business. Management provides the Board with periodic assessments as to those risks and the implementation of the Company's systems to manage those risks. The Board reviews the personnel needs of the Company from time to time, having particular regard to succession issues relating to senior management. Management is responsible for the training and development of personnel. The Board assesses how effectively the Company communicates with shareholders, but has not adopted a formal communications policy. Through the Audit Committee, and in conjunction with its auditors, the Board assesses the adequacy of the Company's internal control and management information systems. The Board looks to management to keep it informed of all significant developments relating to or affecting the Company's operations. Major financings, acquisitions, dispositions and investments are subject to Board approval. The Board adopted a formal mandate for the Board, the Chair of the Board and the CEO. The Board meets quarterly and additionally as required. The Board and committees may take action at these meetings or at a meeting by conference call or by written consent.

Majority Voting Policy

The Board has adopted a policy providing that in an uncontested election of directors, any nominee who receives a greater number of votes "withheld" than votes "for" will tender his or her resignation to the Chairman of the Board promptly following the shareholders' meeting. The Compensation, Governance and Nominating Committee ("CGN Committee") of the Board will consider the offer of resignation and will make a recommendation to the Board on whether to accept it. In considering whether or not to accept the resignation, the CGN Committee will consider all factors deemed relevant by members of such committee. The CGN Committee will be expected to accept the resignation except in situations where the considerations would warrant the applicable director continuing to serve on the Board. The Board will make its final decision and announce it in a press release within 90 days following the meeting. A director who tenders his or her resignation pursuant to this policy will not participate in any meeting of the Board or the CGN Committee at which the resignation is considered.

Board Effectiveness Assessment

The CGN Committee of the Board has implemented a process for periodically assessing the effectiveness of the Board as a whole, as well as its committees and individual directors. As part of the assessment process, each director receives a comprehensive survey which covers, among other matters, the overall functioning of the Board and each Board committee, including its composition, structure and processes; the management structure and reporting functions; the Company's strategic direction and commitment to sustainability; the Board's operational oversight, the Board's relationship with management; and other relevant aspects of the Board's responsibilities and processes. The completed surveys are then compiled into a report which is provided to the CGN Committee. The CGN Committee reviews the results of the Board surveys and puts forward any recommendations it feels appropriate to address any comments or concerns expressed by directors. The report, along with the recommendations of the CGN Committee, is then presented to the Board for further discussion.

Committees

Audit Committee

The Audit Committee assists the Board in its oversight of the Company's consolidated financial statements and other related public disclosures, the Company's compliance with legal and regulatory requirements relating to financial reporting, the external auditors, qualifications and independence and the performance of the internal audit function and the external auditors. The Audit Committee has direct communications channels with the Company's auditors. The Audit Committee reviews the Company's financial statements and related management's discussion and analysis of financial and operating results. The Audit Committee can retain legal, accounting or other advisors.

The Audit Committee currently consists of three directors (Alan Ferry (chair), John E. Fisher and Marilyn Spink). All of the members are unrelated, financially literate and at least one member has accounting or related financial expertise. "Financially literate" means the ability to read and understand statements of financial position, statements of operations and comprehensive loss, statements of shareholders' equity, statements of cash flow and notes to financial statements. "Accounting or related financial expertise" means the ability to analyze and interpret a full set of financial statements, including the notes attached thereto.

Mr. Ferry is a retired Chartered Financial Analyst with over 25 years of experience as a mining analyst with various investment dealers. He holds a B.Sc. and serves on the board of directors of two publicly traded companies and the audit committee of two publicly traded companies.

Mr. Fisher is a retired business person who has worked in base and precious metals exploration in western and northern Canada for companies including Noranda Exploration and United Keno Hill Mines. He has extensive experience in the construction materials and waste management industries, most recently acting as President & CEO of Walker Industries, a private aggregates, waste disposal, and specialty chemical manufacturing company with over a thousand employees.

Ms. Spink is a professional engineer with over 30 years of experience in operations and global project delivery experience in the mining, minerals, metals and heavy industrial sector An experienced corporate director, technical business leader and dynamic strategist committed to collaboratively supporting an organization to meet its strategic objectives employing governance best practices with a particular focus on human capital strategy, cultural transformations and business systems implementation. She is currently leading an organization change management initiative while overseeing a team of 20 working on a $1 billion project to develop the first high profile mine in the UK in the past 40 years.

The Board has adopted a charter for the Audit Committee which is reviewed annually and sets out the role and oversight responsibilities of the Audit Committee with respect to:

• its relationship with and expectation of the external auditors, including the establishment of the independence of the external auditor and the approval of any non-audit mandates of the external auditor;

• determination of which non-audit services the external auditor is prohibited from providing;

• the engagement, evaluation, remuneration, and termination of the external auditors;

• appropriate funding for the payment of the auditor's compensation and for any advisors retained by the Audit Committee;

• any other matter that the Audit Committee feels is important to its mandate or that which the Board chooses to delegate to it.

Compensation, Governance and Nominating Committee

The CGN Committee is responsible for reviewing the compensation of the Company's directors and officers and making recommendations to the Board with respect thereto.

The CGN Committee of the Board is responsible for making recommendations to the Board with respect to the compensation of the executive officers of the Company as well as, among other things, with respect to the Company's Stock Option Plan and any other employee benefits and/or plans and with respect to directors' compensation. The Board (exclusive of the CEO, who is also a member of the Board) reviews such recommendations and gives final approval to the compensation of the executive officers.

The CGN Committee currently consists of Naomi Johnson (Chair), Alan Ferry and John E. Fisher, each of whom are independent. Each of Ms. Johnson, Mr. Ferry and Mr. Fisher has direct and extensive experience in corporate management and compensation issues in either the mineral industry and/or the financial industry. Ms. Johnson is a global CSR executive, international development specialist and a lawyer, lending a diverse and holistic perspective to developing leading-edge approaches to stakeholder risk and impact management across the private, public and not for profit sectors. Most recently Ms. Johnson held the position of Vice President of Community Relations at Titan Mining Corporation. Prior to this she worked for Barrick Gold Corporation from 2008 to 2017. The last position she held at Barrick was that of Partner and Senior Director of Community Relations. She has also worked for HATCH as Regional Practice Lead for the Americas - Social Impact. Mr. Ferry is a member of the committee responsible for compensation matters of Plateau Energy Metals Inc., which is a publicly listed mineral exploration company. Mr. Fisher has worked in base and precious metals exploration in western and northern Canada for companies including Noranda Exploration and United Keno Hill Mines. He also has extensive experience in the construction materials and waste management industries, most recently acting as President & CEO of Walker Industries, a private aggregates, waste disposal, and specialty chemical manufacturing company with over a thousand employees. This experience relating to executive compensation matters collectively provides members of the CGN Committee with a suitable perspective to make decisions on the appropriateness of the Company's compensation policies and practices.

The CGN Committee has not to date felt it necessary to engage any compensation consultant or advisor to assist it in the performance of its duties. This experience relating to executive compensation matters collectively provides members of the Committee with a suitable perspective to make decisions on the appropriateness of the Company's compensation policies and practices.

The CGN Committee of the Board is responsible for recommending candidates for nomination to the Board, and governing the desirable characteristics for directors. In making such recommendations, the CGN Committee considers:

The CGN Committee currently consists of three directors (Ms. Johnson, Mr. Ferry and Mr. Fisher). All of the members are unrelated directors.

D. Employees

As at August 31, 2020, the Company has 9 employees (August 31, 2019 - 11, August 31, 2018 - 12), all of the employees are located in Ontario.

E. Share Ownership

As of November 20, 2020, the Company had 348,413,157 common shares issued and outstanding. The following table sets forth the share ownership of the individuals referred to in "Compensation" as of November 20, 2020, who were insiders as of that date:

Name of Beneficial Owner	Number of Shares	Percent
R. James Andersen	300,000	0.0
Donald Bubar	7,311,100	2.1
Alan Ferry	225,000	0.0
John E. Fisher	50,000	0.0
Naomi Johnson	Nil	0.0
Marilyn Spink	400	0.0
Mark Wiseman	55,000	0.0

The following information, as of November 20, 2020, reflects outstanding options held by the individuals referred to in "Compensation":

Name	Number of common shares underlying unexercised options (#)	Grant Date	Exercise Price ($)	Expiration Date
Donald Bubar	150,000	Jan12/16	0.12	Jan11/21
	200,000	Mar01/16	0.13	Feb28/22
	200,000	Mar01/17	0.18	Feb28/21
	200,000	Mar01/18	0.14	Feb28/23
	200,000	Mar01/19	0.10	Feb28/24
	500,000	Jul09/19	0.08	Jul8/24
	900,000	Mar01/20	0.08	Feb28/25
R. James Andersen	100,000	Dec01/18	0.10	Nov30/20
	125,000	Jan12/16	0.12	Jan11/21
	120,000	Jun01/16	0.25	May31/21
	120,000	Jun01/17	0.15	May31/22
	120,000	Jun01/18	0.11	May31/23
	120,000	Jun01/19	0.12	May31/24
	300,000	Mar01/20	0.08	Feb28/25
	240,000	Jun01/20	0.08	May31/25
David Marsh	100,000	Dec01/18	0.10	Nov30/20
	125,000	Jan12/16	0.12	Jan11/21
	120,000	Jun01/16	0.25	May31/21
	120,000	Jun01/17	0.15	May31/22
	120,000	Jun01/18	0.11	May31/23
	120,000	Jun01/19	0.12	May31/24
	200,000	Mar01/20	0.08	Feb28/25
Mark Wiseman	100,000	Dec01/18	0.10	Nov30/20
	100,000	Jan12/16	0.12	Jan11/21
	80,000	Sep01/16	0.20	Aug31/21
	80,000	Sep01/17	0.14	Aug31/22
	80,000	Sep01/18	0.10	Aug31/23
	80,000	Sep01/19	0.10	Aug31/24
	300,000	Mar01/20	0.08	Feb28/25
	200,000	Sep01/20	0.08	Aug31/25
Alan Ferry	50,000	Dec01/16	0.16	Nov30/21
	50,000	Apr30/18	0.12	Apr29/23
	50,000	Mar01/19	0.10	Feb28/24
	75,000	Jun01/19	0.12	May31/24
	375,000	Mar01/20	0.08	Feb28/25
Brian D. MacEachen	50,000	Dec01/16	0.16	Nov30/21
	50,000	Apr19/18	0.12	Apr18/23
	50,000	Apr30/18	0.12	Apr29/23
	50,000	Mar01/19	0.10	Feb28/24
	75,000	Jun01/19	0.12	May31/24
	275,000	Mar01/20	0.08	Feb28/25
Naomi Johnson	225,000	Sep10/19	0.08	Sep09/24
Naomi Johnson	275,000	Mar01/20	0.08	Feb28/25

The following information, as of November 20, 2020, reflects outstanding share purchase warrants held by the individuals referred to in "Compensation":

(2) Ms. Pagel and Mr. MacEachen ceased to be directors of the Company on February 25, 2020, and June 8, 2020, respectively.

To the knowledge of the Company's directors and senior officers, no shareholder is the direct and/or indirect owner of more than five percent (5%) of the Company's common shares, or the owner of more than five percent of the outstanding shares of each class of the Company's voting securities.

(1) Fair value of stock options earned and recognized as share based compensation during the respective reporting period.

Salaries, benefits and directors' fees decreased by $437,108 to $1,114,485 during Fiscal 2020 compared to Fiscal 2019. This decrease is primarily related to the reduced number of senior management team member in Fiscal 2020 compared to Fiscal 2019 and senior management agreeing to a 50% reduction in their salaries from April to August, 2020.

Share-based compensation increased by $4,260 to $75,252 during Fiscal 2020 compared to Fiscal 2019. This increase is primarily related to the increased number of options earned during Fiscal 2020 compared to Fiscal 2019.

Unless otherwise stated, the technical information set forth herein relating to the Nechalacho Project under the heading "Nechalacho Project", is substantially derived from and in some instances extracted from: (a) the technical report 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; and (b) the Company's news release dated August 15, 2013 each of which is available for review on the Company's SEDAR profile at www.sedar.com and on the Company's website at www.avalonadvancedmaterials.com, and on the Company's EDGAR profile at www.sec.gov.

Unless otherwise stated, the technical information set forth herein relating to the Separation Rapids Lithium Project under the heading "Separation Rapids Lithium Project", is substantially derived from and in some instances extracted from the technical report 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, 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; and (b) the Company's news release dated August 21, 2018 each of which is available for review on the Company's SEDAR profile at www.sedar.com and on the Company's website at www.avalonadvancedmaterials.com, and on the Company's EDGAR profile at www.sec.gov.

Unless otherwise stated, the technical information set forth herein relating to the East Kemptville Tin-Indium Project under the heading "East Kemptville Tin-Indium Project", is substantially derived from and in some instances extracted from the technical report entitled "The East Kemptville Tin Production and Site Remediation Project Preliminary Economic Assessment, Nova Scotia, Canada" dated August 30, 2018, effective July 24, 2018 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; and (b) the Company's news release dated July 24, 2018 each of which is available for review on the Company's SEDAR profile at www.sedar.com and on the Company's website at www.avalonadvancedmaterials.com, and on the Company's EDGAR profile at www.sec.gov.

Dr. William Mercer, P.Geo., Vice President, Exploration of the Company, David Marsh, consulting metallurgist to the Company, and Donald S. Bubar, P. Geo., President and Chief Executive Officer of the Company, are the qualified persons who prepared or supervised the preparation of, or reviewed and approved, as applicable, the technical information (including the technical information relating to mineral processing and metallurgy) contained under the headings "Nechalacho Project" and "Separation Rapids Lithium Project" and Mr. Mercer also reviewed and approved the technical information contained in "Other Properties and Assets".

Other than 7,311,100 common shares of the Company held by Mr. Bubar, the aforementioned firms and persons held either less than one percent or no securities of the Company or of any associate or affiliate of the Company at or following the time when they prepared the Technical Report, or prepared or supervised the preparation of, or approved, as applicable, the technical information contained under the headings "Nechalacho Project" and "Other Properties and Assets", as applicable, and either did not receive any or received less than a one percent direct or indirect interest in any securities of the Company or of any associate or affiliate of the Company in connection with the preparation, supervision of the preparation, or approval, of such disclosure.

Other than Messrs. Mercer and Bubar, who are currently officers of the Company, none of the aforementioned persons, nor any directors, officers or employees of such aforementioned firms, is currently expected to be elected, appointed or employed as a director, officer or employee of the Company or of any associate or affiliate of the Company.

The following financial statements of the Company are attached to this Annual Report:

• Consolidated Statements of Financial Position as at August 31, 2020, and August 31, 2019;

• Consolidated Statements of Comprehensive Loss, change in equity and cash flows for the years ended August 31, 2020, 2019 and 2018;

• Notes to Financial Statements for the years ended August 31, 2020, 2019 and 2018.

Period	High ($)	Low ($)	Volume
2020
November ⁽¹⁾	0.090	0.070	5,640,862
October	0.090	0.070	8,860,561
September	0.070	0.060	5,694,702
August	0.085	0.065	8,575,203
July	0.100	0.050	16,157,158
June	0.065	0.050	6,577,034
May	0.065	0.050	7,126,317
April	0.075	0.025	18,282,686
March	0.045	0.025	9,603,195
February	0.055	0.035	10,920,642
January	0.060	0.050	10,672,206
2019
December	0.060	0.040	9,195,326
November	0.060	0.040	7,348,383
October	0.065	0.040	9,156,123
September	0.060	0.045	8,290,476
Note: (1) November 1, 2020 through November 23, 2020.

The following table sets out the range of the market price and trading volumes of the common shares on the OTCQB for the periods indicated:

Period	High (US$)	Low (US$)	Volume
2020
November ⁽¹⁾	0.070	0.050	2,865,394
October	0.074	0.045	4,222,841
September	0.058	0.042	2,613,862
August	0.067	0.047	5,655,471
July	0.076	0.035	5,903,056
June	0.052	0.036	5,046,419
May	0.050	0.034	4,836,776
April	0.055	0.015	4,774,181
March	0.036	0.016	2,901,248
February	0.042	0.027	2,836,575
January	0.049	0.030	2,896,787
2019
December	0.047	0.027	5,096,614
November	0.052	0.030	1,638,768
October	0.052	0.026	2,624,989
September	0.048	0.030	2,465,051
Note: (1) November 1, 2020 through November 23, 2020.

Prior Sales

As of November 20, 2020, the only securities that the Company has outstanding that are not listed or quoted on a marketplace are: 13,695,000 stock options granted under the Company's Stock Option Plan, 33,319,013 warrants issued to various stakeholders. Set forth in the following tables is information with respect to the stock options, warrants and brokers' compensation warrants issued during the most recently completed financial year.

The Stock Option Plan provides for the issuance of up to 10% of the number of issued and outstanding common shares of the Company to eligible employees, directors and service providers of the Company. The number of options available to be granted under the Stock Option Plan 22,068,994 as of September 1, 2019 and 21,146,315 as of August 31, 2020.

There has been no change to the exercise price of any outstanding options during the fiscal year ended August 31, 2020.

Stock Options

The following table sets out the stock options granted during the fiscal year ended August 31, 2020.

Date of Grant	Date of Expiry	Number of Options Granted	Exercise Price of Options Granted
September 1, 2019	August 31, 2024	100,000	$0.10
September 10, 2019	September 9, 2024	225,000	$0.08
October 5, 2019	October 4, 2021	350,000	$0.08
December 1, 2019	November 30, 2024	90,000	$0.08
December 1, 2019	November 30, 2021	100,000	$0.08
January 9, 2020	January 8, 2022	100,000	$0.08
March 1, 2020	February 28, 2025	3,975,000	$0.08
March 1, 2020	February 28, 2022	1,125,000	$0.08
April 8, 2020	April 7, 2022	200,000	$0.08
June 1, 2020	May 31, 2025	440,000	$0.08
June 1, 2020	May 31, 2022	475,000	$0.08
June 16, 2020	June 15, 2025	500,000	$0.08

Warrants

The following table sets out the warrants issued during the fiscal year ended August 31, 2020.

Date of Issuance

Date of Expiry

Number of Warrants Issued

Exercise Price of Warrants Issued

August 25, 2020⁽¹⁾

August 25, 2022

3,000,000

$0.120

Note:

(1) Issued pursuant to the August 2020 Private Placement completed on August 25, 2020

Brokers' Compensation Warrants

The Company did not issue any brokers' compensation warrants during the fiscal year ended August 31, 2020.

D. Selling Shareholders

Not Applicable.

E. Dilution

Not Applicable.

F. Expenses of the Issue

Not Applicable.

Item 10. Additional Information

Additional information relating to the Company can be found under the Company's profile on the SEDAR website at www.sedar.com. Additional information, including directors' and officers' remuneration and indebtedness, principal holders of the Company's securities and securities authorized for issuance under equity compensation plans, if applicable, is contained in the Company's information circular for its most recent annual meeting of shareholders. Additional financial information is provided in the Company's audited consolidated financial statements and management's discussion and analysis for its most recently completed financial year.

A. Share Capital

Avalon's authorized share structure consists of an unlimited number of common shares, of which 348,413,157 common shares were outstanding as at August 31, 2020 and 25,000,000 preferred shares, of which 950 have been issued and none were outstanding as at August 31, 2020. As of November 20, 2020, Avalon had 348,413,157 common shares issued and outstanding and no preferred shares were outstanding.

B. Memorandum and Articles of Association

Common Shares

All issued and outstanding common shares are fully paid and non-assessable. Holders of common shares of the Company are entitled to receive notice of any meetings of shareholders of the Company, to attend and to cast one vote per common share of the Company at all such meetings. Holders of common shares of the Company do not have cumulative voting rights with respect to the election of directors and, accordingly, holders of a majority of the common shares of the Company entitled to vote in any election of directors may elect all directors standing for election. Holders of common shares are entitled to receive on a pro-rata basis such dividends, if any, as and when declared by the Board of Directors of the Company at its discretion from funds legally available therefore and upon the liquidation, dissolution or winding up of the Company are entitled to receive on a pro-rata basis the net assets of the Company after payment of debts and other liabilities, in each case subject to the rights, privileges, restrictions and conditions attaching to any other series or class of shares ranking senior in priority to or on a pro-rata basis with the holders of common shares of the Company with respect to dividends or liquidation. The common shares of the Company do not carry any pre-emptive, subscription, redemption or conversion rights, nor do they contain any sinking or purchase fund provisions.

Series A1 Preferred Shares

The holder of the Series Al Preferred Shares (the "Holder") then outstanding shall not be entitled to receive any dividend on Series Al Preferred Shares. The Holder may not transfer, sell or trade the Series Al Preferred Shares. The Series Al Preferred Shares redemption value that starts at $5,000 per share and increases by $250 per share each quarter over a 24 month period ending on March 10, 2019, to a cap of $6,750 per share. The Holder may convert the Series Al Preferred Shares into common shares from time to time at a price per common share equal to 85% of the five-day volume weighted average price of the common shares on the TSX immediately prior to the date that notice of conversion is given. The Holder is entitled to certain adjustments if there shall occur any reorganization, recapitalization, reclassification, consolidation, arrangement, subdivision, amalgamation or merger involving the Company. In certain circumstances, the Holder is entitled to accelerate its conversion right to the full amount of the redemption value applicable at such time, or demand repayment of the applicable redemption value per share in cash, upon the occurrence of certain events (the "Redemption Events"). The triggering Redemption Events include certain key financial and non-financial conditions, which include change of control, insolvency and liquidity conditions. These Redemption Events also limit the Company from obtaining other debt or preferred share financings that are not junior to the Preferred Shares other than certain project-related financings, as well as other at-the-market, equity lines or credit type of common share offerings, or convertible security financings where the price of the common share is not fixed at a predetermined price. In addition, if the Redemption Event is a change of control event, the redemption amount will be equal to 110% of the applicable redemption amount at that time. The Company has the right to redeem all of the outstanding Series A1 Preferred Shares at any time at a 5% premium to the redemption value. The Company also has floor price protection such that if any conversion results in an effective conversion price of less than $0.10 per common share, then the Company has the right to deny the conversion and instead redeem the Series A1 Preferred Shares that were subject to that conversion for the redemption amount in cash plus a 5% premium.

Series B1 Preferred Shares

The holder of the Series Bl Preferred Shares (the "B1 Holder") then outstanding shall not be entitled to receive any dividend on Series Bl Preferred Shares. The B1 Holder may not transfer, sell or trade the Series Bl Preferred Shares. The Series Bl Preferred Shares redemption value that starts at $5,000 per share and increases by $250 per share each quarter over a 24 month period ending on January 15, 2020 to a cap of $6,750 per share. The B1 Holder may convert the Series Bl Preferred Shares into common shares from time to time at a price per common share equal to 85% of the five-day volume weighted average price of the common shares on the TSX immediately prior to the date that notice of conversion is given. The B1 Holder is entitled to certain adjustments if there shall occur any reorganization, recapitalization, reclassification, consolidation, arrangement, subdivision, amalgamation or merger involving the Company. In certain circumstances, the B1 Holder is entitled to accelerate its conversion right to the full amount of the redemption value applicable at such time, or demand repayment of the applicable redemption value per share in cash, upon the occurrence of certain events (the "Redemption Events"). The triggering Redemption Events include certain key financial and non-financial conditions, which include change of control, insolvency and liquidity conditions. These Redemption Events also limit the Company from obtaining other debt or preferred share financings that are not junior to the Preferred Shares other than certain project-related financings, as well as other at-the-market, equity lines or credit type of common share offerings, or convertible security financings where the price of the common share is not fixed at a predetermined price. In addition, if the Redemption Event is a change of control event, the redemption amount will be equal to 110% of the applicable redemption amount at that time. The Company has the right to redeem all of the outstanding Series B1 Preferred Shares at any time at a 5% premium to the redemption value. The Company also has floor price protection such that if any conversion results in an effective conversion price of less than $0.10 per common share, then the Company has the right to deny the conversion and instead redeem the Series B1 Preferred Shares that were subject to that conversion for the redemption amount in cash plus a 5% premium.

Series C1 Preferred Shares

The holder of the Series Cl Preferred Shares (the "C1 Holder") then outstanding shall not be entitled to receive any dividend on Series Cl Preferred Shares. The Cl Holder may not transfer, sell or trade the Series Cl Preferred Shares. The Series Cl Preferred Shares redemption value that starts at $5,000 per share and increases by $250 per share each quarter over a 24 month period ending on June 29, 2020, to a cap of $6,750 per share. The Cl Holder may convert the Series Cl Preferred Shares into common shares from time to time at a price per common share equal to 85% of the five-day volume weighted average price of the common shares on the TSX immediately prior to the date that notice of conversion is given. The Cl Holder is entitled to certain adjustments if there shall occur any reorganization, recapitalization, reclassification, consolidation, arrangement, subdivision, amalgamation or merger involving the Company. In certain circumstances, the C1 Holder is entitled to accelerate its conversion right to the full amount of the redemption value applicable at such time, or demand repayment of the applicable redemption value per share in cash, upon the occurrence of certain events (the "Redemption Events"). The triggering Redemption Events include certain key financial and non-financial conditions, which include change of control, insolvency and liquidity conditions. These Redemption Events also limit the Company from obtaining other debt or preferred share financings that are not junior to the Preferred Shares other than certain project-related financings, as well as other at-the-market, equity lines or credit type of common share offerings, or convertible security financings where the price of the common share is not fixed at a predetermined price. In addition, if the Redemption Event is a change of control event, the redemption amount will be equal to 110% of the applicable redemption amount at that time. The Company has the right to redeem all of the outstanding Series Cl Preferred Shares at any time at a 5% premium to the redemption value. The Company also has floor price protection such that if any conversion results in an effective conversion price of less than $0.10 per common share, then the Company has the right to deny the conversion and instead redeem the Series Cl Preferred Shares that were subject to that conversion for the redemption amount in cash plus a 5% premium.

Powers and Duties of Directors

The directors manage or supervise the management of the affairs and business of the Company and have authority to exercise all such powers of the Company as are not, by the Canada Business Corporations Act or by the Articles of Continuance, required to be exercised by the Company in a general meeting.

Directors will serve as such until the next annual meeting. A director who is, in any way, directly or indirectly interested in an existing or proposed contract or transaction with the Company whereby a duty or interest might be created to conflict with his duty or interest as a director, shall declare the nature and extent of his interest in such contract or transaction or the conflict or potential conflict with his duty and interest as a director. Such director shall not vote in respect of any such contract or transaction with the Company in which he is interested and if he shall do so, his vote shall not be counted, but he shall be counted in the quorum present at the meeting at which such vote is taken. However, notwithstanding the foregoing, directors shall have the right to vote on determining the remuneration of the directors. The Company is not aware of any material interest, direct or indirect, in any transaction within the three most recently completed financial years involving any director, executive officer, or proposed nominee for election as a director or any associate or affiliate of any of the foregoing.

The directors may from time to time on behalf of the Company: (a) borrow money upon the credit of the Company; (b) issue, re-issue, sell or pledge debt obligations of the Company; (c) subject to the provisions of the Canada Business Corporations Act, as now enacted or as the same may from time to time be amended, re-enacted or replaced, give a guarantee on behalf of the Company to secure performance of an obligation of any person; and (d) mortgage, hypothecate, pledge or otherwise create a security interest in all or any property of the Company owned or subsequently acquired, to secure any obligation of the Company.

The directors may from time to time delegate to a director, a committee of directors or an officer of the Company any or all of the powers conferred on the Board as set out above, to such extent and in such manner as the Board shall determine at the time of such delegation. Except in the case of any class or series of shares of the Company listed on a stock exchange, the Company shall have a lien on the shares registered in the name of a shareholder or his legal representative for a debt of that shareholder to the Company. Between annual and general meetings of the Company, the directors of the Company may appoint one or more additional directors to serve until the next annual and general meeting, but the number of additional directors shall not at any time exceed one-third of the number of directors who held office at the expiration of the last annual and general meeting.

Every director shall be an individual 18 or more years of age, and no one who is of unsound mind and has been so found by a court in Canada or elsewhere, or who has the status of a bankrupt shall be a director. A director need not be a shareholder. At least 25% of the directors of the Company must be resident Canadians.

Shareholders

An annual general meeting is held once in every calendar year at such time and place as may be determined by the directors. A quorum for the transaction of business at any meeting of shareholders is two persons present in person, each being a shareholder entitled to vote thereat or a duly appointed proxy or proxyholder for an absent shareholder so entitled, holding or representing in the aggregate not less than 25% of the issued and outstanding shares of the Company carrying voting rights at the meeting of shareholders. There is no limitation imposed by the laws of Canada or by the charter or other constituent documents of the Company on the right of a non-resident to hold or vote the common shares, other than as provided in the Investment Canada Act (the "Investment Act") discussed below under "Item 10. Additional Information, D. Exchange Controls."

In accordance with the laws of Canada, directors shall be elected annually by an "ordinary resolution" which means a resolution passed by the shareholders of the Company at an annual meeting by a simple majority of the votes cast in person or by proxy. A director's term of office shall be from the date of the meeting at which he is elected or appointed until the close of the annual meeting next following, or until his successor is elected or appointed.

Under the laws of the Canada Business Corporations Act and the Securities Act (Ontario) certain items such as an amendment to the Company's articles or entering into a merger requires approval by a special resolution which means: (a) a resolution passed by a majority of not less than two-thirds of the votes cast by the shareholders of the Company who, being entitled to do so, vote in person or by proxy at a general meeting of the Company; or (b) a resolution consented to in writing by every shareholder of the Company who would have been entitled to vote in person or by proxy at a general meeting of the Company, and a resolution so consented to is deemed to be a special resolution passed at a general meeting of the Company.

The Company has adopted a by-law (By-law No. 2) relating to the nomination of directors by shareholders of the Company in certain circumstances. By-Law No.2 provides a clear process for shareholders to follow for director nominations and sets out a reasonable time frame for nominee submissions and the provision of accompanying information. The purpose of By-law No.2 is to treat all shareholders fairly by ensuring that all shareholders receive adequate notice of the nominations to be considered at a meeting and can thereby exercise their voting rights in an informed manner. In addition, By-law No.2 should assist in facilitating an orderly and efficient meeting process.

C. Material Contracts

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 property for a total cash consideration of $5 million while the Company will retain ownership of the mineral resources below a depth of 150 metres above sea level, a 3.0% NSR royalty and will continue to have access to the property for exploration, development and mining purposes. Avalon has also agreed to waive the 3.0% NSR Royalty for the first five years of commercial production and to grant Cheetah the option to pay the Company $2 million within eight years of the transaction closing to extend the waiver of this royalty in perpetuity. The Agreement also grants Cheetah an option to purchase the Company's option in the 2.5% NSR Royalty for an inflation adjusted fixed amount estimated at $1.5 million as at the agreement date, provided that, upon exercising the option, it extinguishes this royalty. Advance payments totalling $3.2 million had been received by August 31, 2019 and the balance of $1.8 million was received subsequent to August 31, 2019. The sale was completed in Fiscal 2020. A brief field program and a drill program managed by Avalon in the summer and fall 2019 were conducted on behalf of Cheetah. The Company and Cheetah are currently working on the execution of a co-ownership agreement which will define and guide the parties' activities on the property.

D. Exchange Controls

Canada has no system of exchange controls. There are no Canadian restrictions on the repatriation of capital or earnings of a Canadian public company to non-resident investors. There are no laws in Canada or exchange restrictions affecting the remittance of dividends, profits, interest, royalties and other payments to non-resident holders of the issuer's securities, except as discussed below under "Item 10. Additional Information, E. Taxation."

There are no limitations under the laws of Canada or in the organizing documents of the Company on the right of foreigners to hold or vote securities of the Company, except that the Investment Canada Act may require review and approval by the Minister of Industry (Canada) of certain acquisitions of "control" of the Company by a "non-Canadian". The threshold for acquisitions of control is generally defined as being one-third or more of the voting shares of the Company. "Non-Canadian" generally means an individual who is not a Canadian citizen, or a corporation, partnership, trust or joint venture that is ultimately controlled by non-Canadians.

E. Taxation

Certain Canadian Federal Income Tax Considerations

The following summarizes the principal Canadian federal income tax considerations generally applicable to the holding and disposition of common shares in the capital of the Company by a United States resident, who holds common shares solely as capital property, and does not use or hold, and will not be deemed to use or hold, the common shares in carrying on a business in Canada, referred to as a "U.S. Holder". This summary is based on the current provisions of the Income Tax Act (Canada), referred to as the "Tax Act", the regulations thereunder, all amendments thereto publicly proposed by the government of Canada, the published administrative practices of the Canada Revenue Agency, and the current provisions of the Canada-United States Tax Convention, 1980, as amended, referred to as the "Treaty". Except as otherwise expressly provided, this summary does not take into account any provincial, territorial or foreign (including without limitation, any United States) tax law or treaty. It has been assumed that all currently proposed amendments to the Tax Act will be enacted substantially as proposed and that there is no other relevant change in any governing law or practice, although no assurance can be given in these respects.

Each U.S. Holder is advised to obtain tax and legal advice applicable to such U.S. Holder's particular circumstances.

A U.S. Holder will be liable to pay a Canadian withholding tax on every dividend that is or is deemed to be paid or credited to the U.S. Holder on the U.S. Holder's common shares. The statutory rate of withholding tax is 25% of the gross amount of the dividend. The Treaty reduces the statutory rate with respect to dividends paid to a U.S. Holder, if that U.S. Holder is the beneficial owner of the dividend and is eligible for benefits under the Treaty. Where applicable, the general rate of withholding tax under the Treaty is reduced to 15% of the gross amount of the dividend, but if the U.S. Holder is a company that beneficially owns at least 10% of the voting stock of the Company, the rate of withholding tax is reduced to 5% for dividends. The Company is required to withhold the applicable tax from the dividend payable to the U.S. Holder, and to remit the tax to the Receiver General of Canada for the account of the U. S. Holder.

A U.S. Holder generally will not be subject to income tax under the Tax Act in respect of a capital gain realized on the disposition or deemed disposition of a common share unless the common share constitutes "taxable Canadian property" of the U.S. Holder for purposes of the Tax Act and the gain is not exempt from tax pursuant to the terms of the Treaty.

Provided that the common shares are listed on a "designated stock exchange" for purposes of the Tax Act (which currently includes the TSX) at the time of disposition, the common shares generally will not constitute "taxable Canadian property" of a U.S. Holder, unless at any time during the 60 month period immediately preceding the disposition: (i) the U.S. Holder, persons with whom the U.S. Holder did not deal at "arm's length" for the purposes of the Tax Act, partnerships in which the U.S. Holder or a person with whom the U.S. Holder did not deal at arm's length held a membership interest directly or indirectly through one or more partnerships, or the U.S. Holder together with all such persons, owned 25% or more of the issued shares of any class of the Company and; (ii) more than 50% of the fair market value of the common shares was derived directly or indirectly from one or any combination of real or immovable property situated in Canada, "Canadian resource properties" (as defined in the Tax Act), "timber resource properties" (as defined in the Tax Act), or options in respect of, or interests in, or for civil law rights in, such property whether or not such property exists.

U.S. Holders who may hold common shares as "taxable Canadian property" should consult their own tax advisors.

Certain United States Federal Income Tax Consequences

The following is a general summary of certain material U.S. federal income tax considerations applicable to a U.S. Holder (as defined below) arising from and relating to the acquisition, ownership, and disposition of common shares of the Company.

This summary is for general information purposes only and does not purport to be a complete analysis or listing of all potential U.S. federal income tax considerations that may apply to a U.S. Holder arising from and relating to the acquisition, ownership, and disposition of common shares. In addition, this summary does not take into account the individual facts and circumstances of any particular U.S. Holder that may affect the U.S. federal income tax consequences to such U.S. Holder, including specific tax consequences to a U.S. Holder under an applicable tax treaty. Accordingly, this summary is not intended to be, and should not be construed as, legal or U.S. federal income tax advice with respect to any U.S. Holder. This summary does not address the U.S. federal net investment income, U.S. federal alternative minimum, U.S. federal estate and gift, U.S. state and local, and non-U.S. tax consequences to U.S. Holders of the acquisition, ownership, and disposition of common shares. Except as specifically set forth below, this summary does not discuss applicable tax reporting requirements. Each U.S. Holder should consult its own tax advisor regarding the U.S. federal, U.S. federal net investment income, U.S. federal alternative minimum, U.S. federal estate and gift, U.S. state and local, and non-U.S. tax consequences relating to the acquisition, ownership and disposition of common shares.

No legal opinion from U.S. legal counsel or ruling from the Internal Revenue Service (the "IRS") has been requested, or will be obtained, regarding the U.S. federal income tax consequences of the acquisition, ownership, and disposition of common shares. This summary is not binding on the IRS, and the IRS is not precluded from taking a position that is different from, and contrary to, the positions taken in this summary. In addition, because the authorities on which this summary is based are subject to various interpretations, the IRS and the U.S. courts could disagree with one or more of the positions taken in this summary.

Authorities

This summary is based on the Internal Revenue Code of 1986, as amended, or the "Code", Treasury Regulations (whether final, temporary, or proposed), published rulings of the IRS, published administrative positions of the IRS, the Convention Between Canada and the United States of America with Respect to Taxes on Income and on Capital, signed September 26, 1980, as amended, or the "Canada-U.S. Tax Convention", and U.S. court decisions that are applicable and, in each case, as in effect and available, as of the date of this document. Any of the authorities on which this summary is based could be changed in a material and adverse manner at any time, and any such change could be applied on a retroactive or prospective basis which could affect the U.S. federal income tax considerations described in this summary. This summary does not discuss the potential effects, whether adverse or beneficial, of any proposed legislation that, if enacted, could be applied on a retroactive or prospective basis.

U.S. Holders

For purposes of this summary, the term "U.S. Holder" means a beneficial owner of common shares that is for U.S. federal income tax purposes:

• an individual who is a citizen or resident of the U.S.;

• a corporation (or other entity taxable as a corporation for U.S. federal income tax purposes) organized under the laws of the U.S., any state thereof or the District of Columbia;

• an estate whose income is subject to U.S. federal income taxation regardless of its source; or

• a trust that (1) is subject to the primary supervision of a court within the U.S. and the control of one or more U.S. persons for all substantial decisions or (2) has a valid election in effect under applicable Treasury Regulations to be treated as a U.S. person.

Non-U.S. Holders

For purposes of this summary, a "non-U.S. Holder" is a beneficial owner of common shares that is not a U.S. Holder. This summary does not address the U.S. federal income tax consequences to non-U.S. Holders arising from and relating to the acquisition, ownership, and disposition of common shares. Accordingly, a non-U.S. Holder should consult its own tax advisor regarding the U.S. federal, U.S. federal alternative minimum, U.S. federal estate and gift, U.S. state and local, and non-U.S. tax consequences (including the potential application of and operation of any income tax treaties) relating to the acquisition, ownership, and disposition of common shares.

U.S. Holders Subject to Special U.S. Federal Income Tax Rules Not Addressed

This summary does not address the U.S. federal income tax considerations applicable to U.S. Holders that are subject to special provisions under the Code, including, but not limited to, U.S. Holders that: (a) are tax-exempt organizations, qualified retirement plans, individual retirement accounts, or other tax-deferred accounts; (b) are financial institutions, underwriters, insurance companies, real estate investment trusts, or regulated investment companies; (c) are broker-dealers, dealers, or traders in securities or currencies that elect to apply a mark-to-market accounting method; (d) have a "functional currency" other than the U.S. dollar; (e) own common shares as part of a straddle, hedging transaction, conversion transaction, constructive sale, or other integrated transaction; (f) acquired common shares in connection with the exercise of employee stock options or otherwise as compensation for services; (g) hold common shares other than as a capital asset within the meaning of Section 1221 of the Code (generally, property held for investment purposes); (h) are subject to special tax accounting rules; or (i) own or have owned (directly, indirectly, or by attribution) 10% or more of the total combined voting power or value of the outstanding shares of the Company. This summary also does not address the U.S. federal income tax considerations applicable to U.S. Holders who are: (a) U.S. expatriates or former long-term residents of the U.S.; (b) persons that have been, are, or will be a resident or deemed to be a resident in Canada for purposes of the Income Tax Act (Canada) (the "Tax Act"); (c) persons that use or hold, will use or hold, or that are or will be deemed to use or hold common shares in connection with carrying on a business in Canada; (d) persons whose common shares constitute "taxable Canadian property" under the Tax Act; or (e) persons that have a permanent establishment in Canada for the purposes of the Canada-U.S. Tax Convention. U.S. Holders that are subject to special provisions under the Code, including, but not limited to, U.S. Holders described immediately above, should consult their own tax advisors regarding the U.S. federal, U.S. federal net investment income, U.S. federal alternative minimum, U.S. federal estate and gift, U.S. state and local, and non-U.S. tax consequences relating to the acquisition, ownership and disposition of common shares.

If an entity or arrangement that is classified as a partnership (or "pass-through" entity) for U.S. federal income tax purposes holds common shares, the U.S. federal income tax consequences to such partnership and the partners of such partnership generally will depend on the activities of the partnership and the status of such partners (or owners). This summary does not address the tax consequences to any such partnership or partner. Partners of entities or arrangements that are classified as partnerships for U.S. federal income tax purposes should consult their own tax advisors regarding the U.S. federal income tax consequences arising from and relating to the acquisition, ownership, and disposition of common shares.

Passive Foreign Investment Company Rules

If the Company were to constitute a "passive foreign investment company" under the meaning of Section 1297 of the Code, or a "PFIC", as defined further below, for any year during a U.S. Holder's holding period, then certain different and potentially adverse rules will affect the U.S. federal income tax consequences to a U.S. Holder resulting from the acquisition, ownership and disposition of common shares. In addition, in any year in which the Company is classified as a PFIC, such holder will be required to file an annual report with the IRS containing such information as Treasury Regulations and/or other IRS guidance may require. A failure to satisfy such reporting requirements may result in an extension of the time period during which the IRS can assess a tax. U.S. Holders should consult their own tax advisors regarding the requirements of filing such information returns under these rules, including the requirement to file an IRS Form 8621.

PFIC Status of the Company

The Company generally will be a PFIC if, for a tax year, (a) 75% or more of the gross income of the Company is passive income (the "income test") or (b) 50% or more of the value of the Company's assets either produce passive income or are held for the production of passive income, based on the quarterly average of the fair market value of such assets (the "asset test"). "Gross income" generally includes all sales revenues less the cost of goods sold, plus income from investments and from incidental or outside operations or sources, and "passive income" generally includes, for example, dividends, interest, certain rents and royalties, certain gains from the sale of stock and securities, and certain gains from commodities transactions.

Active business gains arising from the sale of commodities generally are excluded from passive income if substantially all of a foreign corporation's commodities are stock in trade of such foreign corporation or other property of a kind which would properly be included in inventory of such foreign corporation, or property held by such foreign corporation primarily for sale to customers in the ordinary course of business and certain other requirements are satisfied.

For purposes of the PFIC income test and asset test described above, if the Company owns, directly or indirectly, 25% or more of the total value of the outstanding shares of another corporation, the Company will be treated as if it (a) held a proportionate share of the assets of such other corporation and (b) received directly a proportionate share of the income of such other corporation. In addition, for purposes of the PFIC income test and asset test described above, and assuming certain other requirements are met, "passive income" does not include certain interest, dividends, rents, or royalties that are received or accrued by the Company from certain "related persons" (as defined in Section 954(d)(3) of the Code), to the extent such items are properly allocable to the income of such related person that is not passive income.

In addition, under certain attribution rules, if the Company is a PFIC, U.S. Holders will be deemed to own their proportionate share of the stock of any subsidiary of the Company that is also a PFIC, or a "Subsidiary PFIC", and will be subject to U.S. federal income tax on their proportionate share of (a) a distribution on the stock of a Subsidiary PFIC and (b) a disposition or deemed disposition of the stock of a Subsidiary PFIC, both as if such U.S. Holders directly held the shares of such Subsidiary PFIC.

The Company believes that it was classified as a PFIC during the tax year ended August 31, 2020, and may be a PFIC in its current and future tax years. The determination of whether any corporation was, or will be, a PFIC for a tax year depends, in part, on the application of complex U.S. federal income tax rules, which are subject to differing interpretations. In addition, whether any corporation will be a PFIC for any tax year depends on the assets and income of such corporation over the course of each such tax year and, as a result, cannot be predicted with certainty as of the date of this document. Accordingly, there can be no assurance that the IRS will not challenge any determination made by the Company (or a Subsidiary PFIC) concerning its PFIC status. Each U.S. Holder should consult its own tax advisors regarding the PFIC status of the Company and any Subsidiary PFIC.

Default PFIC Rules Under Section 1291 of the Code

If the Company is a PFIC, the U.S. federal income tax consequences to a U.S. Holder of the acquisition, ownership, and disposition of common shares will depend on whether such U.S. Holder makes an election to treat the Company and each Subsidiary PFIC, if any, as a "qualified electing fund" or "QEF" under Section 1295 of the Code, or a "QEF Election", or a mark-to-market election under Section 1296 of the Code, or a "Mark-to-Market Election". A U.S. Holder that does not make either a QEF Election or a Mark-to-Market Election will be referred to in this summary as a "Non-Electing U.S. Holder."

A Non-Electing U.S. Holder will be subject to the rules of Section 1291 of the Code with respect to (a) any gain recognized on the sale or other taxable disposition of common shares and (b) any excess distribution received on common shares. A distribution generally will be an "excess distribution" to the extent that such distribution (together with all other distributions received in the current tax year) exceeds 125% of the average distributions received during the three preceding tax years (or during a U.S. Holder's holding period for our common shares, if shorter).

Under Section 1291 of the Code, any gain recognized on the sale or other taxable disposition of common shares (including an indirect disposition of the stock of any Subsidiary PFIC), and any "excess distribution" received on common shares, must be ratably allocated to each day in a Non-Electing U.S. Holder's holding period for the respective common shares. The amount of any such gain or excess distribution allocated to the tax year of disposition or distribution of the excess distribution and to years before the entity became a PFIC, if any, would be taxed as ordinary income. The amounts allocated to any other tax year would be subject to U.S. federal income tax at the highest tax rate applicable to ordinary income in each such year, and an interest charge would be imposed on the tax liability for each such year, calculated as if such tax liability had been due in each such year. A Non-Electing U.S. Holder that is not a corporation must treat any such interest paid as "personal interest," which is not deductible.

If the Company is a PFIC for any tax year during which a Non-Electing U.S. Holder holds common shares, the Company will continue to be treated as a PFIC with respect to such Non-Electing U.S. Holder, regardless of whether the Company ceases to be a PFIC in one or more subsequent tax years. A Non-Electing U.S. Holder may terminate this deemed PFIC status by electing to recognize gain (which will be taxed under the rules of Section 1291 of the Code discussed above), but not loss, as if such common shares were sold on the last day of the last tax year for which the Company was a PFIC.

QEF Election

A U.S. Holder that makes a timely and effective QEF Election for the first tax year in which its holding period of its common shares begins generally will not be subject to the rules of Section 1291 of the Code discussed above with respect to its common shares. A U.S. Holder that makes a timely and effective QEF Election will be subject to U.S. federal income tax on such U.S. Holder's pro rata share of (a) the net capital gain of the Company, which will be taxed as long-term capital gain to such U.S. Holder, and (b) the ordinary earnings of the Company, which will be taxed as ordinary income to such U.S. Holder. Generally, "net capital gain" is the excess of (a) net long-term capital gain over (b) net short-term capital loss, and "ordinary earnings" are the excess of (a) "earnings and profits" over (b) net capital gain. A U.S. Holder that makes a QEF Election will be subject to U.S. federal income tax on such amounts for each tax year in which the Company is a PFIC, regardless of whether such amounts are actually distributed to such U.S. Holder by the Company. However, for any tax year in which the Company is a PFIC and has no net income or gain, U.S. Holders that have made a QEF Election would not have any income inclusions as a result of the QEF Election. If a U.S. Holder that made a QEF Election has an income inclusion, such U.S. Holder may, subject to certain limitations, elect to defer payment of current U.S. federal income tax on such amounts, subject to an interest charge. If such U.S. Holder is not a corporation, any such interest paid will be treated as "personal interest," which is not deductible.

A U.S. Holder that makes a timely and effective QEF Election with respect to the Company generally (a) may receive a tax-free distribution from the Company to the extent that such distribution represents "earnings and profits" of the Company that were previously included in income by the U.S. Holder because of such QEF Election and (b) will adjust such U.S. Holder's tax basis in its common shares to reflect the amount included in income or allowed as a tax-free distribution because of such QEF Election. In addition, a U.S. Holder that makes a QEF Election generally will recognize capital gain or loss on the sale or other taxable disposition of common shares.

The procedure for making a QEF Election, and the U.S. federal income tax consequences of making a QEF Election, will depend on whether such QEF Election is timely. A QEF Election will be treated as "timely" if such QEF Election is made for the first year in the U.S. Holder's holding period for our common shares in which the Company was a PFIC. A U.S. Holder may make a timely QEF Election by filing the appropriate QEF Election documents at the time such U.S. Holder files a U.S. federal income tax return for such year. If a U.S. Holder does not make a timely and effective QEF Election for the first year in the U.S. Holder's holding period for its common shares, the U.S. Holder may still be able to make a timely and effective QEF Election in a subsequent year if such U.S. Holder also makes a "purging" election to recognize gain (which will be taxed under the rules of Section 1291 of the Code discussed above) as if such common shares were sold for their fair market value on the day the QEF Election is effective.

A QEF Election will apply to the tax year for which such QEF Election is timely made and to all subsequent tax years, unless such QEF Election is invalidated or terminated or the IRS consents to revocation of such QEF Election. If a U.S. Holder makes a QEF Election and, in a subsequent tax year, the Company ceases to be a PFIC, the QEF Election will remain in effect (although it will not be applicable) during those tax years in which the Company is not a PFIC. Accordingly, if the Company becomes a PFIC in another subsequent tax year, the QEF Election will be effective and the U.S. Holder will be subject to the QEF rules described above during any subsequent tax year in which the Company qualifies as a PFIC.

U.S. Holders should be aware that there can be no assurance that the Company will satisfy record keeping requirements that apply to a QEF, or that the Company will supply U.S. Holders with information that such U.S. Holders require to report under the QEF rules, in event that the Company is a PFIC and a U.S. Holder wishes to make a QEF Election. Thus, U.S. Holders may not be able to make a QEF Election with respect to their common shares. Each U.S. Holder should consult its own tax advisors regarding the availability of, and procedure for making, a QEF Election.

Mark-to-Market Election

A U.S. Holder may make a Mark-to-Market Election only if the common shares are marketable stock. Our common shares generally will be "marketable stock" if our common shares are regularly traded on (a) a national securities exchange that is registered with the Securities and Exchange Commission, (b) the national market system established pursuant to section 11A of the Securities and Exchange Act of 1934, or (c) a foreign securities exchange that is regulated or supervised by a governmental authority of the country in which the market is located, provided that (i) such foreign exchange has trading volume, listing, financial disclosure, and meets other requirements and the laws of the country in which such foreign exchange is located, together with the rules of such foreign exchange, ensure that such requirements are actually enforced and (ii) the rules of such foreign exchange ensure active trading of listed stocks. If such stock is traded on such a qualified exchange or other market, such stock generally will be "regularly traded" for any calendar year during which such stock is traded, other than in de minimis quantities, on at least 15 days during each calendar quarter.

A U.S. Holder that makes a Mark-to-Market Election with respect to its common shares generally will not be subject to the rules of Section 1291 of the Code discussed above with respect to such common shares. However, if a U.S. Holder does not make a Mark-to-Market Election beginning in the first tax year of such U.S. Holder's holding period for our common shares or such U.S. Holder has not made a timely QEF Election, the rules of Section 1291 of the Code discussed above will apply to certain dispositions of, and distributions on, our common shares.

A U.S. Holder that makes a Mark-to-Market Election will include in ordinary income, for each tax year in which the Company is a PFIC, an amount equal to the excess, if any, of (a) the fair market value of our common shares, as of the close of such tax year over (b) such U.S. Holder's tax basis in such common shares. A U.S. Holder that makes a Mark-to-Market Election will be allowed a deduction in an amount equal to the excess, if any, of (a) such U.S. Holder's adjusted tax basis in our common shares, over (b) the fair market value of such common shares (but only to the extent of the net amount of previously included income as a result of the Mark-to-Market Election for prior tax years).

A U.S. Holder that makes a Mark-to-Market Election generally also will adjust such U.S. Holder's tax basis in our common shares to reflect the amount included in gross income or allowed as a deduction because of such Mark-to-Market Election. In addition, upon a sale or other taxable disposition of common shares, a U.S. Holder that makes a Mark-to-Market Election will recognize ordinary income or ordinary loss (not to exceed the excess, if any, of (a) the amount included in ordinary income because of such Mark-to-Market Election for prior tax years over (b) the amount allowed as a deduction because of such Mark-to-Market Election for prior tax years).

A Mark-to-Market Election applies to the tax year in which such Mark-to-Market Election is made and to each subsequent tax year, unless our common shares cease to be "marketable stock" or the IRS consents to revocation of such election. Each U.S. Holder should consult its own tax advisor regarding the availability of, and procedure for making, a Mark-to-Market Election.

Although a U.S. Holder may be eligible to make a Mark-to-Market Election with respect to our common shares, no such election may be made with respect to the stock of any Subsidiary PFIC that a U.S. Holder is treated as owning, because such stock is not marketable. Hence, the Mark-to-Market Election will not be effective to eliminate the application of the default rules of Section 1291 of the Code described above with respect to deemed dispositions of Subsidiary PFIC stock or distributions from a Subsidiary PFIC.

Other PFIC Rules

Under Section 1291(f) of the Code, the IRS has issued proposed Treasury Regulations that, subject to certain exceptions, would cause a U.S. Holder that had not made a timely QEF Election to recognize gain (but not loss) upon certain transfers of common shares that would otherwise be tax-deferred (e.g., gifts and exchanges pursuant to corporate reorganizations). However, the specific U.S. federal income tax consequences to a U.S. Holder may vary based on the manner in which common shares are transferred.

Certain additional adverse rules will apply with respect to a U.S. Holder if the Company is a PFIC, regardless of whether such U.S. Holder makes a QEF Election. For example under Section 1298(b)(6) of the Code, a U.S. Holder that uses common shares as security for a loan will, except as may be provided in Treasury Regulations, be treated as having made a taxable disposition of such common shares.

Special rules also apply to the amount of foreign tax credit that a U.S. Holder may claim on a distribution from a PFIC. Subject to such special rules, foreign taxes paid with respect to any distribution in respect of stock in a PFIC are generally eligible for the foreign tax credit. The rules relating to distributions by a PFIC and their eligibility for the foreign tax credit are complicated, and a U.S. Holder should consult with its own tax advisor regarding the availability of the foreign tax credit with respect to distributions by a PFIC.

The PFIC rules are complex, and each U.S. Holder should consult its own tax advisors regarding the PFIC rules and how the PFIC rules may affect the U.S. federal income tax consequences of the acquisition, ownership, and disposition of common shares.

Ownership and Disposition of Common Shares

The following discussion is subject to the rules described above under the heading "Passive Foreign Investment Company Rules."

Distributions on Common Shares

Subject to the PFIC rules discussed above, a U.S. Holder that receives a distribution, including a constructive distribution, with respect to a common share will be required to include the amount of such distribution in gross income as a dividend (without reduction for any Canadian income tax withheld from such distribution) to the extent of the current or accumulated "earnings and profits" of the Company, as computed for U.S. federal income tax purposes. A dividend generally will be taxed to a U.S. Holder at ordinary income tax rates if the Company is a PFIC. To the extent that a distribution exceeds the current and accumulated "earnings and profits" of the Company, such distribution will be treated first as a tax-free return of capital to the extent of a U.S. Holder's tax basis in our common shares and thereafter as gain from the sale or exchange of such common shares. (See "Sale or Other Taxable Disposition of Common Shares" below). However, the Company may not maintain the calculations of earnings and profits in accordance with U.S. federal income tax principles, and each U.S. Holder should therefore assume that any distribution by the Company with respect to our common shares will constitute ordinary dividend income. Dividends received on common shares generally will not be eligible for the "dividends received deduction". Subject to applicable limitations and provided the Company is eligible for the benefits of the Canada-U.S. Tax Convention, or the common shares are readily tradeable on a U.S. securities market, dividends paid by the Company to non-corporate U.S. Holders, including individuals, generally will be eligible for the preferential tax rates applicable to long-term capital gains for dividends, provided certain holding period and other conditions are satisfied, including that the Company not be classified as a PFIC in the tax year of distribution or in the preceding tax year. The dividend rules are complex, and each U.S. Holder should consult its own tax advisor regarding the application of such rules.

Sale or Other Taxable Disposition of Common Shares

Subject to the PFIC rules discussed above, upon the sale or other taxable disposition of common shares, a U.S. Holder generally will recognize capital gain or loss in an amount equal to the difference between the amount of cash plus the fair market value of any property received and such U.S. Holder's tax basis in such common shares sold or otherwise disposed of. Subject to the PFIC rules discussed above, gain or loss recognized on such sale or other disposition generally will be long-term capital gain or loss if, at the time of the sale or other disposition, our common shares have been held for more than one year.

Preferential tax rates apply to long-term capital gain of a U.S. Holder that is an individual, estate, or trust. There are currently no preferential tax rates for long-term capital gain of a U.S. Holder that is a corporation. Deductions for capital losses are subject to significant limitations under the Code.

Additional Considerations

Receipt of Foreign Currency

The amount of any distribution paid to a U.S. Holder in foreign currency, or on the sale, exchange or other taxable disposition of common shares, generally will be equal to the U.S. dollar value of such foreign currency based on the exchange rate applicable on the date of receipt (regardless of whether such foreign currency is converted into U.S. dollars at that time). A U.S. Holder will have a basis in the foreign currency equal to its U.S. dollar value on the date of receipt. Any U.S. Holder who converts or otherwise disposes of the foreign currency after the date of receipt may have a foreign currency exchange gain or loss that would be treated as ordinary income or loss, and generally will be U.S. source income or loss for foreign tax credit purposes. Different rules apply to U.S. Holders who use the accrual method of tax accounting. Each U.S. Holder should consult its own U.S. tax advisors regarding the U.S. federal income tax consequences of receiving, owning, and disposing of foreign currency.

Foreign Tax Credit

Subject to the PFIC rules discussed above, a U.S. Holder that pays (whether directly or through withholding) Canadian income tax with respect to dividends paid on our common shares generally will be entitled, at the election of such U.S. Holder, to receive either a deduction or a credit for such Canadian income tax paid. Generally, a credit will reduce a U.S. Holder's U.S. federal income tax liability on a dollar-for-dollar basis, whereas a deduction will reduce a U.S. Holder's income subject to U.S. federal income tax. This election is made on a year-by-year basis and applies to all foreign taxes paid (whether directly or through withholding) by a U.S. Holder during a year. The foreign tax credit rules are complex and involve the application of rules that depend on a U.S. Holder's particular circumstances. Accordingly, each U.S. Holder should consult its own tax advisor regarding the foreign tax credit rules.

Backup Withholding and Information Reporting

Under U.S. federal income tax law and Treasury Regulations, certain categories of U.S. Holders must file information returns with respect to their investment in, or involvement in, a foreign corporation. For example, U.S. return disclosure obligations (and related penalties) are imposed on individuals who are U.S. Holders that hold certain specified foreign financial assets in excess of certain threshold amounts. The definition of specified foreign financial assets includes not only financial accounts maintained in foreign financial institutions, but also, unless held in accounts maintained by a financial institution, any stock or security issued by a non-U.S. person, any financial instrument or contract held for investment that has an issuer or counterparty other than a U.S. person and any interest in a foreign entity. U.S. Holders may be subject to these reporting requirements unless their common shares are held in an account at certain financial institutions. Penalties for failure to file certain of these information returns are substantial. U.S. Holders should consult with their own tax advisors regarding the requirements of filing information returns, including the requirement to file an IRS Form 8938.

We are subject to the informational requirements of the Exchange Act and file reports and other information with the SEC. You may read and download any of our reports and other information filed with the SEC on EDGAR at http://www.sec.gov.

As a foreign private issuer, we are exempt from the rules under the Exchange Act prescribing the furnishing and content of proxy statements to shareholders.

We will provide without charge to each person, including any beneficial owner, to whom a copy of this annual report has been delivered, on the written or oral request of such person, a copy of any or all documents referred to above which have been or may be incorporated by reference in this annual report (not including exhibits to such incorporated information that are not specifically incorporated by reference into such information). Requests for such copies should be directed to us at the following address: 130 Adelaide St. West, Suite 1901, Toronto, ON, M5H 3P5. The Company is required to file financial statements and other information with the Securities Commission in each of the Provinces and Territories of Canada, except Quebec, electronically through SEDAR which can be viewed at www.sedar.com.

Credit risk is the risk that one party to a financial instrument will cause a financial loss for the other party by failing to discharge an obligation.

The Company is not exposed to any significant credit risk as at August 31, 2020. The Company's cash and cash equivalents are either on deposit with two major Canadian Chartered banking groups in Canada or invested in bankers' acceptance notes or guaranteed investment certificates issued by two major Canadian Chartered banking groups. The Company's receivables primarily consist of Goods and Services Tax/Harmonized Sales Tax receivable, government grants and refundable security deposits with various federal and provincial governments and are therefore not subject to significant credit risk. The Company's financial assets that are exposed to credit risk are as follows:

Liquidity risk is the risk that an entity will not be able to meet its financial obligations as they come due. The Company has in place a planning and budgeting process to assist in determining the funds required to support the Company's normal operating requirements on an on-going basis and its plans for exploration and development expenditures. The Company ensures that there are sufficient funds to meet its short-term requirements, taking into account its anticipated cash flows from operations and its holdings of cash and cash equivalents.

The Company had cash and cash equivalents at August 31, 2020 in the amount of $1,295,723 (2019 - $1,881,841) in order to meet short-term business requirements. At August 31, 2020, the Company had adjusted current liabilities of $907,019 (calculated by excluding the deferred flow-through share premium of $136,800 from the total current liabilities of $1,043,819) (2019 - $4,273,792). As the de-recognition of the balances of the deferred flow-through share premium will not require the future out flow of resources by the Company, it is management's belief that the adjusted current liabilities figure provides useful information in assessing the Company's liquidity. Accounts payable have contractual maturities of less than 30 days and are subject to normal trade terms.

Market risk consists of interest rate risk and foreign currency risk. The Company is exposed to interest rate risk and foreign currency risk.

(i) To the extent that payments made or received on the Company's monetary assets and liabilities are affected by changes in the prevailing market interest rates, the Company is exposed to interest rate cash flow risk.

(ii) To the extent that changes in prevailing market rates differ from the interest rate in the Company's monetary assets and liabilities, the Company is exposed to interest rate price risk.

Considering the Company's budget expenditures for the next twelve months and its current cash and cash equivalents of $1,295,723 as at August 31, 2020, with other variables held constant, sensitivity to a plus or minus 25 basis points change in interest rates would not have any significant effect on the Company's net loss over a twelve month period.

Foreign currency risk is the risk that the fair value or future cash flows of a financial instrument will fluctuate due to changes in foreign exchange rates. The Company is exposed to foreign currency risk to the extent that monetary assets and liabilities are denominated in foreign currency.

The Company's functional currency is the Canadian dollar. The majority of the Company's purchases are transacted in Canadian dollars. Other than the US$ Warrants, the Company had no other significant financial assets or financial liabilities denominated in foreign currencies as at August 31, 2020 and August 31, 2019.

The Company's anticipated on-going expenditures to be transacted in U.S. dollars for the next twelve month period are approximately US$160,000. If the Canadian dollar weakens (or strengthens) 5% against the U.S. dollar with other variables held constant, it would not have any significant effect on the Company's expenditures over a twelve month period.

Other price risk is the risk that the fair value or future cash flows of a financial instrument will fluctuate due to changes in market prices, other than those arising from interest rate risk or foreign currency risk. The Company is not exposed to other price risk with respect to its financial instruments.

The prices of metals and minerals fluctuate widely and are affected by many factors outside of the Company's control. The prices of metals and minerals and future expectation of such prices have a significant impact on the market sentiment for investment in mining and mineral exploration companies. This in turn may impact the Company's ability to raise equity financing for its long term working capital requirements.

The Company does not have securities registered as American Depository Receipts.

Item 14. Material Modifications to the Rights of Security Holders and Use of Proceeds

An evaluation was performed under the supervision and with the participation of the Company's management, including the Company's CEO and the Company's CFO of the effectiveness of the design and operation of the Company's disclosure controls and procedures pursuant to Rules 13a-15(b) and 15d-15(b) of the Exchange Act as of August 31, 2020. Based on their evaluation, the Company's CEO and CFO have concluded that the disclosure controls and procedures were effective to give reasonable assurance that the information required to be disclosed by the Company in reports that it files or submits under the Exchange Act is (i) recorded, processed, summarized and reported, within the time periods specified in the SEC's rules and forms, and (ii) accumulated and communicated to management, including its principal executive and principal financial officers, or persons performing similar functions, as appropriate to allow timely decisions regarding required disclosure.

The Company's management, including the Company's CEO and CFO, is responsible for establishing and maintaining adequate internal control over the Company's internal control over financial reporting, as such term is defined in Rule 13a-15(f) under the Exchange Act. The Company's internal control over financial reporting is a process designed to provide reasonable assurance regarding the reliability of financial reporting and the preparation of consolidated financial statements for external purposes in accordance with IFRS as issued by the IASB. The Company's internal control over financial reporting includes policies and procedures that: pertain to the maintenance of records that, in reasonable detail accurately and fairly reflect the transactions and disposition of assets; provide reasonable assurance that transactions are recorded as necessary to permit preparation of the consolidated financial statements in accordance with IFRS and that receipts and expenditures are being made only in accordance with authorization of management and directors of the Company; and provide reasonable assurance regarding prevention or timely detection of unauthorized acquisition, use or disposition of assets that could have a material effect on the consolidated financial statements.

Because of their inherent limitations, internal control over financial reporting can provide only reasonable assurance and may not prevent or detect misstatements. Furthermore, projections of any evaluation of effectiveness to future periods are subject to the risk that controls may become inadequate because of changes in conditions, or that the degree of compliance with the policies or procedures may deteriorate.

The Company's management, (with the participation of the CEO and the CFO), conducted an evaluation of the effectiveness of the Company's internal control over financial reporting as at August 31, 2020. This evaluation was based on the criteria set forth in Internal Control-Integrated Framework ("COSO 2013 Framework") issued by the Committee of Sponsoring Organizations of the Treadway Commission. Based on its assessment, management has concluded that the Company's internal control over financial reporting was effective as at August 31, 2020, and management's assessment did not identify any material weaknesses.

This Annual Report does not include an attestation report of our registered public accounting firm regarding internal control over financial reporting. Management's report was not subject to attestation by our registered public accounting firm pursuant the Dodd-Frank Wall Street Reform and Consumer Protection Act of 2010 (the "Dodd-Frank Act"), which permits the Company to provide only management's report in this Annual Report. The Dodd-Frank Act permits a "non-accelerated filer" to provide only management's report on internal control over financial reporting in an Annual Report and omit an attestation report of the issuer's registered public accounting firm regarding management's report on internal control over financial reporting.

Based upon their evaluation of our controls, our CEO and CFO have concluded that, there were no changes in our internal control over financial reporting or in other factors during Fiscal 2020 that have materially affected, or are reasonably likely to materially affect, our internal control over financial reporting.

The Board determined that Mr. Alan Ferry, Ms. Marilyn Spink and Mr. John Fisher are qualified as Audit Committee Financial Experts and all members are independent as determined by the rules set forth in the NYSE American Company Guide.

The Company has adopted a Code of Business Conduct and Ethics (the "Business Code") and requires its directors, officers, employees and consultants to maintain the highest level of integrity in their dealings with each other and with the Company's shareholders, business partners, prospective investors and other stakeholders. This Business Code is intended to document some of the specific principles of conduct and ethics which will be followed by our directors, officers and employees in the performance of their responsibilities with respect to the Company's business. It is intended to:

• promote full, fair, accurate, timely and understandable disclosure to the public including our periodic reports required to be filed with the Canadian securities regulatory authorities;

• provide guidance to directors, officers and employees of the Company to help them recognize and deal with ethical issues;

Our directors have committed that they will comply at all times with the principles set forth in this Business Code and they expect each of our officers and employees to do likewise. The Company has posted the Business Code on its website at www.avalonadvancedmaterials.com. There were no amendments to, or waivers granted from any provision of the Business Code during the fiscal year ended August 31, 2020.

The independent auditor for the years ended August 31, 2020, 2019 and 2018 was Ernst & Young LLP, Chartered Professional Accountants.

The following table provides detail in respect of audit, audit related, tax and other fees billed by the Company's external auditors for professional services:

The Audit Committee approved 100% of the fees paid to the principal accountant for audit-related, tax and other fees in the fiscal year 2020. The Audit Committee pre-approves all non-audit services to be performed by the auditor in accordance with the Audit Committee Charter. There were no hours expended on the principal accountant's engagement to audit the Company's financial statements for the most recent fiscal year that were attributed to work performed by persons other than the principal accountant's full-time, permanent employees.

Item 16E. Purchases of Equity Securities by the Issuer and Affiliated Purchasers

The Company's financial statements are stated in Canadian Dollars and are prepared in accordance with IFRS as issued by the IASB. The Consolidated Financial Statements and Notes appear on Pages F-1 through F-41 of this Annual Report, are incorporated herein by reference, and include the following:

● Consolidated Statements of Financial Position as at August 31, 2020, and August 31, 2019;

● Consolidated Statements of Comprehensive Loss, change in equity and cash flows for the years ended August 31, 2020, 2019 and 2018; and

● Notes to Financial Statements for the years ended August 31, 2020, 2019 and 2018.

(1) Incorporated by reference from the Company's Form 6-K filed with the SEC on February 14, 2011

(2) Incorporated by reference from the Company's Form 6-K filed with the SEC on February 15, 2011

(3) Incorporated by reference from the Company's Form 6-K filed with the SEC on February 26, 2016

(4) Incorporated by reference from the Company's Form 6-K filed with the SEC on March 17, 2017

(5) Incorporated by reference from the Company's Form 6-K filed with the SEC on January 16, 2018

(6) Incorporated by reference from the Company's Form 6-K filed with the SEC on July 3, 2018

(7) Incorporated by reference from the Company's Form 20-F filed with the SEC on December 1, 2014

(8) Incorporated by reference from the Company's Form 20-F filed with the SEC on November 29, 2016

(9) Incorporated by reference from the Company's Form 6-K filed with the SEC on July 3, 2019

(10) Incorporated by reference from the Company's Form 6-K filed with the SEC on January 27, 2020

The registrant hereby certifies that it meets all of the requirements for filing on Form 20-F and that it has duly caused and authorized the undersigned to sign this Annual Report on its behalf.

The Company's management is responsible for establishing and maintaining adequate internal control over financial reporting ("ICFR").

The Company's management assessed the effectiveness of the Company's ICFR as at August 31, 2020. The Company's management used the Committee of Sponsoring Organizations of the Treadway Commission (COSO 2013) framework to evaluate the effectiveness of the Company's ICFR. Based on management's assessment, the Company's internal control over financial reporting is effective as of August 31, 2020.

As at August 31, 2020, the Company is not required under the Exchange Act to obtain an audit on its ICFR under Section 404(b) of Sarbanes-Oxley Act of 2002. Accordingly, the Company's auditor, Ernst and Young LLP, Independent Registered Public Accounting Firm, has not performed an audit on the effectiveness of the Company's ICFR as at August 31, 2020 and has not issued an attestation report on management's assessment of the Company's ICFR.

To the Shareholders and the Board of Directors of Avalon Advanced Materials Inc.:

We have audited the accompanying consolidated statements of financial position of Avalon Advanced Materials Inc. (the "Company") as of August 31, 2020 and 2019 the related consolidated statements of comprehensive loss, changes in equity, and cash flows for each of the three years in the period ended August 31, 2020, and the related notes (collectively referred to as the "consolidated financial statements"). In our opinion, the consolidated financial statements present fairly, in all material respects, the financial position of the Company as of August 31, 2020 and 2019, and its financial performance and its cash flows for each of the three years in the period ended August 31, in accordance with International Financial Reporting Standards as issued by the International Accounting Standards Board.

The accompanying consolidated financial statements have been prepared assuming that the Company will continue as a going concern. As discussed in Note 1 to the consolidated financial statements, the company has incurred losses in the current and prior years, and has stated that there exists an uncertainty as to the Company's ability to raise additional funds on favourable terms in order to finance its planned activities and that these conditions indicate the existence of a material uncertainty that raises substantial doubt about the Company's ability to continue as a going concern. Management's evaluation of the events and conditions and management's plans regarding these matters are also described in Note 1. The consolidated financial statements do not include any adjustments to reflect the possible future effects on the recoverability and classification of assets or the amounts and classification of liabilities that might result from the outcome of this uncertainty.

These consolidated financial statements are the responsibility of the Company's management. Our responsibility is to express an opinion on the Company's financial statements based on our audits. We are a public accounting firm registered with the Public Company Accounting Oversight Board (United States) (PCAOB) and are required to be independent with respect to the Company in accordance with the U.S. federal securities laws and the applicable rules and regulations of the Securities and Exchange Commission and the PCAOB.

We conducted our audits in accordance with the standards of the PCAOB. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement, whether due to error or fraud. The Company is not required to have, nor were we engaged to perform, an audit of its internal control over financial reporting. As part of our audits we are required to obtain an understanding of internal control over financial reporting but not for the purpose of expressing an opinion on the effectiveness of the Company's internal control over financial reporting. Accordingly, we express no such opinion.

Our audits included performing procedures to assess the risks of material misstatement of the financial statements, whether due to error or fraud, and performing procedures that respond to those risks. Such procedures included examining, on a test basis, evidence regarding the amounts and disclosures in the financial statements. Our audits also included evaluating the accounting principles used and significant estimates made by management, as well as evaluating the overall presentation of the financial statements. We believe that our audits provide a reasonable basis for our opinion.

The accompanying notes are an integral part of these consolidated financial statements.

Avalon Advanced Materials Inc. ("Avalon") is a publicly listed company incorporated in Canada and continued under the Canada Business Corporations Act. Avalon's common shares are listed on the Toronto Stock Exchange (the "TSX") (TSX: AVL), on the OTCQB® Venture Market (OTCQB: AVLNF), and the Frankfurt Stock Exchange in Germany. The registered address, principal address and records office of Avalon is located at 130 Adelaide Street West, Suite 1901, Toronto, Ontario, Canada, M5H 3P5.

Avalon, together with its subsidiaries (collectively, the "Company") is principally engaged in the acquisition, exploration, evaluation and development of specialty metal and mineral properties, located principally in Canada. To date, the Company has not earned any significant revenues.

The realization of amounts shown for its development asset - the Nechalacho Rare Earth Elements Project (the "Nechalacho REE Project") and its exploration and evaluation assets is dependent upon the discovery of economically recoverable reserves (where not already identified), the ability of the Company to obtain the necessary financing to develop these assets, and future profitable production or proceeds of disposition from these assets.

These consolidated financial statements have been prepared in accordance with International Financial Reporting Standards ("IFRS") as issued by the International Accounting Standards Board ("IASB") applicable to a going concern, which assumes the Company will continue to meet its obligations and discharge its liabilities in the normal course of business for the foreseeable future. Different bases of measurement may be appropriate when a company is not expected to continue operations for the foreseeable future. The Company is in the exploration and development stage and raises funds in the equity markets to conduct its business activities. The Company has incurred losses in the current and prior years, with a net loss of $5,367,264 the year ended August 31, 2020 (the "Year") and an accumulated deficit of $86,784,228 as at August 31, 2020. The Company's cash and cash equivalents balance at August 31, 2020 was $1,295,723, and the working capital was $633,581. Excluding the deferred flow-through share premium of $136,800, the Company's adjusted working capital as at August 31, 2020 was $770,381 (calculated by adding back the deferred flow-through share premium of $136,800 to the working capital of $633,581).

The outbreak of the novel strain of coronavirus, specifically identified as "COVID-19", has resulted in governments worldwide enacting emergency measures to combat the spread of the virus. These measures, which include the implementation of travel bans, self-imposed quarantine periods and social distancing, have caused material disruption to businesses globally resulting in an economic slowdown. Global equity markets have experienced significant volatility and weakness. Governments and central banks have reacted with significant monetary and fiscal interventions designed to stabilize economic conditions. The duration and impact of the COVID-19 outbreak is unknown at this time, as is the efficacy of the government and central bank interventions. It is not possible to reliably estimate the length and severity of these developments, and the impact on the Company's ability to raise capital, its financial results or its financial condition.

Given the continuation of weak investor sentiment and capital market conditions in the junior resource sector, there exists an uncertainty as to the Company's ability to raise additional funds on favorable terms. These conditions indicate the existence of a material uncertainty that raises substantial doubt about the Company's ability to continue as a going concern. As at August 31, 2020, the Company is required to incur additional Canadian exploration expenses ("CEE") of $539,400 by December 31, 2021. The Company's expenditures on discretionary exploration and development activities have some scope for flexibility in terms of amount and timing, which can be adjusted accordingly. Management intends to finance these expenditures over the next twelve months with funds currently on hand, and through planned equity financings.

These consolidated financial statements do not reflect the adjustments to the carrying values of assets and liabilities and the reported expenses and statement of financial position classifications that would be necessary should the going concern assumption be inappropriate, and those adjustments could be material.

These consolidated financial statements have been reviewed and approved by the Company's Audit Committee and the Board of Directors on November 27, 2020.

These consolidated financial statements, including comparatives, have been prepared using accounting policies in compliance with IFRS as issued by the IASB.

These consolidated financial statements have been prepared on a going concern basis using the historical cost basis, except for certain financial instruments which are measured at fair value in accordance with the policies disclosed in Note 3.

These consolidated financial statements include the accounts of the Company and the entities controlled by the Company. Control exists when the Company is exposed, or has rights, to variable returns from its involvement with the investee and has the ability to affect those returns through its power over the investee. The financial statements of subsidiaries are included in the consolidated financial statements from the date that control commences until the date that control ceases.

These consolidated financial statements include the accounts of the Company and its wholly-owned subsidiaries, 8110131 Canada Inc., Nolava Minerals Inc. ("Nolava"), and Avalon Rare Metals Ltd. ("ARML"). Nolava and ARML are incorporated in the United States of America ("USA").

ARML has not carried on any significant operations since its inception. During the year ended August 31, 2012, 8110131 Canada Inc. acquired certain net smelter returns ("NSR") royalty interests in the Company's properties which were held by third parties. Nolava had held certain mining claims in Utah, USA and had conducted exploration work on those mining claims during fiscal year 2011 to fiscal year 2014. All intercompany transactions and balances have been eliminated on consolidation of the accounts.

The Company also has a 50% interest in NWT Rare Earths Ltd., with an unrelated third party owning the other 50%, which was created in the Year to hold the exploration permits and related authorizations pertaining to the Nechalacho REE Project, in order to assist each party's development of their respective projects. NWT Rare Earths Ltd. has not carried on any significant operations since its inception and no equity earnings/losses has been allocated to the Company.

The principal accounting policies followed by the Company are summarized as follows:

Items included in the consolidated financial statements of the Company and each of its subsidiaries (the "Group") are measured using the currency of the primary economic environment in which the entity operates (the "functional currency"). The functional currency of the Company and its subsidiaries is the Canadian dollar ("$"). The consolidated financial statements of the Group are presented in Canadian dollars.

In preparing the financial statements of the individual entities, transactions in currencies other than the entity's functional currency (i.e. foreign currencies) are recorded at the rates of exchange prevailing at the dates of the transactions. At each statement of financial position date, monetary assets and liabilities are translated using the foreign exchange rates prevailing at the end of each reporting period. Non-monetary assets and liabilities are translated using the historical rate on the date of the transaction.

Non-monetary assets and liabilities that are stated at fair value are translated using the historical rate on the date that the fair value was determined. All gains and losses on translation of these foreign currency transactions are included in foreign exchange loss (gain) in the consolidated statement of comprehensive loss.

On consolidation, exchange differences arising from the translation of the net investment in foreign operations, and of borrowings and other currency instruments designated as hedges of such investments, are taken to shareholders' equity. When a foreign operation is partially disposed of or sold, exchange differences that were recorded in equity are recognized in profit or loss as part of the gain or loss on sale. At the present time, the functional currency of the Company and its subsidiaries is the Canadian dollar and hence this does not currently apply to the Company.

Equity-settled share based payments to employees (including directors and senior executives) and others providing similar services are measured at the fair value of the equity instruments at the grant date. The fair value of the share-based payment is measured by reference to the fair value of the equity instrument granted, which in turn is determined using the Black-Scholes option-pricing model on the date of the grant, with management's assumptions for the risk-free rate, dividend yield, volatility factors of the expected market price of the Company's common shares, exercise price, current market price of the underlying equity to be settled with, expected forfeitures and the life of the options.

The fair value of the equity-settled share based payments is recognized over the vesting period in which the service conditions are fulfilled, ending on the date in which the grantee becomes fully entitled to the award, based on the Company's estimate of equity instruments that will eventually vest, and is either expensed or capitalized to exploration and evaluation assets or property, plant and equipment, with a corresponding increase in equity.

Equity-settled share-based payment transactions with parties other than employees are measured at the fair value of the goods or services received, except where that fair value cannot be estimated reliably, in which case they are measured at the fair value of the equity instruments granted, measured at the date the Company obtains the goods or the counterparty renders the service.

On September 1, 2019, the Company adopted IFRS 16, "Leases" ("IFRS 16") using the modified retrospective approach. The Company assesses at the inception of a contract whether that contract is, or contains, a lease based on whether the contract conveys the right to control the use of an identified asset for a period of time in exchange for consideration. For contracts that contain a lease component, the Company then recognizes a right-of-use ("ROU") asset and a lease obligation at the lease commencement date.

Lease obligations are initially measured at the present value of the lease payments that are not paid at the commencement date, discounted using the interest rate implicit in the lease or, if that rate cannot be readily determined, the Company's incremental borrowing rate. Lease obligations are subsequently measured at amortized cost using the effective interest method.

The ROU assets are initially measured based on the initial amount of the lease obligation adjusted for initial direct costs incurred, lease payments made prior to inception, estimated costs to dismantle, remove or restore the asset and less any lease incentives received. ROU assets are subsequently measured at cost and are depreciated on a straight line basis over the shorter of the lease term and the useful life.

The Company elects to apply the practical expedient not to recognize ROU assets and lease obligations for short-term (12 months or less) leases of all asset classes and also elects to apply the practical expedient not to recognize ROU assets and lease obligations for leases of low value (less than $US5,000) assets. The lease payments associated with either short-term leases or leases of low-value underlying assets are recognized as an expense on a straight-line basis over the lease term.

Tax currently payable is based on taxable profit for the year. Taxable profit differs from profit as reported in the consolidated statements of comprehensive loss because of items of income or expense that are taxable or deductible in other years and items that are never taxable or deductible. The Company's liability for current tax is calculated using tax rates that have been enacted or substantively enacted by the end of the reporting period.

Deferred tax assets and liabilities represent income taxes expected to be payable or recoverable on differences between the carrying amount of assets and liabilities in the Company's consolidated financial statements and the corresponding tax basis used in the computation of taxable profit. Deferred tax assets also represent income taxes expected to be recoverable on unclaimed losses carried forward.

Deferred taxes are calculated using the asset and liability method. Deferred tax liabilities are generally recognized for all taxable temporary differences, with some exceptions described below. Deferred tax assets are recognized to the extent that it is probable that taxable profits will be available against which deductible temporary differences can be used. Neither deferred tax liabilities, nor deferred tax assets, are recognized as a result of temporary differences that arise from the initial recognition of goodwill or a transaction, other than a business combination, that affects neither accounting profit nor taxable profit. Deferred tax assets and liabilities are offset when there is a legally enforceable right to offset the current tax assets against the current tax liabilities and when they relate to income taxes levied by the same taxation authority and the Company intends to settle its current tax assets and liabilities on a net basis.

Deferred tax asset and liabilities are measured as of the date of the consolidated statement of financial position using the enacted or substantively enacted tax rates that are expected to be in effect when the differences reverse or when unclaimed losses are utilized.

The carrying amount of deferred tax assets is reviewed at the end of each reporting period and adjusted to the extent that it is no longer probable that sufficient taxable profit will be available to allow the benefit of all or part of the asset to be utilized. To the extent that an asset not previously recognized fulfils the criteria for asset recognition, a deferred tax asset is recognized.

Deferred tax is recognized in the consolidated statements of comprehensive loss, unless it relates to items recognized directly in equity, in which case the deferred tax related to those items is also recognized directly in equity.

The Company has, from time to time, issued flow-through shares to finance a portion of its exploration and development programs. Pursuant to the terms of the related flow-through share agreements, the Company has agreed to incur eligible flow-through expenditures and renounce the tax deductions associated with these qualifying expenditures to the subscribers.

The Company recognizes a proportion of the excess of cash consideration received over the market price of the Company's shares at the date of the announcement of the flow-through share financing ("Flow-through Share Premium") through the consolidated statement of comprehensive loss as a reduction of deferred income tax expense, with a corresponding reduction to the deferred flow-through share premium liability as the eligible flow-through expenditures are incurred.

The Flow-through Share Premium is recorded in the consolidated statement of financial position as a deferred flow-through share premium liability when the flow-through shares are issued. When a unit comprised of a flow-through share with an attached share purchase warrant is issued, the Company has adopted the fair value approach with respect to the measurement of the three components (share, warrant and Flow-through Share Premium) of such unit and use the relative fair value method to allocate the proceeds to each of the three components of the unit.

The basic loss per share is computed by dividing the net loss by the weighted average number of common shares outstanding during the year. The diluted loss per share reflects the potential dilution of common share equivalents, such as outstanding stock options and share purchase warrants, in the weighted average number of common shares outstanding during the year, if dilutive. The "treasury stock method" is used for the assumed proceeds upon the exercise of the options and warrants that are used to purchase common shares at the average market price during the year.

Other Comprehensive income (loss) is the change in the Company's net assets that results from transactions, events and circumstances that are not related to the Company's shares and that are not included in net profit or loss. Such items include unrealized gains or losses on available-for-sale investments, gains or losses on certain hedging derivative instruments and foreign currency gains or losses related to translation of the financial statements of foreign operations. The Company's comprehensive income (loss) and components of other comprehensive income are presented in the consolidated statements of comprehensive loss and the consolidated statements of changes in equity.

Cash and cash equivalents include bank deposits and highly liquid short-term money market investments that are readily convertible to known amounts of cash and which are subject to an insignificant risk of changes in value, such as bankers' acceptance notes, treasury bills and guaranteed investment certificates ("GICs").

These assets relate to mineral rights acquired and exploration and evaluation expenditures incurred in respect to resource projects that are in the exploration and evaluation stage.

Exploration and evaluation assets are allocated to cash generating units ("CGUs") for the purpose of assessing such assets for impairment and each project is identified as a separate CGU. At each financial statement reporting date, the Company assesses whether there is any indication of impairment. Indicators of impairment include, but are not limited to:

i) The right to explore in the specific area has expired during the period or will expire in the near future, and is not expected to be renewed;

ii) Substantive expenditure on further exploration for and evaluation of mineral resources in the specific area is neither budgeted nor planned;

iii) Exploration for and evaluation of mineral resources in the specific area have not led to the commercially viable quantities of mineral resources and the entity has decided to discontinue such activities in the specific area; and

iv) Sufficient data exists to indicate that, although a development in the specific area is likely to proceed, the carrying amount of the exploration and evaluation asset is unlikely to be recovered in full from successful development or by sale.

In circumstances where indicators of impairment exist, an impairment test is performed to determine if the carrying amount of a specific project exceeds its estimated recoverable amount. The estimated recoverable amount is the greater of fair value less costs of disposal, and value in use (which is discounted expected future cash flows). If the estimated recoverable amount of the project is less than its carrying amount, the carrying amount of the project is reduced to its estimated recoverable amount, and an impairment loss is recognized immediately in the consolidated statement of comprehensive loss.

The determination of the demonstration of technical feasibility and commercial viability is subject to a significant degree of judgment and assessment of all relevant factors. In general, technical feasibility may be demonstrable once a positive feasibility study is completed. When determining the commercial viability of a project, in addition to the receipt of a feasibility study, the Company also considers factors such as the existence of markets and/or long term contracts for the product, and the ability to obtain the relevant operating permits.

All subsequent expenditures to ready the property for production are capitalized within development assets, other than those costs related to the construction of property, plant and equipment. Development assets are not depreciated until construction is complete and the assets are available for their intended use.

Once production has commenced, all costs included in development assets are reclassified to mining properties.

Exploration and evaluation expenditures incurred prior to the Company obtaining the right to explore the property are recorded as an expense in the period in which they are incurred.

Property, plant and equipment ("PPE") are stated at cost less any accumulated depreciation and accumulated impairment losses. The cost of an item of PPE consists of the purchase price, any costs directly attributable to bringing the asset to the location and condition necessary for its intended use and an initial estimate of the costs of dismantling and removing the item and restoring the site on which it is located.

Depreciation is provided over the estimated useful lives of the Company's assets on the following basis and rates per annum:

Leased office premises - straight line basis over the shorter of the term of the lease and useful life

Leasehold improvements - straight line basis over the shorter of the term of the lease and useful life

An item of PPE is derecognized upon disposal, when classified as held for sale (when assets' carrying amounts will be recovered principally through a sale transaction rather than through continuing use), or when no future economic benefits are expected to arise from the continued use of the asset. Any gain or loss arising on disposal of the asset, determined as the difference between the net disposal proceeds and the carrying amount of the asset, is recognized immediately in the consolidated statement of comprehensive loss.

The Company conducts an annual assessment of the residual balances, useful lives and depreciation methods being used for PPE and any changes arising from this assessment are applied by the Company prospectively as a change in estimate.

Where an item of PPE comprises major components with different useful lives, the components are accounted for as separate items of PPE. Expenditures incurred to replace a component of an item of PPE that is accounted for separately, including major inspection and overhaul expenditures, are capitalized.

On September 1, 2018, the Company adopted IFRS 9, "Financial Instruments" ("IFRS 9") which replaces IAS 39, "Financial Instruments: Recognition and Measurement" ("IAS 39"). The retrospective adoption of IFRS 9 had no material impact to the Company's consolidated financial statements.

Under IFRS 9, financial assets are initially classified and subsequently measured at amortized cost, fair value through other comprehensive income ("FVOCI"); or fair value through profit or loss "FVTPL". A financial asset is measured at either amortized cost or FVTPL based on the business model in which the financial asset is managed and its contractual cash flow characteristics, unless the financial asset is required or designated to be classified and measured at FVTPL or FVOCI. On initial recognition of an equity instrument investment, the Company may irrevocably elect to measure the investment at FVOCI on an investment-by-investment basis, where the changes in the fair value of equity instruments are permanently recognized in other comprehensive income and will not be reclassified to profit or loss.

IFRS 9 largely retains the existing requirements in IAS 39 for the classification and measurement of financial liabilities. Financial liabilities are measured at amortized cost, unless they are required to be measured at FVTPL (which generally include derivative liabilities or other financial liabilities which are held for trading), or the Company has irrevocably designated them at FVTPL on initial recognition.

Financial assets and financial liabilities at amortized cost are initially recognized at fair value plus or minus transaction costs that are directly attributable to the acquisition or issuance of the financial asset or financial liability, and are subsequently carried at amortized cost using the effective interest rate method, less any impairment. The changes in the fair value that are attributable to changes in the Company's own credit risk of financial liabilities elected at FVTPL are permanently recognized in other comprehensive income and will not be reclassified to profit or loss.

Financial assets and financial liabilities at FVTPL are initially recognized at fair value and transaction costs are expensed in the statement profit or loss, and are subsequently measured at fair value. Any realized and unrealized gains and losses arising from the changes in fair value are included in the statement of profit or loss in the period in which they arise.

Financial assets at FVOCI are initially recognized at fair value plus transaction costs that are directly attributable to the acquisition of the financial asset, and are subsequently carried at fair value, with any unrealized gains and losses arising from the changes in fair value being included in other comprehensive income or loss. When debt financial assets are derecognized, the cumulative gains and losses previously recognized in other comprehensive income are reclassified to profit or loss. The changes in the fair value of equity instrument investments elected at FVOCI are permanently recognized in other comprehensive income and will not be reclassified to profit or loss.

The following table shows the original categories under IAS 39 and the new categories under IFRS 9 for each class of the Company's financial assets and financial liabilities:

IFRS replaces the "incurred loss" model in IAS 39 with a single forward-looking expected credit loss ("ECL") impairment model, which is based on changes in credit quality since initial recognition. The new impairment model is applied, at each reporting date, to financial assets measured at amortized costs or those measured at FVOCI (except for equity instrument investments). Any impairment losses recognized are charged to profit or loss, with the offsetting credit reducing the carrying amount of the financial assets that are measure at amortized cost. For financial assets measured at FVOCI, the impairment loss will be credited to other comprehensive income or loss.

There were no adjustments to the carrying amounts of the Company's financial instruments on the date of transition as a result of the transition from IAS 39 to IFRS 9.

Provision for site closure costs is recorded at the time an environmental disturbance occurs, and is measured at the Company's best estimate of the expected value of future cash flows required to reclaim the disturbance upon site closure, discounted to their net present value. The net present value is determined using a pre-tax discount rate that is specific to the liability. The estimated net present value is re-measured at the end of each reporting period, or when changes in circumstances occur and/or new material information becomes available. Increases or decreases to the provision arise due to changes in legal, constructive or regulatory requirements, the extent of environmental remediation required and cost estimates. The net present value of the estimated costs of these changes is recorded in the period in which the change is identified and quantifiable.

Provisions are recognized when the Company has a present obligation (legal or constructive) as a result of a past event, it is probable that the Company will be required to settle the obligation, and a reliable estimate can be made of the amount of the obligation.

Provisions are measured at the present value of the expenditures expected to be required to settle the obligation using a pre-tax rate that reflects current market assessments of the time value of money and the risks specific to the provision. The increase in the provision due to the passage of time is recognized as an interest expense.

Government grants are recognized as other receivables on the statements of financial position when there is reasonable assurance that the company will comply with the conditions attaching to them and the grants will be received. Government grants are recognized in profit or loss on a systematic basis over the periods in which the company recognizes as expenses the related costs for which the grants are intended to compensate and are recorded as a reduction of such expenses. Grants that are for the development and exploration of the Company's resource properties for which the related expenditures are capitalized are recorded as a reduction of the carrying amount of the related assets.

Funding amounts received in advance of expenses incurred are deferred and are recorded as accrued liabilities on the statements of financial position.

Parties are considered to be related if one party has the ability, directly or indirectly, to control the other party or exercise significant influence over the other party in making financial and operating decisions. Parties are also considered to be related if they are subject to common control or common significant influence. Related parties may be individuals or corporate entities. A transaction is considered to be a related party transaction when there is a transfer of resources or obligations between related parties. Related party transactions that are in the normal course of business and have commercial substance are measured at fair value.

An operating segment is a component of the Company that engages in business activities from which it may earn revenues and incur expenses. In determining the Company's segment structure, consideration is given to the similar operational and political risks to which the Company's current operations within the same business and regulatory environment are exposed.

The Company's current operations comprise a single reporting operating segment engaged in the acquisition, exploration, evaluation and development of rare metal and mineral properties located principally in Canada.

Further details of the nature of these assumptions and conditions may be found in the relevant notes to the consolidated financial statements.

Recoverability of Exploration and Evaluation Assets, Development Assets and Property, Plant and Equipment

The Company assesses its long-lived assets, specifically all exploration and evaluation assets, development assets and PPE at each reporting date to determine whether any indication of impairment exists. Where an indicator of impairment exists, a formal estimate of the recoverable amount is made, which is the higher of the fair value less costs of disposal and value in use. These assessments require the use of estimates and assumptions such as long-term commodity prices, discount rates, foreign exchange rates, years to commencement of production, future capital requirements, exploration potential and operating performance.

The Company follows IFRS 2, Share-based Payment, in determining the fair value of share based payments. This calculated amount is not based on historical cost, but is derived based on assumptions (such as the expected volatility of the price of the underlying security, expected hold period before exercise, dividend yield and the risk-free rate of return) input into a pricing model. The model requires that management make forecasts as to future events, including estimates of: the average future hold period of issued stock options and compensation warrants before exercise, expiry or cancellation; future volatility of the Company's share price in the expected hold period; dividend yield; and the appropriate risk-free rate of interest. The resulting value calculated is not necessarily the value that the holder of the option or warrant could receive in an arm's length transaction, given that there is no market for the options or compensation warrants and they are not transferable. Similar calculations are made in estimating the fair value of the warrant component of an equity unit. The assumptions used in these calculations are inherently uncertain. Changes in these assumptions could materially affect the related fair value estimates.

The Company's accounting policy for the recognition of a site closure and reclamation obligation requires significant estimates and assumptions such as: requirements of the relevant legal and regulatory framework, the magnitude of possible disturbance and the timing thereof, extent and costs of required closure and rehabilitation activity, and discount rate. These uncertainties may result in future actual expenditures differing from the amounts currently provided. Site closure and reclamation provision recognized is periodically reviewed and updated based on the facts and circumstances available at the time. Changes to the estimated future costs are recognized in the Statement of Financial Position by adjusting both the site closure and reclamation asset and provision.

Information about critical judgments in applying accounting policies that have most significant effect on the consolidated financial statements are as follows:

Exploration and evaluation costs incurred during the year are recorded at cost. Capitalized costs include costs directly attributable to exploration and evaluation activities, including salaries and benefits of employees who are directly engaged in the exploration and evaluation activities. Administrative and other overhead costs are expensed. Exploration and evaluation costs incurred that have been determined to have future economic benefits and can be economically recoverable are capitalized. In making this judgment, management assesses various sources of information including but not limited to the geologic and metallurgic information, history of conversion of mineral deposits to proven and probable mineral reserves, scoping and feasibility studies, proximity of operating facilities, operating management expertise and existing permits.

As described in 3(c) above, the Company adopted IFRS 16 effective September 1, 2019 using the modified retrospective approach and accordingly the information presented for fiscal 2019 has not been restated.

On initial application, the Company recognized a ROU asset (included in property, plant and equipment) and a corresponding lease obligation relating to a lease for its office premises in Toronto, which had previously been classified as an operating lease under IAS 17 - Leases. The Company has elected to record the ROU asset based on the corresponding lease obligation. The ROU asset and lease obligation of $1,045,810 were recorded as of September 1, 2019, with no net impact on the opening retained earnings. When measuring the lease obligation, the Company discounted the remaining lease payments under the lease contract using its estimated weighted‐average incremental borrowing rate of 5.0%.

The following table reconciles the Company's operating lease obligation on August 31, 2019, as previously disclosed in the Company's consolidated financial statements, to the lease obligation recognized on initial application of IFRS 16 on September 1, 2019.

The adoption of IFRS 16 had the following impact on the Company's consolidated statement of comprehensive loss for the Year:

The adoption of IFRS 16 had no net impact on the Company's consolidated statement of cash flows for the Year, but had increased the cash used by financing activities by $207,063, which was offset by the same amount of decrease for the cash used by operating activities.

In June 2019, the Company entered into an agreement, under which an unrelated third party would acquire ownership of the near-surface mineral resources principally in the T-Zone and Tardiff Zones of the Nechalacho REE Project above a depth of 150 metres above sea level for a total cash consideration of $5.0 million as described in Note 7a while the Company retains ownership of the deeper resources in the Basal Zone that were the subject of its 2013 feasibility study. The sale was completed during the Year. The Company had transferred the carrying cost relating to the near-surface mineral resources of $2,605,147 from the total carrying cost of the Nechalacho REE Project included in Property, Plant and Equipment to Asset Held for Sale as at August 31, 2019, and recognized a net gain on sale of $2,373,261 during the Year.

The Company owns a 100% interest in certain mineral claims and a mining lease in the Kenora area of Ontario.

The Company held a special exploration licence (the "Special Licence") to search and prospect for all minerals except for coal, salt, potash and uranium within four claims in the East Kemptville area of Yarmouth, Nova Scotia.

The Special Licence had a term of three years which began February 2, 2015 and was renewable for an additional two one-year periods, which extended the Special Licence until February 1, 2020, which has since been converted to a regular exploration licence.

The Company completed a preliminary economic assessment during fiscal 2018 with a development model of utilizing the existing tailings management area ("TMA") and had been in negotiation with the surface rights owner to secure full tenure to the project site. Agreement in principle was reached in Fiscal 2019, however, the surface rights owner subsequently refused to sign the agreement after putting on hold any new work on TMAs on all of its closed minesites. Not having access to the existing unused tailings ponds severely limits the possibilities for economic re-development of the site. This realization coupled with the continuing difficulties in getting surface access to the project site, caused the Company to decide to withdraw its lease application and to write off the costs incurred to-date of $5,587,210 as an impairment loss during the Year.

The Company also had a number of regular exploration licences covering certain claims in the same proximity to the claims covered under the special exploration licence. During the year ended August 31, 2019, the Company decided not to renew these peripheral exploration licences, and accordingly the costs incurred to-date of $639,034 on the mineral claims under the exploration licences had been written off as an impairment loss during the year ended August 31, 2019.

The Company has a 100% interest in a mining lease in the Warren Township Anorthosite Project, located near Foleyet, Ontario, a 100% interest in several claims in the Lilypad Cesium-Tantalum Property, located 150 km northeast of Pickle Lake, Ontario, a 2.0% NSR interest in certain claims of the East Cedartree Gold Property located near Kenora, Ontario, and a 2.4% NSR interest in the Wolf Mountain Platinum-Palladium Project located near Thunder Bay, Ontario.

The Company owns a 100% interest in eight mining leases covering the Nechalacho rare earth elements deposit ("Nechalacho Deposit") located at Thor Lake in the Mackenzie Mining District of the Northwest Territories.

The property is subject to an underlying 2.5% net smelter returns ("NSR") royalty agreement which can be bought back at the principal amount of $150,000 compounded annually at the average Canadian prime rate from May 2, 1982 to the buyback date, and which currently approximates $1.6 million (the "2.5% NSR Royalty").

During the year ended August 31, 2012, the Company entered into an accommodation agreement (the "Accommodation Agreement") with the Deninu K'ue First Nation ("DKFN"). The DKFN is one of three Akaitcho bands who have used, occupied and have constitutionally protected aboriginal rights with respect to the lands on which the Nechalacho Deposit in the Northwest Territories is located.

The Accommodation Agreement provides for business and employment opportunities for the DKFN related to the Nechalacho Deposit and associated facilities in the Northwest Territories and contains measures to mitigate environmental and cultural impacts that may result from the project development. The Accommodation Agreement also commits the DKFN to supporting timely completion of the environmental assessment, permitting and development processes of the Nechalacho REE Project, and provides for the DKFN to participate in the project economics.

As the sale was completed during the Year, the Company had transferred the carrying cost relating to the near-surface mineral resources of $2,605,147 from the total carrying cost of the Nechalacho REE Project included in Property, Plant and Equipment to Asset Held for Sale as at August 31, 2019, and recognized a net gain on sale of $2,373,261 during the Year. Advance payments totaling $3.2 million had been received by August 31, 2019 and was recorded as Deferred Asset Sale Proceeds on the Statement of Financial Position as at August 31, 2019. The balance of $1.8 million was received during the Year.

b) Depreciation of $121,093 (net of $74,997 in rent forgiveness receivable under the Canada Emergency Commercial Rent Assistance program) was recognized relating to the ROU asset during the Year (2019 - $Nil), and the carrying balance of the ROU asset was $849,720 as at August 31, 2020 (2019 - $Nil).

A summary of the changes in the deferred flow-through share premium amount is set out below:

As at August 31, 2020, the Company had the following future commitment relating to the lease contract for its office premises:

On November 30, 2018, the Company issued a convertible note payable in the amount of $500,000 to an entity managed by the Lind Partners ("Lind") (the "Note"). The Note had a term of two years with a maturity date of November 30, 2020 and accrued an interest amount of $100,000 on the date of issuance, resulting in the Note to bear a face value of $600,000 at issuance.

Lind was entitled to convert any outstanding amount of the face value of the Note into common shares commencing on May 26, 2019 at a conversion price equal to the higher of (a) 80% of the five day trailing value weighted average price ("VWAP") of the common shares prior to the date of conversion, and (b) the five day trailing VWAP of the shares prior to the date of conversion, less the maximum discount allowable in accordance with TSX rules. The Company had floor price protection such that if any conversion results in an effective conversion price of less than $0.05 per share, then the Company had the right to instead repay the amount that was subject to that conversion for a 5% premium. The Company also had the right to repurchase the Note at the outstanding face value at any time.

A summary of the changes in the convertible note payable amount is set out below:

In March 2017, the Company entered into a preferred share purchase agreement (the "A1 Agreement") with an entity managed by Lind and issued 500 Series A1 Preferred Shares (the "A1 Preferred Shares") at a price of $5,000 per share for gross proceeds of $2,500,000. Pursuant to Canadian securities laws, the securities issuable under this private placement were subject to a hold period, which expired on July 11, 2017 (the "Hold Period").

The A1 Preferred Shares did not carry a dividend and had a redemption value that started at $5,000 per share and increases by $250 per share each quarter over a 24 months period ending on March 10, 2019, to a cap of $6,750 per share. The A1 Preferred Shares could be converted by Lind into common shares of the Company at a price per common share equal to 85% of the five-day volume weighted average price ("VWAP") of the common shares on the TSX immediately prior to the date that notice of conversion was given (the "Conversion Option").

In conjunction with this private placement, Lind received a commitment fee of $125,000 and 6,900,000 common share purchase warrants (the "A1 Warrants"). Each A1 Warrant entitles the holder to purchase one common share of the Company at a price of $0.23 per common share until March 10, 2022.

Lind had the basic right to convert 25 A1 Preferred Shares into common shares of the Company on a monthly basis, subject to certain conversion limits set out in the A1 Agreement, however Lind was permitted to convert up to 100 A1 Preferred Shares on a monthly basis in the event such amount did not exceed 20% of the Company's 20-day traded volume of common shares on the TSX immediately prior to the date of delivery of a conversion notice.

Lind was also entitled to accelerate its conversion right to the full amount of the redemption value applicable at such time, or demand repayment of the applicable redemption value per share in cash (the "Put Option"), upon the occurrence of certain events as set out in the A1 Agreement (most of which are beyond the Company's control) (the "Redemption Events"). The triggering Redemption Events include certain key financial and non-financial conditions, which included change of control, insolvency and liquidity conditions etc. as defined in the A1 Agreement. These Redemption Events also limited the Company from obtaining other debt or preferred share financings that were not junior to the A1 Preferred Shares other than certain project-related financings, as well as other at-the-market, equity lines or credit type of common share offerings, or convertible security financings where the price of the common share was not fixed at predetermined price. In addition, if the Redemption Event was a change of control event, the redemption amount would be equal to 110% of the applicable redemption amount at that time.

The Company had the right to redeem all of the outstanding A1 Preferred Shares at any time after the Hold Period at a 5% premium to the redemption value (the "Call Option"). The Company also had floor price protection such that if any conversion results in an effective conversion price of less than $0.10 per common share, then the Company had the right to deny the conversion and instead redeem the A1 Preferred Shares that were subject to that conversion for the redemption amount in cash plus a 5% premium.

At any time while any A1 Preferred Shares are outstanding, Lind had the option of subscribing for up to an additional 165 Series A2 Preferred Shares at a price of $5,000 per share and under the same terms and conditions as the initial financing, subject to certain triggering events and subject to the prior approval of the TSX ("Series A2 Option"). Lind would also receive a certain number of Series A2 warrants ("A2 Warrants") if it had exercised the Series A2 Option. The number of A2 Warrants to be issued and the exercise price of A2 Warrants would be calculated by using similar formulas used in determining the number and the exercise price of the A1 Warrants.

In December 2017, the Company entered into a preferred share purchase agreement (the "B1 Agreement") with Lind and issued 300 Series B1 Preferred Shares (the "B1 Preferred Shares") at a price of $5,000 per share for gross proceeds of $1,500,000 in January 2018. Pursuant to Canadian securities laws, the securities issuable under this private placement were subject to a hold period, which expired on May 16, 2018 (the "B1 Hold Period").

In conjunction with this private placement, Lind received a commitment fee of $75,000 and 6,250,000 common share purchase warrants (the "B1 Warrants"). Each B1 Warrant entitles the holder to purchase one common share of the Company at a price of $0.15 per common share until January 15, 2023. Other than the exercise price and expiry date, the B1 Warrants bear the similar terms and conditions as the A1 Warrants.

The B1 Agreement was subject to essentially the same terms and conditions as the A1 Agreement and the B1 Preferred Shares had the same essential features of the A1 Preferred Shares including the rate and amount of the increase in the redemption value, the conversion option, put option and call option etc.

After the B1 Hold Period, Lind had the basic right to convert 15 B1 Preferred Shares into common shares of the Company on a monthly basis, subject to certain conversion limits set out in the B1 Agreement, however Lind was permitted to convert up to 60 B1 Preferred Shares on a monthly basis in the event such amount does not exceed 20% of the Company's 20-day traded volume of common shares on the TSX immediately prior to the date of delivery of a conversion notice.

At any time while any B1 Preferred Shares are outstanding, Lind had the option of subscribing for up to an additional 100 Series B2 Preferred Shares at a price of $5,000 per share and under the same terms and conditions as the initial B1 financing, subject to certain triggering events and subject to the prior approval of the TSX ("Series B2 Option"). Lind would also receive a certain number of Series B2 warrants ("B2 Warrants") if it had exercised the Series B2 Option. The number of B2 Warrants to be issued and the exercise price of the B2 Warrants would be calculated by using similar formulas used in determining the number and the exercise price of the B1 Warrants.

In June 2018, the Company entered into a preferred share purchase agreement (the "C1 Agreement") and issued 150 Series C1 Preferred Shares (the "C1 Preferred Shares") at a price of $5,000 per share for gross proceeds of $750,000. Pursuant to Canadian securities laws, the securities issuable under this private placement were subject to a hold period, which expired on October 30, 2018 (the "C1 Hold Period").

In conjunction with this private placement, Lind received a commitment fee of $37,500 and 3,750,000 common share purchase warrants (the "C1 Warrants"). Each C1 Warrant entitles the holder to purchase one common share of the Company at a price of $0.125 per common share until June 29, 2023. Other than the exercise price and expiry date, the C1 Warrants bear the similar terms and conditions as the A1 Warrants.

The C1 Agreement was subject to essentially the same terms and conditions as the A1 Agreement and the C1 Preferred Shares had the same essential features of the A1 Preferred Shares including the rate and amount of the increase in the redemption value, the conversion option, put option and call option etc.

After the C1 Hold Period, Lind had the basic right to convert 10 C1 Preferred Shares into common shares of the Company on a monthly basis, subject to certain conversion limits set out in the C1 Agreement, however Lind was permitted to convert up to 30 C1 Preferred Shares on a monthly basis in the event such amount does not exceed 20% of the Company's 20-day traded volume of common shares on the TSX immediately prior to the date of delivery of a conversion notice.

At any time while any C1 Preferred Shares are outstanding, Lind had the option of subscribing for up to an additional 50 Series C2 Preferred Shares at a price of $5,000 per share and under the same terms and conditions as the initial C1 financing, subject to certain triggering events and subject to the prior approval of the TSX ("Series C2 Option"). Lind would also receive a certain number of Series C2 warrants ("C2 Warrants") if it had exercised the Series C2 Option. The number of C2 Warrants to be issued and the exercise price of the C2 Warrants would be calculated by using similar formulas used in determining the number and the exercise price of the C1 Warrants.

A summary of the changes in the convertible redeemable preferred shares amount is set out below:

The derivative liabilities consist of the warrants denominated in foreign currency, and certain warrants with exercise prices that are subject to adjustment from time to time in the event of certain common share rights offering (collectively referred to as "liability classified warrants").

The following table summarizes information concerning the derivative liabilities as at the beginning and end of the respective reporting periods:

As at August 31, 2019 and 2020, the estimated closure costs to reclaim the Company's Nechalacho exploration camp site at Thor Lake, the Separation Rapids and the Warren Township exploration sites are $250,000, $40,000 and $13,600 respectively. The closure costs for the Nechalacho exploration camp site are expected to be incurred approximately 20 years after the commencement of commercial production. The expected undiscounted future cash flow is estimated to be $539,000 for the Nechalacho exploration camp site, assuming an annual inflation rate of 3%.

The Company is presently authorized to issue an unlimited number of common shares without par value. The Company is also authorized to issue up to 25,000,000 preferred shares without par value, of which 950 have been issued and none are outstanding as at August 31, 2020.

Common shares issued during the years ended August 31, 2018, 2019 and 2020 are as follows:

i) In November 2017, the Company completed a private placement and issued 3,215,000 flow-through common shares at a price of $0.145 per share (of which 305,000 flow-through common shares were subscribed by certain directors and officers of the Company) and 4,800,000 non-flow-through units at a price of $0.12 per unit (the "NFT Unit") for gross proceeds of $1,042,175 (the "November 2017 Private Placement"). Each NFT Unit consists of one non-flow-through common share and one half non-transferable common share purchase warrant, with each whole warrant being exercisable to acquire one non-flow-through common share of the Company at a price of $0.16 until November 3, 2019.

Of the NFT Unit price of $0.12, $0.112 was allocated to the common share component of the NFT Unit and the balance of $0.008 was allocated to the warrant component of the NFT Unit. These values were allocated on a pro rata basis based on the closing trading price of the Company's common shares on the TSX on the closing date of the private placement, which was $0.135, and the estimated fair value of a whole warrant of $0.0193. The fair value of the warrant was estimated using the Black-Scholes pricing model.

In conjunction with this private placement, the Company paid finder's fees of $34,560, incurred other issuance costs of $10,192 and issued 288,000 non-transferrable compensation warrants, with each compensation warrant being exercisable to acquire one common share of the Company at a price of $0.15 until November 3, 2019. The total fair values of these compensation warrants were estimated at $14,030 using the Black-Scholes pricing model.

The excess of the cash consideration received over the market price of the Company's shares at the date of the announcement of the flow-through share financing totaling $32,150 was recorded as a deferred flow-through share premium liability on the consolidated statement of financial position on the date of issuance.

ii) In December 2017, the Company completed a private placement (the "December 2017 Private Placement") and issued 3,737,400 flow-through common shares at $0.145 per share for gross proceeds of $541,923.

In connection with the December 2017 Private Placement, the Company paid finders' fees of $19,140, incurred other issuance costs of $9,322 and issued 132,000 non-transferrable finder's compensation warrants. Each compensation warrant entitles the holder to purchase one common share of the Company at an exercise price of $0.15 per share until December 22, 2019. The fair values of these compensation warrants were estimated at $4,475 using the Black-Scholes pricing model.

The excess of the cash consideration received over the market price of the Company's shares at the date of the announcement of the flow-through share financing totaling $112,122 was recorded as a deferred flow-through share premium liability on the consolidated statement of financial position on December 29, 2017.

iii) In July 2018, the Company completed a private placement and issued 2,400,000 non-flow-through units ("New NFT Unit") at a price of $0.10 per New NFT Unit and 3,500,000 flow-through units ("New FT Unit") at a price of $0.10 per New FT Unit for total gross proceeds of $590,000. Each New NFT Unit was comprised of one common share and one common share purchase warrant. Each warrant entitles the holder to acquire one common share at a price of $0.12 for a period of two years from the closing date of the private placement (the "Closing Date"), or if the closing price of the common shares on the TSX is $0.16 or higher for a period of twenty consecutive trading days after the Closing Date, the Company may, by notice to the holder (supplemented by a news release of general dissemination) reduce the expiry date of the warrants to not less than 30 days from the date of such notice (the "Expiry Date"). Each New FT Unit was comprised of one flow-through common share and one half of one common share purchase warrant. Each whole warrant entitles the holder to acquire one common share at a price of $0.12 until the Expiry date.

Of the New NFT Unit price of $0.10, $0.0889 was allocated to the common share component of the New NFT Unit and the balance of $0.0111 was allocated to the warrant component of the New NFT Unit. These values were allocated on a pro rata basis based on the closing trading price of the Company's common shares on the TSX on the Closing Date of the private placement, which was $0.095, and the estimated fair value of a warrant of $0.0119. The fair value of the warrant was estimated using the Black-Scholes pricing model.

The fair value of the warrant component of the New FT Unit was estimated at $0.0040 and the fair value of the flow-through feature of the New FT Unit was estimated at $0.0250. Using the relative fair value method, the New FT Unit price of $0.10 was allocated between the share component, the warrant component and the flow-through feature as follows: $0.0746, $0.0035, and $0.0219, respectively.

The fair value of the warrant was estimated using the Black-Scholes pricing model. The Flow-through Share Premium was estimated by multiplying the CEE amount to be renounced per New FT Unit of $0.0999 by the Company's current tax rate of 25%, which totaled $76,650 and was recorded as a deferred flow-through share premium liability on the consolidated statement of financial position on July 11, 2018.

iv) In November 2018, the Company completed a private placement and issued 5,375,000 units at a price of $0.07 per unit (the "Unit") for gross proceeds of $376,250, of which 1,000,000 Units were subscribed by Mr. Donald Bubar, Director, President and CEO of the Company (the "November 2018 Private Placement"). Each unit was comprised of one common share and one half of one common share purchase warrant. Each whole warrant entitles the holder to acquire one common share at a price of $0.12 for a period of two years from the closing date of the private placement (the "Closing Date"), or if the closing price of the common shares on the TSX is $0.16 or higher for a period of twenty consecutive trading days after the Closing Date, the Company may, by notice to the holder (supplemented by a news release of general dissemination) reduce the expiry date of the warrants to not less than 30 days from the date of such notice.

Of the Unit price of $0.07, $0.069 was allocated to the common share component of the Unit and the balance of $0.001 was allocated to the warrant component of the Unit. These values were allocated on a pro rata basis based on the closing trading price of the Company's common shares on the TSX on the closing date of the private placement, which was $0.065, and the estimated fair value of a whole warrant of $0.003. The fair value of the warrant was estimated using the Black-Scholes pricing model.

v) In December 2018, the Company completed a private placement and issued 10,000,000 flow-through common shares at $0.07 per share for gross proceeds of $700,000.

The excess of the cash consideration received over the market price of the Company's shares at the date of the announcement of the flow-through share financing totaling $150,000 was recorded as a deferred flow-through share premium liability on the consolidated statement of financial position on December 21, 2018.

vi) In August 2020, the Company completed a private placement and issued 6,000,000 flow-through units ("FT Unit") at a price of $0.09 per FT Unit for gross proceeds of $540,000. Each FT Unit was comprised of one flow-through common share and one-half of one common share purchase warrant. Each whole warrant entitles the holder to acquire one common share at a price of $0.12 until August 25, 2022.

The fair value of the warrant component of the FT Unit was estimated at $0.0011 and the fair value of the flow-through feature of the FT Unit was estimated at $0.0225. Using the relative fair value method, the FT Unit price of $0.09 was allocated between the share component, the warrant component and the flow-through feature as follows: $0.0660, $0.0012, and $0.0228, respectively.

The fair value of the warrant was estimated using the Black-Scholes pricing model. The Flow-through Share Premium was estimated by multiplying the CEE amount to be renounced per FT Unit of $0.0899 by the Company's current tax rate of 25%. The amount of the Flow-through Share Premium totaled $136,800 and was recorded as a deferred flow-through share premium liability on the consolidated statement of financial position on August 25, 2020.

The following table reconciles the equity classified warrants outstanding to purchase common shares of the Company at the beginning and end of the respective years:

⁽¹⁾Does not include the additional liability classified warrants as disclosed below.

The outstanding equity classified warrants have a weighted average remaining contract life of 1.2 years.

Subsequent to the Year, the expiry dates for the remaining outstanding warrants (each with an exercise price of $0.12 per share) issued in the November 2018 Private Placement were extended. The expiry date has been extended from November 1, 2020 to November 1, 2021 for 1,900,000 warrants, and the expiry date for the remaining 287,500 warrants has been extended from November 23, 2020 to November 23, 2021. All other terms and conditions of these warrants remain unchanged.

The warrants reserve, included as a component of the consolidated statement of changes in equity, relates to equity settled instruments issued by the Company to various stakeholders.

The Company also has the following liability classified warrants outstanding as at August 31, 2020:

The Company is also required to issue 20,000 warrants to the Northwest Territory Métis Nation in two equal installments of 10,000 warrants upon the Nechalacho REE Project meeting certain milestones.

The shareholders have approved a Stock Option Plan (the "Plan") that provides for the issue of up to 10% of the number of issued and outstanding common shares of the Company to eligible employees, directors and service providers of the Company.

The Plan authorizes the granting of options to purchase common shares of the Company at a price equal to or greater than the closing price of the shares on either the trading day prior to the grant or the day of the grant. The options generally vest over a period of one to four years, and generally have a term of two to five years (but can have a maximum term of up to 10 years).

The following table reconciles the stock options outstanding at the beginning and end of the respective years:

As at August 31, 2020, there were 5,416,250 options vested (August 31, 2019 - 6,147,500, August 31, 2018 - 7,816,250) with an average exercise price of $0.12 per share (August 31, 2019 - $0.17, August 31, 2018 - $0.31), that were exercisable.

No stock option was exercised during the Year. During the year ended August 31, 2019, an aggregate of 200,000 (2018 - 50,000) stock options were exercised at the weighted average exercise price of $0.10 (2018 - $0.11) per share, and the weighted average closing market share price on the date preceding the date of exercise was $0.075 (2018 - $0.13) per share.

The share based payments reserve, included as a component of the consolidated statement of changes in equity, relates to equity settled compensation options issued by the Company to its directors, officers, employees and consultants.

The estimated fair value of options earned during the Year was $108,382 (2019 - $97,222, 2018 - $176,836), of which $297 (2019 - $4,484, 2018 - $1,825) was capitalized to property, plant and equipment, $6,768 (2019 - $13,894, 2018 - $25,129) was capitalized as exploration and evaluation assets, $2,284 (2019 - $Nil, 2018 - $596) was charged to operations as general exploration expenses with the balance of $99,033 (2019 - $78,844, 2018 - $149,286) charged to operations as share based compensation expense.

The fair value of each option granted is estimated at the time of grant using the Black-Scholes option-pricing model. The Black-Scholes option-pricing model requires the input of subjective assumptions, including expected life of the option award, share price volatility and other assumptions. The expected life of options granted is derived from historical data on employee exercises and post-vesting employment termination behavior. Expected volatility is based on the historic volatility of the Company's shares. These assumptions involve inherent uncertainties and the application of management judgment. In addition, the Company is required to estimate the expected forfeiture rate and only recognize expense for those options expected to vest.

The weighted average assumptions for grants during the years ended August 31, 2020, August 31, 2019 and August 31, 2018 are as follows:

The following table summarizes information concerning outstanding and exercisable options as at August 31, 2020:

The following table summarizes information concerning outstanding brokers' compensation warrants as at August 31, 2018, August 31, 2019 and August 31, 2020:

Corporate and administrative expenses for the years ended August 31, 2020, 2019 and 2018 consist of the following:

⁽¹⁾These figures do not include share based compensation and are net of the Canada Emergency Wage Subsidy ("CEWS") of $176,294 (2019 - $Nil, 2018 - $Nil). Employees' salaries and benefits including share based compensation expensed for the Year totaled $1,074,999 (2019 - $1,485,977, 2018 - $1,463,258).

⁽²⁾ These figures are net of the CEWS of $8,677 (2019 - $Nil, 2018 - $Nil).

Capital of the Company consists of the components of shareholders' equity, convertible note payable, convertible and redeemable preferred shares, warrants denominated in foreign currency and warrants with exercise prices that are subject to adjustment from time to time in the event of certain common share rights offering.

(i) to safeguard the Company's assets and ensure the Company's ability to continue as a going concern;

(ii) to raise sufficient capital to finance its exploration and development activities on its resource properties; and

(iii) to raise sufficient capital to meet its general and administrative expenditures.

The Company manages its capital structure and makes adjustments to it based on the funds available to the Company in light of changes in general economic conditions, the Company's short term working capital requirements, and its planned exploration and development program expenditure requirements.

As the Company is in the development stage, its principal source of capital is typically from the issuance of share capital. In order to achieve its objectives, the Company expects to spend its existing working capital and raise additional funds as required.

The Company does not have any externally imposed capital requirements. There were no significant changes to the Company's approach to capital management during the year ended August 31, 2020.

Balances and transactions between the Company and its subsidiaries have been eliminated on consolidation and are not disclosed in this note. Details of the transactions between the Company and other related parties are disclosed below:

There have been no material trading transactions with related parties during each of the years ended August 31, 2020, 2019 and 2018, other than the participation by certain related parties in certain equity offerings as listed below:

i) the participation by certain related parties in the November 2017 Private Placement, whereby Donald Bubar, Director, President and CEO, Mark Wiseman, Vice President Sustainability, Patricia Mohr, former Director subscribed for 200,000, 55,000 and 50,000 flow-through shares at $0.145 per share, respectively; and

ii) in November 2018, Mr. Donald Bubar subscribed for 1,000,000 Units at $0.07 per Unit as described in Note 14b.

The remuneration of directors and other key members of the Company's senior management team during the years ended August 31, 2020, August 31, 2019 and August 31, 2018 are as follows:

⁽¹⁾ Salaries and benefits of key management personnel capitalized to exploration and evaluation assets and PPE totaled $199,915 (2019 - $343,246, 2018 - $577,224).

⁽²⁾ Fair value of stock options earned and recognized as share based compensation during the respective reporting period.

Unpaid directors' fees and salaries included in accrued liabilities and owing to the directors and members of the Company's senior management team totaled $188,800 as at August 31, 2020 (August 31, 2019 - $566,685, August 31, 2018 - $137,500).

IFRS 7 establishes a fair value hierarchy that reflects the significance of inputs used in making fair value measurements as follows:

Assets are classified in their entirety based on the lowest level of input that is significant to the fair value measurement. The fair values of the Company's warrants denominated in a currency that is not the functional currency of the Company and the warrants with exercise prices that are subject to adjustment from time to time are based on Level 2 inputs that are observable for the liability such as interest rate, dividend yield and historical volatility. The fair value of the Convertible Note Payable was based on Level 3 inputs including the applicable face value of the Note. The Company had the right to buy back the Note at any time for the outstanding face value, as such the fair value of the Note was the outstanding face value of the Note. The fair values of the Company's A1, B1 and C1 Preferred Shares were based on Level 3 inputs, including applicable redemption amounts and redemption premiums. The Company had the right to redeem the A1, B1 and C1 Preferred Shares at any time and therefore the fair value of the A1, B1 and C1 Preferred Shares was the amount the Company had to pay to redeem the A1, B1 and C1 Preferred Shares, which was the redemption amount as specified in the purchase agreements plus 5% redemption premium.

Except as disclosed elsewhere in these consolidated financial statements, the carrying amounts for the Company's financial instruments approximate their fair values because of the short-term nature of these items.

The Company's risk exposures and the impact on the Company's financial instruments are summarized below:

The Company is not exposed to any significant credit risk as at August 31, 2020. The Company's cash and cash equivalents are either on deposit with two major Canadian Chartered banking groups in Canada or invested in bankers' acceptance notes or guaranteed investment certificates issued by a major Canadian Chartered banking group. The Company's receivables primarily consist of Goods and Services Tax/Harmonized Sales Tax receivable, government grants and refundable security deposits with various federal and provincial governments and are therefore not subject to significant credit risk.

Liquidity risk is the risk that an entity will not be able to meet its financial obligations as they come due. The Company has in place a planning and budgeting process to assist in determining the funds that are required to support the Company's normal operating requirements on an on-going basis and its plans for exploration and development expenditures. The Company ensures that there are sufficient funds to meet its short-term requirements, taking into account its anticipated cash flows from operations and its holdings of cash and cash equivalents.

As at August 31, 2020, the Company has current assets of $1,677,400 and current liabilities of $1,043,819. The Company's working capital as at August 31, 2020 was $633,581. Excluding the deferred flow-through share premium of $136,800, the Company's adjusted working capital as at August 31, 2020 was $770,381, (calculated by adding back the deferred flow-through share premium of $136,800 to the working capital of $633,581). As the de-recognition of the deferred flow-through share premium will not require the future out flow of resources by the Company, it is management's belief that the adjusted working capital figure provides useful information in assessing the Company's liquidity risk.

The Company has cash and cash equivalents balances and it has no interest-bearing debt. The Company's current policy is to invest its excess cash in highly liquid money market investments such as bankers' acceptance notes, treasury bills and GICs. These short term money market investments are subject to interest rate fluctuations.

The Company's functional currency is the Canadian dollar. The majority of the Company's purchases are transacted in Canadian dollars. Other than the US$ Warrants as disclosed in Note 14b, the Company had no other significant financial assets or financial liabilities denominated in foreign currencies as at August 31, 2020.

Considering the Company's budget expenditures for the next twelve months and its current cash and cash equivalents of $1,295,723, with other variables held constant, sensitivity to a plus or minus 25 basis points change in interest rates would not have any significant effect on the Company's net loss over a twelve month period.

Other than the US$ Warrants as disclosed in Note 14b, the Company had no other significant financial assets or financial liabilities denominated in foreign currencies as at August 31, 2020, and its anticipated on-going expenditures to be transacted in US dollars for the next twelve month period is approximately US$160,000. If the Canadian dollar weakens (or strengthens) 5% against the US dollar with other variables held constant, it would not have any significant effect on the Company's expenditures over a twelve month period.

Non-cash financing and investing transactions not reflected in the Consolidated Statements of Cash Flows for the years ended August 31, 2020, August 31, 2019 and August 31, 2018 are as follows:

The following table reconciles the income tax provision from the expected income tax amount based on the statutory rates to the amount recognized in the statements of comprehensive loss:

The tax effects of temporary differences recognized as at August 31, 2020 and August 31, 2019 are as follows:

⁽¹⁾ Included the deferred income tax liability related to the carrying amount of Asset Held for Sale.

The deductible income tax temporary differences that have not been recognized as deferred income tax assets as at August 31, 2020 and August 31, 2019 are as follows:

The Company also has non-refundable investment tax credit carry forwards of $5,687,308 (2019 - $5,701,467), which has not been recognized as a deferred income tax asset.

The Company has non-capital losses carried forward of approximately $34,066,000 (2019 - $33,963,000, 2018 - $31,793,000) available to reduce future years' Canadian taxable income. These losses will expire as follows:

The Company also has net operating losses of approximately $1,668,000 (2019 - $1,668,000, 2018 - $1,668,000) to reduce future years' U.S. taxable income. These losses will expire as follows:

The Company has capital losses carried forward of approximately $2,295,000 (2019 - $2,295,000, 2018 - $2,295,000) available to reduce future years' Canadian taxable capital gains.

The weighted average number of common shares for the purposes of diluted loss per share reconciles to the weighted average number of common shares used in the calculation of basic loss per share as follows:

The loss used to calculate the basic and diluted loss per common share for the year ended August 31, 2020 was $5,367,264 (2019 - $3,386,335, 2018 - $3,240,744).

As at August 31, 2020, the Company had 33,139,013 (2019 - 36,619,013, 2018 - 31,179,240) warrants and 13,545,000 (2019 - 9,396,250, 2018 - 11,345,000) stock options outstanding. These warrants and options could potentially dilute earnings per share in the future, but have not been included in the diluted loss per share calculation because they were antidilutive for the years ended August 31, 2020, August 31, 2019 and August 31, 2018.

As at August 31, 2020, pursuant to the subscription agreements entered into for the August 2020 private placement the Company is required to incur additional CEE of $539,400 by December 31, 2021.

a) granted an aggregate of 350,000 stock options with a weighted average exercise price of $0.08 per share to certain employees and consultants of the Company. The weighted average contract life of these options at issuance was 4.1 years;

b) extended the expiry dates for the remaining outstanding 2,187,500 warrants (each of which with an exercise price of $0.12 per share) that were issued in the November 2018 Private Placement as described in Note 14c); and

c) cancelled 200,000 stock options with a weighted average exercise price of $0.08 per share.

INTRODUCTION		4
CURRENCY		4
QUALIFIED PERSONS		4
CAUTIONARY NOTE REGARDING FORWARD-LOOKING STATEMENTS		4
CAUTIONARY NOTE TO UNITED STATES INVESTORS CONCERNING RESERVE AND RESOURCE ESTIMATES		6
EXPLANATORY NOTE REGARDING PRESENTATION OF FINANCIAL INFORMATION		7
GLOSSARY OF MINING TERMS		8

PART I		12

ITEM 1.	IDENTITY OF DIRECTORS, SENIOR MANAGEMENT AND ADVISERS	12
ITEM 2.	OFFER STATISTICS AND EXPECTED TIMETABLE	12
ITEM 3.	KEY INFORMATION	12
ITEM 4.	INFORMATION ON THE COMPANY	26
ITEM 4A.	UNRESOLVED STAFF COMMENTS	86
ITEM 5.	OPERATING AND FINANCIAL REVIEW AND PROSPECTS	86
ITEM 6.	DIRECTORS, SENIOR MANAGEMENT AND EMPLOYEES	97
ITEM 7.	MAJOR SHAREHOLDERS AND RELATED PARTY TRANSACTIONS	116
ITEM 8.	FINANCIAL INFORMATION	119
ITEM 9.	THE OFFER AND LISTING	119
ITEM 10.	ADDITIONAL INFORMATION	122
ITEM 11.	QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK	134
ITEM 12.	DESCRIPTION OF SECURITIES OTHER THAN EQUITY SECURITIES	135

PART II		136

ITEM 13.	DEFAULTS, DIVIDEND ARREARAGES AND DELINQUENCIES	136
ITEM 14.	MATERIAL MODIFICATIONS TO THE RIGHTS OF SECURITY HOLDERS AND USE OF PROCEEDS	136
ITEM 15.	CONTROLS AND PROCEDURES	136
ITEM 16.	[RESERVED]	137
ITEM 16A.	AUDIT COMMITTEE FINANCIAL EXPERT	137
ITEM 16B.	CODE OF ETHICS	137
ITEM 16C.	PRINCIPAL ACCOUNTANT FEES AND SERVICES	137
ITEM 16D.	EXEMPTIONS FROM THE LISTING STANDARDS FOR AUDIT COMMITTEES	138
ITEM 16E.	PURCHASES OF EQUITY SECURITIES BY THE ISSUER AND AFFILIATED PURCHASERS	138
ITEM 16F.	CHANGES IN REGISTRANTS CERTIFYING ACCOUNTANT	138
ITEM 16G.	CORPORATE GOVERNANCE	138
ITEM 16H.	MINE SAFETY DISCLOSURE.	138

PART III		139

ITEM 17.	FINANCIAL STATEMENTS	139
ITEM 18.	FINANCIAL STATEMENTS	139
ITEM 19.	EXHIBITS	139

SIGNATURES		141

Anomalous		A value, or values, in which the amplitude is statistically between that of a low contrast anomaly and a high contrast anomaly in a given data set.

Anomaly		Any concentration of metal noticeably above or below the average background concentration.

Anorthosite		An unusual mafic igneous intrusive rock consisting of greater than 90% plagioclase feldspar

Assay		An analysis to determine the presence, absence or quantity of one or more components.

Cesium Formate		A high density, low viscosity fluid used in deep offshore oil drilling

Calcined		Heated to a high temperature but below the melting or fusing point, causing loss of moisture, reduction or oxidation, and the decomposition of carbonates and other compounds.

Comminution		The reduction to a powder.

Cubic metres or m³		A metric measurement of volume, being a cube one metre in length on each side.

Decrepitation		The shattering of minerals by the application of heat. In this instance it refers to the heating of the petalite to 1,050^OC in order to convert the lithium to a form which can be dissolved by sulphuric acid after roasting

Dense Media Separation ("DMS")		A gravity process method for separating minerals of different specific gravity. Fluids of suitable density are used so that the minerals lighter than the fluid float and those that are denser sink.

Diamond drill		A rotary type of rock drill that cuts a core of rock that is recovered in long cylindrical sections, two centimetres or more in diameter.

Electrodialysis		The transportation of salt ions from one solution through ion-exchange membranes to another solution under the influence of an applied electric potential difference. In this case it relates to lithium and sulphate ions reacting with hydrogen and hydroxide ions to form lithium hydroxide and sulphuric acid.

Fault		A fracture in a rock where there has been displacement of the two sides.

Feasibility Study		A Feasibility Study is a comprehensive technical and economic study of the selected development option for a mineral project that includes appropriately detailed assessments of applicable Modifying Factors together with any other relevant operational factors and detailed financial analysis that are necessary to demonstrate, at the time of reporting, that extraction is reasonably justified (economically mineable). The results of the study may reasonably serve as the basis for a final decision by a proponent or financial institution to proceed with, or finance, the development of the project. The confidence level of the study will be higher than that of a Pre-Feasibility Study.

Feldspar		Any of a group of abundant rock-forming minerals occurring principally in igneous, plutonic, and some metamorphic rocks, and consisting of silicates of aluminum with potassium, sodium, calcium, and, rarely, barium.

Grade		The concentration of each ore metal in a rock sample, usually given as weight percent. Where extremely low concentrations are involved, the concentration may be given in grams per tonne (g/t or gpt) or ounces per ton (oz/t). The grade of an ore deposit is calculated, often using sophisticated statistical procedures, as an average of the grades of a very large number of samples collected from throughout the deposit.

Greisen		A hydrothermal mineral deposit associated with granites consisting of a stockwork of mineralized veins and replacement zones in altered and mineralized granitic rocks

Hectare or ha		An area totalling 10,000 square metres or 2.47 acres.

Highly anomalous		An anomaly which is 50 to 100 times average background, i.e. it is statistically much greater in amplitude.

Indicated Mineral Resource		An Indicated Mineral Resource is that part of a Mineral Resource for which quantity, grade or quality, densities, shape and physical characteristics are estimated with sufficient confidence to allow the application of Modifying Factors in sufficient detail to support mine planning and evaluation of the economic viability of the deposit. Geological evidence is derived from adequately detailed and reliable exploration, sampling and testing and is sufficient to assume geological and grade or quality continuity between points of observation. An Indicated Mineral Resource has a lower level of confidence than that applying to a Measured Mineral Resource and may only be converted to a Probable Mineral Reserve. Cautionary Note to U.S. Investors: Please review the "Cautionary Note to U.S. Investors Concerning Reserve and Resource Estimates" above.

Inferred Mineral Resource		An Inferred Mineral Resource is that part of a Mineral Resource for which quantity and grade or quality are estimated on the basis of limited geological evidence and sampling. Geological evidence is sufficient to imply, but not verify, geological and grade or quality continuity. An Inferred Mineral Resource has a lower level of confidence than that applying to an Indicated Mineral Resource and must not be converted to a Mineral Reserve. It is reasonably expected that the majority of Inferred Mineral Resources could be upgraded to Indicated Mineral Resources with continued exploration. Cautionary Note to U.S. Investors: Please review the "Cautionary Note to U.S. Investors Concerning Reserve and Resource Estimates" above.

Intrusive		A rock mass formed below earth's surface from magna which has intruded into a pre-existing rock mass.

Lepidolite		A mineral of the mica group containing lithium, typically gray or lilac in color.

Lithian muscovite		A form of the mineral lepidolite containing lithium oxide and having a modified two-layer monoclinic muscovite structure.

Measured Mineral Resource		A Measured Mineral Resource is that part of a Mineral Resource for which quantity, grade or quality, densities, shape, and physical characteristics are estimated with confidence sufficient to allow the application of Modifying Factors to support detailed mine planning and final evaluation of the economic viability of the deposit. Geological evidence is derived from detailed and reliable exploration, sampling and testing and is sufficient to confirm geological and grade or quality continuity between points of observation. A Measured Mineral Resource has a higher level of confidence than that applying to either an Indicated Mineral Resource or an Inferred Mineral Resource. It may be converted to a Proven Mineral Reserve or to a Probable Mineral Reserve. Cautionary Note to U.S. Investors: Please review the "Cautionary Note to U.S. Investors Concerning Reserve and Resource Estimates" above.

Mica		Any of a group of minerals that are complex silicates that crystallize in thin, somewhat flexible, translucent or colored, easily separated layers, including muscovite and lepidolite.

Mineral Reserve		A Mineral Reserve is the economically mineable part of a Measured and/or Indicated Mineral Resource. It includes diluting materials and allowances for losses, which may occur when the material is mined or extracted and is defined by studies at Pre-Feasibility or Feasibility level as appropriate that include application of Modifying Factors. Such studies demonstrate that, at the time of reporting, extraction could reasonably be justified. The reference point at which Mineral Reserves are defined, usually the point where the ore is delivered to the processing plant, must be stated. It is important that, in all situations where the reference point is different, such as for a saleable product, a clarifying statement is included to ensure that the reader is fully informed as to what is being reported. The public disclosure of a Mineral Reserve must be demonstrated by a Pre-Feasibility Study or Feasibility Study. Cautionary Note to U.S. Investors: Please review the "Cautionary Note to U.S. Investors Concerning Reserve and Resource Estimates" above.

Mineral Resource		A Mineral Resource is a concentration or occurrence of solid material of economic interest in or on the Earth's crust in such form, grade or quality and quantity that there are reasonable prospects for eventual economic extraction. The location, quantity, grade or quality, continuity and other geological characteristics of a Mineral Resource are known, estimated or interpreted from specific geological evidence and knowledge, including sampling. Cautionary Note to U.S. Investors: Please review the "Cautionary Note to U.S. Investors Concerning Reserve and Resource Estimates" above.

Modifying Factors		Modifying Factors are considerations used to convert Mineral Resources to Mineral Reserves. These include, but are not restricted to, mining, processing, metallurgical, infrastructure, economic, marketing, legal, environmental, social and governmental factors.

Muscovite		The most common mineral of the mica family

Pegmatite		A coarse-grained granite, sometimes rich in rare elements such as uranium, tungsten, lithium, cesium, beryllium and tantalum.

Petalite		A lithium aluminum silicate mineral, Li(AlSi₄O₁₀), occurring in colorless or white foliated masses

Plagioclase		Any of a common rock-forming series of triclinic feldspars, consisting of mixtures of sodium and calcium aluminum silicates.

Pollucite		A cesium ore mineral

Possible or inferred ore		Term used to describe ore where the mineralization is believed to exist on the basis of some geological information, but the size, shape, grade, and tonnage are a matter of speculation.

Preliminary Economic Assessment or Scoping Study		A study, other than a pre-feasibility or feasibility study, that includes an economic analysis of the potential viability of mineral resources.

Pre-feasibility study (preliminary feasibility study)		A Pre-Feasibility Study is a comprehensive study of a range of options for the technical and economic viability of a mineral project that has advanced to a stage where a preferred mining method, in the case of underground mining, or the pit configuration, in the case of an open pit, is established and an effective method of mineral processing is determined. It includes a financial analysis based on reasonable assumptions on the Modifying Factors and the evaluation of any other relevant factors which are sufficient for a Qualified Person, acting reasonably, to determine if all or part of the Mineral Resource may be converted to a Mineral Reserve at the time of reporting. A Pre-Feasibility Study is at a lower confidence level than a Feasibility Study.

Probable mineral reserve		A Probable Mineral Reserve is the economically mineable part of an Indicated, and in some circumstances, a Measured Mineral Resource. The confidence in the Modifying Factors applying to a Probable Mineral Reserve is lower than that applying to a Proven Mineral Reserve. Cautionary Note to U.S. Investors: Please review the "Cautionary Note to U.S. Investors Concerning Reserve and Resource Estimates" above.

Proven mineral reserve		A Proven Mineral Reserve is the economically mineable part of a Measured Mineral Resource. A Proven Mineral Reserve implies a high degree of confidence in the Modifying Factors. Cautionary Note to U.S. Investors: Please review the "Cautionary Note to U.S. Investors Concerning Reserve and Resource Estimates" above.

Silicate		Any of a large group of silicon-oxygen compounds. Silicates make up about 95 percent of Earth's crust and upper mantle.

Spodumene		A translucent, typically grayish-white silicate mineral which is a source of lithium.

Syenite		Coarse-grained intrusive igneous rock with a general composition similar to that of granite, but deficient in quartz, which, if present at all, occurs in relatively small concentrations.

Tantalite		A dense black mineral consisting of a mixed oxide of tantalum and iron.

Tonne or Metric tonne		Metric measurement of weight equivalent to 1,000 kilograms or 2,204.6 pounds.

Year	Diameter	Drill holes	Metres
2007	BTW	13	2,440.47
	TOTAL	13	2,440.47
2008	NQ2	70	14,033.65
	TOTAL	70	14,033.65
2009	HQ	43	8,794.32
2009	NQ	26	5,476.78
	TOTAL	69	14,271.10
2010	HQ	86	23,840.43
2010	PQ	20	3,754.00
	TOTAL	106	27,594.43
2011	HQ	43	10,967.22
2011	NQ	21	3,923.96
2011	PQ	46	10,864.60
	TOTAL	110	25,755.78
2012	HQ	73	18,100.90
2012	PQ	13	3,160.45
	TOTAL	86	21,261.35
2013	HQ	16	2,977.30
	TOTAL	16	2,977.30
2014	HQ	15	3,135.00
2014	PQ	7	1,773.00
	TOTAL	22	4,908.00
Total to August 31, 2015		492	113,242.08

QA/QC Samples Submitted From January, 2011 to August, 2012
QC Category	DH Sample Count	QC Sample Count	Ratio of QC Samples to DH Samples
Company Standards	16,914	1,117	1:15
Company Blanks	16,914	453	1:37
Laboratory Duplicates	16,914	2,019	1:8
Field Duplicates	16,914	88	1:192

Laboratory Comparison Results for All Elements (ppm)
Element	No. of Samples	Mean 1 (Lab 4)	Mean 2 (Lab 2)	SD 1 (Lab 4)	SD 2 (Lab 2)	CV 1 (Lab 4)	CV 2 (Lab 2)	RPHD%⁽¹⁾
La	453	1996.72	1882.70	1153.64	1076.56	0.58	0.57	2.69
Ce	451	4398.52	4184.67	2535.14	2392.85	0.58	0.57	2.24
Pr	453	558.23	518.04	331.16	300.76	0.59	0.58	3.21
Nd	453	2166.97	2069.39	1297.18	1223.40	0.60	0.59	1.97
Sm	453	456.80	422.45	290.66	265.58	0.64	0.63	3.56
Eu	453	52.32	49.91	34.33	32.65	0.66	0.65	2.07
Gd	453	357.29	359.70	257.90	256.03	0.72	0.71	-0.80
Tb	453	48.63	48.37	44.61	43.68	0.92	0.90	0.01
Dy	452	240.93	235.89	258.54	252.82	1.07	1.07	1.05
Ho	453	41.09	38.98	50.96	50.06	1.24	1.28	5.24
Er	453	101.74	96.24	137.84	132.60	1.35	1.38	4.59
Tm	453	13.25	13.25	18.48	18.48	1.39	1.39	-0.44
Yb	453	80.59	81.97	112.45	112.15	1.40	1.37	-3.44
Lu	453	11.37	11.08	15.76	15.32	1.39	1.38	-0.39
Y	453	964.62	914.19	1144.75	1072.82	1.19	1.17	2.22
Zr-ICPMSh	451	16794.83	16441.79	11635.23	11661.55	0.69	0.71	1.51
Zr-XRF	497	22748.89	20472.55	11023.60	9747.00	0.48	0.48	5.16
Nb-ICPMSh	452	2045.91	1937.76	1173.36	1158.36	0.57	0.60	2.82
Nb-XRF	228	3645.18	3169.35	1189.18	994.35	0.33	0.31	7.00
Ta	453	217.29	207.36	169.17	157.83	0.78	0.76	1.45
Hf	453	380.31	369.85	274.54	268.91	0.72	0.73	1.47

Nechalacho Deposit Mineral Resource Estimate as at May 3, 2013⁽⁸⁾
Category	Zone	Tonnes (million)	TREO (%)	HREO (%)	ZrO₂ (%)	Nb₂O₅ (%)	Ta₂O₅ (%)
Measured	Basal	10.86	1.67	0.38	3.23	0.40	0.04
Indicated	Basal	55.81	1.55	0.33	3.01	0.40	0.04
Measured and Indicated	Basal	66.67	1.57	0.34	3.05	0.40	0.04
Inferred	Basal	61.09	1.29	0.25	2.69	0.36	0.03

Mineral Resource Estimate Grades of Individual Rare Earth Oxides and Specific Gravity⁽⁸⁾
Category	Zone	Tonnes (million)	La₂O₃ (ppm)	Ce₂O₃ (ppm)	Pr₂O₃ (ppm)	Nd₂O₃ (ppm)	Sm₂O₃ (ppm)	Eu₂O₃ (ppm)	Gd₂O₃ (ppm)	Tb₂O₃ (ppm)
Measured	Basal	10.86	2,629	5,878	745	2,928	652	82	594	91
Indicated	Basal	55.81	2,522	5,605	701	2,761	596	73	529	80
Measured and Indicated	Basal	66.67	2,539	5,649	708	2,788	605	75	539	82
Inferred	Basal	61.09	2,110	4,760	608	2,390	487	60	439	63

Category	Zone	Tonnes (million)	Dy₂O₃ (ppm)	Ho₂O₃ (ppm)	Er₂O₃ (ppm)	Tm₂O₃ (ppm)	Yb₂O₃ (ppm)	Lu₂O₃ (ppm)	Y₂O₃ (ppm)	SG
Measured	Basal	10.86	471	84	221	29	174	24	2,061	2.85
Indicated	Basal	55.81	413	72	182	24	141	20	1,813	2.88
Measured and Indicated	Basal	66.67	422	74	189	25	147	20	1,853	2.88
Inferred	Basal	61.09	315	55	132	18	106	15	1,327	2.83

Zone	Classification	Distance to Nearest Drill hole	Minimum Number of Drill holes
Basal	Measured	≤30m (by manually digitized contour)	1
	Indicated	≤60m	1
	Inferred	≤120m	1

Mineral Reserve Estimate as at May 3, 2013
Description	Mineral Reserve Category
Description	Proven	Probable	Proven and Probable
Tonnage (Mt)	3.68	10.93	14.61
TREO (%)	1.7160	1.6923	1.6980
HREO (%)	0.4681	0.4503	0.4548
HREO/TREO	27.28%	26.61%	26.78%
La₂O₃	0.256%	0.256%	0.256%
Ce₂O₃	0.570%	0.567%	0.568%
Pr₂O₃	0.072%	0.071%	0.071%
Nd₂O₃	0.284%	0.283%	0.283%
Sm₂O₃	0.065%	0.065%	0.065%
Eu₂O₃	0.008%	0.008%	0.008%
Gd₂O₃	0.062%	0.061%	0.061%
Tb₂O₃	0.010%	0.010%	0.010%
Dy₂O₃	0.058%	0.056%	0.056%
Ho₂O₃	0.011%	0.010%	0.010%
Er₂O₃	0.029%	0.027%	0.028%
Tm₂O₃	0.004%	0.004%	0.004%
Yb₂O₃	0.023%	0.022%	0.022%
Lu₂O₃	0.003%	0.003%	0.003%
Y₂O₃	0.259%	0.249%	0.251%
ZrO₂	3.440%	3.309%	3.342%
Nb₂O₅	0.425%	0.413%	0.416%
Ta₂O₅	0.046%	0.045%	0.045%

Nechalacho Deposit Mineral Resources as at August 15, 2013 above a US$345/tonne NMR Cut-Off⁽¹¹⁾
Category	Zone	Tonnes (millions)	TREO (%)	HREO (%)	HREO/ TREO (%)	ZrO₂ (%)	Nb₂O₅ (%)	Ta₂O₅ (%)
Measured	Basal	12.56	1.71	0.38	22.50	3.20	0.405	0.0404
Indicated	Basal	49.33	1.62	0.35	21.27	3.07	0.405	0.0398
Measured and Indicated	Basal	61.90	1.64	0.35	21.53	3.10	0.405	0.0399
Inferred	Basal	58.16	1.38	0.26	18.89	2.80	0.380	0.0351

Nechalacho Deposit Measured, Indicated and Inferred Rare Earth Oxide Grades as at August 15, 2013 above a US$345/tonne NMR Cut-Off⁽¹⁾
Category	Zone	Tonnes (millions)	La₂O₃ (%)	CeO₂ (%)	Pr₆O₁₁ (%)	Nd₂O₃ (%)	Sm₂O₃ (%)	Eu₂O₃ (%)	Gd₂O₃ (%)	Tb₄O₇ (%)	Dy₂O₃ (%)	Ho₂O₃ (%)	Er₂O₃ (%)	Tm₂O₃ (%)	Yb₂O₃ (%)	Lu₂O₃ (%)	Y₂O₃ (%)
Measured	Basal	12.56	0.266	0.622	0.078	0.295	0.066	0.0082	0.060	0.0094	0.047	0.008	0.022	0.003	0.017	0.002	0.207
Indicated	Basal	49.33	0.258	0.603	0.074	0.283	0.061	0.0076	0.055	0.0084	0.043	0.007	0.019	0.002	0.015	0.002	0.187
Measured and Indicated	Basal	61.90	0.260	0.607	0.075	0.285	0.062	0.0077	0.056	0.0086	0.043	0.008	0.019	0.003	0.015	0.002	0.191
Inferred	Basal	58.16	0.223	0.528	0.066	0.252	0.051	0.0064	0.046	0.0067	0.033	0.006	0.014	0.002	0.011	0.002	0.136

Nechalacho Deposit Measured, Indicated and Inferred Mineral Resources for Basal Zone by NMR Cut-Off Value as at August 15, 2013 at NMR Cut-off Values over $345/tonne
Zone	NMR Cut-Off ($USD)	Tonnes (millions)	TREO (%)	HREO (%)	HREO/ TREO (%)	ZrO₂ (%)	Nb₂O₅ (%)	Ta₂O₅ (%)
Measured
Basal	≥345	12.56	1.71	0.38	22.50	3.20	0.405	0.0404
Basal	≥600	8.28	1.98	0.48	24.29	3.79	0.468	0.0480
Basal	≥800	5.11	2.20	0.58	26.17	4.23	0.520	0.0544
Basal	≥1000	2.49	2.49	0.68	27.38	4.77	0.586	0.0620
Indicated
Basal	≥345	49.33	1.62	0.35	21.27	3.07	0.405	0.0398
Basal	≥600	28.66	1.95	0.45	23.21	3.68	0.472	0.0479
Basal	≥800	16.15	2.20	0.55	24.87	4.13	0.521	0.0542
Basal	≥1000	6.99	2.52	0.66	26.03	4.66	0.583	0.0614
Measured and Indicated
Basal	≥345	61.90	1.64	0.35	21.53	3.10	0.405	0.0399
Basal	≥600	36.94	1.96	0.46	23.46	3.70	0.471	0.0479
Basal	≥800	21.27	2.20	0.55	25.19	4.15	0.521	0.0543
Basal	≥1000	9.48	2.52	0.66	26.38	4.69	0.584	0.0616
Inferred
Basal	≥345	58.16	1.38	0.26	18.89	2.80	0.380	0.0351
Basal	≥600	22.41	1.74	0.37	21.09	3.40	0.453	0.0431
Basal	≥800	6.68	2.04	0.49	24.26	3.84	0.502	0.0506
Basal	≥1000	1.81	2.42	0.61	25.31	4.17	0.547	0.0570

List of Products from the Rare Earth Separation Plant and Refinery
Product	Design Plant Production (t/y)	Product Distribution (%)	Feasibility Study Specification ⁽¹⁾
La Oxide	1,583	16.0	3 N
Ce Oxide	3,572	36.0	3 N
Pr Oxide	451	4.0	3 N
Nd Oxide	1,783	18.0	3 N
Sm Oxide	391	4.0	2 N
Eu Oxide	49	0.5	4 N
Gd Oxide	371	4.0	3 N
Tb Oxide	54	0.5	4 N
Dy Oxide	271	3.0	4 N
Y Oxide	1,170	11.0	5 N
Lu Oxide	14	0.1	3 N
Er/Ho/Tm/Yb Carbonate Mix⁽²⁾	292	3.0	2 N
Total	10,000	100.0

Nechalacho Project Capital Cost Summary
Cost Category	NWT⁽¹⁾ ($ million)	LA⁽²⁾ ($ million)	Total ($ million)
Mine development	81.58	-	81.58
Main process facilities	351.24	192.51	543.75
Infrastructure	150.68	78.82	229.50
EPCM	119.27	38.57	157.84
Indirect construction costs	175.56	27.25	202.81
Owner's costs	36.76	18.95	55.71
Contingency	120.91	44.90	165.81
Closing costs / bond	13.00	3.16	16.16
Pre-production capital cost	1,049.00	404.16	1,453.16
Sustaining capital	102.72	19.12	121.84
Total capital cost	1,151.72	423.28	1,575.00

Life of Mine Average Operating Costs per Project Cost Area
Project Section	Average Annual Costs ($ million)	LOM Average Unit Costs ($/t milled)
Reagents & Consumables	97.2	133.20
Fuel & power	50.7	69.48
Labour	36.7	50.26
Freight	29.4	40.31
G&A	26.8	36.74
Other	23.7	32.29
Project total	264.5	362.28

Feasibility Study Economic Evaluation
	Discount rate (%/year)	Pre-Tax $ million	After Tax $ million	Payback (years)
Undiscounted Cash Flow		6,052	4,381	4.3
Net Present Value	8	1,833	1,262	5.5
	10	1,351	900	6.3
	12	981	620	7.2
Internal Rate of Return		22.5%	19.6%

Class	Rock unit	Tonnes (Mt)	% Li₂O	% Ta₂O₅	% Cs₂O	% Rb₂O	Wt. % feldspar
Measured	6a,b,c	2.425	1.440	0.005	0.010	0.322	44
	6d	0.939	1.410	0.008	0.027	0.473	40
	Total	3.364	1.431	0.006	0.015	0.365	43
Indicated	6a,b,c	3.992	1.391	0.006	0.012	0.338	44
	6d	1.049	1.402	0.009	0.025	0.469	40
	Total	5.041	1.393	0.007	0.014	0.366	43
Measured +Indicated	6a,b,c	6.416	1.409	0.006	0.011	0.332	44
	6d	1.989	1.406	0.009	0.026	0.471	40
	Total	8.405	1.408	0.007	0.015	0.365	43
Inferred	6a,b,c	1.308	1.351	0.007	0.017	0.342	44
	6d	0.483	1.346	0.008	0.020	0.427	40
	Total	1.791	1.349	0.007	0.018	0.365	43

Area	Capex CAD x 1,000
Area	Initial Plant	Feldspar Flotation (Years 5/6)
Pre-construction	500	0
Mining	0	0
Concentrator	39,696	8,450
Tailings Disposal	6,519	0
Infrastructure	5,750	0
Total Direct Costs	51,965	8,450
EPCM	3,204	845
Freight & Transportation	1,398	327
Other Indirects	5,076	1,199
Total Indirect Costs	9,677	2,371
Owners Costs	2,000	500
Buildings	1,000	250
Contingency	12,528	2,164
Total Capital Costs	77,671	13,735

Category	Ave. Annual Costs (CAD'000)	CAD/t Milled
Petalite and Lepidolite
Mining and Reclaim	18,181	40.0
Concentrate Production and Shipping	35,826	78.8
General and Administration	1,830	4.0
Total Production Costs CAD	55,837	122.8
Total Production Cost USD	42,951	94.4
Feldspar Production and Trucking
CAD	9,707	87.7
USD	7,467	67.5

Item	Units	LOM
Mine Production
Plant feed (Pre Sorter)	t	8,567,928
Waste	t	52,344,381
Total Mined	t	60,912,309

Processing
Mill Feed	t	8,413,705
Lepidolite Concentrate Grade	% Li₂O	4.50%
Lepidolite Concentrate Sold	t	218,529
Petalite Concentrate Grade	%Li₂O	4.25%
Petalite Concentrate Sold	t	1,322,849
Feldspar Concentrate Sold	t	1,307,500

Exchange Rate	CAD/USD	1.30

Total Sales Revenue	CAD'000	1,745,717

Operating Costs	CAD/t milled	CAD'000
Lithium Concentrate Production	122.77	1,032,979
Feldspar Production	16.79	141,236

Total Operating Costs	139.56	1,174,215

Capital Costs		CAD'000
Construction - Initial Capital		77,671

Item	Units	LOM
Feldspar Plant (Yrs 5&6)		13,735

Total Capital Expenditure	CAD'000	91,406
Working Capital		10,000
Site Closure		7,500

	Pre-tax	After Tax
Net Cash Flow (CAD'000)	472,595	327,758

Net Present Value (at 8% disc. rate)	155,562	102,191

Internal Rate of Return (IRR)	27.1	22.7

Payback Period (after tax, undisc.)	Years	4.4

Expense	Amount (CAD'000)
Drilling
Geotech & Hydrology	450
Testwork
Process	350
Water Treatment	50
Engineering
Mine Design	75
Process Plant & Site	175
Studies
Power Supply	50
Market Studies	30
Hydrology	175
Tailings & Waste Rock	120
Environmental Permitting	140
Final Report Compilation	75
Avalon Expenses	30
Total	1,720

		Payment due by period
		Total		<1 year		1-3 years		4-5 years		More than 5 years
Trade payables and other payables	$	728,126	$	728,126	$	-	$	-	$	-
Lease obligation		966,833		218,253		451,736		296,844		-
Total	$	1,694,959	$	946,379	$	451,736	$	296,844	$	-

Name, Present Position with the Company and Country of Residence	Principal Occupation	Director/Officer Since
Donald S. Bubar Director, Chief Executive Officer and President Ontario, Canada	President and CEO of the Company.	February 17, 1995

Alan Ferry ^{(1) (2)} Director and Chair Ontario, Canada	Self-employed businessperson since July 2007; Chair, Plateau Energy Metals Inc.; Director, Guyana Goldfields Inc. 1998-2019.	February 24, 2000

Naomi Johnson ⁽²⁾Director Ontario, Canada	Vice President of Community Relations, Titan Mining Corporation from April 2018 to January 2019, prior thereto, Partner and Senior Director, Community Relations, Barrick Gold Corporation, February 2015 to November 2017, prior thereto Senior Director, Community Relations, Barrick Gold Corporation	September 10, 2019

JOHN E. FISHER⁽¹⁾⁽²⁾Director Ontario, Canada	Retired businessperson; prior thereto President and CEO, Walker Industries Inc.	February 25,2020
MARILYN SPINK⁽¹⁾Director Ontario, Canada	Manager, DMC Mining, July, 2018 to present, prior thereto Project manager/Pm Coach, Isherwood, February, 2013 to July, 2018	June 8,2020
R. James Andersen Chief Financial Officer and Vice President, Finance Ontario, Canada	Chief Financial Officer and Vice President, Finance of the Company since June 2001.	June 11, 2001

William Mercer Vice President, Exploration Ontario, Canada	Vice President, Exploration of the Company since June 2007, prior thereto, self-employed Geological Consultant from October 2006 to December 2010.	June 21, 2007

Mark Wiseman Vice President, Sustainability Ontario, Canada	Vice President, Sustainability of the Company since November 2011; prior thereto, Director Health, Safety and Environment for Xstrata Nickel's Koniambo Project, a division of Xstrata plc (an international mining company, presently Glencore) from 1990 to 2010.	November 7, 2011

(1)	These amounts represent the "grant date fair value" of options granted to the respective Named Executive Officer, which have been determined by using the Black-Scholes model, a mathematical valuation model that ascribes a value to an option based on a number of factors in valuing the option-based awards, including the exercise price of the option, the price of the underlying security on the date the option was granted, and assumptions with respect to the volatility of the price of the underlying security and the risk-free rate of return. Calculating the value of options using this methodology is very different from a simple "in-the-money" value calculation. In fact, options that are well out-of-the-money can still have a significant "grant date fair value" based on a Black-Scholes valuation, especially where, as in the case of the Company, the price of the common shares underlying the option is highly volatile. Accordingly, caution must be exercised in comparing grant date fair value amounts with cash compensation or an in-the-money option value calculation. The same caution applies to the total compensation amounts shown in the last column above, which are based in part on the grant date fair value amounts set out in the column for Option-based awards. These values are consistent with the accounting values used in the Company's financial statements. The Company selected the Black-Scholes model given its prevalence of use within North America.
(2)	The Company does not have a pension plan.
(3)	Medical expenses paid by the Company on behalf of the respective Named Executive Officer.
(4)	Mr. Bubar does not receive any additional compensation for serving as a director of the Company.
(5)	Mr. Marsh left the Company on June 1, 2020

Name	Option-based awards - Value vested during the year ($)⁽¹⁾	Share-based awards - Value vested during the year ($)	Non-equity incentive plan compensation - Value earned during the year ($)
Donald Bubar Director, President and CEO	Nil	Nil	Nil
R. James Andersen CFO and Vice President, Finance	Nil	Nil	Nil
Mark Wiseman Vice President, Sustainability	Nil	Nil	Nil
David Marsh⁽²⁾ Former SVP, Metallurgy and Technology Development	Nil	Nil	Nil

Name	Change of Control	Amount ($)
Donald Bubar Director, President and CEO	3x annual salary	1,200,000
R. James Andersen CFO and Vice President, Finance	3x annual salary	900,000
Mark Wiseman Vice President, Sustainability	12 months + 1 month per year of employment	455,000
David Marsh⁽¹⁾ Former SVP, Metallurgy and Technology Development	Nil ⁽¹⁾	Nil ⁽¹⁾

Name	Number of common shares underlying unexercised warrants (#)	Issuance Date	Exercise Price ($)	Expiration Date
Donald Bubar	Nil	n/a	n/a	n/a
R. James Andersen	Nil	n/a	n/a	n/a
David Marsh⁽¹⁾	Nil	n/a	n/a	n/a
Mark Wiseman	Nil	n/a	n/a	n/a
Alan Ferry	Nil	n/a	n/a	n/a
Brian D. MacEachen⁽²⁾	Nil	n/a	n/a	n/a
Naomi Johnson	Nil	n/a	n/a	n/a
John E. Fisher	Nil	n/a	n/a	n/a
Jane Pagel⁽²⁾	Nil	n/a	n/a	n/a
Marilyn Spink	Nil	n/a	n/a	n/a

		2020		2019
Salaries, benefits and directors' fees	$	1,114,485	$	1,551,593
Share-based compensation ⁽¹⁾		75,252		70,992
	$	1,189,737	$	1,622,585

		August 31, 2020		August 31, 2019

Cash and cash equivalents held at major financial institutions	$	1,295,723	$	1,881,841
Other receivables		263,141		337,573

Reporting Period	Auditor	Audit Fees ⁽¹⁾	Audited-Related Fees ⁽²⁾	Tax Fees ⁽³⁾	All Other Fees ⁽⁴⁾
August 31, 2020	Ernst & Young LLP	$70,000	$Nil	$Nil	$Nil
August 31, 2019	Ernst & Young LLP	$65,000	$Nil	$Nil	$Nil
Notes: (1) "Audit Fees" include the aggregate professional fees billed by the Company's auditor for the audit of the annual financial statements and other regulatory audits and filings. (2) "Audit-Related Fees" include professional fees billed by the Company's auditor related to assurances and related services related to the performance of the audit or review (including interim reviews) of financial statements not included in "Audit Fees". (3) "Tax Fees" include the aggregate fees billed for professional services rendered for tax compliance, tax advice and tax planning. (4) "All Other Fees" include the aggregate fees billed for products and services other than as set out under the headings "Audit Fees", "Audit Related Fees" and "Tax Fees".

Description		Page
Consolidated Financial Statements and Notes		F-1 - F-41

Number	Name
1.1	Articles of Continuance of Avalon Advanced Materials Inc.⁽¹⁾
1.2	By-law #1 of Avalon Advanced Materials Inc.⁽²⁾
1.3	Articles of Amendment of Avalon Advanced Materials Inc.⁽³⁾
1.4	By-law #2 of Avalon Advanced Materials Inc.⁽³⁾
1.5	Articles of Amendment of Avalon Advanced Materials Inc.⁽⁴⁾
1.6	Articles of Amendment of Avalon Advanced Materials Inc.⁽⁵⁾
1.7	Articles of Amendment of Avalon Advanced Materials Inc.⁽⁶⁾
2.1	Description Securities registered under Section 12 of the Exchange Act
4.1	Mining lease #3178 dated July 6, 2006⁽⁷⁾
4.2	Mining lease #3179 dated July 6, 2006⁽⁷⁾
4.3	Mining lease #3265 dated April 28, 2008⁽⁷⁾
4.4	Mining lease #3266 dated April 28, 2008⁽⁷⁾
4.5	Mining lease #3267 dated April 28, 2008⁽⁷⁾
4.6	Mining lease #108395 dated November 16, 2009⁽⁸⁾
4.7	Sale Agreement with Cheetah Resources Pty Ltd⁽⁹⁾
4.8	Stock Option Plan⁽¹⁰⁾
12.1	Certification of the Principal Executive Officer pursuant to Rule 13a-14(a)
12.2	Certification of the Principal Financial Officer pursuant to Rule 13a-14(a)
13.1	Certificate of Principal Executive Officer pursuant to 18 U.S.C. Section 1350
13.2	Certificate of Principal Financial Officer pursuant to 18 U.S.C. Section 1350
15.1	Management's Discussion and Analysis of Financial Statements for the year ended August 31, 2020
101.INS	XBRL Instance Document
101.SCH	XBRL Taxonomy Extension Schema Document
101.CAL	XBRL Taxonomy Extension Calculation Linkbase Document
101.DEF	XBRL Taxonomy Extension Definition Linkbase Document
101.LAB	XBRL Taxonomy Extension Label Linkbase Document
101.PRE	XBRL Taxonomy Extension Presentation Linkbase Document

	AVALON ADVANCED MATERIALS INC.

Dated: November 27, 2020	(signed) "R. James Andersen"
	R. James Andersen
	Vice President, Finance and Chief Financial Officer

Management's Responsibility for Financial Reporting and Report on Internal Control over Financial Reporting	F-1

Report of Independent Registered Public Accounting Firm	F-2

Consolidated Statements of Financial Position	F-3

Consolidated Statements of Comprehensive Loss	F-4

Consolidated Statements of Changes in Equity	F-5

Consolidated Statements of Cash Flows	F-6

Notes to the Consolidated Financial Statements	F-7 - F-41


			2020			2019
Assets
	Current Assets
	Cash and cash equivalents (note 4)	$	1,295,723		$	1,881,841
	Other receivables		263,141			337,573
	Prepaid expenses and deposits		118,536			140,720
	Asset held for sale (note 5)		-			2,605,147
			1,677,400			4,965,281

	Non-Current Assets
	Exploration and evaluation assets (note 6)		12,083,199			17,065,203
	Property, plant and equipment (note 7)		102,836,885			101,981,838
			114,920,084			119,047,041

		$	116,597,484		$	124,012,322

Liabilities
	Current Liabilities
	Accounts payable	$	153,743		$	151,318
	Accrued liabilities		574,383			922,474
	Deferred flow-through share premium (note 8)		136,800			47,481
	Deferred asset sale proceeds (note 7a)		-			3,200,000
	Current portion of lease obligation (note 9)		178,893			-
			1,043,819			4,321,273

	Non-Current Liabilities
	Lease obligation (note 9)		688,574			-
	Convertible note payable (note 10)		-			175,000
	Convertible redeemable preferred shares (note 11)		-			958,125
	Derivative liabilities (note 12)		59,827			27,069
	Site closure and reclamation provisions (note 13)		303,600			303,600
			1,052,001			1,463,794

			2,095,820			5,785,067

Shareholders' Equity
	Share Capital (note 14b)		179,329,547			177,802,700
	Reserve for Warrants (note 14c)		4,336,481			4,330,037
	Reserve for Share Based Payments (note 14d)		17,333,864			17,225,482
	Reserve for Brokers' Compensation Warrants (note 14e)		286,000			286,000
	Accumulated Deficit		(86,784,228	)		(81,416,964	)
			114,501,664			118,227,255

		$	116,597,484		$	124,012,322