technical report on the nechalacho deposit, thor lake project ...

in China. On this basis, Avalon is of the opinion that a CAGR of 20% for average price is not
unreasonable, with the exception of La and Ce, which are projected to be in substantial market
surplus. The variation in price increase for the other oxides may be anticipated to be significant,
with higher than average increase for oxides such as Nd, Dy and Tb offsetting lower than
average price increases for oxides in relative excess supply.
For the PFS, the 2009 rare earth prices were uniformly escalated by 20% per year to 2014, with
the exception of La and Ce, which were not escalated.
Determine a 2014 Value for Individual REE Outside China
In late 2006, the Chinese Government introduced a tax on rare earth exports of 10%, which was
subsequently increased to 15% on selected rare earths in 2007. In December 2007, the
authorities again increased the export taxes on all rare earth exports. With effect from January
1, 2008 the following levels of export tax apply:
• Europium, terbium, dysprosium, yttrium as oxides, carbonates or chlorides (HREE) –
25%
• All other rare earth oxides, carbonates and chlorides (LREE) – 15%
• Neodymium metal (LREE) – 15%
• All other rare earth metals – 25%
In 2007, China also withdrew the refund of VAT (16%) on rare earth exports, while the refund on
value-added exports such as magnets and phosphors remains in place. The effect of this
decision, when considered with the export tax regime above, is that rare earth processors
outside China, such as phosphor and rare earth magnet producers, effectively pay up to 41%
more for their rare earth raw materials (in addition to related transport and storage costs), in
comparison to processors based in China.
These export taxes and the treatment of VAT on REE exports has provided an incentive for
manufacturers to establish plants inside China for the production of rare earth containing
components, as their value-added products are not subject to export taxes if produced there. It
is likely that China will want to retain this manufacturing inside China in the face of competition
in 2014 and beyond. For this reason, Avalon assumes that China’s current export taxes and the
non-refundable VAT policies will continue. Avalon further assumes, at this time, that Avalon (or
any other non-Chinese producer) will not be able to capture the full impact of the export tax and
elimination of VAT refund in its product pricing. Due to increased processing costs outside
China, and in order to be conservative, it is assumed that that Avalon will only benefit by 25% of
these amounts for the LREOs, gadolinium, holmium, erbium, and lutetium, and by 50% for the
rest. Based on these assumptions, Avalon then agrees with the Scott Wilson RPA (2010)
calculated projected 2014 prices for the individual rare earth elements on an FOB China basis.
Technical Report 43-101 – March 13, 2011 Page 18-82
Prepared by Avalon Rare Metals Inc.