Avala Resources Ltd.

  • Date: 2016-02-05

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MANAGEMENT’S DISCUSSION AND ANALYSIS Year ended December 31, 2015

AVALA RESOURCES LTD. (an exploration stage company)

MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS FOR THE YEAR ENDED DECEMBER 31, 2015 The following management’s discussion and analysis (“MD&A”) of the operations, results, and financial position of Avala Resources Ltd. (“Avala”) and its subsidiaries (together the “Company”), dated February 4, 2016, covers the years ended December 31, 2015 and 2014 and should be read in conjunction with the Company’s audited consolidated financial statements and related notes for the years ended December 31, 2015 and 2014 (the “December 31, 2015 and 2014 consolidated financial statements”). The December 31, 2015 and 2014 consolidated financial statements have been prepared in accordance with International Financial Reporting Standards (“IFRS”). All financial results presented in this MD&A are expressed in Canadian dollars unless otherwise indicated. Description of Business Avala is a Canadian-based gold and copper exploration company whose focus is the acquisition, exploration and development of mineral resource properties located in the Republic of Serbia. The Company holds the mineral licenses related to the Lenovac Project, the Timok Gold Project, the Tulare copper-gold porphyry project (the “Tulare Project”) and other early stage projects. To date, the Company has not earned significant revenues and is considered to be in the exploration stage. Avala's financial year-end is December 31 and it trades on the TSX Venture Exchange (“TSXV”) under the symbol AVZ. At February 4, 2016, Avala's issued and outstanding share capital totals 43,594,138 common shares, of which approximately 50.1% is held by Dundee Precious Metals Inc. (“DPM”), a TSX-listed company. Financing On January 26, 2016, Avala entered into a debenture purchase agreement with DPM under which DPM may purchase up to US$1,000,000 of senior secured convertible debentures (the “Debentures”) in three tranches. An initial tranche of US$500,000 was issued on January 26, 2016. Two additional tranches of US$250,000 each can be drawn with the last drawdown requiring DPM’s pre-approval. The initial tranche of US$500,000 bears interest at the rate of 12% per annum and the other two tranches will bear interest at the rate of 15% and 18% per annum, respectively. DPM will have the option to convert all or part of the principal amount of the Debentures into common shares of Avala at any time up to 180 days after maturity of the Debentures at a conversion price of $0.05 per common share. DPM has been granted a security interest over all of the assets of the Company. The Debentures will mature on May 26, 2016. Avala intends to use the proceeds of the sale of the Debentures to fund its exploration expenses and

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Management’s Discussion and Analysis Year ended December 31, 2015

working capital requirements including a 1500m drilling program on its Timok project which is required to meet a minimum working requirement for the renewal of the related mineral license. The Company is evaluating different options to continue to finance the exploration and development of its projects, to provide for management and administration expenses for at least the next 12 months and to reimburse the Debentures, including strategic partnerships and other means. Earn-in and joint venture agreement on the Lenovac Project On November 27, 2015, Avala, its wholly-owned Serbian subsidiary and Rio Tinto Mining & Exploration Limited (“Rio Tinto”) entered into a binding earn-in and joint venture agreement (the “Agreement”) under which Rio Tinto has the right but not the obligation to earn up to a 75% interest in the Lenovac Project by funding project expenditures of up to US$40 million as follows: a) if Rio Tinto incurs total project expenditures of US$3 million by December 31, 2017, it will earn a 51% interest in the Lenovac Project (“Stage 1 earn-in project expenditure”); b) if Rio Tinto incurs additional project expenditures of US$5 million by December 31, 2019, it will earn an additional 14% interest in the Lenovac Project, resulting in its total interest being 65%; and c) if Rio Tinto incurs additional project expenditures of US$32 million prior to December 31, 2023, it will earn an additional 10% interest in the Lenovac Project, resulting in its total interest being 75%. Rio Tinto has agreed to incur minimum project expenditure of US$1 million by December 31, 2016 which is to be part of the Stage 1 earn-in project expenditure. A management committee has been formed and comprised of two representatives from each of Rio Tinto and Avala. Avala is the operator of the Lenovac Project until at least December 31, 2016 after which date Rio Tinto will have the right to assume the role of operator. October 2014 Acquisition of Dunav On October 2, 2014, Avala and Dunav Resources Ltd. (“Dunav”) completed a business combination by way of a plan of arrangement under the Business Corporations Act (British Columbia) (the “Arrangement”) and Dunav became a wholly-owned subsidiary of Avala. Avala and Dunav were related parties prior to the Arrangement by virtue of common directors, overlapping management and by each having DPM as its controlling shareholder. October 2014 Share Consolidation On October 9, 2014, outstanding securities of Avala were consolidated on a ten pre-consolidation for one post-consolidation basis. All outstanding share purchase warrants, stock options and special rights were also adjusted to reflect the 10 for 1 share consolidation. The number of shares and other securities presented in this MD&A have all been adjusted to reflect the impact of this share consolidation.

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Management’s Discussion and Analysis Year ended December 31, 2015

Exploration Activities In early 2015, the Company completed a comprehensive review of all of its mineral projects with a view of developing a near-term work plan taking into account the results obtained from all of the exploration work conducted to date, the Company’s financial resources, and the global economic conditions for junior exploration companies. The near-term work plan that was developed consisted essentially of identifying new targets in areas in close proximity to the Company’s key mineral deposits. Lenovac Project 2

The 100%-held Lenovac license was granted to the Company in 2013. The license covers 132 km and is located 170 km south-east of Belgrade. The project is strategically located 10 km due south of the Reservoir Minerals/Freeport-McMoran Cukaru Peki high-sulphidation epithermal and porphory coppergold discovery, along the eastern margin of the Timok Magmatic Complex. Surface geology is dominated by volcanic derived epiclastics (with occasional mineralized clasts) and other sediments that are interpreted as being post-mineral with respect to the mineralization observed at Bor. During Q2 2015, the Company carried out exploration work on the Lenovac license, including mapping, rock chip sampling and a geophysics program which consisted of 28 line km. Interpretation and inversion modeling of the resistivity data has indicated a number of potential drill targets with mineralization interpreted to lie beneath post-mineral cover that is outcropping within the northern half of the license. Following the execution in November 2015 of the earn-in and joint venture agreement with Rio Tinto (described in the Earn-in and Joint Venture Agreement on the Lenovac Project section above), the Company proceeded with drilling an initial single deep hole in the north portion of the project area. This hole, required to meet a minimum working requirement for the renewal of the mineral license, was drilled to a depth of 852m. Assay results are pending. Timok Gold Project The 100%-held Timok Gold Project, which is located along the western margin of the Timok Magmatic Complex in Eastern Serbia, comprises several gold deposits, including Bigar Hill, Korkan, Korkan East and Kraku Pester. During 2014, the Company completed mineral resource estimates on these four deposits, and supporting National Instrument 43-101 (“NI 43-101”) technical reports were filed in mid2014. A preliminary economic assessment (“PEA”) for the Bigar Hill, Korkan and Kraku Pester deposits was also completed. During Q1 2015, the Company carried out an extensive review of geological, geochemical and geophysical datasets on the Bigar Istok license, which host part of the Timok Gold Project, with an aim to expand the existing resource base at the Timok Gold Project. This work has highlighted a number of

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Management’s Discussion and Analysis Year ended December 31, 2015

interpreted structural corridors which link porphyry units and sediment-hosted gold mineralization. During Q2 2015, the Company completed its planned trenching and channel sampling program, totalling 1,280m, on the Bigar Istok license. This program returned a number of intervals of gold and associated base metal mineralisation, and has been interpreted as a higher temperature style of mineralisation similar to that found at Korkan East. Further interpretation of these results has led to the design of the required 1500m drilling program within the Bigar Istok license, which was started late in Q4 2015. Approximately 1000m has been drilled to date. Results will be released once drilling is completed and all assays have been returned. Tulare Project The Tulare Project, which was acquired in October 2014 through the business combination with Dunav, lies within the Lece Volcanic Complex of Southern Serbia and comprises several porphyry copper-gold targets including the Kiseljak and Yellow Creek deposits. In 2014, a mineral resource estimate for Kiseljak and Yellow Creek was completed and a NI 43-101 technical report was filed. The Tulare Project also comprises the Gubavce-Bakrenjaca carbonate-base metal gold epithermal vein system located in the southern half of the Tulare Project, approximately 3 km south of the Kiseljak deposit. During Q2 2015, the Company conducted a first phase of trench and channel sampling on the GubavceBakrenjaca prospect. Interpretation of these results show a number of approximately east-west structural corridors that cross the Tulare license and are host to brecciated quartz veins with low-grade base metal and gold mineralisation. No further work is planned on this target until funds become available. The Company is continuing to evaluate the potential of a number of other licenses held within the Lece Volcanic Complex and during 2015 carried out geological mapping and rock chip sampling on the Trn and Degrmen licenses. Outlook for 2016 The Company’s exploration activities in 2016 will be focused on the Lenovac property (in partnership with Rio Tinto), through additional geophysics and a drilling program that would be expected to commence in the second half of the year. Based on results from the Company’s 1500m drilling program in the Bigar Istok area, which is expected to be completed in March 2016, the Company will assess various options to finance further work, if justified. Serbian Mining Law Under the amended Law on Mining and Geological Exploration of Serbia, which came into effect on December 16, 2015, exploration licenses are granted for an initial period of three years and may now be renewed for an additional three-year period and a final two-year period, subject to certain conditions

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Management’s Discussion and Analysis Year ended December 31, 2015

including the completion of at least 75% of the planned work program. Under the mining law, a 5% net smelter royalty applies to any mineral production and is payable to the Serbian Government. Qualified Person Mr. Justin van der Toorn, CGeol FGS, EurGeol, a qualified person under NI 43-101, has approved the technical data in this MD&A. Mr. van der Toorn is the Company’s exploration manager, based in Bor, Serbia. Exploration expenses Exploration expenses are detailed as follows:

Year ended

Year ended

Year ended

December 31,

December 31,

December 31,

2015

2014 (1)

2013

$

$

$

Drilling and assaying

113,761

123,243

1,209,136

Salaries and benefits

901,714

1,632,489

2,620,434

20,647

476,196

785,940

5,642

387,746

1,105,636

Consulting fees Studies Sale of geological data (2) Other exploration and evaluation expenses

Share-based remuneration

(278,580)

-

-

453,813

496,246

825,791

1,216,997

3,115,920

6,546,937

-

45,377

480,714

Depreciation and amortization

467,801

457,151

724,374

Gain on disposal of exploration and evaluation assets

(43,217)

(106,735)

(83,902)

61,860

87,600

-

1,703,441

3,599,313

7,668,123

Write-off of exploration and evaluation assets

(1)

Expenses from Dunav are included from October 2, 2014, the date the acquisition of Dunav by Avala was completed.

(2)

In December 2015, the Company sold a set of geological data to a third party for a total amount of $278,580 (US$200,000).

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Management’s Discussion and Analysis Year ended December 31, 2015

Selected Consolidated Financial Information

(1)

The following selected financial information should be read in conjunction with the Company’s December 31, 2015 and 2014 audited consolidated financial statements.

December 31,

December 31,

2015

2014

$

$

617,937

2,766,730

Exploration and evaluation assets

1,094,386

1,579,919

Total assets

2,216,863

4,592,935

Shareholders’ equity

1,709,241

4,318,696

Financial Position Cash

Years ended December 31, 2015

2014

2013

$

$

$

1,703,441

3,599,313

7,668,123

983,456

1,019,296

1,591,529

Income (2) Exploration expenses Management and administration expenses Business combination expenses Net sale of services to related parties Finance expenses on convertible debentures Finance income Net loss for the year

Basic and diluted loss per share (3)

-

270,629

-

(2,249)

(66,303)

(366,625)

-

85,293

-

(10,140)

(21,160)

(61,648)

(2,674,508)

(4,887,068)

(8,831,379)

(0.06)

(0.16)

(0.35)

(2,220,321)

(5,265,298)

(7,793,245)

78,345

5,391,672

(921)

-

(16,825)

7,551,972

Cash Flows Operating activities Investing activities Financing activities (1)

The Company’s December 31, 2015 and 2014 consolidated financial statements have been prepared on the basis of a going concern, which assumes that the Company will continue its operations in the foreseeable future and will be able to realize its assets and discharge its liabilities and commitments in the normal course of operations. The Company is subject to a number of risks and uncertainties associated with its future exploration and development activities, including raising additional funds. If the Company is not successful in raising additional funds, it may be required to further delay, reduce the scope of, or eliminate its current or future exploration and development activities, any of which could have a negative impact on the business, financial condition and results of operation of the Company. The conditions and uncertainties described above indicate the existence of a material uncertainty that casts a significant doubt about the Company’s ability to continue as a going concern. If the going concern assumption was not appropriate for the Company’s December 31, 2015 consolidated financial statements,

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Management’s Discussion and Analysis Year ended December 31, 2015 adjustments which could be material would be necessary to the carrying value of assets and liabilities as well as adjustments to reported expenses. (2)

Results from Dunav are included from October 2, 2014.

(3)

Calculated on a post-consolidation basis, which consolidation is described in the October 2014 Share Consolidation section.

Since its incorporation, the Company has not paid any cash dividend on its outstanding common shares. Any future dividend payment will depend on the Company’s financial needs to fund its exploration programs and any other factor that the board may deem necessary to consider. It is highly unlikely that any dividends will be paid in the near future. Management and administration expenses are detailed as follows:

Year ended

Year ended

Year ended

December 31,

December 31,

December 31,

2015

2014

2013

$

$

$

Salaries and benefits

369,398

326,402

450,059

Administrative and general

310,945

260,070

321,970

Office

122,442

131,640

134,105

Professional fees

88,435

140,378

124,229

Investor relations and travel

27,258

54,253

93,043

Reporting issuer costs

Share-based remuneration Loss on foreign exchange

59,849

35,623

37,895

978,327

948,366

1,161,301

4,667

44,543

495,255

462

26,387

(65,027)

983,456

1,019,296

1,591,529

Financial Review The Company does not yet have revenue-generating activities. Accordingly, the Company’s financial performance is largely a function of the level of exploration activities undertaken on its active projects and the management and administrative expenses required to operate and carry out its exploration activities. Following is a discussion of the major items impacting net loss for the years ended December 31, 2015, 2014 and 2013. Year 2015 compared to 2014 The reduced loss in 2015 compared to 2014 results mainly from a reduction in exploration expenses due to reduced field activities in 2015 in order to conserve cash as well as the impact of the cost cutting measures applied in Serbia in October 2014 following the business combination with Dunav. These cost cutting measures included the termination of 12 employees in Serbia, the non-renewal of consulting agreements and the suspension of all studies following the completion of the PEA on the Timok Gold

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Management’s Discussion and Analysis Year ended December 31, 2015

Project. The 2015 exploration expenses were also reduced by the income of $0.3 million realized in Q4 2015 from the sale of a set of geological data to a third party. Higher management and administration expenses in 2015 compared to 2014, before non-cash items, are mainly due to the weakening of the Canadian dollar as some of the salaries and benefits are paid in U.S. dollar, and to increased administrative expenses related to the maintenance of a number of corporate entities acquired as a result of the business combination with Dunav in October 2014. In 2015, the Company initiated a reorganization to simplify its corporate structure with the objective of reducing administration expenses. In 2014, the Company had incurred non-recurring expenses of $0.3 million related to the business combination with Dunav, $0.3 million in severance payments and $0.1 million in finance expenses related to the issue of the Debentures to DPM. An amount of $4,667 was charged to income in 2015 as share-based remuneration compared to $89,920 in 2014. Such amounts, which are based on the number and the fair value of the stock options granted, are allocated between exploration and management and administration expenses and are charged to income over the vesting period attributable to each grant of options. In 2015, the Company granted 125,000 stock options to its non-executive directors compared to nil in 2014. Following the completion in October 2014 of the business combination with Dunav, the sale of services and supplies to two indirectly-held subsidiaries of Dunav are now eliminated on consolidation (the 2014 comparative results include the sale of services and supplies of $0.6 million with a net margin of $0.1 million until October 2, 2014). In 2015, the Company realized sales of geological services of $18,301 with a net margin of $2,249 (nil in 2014) to Highland Copper Company Inc., a related party by virtue of common management and directors. Year 2014 compared to 2013 The reduced loss in 2014 compared to 2013 results mainly from lower exploration expenses incurred by the Company in 2014 mostly on its Timok Gold Project in Serbia. The reduced expenditures reflect a significant reduction in field activities in 2014, including a reduced workforce in Serbia. Expenses in 2014 include severance costs of $0.3 million related to the termination of 12 Avala employees following the completion of the business combination with Dunav. Lower management and administration expenses in 2014 compared to 2013, before non-cash items, reflect a cut-back in salaries, fees and benefits of directors and senior management by one-third effective January 1, 2014, and lower investor relations and travel expenses.

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Management’s Discussion and Analysis Year ended December 31, 2015

The decrease in exploration and management and administration expenses in 2014 was partially offset by expenses related to the business combination with Dunav, which consisted mostly of brokerage, legal, tax and audit-related fees in the amount of $0.3 million and finance expenses of $0.1 million related to the issue to DPM in August 2014 and September 2014 of convertible debentures amounting to US$750,000 which were reimbursed to DPM in October 2014 following the completion of the business combination with Dunav. An amount of $0.1 million was charged to income in 2014 as share-based remuneration compared to $1.0 million in 2013. Such amounts, which are based on the number and the fair value of the stock options granted, are allocated between exploration and management and administration expenses and are charged to income over the vesting period attributable to each grant of options. In 2014, the Company did not grant any stock options, compared to 125,000 in 2013. In accordance with service agreements to provide geological and other related services and supplies to two indirectly-held subsidiaries of Dunav, the Company realized in 2014, before the business combination with Dunav, sales of services and supplies of $0.6 million with a net margin of $0.1 million compared to sales of services and supplies to Dunav of $2.6 million in 2013 with a net margin of $0.4 million. The reduced sales during the 2014 periods compared to 2013 is due to a reduction in exploration activities at Dunav and that only 9 months of sales were included in the 2014 results. th

th

4 quarter ended December 31, 2015 compared to 4 quarter ended December 31, 2014 th

During the 4 quarter period ended December 31, 2015, the Company incurred a loss of $0.4 million th

($0.01 per share), compared to a loss of $1.0 million ($0.01 per share) during the 4 quarter period ended December 31, 2014. The lower loss during the 2015 period results mainly from a reduction in exploration expenses ($0.3 million) due to the impact in Q4 2014 of the cost cutting measures applied in Serbia and the income of $0.3 million realized in Q4 2015 from the sale of a set of geological data to a third party. Selected Quarterly Financial Information

Revenues Period ended

(millions of $)

Net loss (millions of $)

Basic loss

Diluted loss

per share

per share

($)

($)

December 31, 2015

-

(0.4)

(0.01)

(0.01)

September 30, 2015

-

(0.7)

(0.01)

(0.01)

June 30, 2015

-

(0.8)

(0.02)

(0.02)

March 31, 2015

-

(0.8)

(0.02)

(0.02)

December 31, 2014

0.2

(1.0)

(0.01)

(0.01)

September 30,2014

0.0

(1.3)

(0.05)

(0.05)

June 30, 2014

0.1

(0.9)

(0.04)

(0.04)

March 31, 2014

0.3

(1.7)

(0.06)

(0.06)

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Management’s Discussion and Analysis Year ended December 31, 2015

Liquidity and Capital Resources The Company had a working capital of $0.6 million at December 31, 2015 compared to a working capital of $2.7 million at December 31, 2014. The variation in working capital during the year was mainly attributable to exploration expenses of $1.2 million, management and administration expenses of $1.0 million, partially offset by the proceeds on the sale of capital assets of $0.1 million. On January 26, 2016, the Company entered into a debenture purchase agreement with DPM under which DPM may purchase up to US$1.0 million of Debentures and the Company issued to DPM an initial tranche of the Debentures in an amount of US$0.5 million. (see detail under Issuance of Convertible Securities section). However, the Company will require additional funds to pursue exploration work on its mineral projects, to provide for management and administration expenditures for at least the next 12 months and to reimburse the Debentures. Such additional fund requirements may be met in the future in a number of ways including but not limited to the issue of equity, joint venture or other means. While management has been successful in securing financing in the past, there can be no assurance that it will be able to do so in the future or that these sources of funding or initiatives will be available to the Company or that they will be available on terms which are acceptable to the Company. If adequate financing is not available, the Company may be required to delay, reduce the scope of, or eliminate its current or future exploration activities or relinquish rights to certain of its interests. Capital Management The Company defines capital that it manages as shareholders’ equity. When managing capital, the Company’s objectives are a) to ensure the entity continues as a going concern; b) to increase the value of the entity’s assets; and c) to achieve optimal returns to shareholders. These objectives will be achieved by identifying the right exploration projects, adding value to these projects and ultimately taking them to production or obtaining sufficient proceeds from their disposal. As at December 31, 2015, managed capital was $1,709,241 ($4,318,696 at December 31, 2014). There were no changes in the Company’s approach to capital management during the year ended December 31, 2015. The Company is not subject to any externally imposed capital requirements as at December 31, 2015. Off-Balance Sheet Arrangements At December 31, 2015, the Company had no off-balance sheet arrangements.

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Management’s Discussion and Analysis Year ended December 31, 2015

Significant Accounting Policies Foreign currency translation The Company’s consolidated financial statements are presented in Canadian dollars. Monetary assets and liabilities denominated in a foreign currency other than the functional currency of each entity within the Avala group of companies are translated at the exchange rate in effect at the reporting date, whereas non-monetary assets and liabilities denominated in a foreign currency are translated at the exchange rate in effect at the transaction date. Revenues and expenses denominated in a foreign currency are translated at the average rate in effect during the period with the exception of depreciation that is translated at the historical rate. Gains and losses on exchange arising from the translation of foreign operations are recorded in profit or loss. On consolidation, assets and liabilities of subsidiaries with a functional currency other than the Canadian dollar are translated into Canadian dollars at the closing rate in effect at the reporting date. Income and expenses are translated into Canadian dollars at the average rate over the reporting year. Exchange differences are presented as other comprehensive income and recognised in the currency translation adjustment reserve in equity. Mineral properties Exploration and evaluation expenditures are costs incurred in the course of initial search for mineral deposits with economic potential. Costs incurred before the legal right to undertake exploration and evaluation activities has been obtained are recognized in profit or loss when they are incurred. The cost of acquiring licenses and other expenditures associated with the acquisition of exploration and evaluation assets are capitalized as mineral properties on a property-by-property basis and are carried at cost less accumulated impairment losses, if any. No amortization expense is recognised on these assets during the exploration and evaluation period. Other exploration and evaluation expenditures are expensed as incurred. Once a project has been established as commercially viable and technically feasible, mineral properties are reclassified as tangible assets and related development expenditures are capitalized. An impairment test is performed before reclassification and any impairment loss is then recognized in profit or loss. Property, plant and equipment Property, plant and equipment are carried at cost, less accumulated depreciation and accumulated impairment losses. The cost of an item of property, plant and equipment consists of the purchase price and any costs directly attributable to bringing the asset to the location and condition necessary for its intended use. Where parts of an item of property, plant and equipment have a different useful life, they are accounted for as separate items of property, plant and equipment. Depreciation is recognized on a straight-line basis using the cost of an item of property, plant and equipment, less its estimated residual

12

Management’s Discussion and Analysis Year ended December 31, 2015

value, over its estimated useful life. Each asset's residual value, useful life and depreciation method are reassessed, and adjusted if appropriate, at the reporting date. Building is depreciated over 20 years and machinery, equipment and vehicles are depreciated over their estimated useful lives of 3 to 5 years. The carrying amount of an item of property, plant and equipment is derecognized upon disposal or when no future economic benefits are expected from its use or disposal. The gain or loss arising from the derecognition of an item of property, plant and equipment is included in profit or loss when the item is derecognized. Significant accounting judgments and estimates The preparation of the Company’s consolidated financial statements requires management to make certain estimates, judgments and assumptions that affect the reported amounts of assets and liabilities at the date of the consolidated financial statements and reported amounts of income and expenses during the reporting period. Actual outcomes could differ from these estimates. The Company’s consolidated financial statements include estimates which, by their nature, are uncertain and may require accounting adjustments based on future occurrences. Revisions to accounting estimates, judgments and assumptions are recognized in the period in which the estimate is revised and future periods if the revision affects both current and future periods. These estimates, judgments and assumptions are based on historical experience, current and future economic conditions and other factors, including expectations of future events that are believed to be reasonable under the circumstances. Significant assumptions about the future and other sources of estimation uncertainty that management has made at the financial position reporting date, that could result in a material adjustment to the carrying amounts of assets and liabilities, in the event that actual results differ from the assumptions made, relate to, but are not limited to: i) the estimated useful lives and residual value of property, plant and equipment and intangible assets; ii) the inputs used in accounting for share-based payment transactions using the Black-Scholes option pricing model, including volatility, probable life of options granted, time of exercise of the options and forfeiture rate; iii) management’s assessment

that no material restoration,

rehabilitation and environmental costs should be accrued, based on facts and circumstances that existed during the period; and iv) the assessment of the Company’s ability to execute its strategy by funding future working capital requirements. Accounting standards issued but not yet applied Standards, amendments and interpretations issued but not yet effective up to the date of the issuance of the Company’s consolidated financial statements that are expected to be relevant to the Company are listed below. Certain other standards and interpretations have been issued but are not expected to have a material impact on the Company’s consolidated financial statements.

13

Management’s Discussion and Analysis Year ended December 31, 2015

IFRS 9, Financial Instruments The IASB recently released IFRS 9, Financial Instruments (2014), representing the completion of its project to replace IAS 39, Financial Instruments: Recognition and Measurement. The new standard introduces extensive changes to IAS 39’s guidance on the classification and measurement of financial assets and introduces a new “expected credit loss model” for the impairment of financial assets. IFRS 9 also provides new guidance on the application of hedge accounting. The Company’s management has yet to assess the impact of IFRS 9 on its consolidated financial statements. The new standard is required to be applied for annual reporting periods beginning on or after January 1, 2018. IFRS 16, Leases In January 2016, the IASB published IFRS 16, Leases which will replace IAS 17, Leases. IFRS 16 eliminates the classification as an operating lease and requires lessees to recognize a right-of-use asset and a lease liability in the statement of financial position for all leases with exemptions permitted for shortterm leases and leases of low value assets. In addition, IFRS 16 changes the definition of a lease; sets requirements on how to account for the asset and liability, including complexities such as non-lease elements, variable lease payments and option periods; changes the accounting for sale and leaseback arrangements; largely retains IAS 17’s approach to lessor accounting; and introduces new disclosure requirements. IFRS 16 is effective for annual reporting periods beginning on or after January 1, 2019 with early application permitted in certain circumstances. The Company has yet to assess the impact of this new standard on its consolidated financial statements. Related Party Transactions In 2015, Reunion Gold Corporation, a related party by virtue of common management, provided administrative services to the Company totalling $145,155 compared to $146,692 in 2014. In 2015, the Company also sold geological services to Highland Copper Company Inc., a related party by virtue of common management, for an amount of $18,301 (nil in 2014). Until the completion of the business combination with Dunav on October 2, 2014, the Company provided geological and other related services and supplies to Dunav for total sales of $595,790 in 2014; Hiscen Limited, a company controlled by a former director of the Company, provided geological services to the Company in 2014 totalling $125,090 (nil in 2015); and the Company incurred in 2014 finance expenses of $23,303 related to the Debentures issued to DPM (nil in 2015). These transactions were conducted in the normal course of operations of the Company. None of the transactions provided for special terms and conditions and no guarantees were given or received. The net remuneration to directors and to key management of the Company in 2015 totalled $417,964 ($906,771 during the comparative period in 2014).

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Management’s Discussion and Analysis Year ended December 31, 2015

Commitments The Company has entered into long-term lease agreements expiring in April 2017 which call for minimum lease payments of $117,500 for the rental of office space and core storage facilities. Minimum lease payments are $100,300 in 2016 and $17,200 in 2017. Outstanding Share Data At February 4, 2016, the Company has 43,594,138 issued and outstanding common shares, 5,863,915 share purchase warrants exercisable at a price of $4.80 per share expiring in March 2016, and 1,218,792 stock options at an average exercise price of $7.01, expiring at various dates until May 2020. In connection with the July 2010 acquisition of certain projects in Serbia, the Company issued to DPM 2,500,000 Series A Rights and 2,500,000 Series B Rights (on a post-consolidation basis), each right being exercisable for a term of up to 35 years and entitling DPM to receive one common share per right for no other consideration. The Series A Rights are exercisable upon the positive decision by the Company to proceed with a feasibility study on all or parts of certain projects and upon the occurrence of other events. The Series B Rights are exercisable at such time that a decision is made by the Company’s board of directors to bring all or any part of certain projects into production and upon the occurrence of other events. Financial Risk Factors The Company thoroughly examines the various financial risks to which it is exposed and assesses the impact and likelihood of those risks. These risks include liquidity risk, credit risk and currency risk. Where material, these risks are reviewed by the Board of Directors. Liquidity risk Liquidity risk is the risk that the Company will not be able to meet its financial obligations as they fall due. The Company generates cash flow primarily from its financing activities. The Company’s ability to continue as a going concern is dependent on management’s ability to raise the funds required for its continued operations. Current liabilities of $507,622 ($274,239 at December 31, 2014) are due within the next 3 months. Credit risk The Company’s maximum exposure to credit risk is limited to the carrying amount of financial assets held. To mitigate exposure to credit risk, the Company has established a policy to ensure counterparties demonstrate minimum acceptable credit worthiness, and to ensure liquidity of available funds. The

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Management’s Discussion and Analysis Year ended December 31, 2015

Company’s management considers that all financial assets held are of good credit quality. The Company’s cash is held with large financial institutions, with most of the Company’s cash held with a Canadian-based financial institution. Currency risk In the normal course of operations, the Company is exposed to currency risk on purchases that are denominated in a currency other than the respective functional currencies of each of the entities within the consolidated group. The currencies in which these transactions are denominated are primarily the Serbian dinar and the Euro. The consolidated entity does not presently enter into hedging arrangements to hedge its currency risk. All foreign currency transactions are presently entered into at spot rates. The Board considers this policy appropriate, taking into account the consolidated entity’s size, its current stage of operations, its financial position and the Board’s approach to risk management. At December 31, 2015, the Canadian equivalent value of assets and liabilities denominated in a foreign currency consisted of cash of $283,160 ($101,125 at December 31, 2014), other current assets of $91,167 ($18,407 at December 31, 2014), accounts payable and accrued liabilities of $741 (nil at December 31, 2014) and due to related parties of $112,168 ($93,781 at December 31, 2014). The impact on operations and comprehensive income and equity of a 10% increase or decrease in foreign currencies to the Canadian dollar exchange rate on the Company’s financial instruments based on balances at December 31, 2015 would be $26,000 ($2,600 at December 31, 2014). Interest rate risk The Company’s interest risk relates to cash. The Company's current policy as it relates to its cash balances is to invest excess cash in guaranteed investment certificates or interest bearing accounts of major Canadian chartered banks. The Company regularly monitors compliance to its cash management policy. Cash and guaranteed investment certificates, if any, is subject to floating interest rates. Sensitivity to a plus or minus 1% change in rates would affect the reported loss by approximately $6,000 ($28,000 in 2014). Other Risks and Uncertainties The Company is subject to a number of significant risks and uncertainties due to the nature of its business, the limited financial capability of the Company, and the present stage of exploration and development of its mineral projects. Failure to successfully address such risks and uncertainties could have a significant impact on the Company’s overall operations and financial condition and could materially affect the value of the Company’s assets and future operating results. Therefore, an investment in the securities of the Company involves significant risks and should be considered speculative. The risks and uncertainties described herein are not necessarily the only ones that the Company could be

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Management’s Discussion and Analysis Year ended December 31, 2015

facing. The Company cannot give assurance that it will successfully address these risks or other unknown risks that may affect its business. Readers should carefully consider the risks and uncertainties described below. Company Specific Risks •

The Company does not expect to receive revenues from operations in the foreseeable future and has limited financial resources. In addition, the Company has issued a US$500,000 Debenture in January 2016 that matures in May 2016. The Company will need to raise capital to repay the Debenture and to continue funding the exploration and development of its projects. Various options are being evaluated but if funds are not available to the Company on terms it considers acceptable, or at all, the Company’s operations would be adversely affected and the Company would have to further curtail or suspend its activities and may be required to relinquish some of the mineral licences.



The Company’s ability to raise capital in the capital market is affected by the decline in the price of gold and copper and the decline of the Company’s share price.



Future issuance of common shares into the public market or through the conversion of the convertible securities may cause dilution and lower the market price of the Company’s shares, which may result in losses to the Company’s shareholders.



The significant decline in metal prices in recent years may also impact the Company’s resource estimates and the evaluation of the potential of the Company’s projects; The PEA and mineral resource estimates on the Company’s projects are based on a number of assumptions and parameters that may vary and significantly affect the results announced. The PEA is preliminary in nature, based on mineral resources, and does not demonstrate the economic viability of the deposits.



The Company’s operations are conducted in Serbia, and as such the Company’s operations may be exposed to various levels of political, economic and other risks and uncertainties, including extreme fluctuations in currency exchange rates, high rates of inflation, renegotiation or nullification of existing licenses, permits and contracts, corruption, unstable legal system, restrictions on foreign exchange and repatriation of funds, changes in mining laws, environmental legislation, investment policies, income taxes, government royalties or shifts in political attitude.



The Company is subject to numerous government regulations which could cause delays in carrying out its operations, and increase costs related to its business.



The Company’s activities are subject to environmental liability.



The Company faces substantial competition within the mining industry from other mineral companies with much greater financial and technical resources.



The Company expects to continue to incur losses and may never achieve profitability, which may cause the market price of the Company’s common shares to decline.

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Management’s Discussion and Analysis Year ended December 31, 2015



Certain directors and senior officers of the Company also serve as officers and/or directors of other mineral resource companies, which may give rise to conflicts.

Industry Risks •

Mineral exploration and development is a high risk, speculative business. Few properties that are explored are ultimately developed into producing mines.



Mineral exploration is subject to geological uncertainties and interpretation.



Mineral exploration is subject to numerous industry operating hazards and risks, many of which are beyond the Company’s control.



Mineral resources are not mineral reserves and do not have demonstrated economic viability. Inferred resources have a great amount of uncertainty as to their existence, and economic and legal feasibility.



Substantial expenditures are required to explore mineral projects, define mineral resources, and complete all metallurgical, engineering, environmental, financial and other studies required to complete a feasibility study.



Current economic uncertainties globally have created market volatility and risk aversion among investors, limiting capital raising options.



Commodity prices including the price of gold and copper have fluctuated widely in the past and recently the mining industry faces an uncertain demand and depressed commodity prices.



Mining operations including exploration and development activities are subject to numerous laws and regulations.



Required permits to operate may not be granted.



Title to mineral rights and surface rights may be disputed.



Social and environmental groups may be opposed to the development of mining projects.

Cautionary Note Regarding Forward-Looking Information This MD&A may contain “forward-looking information”, within the meaning of Canadian securities laws. Generally, forward-looking information can be identified by the use of forward-looking terminology such as “plans”, “expects”, “budget”, “estimates”, “forecasts”, or “believes”, “intends” or variations of such words and phrases or statements that certain actions, events or results “may”, “could”, ”would”, “might” happen. Specifically, forward-looking information in this MD&A includes, but is not limited to statements about the operations, business, financial condition, expected financial results, requirements for additional capital, performance, prospects, opportunities, priorities, targets, goals, ongoing objectives, strategies and outlook of the Company. Forward-looking information is based on the reasonable assumptions and opinions of management in light of their experience and their analysis of trends, current conditions, and expected developments, as

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Management’s Discussion and Analysis Year ended December 31, 2015

well as other factors that management believes to be relevant at the time. By its nature, forward-looking information is subject to known and unknown risks, uncertainties and other factors, many of which are beyond the control of the Company, which may cause actual results to be materially different from those expressed or implied by the forward-looking information. Some of the risks include but are not limited to the following: (i) general economic, industry and market segment conditions; (ii) risks associated with operating in a foreign country including potential changes in applicable mining, environmental, taxation and other laws and regulations, as well as how such laws and regulations are interpreted and enforced; (iii) gold and copper price volatility; (iv) stock market volatility; (v) ability to obtain additional financing to support the substantial expenditures required for the exploration and development of mining projects; (vi) environmental and social risks; (vii) the results of exploration program and development studies (viii) the ability of the Company to continue to develop and grow; and (ix) management’s success in anticipating and managing the foregoing factors. Although management strives to identify and monitor important factors that could cause actual results to differ materially from those expected, there may be other factors that cause results not to be as anticipated. There can be no assurance that expectations contained in the forward looking information will prove to be accurate. Accordingly, readers should not place undue reliance on forward-looking information. The Company does not intend to update forward-looking information, except in accordance with applicable securities laws. Additional Information and Continuous Disclosure This MD&A has been prepared as at February 4, 2016. Additional information on the Company is available through regular filings of financial statements, press releases and NI 43-101 technical reports available on SEDAR (www.sedar.com) and on the Company’s website (www.avalaresources.com).

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