Avalon Minerals Limited ASX Code: AVI

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1 Company Research 22nd October 2008 ASX Code: AVI Recommendation: Speculative BUY Current Capital Structure Price of Ordinary Shares (cents) 13.5 Shares Currently on Issue (Million) 52.0 Current Market Capitalisation (undiluted)(a$ Million) 7.0 Key Investment Highlights Summary ( Avalon ) or ( the Company ) has recently released the final part of its maiden resource estimate for its recently acquired Viscaria Copper Project located in Northern Sweden. The better than expected high-grade resource estimate for A Zone south of 8.2Mt grading 2.7% copper and part of a larger total estimate now 39.9Mt grading 1.3% Cu for 515,400 tonnes of metal is a significant achievement in a short period since the projects acquisition in February These encouraging initial estimates provide Avalon with an exciting solid start to assessing the potential of redeveloping the old Outokumpu operations which ceased production in 1997 at a time of low copper prices. Options: Existing Options (Unlisted) (Million)* 13.0 Current Cash estimated at end of October (A$Million) 0.5 *All options issued to date are unlisted staff options exercisable on or before 31 January 2010 at varying strike prices ranging from cents. Board of Directors Mr. David McSweeney Executive Chairman M. Gary Steinepreis Non-Exec Director Mr. Stephen Stone Non-Exec Director Substantial Shareholders (As of 30 September 2008) Blackmort Nominees Pty Ltd 11.6% Mr. David McSweeney 8.7% Mr. Gregory Down 7.7% Mr. David Donald Boyer Brookman Resources Pty Ltd 7.7% 7.3% Key Company Highlights Avalon has secured a wholly owned interest in two recent historical copper mine projects (Viscaria and Adak located in Northern Sweden) for nominal consideration. Viscaria the Company s flagship project was a large supplier of highly desired copper concentrate to European smelters up to Adak had four mines producing copper concentrate up to Viscaria, located on the outskirts of Kiruna township, adjacent to LKAB s world class iron ore operations, benefits significantly from immediately adjacent infrastructure including power, rail, workforce and mining service industries. The project boasts two large diameter declines accessing the workings providing potential for early access to unmined areas and exploration drill sites for resource extension and evaluation work. Preliminary assessment of extensive historical drilling has identified panels of unmined mineralisation in addition to open high-grade mineralised extensions at depth and along the mines 3km strike. Unmined intersections include 23.3m grading 4.19% Cu, 8.3m grading 3.12% Cu, 7.1m grading 3.46% Cu, 5m grading 3.3%Cu, 7.4m grading 2.68% Cu,13.8m grading 2.2% Cu and 15.9m grading 2.5% Cu. In addition a substantial volume of mineralisation within 100m of surface has been identified providing open-cut targets, boosting significantly the Company s potential of rapidly redeveloping the project into a Mtpa operation within 3 years. Mining scoping studies are already underway. Avalon has a strong management team with an outstanding proven background in exploration, mine development and running operations. Sweden is now ranked as one of the top ten countries in the world as being an attractive juristiction for mining investment (Fraser Institute 2008). Montagu Stockbrokers Pty Ltd Level 1, 37 St Georges Tce, Perth WA 6000 PO Box Z5005, Perth WA 6831 T F ABN A Participant of ASX Group AFSL No

2 Overview & Background Information (Avalon or the Company) is a junior resource company which was listed on the ASX in March 2007 following a $3.5 million Initial Public Offering. The Company s aim and capability is to discover and develop mineral deposits which demonstrate potential for early cashflow. Avalon s initial primary focus after listing was on its West Australian and Queensland polymetallic exploration projects. In February 2008 the Company announced it had secured a wholely owned interest in two brownfields copper projects Viscaria and Adak located in Northern Sweden. Re-evaluation of the historical copper mine assets are now justifiably the Company s prime focus. In August 2008 Avalon announced its intent to divest its Western Australian projects to a new listing Caliburn Resources Limited. Investing in Avalon is also about backing quality Management In our view, an investment in Avalon is not just about investing in a company which has recently acquired two high quality projects but is as much about investing in the high caliber and experience of the Company s management. In particular we note David McSweeney who has several years experience in exploring developing and managing underground and open cut mining assets. Prior to his departure to start up Avalon in 2006 David was previously Managing Director of successful gold miner Gindalbie Gold prior to transforming the company into an upcoming iron ore producer by establishing and managing the development of the 2 billion tonne Karara iron-ore project. Complimenting David s experience, is Gary Steinepreis who has had extensive experience in the resource sector with assisting junior resource companies from their inception to successful listing. Acquisition of the Swedish Assets was an Exceptionally Good Value Deal In March 2007 Avalon announced it had signed an agreement with Phelps Dodge Exploration Sweden AB, a subsidiary of Freeport-McMoRan Exploration Corporation for the purchase of the Viscaria and Adak copper mine projects. The consideration paid for both projects was US$420,000 and a 1% net Smelter Royalty on future production. Phelps Dodge had acquired the project off Outokumpu in 2003 but in the time it held the project, failed to drill even a single hole at either of the projects. We view the consideration for Avalon s acquisition agreement with Phelps Dodge very favourably. Compared to other market acquisitions and taking into consideration the significant upside potential, Avalon, in our view certainly did not pay excessive amounts for the projects. In fact we view the acquisition cost as bordering on the inexpensive. Montagu Stockbrokers Pty Ltd 2 of 10

3 Abundant Mining and Exploration Data Already Providing Very Valuable Information on Ore Deposit Mineralisation and Mining Potential Accompanying the acquisition of the Viscaria asset was a large amount of data and information which Outokumpu had collected over the 15 years the mine was in operation between 1982 and This wealth of information which included data on 3,100 diamond drill holes (260,000 metres), stoping panel plans providing valuable information on mined and unmined positions, survey information on all of the existing mine workings, including the two declines in addition to mine plans and sections, has already proven very valuable in the preliminary assessment of the project. In addition to stored core samples, the available information has allowed Avalon and its geological consultants to fast track an assessment of the current resource base (discussed later) and importantly assess potential for mining several panels of high-grade mineralisation which have been identified by drilling but currently remain unmined. Capital Raising Will Be Required In Near Future - But Not Immediately To date the Company has been able to fund the Swedish project acquisitions via capital raised under the IPO and with a small $1 million placement undertaken in March Funds raised from those two raisings was also sufficient for project due diligence and the undertaking of a modern JORC resource estimate at Viscaria, as well as provide working capital for the next quarter. To move to the next stage involving drilling and resource expansion in addition to undertaking an initial scoping study into the possible redevelopment of the Project, the Company will require a new capital raising in the short to medium term. Due to current market conditions Avalon has made an executive decision to postpone this until early 2009 when capital raising conditions are anticipated to improve. This postponement is viewed favourably and should not affect the company negatively. Viscaria Copper Project Details (AVI 100%) Advantageous Proximity to Existing Mining & Transport Infrastructure Viscaria is favourably located only 4km west-northwest of the mining township of Kiruna in Northern Sweden. Kiruna, about two thirds the size of Kalgoorlie in Western Australia, was largely established to service LKABs world class iron ore operation which is located on the outskirts of the town. The township despite being located 145km north of the Arctic Circle enjoys easy all year round access due to a combination of low precipitation, low elevation and excellent infrastructure including asphalt roads, daily flights to the capital Stockholm and an excellent heavy guague rail system which connects the town to the deepwater ports of Narvik on the Atlantic Ocean/Norwegian Sea and the Port of Lulea to the South on the Baltic Sea. The proximity of the Viscaria copper project to such excellent infrastructure in addition to inexpensive (A$0.05/kwhr) high voltage hydroelectric power, a town capable of providing mining infrastructure, fabrication workshops and skilled educated mining personnel should not be overlooked and is a significant positive for the projects potential future redevelopment. Montagu Stockbrokers Pty Ltd 3 of 10

4 Geological Setting & Mineralisation Viscaria has been described as a copper-iron deposit hosted in greenstones, which is interpreted as having a volcanogenic massive sulphide (VMS) origin. An alternative model put forward relates the mineralisation to thrusting episodes. Whilst the exact geological model of formation is still a subject of debate, what is important to note is the scale of the currently defined and historically mined copper mineralisation. The extensive mineralisation is well defined and identified in three still open zones named A, B and D over a total strike length of in excess of 9km over a distance of over 4km. When mining commenced in 1982 the three zones were estimated to contain 30Mt grading 1.5% copper. The Project is documented to have produced 12.54Mt grading 2.29% copper to date. A recent resource estimate by Avalon s consultants has estimated JORC Inferred Resources currently totalling 39.9Mt grading 1.3% Cu. (discussed in detail later). A Zone The majority of the mining undertaken at the project by Outokumpu was on the mineralisation associated with the A zone. Ore shoots within this zone were up to 20 metres wide in places and down to 3-5 metres in thinnest pinched sections. The A zone has traditionally provided the highest grade ore with longwall open stoping methods delivering ore averaging 2.3% copper. However it is known that the historical stoping did encompass a significant amount of wall rock dilution. Historical drill hole analysis, later confirmed by Avalon s geological consultants, demonstrate that A Zone is consistently running higher than this; in most parts grading 2.5-3% copper. Avalon believes that by tightening up stoping outlines more selective cut and fill mining methods should be able to deliver mill feed at better grades closer to 3%. Selected examples of unmined A zone intersections include: 23.3 metres grading 4.19% copper, 8.3 metres grading 3.12% copper, 7.1 metres grading 3.46% copper, 5 metres grading 3.3% copper, 7.4 metres grading 2.68% copper,13.8 metres grading 2.2% copper and 15.9 metres grading 2.5% copper. Montagu Stockbrokers Pty Ltd 4 of 10

5 Early Open Cut Potential Recognised from Northern parts of A Zone Avalon has recently released the first mineral resource for the northern half of the A zone 5.3Mt grading 1.2% for 72,000 tonnes of copper. We note particulaly of economic interest over 1.8Mt grading 1.3% copper identified above 100 metres depth which could potentially be accessible by lower cost open cut mining methods. A Zone South High Grade Underground Resources Announced Early due diligence work undertaken by Avalon s consultants examining drillhole and historical mining data had flagged that early exploration focus should concentrate on the deeper southern part of the A zone which plunges towards the south and which remains open. In late September 2008, the Company announced the final part of the maiden resource estimate for the high grade unmined portions of the southern part of A zone. The results from the southern A zone were better than expected with Avalon announcing A Zone south to contain inferred resources of 8.2Mt grading 2.7% copper for 221,400 tonnes of copper metal. This estimate combined with the earlier northern A Zone resources now total 13.3Mt grading around 2.12% copper for 282,600 tonnes of copper metal. B & D Zone Lodes - A Potential Source of Substantial Additional Resources Historical exploration has defined two other lodes named B and D located to the west of the A zone which show encouraging potential for further substantial amounts of potentially minable mineralisation. Extensive drilling (60 holes) to date has defined the B zone located approximately metres parallel west of A zone. Currently demonstrated by drilling to extend over 3km in strike and over 400 metres in depth B zone is considered a weaker zone of mineralisation commonly grading around 0.8% copper over 2-10 metre widths. Resources for B zone are currently estimated by the Company s consultants to total 24.1Mt grading 0.8% copper. Located approximately 500 metres west out in the footwall is another zone of copper mineralisation called D zone. This mineralisation like B zone is somewhat weaker than A zone but higher in grade than B zone grading around 1.6% copper. It is currently unclear if this apparent stronger grade is simply a function of drilling at this stage as D zone is less well defined by drilling. Nevertheless mineralisation defined in D zone currently estimated as 2.5Mt grading 1.6% copper has importantly been demonstrated to be laterally and depth persistent having so far been defined over a 1.5km strike and down 100 metres. Like B zone, D zone is open along strike to the north and south as well as at depth. Montagu Stockbrokers Pty Ltd 5 of 10

6 Largely due to low metal prices at the time (as low as US$1.00 per pound at the time of the mine s closure in 1997) both B and D zones were not mined by the previous operator. The thicker, richer in grade, more easily accessed A zone was always priority for mining staff charged with a tough task of keeping the large 1.0Mtpa mill fed with sufficient quantities of ore. It is currently too early to assess the economic implications of Avalon mining B and D lodes in conjunction with A zone. As part of the scoping study, and now in a period of substantially higher copper prices, Avalon will be looking into the economics and logistics involved with potentially accessing the B zone off the already established A zone decline to provide additional feed material for a new operation. Importantly it has been established that a substantial portion of D zone delineated to date lies within 100metres of surface which could potentially be accessible via an open cut operation. Summary of Maiden Resources CLASSIFICATION ZONE COMMODITY TONNES (M) Cu (%) CONT. METAL (Tonnes) Inferred B Cu ,000 Inferred D Cu ,000 Inferred A Zone North Cu ,000 Inferred A Zone South Cu ,400 TOTAL A,B & D Cu ,400 Source: Above is a table of Avalon s recently released resource estimate figures which are based on a 0.3% copper lower cutoff. We note that 11.6 Mt (equating to 112,790 tonnes of contained copper metal) is currently identified as being located within 100 metres of surface and therefore prospective for potential early low cost exploitation via open cut mining. Strong Potential of Early Project Development Outokumpu successfully processed 15.5Mt of ore at Viscaria over a period of 15 years feeding a large 1.0Mt capacity plant. Early assessment and resource evaluation by Avalon s consultants has significantly encouraged management to consider the potential of early re-establishment of a mining operation at the project. With current copper prices in recent times exceeding US$2.00 per pound we believe Avalon is favourably positioned to quickly capitalise on this by undertaking feasibility studies into potential re-establisment of mining. Early production would likely be focused on mining the shallow remnant mineralisation from recently identified open cut positions prior to longer term production from underground when open cut resources are exhausted Mtpa Plant Proposed Avalon has proposed the establishment of a Mtpa operation. This in our view appears conservatively sensible rather than opt for a larger historical plant capacity. By doing this, the Company has realistic potential to establish production quickly keeping capital development (capex) costs below a currently broadly estimated US$50 million. Secondly one must bear in mind as operations become deeper then logistics such as haulage distances etc become more of an issue. By not overstretchng with capex and plant capacity the Company should be able to design and impliment an efficient mine plan allowing mining to pull ore from multiple stopes, suplimented and blended with ore from open cut activities to produce a consistent feed product, which would keep a 0.5Mtpa plant running continuously for well in excess of 10 years, producing for customers a continuous reliable uniform concentrate. Montagu Stockbrokers Pty Ltd 6 of 10

7 Strong Indicative Cashflow From Viscaria It is still very early to make any attempt to estimate what sort of prospective cash flow Avalon could potentially see from Viscaria and it is dependable on many variables which still need to be established. However with a combination to assumptions, information from historical mining activities at the project and current, historical and forecast commodity prices we can undertake some production scenarios. Below is a table simulating four scenarios. Underground mining reserves have been determined assuming a 30% conversion of resources to reserves. For open pit approximately 50% conversion is assumed. Underground reserve grades for this simulation are assumed to be the same as historical production. Open cut reserve grades assume a 20% dilution factor. PRODUCTIONSCENARIO 1 PRODUCTIONSCENARIO 2 PRODUCTIONSCENARIO 3 PRODUCTIONSCENARIO 4 Copper Price 5,000 7,000 5,000 7,000 US$ per tonne Mining Reserves 5Mt grading 1.95% Cu 5Mt grading 1.95% Cu 5Mt grading 1.95% Cu 5Mt grading 1.95% Cu Mill Capacity (Mtpa) Mine Life (Years) Capex US$ NPAT per annum US$M The 4 production scenario exercise using the same parameters and varying the copper price, mill capacity, capex and operating costs associated with the building of a larger mill is useful to simulate current suggested mill capacity verses the impact of a larger operation on revenue. We can interpret from the exercise that at current copper prices (over $2lb) the figures suggest a cashflow positive project. The simulation taking into consideration increased capex and reduced operating costs involved with the establishment of a 1Mtpa milling facility shows that having a bigger plant doesn t nececerily mean improved economics. We stress that these production scenario figures are very preliminary at this stage and will be subject to change as Avalon establishes firmer cost figures with ongoing feasibility studies. History of Premium Concentrate Sales - New Offtake Contracts Should Not be Difficult Preliminary discussion with prospective customers in regard to selling Viscaria concentrate from a new operation has provided encouragement. Viscaria is advantageously located within a 300-1,500km radius of several European smelters which are able to take a copper concentrate. Of particular note is the Ronnskar Smelter located 330km south of the project by rail. Ronnskar historically purchased Viscaria copper concentrate from Outokumpu. Preliminary discussions with smelter management has been encouraging with interest shown in the potential for the smelter to again start receiving Viscaria concentrate, with smelter management noting the historical 25% copper grade concentrate being of high quality with low impurities. Other Base and Precious Metal Credits Possible Approximately one third of the assays from historical drilling at Viscaria have been analysed for zinc which reaches concentrations of 1% in places. How important this is for project economics is currently unknown. In addition the Company anticipates the Viscaria copper concentrates will likely contain gold in one quarter to half a gram per tonne concentrations within a standard concentrate. At this stage we anticipate the zinc and gold and any other base and precious metals if present will likely be a credit not factored into mining scoping and feasibility study project economics which therefore could simply provide further revenue for an operations bottom line. Neighbouring Aitik Copper-Gold Project Production Rampup Could Provide Opportunity to Secure Secondhand Mill Equipment The Viscaria project is located only 80km south by rail from the 1.6 Billion tonne Aitik copper gold project. Aitik is a large open pit operation currently processing over 18 Million tonnes per annum of ore. The Aitik operation is currently under directive from the New Boliden board to increase production. In order to achieve this Aitik is currently undertaking a significant expansion of its processing facilities which involves the changing out of equipment such as ball mills in order to make way for the new larger equipment. Aitik s operational expansion has presented itself as a significant timely opportunity for Avalon to potentially acquire at low cost some nearby secondhand processing equipment suitable for contributing towards the redevelopment of Viscaria. This has potential to reduce initial costs associated with reinstating a new processing facility. We note however, that it s not just about a cost saving by using second hand equipment currently but Montagu Stockbrokers Pty Ltd 7 of 10

8 also about lead times involved with fabricating items such as for example ball mills. Whilst once it was easy to have such an item fabricated or purchased, lead times for manufacturing such items can be now be at least two years or more. Company representatives are currently on site assessing the potential of purchasing some of the plant and equipment currently being disposed of. Adak Project (AVI 100%) Adak located 800km north of Stockholm, 280km southwest of Viscaria and 25km north of the currently operating Storliden zinc-copper deposit is the second project Avalon acquired from Phelps Dodge. The 80km 2 project encompasses four historical copper-base metal mines (Adak, Lindskold, Brannmyran and Rudtjebacken), which are centered around the edge of the Adak dome, a 3km diameter granite intrusion. The then state owned mining company Boliden between 1940 and 1978 produced over 12Mt grading on average 1.5% copper with significant gold, silver and zinc credits. The deposits recognised as being a cluster of VMS deposits in the northwestern most part of the well endowed Skellefte Mining District and within trucking distance of New Bolidens Ronnskar Smelter were discovered in the 1940 s to 1970 s by a combination of surface prospecting and electromagnetic geophysical surveying. Avalon s attraction to the project, in addition to a history of significant past production, was the notable lack of any modern day geophysics and drilling. Like Viscaria, Phelps Dodge failed to drill a single hole in the time it held the property. Avalon has recently had completed a modern day helicopter borne VTEM survey over the Project area. This is the first modern day electromagnetic survey to be undertaken at the project in over 40 years. The Company s consultants are currently processing the data from the survey which was undertaken to cross reference historical drilling with a modern day geophysical signature. It is expected that the survey will yield several new exciting targets for near term drilling. Such exploration techniques are known to be effective in the Skellefte mineral district with a very good example of such methods leading to the discovery of the nearby high grade Storliden copper-zinc mine (2Mt grading 3.5% copper and 10% zinc) in 1999, in production since In addition to the VMS potential of the project an original drawcard for Pheps Dodge was the potental of the Adak Dome to contain economic amounts of porphyry copper mineralisation which was partially demonstrated in a single historical drill hole which intercepted 150 metres of anomalous copper values from 305 metres depth. Adak provides for Avalon an exciting under explored brownfields project which has seen very little modern day exploration for several decades. Like Viscaria the Project is located in a well established important active mining district, close to essential infrastructure, technical mining personnel and service industries. In addition being located only 115km north of New Boliden s 1.8mtpa processing facility ad Smelter is highly attractive to Avalon. Montagu Stockbrokers Pty Ltd 8 of 10

9 Sweden the Country -At a Glance Sweden has a long and very successful history when it comes to mining going back hundreds of years. Wrongly percieved as being a country that has an anti mining sentiment, Sweden on the contrary reognises the importance of its primary industries and provides strong support, encouragement and legistlation for exploration and mining ventures which are often recognised as being important employers in remote communities. We note Sweden is now ranked as being one of the top ten countries in the world as being an attractive juristiction for mining investment (Fraser Institute 2008). We are now seeing that starting to come into play with an infux of international explorers and miners, which poses the question has Avalon managed to secure premium projects ahead of the main field? We believe so. Key Country facts include: 99% literate population of 9 million with English widely recognised as second language after Swedish. Constitutional Monarchy with parliamentary democracy and a legislation framework similar to that of Australia. New corporate tax rate of 28%. State commonly has a NSR royalty on projects of only 0.2%. GDP (Purchasing Power Parity) $334.6 billion Any existing environmental issues related to historical mining at historical mining projects remain the liability of the historical operator not the current holder. Director Profiles Montagu Stockbrokers Pty Ltd 9 of 10

10 Mr. David McSweeney LLB, MAICD ( Executive Chairman & Managing Director) Mr. McSweeney is an experienced mining company executive who has worked in the resources sector for 20 years. His direct responsibilities have ranged from exploration to project management, project finance, commercial and legal structuring and corporate development. A founder of Gindalbie Metals Ltd, Mr McSweeney was the Managing Director from 1998 until December During his time at Gindalbie, he oversaw the discovery and commissioning of two successful gold production centres and the repositioning of the Company as an emerging diversified Australian iron ore producer with a market capitalisation of ~A$340 million. Mr. McSweeney is also a Director of Bauxite Resources Limited and Chairman of MSP Engineering Services. Mr. Gary Steinepreis Bcom (Non Executive Director) Mr. Steinepreis is an experienced Chartered Accountant who provides corporate management and accounting advice to a number of companies involved in the resource, technology and leisure industries. He is a director of ASX-listed Toodyay Resources Ltd, Gawler Resources Ltd, RMG Ltd, WAG Ltd and Signature Brands Ltd. Mr Steinepreis is also a founding director of Ascent Capital Pty Ltd, a company formed to pursue the reconstruction and recapitalisation of existing listed companies, assist in the establishment of new businesses, and support the listing of new companies on recognised stock exchanges. Stephen Stone BSc (Hons, Mining Geology), MAusIMM, FAICD (Non-Executive Director) Mr. Stone is a mining geologist with more than 28 years experience in operational, management and corporate roles in the international mining and exploration industry. His professional experience includes 20 years as chief executive of a number of Australian publicly listed exploration companies. He initiated ASX-listings for two of these companies, including Apex Minerals NL, from which he recently retired as Executive Chairman. Mr Stone is the non-executive chairman of ASX-listed West African gold explorer Azumah Resources Ltd and a director of Encore Metals NL. Risks Associated with Investment in Potential Investors need to be aware that investment in, like all investments in mineral exploration and development companies, is of a speculative nature. Normal share market risk conditions apply including commodity price, currency fluctuations, sentiment, supply and demand and general economic outlook. Normal exploration, development, mining and processing risks also apply as well as operating and environmental risks. It is also acknowledged that has offshore mineral projects and therefore some sovereign risk (though perceived low) also exists. Disclaimer Montagu Stockbrokers Pty Limited ABN ( Montagu ), does not provide corporate advice to Avalon Minerals Limited. Montagu was a participant in the Company s most recent capital raising in March Any financial product advice contained in this document is unsolicited general information only. Do not act on this advice without first consulting your Adviser to determine whether the advice is appropriate for your investment objectives, financial situation and particular needs. Montagu believes that any information or advice (including any financial product advice) contained in this document was accurate when issued. However, Montagu does not warrant its accuracy or reliability. Any opinions, forecasts or recommendations reflects the judgement and assumptions of Montagu as at the date of publication and may change without notice. Montagu, its officers, agents and employees exclude all liability whatsoever, in negligence or otherwise, for any loss or damage relating to this document to the full extent permitted by law. Report compiled by: Ian Spence, Resource Consultant BSc. (Joint Hons) Geology & Petroleum Geology, MSc. Mineral Exploration & Mining Geology, MBA Montagu Stockbrokers Pty Ltd 10 of 10