Avalon Rare Metals Refining Nechalacho s future Refining agreement Metals & mining Avalon s announcement that it has entered into a refining agreement with Belgian chemicals company Solvay can be seen as a major de-risking event. Of most importance is that this agreement provides a lower-risk development and financing path towards securing future revenues from Nechalacho via third-party toll treatment of its rare earth element (REE) bearing concentrates. It should also allow Avalon to more easily secure offtake agreements for rare earth oxides produced at the La Rochelle, France facility given the plant s experience and reputation for quality. This agreement also eliminates Avalon s need to build its own C$0.4bn refinery in Louisiana, further de-risking project financing. We await Avalon s optimisation studies (due by end Q214), which we expect to dramatically change the scope of Nechalacho, before revisiting our valuation. Year end Revenue (C$m) PBT* (C$m) EPS* (c) 08/12 0.0 (11.2) (10.0) 0.0 N/A N/A 08/13 0.0 (8.3) (7.4) 0.0 N/A N/A 08/14e 0.0 (12.4) (10.6) 0.0 N/A N/A 08/15e 0.0 (12.7) (9.4) 0.0 N/A N/A Note: *PBT and EPS are normalised and fully diluted, excluding intangible amortisation, exceptional items and share-based payments. DPS (c) Nechalacho changing shape significantly Avalon states it will now send heavy REE-bearing concentrates to La Rochelle in France for processing into pure rare earth oxides, and potentially move its hydrometallurgical plant from Pine Point (ie near to the future Nechalacho mine) to Louisiana. All this is part of Avalon s current optimisation studies for Nechalacho, which includes new metallurgical recovery factors, mine plan and revised flow sheet designs. All these factors will affect the profitability of the project, which we expect to have positive implications for project financing. Agreement with Northwest Territory Métis Nation On 14 February, Avalon announced it had entered into a participation agreement with the Northwest Territory Métis Nation (NWTMN), which provides training, employment and business opportunities related to the Nechalacho project. This co-operative approach to first nation involvement is critical to the development of Nechalacho. Valuation: Outdated, requires optimisation to update Our current base case valuation is based on Avalon s April 2013 FS revised for its FY13 financial results. Due to minor delays in completing the optimisation studies, we also revise our assumption for commissioning the Nechalacho processing plant to 2017 (previously 2016), our assumptions of a 2015 C$35m equity raise (at C$1.00 per share) and a 30% strategic partner sell-down (for C$270m) to 2015 (previously 2014). This results in a valuation of C$4.81 per share (previously C$5.44) using a 10% discount rate, fully diluted share count and commodity prices as supplied by Avalon and stated in our May 2013 Outlook note. P/E (x) Yield (%) Price Market cap Net cash (C$m) at 30 November 2013 12 March 2014 C$0.73 C$81m 8.6m Shares in issue 110.5m Free float 98% Code Primary exchange Secondary exchange Share price performance AVL TSX NYSE % 1m 3m 12m Abs 21.7 35.2 (40.2) Rel (local) 18.4 24.4 (46.1) 52-week high/low C$1.2 C$0.5 Business description Avalon Rare Metals is a mineral development company focused on developing its 100%-owned Nechalacho project in the Northwest Territories, Canada. It also has a number of other explorationstage rare metals projects in North America. Next events Optimisation study Analysts Q214 Tom Hayes +44 (0)20 3077 5725 Charles Gibson +44 (0)20 3077 5724 mining@edisongroup.com Edison profile page Avalon Rare Metals is a research client of Edison Investment Research Limited
Participation agreement with Northwest Territory Métis Nation Avalon has announced it has successfully entered into a participation agreement with the Northwest Territory Métis Nation (NWTMN) concerning its Nechalacho rare earth elements project at Thor Lake in the Northwest Territories. This agreement is pivotal to the development of Nechalacho as it outlines the opportunities present to NWTMN for training, employment and business, and includes measures to mitigate the environmental and cultural impacts of the project. The agreement includes the issue of 10,000 Avalon common shares to NWTMN and an aggregate of 20,000 non-transferable common share purchase warrants. Valuation: Based on outdated April 2013 FS Our current base case valuation is based on Avalon s April 2013 FS revised for Avalon s FY13 financial results. We also highlight that our forecast FY14 EPS loss has increased by 11.6% to -10.6c from -9.5c. This is largely due to inclusion of the following share purchase agreements, revisions to our development timeline and a slight increase in exploration spend from C$4.7m to C$6.4m owing to guidance from the company. We push back commissioning of the plant to 2017, and our current assumption of a C$35m equity raise (at C$1.00 per share) and 30% strategic partner sell-down (for C$270m) to 2015 (previously 2014). This results in a valuation of C$4.81 per share (previously C$5.44) using a 10% discount rate, fully diluted share count and commodity prices as supplied by Avalon and stated in our May 2013 Outlook note. However, we note that since the FS was released in April 2013, the company has provided commentary on its Nechalacho optimisation study results. These include improvements to metallurgical recoveries, changes in process flow sheet design (including changes to the reagent suite used and a different method of ore processing) and revisions to the Nechalacho mine plan to bring forward the mining of higher-grade zones. These factors have both positive and negative effects on capital and operating expenditures and ultimately profitability, although to what degree cannot yet be accurately estimated. We therefore await Avalon s announcement of a revised technical report combining the effects of all these factors before we further adjust our base case valuation. Financials: Share purchase agreement satisfies FY14 outgoings In its FY13 financial statements, Avalon reported year-end (to 31 August) cash of C$10.31m, which has since reduced further to C$8.57m (at 30 November end of Q114) owing to a net cash outflow from operations of C$1.56m, the positive effect of equity offerings of C$3.38m and investments in exploration, mine development and purchase of property, plant and equipment of C$3.57m. Taking the above into account, for FY14 we forecast of C$6.4m in central costs, C$5.8m in sharebased compensation, resource property expenditures of C$6.4m and other capex of C$0.6m. Avalon has also entered into two share purchase agreements in Q114, which should fund it through to completion of its optimisation studies and potentially to the financing stage for Nechalacho. These two agreements are highlighted below. Avalon entered into a share purchase agreement with Cowan & Company LLC, pursuant to which Avalon, at its discretion, may sell up to US$25m in ordinary shares at the prevailing market price on the NYSE. As at 30 November 2013, Avalon issued 705,707 shares for gross proceeds of C$694,984 and incurred issuance and set-up costs for this agreement totalling C$334,914. Avalon s second purchase agreement is with Lincoln Park Capital Fund (LPC), pursuant to which Avalon may sell up to US$30m of its ordinary share capital over a period of 36 months. An initial Avalon Rare Metals 12 March 2014 2
purchase has already been made by LPC of 4,375,000 shares at US$0.64 per share for gross proceeds of US$2.8m (C$2.9m). Avalon also issued 918,521 shares to LPC as a commitment fee and will issue a further 918,521 shares as compensation on a pro rata basis as the US$30m purchase amount is funded. The above share purchases resulted in a total 109,796,214 shares outstanding. We note from Thomson Reuters that Avalon currently has 110,479,567 shares in issue (as of 6 March 2014). We note from management that a further issue was made in January, which we assume from our model was the issue of a further 683,353 shares. The indicative price for an Avalon share in January was C$0.60, which would result in gross proceeds received by Avalon of c C$410,000. Based on the above forecasts and share purchases, we currently estimate an end-fy14 cash shortfall of C$4,447,270, which if met through the use of its two share purchase agreements, using a share price of C$0.84 (as of 6 March 2014), would result in additional dilution of 5,294,369 shares. Avalon Rare Metals 12 March 2014 3
Exhibit 1: Financial summary C$000's 2012 2013 2014e 2015e August IFRS IFRS IFRS IFRS PROFIT & LOSS Revenue 0 0 0 0 Cost of Sales 0 0 0 0 Gross Profit 0 0 0 0 EBITDA (12,071) (8,483) (12,205) (12,205) Operating Profit (before amort. and except.) (12,303) (8,694) (12,510) (12,205) Intangible Amortisation 0 0 0 0 Exceptionals 45 (2,880) 0 0 Other 0 0 0 0 Operating Profit (12,258) (11,573) (12,510) (12,205) Net Interest 1,106 374 155 (534) Profit Before Tax (norm) (11,197) (8,319) (12,355) (12,739) Profit Before Tax (FRS 3) (11,152) (11,199) (12,355) (12,739) Tax 0 0 0 0 Profit After Tax (norm) (11,197) (8,319) (12,355) (12,739) Profit After Tax (FRS 3) (11,152) (11,199) (12,355) (12,739) Average Number of Shares Outstanding (m) 103.2 103.7 108.8 128.0 EPS - normalised (c) (10.8) (8.0) (11.4) (10.0) EPS - normalised and fully diluted (c) (10.0) (7.4) (10.6) (9.4) EPS - (IFRS) (c) (10.8) (10.8) (11.4) (10.0) Dividend per share (c) 0.0 0.0 0.0 0.0 Gross Margin (%) N/A N/A N/A N/A EBITDA Margin (%) N/A N/A N/A N/A Operating Margin (before GW and except.) (%) N/A N/A N/A N/A BALANCE SHEET Fixed Assets 84,043 100,214 106,908 112,408 Intangible Assets 0 0 0 0 Tangible Assets 84,043 100,214 106,908 112,408 Investments 0 0 0 0 Current Assets 40,038 11,632 1,318 283,632 Stocks 0 0 0 0 Debtors 640 389 389 389 Cash 38,300 10,314 0 282,314 Other 1,098 929 929 929 Current Liabilities (5,464) (1,463) (5,910) (1,463) Creditors (5,464) (1,463) (1,463) (1,463) Short term borrowings 0 0 (4,447) 0 Long Term Liabilities 0 0 0 0 Long term borrowings 0 0 0 0 Other long term liabilities 0 0 0 0 Net Assets 118,618 110,383 102,315 394,576 CASH FLOW Operating Cash Flow (6,192) (6,309) (12,205) (12,205) Net Interest 1,106 374 155 (534) Tax 0 0 0 0 Capex (incl. Exporation expenditure) (28,849) (22,265) (6,998) (5,500) Acquisitions/disposals/strategic partner buy-in 0 0 0 270,000 Financing 1,524 210 4,287 35,000 Dividends 0 0 0 0 Net Cash Flow (32,411) (27,990) (14,761) 286,761 Opening net debt/(cash) (70,859) (38,300) (10,314) 4,447 HP finance leases initiated 0 0 0 0 Other (147) 4 1 0 Closing net debt/(cash) (38,300) (10,314) 4,447 (282,314) Source: Company accounts and Edison Investment Research Avalon Rare Metals 12 March 2014 4
Edison, the investment intelligence firm, is the future of investor interaction with corporates. Our team of over 100 analysts and investment professionals work with leading companies, fund managers and investment banks worldwide to support their capital markets activity. We provide services to more than 400 retained corporate and investor clients from our offices in London, New York, Frankfurt, Sydney and Wellington. Edison is authorised and regulated by the Financial Conduct Authority (www.fsa.gov.uk/register/firmbasicdetails.do?sid=181584). Edison Investment Research (NZ) Limited (Edison NZ) is the New Zealand subsidiary of Edison. Edison NZ is registered on the New Zealand Financial Service Providers Register (FSP number 247505) and is registered to provide wholesale and/or generic financial adviser services only. Edison Investment Research Inc (Edison US) is the US subsidiary of Edison and is not regulated by the Securities and Exchange Commission. Edison Investment Research Limited (Edison Aus) [46085869] is the Australian subsidiary of Edison and is not regulated by the Australian Securities and Investment Commission. Edison Germany is a branch entity of Edison Investment Research Limited [4794244]. www.edisongroup.com DISCLAIMER Copyright 2014 Edison Investment Research Limited. All rights reserved. This report has been commissioned by Avalon Rare Metals and prepared and issued by Edison for publication globally. All information used in the publication of this report has been compiled from publicly available sources that are believed to be reliable, however we do not guarantee the accuracy or completeness of this report. Opinions contained in this report represent those of the research department of Edison at the time of publication. The securities described in the Investment Research may not be eligible for sale in all jurisdictions or to certain categories of investors. This research is issued in Australia by Edison Aus and any access to it, is intended only for "wholesale clients" within the meaning of the Australian Corporations Act. The Investment Research is distributed in the United States by Edison US to major US institutional investors only. Edison US is not registered as an investment adviser with the Securities and Exchange Commission. Edison US relies upon the "publishers' exclusion" from the definition of investment adviser under Section 202(a)(11) of the Investment Advisers Act of 1940 and corresponding state securities laws. As such, Edison does not offer or provide personalised advice. We publish information about companies in which we believe our readers may be interested and this information reflects our sincere opinions. The information that we provide or that is derived from our website is not intended to be, and should not be construed in any manner whatsoever as, personalised advice. Also, our website and the information provided by us should not be construed by any subscriber or prospective subscriber as Edison s solicitation to effect, or attempt to effect, any transaction in a security. The research in this document is intended for New Zealand resident professional financial advisers or brokers (for use in their roles as financial advisers or brokers) and habitual investors who are wholesale clients for the purpose of the Financial Advisers Act 2008 (FAA) (as described in sections 5(c) (1)(a), (b) and (c) of the FAA). This is not a solicitation or inducement to buy, sell, subscribe, or underwrite any securities mentioned or in the topic of this document. This document is provided for information purposes only and should not be construed as an offer or solicitation for investment in any securities mentioned or in the topic of this document. Edison has a restrictive policy relating to personal dealing. Edison Group does not conduct any investment business and, accordingly, does not itself hold any positions in the securities mentioned in this report. However, the respective directors, officers, employees and contractors of Edison may have a position in any or related securities mentioned in this report. Edison or its affiliates may perform services or solicit business from any of the companies mentioned in this report. The value of securities mentioned in this report can fall as well as rise and are subject to large and sudden swings. In addition it may be difficult or not possible to buy, sell or obtain accurate information about the value of securities mentioned in this report. Past performance is not necessarily a guide to future performance. Forward-looking information or statements in this report contain information that is based on assumptions, forecasts of future results, estimates of amounts not yet determinable, and therefore involve known and unknown risks, uncertainties and other factors which may cause the actual results, performance or achievements of their subject matter to be materially different from current expectations. For the purpose of the FAA, the content of this report is of a general nature, is intended as a source of general information only and is not intended to constitute a recommendation or opinion in relation to acquiring or disposing (including refraining from acquiring or disposing) of securities. The distribution of this document is not a personalised service and, to the extent that it contains any financial advice, is intended only as a class service provided by Edison within the meaning of the FAA (ie without taking into account the particular financial situation or goals of any person). As such, it should not be relied upon in making an investment decision. To the maximum extent permitted by law, Edison, its affiliates and contractors, and their respective directors, officers and employees will not be liable for any loss or damage arising as a result of reliance being placed on any of the information contained in this report and do not guarantee the returns on investments in the products discussed in this publication. FTSE International Limited ( FTSE ) FTSE 2014. FTSE is a trade mark of the London Stock Exchange Group companies and is used by FTSE International Limited under license. All rights in the FTSE indices and/or FTSE ratings vest in FTSE and/or its licensors. Neither FTSE nor its licensors accept any liability for any errors or omissions in the FTSE indices and/or FTSE ratings or underlying data. No further distribution of FTSE Data is permitted without FTSE s express written consent. Frankfurt +49 (0)69 78 8076 960 Avalon Schumannstrasse Rare 34b Metals 12 March 280 High Holborn 2014 245 Park Avenue, 39th Floor Level 25, Aurora Place Level 15, 171 Featherston St 5 60325 Frankfurt Germany London +44 (0)20 3077 5700 London, WC1V 7EE United Kingdom New York +1 646 653 7026 10167, New York US Sydney +61 (0)2 9258 1161 88 Phillip St, Sydney NSW 2000, Australia Wellington +64 (0)48 948 555 Wellington 6011 New Zealand