AVANTI MINING INC. Management s Discussion and Analysis of Financial Position and Results of Operations

Transcription

1 AVANTI MINING INC. Management s Discussion and Analysis of Financial Position and Results of Operations The following information, prepared as of November 9, 2011, should be read in conjunction with the unaudited condensed consolidated financial statements of Avanti Mining Inc. (the Company or Avanti ) for the nine months ended September 30, 2011, together with the audited consolidated financial statements of the Company for the year ended December 31, 2010 and the accompanying Management s Discussion and Analysis ( the Annual MD&A ) for that fiscal period as well as the unaudited condensed consolidated financial statements of the Company for the three months ended March 31, 2011 and the accompanying Management s Discussion and Analysis for that fiscal period. The referenced consolidated financial statements have been prepared in accordance with International Financial Reporting Standards ( IFRS ). All amounts are expressed in Canadian dollars unless otherwise indicated. FORWARD-LOOKING STATEMENTS Forward-looking statements look into the future and provide an opinion as to the effect of certain events and trends on the business. Forward-looking statements may include words such as plans, intends, anticipates, should, estimates, expects, believes, indicates, suggests and similar expressions. This MD&A and in particular the Outlook section, contains forward-looking statements including, without limitation, statements about the production plan for the Kitsault Property including estimates for capital costs, operating costs, life of mine, NPV, annual metal production, metal recovery and net cash flow estimates, the number of jobs created by the operations at the Kitsault Property, the process for receiving environmental and other mine operation permits and the timing of such permits, the conversion of Inferred resources to Indicated, RCF s intention to convert it loan into securities, future equity financing activities, potential strategic partners, the Company s ability to obtain project debt financing and estimated dates to conclude agreements for the financing and construction of a mine. These forward-looking statements are based on current expectations and various estimates, factors and assumptions and involve known and unknown risks, uncertainties and other factors. It is important to note that: - Unless otherwise indicated, forward-looking statements in this MD&A describe the Company s expectations as of November 9, Readers are cautioned not to place undue reliance on these statements as the Company s actual results, performance or achievements may differ materially from any future results, performance or achievements expressed or implied by such forward-looking statements if known or unknown risks, uncertainties or other factors affect the Company s business, or if the Company s estimates or assumptions prove inaccurate. Such risks and other factors include, among others, risks related to operations; actual results of current exploration activities; actual results of current reclamation activities; conclusions of economic evaluations and feasibility studies; changes in project parameters as plans continue to be refined; future prices of metals; future currency exchange rates; possible variations in ore reserves, grade or recovery rates; failure of plant, equipment or processes to operate as anticipated; accidents, labour disputes and other risks of the mining industry; delays in obtaining governmental approvals or financing or in the completion of development or construction activities, as well as those factors discussed 1

2 in the sections entitled Risks and Uncertainties. Therefore, the Company cannot provide any assurance that forward-looking statements will materialize. - The Company assumes no obligation to update or revise any forward-looking statement, whether as a result of new information, future events or any other reason, except as required by law. For a description of material factors that could cause the Company s actual results to differ materially from the forward-looking statements in this MD&A, please see Risks and Uncertainties and the Risk Factors in the Company s Annual Information Form. GENERAL The Company was formed as a natural resource company engaged in the acquisition, exploration and development of natural resource properties. The Company is yet to receive any revenue from its operations. Accordingly the Company has no operating income or cash flows. Its existence has relied almost exclusively upon equity and debt financing activities. The Company is the 100% owner of the past-producing Kitsault molybdenum property in British Columbia, Canada (the Kitsault Property ). The Company is currently engaged in environmental/permitting applications and arranging financing necessary to commence the construction of the mine immediately upon receipt of the necessary permits in Kitsault Mine The Kitsault Property is located adjacent to tidewater on Alice Arm in the Skeena Mining Division of British Columbia. The Kitsault Property was a producer of molybdenum between 1967 and 1972, processing a total of 9,329,669 tonnes of ore grading 0.112% Mo. From 1981 to 1982, under the ownership of Amax, Inc., 4,069,548 tonnes of low-grade stockpiled and newly mined ore were milled, grading 0.076% Mo. Total production on the property during both periods was approximately 30 million pounds of molybdenum. The Kitsault Property has developed road access to the mine site and is serviced by the BC Hydro transmission grid. The mine on the property ceased operations in 1982 due to low molybdenum prices, but considerable historical reserves remained in place. Feasibility Study On December 16, 2010, the Company released the results of the NI Feasibility Study ("FS") prepared by AMEC on the Kitsault Property. All figures are in US dollars and were derived assuming 100% equity funding. Full details of the FS are disclosed in the NI compliant technical report dated December 15, 2010 and entitled Kitsault Molybdenum Project British Columbia, Canada, NI Technical Report on Feasibility Study, which is filed on SEDAR and available on the Company s website 2

3 Highlights include: An increased resource estimate containing Measured and Indicated mineral resources totalling million tonnes grading 0.072% molybdenum and 4.20 g/t Ag containing million pounds of Mo and 40.3 million ounces of Ag. This represents a 9.7% increase of contained molybdenum and an 18% increase of contained silver over Avanti s prior estimate for Measured plus Indicated mineral resources. In addition, the Inferred category totals million tonnes grading % Mo and 3.65 g/t Ag containing million pounds of molybdenum and 18.4 million ounces of silver, an increase of 330% of contained molybdenum and 360% of contained silver over Avanti s previous resource estimate for Inferred mineral resources; The mine plan calls for a total of million tonnes of proven and probable reserves grading 0.081% molybdenum to be mined over a 16 - year mine life, producing million pounds of molybdenum. The first five years of production grade averages 0.101% Mo; A long term exchange rate of US0.92 per CDN has been used to convert CDN to US except for capital expenditures which were converted at US0.95 per CDN representing the exchange rate used to convert US quotes received in Initial capital costs are estimated at US795 million (+/- 15% accuracy estimated in C at 837 million); Cash operating costs (mine gate) are estimated to be US 4.76/lb of molybdenum; The average annual price of molybdenum for the base case scenario over the mine life as forecast by the CPM Group ranges from US 13.75/lb to US 18.25/lb based upon their June 2010 Molybdenum Market Outlook. The average price over the Kitsault mine life is US per pound of molybdenum. Forecasts were also prepared for a low and a high price scenario; The base case after-tax NPV(8%) is US 774 million (1), with an IRR of 26.3% (1) ; Projected undiscounted net cash flow (after-tax) is US 2.0 billion; Annual metal production for the mine life averages 23.4 million pounds of molybdenum with the first five years averaging 29.6 million pounds per year; There is a life of mine roasting agreement in place with Molymet that assures roasting capacity for the project; The mine has certain infrastructure in place with road and ocean freight access to the mine site and will be serviced by the existing BC Hydro transmission grid; The reopening of the mine is projected to create approximately 300 high paying local jobs during its 16 year life, and at the peak of construction, up to 700 jobs. The construction period is estimated at 25 months; The project is progressing through environmental assessment process under the BC and federal legislation as well as the Nisga'a Final Agreement and the Company expects to submit its Application in the fourth quarter of

4 (1) Reduced from US794 million and 26.8% respectively due to an adjustment to the financial model in May 2011 to accurately reflect certain taxes. Environmental On November 29, 2010, the Company reported that the British Columbia (BC) Environmental Assessment Office ( BCEAO ) had issued a Section 11 Order, under the BC Environmental Assessment Act ( Act ), to Avanti for the Kitsault Project. The Section 11 Order defines the scope of the Kitsault Project that is required to be assessed in the Environmental Assessment ( EA ) Application and includes potential effects to be considered in the EA Application. In addition, the Section 11 Order sets out the consultation requirements and the First Nations to be consulted for the Project. With the Section 11 Order, Avanti moved to finalize the Application Information Requirements ( AIR ) following a 30 day public comment period that ended on April 7, A public meeting was held on March 15, 2011 in Terrace, BC sponsored by the BCEAO, the Canadian Environmental Assessment Agency ( CEEA ) and the Company. The Company has been collecting baseline environmental data on the Kitsault Property since October 2008 as well as evaluating the existing database of environmental information that exists because of the prior operations dating back to the 1960's and an approved Reclamation Plan from This previous information and new baseline data collected by Avanti provides a very robust data set to assist in the EA Application. CEAA has accepted, effective August 18, 2010, the addendum to the Kitsault Project Description filed with the British Columbia Environmental Office ("BCEAO"). This acceptance resulted in a Notice of Commencement ( NoC ) issued by the CEAA on November 8, A thirty day public comment period began on this date and ended on December 10, November 8, 2010 also marked the beginning of the 365 working day review policy under the CEA Act. CEAA issued the Kitsault Project Agreement on April 26, 2011 and it is available on the Major Projects Management Office ( MPMP ) website ( On October 6, 2011, the Application Information Requirements ( AIR ) of the EA was approved by the BCEAO. The AIR specifies the information that must be contained in the EA Application for the Environmental Certificate and is valid for a period of three years from its approval date. The EA Application can now be filed for an initial 30 day review for compliance with the terms of the AIR. Once accepted, the up to 180 day review period as mandated in the Act begins and this runs concurrent with the CEAA review. Financing Based upon the robust economics of the FS, the Company implemented a strategy of financing the estimated 800 million cost to develop the Kitsault Property by seeking strategic partners to make an equity investment in the project to fund approximately 30%, or 240 million of the total funding required. The remaining 70%, or 560 million, of the project costs would be funded by project finance lenders through the efforts of West LB, the Company s exclusive debt arranger. Various letters of intent were signed with Korean and other Asian potential partners. The Company announced on August 2, 2011, that discussions with SeAH Holdings Corp ( SeAH ) with respect to a partnership were terminated as terms could not be agreed upon, however, discussions with other Asian potential partners are continuing. SeAH advised the Company that it will continue to support Avanti as a shareholder. SeAH acquired a total of 53,803,078 Avanti shares in December 2010 (representing 4

5 approximately 12.7% of Avanti s shares currently outstanding). On December 30, 2010, the Company completed a private placement of 10,152,284 flow-through common shares that it issued at a price per share of for proceeds of approximately 4,000,000. The funds raised were used in 2011 by the Company for qualifying exploration expenditures (as defined in the Income Tax Act (Canada)) on the Kitsault Property Summer Drilling Program The Company completed a summer drill program totaling 32 holes for 9,989 meters at the Kitsault Property, 11 condemnation holes totaling 558 meters around Kitsault and 26 holes totaling 2,803 meters at Roundy Creek for a total of 12,350 meters. Assay results are available for approximately 50% of the drill holes, as disclosed in news releases dated August 15, August 25 and September 20, QUARTERLY INFORMATION The following is selected financial data from the Company s unaudited quarterly financial statements for the last eight quarters ending with the most recently completed quarter, being September 30, Sep. 30, 2011 Three Months Ended () Jun. 30, Mar. 31, Dec. 31, 2010 Total Revenues Net Income (Loss) 226, , ,634 (4,186,534) Net Income (Loss) Per Share (basic and diluted) (1) (0.01) Acquisition Cost Of Mineral Properties In The Period - 147, , ,580 Deferred Mineral Property Expenditures In The Period 5,309,269 4,612,359 2,803,525 2,747,170 Total Assets 68,405,501 70,743,063 68,580,041 67,171,986 Three Months Ended () Sep. 30, 2010 Jun. 30, 2010 Mar. 31, 2010 Dec. 31, 2009 (2)(4) Total Revenues Net Loss (2,412,398) (696,258) (127,218) (1,345,399) Net Loss Per Share (basic and diluted) (1) (0.01) (0.00) (0.00) (0.01) Acquisition Cost Of Mineral Properties In The Period - 5,000 1,630,073 (59,068) (3) Deferred Mineral Property Expenditures In The Period 4,144,015 2,874,443 1,426, ,833 Total Assets 53,899,506 54,137,231 54,424,448 37,996,398 (1) The basic and diluted loss per share calculations result in the same amount due to the antidilutive effect of outstanding stock options and warrants. (2) Due to the change in fiscal year end to December 31, 2009, the quarter ended December 31, 2009 is only for a two-month period. 5

6 (3) (4) The negative amount represents the reduction in the net present value of asset retirement obligation recognized as at December 31, Information for all quarters except the quarter ended December 31, 2009 is presented in accordance with IFRS while information for the quarter ended December 31, 2009 is presented in accordance with Canadian Generally Accepted Accounting Principles. The quarterly variation in net income (loss) is due primarily to three factors: - Foreign exchange gains and losses as a result of fluctuations in the Canadian dollar and US dollar exchange rate. The Company holds a portion of its cash in US dollars and the RCF loan is denominated in US dollars. - Interest, accretion and loan placement fees for the quarter ended March 31, 2010 and thereafter vary from approximately 275,000 to 320,000. The interest, accretion and loan placement fees relate to the loan ( RCF loan ) from Resource Capital Fund IV L.P. ( RCF ). - The RCF loan derivative component (Note 7 to the accompanying interim financial statements) is revalued at each reporting date. The value of this derivative liability is directly correlated with the Company s share price. Quarterly non-cash gains and losses are significant for all quarters except for the quarter ending in The increase in total assets in the quarters ended March 31, 2010 and December 31, 2010 was due to the completion in each quarter of security offerings raising cash, net of issue costs, of 15,493,483 and 14,567,833 respectively. Mineral property expenditures in each quarter relate primarily to costs associated with drilling activities, technical studies and environmental assessment related work at the Kitsault Property, all to enable the mine to be developed. During the quarters ended September 30, 2010 and July 31, 2009, the Company recorded BC Mining Exploration Tax Credits ( BCMETC ) of 218,761 and 864,770 respectively, substantially all of which is recorded as a recovery of mineral property expenditures. Pursuant to an assessment of the BCMETC for the year ended January 31, 2009 and the eleven-month period ended December 31, 2009 (the 2009 BCMETC s ), during the quarter ended March 31, 2011, the Company recorded an adjustment to reduce the 2009 BCMETC s claimed by 227,727. During the quarter ended June 30, 2011, the Company and the CRA finalized the 2009 BCMETC s and recorded an adjustment to reduce the BCMETC claimed by an additional 112,507, offset by the 2010 BCMETC claim of 421,130. RESULTS OF OPERATIONS Nine months ended September 30, 2011 The Company recorded a net income of 1,179,083 (0.00 per share) for the nine months ended September 30, 2011 as compared to a net loss of 3,235,874 (0.01 per share) for the nine months ended September 30, The table below details certain non-cash or unusual transactions that for the purposes of this discussion have been adjusted out of the reported net income (loss) to produce an adjusted net loss that forms a better basis for comparing the period-over-period operating results of the Company. 6

7 7 Nine months ended September 30, Net income (loss) for the period as reported 1,179,083 (3,235,874) Share-based payments 1,094,070 1,158,073 Interest and other income (97,834) (42,958) Interest, accretion and loan placement expense 943, ,440 Change in fair value of convertible loan derivative component (3,984,796) (666,179) Foreign exchange loss (gain) 151,305 (217,316) Income taxes (1,419,919) 16,249 Adjusted net loss for the period (1) (2,134,839) (2,138,565) (1) Adjusted net loss for the period is not a term recognized under IFRS. Non-IFRS measures do not have standardized meaning. Accordingly, non-ifrs measures should not be considered in isolation or as a substitute for measures of performance prepared in accordance with IFRS. Comments regarding certain of these items are as follows: - the share-based compensation charge was lower in the current period as the Company granted 6,225,000 stock options during the nine months ended September 30, 2011 at a fair value of 0.20 per option compared with the Company granting 7,675,000 stock options at a fair value of per option during the nine months ended September 30, The compensation charges in each period also include vesting of previously granted options; - interest and other income increased period-over-period due to an increase of cash on hand in the current period as compared to the nine months ended September 30, Interest rates in the current period were comparable to the previous period; - the interest, accretion and loan placement expense arose with respect to the RCF loan. - the RCF loan contains a derivative liability for the conversion feature due to the RCF loan being denominated in US dollars and convertible into shares denominated in Canadian dollars. Changes in the fair value of the derivative liability are recorded through the statement of operations. The fair value is determined using the Black-Scholes Option Pricing Model. This model is primarily affected by the Company s share price. During the nine months ended September 30, 2011 and 2010, gains were recorded based on the decrease in the share price during the respective periods. These gains are non-cash accounting entries and the derivative liability does not represent a cash obligation. - the income tax recovery of 1,419,919 recorded during the nine months ended September 30, 2011 is due primarily to the renunciation of 4,000,000 of flow-through subscriptions to subscribers effective December 31, The comments below discuss results of operations excluding the items (primarily non-cash) discussed above: The approximate 4,000 decrease in the adjusted net loss for the nine months ended September 30, 2011 as compared to the nine months ended September 30, 2010 is attributable primarily to an increase

8 in office and miscellaneous expenses and professional fees offset by a decrease in salaries and benefits expense and shareholder communications expense. Marketing expense of 66,231 ( ,172) are expenses incurred in connection with the Company s efforts to secure off-take agreements for its planned molybdenum production. Professional fees of 754,737 ( ,240) includes legal and audit fees. Legal fees increased during the current period by approximately 196,000 due to work undertaken in connection with potential partnership agreements and drafting contracts for engineering, procurement and construction management contractors. Accounting and audit fees increased by approximately 48,000 due to fees relating to convergence to IFRS as well as specialized tax services. Salaries and benefits of 814,148 (2010-1,036,249) decreased due to a higher portion of costs being allocated to the Kitsault Project. In aggregate, the salaries and benefits have remained relatively unchanged. Three months ended September 30, 2011 The Company recorded a net income of 226,663 (0.00 per share) for the three months ended September 30, 2011 as compared to a net loss of 2,412,398 (0.00 per share) for the three months ended September 30, The table below details certain non-cash or unusual transactions that for the purposes of this discussion have been adjusted out of the reported net income (loss) to produce an adjusted net loss that forms a better basis for comparing the period-over-period operating results of the Company. Three months ended September 30, Net income (loss) for the period as reported 226,663 (2,412,398) Share-based payments 215, ,877 Interest and other income (17,943) (17,844) Interest, accretion and loan placement expense 339, ,250 Change in fair value of convertible loan derivative component (1,643,414) 1,428,448 Foreign exchange loss (gain) 317,695 (107,543) Adjusted net loss for the period (1) (562,515) (656,210) (1) Adjusted net loss for the period is not a term recognized under IFRS. Non-IFRS measures do not have standardized meaning. Accordingly, non-ifrs measures should not be considered in isolation or as a substitute for measures of performance prepared in accordance with IFRS. The variances in these amounts occurred for the reasons discussed in the nine-month period-overperiod comparison above. FINANCING ACTIVITIES AND CAPITAL EXPENDITURES During the nine months ended September 30, 2011, the Company received gross proceeds of 1,351,931 from the exercise of 5,007,150 warrants. The capital expenditures of the Company during the nine months ended September 30, 2011 amounted to approximately 11,936,000 of which 265,000 related to acquiring additional claims adjacent to the

9 Kitsault Property, 1,263,000 related to the purchase of equipment, including the construction of mine site accommodations, with the remaining expenditures virtually all with respect to engineering and environmental studies relating to the Kitsault Property. LIQUIDITY AND CAPITAL RESOURCES The Company s operations consumed approximately 2,196,000 of cash (before working capital items) for the nine months ended September 30, An additional approximate 11,936,000 of cash was spent on the Kitsault Property and on mine site accommodations. The cash requirement was fulfilled from cash on hand at the beginning of the period and from the issuance of shares pursuant to warrant exercises (approximately 1,352,000). The Company s aggregate operating, investing and financing activities during the nine months ended September 30, 2011 resulted in a net decrease in its cash balance from 18,056,725 at December 31, 2010 to 3,959,823 at September 30, The Company s working capital decreased by 19,634,047 correspondingly during the same period, and stood at a deficiency of 4,060,862 at September 30, The working capital decrease is partially due to re-classifying the RCF loan as a current liability. The RCF loan is due on June 15, 2012, when management expects RCF to exercise its conversion rights and receive common shares and warrants of the Company in settlement of the loan. The Company will need additional capital for construction of the mine. To achieve that objective the Company has been pursuing its capital funding strategy discussed in the Outlook section below. TRANSACTIONS WITH RELATED PARTIES During the nine months ended September 30, 2011, the Company received consulting services from a company controlled by the Senior Vice President Project Development in the amount of 117,000 (nine months ended September 30, ,091). Included in accounts payable and accrued liabilities as at September 30, 2011 is 390,541 (December 31, ,003) due to officers of the Company. The amount owing is unsecured, non-interest bearing and due on demand. Key management includes the Chief Executive Officer and the Chief Financial Officer. The compensation paid or payable to key management for services during the nine months ended September 30, 2011 and 2010 is as follows: Three months ended Nine months ended September 30, September 30, Salaries and benefits 200, , , ,274 Share-based payments 152,507 81, , , , ,600 1,345,860 1,271,526 RCF is a control person of the Company as a result of its share ownership. Mr. Ryan T. Bennett, a director of the Company, is an associate of RCF. Effective November 6, 2009, RCF converted US15,116,667 of the Loan into common shares of the Company. The remaining US5,000,000 of

10 indebtedness (the Convertible Loan ) is due and payable on June 15, 2012 and bears interest at the greater of 8% per annum and the three month LIBOR plus 3%, which since inception has been 8%. Interest on the Convertible Loan is payable at the end of each calendar quarter in cash or in common shares of the Company at the option of RCF. The share issuances to RCF in connection with the Convertible Loan as described in Notes 7 and 13 to the accompanying interim consolidated financial statements for the nine months ended September 30, 2011 are related party transactions. The purpose and business reason for the early conversion of the Convertible Loan was to facilitate the public offering of the Company s shares in the capital markets. Further details about the Convertible Loan are disclosed in the accompanying interim consolidated financial statements for the nine months ended September 30, INTERNATIONAL FINANCIAL REPORTING STANDARDS ( IFRS ) Effective January 1, 2011 Canadian publicly listed entities were required to prepare their financial statements in accordance with IFRS. Due to the requirement to present comparative financial information, the effective transition date is January 1, The nine months ended September 30, 2011 is the Company s third reporting period under IFRS. The Company s IFRS conversion team identified four phases to the Company s conversion: scoping and planning, detailed assessment, implementation and post-implementation. The Company has now completed its IFRS conversion project through the implementation phase. The post-implementation phase will continue in future periods, as outlined below. Notes 2 and 14 of the accompanying interim consolidated financial statements provide details of the Company s key Canadian GAAP to IFRS differences, accounting policy decisions and IFRS 1, First-Time Adoption of IFRS, exemptions for significant or potentially significant areas that have had an impact on the Company s financial statements on transition to IFRS or may have an impact in future periods. The conversion to IFRS has had a low impact on the financial record keeping, internal controls and financial disclosures of the Company due to the exploration and project development nature of the Company s business. Accounting systems have been assessed and re-configured to ensure accurate reporting under IFRS, both internally and externally. 10

11 Transitional Financial Impact The table below outlines adjustments to Avanti s assets, liabilities and equity on adoption of IFRS at September 30, 2010 for comparative purposes (unaudited): Effect of Canadian GAAP transition to IFRS IFRS ASSETS Current assets Cash 8,231,948-8,231,948 HST recoverable and other receivables 719, ,647 Prepaid expenses and other assets 77,050-77,050 9,028,645-9,028,645 Mineral property 43,913,714 46,259 43,959,973 Reclamation deposits 219, ,900 Equipment 142, ,207 Deferred financing costs 519, ,352 Other assets 29,429-29,429 53,853,247 46,259 53,899,506 LIABILITIES Current liabilities Accounts payable and accrued liabilities 2,391,272-2,391,272 Convertible loan interest payable 102, ,900 Restoration provision 10,597 (929) 9,668 2,504,769 (929) 2,503,840 Convertible loan derivative component - 2,536,269 2,536,269 Convertible loan debt component 4,875,515 (1,374,310) 3,501,205 Restoration provision 50,613 29,839 80,452 7,430,897 1,190,869 8,621,766 EQUITY ATTRIBUTABLE TO SHAREHOLDERS Share capital 55,177,395-55,177,395 Contributed surplus 8,485,697 50,009 8,535,706 Convertible loan equity component 364,485 (364,485) - Accumulated other comprehensive income - 25,355 25,355 Deficit (17,605,227) (797,474) (18,460,716) (50,009) (25,355) 17,349 46,422,350 (1,144,610) 45,277,740 53,853,247 46,259 53,899,506 11

12 The following is a summary of the adjustments to comprehensive loss for the three and nine months ended September 30, 2010 under IFRS (all of which are outlined in the notes to the accompanying unaudited interim consolidated financial statements): Three months ended Nine months ended September 30, 2010 September 30, 2010 General and administrative expenses Canadian GAAP Effect of transition to IFRS 12 IFRS Canadian GAAP Effect of transition to IFRS Marketing 48,751-48, , ,172 Office and miscellaneous 43,971-43, , ,291 Professional fees 107, , , ,240 Salaries and benefits 357, ,511 1,036,249-1,036,249 Share-based payments 147,381 11, ,877 1,100,582 57,491 1,158,073 Shareholder communications 69,201-69, , ,830 Transfer agent and filing fees 3,880-3,880 58,608-58,608 Travel and related costs 8,814-8,814 73,232-73,232 Loss before other items (787,508) (11,496) (799,004) (3,234,204) (57,491) (3,291,695) Accretion of restoration provision (6,618) 5,783 (835) (19,854) 17,349 (2,505) Change in fair value of convertible loan derivative component - (1,428,448) (1,428,448) - 666, ,179 Foreign exchange (loss) gain 219,895 (51,328) 107, ,132 (35,461) 217,316 (61,024) (25,355) General exploration expense (2,438) - (2,438) (2,438) - (2,438) Interest and other income 17,844-17,844 42,958-42,958 Interest, accretion and loan placement expense (141,016) (153,234) (294,250) (418,824) (430,616) (849,440) Loss before income taxes (699,841) (1,699,747) (2,399,588) (3,354,230) 134,605 (3,219,625) Income taxes (12,810) - (12,810) (16,249) - (16,249) Net loss for the period (712,651) (1,699,747) (2,412,398) (3,370,479) 134,605 (3,235,874) Other comprehensive income Exchange differences on translating foreign operations - 61,024 61,024-25,355 25,355 Total other comprehensive income - 61,024 61,024-25,355 25,355 Total comprehensive loss for the period (712,651) (1,638,723) (2,351,374) (3,370,479) 159,960 (3,210,519) All of the above adjustments are non-cash accounting adjustments. Post-implementation The post-implementation phase will involve continuous monitoring of changes in IFRS in future periods. We note that the standard setting bodies that determine IFRS have significant ongoing projects that could impact the IFRS accounting policies that the Company has selected. In particular, there may be IFRS

13 additional new or revised IFRSs or International Financial Reporting Issues Committee ( IFRIC s) in relation to consolidation, financial instruments, and leases. We also note that the International Accounting Standards Board is currently working on an extractive industries project, which could significantly impact the Company s financial statements primarily in the areas of capitalization of exploration costs and disclosures. The Company has processes in place to ensure that potential changes are monitored and evaluated. The impact of any new IFRSs and IFRIC interpretations will be evaluated as they are drafted and published. FINANCIAL INSTRUMENTS Classification of Financial Instruments The Company s financial instruments consist of cash, other receivables, accounts payable and accrued liabilities, convertible loan interest payable, convertible loan debt component and convertible loan derivative component. The Company designated its cash as fair value through profit or loss ( FVTPL ), which is measured at fair value. The other receivables are designated as loans and receivables, which are measured at fair value. The accounts payable and accrued liabilities, convertible loan interest payable and convertible loan debt component are designated as other financial liabilities, which are measured at amortized cost. The Company designated its convertible loan derivative component as FVTPL, which is measured at fair value. Discussions of risks associated with financial assets and liabilities are detailed below: Foreign Exchange Risk A portion of the Company s financial assets and liabilities are denominated in US dollars. The Company monitors this exposure, but has no hedge positions. September December 30, , 2010 US dollars US dollars Cash 861, ,283 Accounts payable and accrued liabilities (522,902) (1,038,688) Convertible loan interest payable (100,000) (100,000) Convertible loan (5,000,000) (5,000,000) Net exposure to US dollars (4,761,829) (5,899,405) Credit Risk Credit risk arises from cash held with banks and financial institutions. The maximum exposure to credit risk is equal to the carrying value of the financial assets. The Company s cash is primarily held with the Royal Bank of Canada. Interest Rate Risk Interest rate risk is the risk that the future cash flows of a financial instrument will fluctuate because of changes in market interest rates. The risk that the Company will realize a loss is limited because at present the Company holds all of its surplus cash in an interest bearing account and has no other 13

14 interest bearing financial assets or liabilities except for the Convertible Loan, which bears an interest rate until June 15, 2012 as described in Note 7 to the accompanying unaudited interim consolidated financial statements for the nine months ended September 30, Liquidity Risk During the nine months ended September 30, 2011, the Company s working capital decreased from 15,573,000 to a deficiency of 4,061,000 due partially to the inclusion of the convertible loan as a current liability (aggregate of 5,443,000). The face value of the RCF loan, is US5,000,000 and it is due on June 15, The difference between the face value and the book value is due to the accounting treatment of the time value of money and the conversion feature. Management of the Company expects RCF will convert the US5 million convertible loan into common shares and warrants of the Company in accordance with the conversion terms and therefore no cash will be required to repay this loan. At November 9, 2011, RCF held 152,755,842 Avanti common shares or 36% of the Company s issued and outstanding common shares. The Company will need additional capital for the construction of the mine. OUTSTANDING SHARE DATA a) Authorized: Unlimited common shares without par value. b) Fully diluted common shares as at November 9, 2011: Type of Security Number Exercise Price Expiry Date Issued and outstanding common shares 423,503,893 n/a n/a Share purchase warrants 2,750, January 25, 2012 Share purchase warrants 37,076, February 23, 2013 Share purchase warrants 2,557, February 23, 2013 Share purchase warrants 38,759, November 6, 2013 Stock options 150, January 29, 2012 Stock options 1,350, August 20, 2012 Stock options 1,200, December 13, 2012 Stock options 2,150, June 24, 2013 Stock options 1,160, October 22, 2013 Stock options 200, October 6, 2014 Stock options 6,625, January 12, 2015 Stock options 450, June 14, 2015 Stock options 200, November 15, 2015 Stock options 6,225, February 11, 2016 Loan Conversion - Shares 25,000,000 (1) 0.20 June 15, 2012 Loan Conversion - Warrants 12,500,000 (1) 0.27 Four years from date of conversion Total 561,857,187 14

15 (1) Calculated assuming the US5,000,000 principal of the Conversion Loan (see Note 7 to accompanying interim consolidated financial statements for the nine months ended September 30, 2011) has a value of CDN5,000,000 on conversion. DISCLOSURE CONTROLS AND PROCEDURES In connection with National Instrument (Certificate of Disclosure in Issuer s Annual and Interim Filings) ( NI ), the Chief Executive Officer and Chief Financial Officer of the Company have filed a Venture Issuer Basic Certificate with respect to the financial information contained in the interim consolidated financial statements for the nine months ended September 30, 2011 and this accompanying MD&A (together, the Interim Filings ). In contrast to the full certificate under NI , the Venture Issuer Basic Certificate does not include representations relating to the establishment and maintenance of disclosure controls and procedures and internal control over financial reporting, as defined in NI For further information the reader should refer to the Venture Issuer Basic Certificates filed by the Company with the Interim Filings on SEDAR at RISKS AND UNCERTAINTIES Natural resources exploration, development, production and processing involve a number of business risks, some of which are beyond the Company s control. These can be categorized as operational, financial and regulatory risks. Additional risks are disclosed in the Annual Information Form on SEDAR at Operational risks include: the Company may not be able to find and develop reserves economically, the Company s resource and reserve estimates may yield less mineral production under actual conditions then is currently estimated, the Company cannot guarantee title to its properties, the Kitsault Property was purchased on an as-is, where-is basis and may be subject to unknown liabilities and obligations, the Company may not be successful in negotiating cooperation agreements with First Nations to develop its properties, the outcome of legal proceedings the Company is involved in is uncertain, the Company may have difficulty in marketing production and services, there are uncertainties with product deliverability, the Company must manage changing governmental law and regulations, the Company may have difficulty in hiring and retaining skilled employees and contractors, there are significant risks and hazards related to mining that are beyond the Company s control, there is no assurance that the Company will acquire additional mineral properties and any acquisitions may expose the Company to new risks, and the mining industry is intensely competitive for the acquisition of new properties, access to capital and hiring of skilled personnel. The Company continuously monitors and responds to changes in these factors and adheres to all regulations governing its operations. Insurance may be maintained at levels consistent with prudent industry practices to minimize risks, but the Company is not fully insured against all risks, nor are all such risks insurable. Financial risks include commodity prices, interest rates and the Canadian/United States exchange rate, all of which are beyond the Company s control. Additional financial risks are the Company s ability to raise capital and to repay the Loan and other indebtedness it incurs. 15

16 Regulatory risks include the possible delays in getting regulatory approval to, and permits for, the transactions that the Board of Directors believe to be in the best interest of the Company, and include increased fees for filings, the introduction of ever more complex reporting requirements the cost of which the Company must meet in order to maintain its exchange listing. OUTLOOK Avanti is proceeding with the development of its Kitsault Property. The key priority is to conclude the negotiations with strategic partners for the equity portion of the approximately 800 million needed to fund the redevelopment of Kitsault. There have been written expressions of interest to provide project financing from six financial institutions that in aggregate exceed the total debt required of 560 million. Immediately following the strategic alliance, the Company will focus on concluding the debt financing discussions also currently underway in order to complete the total financing required for the Kitsault Property construction and development. The Company has selected its EPCM contractors and will be awarding contracts after financing arrangements have been completed. The Company is negotiating the terms of an Employment Agreement with a Chief Operating officer who will be based in Vancouver, B.C. The Company now plans to submit the Environmental Assessment (EA) application in the fourth quarter of 2011 and hopes to conclude the mandatory six month review and public comment period resulting in the granting of an Environmental Certificate in mid The delay in submission of the EAA application is primarily due to a special survey being conducted to support the socio-economic impacts on the Nisga a Nation pursuant to the interpretation of the Nisga a Treaty by the Provincial and Federal regulators. The Company will also apply for all the other permits needed to redevelop the mine so that there is minimal delay after the EA approval in starting construction. OTHER INFORMATION Additional information related to the Company, including its most recently filed annual information form, is available for viewing on SEDAR at and at the Company s website at 16