Due Diligence and Valuation Report

Arrowhead Code: 21-01-18 Company: AVALON RARE METALS, INC. Coverage initiated: 25 Aug 2008 This document: 31 August 2012 Ticker: TSX: AVL; AMEX: AVL; FWB:OU5 Fair share value bracket: CA$4.48 to CA$13.44i Headquarters: Toronto, Ontario Share price on date: CA$1.72ii CEO & President: Mr. Don Bubar Analyst team Non-Executive Chairman: Mr. Alan Ferry Vishal Pasari Mohanarangam Purushothaman Website: www.avalonraremetals.com [email protected] [email protected] Part of the ABID TREO. In addition, it bought the one of the two NSR royalties, of 3%, for a cash payment of ESR Index CA$2.0MM. Market Data An update to the PFS, released in 2011, shows 52-Week Range: CA$1.40 – CA$4.25iii the pre-tax internal rate of return (IRR) of 39% Average Daily Volume: 324,760iv and pre-tax NPV of 10% at CA$1.77B. A Market Cap. on date: CA$178.21MM CA$64MM feasibility study (FS) for the project is ongoing and is expected to be completed by 2Q Financial Forecast Data (in CA$) 2013. The production is expected to start in 2016 ‘12E ‘13E ‘14E ‘15E 16E ‘17E ‘18E with its initial sales in 2017, at a total capital High profit/ expenditure of approximately $1.2B, including the (8.0) (10.0) (11.0) (18.2) (44.4) 22.6 124.2 (loss) MM US based separation plant. High EPS (0.1) (0.1) (0.1) (0.1) (0.3) 0.1 0.6 Warren Township is a high potential Calcium CA$ Low profit/ Feldspar Project with high purity anorthosite with (8.0) (10.0) (11.0) (18.2) (44.4) 108.4 246.2 (loss) MM 98% calcium plagioclase feldspar. Separation Low EPS Rapids is host to one of the largest rare metal (0.1) (0.1) (0.1) (0.1) (0.3) 0.6 1.2 CA$ pegmatite deposits, a potential source of lithium minerals, in the world. Spor Mountain and Fiscal Year (FY) September 1st – August 31st Miramichi Project, acquired in 2011, is scheduled Summary for a $1.2MM drilling program in 2012. At Spor Avalon Rare Metals Inc. is a Canadian mineral Mountain, by May 2012, 3 holes totalling exploration and development company with seven ~1,000mof the 3000m was drilled on three of the key projects in the exploration and development seven targets. The program is expected to cost of rare earth elements (REE), rare metals, and $0.6MM. rare minerals. All assets are 100% owned, and In June 2012, Avalon signed an accommodation located in Canada and the US. Avalon had no agreement with the Deninu K'ue First Nation. The assets in production as of July 16, 2012. Agreement is expected to provide business and The company’s focus is on the high-potential employment opportunities at Thor Lake. This is a Nechalacho Deposit Thor Lake REE asset in the very significant milestone for the Project as it Northwest Territories, for which the prefeasibility accommodates the interests of partners in a study (PFS) has been completed. The Thor lake mutually beneficial and respectful way. project is emerging as one of the world’s largest Given due diligence and valuation estimations undeveloped rare earth elements resources and is based on intrinsic revenue capacity of the exceptionally enriched in the more valuable heavy Nechalacho deposit, Arrowhead believes that REE (HREE). In the updated resource estimate Avalon’s fair share value lies in the CA$4.48 to shows 21.7% HREO/TREO in the Measured CA$13.44 v By policy, Avalon complies with category. standards in matters of social and environmental In July 2012, Avalon released an updated responsibility. For interest taken in relationships resource estimate with Measured & Indicated with stakeholders and environmental externalities, Avalon was included in Arrowhead’s Resources at 161.21MMT grading 1.33% TREO vi and Inferred resources at 331.67 grading 1.05% ESR Index on November 7, 2008.

Avalon Rare Metals, Inc. – Arrowhead BID 1 TSX: AVL; AMEX: AVL; FWB: OU5 Due Diligence and Valuation Report See important disclosures on page 26 of this report.

Table of Contents

Company Presentation ...... 3

News ...... 7

Listing Information ...... 8

Contacts ...... 8

Major Shareholders ...... 8

Management and Governance ...... 9

Assets and Projects ...... 11

Technologies and Markets ...... 17

Porter’s Five Force Analysis for the Rare Earth Elements (REE) industry ...... 21

SWOT Analysis ...... 21

Value ...... 22

Analyst Certifications and Important Disclosures...... 26

Valuation ...... 27

Avalon Rare Metals, Inc. – Arrowhead BID 2 TSX: AVL; AMEX: AVL; FWB:OU5 Due Diligence and Valuation Report See important disclosures on page 26 of this report.

Company Presentation Avalon Rare Metals Inc. (Avalon), headquartered in Toronto, focuses on the rare metals and minerals, with operations mainly in Canada. Currently, Avalon possesses seven assets; six in Canada and one in the United States. It also has a small Net Smelter Return (NSR) interest in two base and precious metals properties in which the company was formerly involved. All the seven assets in Avalon’s portfolio are either in the development or exploration phases. Avalon’s revenue through 2017 is mainly linked to the entry into production in late 2016 of its Nechalacho deposit and perhaps secondarily of other deposits at Thor Lake. Other projects such as East Kemptville, Warren Township, and Separation Rapids are also at an advanced exploration stage. The company has resumed work on the Warren Township and the Separation Rapids projects, after receiving an expression of interest from an industrial minerals company. The company has signed four MOUs with four Asian industrial companies seeking to participate in the project as strategic investors or technology partners. Three of the MOUs intend for an investment in the project and off take agreements, while the fourth is for the technology support on the separation plant. Avalon looks forward to progress and sign definitive agreements; however, no specific timelines are in place for concluding these negotiations. In June 2012, Avalon signed an accommodation agreement with the Deninu K'ue First Nation. The Agreement is expected to provide business and employment opportunities related to the Avalon’s Nechalacho Deposit. A definitive financial structure for the project has not been finalized, however, as per the agreement, Avalon has agreed to issue to the DKFN an aggregate of 10,000 common shares of the Company, and grant an aggregate of 50,000 non-transferrable common share purchase warrants of the Company. This is a very significant milestone for the Nechalacho Project and it accommodates the interests of partners in a mutually beneficial and respectful way. To first nation it will helps in mitigation of the environmental impacts and provision for environmental monitoring on the land, which is crucial to First Nation members. It also provides business and employment opportunities, along with the education and training provisions, which are essential components of this agreement. Avalon Rare Metals’ Corporate Environmental and Social Responsibility Policies and Inclusion in the ABID ESR Index: For several years, Avalon’s management has focused on developing the company within an environmentally and socially sustainable and responsible framework. In 2010, Avalon won the PDAC Environmental and Social Responsibility Award. In May 2010, Avalon engaged Jantzi-Sustainalytics to assess Avalon’s sustainability performance against a number of benchmarks, including stakeholders’ expectations, competitors’ performance, industry average performance levels, and socially responsible investor expectations. Avalon ranked higher than the average score of 59, with an overall score of 69.2. As of 2008, the focus on corporate environmental and social responsibility (CESR) was translated into a corporate policy based on the principles and guidelines for responsible exploration and the guidelines for environmental excellence in exploration (e3 Plus), both established by the Prospectors and Developers Association of Canadavii (PDAC). To supervise the implementation of these guidelines, Avalon has formed a Sustainability Committee to the Board of Directors on matters relating to corporate environmental and social responsibility such as community relations, environmental practice and health and safety in its projects. The Sustainability Committee has three members with relevant experience and is chaired by Mr. David Connelly, member of the Board of Directors. In January 2011, Avalon embarked upon its CSR Roadmap for managing the business in a sustainable manner. The inaugural Corporate Sustainability Report 2011, entitled Journey to a Sustainable Future

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was released in April 2012. The Report is prepared within the framework of the Global Reporting Initiative, Version 3.1. For stakeholder responsibility, Avalon has collaborated with officials and communities in the Northwest Territories (NWT) with the objective to educate and employ local workforce and companies. In co- operation with the NWT Mine Training Society, the company has sponsored the Aboriginal Driller Helper Training Programs on first aid and surface diamond drilling for community members. Also, the strong personal commitment of Avalon’s President and CEO Donald Bubar on CESR, led to the inclusion of Avalon to Arrowhead’s ESR Index on November 7, 2008. (For further details please read ABID ESR Report on Avalon). It also won the PDAC Environmental and Social Responsibility Award in 2010. The Arrowhead ESR Index tracks the primary equity securities of corporations that demonstrate strong implication and success in implementing policies for reducing emission footprints, taking responsibility for externalities of various types, and establishing mutually profitable relationships with stakeholders and communities.

Avalon’s Asset Portfolio Avalon has a portfolio of seven 100% owned assets, of which six are in Canada and one in the United States. All the assets are in exploration and development stages. Avalon’s Projects Project details Primary Projects: Net interest in Nechalacho Deposit is 97.5% and Separation Rapids is 98%. Two other non-core base and precious metals exploration and development projects, which were sold to partners, and in which Avalon retains a small royalty interest are: Wolf Mountain property with 0.4% NSR royalty interest (JV partners own a buy-back option for the totality of Avalon interest at $1,000,000) East Cedartree property with 2% NSR royalty interest (Metalore Resources Ltd. owns a buy- back option for 1% at $1,000,000)

Source: Company filings Source: Company filings Avalon Rare Metals Key Mining Assets and the Project Time-line

Product market Exploration Resource and off-take Production Current status phase estimates possibilities Expected FS fully funded and planned to be Thor Lake Yes Yes Yes 2016 completed by 2Q 2013 New 43-101 compliant estimate East Kemptville Yes Yes expected in 2012. Restarted the permitting process Warren Township Yes R&D in progress for renewing the development Lilypad Lakes Yes Restarted the permitting process Separation Rapids Yes Yes R&D in progress for resuming operation at the site Spor Mountain Yes $1.2MM drilling planned Miramichi Tin Yes

For more details on Assets, see the Assets and Projects section of this report.

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Avalon’s Portfolio and Premiums Overall, Avalon benefits from diversity (in projects and products) and a strong and experienced management team. In terms of its commodity focus, Arrowhead believes there is significant opportunity for market growth in REEs, rare metals, and rare minerals. Arrowhead also considers that the company enjoys regional benefits, with Thor Lake being its flagship project. Diverse project base: Avalon possesses a series of seven key properties with a full suite of rare metals. Avalon’s focus on REE’s enables the company to develop considerable expertise within a complex and potentially high-return subsector of exploration, mining, and production. Regional advantages: Thor Lake, the company’s most important development project, is a world- class asset with interesting resource estimations and economic data. The project has a good level of advancement and potential for high returns, and is favored by federal and local government and communities. The company released its updated PFS in August 2011 for the Nechalacho project, revising the pre-tax IRR to 39% from the previously estimated 14%, and a pre-tax NPV (@10%) of CA$1.77B over the previous CA$246MM. Execution and operational flexibility: Avalon’s operations are mainly conducted in Canada, with six of seven projects based in the country. This is an advantage over many other mining exploration and development enterprises that operate in foreign territories and have to integrate costs of dealing with the local regulations, establishing administrative and technical operations in places distant from headquarters and financing. Corporate and social responsibility: Avalon emphasizes on maintaining strong relationship with its stakeholders as well as the First Nations that live in the land surrounding some of the company’s assets. Avalon also holds a responsible attitude towards the environment. It has set aside CA$350K for environmental remediation related to historical development work at the North T-Zone of Thor Lake, and community consultation work on environmental matters. Avalon released its inaugural Corporate Sustainability Report 2011, in April 2012, was entitled as Journey to a Sustainable Future. Effective management team: Avalon has a strong and complementary management and governance, forming an all-around team for regulatory, financial, and technical operations. For more details on the management, see the Management and Governance section of the report. Avalon’s Portfolio and Risks Avalon‘s portfolio is concentrated in the exploration and development phase, with no substantial revenue from production until 2017 from the Nechalacho Deposit. This, to some extent exposes the company to financial risk for the years 2013-16. Additionally, the company has recorded losses in its three fiscal years and anticipates reporting losses, as it increases its business plans, till it turns producer. Nevertheless, with a sound capital-raising track-record, Arrowhead believes Avalon should be secure in case of delays in the revenue forecast plan or when eventual unplanned capital expenditure increases. Agenda for Avalon’s stated capital expenditure (the feasibility and ultimate cost of important capex) will have to be confirmed in the future with actual market conditions for financing. Avalon faces certain risks specifically on its flagship project: Risk Mitigant Delay in the FS due to the relatively slow progress of Avalon is currently in the process of completing its budget the metallurgical test program could result in an update, expected to be completed by the end of 2Q 2013. increase in costs from the currently budgeted $35MM in the fiscal 2012 and $12MM in 2013. Delay in timely completion of the metallurgical pilot Company representatives attending the laboratories plant programs regularly along with hiring a senior chemical consultant, who will lead this program Delay in timely availability of Project financing Aims to arrange for off-take agreements Delay in receipt of operating permits Partially mitigated due to negligible local community opposition to the Project development plan and immediate submission of the DAR

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Avalon’s Corporate Strategy The company through its corporate strategy aims at: Developing six of its seven projects, with the Thor Lake rare metals project currently the only material property and at the most advanced stage. The company is focused on bringing this project into production in 2016 with sales in 2017. Completion of the $64MM feasibility study is underway and is scheduled for completion in 2Q 2013. Bringing East Kemptville into production, with an update on evaluation of samples due. The company aims to advance East Kemptville and Warren Township projects and begin generating other new rare metals projects. Advancing feasibility study work, especially pilot plant work, and planning for HREE separation plant. Avalon has initiated its large scale flotation pilot plant trial at SGS in January 2012. Attracting strategic partners, entering into off-take agreements, and concluding the negotiations with First Nations into Agreements. Expanding investor audience internationally and in the Clean Tech community (CSR Road Map 2011)

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News Initial definition of Measured Resources for the Nechalacho Deposit: On July 10, 2012, Avalon announced an updated resource estimate for the Nechalacho Deposit, prepared by Roscoe Postle Associates Inc. It has estimated Measured & Indicated Resources at 161.21MMT grading 1.33% TREO and 15.90% HREO/TREO and inferred resources at 331.67MMT grading 1.05% TREO and 12.50% HREO/TREO. Avalon buys Thor Lake NSR royalty: On July 3, 2012, Avalon announced that it has bought out the 3% NSR royalty on its Thor Lake property for a cash payment of CA$2.0 million. This NSR was one of two NSR royalties on the Property that the Company inherited when it acquired title to the Property in 2005. Avalon and Deninu K'ue First Nation signed an accommodation agreement: On June 7, 2012, Avalon announced that it has entered into an accommodation agreement with the Deninu K'ue First Nation. The Agreement is expected to provide business and employment opportunities related to the Avalon’s Nechalacho Deposit. Though the definitive financial structure for the project has not been finalized, as per the agreement, Avalon has agreed to issue to the DKFN an aggregate of 10,000 common shares of the Company, and grant an aggregate of 50,000 non-transferrable common share purchase warrants of the Company. Avalon Provides Nechalacho Project Update: On May 7, 2012, Avalon provided progress update on its Nechalacho Rare Earth Element Project. o The full scale flotation pilot plant trial on a 40 tonne sample of mineralized material from the Basal Zone was completed in February 2012. o Further optimization of the flotation plant design parameters is planned, and a follow-up flotation pilot plant trial on a two to three tonne ore sample is scheduled for August 2012. o Planning for the hydrometallurgical process pilot plant is nearing completion. o Completed a total of 10,725.4m of drilling in 47 holes using two drills during its 2012 winter drilling program. Avalon sees delays at Nechalacho rare earth project: On May 7, 2012, Avalon announced that it expects delays in a feasibility study on its flagship Nechalacho rare earth project in Canada's Northwest Territories, as it needs more time to complete metallurgical studies. This would delay the feasibility study to 2Q 2013 and initial production from the site to late 2016. Avalon Releases Inaugural Sustainability Annual Report: On April 16, 2012, Avalon released its inaugural Corporate Sustainability Report 2011, entitled Journey to a Sustainable Future. The Report has been prepared within the framework of the Global Reporting Initiative (the "GRI"), Version 3.1. This demonstrates Avalon’s strategic commitment to sustainability and provides a solid foundation for building a socially and environmentally responsible mineral production business. Results of Prefeasibility Study for a Separation Plant: On April 12, 2012, Avalon announced the results of a prefeasibility study for a rare earth elements separation plant to be located in the southern United States. The capital and operating costs for a separation plant with a capacity of 10,000 tonnes per annum, is estimated to be US$302MM and US$5,634/t at an exchange rate of US$1.00 = CA$0.96. Avalon expects that the total cost of the feasibility study will increase by $18MM to $64MM. Avalon Rare Metals provides update on Nechalacho feasibility study: On March 25, 2012, Avalon announced that the feasibility study on the Nechalacho rare earth elements project is progressing steadily and remains on target for completion at the end of 2012. Project permitting is now proceeding on schedule and it is anticipated that the necessary permits will be in place to allow construction activities to begin in mid-2013. The 40 tonne full scale pilot plant trial on Basal Zone ore was completed in February at SGS Minerals, Lakefield, Ontario. The follow up flotation pilot plant trial on a two to three tonne sample has been scheduled for May 2012, with the objective of finalizing plant design parameters for the FS. Avalon Announces New Senior Management Appointment: On March 25, 2012, Avalon announced the appointment of Mr. Tim Butler as Vice President, Human Resources. He will lead the resourcing requirements to advance the Nechalacho project through development, construction and

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operations. He is a senior human resources practitioner and has worked with some of the world's largest resource companies with international experience in Canada, USA, Australia and South America. Avalon Rare Metals Among AMEX Volume Leaders: On January 9, 2012, Avalon emerged among the most heavily traded AMEX-listed issues on Monday. AVL stock increased 7.3%, gaining $0.21 per-share on volume of about 3.1 milluion shares, closing Monday’s session at $3.05 per- share. Avalon’s AGM scheduled for January 26, 2012: On December 28, 2011, Avalon provided notification for the AGM for the financial year-end August 31, 2011. At the meeting, management will provide shareholders with an update on business activities and the appointment of directors and auditors with approval of the shareholders. There is no special business on the agenda. Avalon retained SNC-Lavalin to complete Nechalacho Feasibility Study: On December 21, 2011, Avalon retained SNC Lavalin to complete the Feasibility for its Nechalacho project. The main purpose of this study is to support capital raising to bring Nechalacho into commercial operation, by confirming the technical and economic viability of the project. It is scheduled for completion around the end of 2012. SNC-Lavalin will be responsible for completing the overall BFS, including technical aspects of the hydrometallurgical plant and separation plant, as well as for integrating all other components of the Project assembled by Avalon and other subcontractors. Avalon appoints Mr. Mark Wiseman as the Vice-president, Sustainability: On November 23, 2011, Avalon announced the appointment of Mr. Mark Wiseman as Vice-President, Sustainability. Mr. Wiseman will be responsible for ensuring that Avalon delivers on all of its corporate social responsibility obligations. Mr. Wiseman obtained his MBA from Laurentian University in Sudbury, graduated in B.Sc. in Zoology from the University of Guelph. Mark has over 30 years of experience in the mining industry, specifically in the area of community, environment, health and safety (CEHS). Listing Information The company is listed on the Toronto Stock Exchange (TSX), NYSE (AMEX) with ticker as AVL, and Frankfurt Stock Exchange (FWB) with ticker OU5. Contacts Registered office: 130 Adelaide St. W, Suite 1901, Toronto, ON M5H 3P5 Telephone: (416) 364-4938, (416) 364-4938 Facsimile: (416) 364-5162 Email: [email protected], [email protected]

Major Shareholdersviii

Equity Holder No. of Shares Held (MM) Percentage Holding Manulife Asset Management (US) L 9.54 9.21% John Hancock Advisers 4.27 4.12% Global X Management Co 2.32 2.24% Van Eck Associates 1.75 1.69% Manulife Asset Management 1.34 1.29% Bubar Donald S 1.25 1.21%

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Management and Governance The Management and Governance team comprises a balance of experienced engineers for operations and accomplished practitioners of mining project finance, institutional and market financing for mining assets and regulatory issues. On March 26, 2012, Tim Butler joined as Vice President – Human Resources.

Personnel Designation Biography Mr. Donald S. Director, Has over 30 years’ experience as a consulting geologist in mineral exploration Bubar President and in Canada and has been the President of Avalon Resources, Ltd. since 1995. (M.Sc., P.Geo) CEO Former VP, Exploration for Aur Resources Inc. Has over 28 years’ experience as a mining analyst with various investment Mr. Alan L.H. Ferry Non-Executive dealers. Former VP of Dominick & Dominick Securities Inc., Director and (CFA) Chairman Chairman of Macusani Yellowcake Inc. and Director of Guyana Goldfields Ltd. and Inter-Rock Minerals Inc. Director, Mr. David Connelly Acted as a strategic consultant to businesses, government, and First Nations on Chairman of (CStJ, CD, MBA, implementing economic development opportunities. Former President and CEO Sustainability B.Comm) of Inuvialuit Development Corporation. Committee Before joining Avalon’s Board, Mr. Fontaine was in public office for an Mr. Phil Fontaine Director unprecedented three terms as National Chief of the Assembly of First Nations (BA, LL.D.) until July 2009. Mr. Brian D. Director, Has over 23 years’ experience in the mining industry. Currently President and MacEachen Chairman of Audit CEO of Linear Metals Corp. (CA) Committee Lawyer with 29 years’ professional experience. Formerly Executive VP, Mr. Peter McCarter Director Corporate Affairs, Secretary and a Director of Aur Resources Inc. prior to its (BA, LLB, MBA) acquisition by Teck Cominco Ltd Rich experience in international banking, including being the founding President Mr. Hari Panday Director and CEO of ICICI Bank, Canada. Prior to founding ICICI Bank, Canada, Mr. (CGA, ICD.D) Panday held senior positions at HSBC Bank Canada and the Bank of Montreal. Mining engineer with 30 years’ experience in the mining sector in Australia and Mr. Richard Director Canada. Vice President of Operations at the Ekati Diamond mine and President Morland (B. Eng) and Chief Operating Officer at BHP Billiton Diamonds Inc. Mr. R.J. (Jim) Vice-President, Principal of accounting firm Andersen & Company Professional Corporation. He Andersen Finance and CFO was in charge of the company’s external audit from 1996 to 2000. (CA, CPA, CFP) Has been VP Exploration with Avalon since 2007. Has 32 years’ experience with Dr. William Mercer Vice-President, the Noranda/Falconbridge group holding a series of managerial positions (Ph.D, P.Geo) Exploration working on international projects in over 30 countries, ultimately serving as Director-Geology and Geochemistry. Mining engineer with over 20 years’ experience in precious and industrial David D. Swisher Vice-President, mineral operations both underground and on surface, including the study of (B.Sc) Operations underground and surface mining techniques in Sweden. Vice-President, Spent 19 years with the Noranda/Falcondbridge group in various sales and Pierre Neatby Sales and marketing roles, including Managing Director of Noranda's London, UK based (BA Econ (Hons)) Marketing sales company. Trained as a Black Belt in Six Sigma with Noranda. A senior human resources practitioner, with international experience in Canada, Tim Butler USA, Australia and South America in various functions like organizational Vice-President, (BA Eco, B.Com, development, change management, business improvement, occupational health Human Resources HR – Graduate) & safety, and labour relations. Within his stint in BHP Billiton, he got the Canada's first diamond mine up and running. Brian Chandler Senior Vice- Has over 30 years’ experience in project development and operations in various (B.Sc - Coventry President and part of the world. Served as Senior Vice President and Managing Director for University) COO the African operations of IAMGOLD Corp, based in Dakar, Sénégal. Vice-President, Has 20 years’ experience in private legal practice, representing clients in Richard Pratt, General Counsel sectors including mining, manufacturing, broadcasting and technology, focusing (B.Com (Hons), and Corporate on business critical public and private debt financings and re-organizations. LLB) Secretary Also served as General Counsel for Mag Industries Corp, a TSX-listed company.

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Has been with Avalon since 2007 and has 11 years’ experience in public Cindy Hu, B.Com, CGA Controller accounting practice and financial reporting for various junior public companies (CA, CPA (Illinois)) and private wealth management portfolios. Has over 30 years’ experience as a biologist in the fields of health, safety, Mark Wiseman Vice-President, environment and social responsibility. Has worked at responsible HSEC (BSc (Hon), MBA) Sustainability positions in the mining industry, both in operations and large scale projects, nationally and internationally.

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Assets and Projects

Thor Lake Rare Metals Project up flotation pilot plant trial on a 2T-3T sample is scheduled for May 2012, for optimizing plant Avalon’s interest: 100% design parameters for the FS. Asset Summary: The Nechalacho deposit, The 2011 summer drill program was concluded formerly the Lake Zone, REE deposit at Thor in October 2011 at a total of 13,979m in 72 Lake, NWT, is the third largest REE deposit in holes. An updated resource estimate the world (in terms of TREO), and has incorporating all the 2011 drilling results is exceptional enrichment in the more valuable expected by the third quarter of FY2012. heavy rare earths (HREE). This project is the The 2012 winter drilling program commenced in main focus and the object of feasibility study January 2012 and concluded in April 2012 at a (FS); expected to be completed by 2Q 2013. 10,725.4m in 47 holes. The main objective was Production is expected to start in 2016 with its to define the geometry and continuity of the initial sales in 2017, at a total capital Nechalacho deposit in the areas to be mined in expenditure of approximately CA$1.2B, the first three years of production at Thor Lake. including the US based separation plant. A summer drilling program is scheduled in July 2012, with approximately 12,000m of additional Target commodities: REEs with by-products of definition drilling planned. The HQ core drill is tantalum, niobium, and zirconium focused on the southern margin of the Location: Thor Lake is located 100km Nechalacho deposit, where some of the highest Southeast of Yellowknife, in the NWT of Canada. grade resources is found. The rare metals deposits are hosted by the Project schedule peralkaline Blachford Lake intrusion, an Aphebian-age ring complex emplaced in Archean-age supracrustal rocks of the Yellowknife Supergroup. Thor Lake Project location

In April 2012, SNC-Lavalin Inc finished the PFS for a separation plant. The capital and operating costs for a separation plant with a capacity of 10,000tpa, is estimated to be US$302MM and US$5,634/t at an exchange rate of US$1.00 = Recent developments: The work on the FS is CA$0.96. Currently Avalon is in the process of underway, with collection of bulk sample, pilot identifying partners and preparing for final plant process development work, and feasibility. environmental impact assessment, along with additional definition drilling and product market During 1Q 2012, Avalon completed the development work. Metallurgical studies are accommodation agreements with the Deninu being undertaken to define the most efficient Kue First Nation, Lutsel K’e Dene First Nation process for the recovery of the REE. After the and the Yellowknives Dene First Nation. completion of the three mini-pilot plant trails, However, negotiations are ongoing with the the company commenced the full scale pilot objective of concluding these agreements in plant in January 2012 and was completed in 2012. In June 2012, Avalon signed the February 2012 on a 40T sample of mineralized agreement with Deninu K'ue First Nation and it material from the Nechalacho Deposit. A follow is expected to provide business and employment opportunities related to the Avalon’s Nechalacho

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Deposit. The definitive financial structure for the Other Details project has not been finalized, however, as per Project Mine life 20 years at 730,000tpa ~1,833T/day initially the agreement, Avalon has agreed to issue to Forecast production rates ~ 2,000T / day in year two the DKFN an aggregate of 10,000 common Forecast Capex ~CA$1.0B shares of the Company, and grant an aggregate Forecast operating costs ~CA$269/T of ore of 50,000 non-transferrable common share purchase warrants of the Company. The Prefeasibility DCF Model Original PFS Updated PFS Accommodation Agreement with DKFN also Financial Pre-tax After-tax Pre-tax After-tax commits to support for timely completion of the Analysis (CA$) (CA$) (CA$) (CA$) environmental assessment, permitting and IRR 14% 12% 39% 34% development processes of the Project. Net cash $2.1B $1.5B $6.08B $4.48B flow After completion of certain regulatory permits NPV @ 8% $428MM $236MM $2.22B $1.61B NPV @ and approvals, DKFN will acquire 3,333 $246MM $97MM $1.77B $1.27B 10% limited partnership units, out of a projected Source: Corporate Presentation, 14-May-2012 100,000 limited partnership units to be held Interest agreement: The Thor Lake property by Avalon and its Aboriginal partners. comprises five contiguous mining leases totaling Avalon is currently undergoing an environmental 4,249ha. The mining leases have a 21-year life assessment conducted by the Mackenzie Valley and each lease is renewable in 21-year Environmental Impact Review Board, expected increments. The property is subject to royalty of to be completed by the end of calendar 2012. 2.5% NSR. In July 2012, Avalon bought one of It has also entered into non-binding the NSR royalty of 3% for a cash payment of memorandums of understanding with four CA$2.0 million. industrial companies seeking to participate in Target deposits: Zones of rare metal the Project by investing and/or providing mineralization have been identified on the technical expertise in exchange for obtaining off- property to date as being of potential economic take rights. interest: the North T deposit, South T deposit, S Zone, R Zone, and the Lake Zone, which has Potential mineralization: The NI 43-101- been upgraded and renamed the Nechalacho compliant resource estimates on the deposit deposit. were published in June 2010 and were last ix The Lake Zone deposit is now recognized as updated in August 2011 . They include a having two distinct sub-zones or layers; an 226.88MMT Inferred Resource. The table below Upper Zone, consisting mainly of LREE dominant provides the main data for the 14MMT Probable minerals and a lower Basal Zone which contains Mineral Reserves: the HREE bearing mineral fergusonite.

Resource TREO HREO ZrO2 Nb2O5 Ta2O5 Collectively, the two sub zones combined MM T category (%) (%) (%) (%) (%) represent a large low grade REE resource. Probable 14.5 1.53 0.40 2.90 0.38 0.04 Metallurgy: The Basal Zone layer of the Nechalacho deposit contains a high proportion of Measured 8.9 1.64 0.36 3.11 0.40 0.04 heavy REE, along with light REE in variable Indicated 152.3 1.32 0.20 2.28 0.32 0.03 amounts. The deposit contains significant amount of the rare metals tantalum (Ta), Inferred 331.7 1.05 0.13 2.09 0.30 0.02 niobium (Nb) and zirconium (Zr), which will be A updated resource estimate was released in recovered and converted into saleable products. July 2012, showcasing Measured & Indicated The planning for the hydrometallurgical process Resources at 161.21MMT grading 1.33% TREO pilot plant is nearing its completion. The process and 15.90% HREO/TREO and inferred resources will consist of two stages, in first stage sulphuric at 331.67MMT grading 1.05% TREO and 12.50% acid bake releases most of the light rare earths HREO/TREO. and 50% of the heavy rare earths and second The initial definition of Measured Resources is an then the cracking process liberates the balance important milestone, as it will lead to increased of the heavy rare earths and the by-products confidence in the Mineral Reserves, a key zirconium, niobium and tantalum. component for the Feasibility Study, and in Bench scale testwork on sulphuric acid bake is continuity of the Basal Zone mineralization as complete and it is ongoing for the cracking Avalon heads for mine development.

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process. The pilot plant for the sulphuric acid 2007 Avalon initiated a detailed compilation of bake process is scheduled for August 2012 once historical data for the project area including re- the evaluation of various equipment alternatives logging, assaying and mineralogical study of is completed. additional drill core from the Baby Zone. Through 2008 to 2010, the company defined several drill East Kemptville Rare Metals Project targets using the compiled historical data and Avalon’s Interest: 100% new surveys completed intermittently by Avalon. In February 2010, a drilling program was carried Asset Summary: The property consists of 10 out, with four holes to test the target, where a contiguous exploration licenses and a Special combined geophysical and geochemical anomaly License comprising 6,264.53ha and 356.12ha is supported by anomalous tin values reported respectively. Avalon’s Special License covers the from historical drilling. The entire work program Baby Zone area as well as potential new zones / had a budget of CA$500,000. extensions to the southwest. Highly anomalous indium values, up to 120ppm, and other rare Recent developments: metals such as tungsten, gallium and germanium 2011: The Company continued its efforts to are present in the Baby Zone samples. move forward with the proposed work program Target commodities: Indium, Tin on the Special Licence required to complete the Location: The East Kemptville deposit is a Preliminary Economic Assessment. The company greisen, or hydrothermal replacement zone, requested for an extension from the government associated with the contact of a regional granite authority to fulfill its expenditure obligations intrusion known as the South Mountain under the Special License by August 2014. batholith. This contact is favorable for the 2012: The preparation of a 43-101 compliant occurrence of additional tin-indium-copper-zinc resource estimate and preliminary economic deposits. assessment is planned for 2012. The discussions are on with government officials to find a East Kemptville solution to the site access issue. Warren Township Project

Avalon’s interest: 100% Asset Summary: The Warren Township Calcium Feldspar Project is an advanced mineral development opportunity. Previous work has shown that Anorthosite can be processed to produce a high quality calcium feldspar raw material for the manufacture of reinforcing glass fibre. Presently, the company has restarted the permitting process work, with a potential for renewing the development work at the site. The Baby Zone has been described by Nova Target commodities: Rare mineral Anorthosite Scotia Department of Natural Resources (Canada) geologists as a relatively high-grade tin satellite Location: The Warren Township property is deposit. It has been reported anecdotally that the located near the village of Foleyet, 100 km W of copper-zinc sulphide content in this deposit was Timmins, Ontario. The project consists of three higher than what was typical of the main tin mining claims totaling 728.43ha. Shawmere deposit, which is significant with respect to a Anorthosite Complex hosting a large resource (in potential for hosting high concentrations of indium. excess of 800KT) of a high purity anorthosite, consisting of up to 98% high calcium plagioclase History: Avalon undertook analytical work on feldspar. drill-cores specifically for indium in 2005. In August 2006, the Province of Nova Scotia Shawmere Anorthosite Complex hosting a large granted a Special License and since then various resource (in excess of 800KT) of a high purity exploration licenses have been staked to cover anorthosite, consisting of up to 98% high calcium potential regional exploration targets identified in plagioclase feldspar. the company´s compilation efforts. Further, in

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Warren Township Separation Rapids

Avalon’s interest: 100% (Acquired 2% NSR interest held by the original property vendors on payment of $220,000 in 2Q 2012) Asset Summary: The property is host to one of the largest rare metal pegmatite deposits in the world, only the fourth example in the world of a rare metal pegmatite. The deposit is a potential source of lithium minerals for use in the glass and ceramics industry and specialty composite materials. Target commodities: Lithium, tantalum and rubidium minerals and a pure form of sodium Accessibility: The property is located near both feldspar. road and rail transportation infrastructure and its proximity to markets in southern Ontario and the Location: The Separation Rapids property is North-eastern U.S. offers the potential for the located in the Paterson Lake Area, development of a low-cost, highly profitable approximately 70km by road north of Kenora, industrial minerals operation. Ontario. Separation Rapids Advancement: Early in 2006, the company received a new expression of interest for the calcium feldspar product from a potential customer in the glass industry. A small test sample was evaluated by the customer and its chemical specifications were deemed acceptable. Subsequently, a suitable toll milling facility was identified in southern Alberta for the preparation and delivery of a 417T product sample for a full- scale furnace trial. The trails confirmed that substituting anorthosite into the batch formula, partially or fully replaced the requirement for two Accessibility: The property is directly other raw materials, reduced energy demand by accessible through a private road. The main line at least 10% and significantly reduced of the Canadian National Railway passes greenhouse gas emissions. through the village of Redditt, just 50km by Recent Developments: In October 2011, road south of the property. following an expression of interest received from Marketability of Lithium Minerals – R&D an international industrial minerals company, advancement: The Company is involved in the Avalon has resumed work on the calcium exploration and development of the property feldspar projects. The characteristics of the 35 since 2000. In 2007, Avalon initiated a research tonnes of material shipped for detailed project with SGS Lakefield Research to evaluation met their specifications and investigate the application of hydrometallurgical discussions were on to form a Joint venture. extraction technology application to recover a However, for internal reasons, the Industrial lithium product suitable for the lithium ion Minerals Company did not pursue the joint battery market. Its initial literature research venture. indicated that this technology should be effective with the petalite that is the dominant During March-May 2012, Avalon received an lithium mineral at Separation Rapids. indication of interest from a prospective customer for the anorthosite product that would On October 1, 2009, Avalon acquired a Mining be produced from Warren Township and is Lease for the Big Whopper petalite deposit and presently evaluating costs of producing and all neighbouring land that may be needed for shipping this material to this potential customer. development work. The 21-year lease covers an area of 400.181 hectares with an annual rent of $1,264.

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Advancement: In October 2011, following an by winter road from Pickle Lake for a few weeks expression of interest received from an in February and March. However, a new all- international industrial minerals company, the weather road link to Nakina is in the advanced company resumed work on its Separation planning stage. Rapids lithium minerals project. It has recently Advancement: In 2001, a drilling program was delivered bulk samples of mineralized material conducted to begin delineating the dimensions from the project for a detailed evaluation of its of the Rubellite Dyke and Pollucite Dyke market potential. Though it returned positive tantalum–cesium zones, while also testing results, the company, for internal reasons, did several geochemical and geophysical targets for not pursue the Joint Venture. new rare metal pegmatites. The dyke is Future Plans: Avalon is continuing with the mineralized with tantalum from wall-to-wall with permitting process under the Mining Act average grades ranging from 0.025% to (Ontario) in order to be ready to resume 0.048% Ta2O5 (0.5 to 1.0 lb/tonne tantalum operations at the site when a market oxide). In addition, a detailed mapping of the opportunity is confirmed. Initial work involving area led to the identification of two new parallel the preparation and filing of a detailed project tantalum-rich pegmatites within 100m of the description report has been completed. Further, Rubellite Dyke, providing a potential for under the direction of the mineral tenure additional near-surface resources in this area. consultant a budget is being prepared to Grab samples from these pegmatites returned determine the cost of completing the assays ranging between 0.04% and 0.11% submission. Ta2O5 and channel sampling of the Rubellite. Dyke itself revealed new zones of cesium Lilypad Lakes Project enrichment averaging up to 1.812% cesium oxide (Cs2O) over 4.0m and 1.385% Cs2O over Avalon’s Interest: 100% 9.5m along with tantalum grades of 0.061%

Asset Summary: The project, consisting of 14 Ta2O5 and 0.048% Ta2O5, respectively. At the claims totaling 3107.99ha, has been inactive South Dyke, a new exposure of high-grade since 2001 awaiting a recovery in tantalum mineralization was discovered, from which a prices or new demand for cesium minerals channel sample assayed 0.108% Ta2O5 across a before considering further expenditures. The 4.0m width. The South Dyke is now recognized company has a bank of sufficient assessment as one of a series of narrow, highly-fractionated credits for this property to hold all the claims pegmatites, characterized by relatively high until 2010. tantalum grades (>0.10% Ta2O5) and high Target commodities: Tantalum, Cesium quality mineralization (100% microlite, averaging 79% Ta O ). Location: The Lilypad Lakes project consists of 2 5 14 claims of 3,107.99ha and covers a field of Drilling of the Pollucite Dyke extended this tantalum and cesium-rich pegmatites. It is tantalum-cesium zone to depths of over 250m, located 150km NE of Pickle Lake, Ontario near and western extension for over 200m along the aboriginal community at Fort Hope. strike, where it remains open. A channel sample in the westernmost exposure assayed 0.07% Lilypad Lakes Project Ta2O5 across a 1.0m width, and grab samples from nearby exposures assayed up to 0.087%

Ta2O5 and 4.62% Cs2O. During the mapping program, a 235kg mini-bulk sample was collected from the Rubellite Dyke for preliminary metallurgical test work at Lakefield Research Ltd. The test work results determined that a direct gravity concentration method would recover 60-65% of the tantalum in the ore into

a concentrate grading over 30% Ta2O5, and revealed that recoveries can be improved to over 80% by performing a flotation process on Accessibility: The property is only accessible the tailings from the gravity circuit. by float-equipped aircraft or by snowmobile from Fort Hope in winter. Fort Hope is accessible

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Future Plans: Further test work to optimize the Advancement: Eastwest Resource Corp and process of tantalum recovery is recommended Canadian Golden Dragon Resources Ltd explored by Lakefield. Avalon is presently seeking a new the property for platinum-palladium deposits partner to continue exploration on this and reported in 2006 that drill hole WM05-17 promising tantalum-cesium prospect. The intersected 0.44m grading 7.90 g/t Pt+Pd+Au Rubellite Dyke area is the top priority target for (3.69 g/t Pt, 3.99 g/t Pd and 0.21 g/t Au) within further exploration work on the Lilypad Lakes a broader intercept of 1.72m grading 3.25 g/t property. Pt+Pd+Au. They have not yet reported a resource estimate. Non-core Base and Precious Metals Properties East Cedartree Gold Property

Company’s interest: It holds a 2% NSR with a Wolf Mountain Platinum-Palladium Project 1% at $1,000,000 buy-back option for Metalore Resources Ltd. Company’s Interest: It holds 0.4% NSR with a 0.4% at $1,000,000 buy-back option for JV East Cedartree partners. Target Commodities: Platinum, Palladium Location: The Wolf Mountain platinum- palladium project is located approximately 90km NE of Thunder Bay, Ontario. The Wolf Mountain project consists of two properties: The Seagull property and the Disraeli Lake property, covering a total combined area of 12,383ha. It covers two proterozoic-aged layered ultramafic intrusions favorable for the occurrence of platinum-palladium and copper-nickel deposits.

Wolf Mountain Project Target commodities: Gold Location: The East Cedartree gold property is located 70km SE of Kenora, Ontario. Interest agreement with Metalore Resources Ltd.: Avalon owns interests in five claims within the Cedartree Gold property. The titleholder to the claims, Metalore Resources Ltd., can re-purchase a 1% NSR from the Company at any time for $1.0MM cash. Avalon sold its title to the claims to Metalore in 2002 for $50,000 cash and 10,000 shares of Metalore. Advancement: Metalore has carried out a number of diamond drilling programs since the Interest agreement with Eastwest 2002-end to follow up on encouraging results Resource Corp. and Canadian Golden from previous drilling by Avalon in 1998. The Dragon Resources Ltd.: In November 2003, most recent program, conducted in 2006-07, Avalon sold its 40% working interest in the reported several significant gold intersections, project to JV partners Eastwest Resource Corp including 104.3 g/t of gold over 4.3m. Metalore and Canadian Golden Dragon Resources Ltd for has not yet reported a resource estimate for this $20,000 cash and carried a 0.4% NSR royalty mineralized gold zone. interest in the two properties. The JV can purchase this royalty interest from the company at any time for $1,000,000 cash.

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Technologies and Markets

Rare Earth Elements (REE) – Applications: Due to their application in new x energy technologies, Rare-earth minerals are Seventeen rare elements considered a strategic resource. Rare earth elements are important components in high- Chemistry and Properties: Rare earth efficiency fluorescent lighting, photovoltaic thin elements are a collection of 17 chemical films, regenerative braking in hybrid cars, elements in the periodic table, namely the xi efficient large wind turbines. fifteen lanthanoids . There are important defense applications such Sources and Production: China accounts for as jet fighter engines, missile guidance systems, more than 95% of the world’s REE production, antimissile defense, and space-based satellites followed by India, Brazil and Malaysia. and communication systems. Mine Reserve % of Reserves % of % of Currently, the dominant end-uses of REEs in the Country Production Base total (MMT) total total (MT) (MMT) US are as auto catalysts and petroleum refining catalysts. Other end-uses include as phosphors China 130,000 97 55 50 89 59.3 in color television and flat panel, and as India 2,700 2 3.1 2.8 1.3 1 permanent magnets and rechargeable batteries in hybrid and electric vehicles, and numerous Brazil 550 0.42 Small - - - medical devices. Malaysia 350 0.27 Small - - - Demand Rare Earth Elementsxii United States - - 13 13 14 9.3 Light Rare Heavy Rare Earths Earth Russia (and Major End Use Major End Use (more (less other former - - 19 17 21 14 abundant) abundant) Soviet Union phosphors, countries) Hybrid engines, Lanthanum Terbium permanent Metal alloys Australia - - 1.6 1.5 5.8 3.9 magnets Auto catalyst, permanent Petroleum Other - - 22 20 23 12.5 Cerium Dysprosium magnets, hybrid refining, Metal engines Total 133,600 110 154 alloys Praseodymium Magnets Erbium phosphors The REE reserves and the reserve base are Auto catalyst, more dispersed throughout the world. China Petroleum red color, refining, Hard fluorescent Neodymium Yttrium holds 50% of the world’s reserves (55 MMT out drives in laptops, lamps, ceramics, of 110 MMT) and the United States holds about Headphones, metal alloy agent 13%. South Africa and Canada (included in the Hybrid engines glass coloring, Samarium Magnets Holmium “Other” category) have significant REE potential, lasers Red color for according to the USGS. medical x-ray Europium television and Thulium units Metric tons of Rare Earth Elements (REE) computer screens catalysts in Mine production Gadolinium magnets Lutetium petroleum Region 2010 2011 Reserves refining lasers, steel Ytterbium United States - - 13,000,000 alloys Australia - - 1,600,000 As per Industrial Minerals Co. of Australia Ltd., Brazil 550 550 48,000 world demand is projected to increase to 210KT China 130,000 130000 55,000,000 annually by 2015, while it is unlikely that new Commonwealth of Independent States NA NA 19,000,000 mine output will close the gap in the short term. By 2015, global demand for REEs may exceed India 2800 3000 3,100,000 200KT per year. An additional capacity shortfall Malaysia 30 30 30,000 of 40KT per year could occur. Other countries NA NA 22,000,000 Important segments for REE are All World 133,000 130,000 110,000,000 Mechanical/metallurgical, Glass and Ceramics,

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Chemical, Energy, Electronics, Optics and Source: Metal-Pages.com as at May 09, 2012. Prices are indicated and basis FOB China. Optoelectronics. The table below shows a comparison between REE Demand (2009-2016F) original Chinese FOB prices and updated Chinese Metric tons FOB prices for 2014. 80,000 Original PFS Updated PFS Rare % 70,000 Forecast FOB Forecast FOB Earth Increase China 2014 China 2014 60,000 Oxide US$/kg US$/kg 50,000 La2O3 $4.06 $17.49 331%

40,000 Ce2O3 $2.08 $12.45 499% 30,000 Pr2O3 $43.87 $75.20 71% Nd2O3 $46.06 $76.78 67% 20,000 Sm2O3 $5.58 $13.50 142% 10,000 Eu2O3 $1,086.10 $1,393.00 28%

0 Gd2O3 $13.7 $54.99 301%

2009 2010 2011 2016 Tb4O7 $1,166.09 $1,056.00 -9% Mechanical/Metallurgical Dy2O3 $254.59 $688.10 170% Glass and ceramics Chemical Ho2O3 $66.35 $66.35 0.00% Energy Er O $48.92 $48.92 0.00% Electronics, optics, and optoelectronics 2 3 Others Lu2O3 $522.83 $522.80 0.00% Source:http://www.eetimes.com/electronics-news/4233358/Rare-earths- Y O $23.22 $67.25 189.62% rising-for-next-five-years 2 3 Market Drivers & Trends: After three years of According to BCC Research, rare earths soaring prices for rare earth metals, with the consumption has risen by three times over the cost of some rising nearly thirtyfold, the market last 15 years, but mostly from the - metallurgy, is rapidly coming back down. International glass/ceramics, and chemical catalysts. prices for some light rare earths, like cerium and However, high levels of research and lanthanum, have fallen as much as two-thirds development of new applications requiring rare since August 2011 and are expected to fall earths in the energy and electronics sectors will further due to weak demand. increasingly drive worldwide demand over the next five years. For 2012, China’s export quota is expected to be around 31,130 tons, slightly higher than 30,184 Market Trends: REE Prices tons for 2011. However, only 49% of the quota, Price or 14,750 tons was exported between January Metal Oxide Principal Uses US$/kg and November 2011. 80% of the total Light Rare Earths allocations is already allocated, with an Re-chargeable additional 20% quota remaining to be allocated. Lanthanum Oxide 99% min 20-22 batteries REE demand and supply projection Catalyst, glass, Cerium Oxide 99% min 21-23 REE demand and supply Projectionin tREO (Source:IMCOA, polishing 250,000 Roskill) Praseodymium Oxide 99% Magnets, glass 110-120 min colorant 200,000 Magnets, lasers, 150,000 Neodymium Oxide 99% min 110-120 glass 100,000 Magnets, lighting, Samarium Oxide 99% min 85-88 50,000 lasers 0 2005 2006 2007 2008 2009 2010 2011 2012 2013 2014 2015

Heavy Rare Earths China Supply RoW Supply Total Demand China Demand TV color phosphors: 2300- Europium Oxide 99% min RoW Demand Adjusted Total Demand red 2320

Phosphors: green, 1800- Terbium Oxide 99% min magnets 2000 In the long run, however, the USGS believes that reserves and undiscovered resources are 1030- Dysprosium Oxide 99% min Magnets, lasers 1050 large enough to meet demand. By the end of Magnets, the forecast period, the overall supply of rare Gadolinium Oxide 99% min 100-105 superconductors earths is expected to exceed the demand for the Phosphors, ceramics, individual elements due to coproduction Yttrium Oxide 99.999% min 95-100 lasers requirements, creating a surplus in some rare

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earth oxides and a shortage in others, primarily Tin some of the heavy rare earths. Chemistry and Properties: Tin is an element Indium with the symbol Sn and atomic number 50. Chemistry and Properties: Indium is a rare, Production: Five countries, namely China, soft, malleable and easily fusible poor metal, Indonesia, Peru, Bolivia and Brazil, account for which is chemically similar to aluminum or about 95% of the world's tin production. xiii gallium but more closely resembles zinc . Tin Production by countries Sources and Production: China is a significant Rest of the World producer of indium followed by Korea, Japan 9.0% and Canada. In 2011, China produced 53% of Bolivia the total indium production in the word, while 5.0% Korea, Japan and Canada contributed 10%-15% China Peru 45.0% each. 11.0% Indium Production (2011) Other countries Brazil Belgium 5.0% 1.0% 5.0% Indonesia Canada 30.0% 10.0% Source: www.lme.com

Japan Applications: Tin is primarily used in solder in 11.0% China the electronics industry, which represents about 53.0% 32% of the world consumption, followed by Tin Plates (27%), Alloys (14%) and PVC (6%). Tin Korea is also used as an alloy in flat-screen display 15.0% panels. Source: www.usgs.gov Demand: As for most other industrial Demand: Indium’s primary application is to commodities, China is now the largest consumer form transparent electrodes from indium tin of tin. Other leading consumers include; Japan, oxide in liquid crystal displays (LCDs), which are other Asia, the USA and Europe. in high and growing demand. Indium is also alloyed with gallium in Copper Indium Gallium As per Industrial Technology Research Institute Selenide (CIGS) solar power panels, a rapidly - ITRI (Taiwan) estimates, consumption is expanding market. expected to reach 364.4KT in 2012 valuing the tin market at $9.5b, based on the average price Prices: The growing demand from the in 2011.xiv consumer electronics industry has resulted in World base metal demand vs Tin demand strong prices and opportunities for new producers in the decades to come. Index 200 Indium price trend for five years($/lb)

175

150

125

100 2001 2002 2003 2004 2005 2006 2007 2008 2009 2010 2011f 2012f 2013f

Tin Other base metals

Source: www.kasbahresources.com Supply: As per ITRI estimates, tin production is expected to expand 0.6% to 355KT in 2012, the smallest gain in three years. The rise in output Source: www.metalprices.com for Jul 06, 2007 to Jun 29, 2012

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in Brazil and Malaysia will compensate for to remain "tight" for at least two years, which is declines in China and Indonesia.xv likely to ease only around 2013. Tin supply forecast remains uncertain for the Market Trends: Commodity Prices long and short term. Few projects are currently Tin price trend in the last 5 year ($/lb) planned and those already underway report low concentration of ore. China, a significant producer and consumer of tin has also been foraging the international markets suggesting domestic supply is constrained. World tin mine production '000s 375

300

225

150 Source: www.metalprices.com for 18 Jul, 2007 to 17 Jul 2012 75 Over the past ten years, tin saw a bull market 0 2004 2005 2006 2007 2008 2009 2010 2011 2012f after 2005, with a peak in May 2008 in the PT Timah PT Koba Other Indonesia China Latin America Other US$11/lb range. Following some recovery after

Source: www.kasbahresources.com the financial crisis, tin prices hovered around According to various market watchers and US$19/kg to US$32/kg in 2011. research estimates, the supply chain is expected

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Porter’s Five Force Analysis for the Rare Earth Elements (REE) industry

Barriers to Entry Very High

Highly capital intensive industry; low access and availability to economically viable resources; concentration of resources; exploration and development makes entry of new entrants very difficult.

Power of Suppliers High Power of Customers Low Industry competition Medium Government regulation and shortage of economically viable Owing to limited availability of resources is the only problem faced Industry competition mainly pertains REE deposits, concentration of by suppliers. Presently the suppliers to the resources acquisition and major deposits in China and are at an competitive edge, with development of mines. China’s export restrictions has high prices of the REE metals and restraint the power of customers. oxides due to the lack of capacity and short supply.

Threat of substitutes Low

The treat of other metals to be used as a substitutes of REE’s is very rare. Though research is being performed for an appropriate substitute, no significant discovery has been made till date.

SWOT Analysis

Strengths Weaknesses

Avalon has a strong and experienced management Avalon’s capital expenditure (the feasibility and team with focus on productivity and efficiency ultimate cost of capex) agenda will have to be improvements. confirmed in the future with actual market conditions for the sources of financing. Avalon possesses a series of five key properties with a diversified exposure to a broad range of rare metals which it will develop based on long- term market demand

Opportunities Threats SWOT Demand for REE is mainly dependent on the demand Though there is no local community opposition for the for final products (like flat panels displays, development of Thor lake project, slow response times automobiles, etc.) by MVEIRB for operating permits can delay the production plan. Growing demand for consumer goods and an anticipated increase in purchasing power of individuals provides immense potential for the REE market.

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Value The Fair Market Value for all of Avalon Rare Metals’ shares stands between CA$462MM and CA$1,387MM.

The Fair Market Value for one of Avalon Rare Metals’ publicly traded shares stands between CA$4.48 to CA$13.44.

Avalon Rare Metals Balance Sheet Forecast

all figures in '000 CA$, based on low key variable CONSOLIDATED BALANCE SHEET unless stated differently estimates

st year beginning Sept. 1 2011A 2012E 2013E 2014E 2015E 2016E 2017E 2018E 2019E Total Current Assets 27,389 9,440 3,296 39,602 70,188 28,847 177,949 365,059 559,414 Total Non-current 87,998 100,395 106,875 455,500 1,033,126 1,180,291 1,148,462 1,115,726 1,088,419 Assets TOTAL ASSETS 115,387 109,834 110,170 495,102 1,103,315 1,209,138 1,326,411 1,480,785 1,647,834 Total Current 2,178 2,178 2,178 43 44 9,647 21,649 21,650 21,650 Liabilities Total Non-current - - - 250,000 600,000 600,000 580,000 560,000 540,000 Liabilities TOTAL LIABILITIES 2,178 2,178 2,178 250,043 600,044 609,647 601,649 581,650 561,650 Total Shareholder's 113,208 107,656 107,992 245,059 503,270 599,491 724,762 899,135 1,086,184 Equity TOTAL LIABILITIES 115,387 109,834 110,170 495,102 1,103,315 1,209,138 1,326,411 1,480,785 1,647,834 & EQUITY

Important information on Arrowhead methodology The principles of the valuation methodology employed by Arrowhead BID are variable to a certain extent, depending on the sub-sectors in which the research is conducted. But all Arrowhead valuation researches possess an underlying set of common principles and a generally common quantitative process. With Arrowhead commercial and technical due diligence, the company researches the fundamentals, assets and liabilities of a company, and builds estimates for revenue and expenditure over a coherently determined forecast period. Elements of past performance such as price/earnings ratios, indicated as applicable, are mainly for reference. Still, elements of real-world past performance enter the valuation through their impact on the commercial and technical due diligence. Elements of comparison such as multiple analyses may be to some limited extent integrated in the valuation on a project-by-project or asset-by-asset basis. In the case of this Avalon report, there are no multiple analyses integrated in the valuation.

Avalon Rare Metals, Inc. – Arrowhead BID 22 TSX: AVL; AMEX: AVL; FWB:OU5 Due Diligence and Valuation Report See important disclosures on page 26 of this report.

Enterprise Value Estimation: Thor Project We have identified peers for Avalon Rare Metals in Australia and Americas, as a reasonable proxy to ascertain a suitable Enterprise Value, based on the TREO grade of the resources.

REE Comparables

Enterprise EV/TREO TREO TREO Total REE TREO TREO Company Ticker Stage Indicated Inferred Value CA$/ % % Resource % (MT) CA$ MM T AVL Avalon Rare Metals Feasibility 152.3 1.3% 331.7 1.1% 484.0 1.1% 4.289 107.8 25.1 (TSX) MCP Production / Molycorp 24.3 6.7% 10.4 6.3% 34.8 6.6% 2.286 1465.4 641.0 (NYSE) expansion GGG Prefeasibility GreenLand Minerals 437.0 1.1% 520.0 1.1% 957.0 1.1% 10.3 155.7 15.1 (ASX) completed ALK Alkane Resources Feasibility 35.7 0.9% 37.5 0.9% 73.2 0.9% 0.7 333.6 506.3 (ASX) LYC Lynas Corporation Construction 22.3 6.9% 1.7 4.3% 23.9 6.7% 1.609 1731.7 1076.4 (ASX) Rare Element RES Feasibility 7.5 3.8% 25.7 2.9% 33.2 3.1% 1.019 156.6 153.7 Resources (TSXV) QRM Quest Rare Minerals Prefeasibility 140.3 0.9% 89.6 0.9% 229.9 0.9% 2.099 47.5 22.6 (TSXV) Arafura Resources ARU Feasibility 21 2.60% 22.0 2.4% 43.0 2.5% 1.074 45.8 42.6 Ltd (ASX)

Thor Project Enterprise Value Estimate

1200 LYC 1000

y = 12766x - 54.872 800 R² = 0.642 MCP 600 ALK 400

200 RES EV/TREO (CAD$/tonne) QRM GGG ARU 0 AVL 0.0% 1.0% 2.0% 3.0% 4.0% 5.0% 6.0% 7.0% 8.0% TREO %

Based on a regression analysis, we observe that there is a fair correlation (R-Squared ~64%) between the Enterprise Value (EV) / TREO and the TREO%. We have estimated the Enterprise Value of Avalon’s resources, based on the regression equation represented in the chart.

Thor Project Valuation Bracket

Est. TREO TREO Est. EV Value/Share EV/TREO % (MT) CA$ MM (CA$) CA$/T 1.1% 4.3 90.0 386.1 3.7

On a stand-alone basis, the Thor project has an estimated current Enterprise Value bracket of CA$386.1MM, implying a Fair Value bracket of CA$ 3.7 on a per share basis.

Avalon Rare Metals, Inc. – Arrowhead BID 23 TSX: AVL; AMEX: AVL; FWB:OU5 Due Diligence and Valuation Report See important disclosures on page 26 of this report.

Arrowhead BID Fair Market Value Bracket The Arrowhead Fair Market Value is given as a bracket. This is based on quantitative key variable analysis, such as key price analysis for revenue and cost drivers or analysis and discounts on revenue estimates for projects, especially relevant to those projects estimated to provide revenue near the end of the chosen forecast period. Low and high estimates for key variables are produced as a tool for valuation. In principle, an investor comfortable with the high-brackets of our key variable analysis will align with the high-bracket in the Arrowhead Fair Value Bracket, and likewise, in terms of low estimates. The investor will also take into account the company intangibles – as presented in the first pages of this document, in the analysis on strengths and weaknesses and on other essential company information. These intangibles serve as supplementary decision factors for adding or subtracting a premium in the investor’s own analysis. The bracket should be understood as a tool provided by Arrowhead BID for the reader of this report and the reader should not solely rely on this information to make his decision on any particular security. The reader must also understand that on the one hand the global capital markets contain inefficiencies, especially in terms of information, and that on the other hand, corporations and their commercial and technical positions evolve rapidly: this present edition of the Arrowhead valuation is for a short to medium-term alignment analysis (one to twelve months). The reader should refer to important disclosures on page 24 of this report.

Information on the Avalon Rare Metals, Inc. valuation Time horizon: The Arrowhead Fair Valuation for Avalon Rare Metals, Inc. is based on a discounted cash flow method – DCF. The time period chosen for the valuation is 121.5 months (2012-2022). Terminal Value: Terminal Value is estimated to depend on a terminal growth rate of 3%, representing the development of other projects beyond 2021 against the emptying of Thor Lake’s total current hypothetical reserves and the rising marginal cost of replacing expended assets – i.e. comparable REE assets should normally be relatively expensive to acquire, as the best and easiest assets are expended, and assets become rarer. Prudential nature of valuation: It should be noted that this Arrowhead Fair Value Bracket estimate is a relatively negative and prudential estimate, as it discounts the eventuality of any project coming to market at any of Avalon’s other properties of East Kemptville, Separation Rapids or Warren Township before 2017. At the same time, these projects have been included, to some extents, in capital expenditure forecasts in this valuation.

Avalon Rare Metals, Inc. – Arrowhead BID 24 TSX: AVL; AMEX: AVL; FWB:OU5 Due Diligence and Valuation Report See important disclosures on page 26 of this report.

Key variables in Avalon Rare Metals Inc.’s revenue estimations Rare Earth Elements product prices for 2014-2022 Arrowhead has remained conservative in the forecast price range considering the recent surge in REE prices and with the expected increase supply. Arrowhead forecasts that 2017-2022 prices for the TREO, extracted from the Nechalacho deposit should be US$40-US$45/kg. Price /Kg (in US$) 2017-2022 Low 40 High 45 Hypothesis for production rates at Thor Lake Avalon’s PFS plans for a ramp up in production at the Nechalacho deposit, during the first year of production, with 1,833tpd of mineralized ore mined and produced per day, and 2,000tpd, starting from year 2. Based on the robust update in the PFS, Arrowhead estimates the production in the Nechalacho deposit to vary between a low estimate of 1600-1,800tpd of extracted TREO from FY2017 and 1,800- 2,000tpd of extracted TREO starting FY2018. Production Rates FY2017 FY2018-2022 (in tpd) Low 1600 1800 High 1800 2000 US$/CA$ exchange rates Since Avalon’s revenues are based on market prices over given time periods of a certain number of commodities, which are priced in US$, the currency factor is important. US$/CA$ exchange rates of 0.98 are the benchmark for a low value, while a high value estimate is on an average rally at 1.0. Exchange rate 2012-2022 Low 0.98 High 1.00

Avalon Rare Metals, Inc. – Arrowhead BID 25 TSX: AVL; AMEX: AVL; FWB:OU5 Due Diligence and Valuation Report See important disclosures on page 26 of this report.

Analyst Certifications and Important Disclosures

Analyst certifications objectives and financial situation utilizing their own financial advisors as they deem necessary. I, Mohanarangam Purushothaman, certify that Investors are advised to gather and consult all of the views expressed in this research report multiple information sources before making accurately reflect my personal views about the investment decisions. Recipients of this report subject security and the subject company. are strongly advised to read the information on I, Vishal Pasari, certify that all of the views Arrowhead Methodology section of this report to expressed in this research report accurately understand if and how the Arrowhead Due reflect my personal views about the subject Diligence and Arrowhead Fair Value Bracket security and the subject company. integrate alongside the rest of their stream of information and within their decision taking Important disclosures process. Arrowhead Business and Investment Decisions, Past performance of securities described directly LLC received fees in 2011 from Avalon Rare or indirectly in this report should not be taken as Metals Inc. for researching and drafting this an indication or guarantee of future results. The report and for a series of other services to price, value of, and income from any of the Avalon Rare Metals Inc., including distribution of financial securities described in this report may this report and networking services. Neither rise as well as fall, and may be affected by Arrowhead nor its partners own any long or simple and complex changes in economic, short positions on Avalon Rare Metals Inc. financial and political factors. equity or other Avalon Rare Metals Inc. securities. Should a security described in this report be denominated in a currency other than the Aside from certain reports published on a investor’s home currency, a change in exchange periodic basis, the large majority of reports are rates may adversely affect the price of, value of, published by Arrowhead BID at irregular or income derived from the security. intervals as appropriate in the analyst’s judgment. This report is published solely for information purposes, and is not to be considered as an offer Any opinions expressed in this report are to buy any security, in any state. statements of our judgment to this date and are subject to change without notice. Other than disclosures relating to Arrowhead Business and Investment Decisions, LLC, the This report was prepared for general circulation information herein is based on sources we and does not provide investment believe to be reliable but is not guaranteed by recommendations specific to individual us and does not purport to be a complete investors. As such, any of the financial or other statement or summary of the available data. money-management instruments linked to the company and company valuation described in Arrowhead Business and Investment Decisions, this report, hereafter referred to as “the LLC is not responsible for any loss, financial or securities”, may not be suitable for all investors. other, directly or indirectly linked to any price movement or absence of price movement of the Investors must make their own investment securities described in this report. decisions based upon their specific investment

Avalon Rare Metals, Inc. – Arrowhead BID 26 TSX: AVL; AMEX: AVL; FWB:OU5 Due Diligence and Valuation Report See important disclosures on page 26 of this report.

Valuation WACC xvi Nechalacho REO Hypothesis for ore Risk-free rate 1.63% Exch. Rate mix prices 2017- production at (US$/CA$) Beta 1.50 xvii 2022 Nechalacho Risk premium 5.00% xviii Max 2.00% xix value Additional Risk Premium Please refer to the Key Variable Section Cost of Equity 12.13% Min Terminal Growth Rate 3.00% xx value

FCFE (High) Time Period 0.13 1.13 2.13 3.13 4.13 5.13 6.13 7.13 8.13 2012E 2013E 2014E 2015E 2016E 2017E 2018E 2019E 2020E Net cash from operating (9,361) (9,638) (10,598) (19,153) (29,955) 142,202 285,128 303,625 320,475 activities Capital Expenditure (36,781) (12,726) (6,908) (349,173) (592,084) (184,741) (11,669) (9,535) (13,695) Net Debt Addition - - - 250,000 350,000 - (20,000) (20,000) (20,000) Free Cash Flow to Equity (46,142) (22,364) (17,506) (118,326) (272,040) (42,539) 253,459 274,090 286,779 Discount Factor 0.99 0.88 0.78 0.70 0.62 0.56 0.50 0.44 0.39 Present Value of FCF (45,487) (19,662) (13,726) (82,737) (169,640) (23,657) 125,708 121,234 113,125

FCFE (Low) Time Period 0.13 1.13 2.13 3.13 4.13 5.13 6.13 7.13 8.13 2012E 2013E 2014E 2015E 2016E 2017E 2018E 2019E 2020E Net cash from operating (9,361) (9,638) (10,598) (19,153) (29,955) 57,793 164,668 155,543 166,951 activities Capital Expenditure (36,781) (12,726) (6,908) (349,173) (592,084) (184,741) (11,669) (9,535) (13,695) Net Debt Addition - - - 250,000 350,000 - (20,000) (20,000) (20,000) Free Cash Flow to Equity (46,142) (22,364) (17,506) (118,326) (272,040) (126,948) 132,999 126,009 133,256 Discount Factor 0.99 0.88 0.78 0.70 0.62 0.56 0.50 0.44 0.39 Present Value of FCF (45,487) (19,662) (13,726) (82,737) (169,640) (70,599) 65,963 55,736 52,565

ARROWHEAD FAIR VALUE BRACKET High Low Terminal Value (TV) 3,600,636 1,739,022 Present Value of TV 1,129,655 545,596 Present Value of FCF + TV 1,341,968 417,399 + Cash 45,000 45,000

Equity Value Bracket 1,386,968 462,399 Shares Outstanding (in '000) 103,612 103,612 Fair Value Bracket 13.44 CAD 4.48 CAD Current Market Price 1.72 CAD 1.72 CAD Current Market Capital CA$178MM CA$178 MM Target Market Capital CA$1,387MM CA$462MM

Avalon Rare Metals, Inc. – Arrowhead BID 27 TSX: AVL; AMEX: AVL Due Diligence and Valuation Report See important disclosures on page 26 of this report.

Notes and References i Arrowhead Business and Investment Decisions Fair Value Bracket – AFVBTM. See information on valuation on pages 22-27 of this report and important disclosures on page 26 of this report. ii Source: Bloomberg as on August 31, 2012 iii Source: Bloomberg as on August 31, 2012 iv 3 months volume as on August 31, 2012 v Arrowhead Business and Investment Decisions Fair Value Bracket – AFVBTM. See information on valuation on pages 22-27 of this report and important disclosures on page 26 of this report. vi Arrowhead Business and Investment Decisions Environmental and Social Responsibility (ESR) Index. The Arrowhead ESR Index tracks the primary equity securities of corporations which demonstrate strong implication and success in implementing policies for reducing emission footprints, taking responsibility for externalities of various types and establishing mutually profitable relationships with stakeholders and communities. vii The full PDAC guidelines can be found at www.pdac.ca/pdac/advocacy/csr/. viii Source Bloomberg as on August 31, 2012 ix Source: Technical Report NI43-101 August 2011; http://avalonraremetals.com/_resources/reports/RPA_Avalon_Thor_Lake_NI_43-101_August_25_2011.pdf x http://minerals.usgs.gov/minerals/pubs/commodity/rare_earths/mcs-2012-raree.pdf; http://seekingalpha.com/article/474431-rare-earth-metals-how-to-capitalize-on-the- recovery; http://rareearthinvestingnews.com/5828/2012-rare-earths-market-outlook-china-quota-prices-hree-lree/; http://www.forbes.com/sites/kitconews/2011/12/30/2012-outlook-uncertainty-continues-for-rare-earths-prices-china-still-major-player/; http://www.fas.org/sgp/crs/natsec/R41347.pdf; http://www.bloomberg.com/news/2011-12-28/china-2012-rare-earth-export-quota-almost-level-with-this-year.html; xi Source: IUPAC xii Source: http://www.fas.org/sgp/crs/natsec/R41347.pdf xiii Source: Wikipedia – http://en.wikipedia.org/wiki/Indium xiv http://mobile.bloomberg.com/news/2012-01-17/consumer-electronics-frenzy-tops-1-trillion-as-tin-rebounds-commodities?category=%2Fnews%2Ffinance%2F xv http://mobile.bloomberg.com/news/2012-01-17/consumer-electronics-frenzy-tops-1-trillion-as-tin-rebounds-commodities?category=%2Fnews%2Ffinance%2F xvi Source: Bloomberg as on July 18, 2012 xvii Source: Arrowhead BID estimate xviii Source: Arrowhead BID estimate xix Source: Arrowhead BID estimate xx Source: Arrowhead BID estimate

Avalon Rare Metals, Inc. – Arrowhead BID 28 TSX: AVL; AMEX: AVL Due Diligence and Valuation Report See important disclosures on page 26 of this report.