Avadale Capital Inc. – Gold Mining in Kazakhstan Sector ... · Sector/Industry: Junior Mining ......

Siddharth Rajeev, B.Tech, MBA, CFA Analyst

Daniel Iwata, BA Research Associate

February 3, 2014

2014 Fundamental Research Corp. “10 Years of Bringing Undiscovered Investment Opportunities to the Forefront “ www.researchfrc.com

PLEASE READ THE IMPORTANT DISCLOSURES AT THE BACK OF THIS REPORT

Avadale Capital Inc. – Gold Mining in Kazakhstan Sector/Industry: Junior Mining www.avadalecapital.com

Issuer Avadale Capital Inc.

Offering Document Date

05-Apr-13

Securities IssuedSecured, non-convertible

debentures - Series A @ 10% and Series B @ 0%

Maturity approximately 3 years

Profit Share Series A - 12.5% / Series B - 25%

Min/Max Subscription Min - $250k / Max - $3M

Minimum Investment $25,000

Unit Price $1,000 per debenture

Selling Commissions up to 10%

Registered Plans not eligible for deferred plans

Offering Summary

Capital raised to date – nil This offering does not have an Offering

Memorandum. This offering is only for accredited

investors. FRC Rating Series A Series B

IRR (before-tax) 14.5% 7.3%

Rating 4- 5-

Risk 5 5

*see back of report for rating definitions

Investment Highlights Avadale Capital Inc. is seeking to raise up to $3 million by issuing

secured, non-convertible debentures. The funds will be loaned to GRK Vizol LLP (“Vizol”), a related entity based in Kazakhstan. Vizol holds a 100% interest in the Kurchum River gold project in East Kazakhstan.

Vizol acquired the Kurchum River gold property in 2007. The Kurchum River project is primarily an alluvial gold mining (placer mining) operation with an on-site processing facility, and a camp in place. Vizol will use the funds from this offering to purchase heavy equipment to remove gravel overlying the sand containing gold.

From 1979 to 2004, the property produced 108,000 oz of gold. From 2008 to 2012, Vizol produced approximately 5,483 oz from the property. There was no production in 2013.

An independent report produced by Micon in 2007 estimated an indicated plus inferred resource of approximately 67,000 ounces in 2.6 million tonnes.

After the removal of the gravel overburden, management estimates production can be increased to 5,188 oz a year.

Kazakhstan has a very developed mining and mineral exploration industry. The country’s government estimates production to increase from 1.47 million oz in 2013, to 2.24 million oz by 2015.

Risks Defining an alluvial resource can be complicated. The company might not be able to raise sufficient capital to buy the

required equipment. Interest rate risks. Delays in ramping up production. Like most mining projects, the project is exposed to mining /

processing / operational risks. Commodity price fluctuations. Exchange rate risks. Production has to increase significantly from historic levels to

generate attractive returns for investors. Operating cost and recovery rates might not be as expected. Key person risks exist as Michael Nugent owns 100% of Avadale

and Vizol.

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Overview Management

Avadale Capital Inc. (“company”), based in Calgary, was incorporated on February 22, 2013. The company is seeking to raise up to $3 million. The funds will be loaned to GRK Vizol LLP (“Vizol”), a Limited Partnership established in Kazakhstan on March 7, 2006. Vizol holds a 100% interest in the Kurchum River gold project on the Kurchum River in East Kazakhstan. The Kurchum River project is primarily an alluvial gold mining operation with infrastructure in place. Vizol will use the funds from this offering to purchase seven bulldozers, and two loaders, if the maximum offering is achieved, to remove a large amount of gravel overlying the sand containing gold. Investors will receive secured, non-convertible debentures. Investors have the option to purchase Series A or Series B debentures. Series A debenture holders are expected to receive 10% p.a. in interest (paid monthly), and a 12.5% interest in the project’s profits. Series B debenture holders do not receive any interest, but has a higher share of the project’s profits (25%). Investors can choose to have physical delivery of gold instead of cash. The physical gold will be delivered to an investor’s Canadian address. Vizol is owned 100% by Bentley International Oil Ltd, a Calgary based company owned by Michael Nugent. Michael Nugent also owns 100% of Avadale Capital Inc. Avadale was established exclusively as a financing arm of Vizol. Brief biographies of the senior management team, as provided by the company, follow. This is management’s first exempt offering. Michael Nugent - Director and President of the Corporation Michael B. Nugent has executive experience in multiple industries as director, CEO and COO with both public and private, resource, technology, real estate and investment companies. Mr. Nugent currently is President of PointCapital Management Corp, a privately held resource investment firm. Previously, he has held management positions with public companies including director, president and CEO of Quadra Resources Corp. which was acquired by Arsenal Energy Inc, an Alberta public company. Previously he was director, president and COO of Black Gold Oil and Gas Ltd., an Alberta public company. After Black Gold he proceeded to start and active in several businesses and is experienced with all facets of business operations. Mr. Nugent has experience in petroleum, mining, technology, real estate and finance. After obtaining his Bachelor of Commerce Degree from the University of Calgary he worked as a petroleum land-man for various Canadian oil companies prior to establishing Black Gold. During the 1980’s Mr. Nugent successfully managed Black Gold prior to selling the company in the early 1990’s. A veteran of the oil industry, Mr. Nugent began his petroleum career with Amoco Canada and acquired the Professional Land-man designation in 1978, working Western Canada. He has more than 35 years experience in oil, gas and mining exploration and production, in Canada as well as internationally including the US, South America, North Africa Australia, and both Central and South-East Asia. Mr. Nugent is experienced in multi-company operations and consolidation of financial information for reporting purposes. He is familiar

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with U.S. and Canadian securities regulations and public company reporting requirements and has managed private and public placements for a number of companies. He has extensive international experience and maintains numerous business and personal contacts. Michael Whitehead - Director and Secretary of the Corporation Mr. Whitehead is a seasoned businessman who has an extensive background in resource financing for mining and oil and gas exploration. He earned a Bachelor of Commerce degree in 1982 from the University of Alberta. After graduation, he began work as an investment advisor at Wood Gundy, a company involved in numerous resource financings worldwide. By 1992, Mr. Whitehead had left Wood Gundy and started working with different technology and resource companies which focused on raising capital .Then in 1995, he founded Quadra Resources, a company concentrated on resource exploration prospects in the Philippines, Central Asia, Australia and North Africa. The company was sold in 2003. Since that time, Mr. Whitehead has continued to focus on resource companies and consult to them for capital raises and in some cases taking them public on North American and European Stock Exchanges. He has been the president, CEO, and Director of Silver Corp., a private Canadian company. His main responsibilities included seeking strategic opportunities and managing day-to-day activities. Before that, he held the same positions in Copper One Inc., a mineral exploration company in Vancouver. Barry Foster - Director and Treasurer of the Corporation Barry H. Foster has executive experience in multiple industries as director, CFO and COO with both public and private enterprises. Mr. Foster is President of Rampol Services Inc., a privately held staffing and resource consulting firm. He has held positions with public companies in management including director and CFO of Quadra Resources Corp. which was acquired by Arsenal Energy Inc. (TSX:AEI). Previously he was director, CFO and COO of Chartwell Technology Inc. (TSX:CWH). He has started several businesses and is experienced with all facets of business operations. Mr. Foster is a member of the Certified General Accountants Association of Alberta and has experience in petroleum, technology, finance and accounting. After obtaining his Diploma in Computer Technology from the Southern Alberta Institute of Technology he worked as an information technology professional, educator, accountant, and petroleum landman. A veteran of the oil industry, Mr. Foster began his petroleum career with Dome Petroleum in 1980 and worked the frontiers, international and Western Canada and acquired the Professional Landman designation in 1990. He has more than 25 years experience in upstream oil and gas exploration and operations in Canada as well as internationally in South America, North Africa and other regions. Mr. Foster has maintained his expertise in information technology including ERP, web and database technology, open-source initiatives, and computing in general. He has extensive exposure to Canadian and International Accounting Standards and U.S. Generally Accepted Accounting Principles. He is experienced in multi-company operations and consolidation of financial information for reporting purposes. He is familiar with U.S. and Canadian securities regulations and public company reporting requirements and has managed private placements for a number of companies. He also has extensive international experience including offshore incorporation and tax planning.

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Property

Location – The following map shows the location of the project in Eastern Kazakhstan.

Source: Avadale Capital


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The nearest city is Ust Kamenogorsk (shown in the map below), which has a population of approximately 304,000. The Kurchum property is located about 200 km southeast of Ust Kamenogorsk, and about 60 km east of Kurchum town.

Source: Micon

Geology / Deposit - The property has not had any detailed exploration since the 1970’s. According to Micon, in addition to alluvial mineralization, the geology in the region is favourable for the discovery of significant hardrock gold mineralization, which may be of the hydrothermal (such as the Aksu gold deposit in Kazakhstan) or Carlin-type mineralization in Nevada, USA. However, exploration of hardwork mineralization has been very limited. Micon estimates a very preliminary resource estimate of 16.2 mm oz for the hardrock mineralization. It is not NI43-101 compliant, and the estimate is below the confidence of inferred resources. We consider this estimate to be very premature. The project has an independent geological report prepared by Micon International (UK) in March 2007. According to Micon, the region is “underlain by a multi-stage narym granite complex intruding metasediments, lavas and pyroclastic formations in the vicinity of major northwest-southeast striking structures which generally characterise other gold-bearing regions in Kazakhstan.” The image below shows the boundary of the existing alluvial area.

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Kurchum Concession Areas and Simplified Geology

Source: Micon History – In 2007, Vizol acquired the Kurchum River gold property in for $2 million from private Kazakhstan investors (as per management). Vizol holds a 100% interest in the property, with an exploration and production license over a 75.2 km2 land package until 2021. The surface rights in the area are held by the government. From 2008 to 2012, Vizol produced 5,483 oz of gold through an alluvial mining operation. The property was mined from 1979 to 2004 by the Soviet Union and the Kazakhstan government and private entities. The overall production during that time period was over 3,500 kilograms (108,000 oz) of gold. There was no production between 2004 and 2008. According to management, production ceased in 2004, due to the lack of suitable equipment. The annual production rate since 1979 has ranged between 20 kg and 200 kg. These production data were provided by management, and have not been independently verified.

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Gold Production from the Kurchum Area: 1979 - 2004

Source: Micon Report

In 2008, Vizol hired additional staff (field maintenance & operating personnel), and commenced operating near the camp site and south leg area using rental heavy equipment. Production since then is shown in the table below (Source: Management).

2008 2009 2010 2011 2012

Production 1,550 1,571 - 1,322 1,041 Average Grade (gpt) 2.11 1.38 - 1.4 1.22

*Note that these production figures are slightly lower than those reported in the company’s presentation and ‘Confidential Information Package’. Management has confirmed that the above figures are closer to the accurate figures. The total production from 2008 to 2012 was 5,483 oz (4,338 oz came from the red area in the East Flank area in the map below). Production was suspended in 2010 as the project had to wait for new mining permits. Vizol received the new permits in late 2010, which is now valid until 2021.

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East flank area

Source: Company

The map below shows the East Flank area; the region in the upper left corner is the current work area.

Source: Company

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The following map shows the locations of the East Flank and the camp.

Source: Company

2012 production dropped YOY because – a) rental equipment breakdown, and b) in 2012, the company built a dam to redirect 800m of a river, flowing adjacent (blue area in the map on the previous page) to the mined area in 2008 - 2012, to give access to the mine (riverbed) underneath the river. Management did not provide us any updated pictures showing the diverted river. The mine underneath the river has larger overburden, which require additional heavy equipment. Until then, management was leasing up to three bulldozers for their operations. As they did not believe that leasing additional heavy equipment was economically attractive for the project, they decided to suspend production until they raise sufficient capital to purchase their own equipment. The company was therefore unable to conduct any mining in 2013. Vizol now needs to purchase heavy equipment, such as bulldozers and loaders, to remove large amounts of gravel overlying the sand containing gold. The gold bearing sand will be processed in a sluice box using high pressure water. As gold is heavier than dirt, the high pressure water washes away the dirt leaving gold behind. Work done by Vizol – The following chart summarizes the major activities by Vizol since 2009.

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2009 2010

* Summer - South leg area * Extended mining license to 2021

* Processed 500 m3 gravels per day * New mining and environmental studies completed

* Fall - East Flank area * Secured mining operations work permit for spring 2011

* Processed 800 m3 gravels per day

* Limited production days due to lack of equipment to remove overburden and assist in processing

2011 2012

* Obtained gold export permit * Diverted 800 m of Kurchum river

* Upgraded alluvial processing procedures & equipment * Prepared production of river bed

* Increased gold recovery to 90%

* Application to expand exploration & production lands to 500 km2

* Purchased shallow drilling/coring rig

* Continued exploration on alluvial and hard rock geological systems

Source: Avadale Capital Infrastructure – The area has reasonably good infrastructure, with access to the electricity grid and asphalt/dirt roads. The region is connected to Almaty (the largest city in the country) by road, rail and air, with airports at Ust Kamenogorsk and Semipalatinsk. The project has an on-site processing plant, with camp facility. The camp consists of accommodation units (a 2-storey dormitory and eight trailers suitable for year-round occupation), canteen, warehouse, storage facilities, etc. The image below shows the site office (the single storey building in the foreground), sleeping quarters (the two storey building next to the office), and the gold refinery (behind the sleeping quarters).

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Source: Company

Electricity is currently provided by an on-site generator. However, Vizol can establish a direct electricity connection with the grid (10 km from the site) if required. Management believes that they can continue to use diesel generators for power for the proposed operations. Management estimates it will cost approximately $50k to attain a direct electricity connection with the grid in case they decide to pursue that option in the future. Water availability is not a concern due to the proximity to the Kystav and Kurchum Rivers, and their tributaries.

Year-round operations are not possible due to severe winter conditions. The minimum winter temperature can be as low as -50°C, and the maximum summer temperature can go as high as 40°C. Typically, the project can be in operation between April to November. According to Micon, “Access to the concession area is moderately good with an asphalt road to within 30 km of the site and then via dirt road, however, the on-site roads are poor.” However, note that Micon did not visit the site. Property Staff – Vizol currently has about 10-12 employees, including geologists, engineers and finance professionals, is located at their office in Ust-Kamenogorsk. When operating, the camp will have about 60 and 70 personnel. Resource estimate: Based on their review of the data provided by management, Micon prepared a resource estimate for the project in 2007. It is not NI 43-101 compliant, and the report was prepared for management’s internal use. Although Micon visited Vizol offices in Ust Kamenogorsk, they were unable to visit the site due to weather conditions. Micon had

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also not independently verified the statements and data provided by management. Micon estimates that the placer deposits have an indicated plus inferred resource of 2,079.7 kg (approximately 67,000 ounces) of gold, across eight blocks, in 2.6 million tonnes.

Kurchum Placer Gravel Reserves

C1 is equivalent to indicated, and C2 is equivalent to inferred resources

Source: Micon

Grades in the eight blocks range between 0.46 g/t and 1.89 g/t; the weighted average grade is estimated at 0.8 gpt. Historical grades (2008 to 2012) averaged 1.53 gpt, as per management. The stripping ratio is estimated at 1:2.5. Management, subsequently, updated Micon’s estimate in 2012. The revised estimate, which is shown in the table below, is 60,799 oz.

VOSKAZNEDRA - State Gold Reserve CommitteeReserves of GRK Vizol LLP -Kurchum River Contract - Jan 1, 2012

Reserves TotalName of Contract Area C1 - Kg Troy Oz C2 - Kg Troy Oz C1 +C2 Troy Oz

Eastern Flank middle stream of Kurchum River 869.26 27,034.0 869.26 27,034.0 Middle Stream Kurchum River 153.7 4,780.1 48 1,492.8 201.7 6,272.9 Western Flank middle Stream of Kurchum River 104 3,234.4 104 3,234.4 Middle stream Kustav-Kurchum River 155.3 4,829.8 155.3 4,829.8 Lower stream Kustav-Kurchum River 325.7 10,129.3 10 311 335.7 10,440.3 Burabay 147 4,571.7 147 4,571.7 Taschan 142 4,416.2 142 4,416.2

Total: 1,896.96 58,995.5 58 1,803.8 1,954.96 60,799.3 Source: Company

In the 2007 report, Micon estimated net cash flows (before-tax) of US$27.25 million, as shown below, from the alluvial operations of the project.

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Tonnage 2,600,000 Resource 67,000Gold Price $650

Revenues $43,550,000Operating Costs ($3/t) -$7,800,000Capital CostsEquipment and New Processing Plant -$2,500,000Mine stripping (removal of 6Mt of gravel) -$6,000,000

Net Cash Flows $27,250,000 The analysis assumed 100% recovery. According to management, the recovery rate has historically been 80%+. The study also assumes a US$3 per tonne operating cost based on comparable projects. The estimated capital cost, by Micon, was $8.5 million, which includes $2.5 million for equipment and a processing plant, and $6 million for mine stripping. Vizol has so far spent approximately $2 million on equipment, camp upgrades, and a licence extension until 2021. The study used a gold price of US$650/oz. The following table shows the sensitivity of the net cash flows to gold prices.

Gold Price (US$/oz)

NCF (US$)

$27,250,000$600 $24,500,000$900 $41,000,000

$1,200 $57,500,000$1,500 $74,000,000$1,800 $90,500,000

* We derived these figures from Micon’s model, assuming operating costs change at the same rate as gold prices

For our valuation models, we used a long-term gold price of US$1,200 per oz, with C$/US$ of 1.10 (presented later in the report). Use of Funds - Vizol intends to purchase:

7 bulldozers (model SD32) - 40 ton weight, 320 hp diesel - costing $240k each for a total amount of $1.68 million

two loaders - rubber tired, including a 3.5 cubic meter front mounted bucket, costing

$60k each for a total cost of $0.12 million. The total cost of the equipment is $1.80 million. According to management, the monthly lease rates are approximately 10% of the price of equipment. Therefore, purchasing equipment is a much better option than leasing , for projects that require equipment for longer terms.

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Vizol plans to purchase the equipment from the Chinese manufacturer, Shantui Construction Machinery Co. Vizol expects a delivery time of 30 days from the time of order. The following are images of the proposed equipment.

SHANTUI SD32 crawler bulldozer

Source: Shantui

Source: Shantui

The following table shows the revenues and production costs per oz produced between 2008 and 2012. As shown, the production cost was approximately $1,006 per oz in 2011, and

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$1,657 per oz in 2012. Management believes they can bring their cost down to $400 per oz if they can purchase the required heavy equipment, and increase production rates.

2008 2009 2010 2011 2012

Production 1,550 1,571 N/A 1,322 1,041

Revenues $483,300 $1,365,173 N/A $2,423,565 $1,817,881

Revenue / Oz $312 $869 N/A $1,833 $1,746

Production Cost $301,687 $1,285,240 N/A $1,330,319 $1,725,362Cost / oz $195 $818 N/A $1,006 $1,657

According to management, they had leased three bulldozers in 2011, on which they paid an annual lease amount of $500 - $600k. Excluding these lease rates, the operating cost in 2011 would have been $700 per oz. Mining Process: The company will commence operations with removal of the overburden (3 to 7 meters from surface depending on the location) using the bulldozers. The gold bearing sand below the overburden is estimated to have a thickness of 2 meters. Subsequently, sluice box, water pumps and water flow lines will be installed. A ground water storage pond will be prepared for the operations, and the reuse of water. The next key steps are outlined below: - Bulldozers push the sand containing gold into a pile for the loader to pick up. - The loaders then transport the sand to the floor of the sluice box. - High-pressure water is sprayed onto the sand. - Water and sand slurry then drop through openings in the floor of the box, and are directed down into an enclosed and locked gold capture vessel of the sluice box. - Gold particles are captured on the floor of the capture vessel. - Waste sand and gravel are removed, and cleared from the sluice box using a small bulldozer. No chemicals or toxic substances are used in the process. Below are a few pictures of the site and its operations. The following image shows mining operations on the East Flank.

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The following image shows processing black sand at the camp processing facility.


The gold and associated black sand material is then transported to the camp’s gravity separation processing facility, located at the camp site. The East Flank area is approximately 14 km from the camp. The mixture is then processed through multiple cleaning operations that separate the gold particles and black sand. The gold is then stored in a locked steel barred room.

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Gold is then transported under armed security to Ust-Kamenogorsk, where it is stored in the vault of the ATF Bank. Once the inventory at the bank reaches 5-10 kg, gold is shipped to Metalor Technologies International SA in Switzerland for refining. Metalor receives about 5% of the total value of the contained gold. Vizol has had an agreement with Metalor since 2008/2009. Micon, in their report, stated that “prospecting and mining activities at Kurchum will need to address a number of environmental concerns including the effects upon local water resources and bio-habitats. The principal concerns are expected to relate to the disposal of waste products (lump materials, tailings and slurries/fines) and the discharge of process waters in relation to future mining operations.” When asked about this, management indicated that they are in compliance with all environmental regulations. Management production estimates: Vizol expects to produce at a rate of 741 oz per month. Based on a 7 month operation in a year (50% in April + 100% in May to Oct + 50% in November), the expected annual production is 5,188 oz for 10 – 15 years, based on the current resource estimates. Management believes the resource estimates can be increased with exploration. However, they do not have any plans to conduct exploration at this time. Additional exploration permit – According to management, Vizol was awarded in summer 2013, a 500 sq. km. gold exploration licence located adjacent to the Bakyrchik gold mine, 75km south-west of Ust-Kamenogorsk. The Bakyrchik mine is estimated to hold 5.8 mm oz of gold @ 8gpt.

Kanaika #2, Bakyrchik #1 location map

Source: Company

Management states that previous exploration work has identified eight gold bearing areas in the property, returning grades between 0.1 and 10 gpt. Since we do not have any additional

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Kazakhstan

details on the project, we are not in a position to comment on its impact on Avadale’s investors. Kazakhstan’s Gross Domestic Product (“GDP”) has been steadily rising since 2000. In the early part of the decade, the country experienced very strong growth. Growth has averaged 7.7% p.a. from 2000-2012. The chart below shows Kazakhstan’s annual GDP by dollars, and the annual growth rate. The World Bank estimates 38.2% of the GDP is from natural resources.

Source: World Bank Kazakhstan has a very developed mining and mineral exploration industry. They are currently the largest producer of uranium in the world. In 2012, they accounted for 36.5% of the world’s supply (Source: World Nuclear Association). Kazakhstan is also 12th in the world for iron ore mine production, with an estimated 25 million tonnes of ore produced in 2012 (Source: US Geological Survey). The country also has a growing coal and copper industry. In addition to mining, Kazakhstan has been an increasing producer of oil, as shown in the chart below.

$0

$50,000

$100,000

$150,000

$200,000

$250,000

0

2

4

6

8

10

12

14

1620

00

2001

2002

2003

2004

2005

2006

2007

2008

2009

2010

2011

2012

Percent

GDP growth(annual %)

GDP (US$ mm)

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Source: Business Monitor

In 2010, Kazakhstan became the 20th largest producer of gold in the world (Source: World Gold Council). The country’s government estimates production to increase from 1.47 Moz in 2013, to 2.24 Moz by 2015. The following chart shows historical production.

20,000

22,000

24,000

26,000

28,000

30,000

32,000

34,000

36,000

38,000

40,000

2007 2008 2009 2010 2011

Gold production (Kilograms)

Source: British Geological Survey

The Fraser Institute’s survey ranked Kazakhstan in the bottom third of countries for various factors that encourages exploration and mining in the region. The Fraser Institute ranks it 80 out of 96 countries for public policy that encourages exploration. In most of the categories for the survey, the respondents surveyed had a moderate aversion to investing in Kazakhstan. The study looked at aspects including environmental concerns, legal concerns, corruption and security, and government regulation. The majority of the major gold deposits are located in the east of Kazakhstan. Gold mines in

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Structure

production (brown), and properties being explored (purple) are shown below.

Source: London Bullion Market Association

The largest deposit in Kazakhstan is the Kyzyl gold project (located in northeastern Kazakhstan), which includes the Bakyrchik and Bolshevik (not shown) properties. The project is owned by Altynalmas Gold. Turquoise Hill (TSX: TRQ) which owned 50% of Altynalmas, sold its interest to Sumeru Gold BV in August 2013, for $235 million in cash. In a resource estimate released by Roscoe Postle Associates (RPA) in February of 2012, they estimated Bakyrchik contained 5.76 million ounces of gold. KazzInc. (whose majority stakeholder is Glencore; LSE: GLEN) is one of the largest producers of gold in the region. They own various interests in many mines throughout Kazakhstan, including Vasilkovskoye (one of the highest producing deposits in Kazakhstan). The other large producing mine in Kazakhstan is Akbokai, which is state owned. The following chart shows the structure of the offering:

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Investors receive debentures, in return for their capital, from Avadale Capital Inc. Avadale will then loan the capital to GRK Vizol LLP. Investors can purchase Series A or Series B debentures. Series A offers 10% p.a. interest, paid monthly. In addition, Series A debentures are entitled to 12.5% of the project’s profits. Profits are defined as:

Source: Company Series B debentures do not offer any interest, but are entitled to a 25% share of the profits.

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Financials

The debentures mature after 36 production months. The first production month will be no later than the fourth calendar month following the date on which the debentures are issued. The following table shows the source of funds:

This offering has a sales commission of up to 10%, which we believe is in line with comparable exempt offerings.

Use of funds – The total cost of the equipment is $1.80 million. The remaining $825k will be used for working capital, including $225k for equipment repairs and start-up expenses, and $600k for operating expenses in the first two - three months. Events of Default - An event of default occurs if there is a failure for 60 days to make interest payments, and if principal is not paid at maturity. In the case of default, the debenture holders can declare the principal and interest on all outstanding debentures to be immediately due and payable. Security - As security, Vizol will provide a general security agreement in favour of Avadale over all of its property. Avadale’s loan will rank senior to Vizol's existing lenders, but may be subordinate to additional debt, if they are required to be obtained if the current offering does not raise the full $3 million. The following table shows a summary of Vizol’s income statement (audited by an independent accounting firm in Kazakhstan).

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Expected Returns

STATEMENTS OF OPERATIONS(in US$) - YE Dec 31st 2008 2009 2010 2011 2012

Sales 483,300 1,365,173 2,139 2,423,565 1,817,881

Operating Costs 1,008,793 1,915,280 1,231,393 1,971,185 2,452,608 Operating Profit (525,493) (550,107) (1,229,254) 452,380 (634,727)

Interest & Bank Charges 278,505 251,246 Earnings from operations (525,493) (550,107) (1,229,254) 173,875 (885,973)

Taxes/(Income Tax Recovery) - 26,874 - - Net Earnings for the period (525,493) (550,107) (1,256,128) 173,875 (885,973)

*we used a conversion rate of KZT:US$ = 150:1

The company has not prepared their 2013 audited statements yet. Revenues were US$1.82 million from the sale of 1,041 oz in 2012. Net loss in the year was US$0.89 million. Operating profits were negative every year, except 2011. A summary of Vizol’s balance sheet is shown below: Balance Sheet Summary 2008 2009 2010 2011 2012

Cash $16,787 $27 $981 $52,817 $26,088Working Capital -$968,960 -$944,173 $348,580 -$172,864 -$927,427Current Ratio 0.46 0.56 5.58 0.80 0.28 Long-term Debt $0 $0 $2,999,124 $2,309,785 $2,776,362Long-term Debt / Capital 0.0% 0.0% 263.3% 198.2% 305.2%

EBIT Interest Coverage Ratio 1.62 (2.53)

At the end of 2012, Vizol had approximately US$4.07 million in debt and accounts payables; approximately US$2.78 million was from Bentley International (a related entity). Cash position was US$27k, and working capital was negative US$0.93 million. As management has not provided us 2013 statements, we are not in a position to comment on the current financial position. Management, however, indicated to us that as there were limited operations in 2013, and Vizol’s financial condition has changed little since the end of 2012.

The following table shows management, and our financial projections, for the three year time horizon of the debentures.

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Rating

Management FRC (Base-Case) Conservative

Annual Production (oz) 5,187 2,594 1,370 Gold Price $1,400 $1,320 $1,320Fees to Metalor 5% 5% 5%

Revenues (3 years) $20,696,130 $9,758,628 $5,153,940

Average Operating Expenses (incl. G&A) / oz $416 $600 $800

Operating Expenses $6,473,376 $4,669,200 $3,288,000Kazakhstan Royalty (5.4% of revenues) $1,117,591 $526,966 $278,313

Interest on Series A debentures (10%) $450,000 $450,000 $450,000

Net Cash from Operations $12,655,163 $4,112,462 $1,137,627

Participation Pool (total cash flows from production months) $11,638,539 $3,407,066

Profit Share (Series A) - 12.5% $727,409 $212,942 $568,814

Profit Share (Series B) - 25%% $1,454,817 $425,883 $568,814

Vizol's Share (remaining capital) $7,472,937 $473,637 -

Series A (IRR) 27.64% 14.47% -12.55%

Series B (IRR) 33.36% 7.29% -26.01%

*calculations are pre-tax

Based on a $1,400 per oz gold price, and 5,187 oz of annual production, management estimates an Internal Rate of Return (“IRR”) of 27.6% p.a. for Series A, and 33.4% p.a. for Series B. Management assumes an average cost (including General and Administrative expenses) of $416 per oz over three years. Our long-term gold price forecast is US$1,200 per oz (C$1,320 per oz). Although management expects to achieve annual production of 5,187 oz, we have applied a 50% discount, and used 2,594 oz in our forecasts, due to uncertainties as to the extent of the overburden in the proposed mining areas. Moreover, the average production between 2008 and 2012 (1,370 per oz) was well below management’s estimate of 5,187 oz per annum for the next three years. We assumed an operating cost of $600 per oz. Based on these estimates, we expect an IRR of 14.5% p.a. for Series A, and 7.3 % p.a. for Series B. We also presented a conservative scenario in the table above. In that scenario, we assumed an operating cost of $800 per oz, and annual production of 1,370 oz (which was the average production between 2008 – 2012). Our models gave an IRR of -12.6% p.a. for Series A, and -26.0% p.a. for Series B. Note that these estimates will vary if management/investors decide to push the maturity by one or two years to capture the project’s cash flows in those years. Based on our review of the offering, we believe Series A offers higher risk adjusted

Page 25



returns. We assign an overall rating of 4- to Series A, and 5- to Series B. Our risk rating for both debentures is 5.

FRC Rating Series A Series B

IRR (before-tax) 14.5% 7.3%

Rating 4- 5-

Risk 5 5

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Fundamental Research Corp. Rating Scale: Rating – 1: Excellent Return to Risk Ratio Rating – 2: Very Good Return to Risk Ratio Rating – 3: Good Return to Risk Ratio Rating – 4: Average Return to Risk Ratio Rating – 5: Weak Return to Risk Ratio Rating – 6: Very Weak Return to Risk Ratio Rating – 7: Poor Return to Risk Ratio A “+” indicates the rating is in the top third of the category, A “-“ indicates the lower third and no “+” or “-“ indicates the middle third of the category. Fundamental Research Corp. Risk Rating Scale: 1 (Low Risk) 2 (Below Average Risk) 3 (Average Risk) 4 (Speculative) 5 (Highly Speculative)

Rating - 1 0% Risk - 1 0%Rating - 2 23% Risk - 2 2%Rating - 3 50% Risk - 3 30%Rating - 4 6% Risk - 4 43%Rating - 5 6% Risk - 5 7%Rating - 6 2% Suspended 17%Rating - 7 0%Suspended 13%

FRC Distribution of Ratings

Disclaimers and Disclosure The opinions expressed in this report are the true opinions of the analyst about this company and industry. Any “forward looking statements” are our best estimates and opinions based upon information that was provided and that we believe to be correct, but we have not independently verified with respect to truth or correctness. There is no guarantee that our forecasts will materialize. Actual results will likely vary. The analyst and Fundamental Research Corp. “FRC” does not own any shares of the subject company, does not make a market or offer shares for sale of the subject company, and does not have any investment banking business with the subject company. Fees have been paid by the issuer to FRC to issue this report. The purpose of the fee is to subsidize the high costs of research and monitoring. FRC takes steps to ensure independence including setting fees in advance and utilizing analysts who must abide by CFA Institute Code of Ethics and Standards of Professional Conduct. Additionally, analysts may not trade in any security under coverage. Our full editorial control of all research, timing of release of the reports, and release of liability for negative reports are protected contractually. Distribution procedure: our reports are distributed first to our web-based subscribers on the date shown on this report then made available to delayed access users through various other channels for a limited time. The performance of FRC’s research is ranked by Investars. Full rankings and are available at www.investars.com. To subscribe for real-time access to research, visit http://www.researchfrc.com/subscription.htm for subscription options. This report contains "forward looking" statements. Forward-looking statements regarding the Company and/or stock’s performance inherently involve risks and uncertainties that could cause actual results to differ from such forward-looking statements. Factors that would cause or contribute to such differences include, but are not limited to, continued acceptance of the Company's products/services in the marketplace; acceptance in the marketplace of the Company's new product lines/services; competitive factors; new product/service introductions by others; technological changes; dependence on suppliers; systematic market risks and other risks discussed in the Company's periodic report filings, including interim reports, annual reports, and annual information forms filed with the various securities regulators. By making these forward looking statements, Fundamental Research Corp. and the analyst/author of this report undertakes no obligation to update these statements for revisions or changes after the date of this report. A report initiating coverage will most often be updated quarterly while a report issuing a rating may have no further or less frequent updates because the subject company is likely to be in earlier stages where nothing material may occur quarter to quarter. Fundamental Research Corp DOES NOT MAKE ANY WARRANTIES, EXPRESSED OR IMPLIED, AS TO RESULTS TO BE OBTAINED FROM USING THIS INFORMATION AND MAKES NO EXPRESS OR IMPLIED WARRANTIES OR FITNESS FOR A PARTICULAR USE. ANYONE USING THIS REPORT ASSUMES FULL RESPONSIBILITY FOR WHATEVER RESULTS THEY OBTAIN FROM WHATEVER USE THE INFORMATION WAS PUT TO. ALWAYS TALK TO YOUR FINANCIAL ADVISOR BEFORE YOU INVEST. WHETHER A STOCK SHOULD BE INCLUDED IN A PORTFOLIO DEPENDS ON ONE’S RISK TOLERANCE, OBJECTIVES, SITUATION, RETURN ON OTHER ASSETS, ETC. ONLY YOUR INVESTMENT ADVISOR WHO KNOWS YOUR UNIQUE CIRCUMSTANCES CAN MAKE A PROPER RECOMMENDATION AS TO THE MERIT OF ANY PARTICULAR SECURITY FOR INCLUSION IN YOUR PORTFOLIO. This REPORT is solely for informative purposes and is not a solicitation or an offer to buy or sell any security. It is not intended as being a complete description of the company, industry, securities or developments referred to in the material. Any forecasts contained in this report were independently prepared unless otherwise stated, and HAVE NOT BEEN endorsed by the Management of the company which is the subject of this report. Additional information is available upon request. THIS REPORT IS COPYRIGHT. YOU MAY NOT REDISTRIBUTE THIS REPORT WITHOUT OUR PERMISSION. Please give proper credit, including citing Fundamental Research Corp and/or the analyst, when quoting information from this report. The information contained in this report is intended to be viewed only in jurisdictions where it may be legally viewed and is not intended for use by any person or entity in any jurisdiction where such use would be contrary to local regulations or which would require any registration requirement within such jurisdiction

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